-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RKUdrt/egBj2hDm6VifF3RkNJApDqwIPIR4aeJ0D8X0uZGN3C29Y9YOycJJ0P7bg g0HOzxbEidbDm3bnUq6Hzw== 0000950147-99-000877.txt : 19990817 0000950147-99-000877.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950147-99-000877 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENSORY SCIENCE CORP CENTRAL INDEX KEY: 0000784721 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 860492122 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09706 FILM NUMBER: 99690786 BUSINESS ADDRESS: STREET 1: 7835 EAST MCCLAIN DRIVE CITY: SCOTTSDALE STATE: AZ ZIP: 85260-6949 BUSINESS PHONE: 6029983400 MAIL ADDRESS: STREET 1: 14455 N HAYDEN RD STREET 2: STE 219 CITY: SCOTTSDALE STATE: AZ ZIP: 85260-6949 FORMER COMPANY: FORMER CONFORMED NAME: GO VIDEO INC DATE OF NAME CHANGE: 19920703 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 6/30/99 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File No. 2-331855 SENSORY SCIENCE CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 86-0492122 ------------------------ --------------- (State of incorporation) (I.R.S. E.I.N.) 7835 East McClain Drive, Scottsdale, Arizona 85260 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip code) (480) 998-3400 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] NO [ ] 13,680,177 shares of Common Stock were outstanding as of August 12, 1999 SENSORY SCIENCE CORPORATION INDEX Page No. -------- Part I. FINANCIAL INFORMATION Consolidated Balance Sheets -- At June 30, 1999 and March 31, 1999 3 Consolidated Statements of Operations -- Three Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows -- Three Months Ended June 30, 1999 and 1998 5-6 Notes to the Interim Consolidated Financial Statements - 7-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 Quantitative and Qualitative Disclosures About 13 Market Risk Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures S-1 THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS REFER TO FUTURE EVENTS OR INCLUDE TERMS SUCH AS: THE COMPANY "BELIEVES", "EXPECTS", "INTENDS", "PLANS", AND OTHER USES OF FUTURE TENSES. SEE NOTES TO THE INTERIM CONSOLIDATED FINANCAL STATEMENTS AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". ALSO SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ON PAGES 10-12, FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD AFFECT THE VALIDITY OF ANY SUCH FORWARD LOOKING STATEMENTS. SUCH FACTORS INCLUDE THE FOLLOWING: BUSINESS CONDITIONS AND GENERAL ECONOMIC CONDITIONS; INDUSTRY, REGULATORY, AND LEGISLATIVE INITIATIVES, INCLUDING THE DIGITAL MILLENNIUM COPYRIGHT ACT, THAT MAY AFFECT THE COMPANY'S ABILITY TO DEVELOP, MANUFACTURE, AND MARKET ITS PRODUCTS; COMPETITIVE FACTORS, SUCH AS PRICING AND MARKETING EFFORTS OF RIVAL COMPANIES; TIMING OF PRODUCT INTRODUCTIONS; SUCCESS OF COMPETING OR FUTURE TECHNOLOGIES; ABILITY OF CONTRACT MANUFACTURERS TO MEET PRODUCT PRICE AND TECHNOLOGY OBJECTIVES AND DELIVERY SCHEDULES; THE PACE AND SUCCESS OF PRODUCT RESEARCH AND DEVELOPMENT; AND THE SUCESSFUL INTERGRATION OF CALIFORNIA AUDIO LABS. 2 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1999 March 31, 1999 ------------ -------------- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents 173,318 358,038 Receivables - less allowance for doubtful accounts of $98,500 11,636,306 10,526,335 Inventories 13,798,225 13,934,301 Prepaid expenses and other assets 331,567 191,519 Net investment in discontinued operations 171,351 115,415 Deferred tax asset 378,000 100,000 ------------ ------------ Total Current Assets 26,488,767 25,225,608 ------------ ------------ EQUIPMENT AND IMPROVEMENTS: Furniture, fixtures & equipment 979,975 875,270 Leasehold improvements 212,830 212,830 Office equipment 1,181,965 1,131,546 Tooling 1,586,802 1,587,602 ------------ ------------ Gross equipment and improvements 3,961,572 3,807,248 Less accumulated depreciation and amortization (2,674,802) (2,561,827) ------------ ------------ Equipment and improvements - net 1,286,770 1,245,421 ------------ ------------ PATENTS, net of amortization 144,821 149,381 GOODWILL, net of amortization 1,158,037 1,173,316 MARKET EXCLUSIVITY FEE, net of amortization 1,943,398 2,085,598 DEFERRED TAX ASSET 470,000 470,000 OTHER ASSETS, net of amortization 278,601 280,705 ------------ ------------ TOTAL $ 31,770,394 $ 30,630,029 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,764,167 $ 4,147,579 Accrued expenses 1,338,816 1,395,460 Other current liabilities 1,283,711 1,471,586 Warranty reserve 253,000 222,000 Income tax payable -- 2,724 Line of credit 10,479,647 9,335,363 ------------ ------------ Total Current Liabilities 18,119,341 16,574,712 ------------ ------------ Long term liabilities 428,603 426,677 Mandatory convertible subordinated debt 211,675 211,675 ------------ ------------ Total Liabilities 18,759,619 17,213,064 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock 13,678 13,658 Additional paid-in capital 21,738,644 21,708,124 Accumulated deficit (8,741,547) (8,304,817) ------------ ------------ Total Stockholders' Equity 13,010,775 13,416,965 ------------ ------------ TOTAL $ 31,770,394 $ 30,630,029 ============ ============ 3 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30, ---------------------------- 