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
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0492122
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(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
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(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
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SENSORY SCIENCE CORPORATION
INDEX
Page No.
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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
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SENSORY SCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 March 31, 1999
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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
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Total Current Assets 26,488,767 25,225,608
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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
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Gross equipment and improvements 3,961,572 3,807,248
Less accumulated depreciation and amortization (2,674,802) (2,561,827)
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Equipment and improvements - net 1,286,770 1,245,421
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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
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TOTAL $ 31,770,394 $ 30,630,029
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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
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Total Current Liabilities 18,119,341 16,574,712
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Long term liabilities 428,603 426,677
Mandatory convertible subordinated debt 211,675 211,675
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Total Liabilities 18,759,619 17,213,064
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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)
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Total Stockholders' Equity 13,010,775 13,416,965
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TOTAL $ 31,770,394 $ 30,630,029
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3
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SENSORY SCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30,
----------------------------
1999 1998
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SALES $ 14,136,184 $ 10,795,319
COST OF SALES 11,145,390 7,667,269
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Gross Profit 2,990,794 3,128,050
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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
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Total Other Operating Costs 3,446,251 2,467,928
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Operating (Loss) Income (455,457) 660,122
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Other (Expenses) Revenues:
Interest income 1,751 3,372
Interest expense (264,171) (134,491)
Other income (expense) 3,147 75
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Total Other Expense (259,273) (131,044)
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(LOSS) INCOME BEFORE (BENEFIT)
PROVISION FOR INCOME TAXES (714,730) 529,078
(BENEFIT) PROVISION FOR INCOME TAXES (278,000) 52,888
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(LOSS) INCOME FROM CONTINUING OPERATIONS $ (436,730) $ 476,190
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DISCONTINUED OPERATIONS:
Income from operations -- 62,420
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NET (LOSS) INCOME $ (436,730) $ 538,610
============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Continuing Operations $ (0.03) $ 0.04
Discontinued Operations -- $ 0.00
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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
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SENSORY SCIENCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended June 30,
--------------------------
1999 1998
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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
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Net cash used in operating activities (1,125,987) (1,146,295)
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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
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Net cash used in investing activities (210,260) (1,442,846)
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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
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Net cash used in financing activities 1,151,527 2,457,367
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (184,720) (131,774)
CASH AND CASH EQUIVALENTS, beginning of period 358,038 445,925
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CASH AND CASH EQUIVALENTS, end of period $ 173,318 $ 314,151
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5
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SENSORY SCIENCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three
Months Ended June 30
-----------------------
1999 1998
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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
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Excess of cost over fair value of assets acquired $ -- $1,233,475
========== ==========
6
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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
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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)
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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
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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
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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
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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
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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
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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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 173,318
<SECURITIES> 0
<RECEIVABLES> 11,808,365
<ALLOWANCES> (98,500)
<INVENTORY> 13,990,311
<CURRENT-ASSETS> 26,856,352
<PP&E> 3,961,572
<DEPRECIATION> (2,674,802)
<TOTAL-ASSETS> 32,137,979
<CURRENT-LIABILITIES> 18,487,200
<BONDS> 211,675
0
0
<COMMON> 13,662
<OTHER-SE> 13,009,136
<TOTAL-LIABILITY-AND-EQUITY> 32,137,979
<SALES> 14,136,184
<TOTAL-REVENUES> 14,136,184
<CGS> 11,145,390
<TOTAL-COSTS> 11,145,390
<OTHER-EXPENSES> 3,441,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,171
<INCOME-PRETAX> (714,730)
<INCOME-TAX> (278,000)
<INCOME-CONTINUING> (436,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
