U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997.
Commission File Number: 0-27382.
SC&T International, Inc.
------------------------------------
(Exact name of small business as specified in its charter)
Arizona 86-0737579
---------------------------- -----------------------------
(State or other jurisdiction (IRS Employer Identification)
of incorporation or organization)
15695 North 83rd Way, Scottsdale, Arizona 85260
-----------------------------------------------
(Address of principal executive offices)
(602) 368-9490
-------------------------
(Registrant's telephone number, including area code)
3837 East Lasalle Street, Phoenix, AZ 85040
-------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 22,935,263 shares of Common
Stock, par value $0.01 per share.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
1
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Page
Part I Financial Information
Item 1 Financial Information 3
Consolidated Balance Sheet as of March 31, 1997 3
Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 1997 and March 31, 1996 5
Consolidated Statement of Shareholders' Equity for the Nine
Months Ended March 31, 1997 6
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1997 and March 31, 1996 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis 14
Part II Other Information
Item 1 Litigation 21
Item 2 Change in Securities 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security-Holders 21
Item 5 Other Information 21
Item 6 Exhibits & Reports on Form 8-K 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1997
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 2,677,636
Receivables (Note 2&7) 1,491,929
Inventory (Note 3) 3,924,376
Other current assets 273,943
---------------
Total current assets 8,367,884
Product development costs, less accumulated amortization of $122,266 542,918
Property and equipment, less accumulated depreciation of $190,939 (Note 4) 1,142,028
Other assets 129,314
---------------
$ 10,182,144
===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1997
(Unaudited)
<TABLE>
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, bank (Note 5) $ -
Accounts payable 416,586
Accrued expenses 150,687
--------------
Total current liabilities 567,273
--------------
Commitments and contingencies (Note 6) -
Shareholders' equity:
Common stock, $0.01 par; authorized 25,000,000 shares;
23,135,263 shares issued and 22,935,263 shares 231,353
outstanding (Note 8)
Series A preferred stock, $0.01 par; authorized 5,000,000
shares; 718 shares issued and outstanding (Note 9) 7
Additional paid-in capital 14,894,834
Treasury stock - at cost, 200,000 shares (Note 7) (29,415)
Currency translation (73,663)
Accumulated deficit (5,408,245)
--------------
Total shareholders' equity 9,614,871
--------------
$ 10,182,144
==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month and Nine Month Periods Ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------- -------------------------------
1997 1996 1997 1996
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 1,676,211 $ 832,460 $ 6,530,022 $ 2,745,533
Cost of goods sold 1,370,025 502,582 4,648,735 1,871,188
-------------- ------------ -------------- -------------
Gross profit 306,186 329,878 1,881,287 874,345
Selling, general and administrative expenses:
Payroll and payroll taxes 302,265 220,904 764,238 536,571
Selling and promotion 792,391 126,377 1,356,270 397,529
Office and administrative 269,726 108,390 681,209 305,973
Research and development 67,961 48,444 196,768 137,297
Consulting fees 56,023 - 143,841 -
Other 145,426 92,441 405,372 171,314
-------------- ------------ -------------- -------------
1,633,792 596,556 3,547,698 1,548,684
-------------- ------------ -------------- -------------
Loss from operations (1,327,606) (266,678) (1,666,411) (674,339)
Other income (expense):
Interest income 41,360 15,472 223,570 21,132
Interest expense (8,429) (30,369) (30,038) (111,861)
--------------- ------------ -------------- -------------
Income (Loss) before income tax & financing costs (1,294,675) (281,575) (1,472,879) (765,068)
Interest associated with short-term bridge financing - - - (56,011)
Loan amortization cost resulting from repayment of - - - (244,136)
debt
Income tax expense - - - -
-------------- ------------ -------------- -------------
Net Income (Loss) $ (1,294,675) $ (281,575) $ (1,472,879) $ (1,065,215)
=============== ============ ============== =============
Net Income (Loss) from operations per common share $ (0.06) $ (0.06) $ (0.12) $ (0.16)
============== ============ ============== =============
