<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 September 30, 2000
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 [ ]
14,426,970 shares of Common Stock were outstanding as of November 7, 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 September 30, 2000 and March 31, 2000 3
Consolidated Statements of Operations and Comprehensive (Loss) Income --
Quarters and Six Months Ended September 30, 2000 and 1999 4-5
Consolidated Statements of Cash Flows -- Six Months Ended
September 30, 2000 and 1999 6-7
Notes to the Consolidated Financial Statements 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12-13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14-15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</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: WE OR THE COMPANY "BELIEVES", "EXPECTS",
"INTENDS", "PLANS", AND OTHER USES OF FUTURE TENSES. SEE NOTES TO THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" FOR SUCH FORWARD LOOKING
STATEMENTS. ALSO SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" ON PAGES 10-12 AND EXHIBIT 99.1 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 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, AND THE PACE AND
SUCCESS OF PRODUCT RESEARCH AND DEVELOPMENT AND FINANCING INITIATIVES.
2
<PAGE> 3
SENSORY SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,281,766 $ 1,218,949
Receivables - less allowance for doubtful
accounts of $116,000 and $116,000, respectively 13,477,930 15,670,572
Inventories 12,976,019 11,869,163
Prepaid expenses and other assets 394,247 975,923
Deferred tax asset -- 100,000
Net investment in discontinued operations -- 214,426
------------ ------------
Total Current Assets 28,129,962 30,049,033
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, fixtures & equipment 1,018,282 856,787
Leasehold improvements 651,615 420,227
Office equipment 2,017,555 1,803,319
Tooling 1,565,623 1,377,523
------------ ------------
Gross equipment and improvements 5,253,075 4,457,856
Less accumulated depreciation and amortization (2,390,323) (1,912,972)
------------ ------------
Equipment and improvements - net 2,862,752 2,544,884
------------ ------------
PATENTS, net of amortization 129,122 136,264
GOODWILL, net of amortization 1,080,880 1,111,763
MARKET EXCLUSIVITY FEE, net of amortization 1,232,398 1,516,799
DEFERRED TAX ASSET 570,000 317,500
OTHER ASSETS, net of amortization 261,576 248,414
------------ ------------
$ 34,266,690 $ 35,924,657
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,710,460 $ 4,789,152
Accrued expenses 1,031,029 938,866
Other current liabilities 776,032 957,838
Warranty reserve 271,262 324,964
Line of credit 14,969,979 14,732,513
------------ ------------
Total Current Liabilities 29,758,762 21,743,333
Severance reserve and other liabilities 453,144 386,713
------------ ------------
Total Liabilities 30,211,906 22,130,046
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 14,422 14,260
Additional paid-in capital 22,723,832 22,422,587
Unrealized gain on investment, net of tax -- 228,748
Accumulated deficit (18,683,470) (8,870,984)
------------ ------------
Total Stockholders' Equity 4,054,784 13,794,611
------------ ------------
$ 34,266,690 $ 35,924,657
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
QUARTER ENDED SEPTEMBER 30,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Net sales $ 18,513,505 $19,582,961
Cost of sales 17,607,609 15,290,966
------------ -----------
Gross profit 905,896 4,291,995
------------ -----------
Costs and expenses:
Sales and marketing 3,178,965 1,707,766
Research and development 770,082 1,009,418
General and administrative 1,996,536 1,246,374
------------ -----------
5,945,583 3,963,558
------------ -----------
Operating (loss) income (5,039,687) 328,437
Interest and other expenses 385,317 302,713
------------ -----------
(Loss) income before income taxes (5,425,004) 25,724
Income tax benefit -- --
------------ -----------
NET (LOSS) INCOME $ (5,425,004) $ 25,724
============ ===========
NET (LOSS) INCOME PER SHARE - BASIC $ (0.38) $ 0.00
============ ===========
NET (LOSS) INCOME PER SHARE - DILUTED $ (0.38) $ 0.00
============ ===========
Weighted average basic shares outstanding 14,373,867 13,784,975
Weighted average equivalent shares -- 1,083,673
------------ -----------
Weighted average diluted shares outstanding 14,373,867 14,868,648
============ ===========
NET (LOSS) INCOME $ (5,425,004) $ 25,724
Other comprehensive income - Holding gain
arising during the quarter, net of tax of $5,000 7,500
------------ -----------
