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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 June 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 [ ]
14,364,230 shares of Common Stock were outstanding as of August 7, 2000.
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SENSORY SCIENCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- At June 30, 2000 and March 31, 2000 3
Consolidated Statements of Operations -- Quarters Ended
June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -- Three Months Ended
June 30, 2000 and 1999 5-6
Notes to the Interim Consolidated Financial Statements 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9-10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
</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". ALSO SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ON
PAGES 9-10 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.
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SENSORY SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 580,558 $ 1,218,949
Receivables - less allowance for doubtful
accounts of $116,000 and $116,000, respectively 11,239,771 15,670,572
Inventories 14,784,128 11,869,163
Prepaid expenses and other assets 626,705 975,923
Deferred tax asset 100,000 100,000
Net investment in discontinued operations -- 214,426
------------ ------------
Total Current Assets 27,331,162 30,049,033
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EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, fixtures & equipment 936,136 856,787
Leasehold improvements 690,200 420,227
Office equipment 1,949,503 1,803,319
Tooling 1,678,141 1,377,523
------------ ------------
Gross equipment and improvements 5,253,980 4,457,856
Less accumulated depreciation and amortization (2,041,933) (1,912,972)
------------ ------------
Equipment and improvements - net 3,212,047 2,544,884
------------ ------------
PATENTS, net of amortization 132,693 136,264
GOODWILL, net of amortization 1,096,321 1,111,763
MARKET EXCLUSIVITY FEE, net of amortization 1,374,598 1,516,799
DEFERRED TAX ASSET 475,000 317,500
OTHER ASSETS, net of amortization 303,731 248,414
------------ ------------
$ 33,925,552 $ 35,924,657
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,251,942 $ 4,789,152
Accrued expenses 1,443,541 938,866
Other current liabilities 932,912 957,838
Warranty reserve 297,705 324,964
Line of credit 13,247,507 14,732,513
------------ ------------
Total Current Liabilities 24,173,607 21,743,333
Severance reserve and other liabilities 422,448 386,713
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Total Liabilities 24,596,055 22,130,046
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STOCKHOLDERS' EQUITY:
Common stock 14,361 14,260
Additional paid-in capital 22,581,111 22,422,587
Unrealized (loss) gain on investment, net of tax (7,500) 228,748
Accumulated deficit (13,258,475) (8,870,984)
------------ ------------
Total Stockholders' Equity 9,329,497 13,794,611
------------ ------------
$ 33,925,552 $ 35,924,657
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
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SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
QUARTER ENDED JUNE 30,
-------------------------------
2000 1999
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<S> <C> <C>
Net sales $ 10,683,096 $ 14,136,184
Cost of sales 9,416,091 11,145,390
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Gross profit 1,267,005 2,990,794
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Costs and expenses:
Sales and marketing 2,815,007 1,548,394
Research and development 749,133 865,137
General and administrative 1,754,069 1,032,720
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5,318,209 3,446,251
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Operating loss (4,051,204) (455,457)
Interest and other expenses 336,278 259,273
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Loss before income taxes (4,387,482) (714,730)
Income tax benefit -- (278,000)
------------ ------------
NET LOSS $ (4,387,482) $ (436,730)
============ ============
NET LOSS PER SHARE - BASIC $ (0.31) $ (0.03)
============ ============
NET LOSS PER SHARE - DILUTED $ (0.31) $ (0.03)
============ ============
Weighted average basic shares outstanding 14,310,507 13,678,338
Weighted average equivalent shares -- --
------------ ------------
Weighted average diluted shares outstanding 14,310,507 13,678,338
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
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SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,387,482) $ (436,730)
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 377,086 275,014
Discontinued operations (278,000)
Change in operating assets and liabilities:
Receivables 4,430,801 (1,109,971)
Inventories (2,914,965) 136,076
Prepaids and other assets (44,530) (137,944)
Accounts payable 3,462,790 616,588
Accrued expenses 504,675 (56,644)
Other asset and liabilities, net (84,092) (157,673)
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Net cash provided (used) in operating activities 1,344,283 (1,149,284)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment and improvement expenditures (870,719) (154,324)
Investment in discontinued operation 214,426 (55,936)
Proceeds from disposal of discontinued operations 830,924
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Net cash provided (used) in investing activities 174,631 (210,260)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 158,625 30,540
Net borrowings (repayments) under line of credit (2,315,930) 1,144,284
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Net cash provided (used) by financing activities (2,157,305) 1,174,824
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NET DECREASE IN CASH AND CASH EQUIVALENTS (638,391) (184,720)
CASH AND CASH EQUIVALENTS, beginning of period 1,218,949 358,038
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CASH AND CASH EQUIVALENTS, end of period $ 580,558 $ 173,318
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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SENSORY SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------
2000 1999
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<S> <C> <C>
SUPPLEMENTAL INFORMATION TO CASH FLOW
STATEMENT:
Cash paid for interest $343,518 $275,000
Cash paid for income taxes $ $ 16,300
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES:
Unrealized loss on investment $393,748 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
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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
June 30, 2000, the results of operations and cash flows for the quarters ended
June 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 - 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 $644,000 at June 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 C - PRODUCT MANUFACTURING AND LICENSING
The Market Exclusivity Fee of $1.4 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 quarter
ended June 30, 2000, the Company's largest customer represented 19% of total
revenues and the Company's second largest customer represented 18% of revenues.
No other customer represented 10% or more of the Company's revenues. Accounts
receivable from these two customers at June 30, 2000 amounted to $4.1 million.
