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 December 31, 1998
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
GO-VIDEO, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 86-0492122
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(State of Incorporation) (IRS E.I.N.)
7835 EAST MCCLAIN DRIVE, SCOTTSDALE, ARIZONA 85260
- -------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(602) 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.
YES X NO
----- ----
13,471,978 shares of Common Stock were outstanding as of February 10, 1999
<PAGE>
GO-VIDEO, INC.
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION
Consolidated Balance Sheets --
At December 31, 1998 and March 31, 1998 3
Consolidated Statements of Operations --
Three and Nine Months Ended December 31,
1998 and 1997 4
Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements -- 6 - 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 9 - 13
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
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31, MARCH 31,
1998 1998
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 587,634 $ 445,925
Receivables - less allowance for doubtful
accounts of $110,000 and $100,000, respectively 14,388,863 9,460,081
Inventories 15,409,008 6,012,022
Prepaid expenses and other assets 502,530 47,146
Deferred tax asset 100,000 100,000
------------ ------------
Total Current Assets 30,988,035 16,065,174
------------ ------------
EQUIPMENT AND IMPROVEMENTS:
Furniture, fixtures & equipment 847,776 600,143
Leasehold improvements 212,830 212,830
Office equipment 1,147,148 844,056
Tooling 1,517,602 1,353,360
------------ ------------
Total 3,725,356 3,010,389
Less accumulated depreciation and amortization 2,508,863 2,109,376
------------ ------------
Equipment and Improvements - net 1,216,493 901,013
------------ ------------
Patents, net of amortization of
$60,357 and $54,410, respectively 115,660 121,607
Goodwill, net of amortization of
$106,347, and $51,139, respectively 1,194,588 119,324
Market Exclusivity Fee, net of amortization of
$94,800 and $0, respectively 2,227,798 1,374,248
Deferred Income Taxes 470,000 430,000
Other Assets 73,104 33,243
------------ ------------
TOTAL ASSETS $ 36,285,678 $ 19,044,609
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,368,775 $ 1,999,330
Accrued expenses 2,106,202 1,042,039
Other current liabilities 1,754,676 1,983,875
Warranty reserve 230,000 160,000
Line of credit 13,546,836 1,860,493
Income tax payable 86,500 23,000
------------ ------------
Total current liabilities 22,092,989 7,068,737
------------ ------------
Long Term Liabilities 147,213 127,825
Mandatory Convertible Subordinated Debt 307,500 740,833
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock $.001 par value - authorized,
50,000,000 shares; issued and outstanding:
13,437,678 and 12, 643,297 shares,
respectively 13,438 12,643
Additional capital 21,372,896 20,480,154
Accumulated deficit (7,648,358) (9,385,583)
------------ ------------
Total stockholders' equity 13,737,976 11,107,214
------------ ------------
TOTAL $ 36,285,678 $ 19,044,609
============ ============
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three For The Nine
Months Ended December 31, Months Ended December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 21,367,940 $ 14,207,693 $ 51,334,545 $ 36,292,084
COST OF SALES 16,274,249 10,448,312 38,368,240 27,043,694
------------ ------------ ------------ ------------
Gross profit 5,093,691 3,759,381 12,966,305 9,248,390
------------ ------------ ------------ ------------
OTHER OPERATING COSTS:
Sales and marketing 2,597,866 1,584,704 5,351,182 3,693,195
Research and development 779,854 138,686 1,522,507 655,812
General and administrative 1,119,648 730,176 3,404,906 2,285,420
------------ ------------ ------------ ------------
Total other operating costs 4,497,368 2,453,566 10,278,595 6,634,427
------------ ------------ ------------ ------------
Operating income 596,323 1,305,815 2,687,710 2,613,963
------------ ------------ ------------ ------------
OTHER (EXPENSE) REVENUES:
Interest income 3,835 2,408 14,102 6,667
Interest expense (376,452) (215,072) (781,170) (493,079)
Other income (expense) 130 100 505 (8,494)
------------ ------------ ------------ ------------
