<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 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 [ ]
13,895,660 shares of Common Stock were outstanding as of February 11, 2000
<PAGE> 2
SENSORY SCIENCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- At December 31, 1999 and March 31, 1999 3
Consolidated Statements of Operations -- Quarter and Nine Months Ended
December 31, 1999 and 1998 4-5
Consolidated Statements of Cash Flows -- Nine Months Ended
December 31, 1999 and 1998 6-7
Notes to the Interim Consolidated Financial Statements 8-9
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 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
</TABLE>
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 SUCCESSFUL INTERGRATION OF
CALIFORNIA AUDIO LABS.
2
<PAGE> 3
SENSORY SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 1,011,540 $ 358,038
Receivables - less allowance for doubtful
accounts of $136,000 and $98,500 respectively 13,668,086 10,526,335
Inventories 14,556,195 13,934,301
Prepaid expenses and other assets 307,167 191,519
Net investment in discontinued operations 682,736 115,415
Deferred tax asset 100,000 100,000
------------ ------------
Total Current Assets 30,325,724 25,225,608
------------ ------------
EQUIPMENT AND IMPROVEMENTS:
Furniture, fixtures & equipment 1,058,455 875,270
Leasehold improvements 222,006 212,830
Office equipment 1,693,754 1,131,546
Tooling 2,436,443 1,587,602
------------ ------------
Gross equipment and improvements 5,410,658 3,807,248
Less accumulated depreciation and amortization (3,355,862) (2,561,827)
------------ ------------
Equipment and improvements - net 2,054,796 1,245,421
------------ ------------
PATENTS, net of amortization 137,680 149,381
GOODWILL, net of amortization 1,127,197 1,173,316
MARKET EXCLUSIVITY FEE, net of amortization 1,658,999 2,085,598
DEFERRED TAX ASSET 470,000 470,000
OTHER ASSETS, net of amortization 250,000 280,705
------------ ------------
$ 36,024,396 $ 30,630,029
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,088,009 $ 4,147,579
Accrued expenses 556,054 1,395,460
Other current liabilities 813,634 1,471,586
Warranty reserve 467,471 222,000
Income tax payable -- 2,724
Line of credit 12,957,543 9,335,363
------------ ------------
Total Current Liabilities 21,882,711 16,574,712
Long term liabilities 456,972 426,677
Mandatory convertible subordinated debt -- 211,675
------------ ------------
Total Liabilities 22,339,683 17,213,064
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 13,894 13,658
Additional paid-in capital 21,986,995 21,708,124
Accumulated deficit (8,316,176) (8,304,817)
------------ ------------
Total Stockholders' Equity 13,684,713 13,416,965
------------ ------------
$ 36,024,396 $ 30,630,029
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
QUARTER ENDED DECEMBER 31,
------------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 20,435,421 $ 20,641,722
Cost of sales 15,547,848 15,660,645
------------ ------------
Gross profit 4,887,573 4,981,077
------------ ------------
Costs and expenses:
Sales and marketing 1,872,874 2,288,997
Research and development 547,189 784,235
General and administrative 1,363,206 1,119,648
------------ ------------
3,783,269 4,192,880
------------ ------------
Operating income 1,104,304 788,197
Interest and other expenses 426,657 356,408
------------ ------------
Income before income taxes 677,647 431,789
Income taxes 278,000 36,026
------------ ------------
Income from continuing operations 399,647 395,763
Income (loss) from discontinued operations -- (195,679)
------------ ------------
NET INCOME $ 399,647 $ 200,084
============ ============
NET INCOME (LOSS) PER SHARE - BASIC:
Continuing operations $ 0.03 $ 0.03
Discontinued operations -- (0.01)
------------ ------------
$ 0.03 $ 0.02
============ ============
NET INCOME (LOSS) PER SHARE - DILUTED
Continuing operations $ 0.03 $ 0.03
Discontinued operations (0.02)
------------ ------------
$ 0.03 $ 0.01
============ ============
Weighted average basic shares outstanding 13,893,660 13,393,199
Weighted average equivalent shares 374,179 1,360,130
------------ ------------
Weighted average diluted shares outstanding 14,267,839 14,753,329
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
------------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 54,154,566 $ 48,511,232
Cost of sales 41,984,204 36,222,813
------------ ------------
Gross profit 12,170,362 12,288,419
------------ ------------
Costs and expenses:
Sales and marketing 5,155,971 4,456,337
Research and development 2,439,085 1,525,977
General and administrative 3,598,022 3,404,907
------------ ------------
11,193,078 9,387,221
------------ ------------
Operating income 977,284 2,901,198
Interest and other expenses 988,643 733,196
------------ ------------