COMPREHENSIVE (LOSS) INCOME $ (5,417,504) $ 25,724
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 29,196,601 $ 33,719,145
Cost of sales 27,023,700 26,436,356
------------ ------------
Gross profit 2,172,901 7,282,789
------------ ------------
Costs and expenses:
Sales and marketing 5,993,972 3,283,097
Research and development 1,519,215 1,891,896
General and administrative 3,750,605 2,234,816
------------ ------------
11,263,792 7,409,809
------------ ------------
Operating loss (9,090,891) (127,020)
Interest and other expenses 721,595 561,986
------------ ------------
Loss before income taxes (9,812,486) (689,006)
Income tax benefit -- (278,000)
------------ ------------
NET LOSS $ (9,812,486) $ (411,006)
============ ============
NET LOSS PER SHARE - BASIC $ (0.68) $ (0.03)
============ ============
NET LOSS PER SHARE - DILUTED $ (0.68) $ (0.03)
============ ============
Weighted average basic shares outstanding 14,342,187 13,724,603
Weighted average equivalent shares -- --
------------ ------------
Weighted average diluted shares outstanding 14,342,187 13,724,603
============ ============
NET LOSS $ (9,812,486) $ (411,006)
Other comprehensive loss - Holding loss arising
during the six months, net of tax of $152,500 (228,748)
------------ ------------
COMPREHENSIVE LOSS $(10,041,234) $ (411,006)
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,812,486) $ (411,006)
Adjustments to reconcile net loss to net cash
provided (used) by operations:
Depreciation and amortization 1,079,469 666,910
Deferred taxes (278,000)
Change in operating assets and liabilities:
Receivables 2,192,642 (8,976,424)
Inventories (1,106,856) 416,582
Prepaids and other assets (49,574) (451,552)
Accounts payable 7,921,308 1,488,219
Accrued expenses 92,163 461,338
Other asset and liabilities, net (194,425) (174,271)
----------- -----------
Net cash provided (used) in operating activities 122,241 (7,258,204)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment and improvement expenditures (1,062,811) (1,079,339)
Investment in discontinued operation 214,426 (299,379)
Proceeds from disposal of discontinued operations 830,924
Proceeds from sale of investment 250,088
----------- -----------
Net cash provided (used) in investing activities 232,627 (1,378,718)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 301,407 64,244
Net (repayments) borrowings under line of credit (593,458) 8,559,520
----------- -----------
Net cash (used) provided by financing activities (292,051) 8,623,764
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 62,817 (13,158)
CASH AND CASH EQUIVALENTS, beginning of period 1,218,949 358,038
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,281,766 $ 344,880
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
SUPPLEMENTAL INFORMATION TO CASH FLOW
STATEMENT:
Cash paid for interest $735,118 $576,412
Cash paid for income taxes $ -- $ 16,300
</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" or "we") 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 2000 Annual Report to
Stockholders for the fiscal year ended March 31, 2000 ("Fiscal 2000"). See the
Capital Resources and Liquidity section of Management's Discussion and Analysis
of Financial Condition and Results of Operations for a discussion of liquidity
issues.
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
September 30, 2000, the results of operations for the quarters and six months
ended September 30, 2000 and 1999 and cash flows for the six months ended
September 30, 2000 and 1999 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 classifications.
NOTE B - RECENT DEVELOPMENTS
Working capital of the Company has declined from $8.3 million at the end of
fiscal 2000 to a deficit of $1.6 million at the end of September 30, 2000. The
Company experienced operating losses during the six months ended September 30,
2000 due to decreases in unit volumes and declining average selling prices on
certain key products which has affected the Company's liquidity. Management is
addressing liquidity issues by obtaining price reductions with contract
manufacturers and is reviewing certain strategic relationships and planned
expenditures. In addition, management has obtained additional credit for
inventory purchases amounting to $5.0 million from a major supplier. This new
credit limit is fully utilized at September 30, 2000. During the quarter ended
September 30, 2000, we also announced a reorganization of the Company, more
fully described below. Management is also attempting to obtain additional
outside investment to fund Company initiatives and/or working capital.