Weighted average common shares outstanding 22,935,263 4,236,029 13,717,587 4,236,029
============== ============ ============== =============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Treasury Stock Accumulated
------------ --------------- paid-in -------------- Currency -----------
Shares Amount Shares Amount capital Shares Amount translation deficit
------ ------ ------ ------ ------- ------ ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 5,085,415 $ 50,854 1,051 $ 11 $15,097,557 (200,000) $ (29,415) $ (23,271) $ (3,963,305)
Preferred stock issuance costs (49,726)
Issuance of common stock 18,332 184 27,314
Preferred stock conversion 18,031,516 180,315 (333) (4) (180,311)
Currency translation (50,392)
Net loss (1,444,940)
--------- -------- ------ ----- ---------- --------- --------- --------- ------------
Balance at March 31, 1997 23,135,263 $231,353 718 $ 7 $14,894,834 (200,000) $ (29,415) $ (73,663) $ (5,408,245)
========== ======== ====== ===== =========== ======== ========= ========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,472,879) $ (1,065,215)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 283,888 396,806
(Increase) decrease in accounts receivable (719,475) 428,090
Increase (decrease) in allowance for doubtful accounts (32,000) (98,000)
(Increase) decrease in inventories (2,126,576) (249,181)
(Increase) decrease in advances on purchases of
inventory (365,719) (143,289)
(Increase) decrease in other current assets (199,000) (197,164)
(Increase) decrease in other assets (92,538) (13,367)
Increase (decrease) in accounts payable (677,225) (300,349)
Increase (decrease) in accrued expenses (102,811) 7,561
------------------ -----------------
Net cash used in operating activities (5,504,325) (1,234,108)
------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment (1,050,848) (33,148)
Development costs (450,364) (165,222)
Loans to related parties - (17,485)
----------------- ------------------
Net cash used in investing activities (1,501,212) (215,855)
------------------ ------------------
Cash flows from financing activities:
Currency translation (50,392) -
Net repayments under line of credit agreement (78,528) (67,829)
Principal payments on debentures - (875,000)
Principal payments on short-term debt (5,556) -
Principal payments on long-term debt (1,266) (17,614)
Net repayments on related party loans - (1,000,000)
Proceeds from stock issuance (22,228) 4,551,210
Stock issuance costs - (884,629)
Stock issued for related party services - -
Proceeds from sale of debentures - 875,000
Repayments to factor (121,368) (324,691)
------------------ ------------------
Net cash (used in)provided by financing activities (279,338) 2,155,348
------------------ -----------------
Net increase (decrease) in cash (7,284,875) 705,385
Cash, beginning of period 9,962,511 289,707
----------------- -----------------
Cash, end of period $ 2,677,636 $ 995,092
================= =================
</TABLE>
7
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Interim financial reporting:
The accompanying unaudited Consolidated Financial Statements for SC&T
International, Inc. (the "Company") have been prepared in accordance with the
generally accepted accounting principles for interim financial information and
the instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for the periods
presented have been made. The results of operations for the nine month period
ended March 31, 1997 are not necessarily indicative of the operating results
that may be expected for the entire fiscal year ending June 30, 1997. These
financial statements should be read in conjunction with the Company's Form
10-KSB filed with the Securities Exchange Commission on September 27, 1996.
Reclassification:
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Receivables:
Receivables at March 31, 1997 consist of the following:
Trade accounts receivable $ 1,494,013
Related party (Note 7) 64,914
Allowance for returns and doubtful accounts (67,000)
------------
$ 1,491,929
============
3. Inventory:
Inventory at March 31, 1997 consists of the following:
Finished goods $ 3,752,311
Advances on purchases of inventory 453,925
Reserve for obsolescence (281,861)
-------------
$ 3,924,376
============
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. Advances on purchases of
inventory are for inventory currently being manufactured or anticipated to be
manufactured in the near future. Reserve for obsolescence exists due to
continual changes in the consumer electronic products industry.
