-----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, LLPd6DsaSGBJQ21Itw3xAJjm+kk5Ge2sH5WXSI5Es5ykJs0DG+jVjct5Ztr5kx0j gn8oXxBn1DyvlRF1Mcvn6w== 0000950147-99-001281.txt : 19991117 0000950147-99-001281.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950147-99-001281 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754913 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 9/30/99 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 September 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) (IRS 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. YES [X] NO [ ] 13,890,791 shares of Common Stock were outstanding as of October 14, 1999 SENSORY SCIENCE CORPORATION INDEX Page No. -------- Part I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets -- At September 30, 1999 and March 31, 1999 3 Consolidated Statements of Operations -- Three and Six Months Ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows -- Six Months Ended September 30, 1999 and 1998 5-6 Notes to the Interim Consolidated Financial Statements - 7-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 Part II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 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
September 30, 1999 March 31, 1999 ------------------ -------------- ASSETS (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 344,880 $ 358,038 Receivables - less allowance for doubtful accounts of $136,000 and $98,500 respectively 19,502,759 10,526,335 Inventories 13,517,719 13,934,301 Prepaid expenses and other assets 636,549 191,519 Net investment in discontinued operations 414,794 115,415 Deferred tax asset 378,000 100,000 ------------ ------------ Total Current Assets 34,794,701 25,225,608 ------------ ------------ EQUIPMENT AND IMPROVEMENTS: Furniture, fixtures & equipment 984,992 875,270 Leasehold improvements 219,105 212,830 Office equipment 1,266,624 1,131,546 Tooling 2,375,886 1,587,602 ------------ ------------ Gross equipment and improvements 4,846,607 3,807,248 Less accumulated depreciation and amortization (2,905,527) (2,561,827) ------------ ------------ Equipment and improvements - net 1,941,080 1,245,421 ------------ ------------ PATENTS, net of amortization 141,250 149,381 GOODWILL, net of amortization 1,142,617 1,173,316 MARKET EXCLUSIVITY FEE, net of amortization 1,801,198 2,085,598 DEFERRED TAX ASSET 470,000 470,000 OTHER ASSETS, net of amortization 287,227 280,705 ------------ ------------ TOTAL $ 40,578,073 $ 30,630,029 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,635,798 $ 4,147,579 Accrued expenses 1,856,798 1,395,460 Other current liabilities 1,261,575 1,471,586 Warranty reserve 204,501 222,000 Income tax payable -- 2,724 Line of credit 17,894,883 9,335,363 ------------ ------------ Total Current Liabilities 26,853,555 16,574,712 ------------ ------------ Long term liabilities 442,640 426,677 Mandatory convertible subordinated debt -- 211,675 ------------ ------------ Total Liabilities 27,296,195 17,213,064 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock 13,891 13,658 Additional paid-in capital 21,983,810 21,708,124 Accumulated deficit (8,715,823) (8,304,817) ------------ ------------ Total Stockholders' Equity 13,281,878 13,416,965 ------------ ------------ TOTAL $ 40,578,073 $ 30,630,029 ============ ============
3 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
For The Three For The Six Months Ended September 30, Months Ended September 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- SALES $19,582,961 $17,074,191 $33,719,145 $27,869,510 COST OF SALES 15,290,966 12,894,899 26,436,356 20,562,168 ----------- ----------- ----------- ----------- Gross profit 4,291,995 4,179,292 7,282,789 7,307,342 ----------- ----------- ----------- ----------- OTHER OPERATING COSTS: Sales and marketing 1,707,766 1,126,628 3,283,097 2,166,430 Research and development 1,009,418 384,960 1,891,896 742,816 General and administrative 1,246,374 1,215,018 2,234,816 2,285,288 ----------- ----------- ----------- ----------- Total other operating costs 3,963,558 2,726,606 7,409,809 5,194,534 ----------- ----------- ----------- ----------- Operating income 328,437 1,452,686 (127,020) 2,112,808 ----------- ----------- ----------- ----------- OTHER (EXPENSE) REVENUES: Interest income 3,145 6,895 4,896 10,267 Interest expense (315,996) (252,940) (580,167) (387,431) Other income (expense) 10,138 300 13,285 375 ----------- ----------- ----------- ----------- Total other expense (302,713) (245,745) (561,986) (376,789) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 25,724 1,206,941 (689,006) 1,736,019 PROVISION (BENEFIT) FOR INCOME TAXES -- 108,069 (278,000) 160,957 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS 25,724 1,098,872 (411,006) 1,575,062 ----------- ----------- ----------- ----------- DISCONTINUED OPERATIONS Income (loss) from operations -- (98,524) -- (36,104) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 25,724 $ 1,000,348 $ (411,006) $ 1,538,958 =========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE: Continuing operations $ 0.00 $ 0.08 $ (0.03) $ 0.12 Discontinued operations -- $ 0.00 -- 0.00 ----------- ----------- ----------- ----------- Net Income (Loss) per Common Share $ 0.00 $ 0.08 $ (0.03) $ 0.12 =========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE - ASSUMING DILUTION Continuing operations $ 0.00 $ 0.07 $ (0.03) $ 0.10 Discontinued operations -- $ 0.00 -- 0.00 ----------- ----------- ----------- ----------- Net Income (Loss) per Common Share - Assuming Dilution $ 0.00 $ 0.07 $ (0.03) $ 0.10 =========== =========== =========== ===========