1999 1998 ------------ ------------ SALES $ 14,136,184 $ 10,795,319 COST OF SALES 11,145,390 7,667,269 ------------ ------------ Gross Profit 2,990,794 3,128,050 ------------ ------------ OTHER OPERATING COSTS: Sales and marketing 1,548,394 1,039,802 Research and development 865,137 357,856 General and administrative 1,032,720 1,070,270 ------------ ------------ Total Other Operating Costs 3,446,251 2,467,928 ------------ ------------ Operating (Loss) Income (455,457) 660,122 ------------ ------------ Other (Expenses) Revenues: Interest income 1,751 3,372 Interest expense (264,171) (134,491) Other income (expense) 3,147 75 ------------ ------------ Total Other Expense (259,273) (131,044) ------------ ------------ (LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES (714,730) 529,078 (BENEFIT) PROVISION FOR INCOME TAXES (278,000) 52,888 ------------ ------------ (LOSS) INCOME FROM CONTINUING OPERATIONS $ (436,730) $ 476,190 ------------ ------------ DISCONTINUED OPERATIONS: Income from operations -- 62,420 ------------ ------------ NET (LOSS) INCOME $ (436,730) $ 538,610 ============ ============ NET (LOSS) INCOME PER COMMON SHARE: Continuing Operations $ (0.03) $ 0.04 Discontinued Operations -- $ 0.00 ------------ ------------ Net (Loss) Income per Common Share $ (0.03) $ 0.04 ============ ============ NET (LOSS) INCOME PER COMMON SHARE - ASSUMING DILUTION: Continuing Operations $ (0.03) $ 0.03 Discontinued Operations -- $ 0.01 ------------ ------------ Net (Loss) Income per Common Share $ (0.03) $ 0.04 ============ ============ 4 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended June 30, -------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ (436,730) $ 538,610 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 275,014 107,266 Deferred Taxes -- Discontinued Operations (278,000) (62,420) Change in operating assets and liabilities-net of acquisition: Receivables (1,109,971) 144,907 Inventories 136,076 (2,788,969) Prepaids (140,048) (257,977) Other assets 2,104 2,462 Accounts payable 616,588 568,163 Accrued expenses (56,644) 678,133 Other current liabilities (187,875) (136,783) Warranty reserve 31,000 460 Other long-term liabilities 25,223 1,853 Income taxes payable (2,724) 58,000 ----------- ----------- Net cash used in operating activities (1,125,987) (1,146,295) ----------- ----------- INVESTING ACTIVITIES Market exclusivity fee -- (599,775) Cash paid for acquisition net of cash acquired -- (773,904) Equipment and improvement expenditures (154,324) (296,554) Investment in discontinued operation (55,936) 227,387 ----------- ----------- Net cash used in investing activities (210,260) (1,442,846) ----------- ----------- FINANCING ACTIVITIES Proceeds from the issuance of capital stock 30,540 131,826 Payments on capital lease obligations (21,686) Payment of debt assumed in acquisition (23,297) (1,205,833) Net borrowings (payments) under line of credit 1,144,284 3,553,060 ----------- ----------- Net cash used in financing activities 1,151,527 2,457,367 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (184,720) (131,774) CASH AND CASH EQUIVALENTS, beginning of period 358,038 445,925 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 173,318 $ 314,151 =========== =========== 5 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Three Months Ended June 30 ----------------------- 1999 1998 ---------- ---------- SUPPLEMENTAL INFORMATION TO CASH FLOW STATEMENT: Cash paid for Interest $ 275,000 $ 123,009 Cash paid for Income Taxes $ 16,300 $ -- ========== ========== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of subordinated debt and accrued interest to common stock $ -- $ 216,666 ========== ========== In connection with the acquisition, liabilities were assumed as follows: Liabilities assumed $ -- $1,690,778 Fair value of assets acquired, including $33,799 in cash $ -- $1,231,207 ---------- ---------- Excess of cost over fair value of assets acquired $ -- $1,233,475 ========== ========== 6 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS GENERAL In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company and the results of its operations and changes in its financial position for the periods reported. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. The consolidated financial statements include Sensory Science Corporation and its wholly owned subsidiary, California Audio Labs, LLC ("Cal Audio"). All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior financial statements to conform to the current classifications. On April 1, 1998, the Company acquired all of the equity interests of Cal Audio. The purchase price was $.8 million, plus $1.2 million of debt assumed plus the assumption of other liabilities of $0.5 million. The acquisition was accounted for using the purchase method of accounting for business combinations. The excess of assets acquired over liabilities assumed of $1.2 million has been allocated to goodwill and is being amortized over twenty years. Inventories at June 30, 1999 consisted of $1.2 million of raw materials and service parts and $12.6 million of finished goods. The Market Exclusivity Fee of $1.9 million represents the unamortized balance of a $2.3 million fee paid by the Company to Loewe Opta