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NOTE D - 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 June 30, 2000 and March 31, 2000 are
as follows:
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
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<S> <C> <C>
Current:
Reserves not currently deductible $ 1,369,200 $ 1,369,200
Unrealized loss (gain) on available-for-sale
securities 5,000 (152,500)
Noncurrent:
Differences between book & tax
basis of property (279,500) (279,500)
Operating loss carryforwards 9,018,400 4,630,900
Tax credit carryforwards 187,300 187,300
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Net Deferred Tax Asset $ 10,300,400 $ 5,755,400
Valuation Allowance (9,725,400) (5,337,900)
------------ ------------
Net Deferred Asset $ 575,000 $ 417,500
============ ============
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2000 COMPARED WITH THE QUARTER ENDED JUNE 30, 1999:
Net sales decreased $3,453,000, or 24.4% to $10.7 million during the quarter
ended June 30, 2000 from $14.1 million during the quarter ended June 30, 1999.
The decrease in sales was primarily due to two factors. First, gross revenues of
the Dual-Deck VCRs ("DDVCR") decreased approximately 27.7% from prior year's
levels due to a 14.4% decrease in unit volumes. Second, net sales were lower
than last year's levels due to the granting of approximately $1.0 million in
discounts to existing customers during the second half of June 2000 to
jump-start the sell-through of primarily DDVCRs and to a lesser extent Digital
Televisions. These discount initiatives were in response to market and seasonal
issues. We expect net sales will improve particularly with the new VCR/DVD
combination product, which is being shipped beginning in July 2000. New products
gross revenues were up approximately 54.2% from the prior year's levels. The new
product lines include the RaveMP portable internet media players, digital
televisions, digital video players and California Audio Labs digital home
theater products. Within this category, digital television revenue was soft in
the quarter, but we expect that pricing actions and consumer acceptance will
cause sell-through to improve.
Gross profit was approximately $1.3 million and $3.0 million for the quarters
ended June 30, 2000 and June 30, 1999, respectively. Gross profit as a
percentage of sales for the quarter ended June 30, 2000 was 11.9%, which was
down significantly from last year's levels of approximately 21.2%. Gross margins
were negatively impacted by the granting of approximately $1.0 million in
discounts during June 2000. Without these discounts, gross margins would have
been approximately 9% higher. We anticipate that gross margins will improve
going forward.
Sales and marketing expense was approximately $2.8 million for the quarter ended
June 30, 2000, essentially the same as the fourth quarter of fiscal 2000, but up
$1.3 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 price rebates issued to consumers.
Research and development expense during the first quarter decreased slightly
from last year's levels to about $0.7 million, but were approximately 60% higher
than the fourth quarter of last year due to high product development expenses
associated with the media appliance product concept that the Company is
developing. As a percentage of sales, research and development expense was 7.0%
for the quarter ended June 30, 2000 compared to 6.1% for the quarter ended June
30, 1999.
General and administrative expense was up approximately $0.7 million, or up 70%,
from the prior year due to expanded business development activities, increased
staffing and upgrading our computer operations. General and administrative
expense as a percentage of revenues was 16.4% for the quarter ended June 30,
2000 compared to 7.3% for the quarter ended June 30, 1999.
Because of the above, the Company recorded an operating loss of $4.1 million for
the quarter ended June 30, 2000 compared to an operating loss of $0.5 million
for the quarter ended June 30, 1999. The Company recorded net interest and other
expense of $0.3 million for the quarter ended June 30, 2000, which was up
slightly from last year's levels.
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 growth in revenues and earnings, and
development of the home theater markets, the Internet recording and playback
devices markets and other new
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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.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities was $1.3 million for the three months
ended June 30, 2000, representing an increase of $2.5 million as compared with
the three months ended June 30, 1999. The most significant factor comprising the
net cash provided for the three months ended June 30, 2000 was a decrease in
accounts receivable due mostly to improved collection efforts and high sales at
the close of fiscal 2000 which were being collected during the three months
ended June 30, 2000. Also contributing to the increase in cash provided by
operating activities was an increase in accounts payable due primarily to the
timing of payments to the Company's various product suppliers. An increase in
product inventories due to lower than anticipated sales volumes partially offset
these improvements.
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 three months ended
June 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 June 30, 2000 was
approximately $1.5 million.
Working capital of the Company has declined from $8.3 million at the end of
fiscal 2000 to $3.2 million at the end of June 30, 2000. The Company experienced
operating losses during the quarter ended June 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
renegotiating terms with contract manufacturers and is reviewing certain
strategic relationships and planned expenditures. In addition, management is
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.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.33 Amendment Number Five to Second Amended and Restated Loan and
Security Agreement.
10.34 Asset Purchase Agreement between GVI Security, Inc. and Sensory
Science Corporation dated May 9, 2000.
10.35 Inventory Transfer Agreement dated as of May 9, 2000 by and among GVI
Security, Inc., Sensory Science Corporation, and Samsung Electronics
Co., Ltd.
27 Financial Data Schedule
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
11
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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: August 14, 2000 By /s/ Roger B. Hackett
--------------------------------------
Roger B. Hackett Chairman of the
Board, Chief Executive Officer,
President and Chief Operating Officer
Date: August 14, 2000 By /s/ Thomas E. Linnen
--------------------------------------
Thomas E. Linnen Executive Vice
President (principal financial and
accounting officer)
12
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EXHIBIT INDEX
10.33 Amendment Number Five to Second Amended and Restated Loan and
Security Agreement.
10.34 Asset Purchase Agreement between GVI Security, Inc. and Sensory
Science Corporation dated May 9, 2000.
10.35 Inventory Transfer Agreement dated as of May 9, 2000 by and among GVI
Security, Inc., Sensory Science Corporation, and Samsung Electronics
Co., Ltd.
27 Financial Data Schedule
99.1 Safe Harbor Compliance Statement for Forward-Looking Statements