4 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Six Months Ended September 30, -------------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ (411,006) $ 1,538,958 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 666,930 315,114 Deferred taxes (278,000) -- Provision for bad debt 37,500 (33,799) Loss on sale of equipment -- 10,320 Discontinued operations -- 36,104 Change in operating assets and liabilities - net of acquisition: Receivables (9,263,924) (2,496,206) Inventories 416,582 (9,280,684) Prepaids (445,030) (532,960) Other assets (6,522) (41,178) Accounts payable 1,488,219 2,143,206 Accrued expenses 486,354 574,092 Other current liabilities (210,011) 559,267 Warranty reserve (17,499) (50,000) Other long-term liabilities (78,464) 3,704 Income taxes payable (2,724) 121,200 ------------ ------------ Net cash used in operating activities (7,476,091) (7,132,861) ------------ ------------ INVESTING ACTIVITIES Market exclusivity fee -- (1,248,350) Cash paid for acquisition net of cash acquired -- (773,904) Equipment and improvement expenditures (255,075) (391,014) Investment in discontinued operation (299,379) 316,212 Tooling expenditures (534,283) -- ------------ ------------ Net cash used in investing activities (1,088,737) (2,097,056 ------------ ------------ FINANCING ACTIVITIES Proceeds from the issuance of capital stock 39,228 286,118 Payments on capital lease obligations (47,080) (47,320) Payment of debt assumed in acquisition (1,205,833) Net borrowings (payments) under line of credit 8,559,522 10,308,053 ------------ ------------ Net cash used in financing activities 8,551,670 9,341,018 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,158) 111,101 CASH AND CASH EQUIVALENTS, beginning of period 358,038 445,925 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 344,880 $ 557,026 ============ ============ 5 SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Six Months Ended September 30, -------------------------- 1999 1998 ---------- ---------- SUPPLEMENTAL INFORMATION TO CASH FLOW STATEMENT: Cash paid for Interest $576,412 $ 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 $236,691 $ 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 September 30, 1999 consisted of $1.5 million of raw materials and service parts, and $12.0 million of finished goods. The Market Exclusivity Fee of $1.8 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 December 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 six months ended September 30, 1999, the Company's largest customer represented 15% 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 September 30, 1999 were $3.9 million and $2.5 million. 7 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 September 30, 1999 are as follows: 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 September 30, ----------------------------- 1999 1998 ----------- ----------- Income From Continuing Operations $ 25,724 $ 1,098,872 ----------- ----------- Average Outstanding Common Shares 13,784,975 13,311,129 ----------- ----------- Basic Income From Continuing Operations Per Share $ 0.00 $ 0.08 ----------- ----------- Diluted Income from Continuing Operations per Common Share: Income available to common stockholders, from above $ 25,724 $ 1,098,872 Add interest on presumed conversion of convertible debt 6,250 11,333 ----------- ----------- Net income available for diluted earnings per share $ 31,974 $ 1,110,205 =========== =========== Average outstanding common shares, from above 13,784,975 13,311,129 Additional dilutive shares related to stock options and warrants 1,083,673 1,324,980 Additional dilutive shares related to subordinated notes 0 406,000 ----------- ----------- Average outstanding and potentially dilutive common shares 14,868,648 15,042,109 =========== =========== Dilutive Income From Continuing Operations per share $ 0.00 $ 0.07 =========== =========== 8 Options and warrants to purchase 1.6 million shares of common stock at various prices were outstanding during the three months ended September 30, 1999 but were not included in the computation of diluted earnings per share because the exercise prices of the options and warrants were greater than the average price of the common shares. For the Six Months Ended September 30, ----------------------------- 1999 1998 ------------ ------------ Income (Loss) From Continuing Operations $ (411,006) $ 1,575,062 ------------ ------------ Average Outstanding Common Shares 13,724,603 13,076,683 Basic (Loss) Income From Continuing Operations Per Share $ (.03) $ 0.12 ------------ ------------ Diluted (loss) Income from Continuing Operations per Common Share: (Loss) income available to common stockholders, from above $ (411,006) $ 1,575,062 Add interest on presumed conversion of convertible debt 0 31,000 ------------ ------------ Net (loss) income available for diluted earnings per share $ (411,006) $ 1,606,062 ============ ============ Average outstanding common shares, from above 13,724,603 13,076,683 Additional dilutive shares related to stock options and warrants 0 1,230,100 Additional dilutive shares related to subordinated notes 0 508,000 ------------ ------------ Average outstanding and potentially dilutive common shares 13,724,603 14,814,783 ------------ ------------ Dilutive (Loss) Income From Continuing Operations per share $ (.03) $ 0.11 ============ ============ Options and warrants to purchase 1.6 million shares of common stock at various prices were outstanding during the nine months ended September 30, 1999, but were not included in the computation of diluted earnings per share because the exercise prices of the options and warrants were greater than the average price of the common shares. 