Income (loss) before income taxes (11,359) 2,168,002
Income taxes -- 196,983
------------ ------------
Income (loss) from continuing operations (11,359) 1,971,019
Income (loss) from discontinued operations -- (231,783)
------------ ------------
NET INCOME (LOSS) $ (11,359) $ 1,739,236
============ ============
NET INCOME PER SHARE - BASIC:
Continuing operations $ -- $ 0.15
Discontinued operations (0.02)
------------ ------------
$ -- $ 0.13
============ ============
NET INCOME PER SHARE - DILUTED
Continuing operations $ -- $ 0.13
Discontinued operations (0.01)
------------ ------------
$ -- $ 0.12
============ ============
Weighted average basic shares outstanding 13,780,955 13,135,020
Weighted average equivalent shares 816,530 1,613,444
------------ ------------
Weighted average diluted shares outstanding 14,597,485 14,748,464
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
]\ SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------
` 1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (11,359) $ 1,739,236
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,238,684 509,926
Provision for bad debt 37,500 (33,799)
Loss on sale of equipment (4,315)
Discontinued operations 231,783
Change in operating assets and liabilities, net of acquisition:
Receivables (3,429,251) (6,525,598)
Inventories (621,894) (8,975,817)
Prepaids and other assets (84,943) (535,245)
Accounts payable 2,940,430 3,698,802
Accrued expenses (814,390) 949,662
Other current liabilities (657,952) (263,642)
Warranty reserve 245,471 (62,298)
Other long-term liabilities 77,375
Income taxes payable (2,724) 63,500
------------ ------------
Net cash used in operating activities (1,083,053) (9,207,805)
------------ ------------
INVESTING ACTIVITIES
Market exclusivity fee (948,350)
Cash paid for acquisition net of cash acquired (773,904)
Equipment and improvement expenditures (1,313,640) (572,336)
Investment in discontinued operation (567,321) 900,287
------------ ------------
Net cash used in investing activities (1,880,961) (1,394,303)
------------ ------------
FINANCING ACTIVITIES
Proceeds from the issuance of common stock 42,416 556,906
Payments on capital lease obligations (47,080) (67,213)
Payment of debt assumed in acquisition (1,205,833)
Net borrowings under line of credit 3,622,180 11,459,957
------------ ------------
Net cash used in financing activities 3,617,516 10,743,817
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 653,502 141,709
CASH AND CASH EQUIVALENTS, beginning of period 358,038 445,925
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,011,540 $ 587,634
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE
MONTHS ENDED DECEMBER 31,
-----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
SUPPLEMENTAL INFORMATION TO CASH FLOW
STATEMENT:
Cash paid for Interest $ 937,664 $ 717,560
Cash paid for Income Taxes $ 27,787 $ 113,900
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 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
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE> 8
SENSORY SCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PREPARATION
The consolidated financial statements include Sensory Science Corporation ("the
Company") and its wholly owned subsidiary, California Audio Labs, LLC ("Cal
Audio"). This information should be read in conjunction with the financial
statements set forth in the Sensory Science Corporation 1999 Annual Report to
Stockholders for the fiscal year ended March 31, 1999.
Accounting policies utilized in the preparation of the financial information
herein presented are the same as set forth in the Company's annual financial
statements except as modified for interim accounting policies which are within
the guidelines set forth in Accounting Principles Board Opinion No. 28, "Interim
Financial Reporting." The interim consolidated financial statements are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position as of
December 31, 1999, the results of operations and cash flows for the quarters and
nine months ended December 31, 1999 and 1998 have been included. Interim results
of operations are not necessarily indicative of the results of operations for
the full year.
Certain reclassifications have been made to the prior financial statements to
conform to the current classification.
NOTE B - ACQUISITION OF BUSINESS
On April 1, 1998, the Company acquired all of the equity interests of Cal Audio.
The purchase price was $775,000 plus assumption of liabilities. The transaction
was accounted for using the purchase method. The fair value of assets acquired
and liabilities assumed was $1,232,000 and $1,690,000, respectively. The excess
of cost over fair value of assets acquired of $1,233,000 was recorded as
goodwill. The goodwill is being amortized on a straight-line basis over a
20-year period.