Management believes that these actions and plans will provide sufficient working
capital for the Company for the next twelve months.
During the second quarter of the fiscal year, we announced a business
reorganization to place more emphasis on sales and marketing initiatives and
improve operational efficiency. As part of the reorganization, we consolidated
our sales force to get closer to the customer, streamlined operations to be more
responsive and increase efficiencies and shifted resources to marketing from
other areas of our business. In addition, we began shifting the manufacturing of
our California Audio Labs product line from internal manufacturing to contract
manufacturing. This move of manufacturing operations will take us completely out
of the manufacturing business, which has proven to be costly to our bottom line.
The overall corporate reorganization will result in the reduction in total staff
of about one-third, with the most significant portion being manufacturing-
related positions. As part of this overall reorganization, we incurred a
one-time charge of approximately $1.5 million. Approximately $1.3 million of
this one-time charge relates to inventory and obsolete parts writedowns and the
remaining $0.2 million associated with severance costs. In addition to the above
initiatives, we have also negotiated price reductions, increased credit lines
with a key manufacturer and improved payment terms with our key manufacturing
partners which should benefit our margins going forward.
NOTE C - DISCONTINUED OPERATIONS
In fiscal 1999, the Company approved plans to dispose of its security products
business to the former management of the business. A legal transfer of the
assets occurred during May 2000. The Company has continued involvement in the
new company through a guaranty of debt totaling $990,000 at September 30, 2000
for up to one year and management authority over the purchasing company through
a seat on its Board of Directors. Cash proceeds from the disposal of this
business during May 2000 amounted to $830,924, which represented the debt
associated with the security products business. The debt was paid at closing
using these proceeds. The disposition of the remaining net assets resulted in a
loss of approximately $242,000, which approximated the reserve the Company had
established of approximately $289,000. Therefore, the disposition did not have a
material impact on the financial position of the Company.
NOTE D - PRODUCT MANUFACTURING AND LICENSING
The Market Exclusivity Fee of $1.2 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. An amendment to our agreement with Loewe Opta was completed in
September 2000, modifying the territory to market and distribute these products
to exclude Mexico and Canada. In exchange, we have received pricing concessions
on certain models of digital direct view televisions purchased from Loewe Opta.
In our opinion, the change in territory has a minimal effect on our marketing
and sales strategy for these products. Accordingly, the carrying amount of the
market exclusivity fee was not reduced. The Company began amortization of the
fee in November 1998 on a straight-line basis over the initial term of the
agreement which ended on January 1, 2003. This amendment reduces the initial
term by one year and now expires on January 1, 2002.
NOTE E - COMPANY OPERATIONS
Sales of the Company's Dual-Deck videocassette recorder have constituted
substantially all of its revenue for the last five fiscal years. For the six
months ended September 30, 2000, the Company's largest customer represented
13.9% of total revenues and the Company's second largest customer represented
10.2% of revenues. No other customer represented 10% or more of the Company's
revenues. Accounts receivable at September 30, 2000 for the Company's largest
customer amounted to approximately $3.8 million and approximately $1.1 million
for the Company's second largest customer.
8
<PAGE> 9
NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
an amendment to SFAS No. 133. The Company will adopt these statements effective
April 1, 2001. The statements require that entities record all derivatives as
assets or liabilities, measured at fair value, with the change in fair value
recognized in earnings or in other comprehensive income, depending on the use of
the derivative and whether it qualifies for hedge accounting. We are in the
process of evaluating the impact which will result upon adoption of this
standard.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), that summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The adoption of SAB
101 did not have a material effect on our revenues or revenue recognition
policy.
NOTE G - SEGMENT INFORMATION
We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 which requires enterprises to report
information about operating segments in annual financial statements and selected
information about reportable segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
We operate in one business segment but track revenue by two product categories.