Total other expense (372,487) (212,564) (766,563) (494,906)
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 223,835 1,093,251 1,921,147 2,119,057
PROVISION FOR INCOME TAXES 20,000 20,000 178,000 35,000
------------ ------------ ------------ ------------
NET INCOME $ 203,835 $ 1,073,251 $ 1,743,147 $ 2,084,057
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ 0.02 $ 0.09 $ 0.13 $ 0.17
============ ============ ============ ============
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION $ 0.01 $ 0.08 $ 0.12 $ 0.16
============ ============ ============ ============
</TABLE>
<PAGE>
GO-VIDEO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine
Months Ended December 31
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,743,147 $ 2,084,057
Adjustments to reconcile net income
to net cash used by operating activities -
Depreciation and amortization 509,926 494,199
Provision for losses on accounts receivable (33,799) 0
Loss (gain) on sale of equipment (4,315) 10,320
Change in operating assets and liabilities
- net of acquisition:
Receivables (6,806,755) 287,212
Inventories (8,540,646) (1,857,970)
Prepaid expenses and other assets (455,384) (66,524)
Other assets (79,861) (6,705)
Accounts payable 4,299,357 (948,707)
Accrued expenses 1,064,163 343,079
Other current liabilities (263,642) (30,610)
Warranty reserve (62,298) (47,000)
Other long-term liabilities 0 4,325
Income taxes payable 63,500 (17,000)
------------ ------------
Net cash provided by (used in) operating
activities (8,566,607) 248,676
------------ ------------
INVESTING ACTIVITIES:
Market Exclusivity Fee (948,350) (974,248)
Cash paid for acquisition net of cash acquired (1,947,034) 0
Equipment and improvement expenditures (572,336) (236,726)
------------ ------------
Net cash used in investing activities (3,467,720) (1,210,974)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 556,906 456,839
Payment on capital lease obligations (67,213) (66,395)
Net borrowings under line of credit 11,686,343 607,696
------------ ------------
Net cash provided by financing activities 12,176,036 998,140
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 141,709 35,842
CASH AND CASH EQUIVALENTS, beginning of period 445,925 302,788
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 587,634 $ 338,630
============ ============
SUPPLEMENTAL INFORMATION TO CASH FLOW
STATEMENT:
Interest paid $ 717,560 $ 493,079
============ ============
Income tax paid $ 113,900 $ 52,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of subordinated debt and accrued
interest to common stock $ 216,666 $ 264,583
============ ============
In connection with the acquisition, liabilities
were assumed as follows:
Cash paid and liabilities assumed $ 2,567,965 $ 0
------------ ------------
Fair value of assets acquired, including
$33,799 in cash $ 1,437,494 $ 0
------------ ------------
Excess of cost over fair value of
assets acquired $ 1,130,471 $ 0
============ ============
<PAGE>
GO-VIDEO, INC. 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 Go-Video, Inc. and beginning in April 1998 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 $1.9 million which includes $1.2 million of debt assumed
plus the assumption of other liabilities of $0.6 million. The acquisition was
accounted for using the purchase method of accounting for business combinations.
The excess of assets acquired over liabilities assumed of $1.1 million has been
allocated to goodwill and is being amortized over twenty years.
Inventories at December 31, 1998 consisted of $1.1 million of raw materials and
service parts and $14.3 million of finished goods.
The Market Exclusivity Fee of $2.2 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 fee was paid in full as of September 30, 1998. 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 and video security products.
Sales of the Company's Dual-Deck videocassette recorder have constituted
substantially all of its revenue of the last five fiscal years. For the nine
months ended December 31, 1998, the Company's largest customer represented 17%
of total revenues and the Company's second largest customer represented 11% of
revenues. No other customer represented 10% or more of the Company's revenues.
Accounts receivable from these two customers at December 31, 1998 were $1.6
million and $2.6 million, respectively.