GmbH ("Loewe Opta") for the exclusive right to market and distribute in North America a line of digital direct view televisions specifically developed and manufactured by Loewe Opta for the Company. The Company began amortization of the fee in November 1998 on a straight-line basis over the initial term of the agreement, which ends on January 1, 2003. The Company is engaged in the design, development, and marketing of consumer electronic audio, video, and television products. In April 1999, the Company entered into a Memorandum of Understanding to sell most of the assets of the Security Products Division to the senior management of the division for cash. The Company expects to complete the sale of the assets of the Security Products Division by September 1999 but there is no assurance that it will be able to do so, or that it will recognize the full estimated values for the division's assets. Completion of the sale is subject to numerous conditions including the execution of a mutually acceptable purchase agreement, the buyer's ability to obtain sufficient financing, and the buyer's ability to negotiate various agreements with the manufactures. The Company's financial results show the operations of the Security Products Division as discontinued operations. Sales of the Company's Dual-Deck videocassette recorder have constituted substantially all of its revenue for the last five fiscal years. For the three months ended June 30, 1999, the Company's largest customer represented 18% of total revenues and the Company's second largest customer represented 12% of revenues. No other customer represented 10% or more of the Company's revenues. Accounts receivable from these two customers at June 30, 1999 were $2.5 million and $1.0 million, respectively. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset as of June 30, 1999 are as follows: 7 Deferred Tax Assets: Current - reserves not currently deductible $ 1,104,000 Noncurrent: Differences between book & tax basis of property $ 337,000 Operating loss carryforwards 4,594,000 Tax credit carryforwards 189,000 Other intangibles 77,000 ----------- Net Deferred Tax Asset $ 6,301,000 Valuation Allowance (5,453,000) ----------- Net Deferred Asset $ 848,000 =========== SFAS No.128, "Earnings Per Share", requires a reconciliation of the numerator and denominators of basic and diluted earnings per share as follows: For the Three Months Ended June 30, ---------------------------- 1999 1998 ------------ ------------ Income (Loss) From Continuing Operations $ (436,730) $ 476,190 ------------ ------------ Average Outstanding Common Shares 13,664,231 12,842,237 ------------ ------------ Basic (Loss) Income From Continuing Operations Per Share $ (0.03) $ 0.04 ------------ ------------ Diluted (loss) Income from Continuing Operations per Common Share: (Loss) income available to common stockholders, from above $ (436,730) $ 476,190 Add interest on presumed conversion of convertible debt 19,667 ------------ ------------ Net (loss) income available for diluted earnings per share $ (436,730) $ 495,857 ============ ============ Average outstanding common shares, from above 13,678,338 12,842,237 Additional dilutive shares related to stock options and warrants 0 1,135,220 Additional dilutive shares related to subordinated notes 0 610,000 ------------ ------------ Average outstanding and potentially dilutive common shares 13,678,338 14,587,457 ============ ============ Dilutive (Loss) Income From Continuing Operations per share $ (0.03) $ 0.03 ============ ============ Interest on the convertible debt totaled $9,375 during the three-month period ended June 30, 1999. Options and warrants to purchase 2.1 million shares of common stock at various prices were outstanding during the three months ended June 30, 1999. These items were not included in the above calculation of diluted income (loss) from continuing operation per share since they would have an anti-dilutive impact on the net loss per share. The information presented within the financial statements should be read in conjunction with the Company's audited Financial Statements for the fiscal years ended March 31, 1999 and 1998 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" from the 1999 Annual Report on Form 10-K. 8 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three months ended June 30, 1999 compared with the three months ended June 30, 1998: Net sales increased 31% to $14.1 million during the three months ended June 30, 1999 from $10.8 million during the three months ended June 30, 1998. The increase in sales resulted from a 49% increase in Dual-Deck VCR ("DDVCR") unit shipments for the three months ended June 30, 1999 compared to the same period one year prior, offset by a 20% decrease in the average selling price. The increase in sales also resulted from the addition of digital television ("DTV") shipments for the three months ended June 30, 1999. The Company began shipments of its line of DTV's in November 1998 and thus did not have any DTV sales in the three months ended June 30, 1998. The overall increase in DDVCR shipments resulted from increased consumer demand due to lower average retail selling prices and a shift in the Company's sales mix. Sales of DTV's accounted