Operating margins are not tracked separately by category. The following
represents the revenue by product category for the quarters and six months ended
September 30:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
$ % $ %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
QUARTERS ENDED SEPTEMBER 30:
Dual-Deck VCR's 9,195,230 49.7 17,713,877 90.5
New Digital Products 9,318,275 50.3 1,869,084 9.5
---------- ----- ---------- -----
Total 18,513,505 100.0 19,582,961 100.0
========== ===== ========== =====
SIX MONTHS ENDED SEPTEMBER 30:
Dual-Deck VCR's 17,418,255 59.7 29,622,986 87.9
New Digital Products 11,778,346 40.3 4,096,159 12.1
---------- ----- ---------- -----
Total 29,196,601 100.0 33,719,145 100.0
========== ===== ========== =====
</TABLE>
Our assets are all located in the United States and all sales were to customers
in the United States and Canada.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS:
Working capital of the Company has declined from $8.3 million at the end of
fiscal 2000 to a deficit of $1.6 million at the end of September 30, 2000. The
Company experienced operating losses during the six months ended September 30,
2000 due to decreases in unit volumes and declining average selling prices on
certain key products which has affected the Company's liquidity. Management is
addressing liquidity issues by obtaining price reductions with contract
manufacturers and is reviewing certain strategic relationships and planned
expenditures. In addition, management has obtained additional credit for
inventory purchases amounting to $5.0 million from a major supplier. This new
credit limit is fully utilized at September 30, 2000. During the quarter ended
September 30, 2000, we also announced a reorganization of the Company, more
fully described below. Management is also attempting to obtain additional
outside investment to fund Company initiatives and/or working capital.
Management believes that these actions and plans will provide sufficient working
capital for the Company for the next twelve months.
During the second quarter of the fiscal year, we announced a business
reorganization to place more emphasis on sales and marketing initiatives and
improve operational efficiency. As part of the reorganization, we consolidated
our sales force to get closer to the customer, streamlined operations to be more
responsive and increase efficiencies and shifted resources to marketing from
other areas of our business. In addition, we began shifting the manufacturing of
our California Audio Labs product line from internal manufacturing to contract
manufacturing. This move of manufacturing operations will take us completely out
of the manufacturing business, which has proven to be costly to our bottom line.
The overall corporate reorganization will result in the reduction in total staff
of about one-third, with the most significant portion being
manufacturing-related positions. As part of this overall reorganization, we
incurred a one-time charge of approximately $1.5 million. Approximately $1.3
million of this one-time charge relates to inventory and obsolete parts
writedowns and the remaining $0.2 million associated with severance costs. In
addition to the above initiatives, we have also negotiated price reductions,
increased credit lines with a key manufacturer and improved payment terms with
our key manufacturing partners which should benefit our margins going forward.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH THE QUARTER ENDED SEPTEMBER 30,
1999:
Net sales decreased $1,069,000, or 5.5%, to $18.5 million during the quarter
ended September 30, 2000 from $19.6 million during the quarter ended September
30, 1999. The decrease in sales was primarily due to a decline in gross revenues
of the Dual-Deck VCRs ("DDVCR") by approximately 50% from prior year's levels
due to a 37.4% decrease in unit volumes. Partially offsetting this decrease in
the DDVCR business was the sale of the new VCR/DVD combination products which
accounted for approximately 36% of gross sales in the second quarter of 2000. We
expect the VCR/DVD product sales will account for approximately 40% of revenues
in the quarter ended December 31, 2000. Other new products gross revenues were
down approximately 10% from the prior year's levels, primarily due to lower
sales volume of RaveMP portable internet media players. In addition, digital
television revenue was essentially flat with last year.
Gross profit was approximately $0.9 million and $4.3 million for the quarters
ended September 30, 2000 and September 30, 1999, respectively. Gross profit as a
percentage of sales for the quarter ended September 30, 2000 was 4.9%, which was
down significantly from last year's levels of approximately 21.9%. This
quarter's gross profit includes a one-time charge of approximately $1.3 million
relating to inventory writedowns of one model of our digital television, certain
internet media players and obsolete parts. Without this one-time charge, gross
margins for the quarter ended September 30, 2000 would have been 12.2% of sales,
down significantly from last year's levels. The primary factor contributing to
the decline in gross margins is a 21.6% decline in the average selling prices of
the DDVCR and to a lesser extent a similar decline in the average selling prices
of digital televisions due to the transition from the 480p line of products to
the 1080i line or high definition compatible products. We anticipate that gross
margins for the DDVCR business will continue to decline.