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. 9 ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998: Net sales increased $2.5 million or 15% to $19.6 million during the three months ended September 30, 1999 from $17.1 million during the three months ended September 30, 1998. The increase in sales resulted from a $3.1 million increase in revenues from new product lines. These new product lines include the RaveMP Portable Internet Media Players, Digital Televisions and California Audio Labs digital home theater products. Dual-Deck VCR ("DDVCR") unit shipments for the three months ended September 30, 1999 increased 17% compared to the same period one year prior. A shift in sales mix and one-time price reductions and allowances primarily associated with a DDVCR model changeover caused DDVCR net sales to decline 3% in the three months ended September 30, 1999 from the same period in the prior year. Sales from new product lines are expected to continue being a growing percentage of the company's sales in future quarters as the Company expects to introduce a new product line of DVD (Digital Video Disk) products and expand its California Audio Labs CL 2500 Series system. Gross profit was approximately $4.3 million and $4.2 million in the three month periods ended September 30, 1999 and September 30, 1998, respectively. Gross profit as a percentage of sales decreased to 21.9% in the current quarter ended September 30, 1999 from 24.5% in the same period last year. The decrease in gross profit percentage was primarily due to discounted prices and allowances relating to the sale of older model DDVCR's. Gross profit as a percentage of sales for new products was also lower than the company's historical gross margin rates due to special programs and allowances necessary to initiate distribution. The Company believes that it will be able to improve gross margins in future quarters as a result of lower DDVCR manufacturing costs which will offset the downward trend in VCR market prices and the Company expects higher margins associated with the continuing sales of new product lines. Sales and marketing expense increased 51.6% to $1.7 million for the three months ended September 30, 1999 from $1.1 million for the three months ended September 30, 1998. The increase in sales and marketing expense was primarily due to increased sales commissions on higher overall sales levels, and the addition of selling and marketing expenses across all categories incurred to support the sales of the Company's new product lines. As a percentage of sales, sales and marketing expense increased from 6.6% in the three months ended September 30, 1998, to 8.7% in the three months ended September 30, 1999. Research and development expense increased 162% from $0.4 million for the three months ended September 30, 1998 to $1.0 million for the three months ended September 30, 1999. The increased research and development costs are due to product development costs incurred to develop the company's new product lines. As a percentage of sales, research and development expense increased from 2.3% for the three months ended September 30, 1998, to 5.2% for the three months ended September 30, 1999. General and administrative expense remained level at $1.2 million for the three month periods ended September 30, 1999 and September 30, 1998. General and administrative expense declined as a percentage of revenues to 6.4% for the three months ended September 30, 1999 from 7.1% in the same period last year. As a result of the above, the Company recorded an operating profit of $0.3 million for the three months ended September 30, 1999 as compared with an operating profit of $1.5 million for the three months ended September 30, 1998. The Company recorded net interest and other expense of $0.3 million for the three month periods ended September 30, 1999 and, September 30, 1998. 10 SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE SIX MONTHS ENDED SEPTEMBER 30, 1998 Net sales increased $5.8 million or 21.0% to $33.7 million during the six months ended September 30, 1999 from $27.9 million during the six months ended September 30, 1998. The increase in sales resulted from a $4.6 million increase in revenues from new product lines. These new product lines include Digital Televisions, RaveMP Portable Internet Media Players and California Audio Labs digital home theater products. Dual-Deck VCR ("DDVCR") unit shipments for the six months ended September 30, 1999 increased 27% compared to the same period one year prior due to increased consumer demand. Special programs and allowances primarily associated with a DDVCR model changeover caused DDVCR net sales to increase only 4.5% in the six months ended September 30, 1999 from the same period in the prior year. Gross profit was approximately $7.3 million in the six months ended September 30, 1999 and 1998. Gross profit as a percentage of sales decreased to 21.6% in the current quarter ended September 30, 1999 from 26.2% in the same period last year. The decrease in gross profit percentage was primarily due to discounted prices and allowances relating to the sale of older model DDVCR's. Gross profit as a percentage of sales for new products was also lower than the company's historical gross margin rates due to special programs and allowances necessary to initiate