The Financial Accounting Standards Board recently issued SFAS No. 130 on
"Reporting Comprehensive Income" and SFAS No. 131 on "Disclosure about Segments
of an Enterprise and Related Information". The "Reporting Comprehensive Income"
standard is effective for fiscal years beginning after December 15, 1998. The
standard changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet. The Company is currently
evaluating what impact this standard will have on the Company's financial
statements. The "Disclosure about Segments of an Enterprise and Related
Information" standard is effective for fiscal years beginning after December 15,
1998. This standard requires that public companies report certain information
about operating segments in their financial statements. It also establishes
<PAGE>
related disclosures about products and services, geographic areas, and major
customers. The Company is currently evaluating what impact this standard will
have on its disclosures.
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 December 31, 1998 are as follows:
Deferred Tax Assets:
Current - reserves not currently
deductible $ 492,000
Noncurrent:
Differences between book & tax
basis of property $ 422,000
Operating loss carryforwards 6,687,000
Tax credit carryforwards 189,000
Other intangibles 77,000
-----------
Net Deferred Tax Asset $ 7,867,000
Valuation Allowance (7,297,000)
-----------
Net Deferred Asset $ 570,000
===========
SFAS No.128, "Earnings Per Share", requires a reconciliation of the numerator
and denominators of basic and diluted earnings per share as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Income $ 203,835 $ 1,073,251
----------- -----------
Average Outstanding Common Shares 13,393,199 12,459,072
----------- -----------
Basic Net Income Per Share $ 0.02 $ 0.09
----------- -----------
Diluted Net Income per Common Share:
Income available to common stockholders, from above $ 203,835 $ 1,073,251
Add interest on presumed conversion of convertible debt 9,375 18,000
----------- -----------
Net income available for diluted earnings per share $ 213,168 $ 1,091,251
=========== ===========
Average outstanding common shares, from above 13,393,199 12,459,072
Additional dilutive shares related to stock options and warrants 1,060,130 987,314
Additional dilutive shares related to subordinated notes 300,000 783,333
----------- -----------
Average outstanding and potentially dilutive common shares 14,753,329 14,229,719
=========== ===========
Dilutive net income per share $ 0.01 $ 0.08
=========== ===========
</TABLE>
<PAGE>
Options and warrants to purchase 103,300 shares of common stock at various
prices were outstanding during the three months ended December 31, 1998 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.
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Income $ 1,743,147 $ 2,084,057
----------- -----------
Average Outstanding Common Shares 13,135,020 12,152,863
----------- -----------
Basic Net Income Per Share $ 0.13 $ 0.17
----------- -----------
Diluted Net Income per Common Share:
Income available to common stockholders, from above $ 1,743,147 $ 2,084,057
Add interest on presumed conversion of convertible debt 35,000 42,000
----------- -----------
Net income available for diluted earnings per share $ 1,778,147 $ 2,126,057
=========== ===========
Average outstanding common shares, from above 13,135,020 12,152,863
Additional dilutive shares related to stock options and warrants 1,173,444 675,112
Additional dilutive shares related to subordinated notes 440,000 816,666
----------- -----------
Average outstanding and potentially dilutive common shares 14,748,464 13,644,641
=========== ===========
Dilutive net income per share $ 0.12 $ 0.16
=========== ===========
</TABLE>
Options and warrants to purchase 172,187 shares of common stock at various
prices were outstanding during the nine months ended December 31, 1998, 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, 1998 and March 31, 1997 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" from the 1998 Annual
Report on Form 10-K.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1997:
Net sales increased 50% to $21.4 million during the three months ended December
31, 1998 from $14.2 million during the three months ended December 31, 1997. The
increase in net sales was primarily due to a 102% increase in unit shipments of
Dual-Deck VCR's ("DDVCR") sold by the Company's Consumer Electronics Division
for the three months ended December 31, 1998 compared to the three months ended
December 31, 1997, offset in part by a 22% decrease in the average selling price
per unit over the two periods. The increase in net DDVCR units sold was
primarily due to the Summer 1998 introduction of a new line of DDVCR's featuring
significant reductions in retail selling prices ranging from 13% to 25%,
including a new leader model sold at a retail price of $299 which replaced a
similar model selling at $399. Sales of the Company's Security Products Division
represented 3% of total net sales for the three months ended December 31, 1998,
down from 8% for the comparable period of the prior year. The Company's Home
Theater Division, which is responsible for the marketing and sales of
high-performance audio, video and television products under the Loewe and
California Audio Labs brands, represented 7% of total sales for the three months
ended December 31, 1998 versus none for the comparable period of the prior year.