NOTE C - DISCONTINUED OPERATIONS
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 March 2000, but there is no assurance that it
will be able to do so, or that it will recognize the full estimated value 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.
NOTE D - PRODUCT MANUFACTURING AND LICENSING
The Market Exclusivity Fee of $1.7 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.
Sales of the Company's Dual-Deck videocassette recorder have constituted
substantially all of its revenue for the last five fiscal years. For the nine
months ended December 31, 1999, the Company's largest customer represented 13%
of total revenues, the Company's second largest customer represented 11% of
revenues and the Company's third largest customer represented 10% of revenues.
No other customer represented 10% or more of the Company's revenues. Accounts
receivable from these three customers at December 31, 1999 amounted to $3.2
million.
8
<PAGE> 9
NOTE E - DEFERRED INCOME TAXES
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, 1999 are as follows:
<TABLE>
<S> <C>
Current - reserves not currently deductible $ 1,104,000
Noncurrent:
Differences between book & tax
basis of property $ 337,000
Operating loss carryforwards 4,316,000
Tax credit carryforwards 189,000
Other intangibles 77,000
-----------
Net Deferred Tax Asset $ 6,023,000
Valuation Allowance (5,453,000)
-----------
Net Deferred Asset $ 570,000
===========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1999 COMPARED WITH THE QUARTER ENDED DECEMBER 31,
1998:
Net sales decreased $200,000, or 1% to $20.4 million during the quarter ended
December 31, 1999 from $20.6 million during the quarter ended December 31, 1998.
The decrease in sales resulted from an increase in revenues from new product
lines and lower pricing allowances which were offset by a decrease in Dual-Deck
VCR ("DDVCR") revenues. The 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 quarter
ended December 31, 1999 decreased by 5% compared to the same period last year
due to a reduction in sales of lower-margin monaural models. Although the growth
of the digital television market failed to meet industry expectations in the
quarter, the Company's market share grew to 15%, which puts the Company's brand
at number two in the digital direct-view market according to NPD Intellect.
Sales from new product lines are expected to continue being a growing percentage
of the Company's sales in future quarters.
Gross profit was approximately $4.9 million and $5.0 million for the quarters
ended December 31, 1999 and December 31, 1998, respectively. Gross profit as a
percentage of sales for the quarter ended December 31, 1999 was 23.9%, which was
approximately the same as the same period last year. The gross profit margin of
DDVCR's improved during the quarter due to a shift in sales to higher margin
Hi-Fi units. Gross profit as a percentage of sales for new products was lower
than the company's historical gross margin rates due to special programs and
allowances necessary to initiate distribution and lower than expected revenues.
Sales and marketing expense decreased $0.4 million for the quarter ended
December 31, 1999 to $1.9 million from $2.3 million for the quarter ended
December 31, 1998. The decrease in sales and marketing expense was primarily due
to lower retail marketing costs, principally advertising placement. As a
percentage of revenue, sales and marketing expense decreased from 11.1% for the
quarter ended December 31, 1998, to 9.2% for the quarter ended December 31,
1999.
Research and development expense decreased by 30% to $0.5 million for the
quarter ended December 31, 1999 from $0.8 million for the quarter ended December
31, 1998. The decreased research and development cost was due to the migration
of new products from the development stage to the product line. As a percentage
of sales, research and development expense was 2.7% for the quarter ended
December 31, 1999 compared to 3.8% for the quarter ended December 31, 1998.
General and administrative expense was $0.3 million higher for the third quarter
ended December 31, 1999 compared with the same quarter in the prior year
principally as a result of additional support expenses for Company initiatives.
General and administrative expense increased as a percentage of revenues to 6.7%
for the quarter ended December 31, 1999 from 5.4% in the same period last year.
As a result of the above, the Company recorded operating income of $1.1 million
for the quarter ended December 31, 1999 as compared to operating income of $0.8
million for the quarter ended December 31, 1998. The Company recorded net
interest and other expense of $0.4 million for the quarter ended December 31,
1999, which was approximately the same as the prior year.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH THE NINE MONTHS ENDED DECEMBER
31, 1998
Net sales increased $5.7 million, or 11.6%, to $54.2 million during the nine
months ended December 31, 1999 from $48.5 million during the nine months ended
December 31, 1998. The increase in sales resulted from new product lines,
principally RaveMP Portable Internet Media Players and Digital Televisions.