for $1.8 million of the Company's sales during the three months ended June 30, 1999. Sales of the Company's California Audio Labs product line decreased to $0.3 million for the three months ended June 30, 1999 compared to $0.6 million for the same period one year prior. The decrease in the shipments of the current line of California Audio Lab products is in anticipation of the release of the Company's new California Audio Lab product line expected in the summer of 1999. Gross profit was $3.0 million and $3.1 million for the three months ended June 30, 1999 and 1998, respectively, representing a 4% decrease in gross profit dollars. The decrease in gross profit dollars was primarily due to the sale of older model DDVCR's at discounted prices and a shift in sales mix from higher profit hi-fi DDVCR's to lower-profit mono DDVCR's. Gross profit as a percentage of sales (gross margin) decreased from 29.0% for the three months ended June 30, 1998 to 21.3% for the three-month period ended June 30, 1999. The decrease in gross margin resulted primarily from lower average selling prices for DDVCR's and the impact of dealer incentives to reduce inventories of discontinued DDVCR's in anticipation of a July 1999 introduction of a new line of DDVCR's with lower manufacturing costs and improved product features. Although the Company expects that the current downward VCR market pricing trends will continue, the Company believes that it will be able to improve gross margins in future quarters as a result of lower DDVCR manufacturing costs and increased sales of higher-margined products such as the DTV and California Audio Lab product. Sales and marketing expense increased 49% to $1.5 million for the three months ended June 30, 1999 from $1.0 million for the three months ended June 30, 1998. The increase in sales and marketing expense was primarily due to increased sales commissions on higher overall sales levels, increased advertising and sales promotion activities for the Company's line of DDVCR's, and the addition of selling and marketing expenses across all categories incurred to support the sales of the Company's new lines of digital televisions and audio products. As a percentage of sales, sales and marketing expense increased from 9.6% in the three months ended June 30, 1998, to 11.0% in the three months ended June 30, 1999. Research and development expense increased 142% from $0.4 million for the three months ended June 30, 1998 to $0.9 million for the three months ended June 30, 1999. The increased research and development costs are primarily due to product development costs incurred to develop a line of home theater audio products, completion of product development of the Company's new line of digital televisions, and additional new product development and engineering costs. As a percentage of sales, research and development expense increased from 3.3% for the three months ended June 30, 1998, to 6.1% for the three months ended June 30, 1999. The Company intends to continue to increase its product development and engineering expenditures to support its strategy of diversifying its operations from support of its Dual-Deck VCR product line to the design, development, and marketing of multiple lines of audio, video, and television consumer electronic products. 9 General and administrative expense decreased 4% to $1.0 million for the three months ended June 30, 1999 from $1.1 million for the three months ended June 30, 1998. The decrease in general and administrative expense was due to a decrease in compensatory expenses, primarily bonus payments, as compared with the same period last year. General and administrative expense decreased from 10.0% of sales for the three months ended June 30, 1998 to 7.3% of sales for the three months ended June 30, 1999. As a result of the above, the Company recorded an operating loss of $0.5 million for the three months ended June 30, 1999 as compared with an operating profit of $0.7 million for the three months ended June 30, 1998. The Company recorded net other expense of $0.3 million for the three months ended June 30, 1999 compared to $0.1 million for the three months ended June 30, 1998. The increase in net other expense was primarily due to increased interest expense due to higher average borrowings under the Company's line of credit for the three months ended June 30, 1999 compared with the same period of the prior year. The Company recorded a benefit from income taxes of $0.3 million in the first quarter of fiscal year 2000. For the three months ended June 30, 1998, the Company recorded a provision for income tax of $0.1 million, representing its estimated state and federal alternative minimum tax liability. SEASONALITY The Company's product lines compete within the consumer electronics industry, which generally experiences seasonal peaks in sales from September through January, covering the holiday selling season. The Company expects to continue to exhibit seasonal peaks of its sales in line with industry experience. YEAR 2000 COMPLIANCE The Company recognizes the problems associated with Year 2000 transactions and has evaluated its management information systems and the possible effect of Year 2000 hardware and software issues. The Company