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SENSORY SCIENCE CORPORATION
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the "PSLRA"),
Congress encouraged public companies to make "forward-looking statements" by
creating a safe-harbor to protect companies from securities law liability in
connection with forward-looking statements. Sensory Science Corporation ("we" or
the "Company") intends to qualify both its written and oral forward-looking
statements for protection under the PSLRA.
To qualify oral forward-looking statements for protection under the PSLRA, a
readily available written document must identify important factors that could
cause actual results to differ materially from those in the forward-looking
statements. The Company provides the following information in connection with
its continuing efforts to qualify forward-looking statements for the safe harbor
protection of the PSLRA.
Forward-looking statements express expectation of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to these
inherent uncertainties, the investment community is urged not to place undue
reliance on forward-looking statements. In addition, the Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to projections
over time.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION.
Our future results and financial condition are dependent upon our ability to
successfully design, develop and market consumer electronic products. Inherent
in this process are a number of factors that we must successfully manage to
achieve favorable future operating results and financial condition. The
following important factors, in addition to those included in Company's Annual
Report on Form 10-K, could cause actual results to differ materially from the
Company's forward-looking statements.
- WE FACE INTENSE COMPETITION IN AN INNOVATIVE INDUSTRY THAT MAY REQUIRE US
TO INCREASE EXPENDITURES AND LOWER PROFIT MARGINS TO PRESERVE OR MAINTAIN
OUR MARKET SHARE.
The consumer electronics industry is highly competitive and is characterized by
declining prices and constant innovations in quality and features. Manufacturing
and core technology is dominated by large companies, all of which compete with
us for market share in the consumer electronics market. Manufacturing dominance
is maintained by substantial technological and entry cost barriers.
Sales of consumer electronic products in the United States have become
increasingly consolidated into large national and regional consumer electronics
chains, warehouse clubs, and mass merchants, all of which exercise considerable
purchasing power. Independent and smaller regional retailers have, in many
cases, abandoned lower and mid - priced consumer electronic product categories
to concentrate on premium consumer electronic products, such as high-performance
home theater systems, specialized audio components and speakers, and custom
installations of home entertainment systems.
Because of industry consolidation, there are substantial hurdles for bringing
new products to the consumer electronic marketplace, particularly if the company
offering the product is not already distributing other consumer electronic
products. Consumer electronic retailers have considerable negotiating power and
generally require that suppliers have sufficient financial, operational, and
marketing wherewithal to provide a high level of support for product lines
carried by that retailer.
Many of our competitors are large companies which have greater financial
resources than we do. They could outspend us in an attempt to take market share
from us.
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- PRICE-CUTTING MEASURES IN RESPONSE TO COMPETITIVE PRESSURES COULD RESULT IN
DECREASED PROFIT MARGINS.
The consumer electronics industry is subject to significant price competition.
From time to time, we may need to reduce the prices for some of our products to
respond to competitive and consumer pressures and to maintain market share. Any
reduction in our prices to respond to these pressures would have an adverse
impact on our profit margins and business liquidity. In addition, if our sales
volumes fail to grow sufficiently to offset any reduction in margins, our
results of operations would be materially adversely affected.
- LOSS OF OUR PRINCIPAL CUSTOMERS COULD SIGNIFICANTLY DECREASE OUR SALES AND
PROFITABILITY.
During fiscal 2000 three customers each accounted for at least 10% of our annual
sales. Sam's Club was our largest customer accounting for 13%, Circuit City
accounted for 12% and QVC accounted for 11% of net sales in fiscal 2000. The
loss of or a substantial decrease in the volume of purchases by any of these or
of our other top customers could have a material adverse effect on sales and
profitability.
- LOSS OF OUR PRINCIPAL CONTRACT MANUFACTURES COULD SIGNIFICANTLY DECREASE
OUR SALES AND PROFITABILITY.
Independent companies manufacture most of our products. Our Dual-Deck VCR's
are manufactured by two independent manufacturers: Samsung and Shintom Co., Ltd.
("Shimtom"). We use two manufacturers for our line of digital televisions: Loewe
Opta GmbH and Five Rivers Electronic Innovations, LLC ("Five Rivers").
Although we believe that our relationship with our contract manufacturers is
good, an adverse change in the relationship with any of these contract
manufacturer's could have an adverse affect on our ability to timely meet
customer demand and our profit objectives. In addition, failure to negotiate
favorable purchase prices in response to competitive pressures could also
adversely affect our margins.