The increased revenue resulted from the April 1998 acquisition of California
Audio Labs and the November 1998 commencement of sales of the division's new
line of digital televisions, neither of which were present during the same
period of the previous year. The Company anticipates that the Home Theater
Division will contribute increasing revenue both in dollars and as a percentage
of total revenues over time, subject to market acceptance of the digital
television line and, to a lesser extent, the audio product line.
Gross profit was $5.1 million and $3.8 million for the three months ended
December 31, 1998 and 1997, respectively, representing a 35% increase in gross
profit dollars. The increase in gross profit dollars was primarily due to higher
unit sales of DDVCR's and the addition of television and audio product sales,
offset in part by lower security product sales. Gross profit as a percentage of
sales (gross margin) decreased from 26.5% for the three months ended December
31, 1997 to 23.8% for the three month period ended December 31, 1998. The
decrease in gross margin resulted primarily from lower average selling prices of
DDVCR's, partially offset by lower DDVCR manufacturing costs and higher margined
sales of digital televisions and audio products. The Company anticipates that
gross margins from its DDVCR sales will continue to decline during the fourth
quarter of the Company's 1999 fiscal year (which ends March 31, 1999) due to
continued market pressure on average selling prices of its DDVCR.
Sales and marketing expense increased 64% to $2.6 million for the three months
ended December 31, 1998 from $1.6 million for the three months ended December
31, 1997. 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 11.1% in the three months ended December 31, 1997 to 12.2% in the
three months ended December 31, 1998.
Research and development expense increased 462% from $0.1 million for the three
months ended December 31, 1997 to $0.8 million for the three months ended
December 31, 1998. 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
1.0% for the three months ended December 31, 1997 to 3.7% for the three months
ended December 31, 1998. 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,
<PAGE>
development, and marketing of multiple lines of audio, video, and television
consumer electronic products.
General and administrative expense increased 53% to $1.1 million for the three
months ended December 31, 1998 from $0.7 million for the three months ended
December 31, 1997. The increase in general and administrative expense was
primarily due to higher costs incurred due to the acquisition and integration of
California Audio Labs and higher human resources, management information
systems, and office support costs related to the increased employee population
over the same period of the prior year. General and administrative expense
increased from 5.1% of sales for the three months ended December 31, 1997 to
5.2% of sales for the three months ended December 31, 1998.
As a result of the above, the Company recorded operating profit of $0.6 million
for the three months ended December 31, 1998 compared with operating profit of
$1.3 million for the three months ended December 31, 1997. The Company recorded
net other expense of $0.4 million for the three months ended December 31, 1998
compared to $0.2 million for the three months ended December 31, 1997. 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 December 31, 1998 compared with the same period of the prior
year. The Company recorded a provision for income taxes of $20,000, representing
its state and estimated alternative minimum tax liabilities for the three months
ended December 31, 1998. For the three months ended December 31, 1997, the
Company recorded a provision for income tax of $20,000, representing its
alternative minimum tax liability.
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE NINE MONTHS ENDED DECEMBER
31, 1997:
Net sales increased 41% to $51.3 million during the nine months ended December
31, 1998 from $36.3 million during the nine months ended December 31, 1997. The
increase in net sales was primarily due to a 73% increase in net unit shipments
of DDVCR's sold by the Company's Consumer Electronics Division for the nine
months ended December 31, 1998 compared to the nine months ended December 31,
1997, offset in part by a 20% decrease in the average selling price per unit
over the two periods. The increase in net units sold was primarily due to
increased demand for the Company's newest model line of DDVCR's introduced
during the nine months ended December 31, 1998. The new line of DDVCR's featured
significant reductions in selling prices ranging from 13% to 25%, including a
new leader model sold at a retail price of $299 which replaced a similar model
selling at $399. Sales of the Company's Security Products Division were
approximately 6% of total sales for the nine months ended December 31, 1998, up
slightly from 5% for the comparable period of the prior year. The Company's Home
Theater Division, which is responsible for the marketing and sales of
high-performance audio, video and television products under the Loewe and
California Audio Labs brands, represented 4% of total sales for the nine months
ended December 31, 1998 versus none for the comparable period of the prior year.