distribution. Sales and marketing expense increased 51.5% to $3.3 million for the six months ended September 30, 1999 from $2.2 million for the six months ended September 30, 1998. The increase in sales and marketing expense was primarily due to increased sales commissions on higher overall sales levels, and the addition of selling and marketing expenses across all categories incurred to support the sales of the Company's new product lines. As a percentage of sales, sales and marketing expense increased to 9.7% in the six months ended September 30, 1999, from 7.8% in the three months ended September 30, 1998. Research and development expense increased 155% to $1.9 million for the six months ended September 30, 1999 from $0.7 million for the six months ended September 30, 1998. The increased research and development costs are due to product development costs incurred to develop the company's new product lines. As a percentage of sales, research and development expense increased to 5.6% for the six months ended September 30, 1999, from 2.7% for the six months ended September 30, 1998. General and administrative expense remained level at $2.2 million for the six month periods ended September 30, 1999 and September 30, 1998. General and administrative expense declined as a percentage of revenues to 6.6% for the six months ended September 30, 1999 from 8.2% in the same period last year. As a result of the above, the Company recorded an operating loss of $0.1 million for the six months ended September 30, 1999 as compared with an operating profit of $2.1 million for the three months ended September 30, 1998. The Company recorded net interest and other expense of $0.6 million for the three months ended September 30, 1999 compared to $0.4 million in the same period of the prior year. The increase was caused by higher interest expense associated with higher borrowings in the Company's line of credit required to fund higher working capital. 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 December 1999. The Company has 11 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 December 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. 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. 12 CAPITAL RESOURCES AND LIQUIDITY Net cash used by operating activities was $7.5 million for the six months ended September 30, 1999, representing an increase of $0.4 million as compared with the six months ended September 30, 1998. The more significant factors comprising the net cash used for the six months ended September 30, 1999 were the net loss of $0.4 million, and an increase of $9.3 million in accounts receivable. The increase in the accounts receivable balance from March 31, 1999 to September 30, 1999 was primarily due to the timing of sales in the three months ended September 30, 1999. Of the total sales of $19.6 million for the three months ended September 30, 1999, $10.8 million, or 55%, occurred in the month of September. This increase in the accounts receivable balance was partially offset by a $1.5 million increase in accounts payable, which was primarily due to the timing of payments to the company's various product suppliers. The Company had net working capital of $7.9 million and $8.7 million at September 30, 1999 and September 30, 1998, respectively. At September 30, 1999, the Company's current ratio (the ratio of current assets to current liabilities) was 1.3 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 requires incremental working capital for investment primarily in inventories and receivables. The Company's primary source of funds for the six months ended September 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 September 30, 1999 was approximately $2.1 million. All closing costs related to the origination and amendment of the financing agreement had been fully amortized by March 31, 1999. The Company has completed preliminary negotiations with, and had received tentative approval from, Congress Financial Corporation to increase the current line of credit to $30.0 million. The Company believes that its current financial resources will be sufficient to support operations over the next twelve months. In August 1996, the Company sold $1.5 million of convertible subordinated notes in a private placement with institutional holders. As per the terms of these instruments, the remaining $0.2 million of notes outstanding as of August 1999 have been converted to 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. 13 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 to remodel its existing space, and lease space in a building adjacent to the Scottsdale headquarters location. 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 14 SIGNATURES 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: November 11, 1999 By /s/ Roger B. Hackett ----------------------------------------------- Roger B. Hackett Chairman of the Board, Chief Executive Officer, President and Chief Operating Officer Date: November 11, 1999 By /s/ Thomas E. Linnen ----------------------------------------------- Thomas E. Linnen Senior Vice President (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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAR-31-2000 APR-01-1999 SEP-30-1999 344,880 0 19,502,759 (136,000) 13,517,719 34,794,701 4,846,607 2,905,527 40,578,073 26,296,195 0 0 0 13,891 13,267,987 30,578,073 33,719,145 33,719,145 26,436,356 7,409,809 (18,181) 0 561,986 (686,006) (278,000) (411,006) 0 0 0 (411,006) (0.03) 0
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