Sales and marketing expense was approximately $3.2 million for the quarter ended
September 30, 2000, up slightly from the first quarter, but up $1.5 million from
prior year levels. The increase in sales and marketing expense was
11
<PAGE> 11
primarily due to increased promotional costs for market development funds paid
to customers and increased costs of consumer rebate programs.
Research and development expense for the quarter ended September 30, 2000,
although essentially flat with the first quarter of the fiscal year, decreased
from last year's levels by about $0.2 million for the same period due primarily
to lower travel and design costs. As a percentage of sales, research and
development expense was 4.2% for the quarter ended September 30, 2000 compared
to 5.2% for the quarter ended September 30, 1999.
General and administrative expense was up approximately $0.8 million, or up 60%,
from the prior year to $2.0 million. General and administrative expense for the
quarter ended September 30, 2000 includes severance costs for staff reductions
amounting to approximately $0.2 million. Without the one-time charge, general
and administrative costs were essentially level with the first quarter of the
fiscal year but up from the prior year due primarily to higher salary costs.
During the second quarter, we announced staff reductions that we expect will
reduce payroll cost by approximately $2.4 million on an annual basis. General
and administrative expense as a percentage of revenues, excluding the severance
charges, was 9.8% for the quarter ended September 30, 2000 compared to 6.4% for
the quarter ended September 30, 1999.
Because of the above, the Company recorded an operating loss of $5.0 million for
the quarter ended September 30, 2000 compared to near breakeven for the quarter
ended September 30, 1999. We recorded net interest and other expense of $0.4
million for the quarter ended September 30, 2000, which was up slightly from
last year's levels.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
1999:
Net sales decreased $4.5 million, or 13.4%, to $29.2 million during the six
months ended September 30, 2000 from $33.7 million during the six months ended
September 30, 1999. The decrease in sales was primarily due to a decline in
gross revenues of the Dual-Deck VCRs ("DDVCR") by approximately 42% from prior
year's levels due to a 29% decrease in unit volumes. Partially offsetting this
decrease in the DDVCR business was the sale of the new VCR/DVD combination
products which began shipping to customers late in the third quarter of 2000. We
expect the selling price of our DDVCR product line will be under pressure,
however we are continuing to work with our suppliers to obtain more favorable
pricing and terms and we expect those benefits will begin to be felt during the
quarters ahead. We expect the VCR/DVD product sales will account for
approximately 40% of revenues in the quarter ended December 31, 2000. Other new
products' gross revenues were essentially level with last year. We believe
recent retail price moves in connection with lower negotiated purchase prices
and the introduction of the new 1080i model in the third quarter of the fiscal
year should improve revenues from digital televisions.
Gross profit was approximately $2.2 million and $7.3 million for the six months
ended September 30, 2000 and September 30, 1999, respectively. Gross profit as a
percentage of sales for the six months ended September 30, 2000 was 7.4%, which
was down significantly from last year's levels of approximately 21.6%. The six
months ended September 30, 2000 includes a one-time charge of approximately $1.3
million relating to inventory writedowns of one model of our digital television,
certain internet media players and obsolete parts. Without this one-time charge,
gross margins for the six months ended September 30, 2000 would have been 12.1%
of sales, down significantly from last year's levels. The primary factor
contributing to the decline in gross margins is an 18.1% decline in the average
selling prices of the DDVCR and to a lesser extent as similar decline in the
average selling prices of digital televisions. We anticipate that future gross
margins for the DDVCR business will continue to decline.
Sales and marketing expense was approximately $6.0 million for the six months
ended September 30, 2000, up $2.7 million from prior year levels. The increase
in sales and marketing expense was primarily due to increased promotional costs
for market development funds paid to customers and increased costs of consumer
rebate programs.