believes all but one of its internal management information systems is Year 2000 compliant. The one internal system that is not Year 2000 compliant is a customer contact management system that the Company expects to replace by September 1999. The Company has communicated with its significant suppliers, financial institutions, customers, and other parties that purchase products or provide critical services or supplies to assess their respective compliance with Year 2000 issues. The Company has not received sufficient information from key suppliers, financial institutions, or customers about their Year 2000 compliance and remediation plans to predict the outcome of their efforts. If the Company's larger customers are not Year 2000 compliant, payments to the Company could be delayed and the Company's cash flow would be affected. If the Company's contract manufacturers are not Year 2000 compliant, the Company's receipt of inventory may be disrupted which could affect its sales and cash flow. If the Company's financial institutions are not Year 2000 compliant, its operations could be disrupted as vendors and employees await payment for goods and services provided and the Company awaits collection of its accounts receivable. The Company is in the process of designing a contingency plan, which it expects to complete by September 1999. However, the Company cannot provide assurances that its significant suppliers, financial institutions, and customers will properly address and resolve critical Year 2000 issues. The Company has incurred and expects to continue to incur expenses to make all of its internal systems Year 2000 compliant. The Company currently estimates that these costs will total less than $200,000. The costs of Year 2000 compliance and the date on which the Company plans to be completely Year 2000 compliant is based on its current estimates. These estimates reflect the Company's assumptions about future events, including the continued availability of third party remediation plans. The Company cannot be sure that these estimates will be achieved, and its actual results could differ materially from its plans. Specific factors that could cause material differences include the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer source codes and embedded technology, the results of internal and external testing and the timeliness and effectiveness of remediation efforts of third parties. 10 FUTURE RESULTS The Company's expectations for results of operations and other forward-looking statements contained in this report on Form 10-Q, particularly statements relating to the sustainability of profitable growth, the impact of year 2000 issues, and expected results from the Company's product line diversification into the digital television and audio markets, involve a number of risks and uncertainties. Among the factors that could affect future operating results are the following: business conditions and general economic conditions; changes in legislation or industry initiatives that may affect the ability of the Company to sell its products; competitive factors, such as the pricing and marketing efforts of rival companies; timing of product introductions; success of competing or future technologies; ability to negotiate reduced product manufacturing costs; the ability of contract manufacturers to meet product specifications, target pricing, and shipment schedules; and the pace and success of product research and development, particularly with the digital television and audio products; and the successful integration of California Audio Labs which was acquired by the Company effective April 1, 1998. The Company's future results may be affected by the Digital Millennium Copyright Act of 1998 which, among other requirements, requires all analog VHS format video cassette recorders sold in the United States after April 2000 to recognize anti-copying technology that uses the automatic gain control feature. Conforming to the automatic gain control copy technology would prevent consumers from using the Company's videocassette recorders sold after April 2000 from copying certain technically protected tapes. The Company intends to modify its products to comply with the requirements of this new legislation by the relevant effective dates. The Company is unable to determine what the effect of the required modification may be on future sales of its video cassette recorder products, but believes that any negative effects may be mitigated by the fact that the Company's Dual-Deck VCR offers numerous feature benefits to consumers over single-deck VCR's and by the Company's success over the last several years in significantly reducing the price premium paid by consumers for the added features of its line of Dual-Deck VCR's over single-deck VCR's. CAPITAL RESOURCES AND LIQUIDITY Net cash used by operating activities was $1.1 million for the three months ended June 30, 1999, unchanged from the three months ended June 30, 1998. The more significant factors comprising the net cash used for the three months ended June 30, 1999 was the net loss of $0.4 million and an increase of $1.1 million in accounts receivable. The increase in the accounts receivable balance from March 31, 1999 to June 30, 