4. Property and Equipment:
Property and equipment at March 31, 1997 consists of the following:
8
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Land $ 362,746
Construction in Progress 481,498
Office Furniture & Equipment 189,629
Tools & Dies 217,378
------------
$ 1,332,967
Less Accumulated Depreciation (190,939)
------------
$ 1,142,028
============
Depreciation expense totaled $90,458 for the nine months ended March
31, 1997.
5. Notes Payable, Bank:
The Company has a revolving line of credit with a bank in Arizona
secured by a certificate of deposit. The line of credit is used to back
international letters of credit issued to manufacturers of the Company's
products. The Company has a line of credit due on demand with a bank in Belgium.
In addition, the Company has a second line of credit with a Belgian bank for
account receivable financing. The bank advances approximately 93% of a specific
invoice. Repayment is due 10 days after the due date of the accounts receivable
invoice.
The Company has no outstanding balances for these lines of credit at
March 31, 1997.
6. Commitments and Contingencies:
Operating Leases:
The Company leases an office and warehouse from an unrelated third
party under an operating lease that expired in March 1997. In October 1996, the
Company purchased approximately 1.24 acres of land, for approximately $363,000,
located at the Scottsdale Airpark in Scottsdale, Arizona. The Company completed
construction of approximately 12,000 square feet of warehouse space and
approximately 6,000 square feet of executive office space in April 1997. The
Company's commitment for completion of the building is approximately $420,000.
The Company leased its office location in Belgium through April 30,
1996 from a former director, who was a shareholder and owned 50% of the building
where the office was located, for a monthly rental of approximately $3,700. The
Company exercised its cancellation rights described in the lease and relocated
to a temporary facility, effective May 1, 1996. As of September 1, 1996, the
Belgian office relocated to Gent, Belgium. The new operating lease provides for
a monthly rental rate of approximately $1,600 per month, with a 60 day
cancellation clause effective after December 31, 1996.
9
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The Company leases a corporate apartment from an unrelated third party
under an operating lease which expires July 7, 1997. Under the lease, the
monthly rental is approximately $740, and the Company is responsible for certain
expenses.
The Company leases office equipment under three operating leases
requiring monthly payments of approximately $ 500. The leases expire in November
1997 and November 1998.
Future minimum rental payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year as of
March 31, 1997 are as follows:
1997 $ 32,000
1998 3,000
1999 0
-----------
$ 35,000
===========
Total rental expenses for the three months ended March 31, 1997 and
March 31, 1996 were approximately $ 21,000 and $29,000, respectively.
Promotional Programs:
In October 1996, SC&T Racing Enterprises, Ltd. entered into an
approximate $600,000 agreement to sponsor a Formula Atlantic Team in the 1997
Kool Toyota Racing Series. The Company intends to use the racing team to promote
its products and increase brand awareness throughout the 1997 selling season.
Pending or Threatened Litigation:
The Company, from time to time, is a party to various legal proceedings
which are incidental to its business. In the opinion of management, the ultimate
resolution of these proceedings will not have a materially adverse affect on the
Company's financial position or results of operations.
The Company is currently suing a competitor, who competes in the same
industry. Any potential benefit of this lawsuit is not reflected in these
financial statements.
Inventory:
The Company has advanced funds against purchase commitments totaling
approximately $454,000.
7. Related Party Transactions:
Related Party Receivables:
10
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The Company has a related party receivable from its Chairman of the
Board, who is also a shareholder. The note receivable bears interest at 8.25%
annually. The repayment terms provide for 36 principal payments of $500 per
month, with a balloon payment of $33,814 plus interest due at the end of the
term. The receivable balance was $40,897 at March 31, 1997, of which $6,000 is
current and $34,897 is long-term.
The Company also advances funds to employees for traveling purposes.
The balance at March 31, 1997 was approximately $21,000.