Research and development expense for the six months ended September 30, 2000 was
down approximately $0.4 million, or 19.7%, from last year's levels due primarily
to lower travel and design costs. As a percentage of sales, research and
development expense was 5.2% for the six months ended September 30, 2000
compared to 5.6% for the six months ended September 30, 1999.
General and administrative expense was up approximately $1.5 million from the
prior year to $3.8 million due primarily to higher expenses associated with our
information system infrastructure and overall salary costs. General and
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administrative expense for the six months ended September 30, 2000 includes
severance costs for staff reductions amounting to approximately $0.2 million.
During the second quarter, we announced staff reductions that we expect will
reduce payroll cost by approximately $2.4 million on an annual basis. General
and administrative expense as a percentage of revenues, excluding the severance
charges, was 12.3% for the six months ended September 30, 2000 compared to 6.6%
for the six months ended September 30, 1999.
Because of the above, the Company recorded an operating loss of $9.1 million for
the six months ended September 30, 2000 compared to an operating loss of $0.1
million for the six months ended September 30, 1999. We recorded net interest
and other expense of $0.7 million for the six months ended September 30, 2000,
which was up $0.2 million from last year's levels due to additional borrowings
under our line of credit.
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.
FUTURE RESULTS
Our expectations for results of operations and other forward - looking
statements contained in this quarterly report on Form 10-Q, in particular
statements concerning expected future revenues and expenses, and development of
the home theater markets, the Internet recording and playback devices markets
and other new product markets, involve a number of risks and uncertainties. Some
of the factors that could cause actual results to differ materially from those
expected are provided in Exhibit 99.1 and the following: business conditions and
general economic conditions; competitive factors, such as pricing and marketing
efforts of rival companies; timing of product introductions and consumer
acceptance of new products; ability of contract manufacturers to meet product
price objectives and delivery schedules; legislative, regulatory and industry
initiatives that may affect planned or actual product features and marketing
methods; and the pace and success of product research and development and
financing initiatives.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities was $0.1 million for the six months
ended September 30, 2000, representing an increase of $7.4 million as compared
with the six months ended September 30, 1999. The most significant factors
comprising the net cash provided by operating activities for the six months
ended September 30, 2000 was a decrease in accounts receivable due mostly to
improved collection efforts and changes in trade payables due to improved terms
with a major supplier of products sold by the Company. An increase in product
inventories due to lower than anticipated sales volumes partially offset these
changes.
The Company funds its cash requirements through a combination of cash flow from
operations and loans under a line of credit with Congress Financial Corporation.
During the fiscal year, the Company's sales seasonality generally requires
incremental working capital for investment primarily in inventories and
receivables. The Company's primary source of funds for the six months ended
September 30, 2000 was the line of credit. The financing agreement with Congress
Financial was first entered into in October 1992 and was last amended during
June 2000. 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 September 30, 2000 was
approximately $2.5 million. The Company's ability to purchase products sold in
the marketplace to meet customer demand may be limited by the availability of
funds under the line of credit.
Working capital of the Company has declined from $8.3 million at the end of
fiscal 2000 to a deficit of $1.6 million at the end of September 30, 2000. The
Company experienced operating losses during the six months ended September 30,
2000 due to decreases in unit volumes and declining average selling prices on
certain key products which has affected the Company's liquidity. Management is
addressing liquidity issues by obtaining price reductions with contract
manufacturers and is reviewing certain strategic relationships and planned
expenditures. In addition, management has obtained additional credit for
inventory purchases amounting to $5.0 million from a major supplier. This new
credit limit is fully utilized at September 30, 2000. During the quarter ended
September 30, 2000, we also announced a reorganization of the Company, more
fully described below. Management is also attempting to obtain additional
outside investment to fund Company initiatives and/or working capital.
Management believes that these actions and
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<PAGE> 13
plans will provide sufficient working capital for the Company for the next
twelve months.
During the second quarter of the fiscal year, we announced a business
reorganization to place more emphasis on sales and marketing initiatives and
improve operational efficiency. As part of the reorganization, we consolidated
our sales force to get closer to the customer, streamlined operations to be more
responsive and increase efficiencies and shifted resources to marketing from
other areas of our business. In addition, we began shifting the manufacturing of
our California Audio Labs product line from internal manufacturing to contract
manufacturing. This move of manufacturing operations will take us completely out
of the manufacturing business, which has proven to be costly to our bottom line.