1999 was primarily due to the timing of sales in the three months ended June 30, 1999. Of the total sales of $14.1 million for the three months ended June 30, 1999, $6.5 million, or 46%, occurred in the month of June. The Company had net working capital of $8.4 million and $8.7 million at June 30, 1999 and June 30, 1998, respectively. At June 30, 1999, the Company's current ratio (the ratio of current assets to current liabilities) was 1.5 to 1. The Company funds its cash requirements through a combination of cash flow from operations and loans under a line of credit with Congress Financial Corporation. During the fiscal year, the Company's sales seasonality generally require incremental working capital for investment primarily in inventories and receivables. The Company's primary source of funds for the three months ended June 30, 1999 was the line of credit. The financing agreement with Congress Financial was first entered into in October 1992 and was last amended in August 1998. The maximum line of credit is $20.0 million, limited by a borrowing base determined by specific inventory and receivable balances. The line provides for cash loans, letters of credit, and acceptances. The agreement, as amended, expires in November 2002 with a maximum prepayment (if applicable) fee of 1%. Loans are priced at prime plus 1/2%. All assets of the Company are pledged as collateral for the line of credit. The unused and available line of credit at June 30, 1999 was approximately $6.0 million. All closing costs related to the origination and amendment of the financing agreement had been fully amortized by March 31, 1999. The Company believes that its current financial resources will be adequate to support operations over the next twelve months 11 In August 1996, the Company sold $1.5 million of convertible subordinated notes in a private placement with institutional holders. Notes outstanding after August 1999 must be converted to common stock at the option of the Company. As of June 30, 1999, $1.3 million of the notes had been converted into common stock. Effective January 1, 1998, the Company entered into an agreement with Loewe Opta GmbH of Kronach, Bavaria, Germany, to develop and market a line of digital television products designed specifically for the North American market. The initial agreement is effective through January 1, 2003 with built in five-year extensions. The Company incurred fees totaling $2.3 million for the exclusive right to market and distribute Loewe Opta direct view televisions in North America. The Company received its first shipments of product from Loewe in November 1998. On April 1, 1998 the Company acquired California Audio Labs, L.L.C. ("California Audio Labs"). California Audio Labs designs, develops, and assembles digital audio and video products marketed to the high-performance home theater market under the California Audio Labs and Cinevision brand names. The Company has incurred and expects to continue to incur increased expenses related to the integration and development of the California Audio Labs business and therefore anticipates operating losses from its line of California Audio Labs products during the fiscal year ending March 31, 2000. The Company leases a 33,000 square foot corporate office and warehouse facility in Scottsdale, Arizona, which is fully utilized and in good condition. The lease began in January 1996 and expires in January 2003, with one three year extension at the Company's option. The Company also leases a 7,800 square foot engineering and manufacturing facility in Blue Lake, California, which is fully utilized and in good condition. The lease began in June 1997 and expires in May 2002. The Company is currently evaluating its space requirements in relation to its business plan which anticipates increased needs for personnel, office, and engineering space. As a result, the Company expects that it will need to lease additional space and to remodel its existing space, both of which would increase its overall rental costs. INFLATION Inflation has had no material effect on the Company's operations or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not utilize market risk sensitive instruments. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27 Financial Data Schedule 12 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SENSORY SCIENCE CORPORATION (REGISTRANT) Date: August 12, 1999 By /s/ Roger B. Hackett ------------------------------------- Roger B. Hackett Chairman of the Board, Chief Executive Officer, President and Chief Operating Officer Date: August 12, 1999 By /s/ Douglas P. Klein ------------------------------------- Douglas P. Klein Senior Vice President and Chief Financial Officer, Secretary, Treasurer (principal financial and accounting officer) S-1 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR THE FIRST QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS MAR-31-2000 APR-01-1999 JUN-30-1999 173,318 0 11,808,365 (98,500) 13,990,311 26,856,352 3,961,572 (2,674,802) 32,137,979 18,487,200 211,675 0 0 13,662 13,009,136 32,137,979 14,136,184 14,136,184 11,145,390 11,145,390 3,441,353 0 264,171 (714,730) (278,000) (436,730) 0 0 0 0 (0.03) (0.03)
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