Treasury Stock:
In June 1996, the Company entered into a separation and settlement
agreement with the former General Director of the Belgian subsidiary, whereby
the former General Director resigned as an officer, director and employee of the
Company. Under the terms of the agreement, the former General Director received
$29,415. In addition, the former General Director forfeited 200,000 shares of
common stock of the Company owned by him on the date of the agreement.
Employment Agreement:
In September 1995, the Company entered into an employment agreement
with its Chairman of the Board, who is also a shareholder, for a period of five
years. The agreement provides for an annual salary of $104,000 and contains
certain provisions regarding the repurchase of the Chairman of the Board's stock
and guaranteed salary payments. In January 1997, the Company entered into an
amendment to its agreement with its Chairman of the Board providing for certain
payments in the event of termination, as a result of a change in control of the
Company's board of directors. As of January 1, 1997 the Company's board of
directors increased the Chairman of the Board's salary by $46,000 per year.
Short-term Bridge Financing:
In December 1995, the Company used approximately $1,875,000 of the
proceeds from its initial public offering to repay two short-term bridge
financing arrangements with shareholders and all accrued interest associated
with the debt.
8. Issuance of Common Stock:
As of December 31, 1996, 333 shares of preferred stock were converted
into 18,031,516 shares of common stock. As a result of these conversions the
Company does not have sufficient authorized common stock available for issuance
upon future conversions. The Company has 718 shares of preferred stock that
remain unconverted. Therefore, no additional shares of preferred stock may be
converted without a vote of the Company's shareholders to increase the Company's
authorized share capital. There is no assurance that the shareholders will vote
to increase the amount of authorized share capital.
11
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
In January 1996, the Company issued 67,500 Redeemable Common Stock
Purchase Warrants for which the Company received cash of approximately $6,750.
During the quarter ended December 31, 1995, the Company completed a
public offering of Common Stock. The Company received net proceeds of
approximately $3,615,000 and issued a total of 900,000 shares of Common Stock.
The Company also issued 450,000 Redeemable Common Stock Purchase
Warrants. Each Warrant represented the right to purchase one-half share of
Common Stock at a price of $7.00 per share, subject to adjustment under certain
circumstances. The Warrants expire in December 1998. Each warrant is immediately
exercisable. The Warrants are redeemable by the Company for $0.05 per Warrant
upon 30 days notice mailed within 20 days after the closing bid price of the
Common Stock has equaled or exceeded $8.00 per share for a period of 20
consecutive trading days. The Company received cash of approximately $45,000 for
the Purchase Warrants.
In October 1995, the Company increased its authorized share capital to
25,000,000 shares of common stock and authorized 5,000,000 shares of preferred
stock.
During the quarter ended September 30, 1995, the Company completed a
private placement for short-term bridge financing of 8% Subordinated Debentures,
due at the earlier of September 30, 1996, or upon completion of the offering.
The Company issued 87,500 shares of Common Stock at $1.00 per share to obtain
the short-term bridge financing.
In September 1995, the Chairman of the Board was issued 15,822 shares
of Common Stock at a value of $1.00 per share for past services provided to the
Company.
9. Issuance of Preferred Stock:
In June 1996, the Company issued 1,051 shares of Series A Preferred
Stock, $0.01 par value per share, for $10,000 per share with an accretion rate
of 8% per annum up to the date of conversion. The Company received net proceeds
of approximately $9,669,000 for the 1,051 shares. The shares may be converted to
Common Stock at a conversion price which shall be the lesser of $7.75 per share
or 85% of the average closing bid price of the Company's Common Stock for the
ten trading days preceding the conversion date. There is no floor on the
potential conversion price of the stock. The Series A Preferred Stock is
convertible as follows: one-third of the shares of Series A Preferred Stock on
or subsequent to August 20, 1996; one-third of the shares on or subsequent to
September 19, 1996; and the remaining shares on or subsequent to October 19,
1996. All conversions are subject to the Company's right of redemption. The
Series A Preferred Stock will bear no dividends and have no voting rights except
as otherwise required by Arizona statute.