The increased revenue resulted from the April 1998 acquisition of California
Audio Labs and the November 1998 commencement of sales of the division's new
line of televisions, neither of which were present during the same period of the
previous year. The Company anticipates that the Home Theater Division will
contribute increasing revenue both in dollars and as a percentage of total
revenues over time, subject to market acceptance of the digital television line
and, to a lesser extent, the audio product line.
Gross profit was $13.0 million and $9.2 million for the nine months ended
December 31, 1998 and 1997, respectively, representing a 40% increase in gross
profit dollars. The increase in gross profit dollars was primarily due to higher
sales of DDVCR's and the addition of television and audio products in the
current fiscal year. Gross profit as a percentage of sales (gross margin)
decreased slightly from 25.5% for the nine months ended December 31, 1997 to
25.3% for the nine month period ended December 31, 1998. The decrease in gross
margin resulted primarily from lower average selling prices of DDVCR's,
partially offset by lower DDVCR manufacturing costs and higher margined sales of
digital televisions and audio products. The Company anticipates that gross
margins from its DDVCR sales will continue to decline during the fourth quarter
of the Company's 1999 fiscal year (which ends March 31, 1999) due to continued
market pressure on average selling prices of its DDVCR.
Sales and marketing expense increased 45% to $5.4 million for the nine months
ended December 31, 1998 from $3.7 million for the nine months ended December 31,
<PAGE>
1997. 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 slightly from 10.2%
in the nine months ended December 31, 1997 to 10.4% in the nine months ended
December 31, 1998.
Research and development expense increased 132% from $0.7 million for the nine
months ended December 31, 1997 to $1.5 million for the nine months ended
December 31, 1998. The increase in research and development costs was 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
1.8% for the nine months ended December 31, 1997 to 3.0% for the nine months
ended December 31, 1998. 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.
General and administrative expense increased 49% to $3.4 million for the nine
months ended December 31, 1998 from $2.3 million for the nine months ended
December 31, 1997. The increase in general and administrative expense was
primarily due to higher costs incurred due to the acquisition and integration of
California Audio Labs, LLC and higher human resources, management information
systems, and office support costs related to the increased employee population
over the same period of the prior year. General and administrative expense
increased from 6.3% of sales for the nine months ended December 31, 1997 to 6.6%
of sales for the nine months ended December 31, 1998.
As a result of the above, the Company recorded operating profit of $2.7 million
for the nine months ended December 31, 1998 compared with operating profit of
$2.6 million for the nine months ended December 31, 1997. The Company recorded
net other expense of $0.8 million for the nine months ended December 31, 1998
compared to $0.5 million for the nine months ended December 31, 1997. The
increase in net other expense is primarily due to increased interest expense due
to higher average borrowings under the Company's line of credit for the nine
months ended December 31, 1998, compared with the same period of the prior year.
The Company recorded a provision for income taxes of $178,000 representing its
state and estimated alternative minimum tax liabilities for the nine months
ended December 31, 1998. For the nine months ended December 31, 1997, the
Company recorded a provision for income tax of $35,000 representing its
alternative minimum tax liability.
SEASONALITY
The Company's primary 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 is conducting an evaluation of its management information systems
and the possible effect of Year 2000 hardware and software issues. The Company
believes its internal management information systems are Year 2000 compliant. In
addition, the Company is in communication with its significant suppliers,
financial institutions, customers, and other parties that purchase product or
provide critical services or supplies to the Company to assess their respective
compliance with Year 2000 issues. The Company expects to complete its assessment
by June 1999. The more significant issue that may impact the Company is the
ability of contract manufacturers to fulfill product orders on schedule and at
contracted costs. The Company is in the process of designing a contingency plan,
<PAGE>
but there can be no assurance that the Company's significant suppliers and
customers will properly address and resolve such Year 2000 issues. Expenditures
to make the Company Year 2000 compliant will be expensed as incurred and based
on the Company's review to date are not expected to be material to the Company's
financial position or results of operations.