Dual-Deck VCR unit shipments for the nine months ended December 31, 1999
increased 13% compared to the previous year. Special programs and allowances
primarily associated with a DDVCR model changeovers caused DDVCR net revenues to
decrease by 1.7%.
Gross profit was approximately $12.2 million in the nine months ended December
31, 1999, approximately the same as last year. Gross profit as a percentage of
sales for the nine months ended December 31, 1999 decreased to 22.5% from 25.3%
for the same period last year. The decrease
10
<PAGE> 11
in gross profit percentage was primarily due to discounted prices and allowances
relating to the sale of older model DDVCR's.
Sales and marketing expense increased 15.7% to $5.2 million for the nine months
ended December 31, 1999 from $4.5 million for the nine months ended December 31,
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 9.5% in the nine months ended December 31, 1999, from 9.2%
in the nine months ended December 31, 1998.
Research and development expense increased 160% to $2.4 million for the nine
months ended December 31, 1999 from $1.5 million for the nine months ended
December 31, 1998. The increased research and development cost was 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 4.5% for
the nine months ended December 31, 1999 from 3.1% for the nine months ended
December 31, 1998. Research and development will continue to be a focal point
of the Company.
General and administrative expense increased approximately $0.2 million for the
nine-month period ended December 31, 1999 compared with the prior year. General
and administrative expense declined as a percentage of revenues to 6.6% for the
nine months ended December 31, 1999 from 7.0% in the same period last year.
As a result of the above, the Company recorded operating income of $1.0 million
for the nine months ended December 31, 1999 as compared to operating income of
$2.9 million for the nine months ended December 31, 1998. The Company recorded
net interest and other expense of $1.0 million for the nine months ended
December 31, 1999 compared to $0.7 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 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
Prior to December 31, 1999, the Company evaluated its management information
systems and the possible effect of Year 2000 hardware and software issues. The
Company also 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 estimates it incurred approximately $100,000 to be year
2000 compliant. Subsequent to December 31, 1999, the Company did not experience
any interruptions or other material adverse affects on its business as a result
of the beginning of the Year 2000. All systems are currently Year 2000 compliant
and to the best of our knowledge, all major suppliers and customers as well as
the financial institutions with which the Company conducts its business are Year
2000 compliant.
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 and expected results from
the Company's product line diversification into the digital television and audio
markets, involve a number of risks and
11
<PAGE> 12
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 nine months ended
December 31, 1999, representing an improvement of $8.1 million as compared with
the nine months ended December 31, 1998. The most significant factor comprising
the net cash used for the nine months ended December 31, 1999 was an increase in
accounts receivable due to the timing of sales at the end of the quarter. The
increase in the accounts receivable balance was partially offset by a $2.9
million increase in accounts payable, which was primarily due to the timing of
payments to the company's various product suppliers.
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 nine months ended
December 31, 1999 was the line of credit. The financing agreement with Congress
Financial was first entered into in October 1992 and was last amended in October
1999. The maximum line of credit is $30.0 million, limited by a borrowing base
determined by specific inventory and receivable balances. Interest is charged at
prime plus 1/2%. The line is collateralized by all assets of the company. The
unused and available line of credit at December 31, 1999 was approximately $5.2
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 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
were converted to common stock.
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.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
13
<PAGE> 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: February 11, 2000 By /s/ Roger B. Hackett
------------------------------------------------
Roger B. Hackett Chairman of the Board, Chief
Executive Officer, President and Chief
Operating Officer
Date: February 11, 2000 By /s/ Thomas E. Linnen
------------------------------------------------
Thomas E. Linnen Executive Vice President
(principal financial and accounting officer)
14
<PAGE> 15
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR
THE THIRD QUARTER ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 1,011,540
<SECURITIES> 0
<RECEIVABLES> 13,804,086
<ALLOWANCES> (136,000)
<INVENTORY> 14,556,195
<CURRENT-ASSETS> 30,325,724
<PP&E> 5,410,658
<DEPRECIATION> 3,355,862
<TOTAL-ASSETS> 36,024,396
<CURRENT-LIABILITIES> 21,882,711
<BONDS> 0
0
0
<COMMON> 13,894
<OTHER-SE> 13,670,819
<TOTAL-LIABILITY-AND-EQUITY> 36,024,396
<SALES> 54,154,566
<TOTAL-REVENUES> 54,154,566
<CGS> 41,984,204
<TOTAL-COSTS> 11,193,078
<OTHER-EXPENSES> (9,085)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 997,728
<INCOME-PRETAX> (11,359)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,359)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