- A CHANGE IN FINANCIAL ARRANGEMENTS COULD ADVERSELY AFFECT OUR LIQUIDITY.
We fund our cash requirements through a combination of cash flows from
operations and loans under a line of credit with Congress Financial Corporation
("Congress Financial"). During the fiscal year, our sales seasonality generally
requires incremental working capital for investments, primarily in inventories
and receivables. Our primary source of funds for financing is this line of
credit. The financing agreement with Congress Financial was first entered into
in October 1992 and was last amended in May 2000. The maximum line of credit
available is $30.0 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%. The lender is collateralized by all assets of Sensory Science.
Our relationship with Congress Financial is good. However, an adverse change in
the terms of this agreement, or the failure to obtain alternative funding, would
have a material adverse affect on the liquidity of the Company.
- LOSS OF KEY MANAGERIAL PERSONNEL COULD NEGATIVELY IMPACT OUR OPERATIONS.
Our operation requires managerial expertise. Of our key personnel, only the
Chief Executive Officer has an employment contract with us. There can be no
assurance that any of our key employees will remain in our employ. The loss of
key personnel could have a material adverse effect on our operations.
- OPERATING LOSSES AND CHANGES IN LIQUIDITY.
Working capital of the Company has declined from $8.3 million at the end of
fiscal 2000 to a working capital deficit of $1.6 million at September 30, 2000.
The Company experienced operating losses during the quarter and six months ended
September 30, 2000 due to decreases in unit volumes and declining average
selling prices on some key products which has affected the Company's liquidity.
The Company's ability to purchase products sold in the marketplace to meet
customer demand may be limited by the availability of funds under its line of
credit. Management has addressed and continues to address liquidity issues by
renegotiating terms with contract manufacturers and is reviewing certain
strategic relationships and planned expenditures. Management is attempting to
obtain additional outside investment to
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fund Company initiatives and/or working capital. Management believes that these
actions and plans will provide sufficient working capital for the Company,
however there is no assurance that these plans will ultimately be successful. If
the Company continues to sustain significant losses liquidity will be further
impaired.
- GENERAL ECONOMIC CONDITIONS AND CONSUMER ACCEPTANCE OF PRODUCT INITIATIVES.
Sales of consumer electronic products have historically been dependent upon
discretionary spending by consumers, which may be adversely affected by general
economic conditions. Any period of economic uncertainty or decline that impacts
consumer spending or any change in consumer preferences could have a material
adverse affect on the Company's business, results of operations and financial
condition. The Company is also dependent upon consumer acceptance of our new
products.
- GOVERNMENT REGULATION AND COPYRIGHT ISSUES.
We have designed and marketed the Dual-Deck VCR for use as a full-featured
videocassette recorder. Our marketing literature and owner manuals caution
consumers that the Dual-Deck VCR should not be used in a manner which
infringes on the rights of owners of copyrighted material. However, we cannot
predict the likelihood that distribution of current or future Dual-Deck VCR
models will be challenged. All VCR's, including the Dual-Deck VCR, are
affected by Federal legislation that was passed in October 1998 commonly
referred to as The Digital Millennium Copyright Act. One of the effects of this
new law required us to modify the operations of Dual-Deck VCR's sold after
April 2000 so that our VCR's recognize a type of anticopying signal and prevent
consumers from making a usable copy of videotapes encoded with that type of
anticopying signal. We modified Dual-Deck VCR models manufactured after May
1999 so that if they were purchased before April 2000 they continued to operate
as originally designed for the lifetime of the VCR, but if they were purchased
after April 2000 they recognize and respond to the anticopying signal. We are
unable to determine what the effect of the required modification may be on
future sales of our Dual-Deck VCR's, but believe that negative effects may be
mitigated by a combination of the numerous other feature benefits to consumers
of Dual-Deck VCR's over single-deck VCR's and by our success in recent years
of reducing the price premium paid by consumers for our line of Dual-Deck
VCR's over single-deck VCR's.
- PRODUCT OBSOLESCENCE.
We anticipate that VCR's will begin to face obsolescence issues in the future
from digitally-based home player/recorder consumer products. Two companies
have recently introduced digital home video recording devices that use hard
drives to record and store video, and other types of digital recording devices
are likely to be introduced in the future. Nevertheless, these new products face
considerable marketing and consumer acceptance obstacles. We are not aware of
any product that is currently being offered that is widely considered today to
be a viable replacement for the VCR as the primary home video recording device.
However, we cannot predict how long the VCR in its current form will remain the
primary home video recording device.