Upon dissolution of the Company the holders of Series A Preferred Stock
are entitled to distributions in the sum of the original Series A issue price
for each outstanding share, plus 8% of the original Series A issue price per
annum since purchase. At any time commencing 12 months and one day
12
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
after the last closing date, the Company shall have the right to redeem any or
all of the Series A Preferred Stock subject to certain conditions set forth in
the Certificate of Designation.
10. Significant Customers:
There was one significant customer which accounted for approximately
12% of the Company's total revenues for the nine months ended March 31, 1997.
The accounts receivable balance for this customer totaled approximately $110,000
at March 31, 1997. The Company had no customers for the nine months ended March
31, 1996 that accounted for more than 10% of total revenues.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-QSB that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934,
including statements regarding the Company's "expectations," "anticipation,"
"intentions," "beliefs," or "strategies" regarding the future. Forward looking
statements include statements regarding revenue, margins, expenses and earnings
analysis for the remainder of fiscal 1997 and thereafter; future products or
product development; future research and development spending and the Company's
product development strategy; and liquidity and anticipated cash needs and
availability. All forward looking statements included in this document are based
on information available to the Company on the date of this Report, and the
Company assumes no obligation to update any such forward looking statement. It
is important to note that the Company's actual results could differ materially
from those in such forward looking statements. Among the factors that could
cause actual results to differ materially are the factors discussed in this
Report as well as in the "Risk Factors" section included in the Company's
Registration Statement on Form SB-2, as declared effective by the Securities and
Exchange Commission on November 8, 1996 (Reg. No. 333-07019).
Overview
SC&T International, Inc. (the "Company") was formed in June 1993. The
Company develops and markets accessory and peripheral products for the
multimedia, interactive and communication segments of the PC industry. The
Company's products include fully-integrated multimedia stereo keyboards, CD-ROM
storage systems, various after market equalizer/amplifiers, sound enhancement
products, sub-woofer sound systems, PC volume controllers, CD-ROM audio cables
and a line of PC and video arcade racing wheels and pedals for use with Sega,
Sega Saturn, Nintendo 64, Sony Playstation and IBM-PC's.
Revenues for the nine months ended march 31, 1997 have increased to
approximately $6,530,000 from approximately $2,745,000 for the nine months ended
March 31, 1996. Despite the expansion in the number of customers and the
corresponding increase in revenue since commencing operations, the Company's
total operating expenses have exceeded revenue, resulting in a net loss of
approximately $1,473,000 for the nine months ended March 31, 1997. The Company's
primary costs are for research and development, tooling for new products,
inventory, trade shows and selling and promotion activities, such as the
Company's sponsorship of a Formula Atlantic Team in the 1997 Kool Toyota Racing
Series. In addition, operating results may be influenced by factors such as
turnover in the Company's sales personnel, the demand for the Company's
products, the timing of new product introductions by both the Company and its
competitors, pricing by both the Company and its competitors, inventory levels,
the Company's ability to develop and market new products, the Company's ability
to manufacture its products at high quality levels and at commercially
reasonable costs, the timing and levels of sales and marketing expenditures and
general economic conditions.
- ---------
Sega, Nintendo, Sony Playstation and IBM are trademarks and are the property of
their owners, which Companies are not affiliated with SC&T International, Inc.
14
<PAGE>
Results of Operations of the Company for the Nine-Month Periods Ended March 31,
1997 and 1996
Net Sales
Net sales for the nine months ended March 31, 1997 increased to
approximately $6,530,000 or approximately $3,784,000 more than net sales for the
nine months ended March 31, 1996. This increase resulted from a variety of
factors, including growing acceptance of the Company's products in the
marketplace, a broadening of the Company's distribution channels and the
expansion of the Company's overall product lines.