The overall corporate reorganization will result in the reduction in total staff
of about one-third, with the most significant portion being
manufacturing-related positions. As part of this overall reorganization, we
incurred a one-time charge of approximately $1.5 million. Approximately $1.3
million of this one-time charge relates to inventory and obsolete parts
writedowns and the remaining $0.2 million associated with severance costs. In
addition to the above initiatives, we have also negotiated price reductions,
increased credit lines with a key manufacturer and improved payment terms with
our key manufacturing partners which should benefit our margins going forward.
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.
The Company's Annual Meeting of Stockholders was held on September 7, 2000. The
stockholders elected the following persons to serve three-year terms as
Directors of the Corporation: Thomas F. Hartley, Jr. and Carmine F. Adimando.
The votes for and against (withheld) each nominee were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
--------------------- ---------- --------------
<S> <C> <C>
Thomas F. Hartley, Jr 12,030,079 777,466
Carmine F. Adimando 12,040,979 766,566
</TABLE>
Roger B. Hackett, Thomas E. Linnen and William T. Walker, Jr. also continued as
Directors following the meeting.
The stockholders also approved the Sensory Science Corporation 2000 Stock
Incentive Plan. The votes for and against the 2000 Stock Incentive Plan were as
follows:
<TABLE>
<CAPTION>
Votes For Abstentions Votes Against Broker Non-votes
--------- ----------- ------------- ----------------
<S> <C> <C> <C>
2,994,560 272,558 1,340,176 8,200,251
</TABLE>
The stockholders also approved the Sensory Science Corporation 2000 Nonemployee
Directors' Stock Options Plan. The votes for and against the 2000 Nonemployee
Directors' Stock Option Plan were as follows:
<TABLE>
<CAPTION>
Votes For Abstentions Votes Against Broker Non-votes
--------- ----------- ------------- ----------------
<S> <C> <C> <C>
2,867,579 296,506 1,443,209 8,200,251
</TABLE>
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The stockholders did not approve an amendment to the Certificate of
Incorporation to authorize the issuance of Preferred Stock. This proposal
required the affirmative vote of a majority of the outstanding Common Stock of
the Company. The votes for and against the amendment to the Certificate of
Incorporation to authorize the issuance of Preferred Stock were as follows:
<TABLE>
<CAPTION>
Votes For Abstentions Votes Against Broker Non-votes
--------- ----------- ------------- -----------------
<S> <C> <C> <C>
2,709,723 148,809 1,748,762 8,200,251
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3-A of the Company's S-1 Registration
Statement No. 33-17277.
3.2 Amendment to Articles of Incorporation. Incorporated by reference
to the Company's Form 8-K filing dated March 2, 1999.
10.33 Amendment No. 3. to the Development, Marketing and Distribution
Agreement between Sensory Science Corporation and Loewe Opta GmbH
dated January 1, 1997. Filed Herewith.
27 Financial Data Schedule
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
</TABLE>
(B) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SENSORY SCIENCE CORPORATION
(Registrant)
Date: November 14, 2000 By /s/ Roger B. Hackett
---------------------------------------------
Roger B. Hackett Chairman of the Board,
Chief Executive Officer, President and
Chief Operating Officer
Date: November 14, 2000 By /s/ Thomas E. Linnen
---------------------------------------------
Thomas E. Linnen Executive Vice President
(principal financial and accounting officer)
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EXHIBIT INDEX
<TABLE>
EXHIBIT
NO DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3-A of the Company's S-1 Registration
Statement No. 33-17277.
3.2 Amendment to Articles of Incorporation. Incorporated by reference
to the Company's Form 8-K filing dated March 2, 1999.
10.33 Amendment No. 3. to the Development, Marketing and Distribution
Agreement between Sensory Science Corporation and Loewe Opta GmbH
dated January 1, 1997. Filed Herewith.
27 Financial Data Schedule
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
</TABLE>