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 $8.6 million for the nine months ended
December 31, 1998 compared to cash provided by operations of $0.2 million for
the nine months ended December 31, 1997. The more significant factors comprising
the net cash used were an $8.5 million increase in inventories and a $6.8
million increase in accounts receivable, offset in part by a $4.3 million
increase in accounts payable. The increase in the inventory balance from March
31, 1998 to December 31, 1998 was primarily due to increased inventories of
DDVCR's in anticipation of higher sales, the April 1, 1998 acquisition of Cal
Audio, and the receipt of initial shipments of digital televisions from the
Company's television manufacturer. The increase in the accounts receivable
balance was primarily due to increased sales levels of DDVCR's and the late
November 1998 commencement of television sales, as the Company's average
collection experience has generally remained consistent. The increase in
accounts payable reflects higher inventory purchases and a lengthening of
regular payment terms negotiated with one of the Company's principal
manufacturers as compared to the same period of the prior year.
The Company had net working capital of $8.9 million and $9.0 million at December
31, 1998 and March 31, 1998, respectively. At December 31, 1998, the Company's
current ratio (the ratio of current assets to current liabilities) was 1.4 to 1.
The Company's sales growth and seasonality requires incremental working capital
for investment in inventories and receivables, which the Company has primarily
funded through a revolving line of credit with Congress Financial Corporation
("Congress"). The financing agreement with Congress was entered into in October
1992 and was last amended in August 1998. The maximum line of credit, as
amended, is $20.0 million, limited by a borrowing base determined by specific
<PAGE>
inventory and receivable balances and provides for cash loans, letters of credit
and acceptances. The agreement, as amended, expires in November 2002 with a
prepayment (if applicable) fee of 1.0% through November 1999, 0.5% from December
1999 until November 2000, and 0.25% in the remaining two years of the agreement.
Loans are priced at the lender's prime lending rate plus 0.5% or LIBOR plus
2.75%. The lender is collateralized by all assets of the Company. The unused and
available line of credit at December 31, 1998 was $3.4 million. Management
believes its current financial resources to be adequate 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. Notes outstanding after
August 1999 must be converted to common stock at the option of the Company. As
of December 31, 1998, $1.1 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, 1999.
The Company leases a 33,000 square foot executive office and warehouse facility
in Scottsdale, Arizona, which is fully utilized and in good condition. The lease
began in January 1996 and has a term of seven years, with one three year
extension at the option of the Company. The Company is currently considering its
space requirements in relation to its business plan, which anticipates increased
needs for personnel, office, and warehousing space. As such, the Company may be
required to seek additional space and/or to remodel its existing space, which
would increase the Company's 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
<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.
GO-VIDEO, INC. (REGISTRANT)
Date: February 12, 1999 By /s/ Roger B. Hackett
---------------------------------------
Roger B. Hackett
Chairman of the Board,
Chief Executive Officer,
President and Chief Operating Officer
Date: February 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
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 587,634
<SECURITIES> 0
<RECEIVABLES> 14,498,863
<ALLOWANCES> 110,000
<INVENTORY> 15,409,008
<CURRENT-ASSETS> 30,988,035
<PP&E> 3,725,356
<DEPRECIATION> 2,508,863
<TOTAL-ASSETS> 36,285,678
<CURRENT-LIABILITIES> 22,092,989
<BONDS> 0
0
0
<COMMON> 13,438
<OTHER-SE> 13,724,538
<TOTAL-LIABILITY-AND-EQUITY> 36,285,678
<SALES> 51,334,545
<TOTAL-REVENUES> 51,334,545
<CGS> 38,368,240
<TOTAL-COSTS> 38,368,240
<OTHER-EXPENSES> 10,278,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 766,563
<INCOME-PRETAX> 1,921,147
<INCOME-TAX> 178,000
<INCOME-CONTINUING> 1,743,147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,743,147
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.12
</TABLE>