Gross Profit
The Company's gross profit percentage decreased from 31.85% for the
nine months ended March 31, 1996 to 28.8% for the nine months ended March 31,
1997. Gross profit margins are affected by several factors, including the mix of
sales between the Company's products, which typically sell at gross profit
margins ranging from 25% to 40%. In addition, the gross profit margin for the
nine months was affected by an increase to the inventory obsolescence reserve of
approximately $227,000. The reserve for inventory obsolescence was increased to
reflect concern about increased inventory and possible price adjustments to
improve market acceptance of the Company's products. The Company anticipates
that new products will initially sell at higher profit margins. However, there
can be no assurance, nor does the Company expect that such margins will be
maintained over the life of the product.
Payroll and Payroll Taxes
The Company's payroll and payroll tax expense increased from
approximately $536,000 in the nine months ended March 31, 1996 to approximately
$764,000 in the nine months ended March 31, 1997, or approximately 42.4%.
Although the total dollar amount increased, payroll and payroll tax expense
decreased as a percentage of sales, from 19.5% for the nine months ended March
31, 1996 to 11.7% for the nine months ended March 31, 1997.
Selling and Promotion
The Company's selling and promotion expenses increased from
approximately $398,000 in the nine months ended March 31, 1996 to approximately
$1,356,000 in the nine months ended March 31, 1997, or an increase of
approximately 241%. Selling and promotion expenses increased as a percentage of
sales, from 14.5% for the nine months ended March 31, 1996 to 20.8% for the nine
months ended March 31, 1997. A portion of these expenses were utilized to
continue promoting and creating packaging for new products in addition to
exhibiting the Company's products at several trade shows, in an effort to expand
their brand name awareness and market penetration. The majority of the increase
was due to the Company's sponsorship of a Formula Atlantic Team in the 1997 Kool
Toyota Racing Series. The sponsorship represents a major advertising program
undertaken to promote the Company's PER4MER(TM) Turbo Racing Wheel and the
Company's Platinum Sound(R) product line.
15
<PAGE>
Office and Administration
The Company's office and administrative expenses increased from
approximately $306,000 in the nine months ended March 31, 1996 to approximately
$681,000 in the nine months ended March 31, 1997, or approximately 122.5%. As a
percentage of net sales, office and administrative expenses decreased from 11.1%
for the nine months ended March 31, 1996 to 10.4% for the nine months ended
March 31, 1997.
Research and Development
Expenditures for research and development increased from approximately
$137,000 in the nine months ended March 31, 1996 to approximately $197,000 for
the nine months ended March 31, 1997. The Company's expenditures for research
and development vary from period to period depending upon the number of products
under development and the stage of the development and vary as a percentage of
sales depending upon sales achieved in that period. Research and development
includes an amortization cost of $116,228 for the nine months ended March 31,
1997.
Net Loss
As a result of the factors described above, the Company's net loss
increased from approximately $765,000 in the nine months ended March 31, 1996 to
approximately $1,472,000 in the nine months ended March 31, 1997.
Net Loss Per Share
Net loss per share decreased from $0.25 for the nine months ended March
31, 1996 to $0.11 for the nine months ended March 31, 1997. The loss per share
of $0.25 for the nine months ended March 31, 1996 includes $0.07 loss per share
resulting from a non-recurring financing charge incurred in the nine months
ended March 31, 1996. The loss per share for the nine months ended March 31,
1997 includes a $0.02 per share loss due to a $227,000 increase to the inventory
obsolescence reserve. The decrease in net loss per share during the nine months
ended March 31, 1997 as compared to the same period in the prior year was due
primarily to the effect of additional shares of common stock issued in
connection with the Company's private placements and the conversion of Series A
Preferred Stock.
16
<PAGE>
Results of Operations of the Company for the Three Month Periods Ended March 31,
1997 and 1996
Net Sales
Net sales for the three months ended March 31, 1997 increased to
approximately $1,676,000 or approximately $844,000 more than net sales for the
three months ended March 31, 1996. This increase resulted from a variety of
factors, including growing acceptance of the Company's products in the
marketplace, a broadening of the Company's distribution channels and the
expansion of the Company's overall product lines.
Gross Profit
The Company's gross profit percentage decreased from 39.6% for the
three months ended March 31, 1996 to 18.3% for the three months ended March 31,
1997. Gross profit margins are affected by several factors, including the mix of
sales between the Company's products, which typically sell at gross profit
margins ranging from 25% to 40%. The primary factor for the decrease in gross
profit margin during the three months ended March 31, 1997 was an increase in
the inventory reserve of $227,000 to reflect concern about the increased
inventory and possible price adjustment to improve market acceptance of the
Company's products. The Company anticipates that new products will initially
sell at higher profit margins. However, there can be no assurance, nor does the
Company expect that such margins will be maintained over the life of the
product.
Payroll and Payroll Taxes
The Company's payroll and payroll tax expense increased from
approximately $220,000 in the three months ended March 31, 1996 to approximately
$302,000 in the three months ended March 31, 1997, or approximately 37.3%.
Although the total dollar amount increased, payroll and payroll tax expense
decreased as a percentage of sales, from 26.5% for the three months ended March
31, 1996 to 18.0% for the three months ended March 31, 1997.
Selling and Promotion
The Company's selling and promotion expenses increased from
approximately $126,000 in the three months ended March 31, 1996 to approximately
$792,000 in the three months ended March 31, 1997, or an increase of
approximately 529%. This represents an increase in selling and promotion
expenses, as a percentage of sales from 15.2% for the three months ended March
31, 1996 to 47.3% for the three months ended March 31, 1997. A portion of these
expenses were utilized to continue promoting and creating packaging for new
products in addition to exhibiting the Company's products at several trade
shows, in an effort to expand their brand name awareness and market penetration.
Approximately $600,000 of the increase was associated with the Company's
sponsorship of a Formula Atlantic Team in the 1997 Kool Toyota Racing Series.
This includes approximately $284,000 of cost incurred and capitalized in the
second quarter. Management has since determined to expense the entire cost of
the sponsorship as incurred.
17
<PAGE>
Office and Administration
1997, or approximately 150%. As a percentage of net sales, office and
administrative expenses increased from 13.0% for the three months ended March
31, 1996 to 16.1% for the three months ended March 31, 1997.
Research and Development
Expenditures for research and development increased from approximately
$48,000 in the three months ended March 31, 1996 to approximately $68,000 for
the three months ended March 31, 1997. The Company's expenditures for research
and development vary from period to period depending upon the number of products
under development and the stage of the development and vary as a percentage of
sales depending upon sales achieved in that period. Research and Development
contains approximately $48,000 of amortization for the three months ended March
31, 1997.
Net Loss
As a result of the factors described above, the Company's net loss for
the three months ended March 31, 1997 increased to approximately $1,294,000,
this compared to a net loss of $591,435 for the three months ended March 31,
1996.
Net Loss Per Share
Net loss per share decreased from $0.07 for the three months ended
March 31, 1996 to $0.06 for the three months ended March 31, 1997. The loss per
share of $0.06 for the three months ended March 31, 1997 includes a $0.01 per
share loss due to a $227,000 increase in the inventory obsolescence reserve. The
net loss also reflects a $0.01 per share loss due to approximately $284,000 of
cost associated with the Company's sponsorship of a Formula Atlantic Team in the
1997 Kool Toyota Racing Series that was initially capitalized in the period
ended December 31, 1996. The cost of the sponsorship will be recognized as a
period expense on a going forward basis. The decrease in the net loss during the
three months ended March 31, 1997 was affected by the increase in the weighted
average common shares outstanding from approximately 4.2 million to 22.9
million. The increase in weighted average common shares was due to additional
shares of common stock issued in connection with the Company's private
placements and conversion of Series A Preferred Stock.
Liquidity and Capital Resources
As a result of the Company's initial public offering and its private
placement of Series A Preferred Stock in June 1996, the Company's working
capital is approximately $7,800,000 at March 31, 1997. The Company is required
to pay the costs of stocking inventory before the Company receives orders and
payment from its customers. Typically, the Company's customers do not pay the
Company for its products until approximately 60 days following delivery and
billing. As a result, the receipt of cash from operations typically lags
substantially behind the payment of the costs for purchase and delivery of the
Company's products.
Through July 1996, the Company financed operations by factoring its
United States receivables. Historically, the Company's European subsidiary
financed operations through a line of credit of
18
<PAGE>
Liquidity and Capital Resources, Continued
approximately $182,000. In addition, to raise funds to meet its expenses, the
Company obtained inventory financing in April and May 1995 for an aggregate of
$1,000,000, completed a private placement in April 1995 of $1,500,000 for
2,000,000 shares of Common Stock and completed a private placement in September
1995 of $875,000 of 8% Subordinated Debentures. In December 1995, the Company
used approximately $1,875,000 of the $4,500,000 gross proceeds of its initial
public offering to repay the inventory financing and the 8% Subordinated
Debentures. In June 1996 the Company received gross proceeds of $10,510,000 for
an issuance of 1,051 shares of Series A Preferred Stock. The preferred
shareholders earn 8% accretion per annum up to the date of conversion. In
addition, the Company has negotiated a $500,000 revolving line of credit for
it's U.S. operations.
Business Outlook and Risk Factors
The trends indicated by the Company's operating results for the nine
months ended March 31, 1997 reflect the Company's belief that (i) there is
growing acceptance in the global marketplace for the Company's expanded product
line and (ii) the Company's success in entering into new manufacturing
relationships that take advantage of savings due to economies of scale resulting
in decreases in manufacturing costs. The Company's total revenue and product mix
could be materially and adversely affected by many factors, some of which are
beyond the control of the Company. Those factors include, but are not limited
to, turnover in the Company's sales force, competition from existing or new
products, production delays, the Company's ability to penetrate new markets and
attract new customers, unexpected postponement or cancellation of significant
orders, lack of market acceptance of the Company's products, manufacturing
defects and seasonality of sales and general economic conditions.
The Company continues to invest in sales and marketing in order to
enhance its image and brand awareness. In October, 1996, the Company became a
sponsor of a Formula Atlantic Team in the 1997 Kool Toyota Racing Series. The
Company intends to tie this sponsorship into promotion of its PER4MER (TM) Turbo
Racing Wheel and to increase visibility of the Company's overall range of
products. Although the Company believes that its increased sales and marketing
efforts will contribute to an increased number of customers and increased
revenue associated with sales of its products, certain risk factors exist that
could have a material adverse effect on the Company's operating results. Those
risk factors include, but are not limited to, lack of assurance that its
products will achieve or maintain market share and the fact that the Company's
products compete with those of many major domestic and international companies,
many of which have greater market recognition and substantially greater
financial, technical and marketing resources than the Company possesses.
Although the Company has focused on controlling administrative costs, it
recognizes the added costs associated with attracting and retaining key
personnel. Because it operates in an industry that is characterized by high cost
of recruiting and a current lack of qualified personnel, the Company constantly
evaluates employee benefits and the work environment that it provides its
employees. The high cost associated with industry hiring practices could have a
material adverse affect on the Company's quarterly operating results. The
Company intends to continue to moderate general and administrative costs so that
revenue growth will begin to exceed operating expenses. There can be no
assurance, however, that the Company will be able to predict or respond to a
shortfall in sales during any given quarter in order to reduce its fixed general
and administrative expenses on a timely basis.
19
<PAGE>
Business Outlook and Risk Factors, Continued
The Company believes that the industry in which it markets its products
has a strong outlook, with expanding markets characterized by rapid
technological change, frequent introduction of product upgrades and evolving
industry standards. The Company strives to provide market-leading solutions that
address the PC user interested in upgrading existing equipment. Due to the risk
factors discussed and to other factors that generally affect high technology
companies, there can be no assurance that the Company will be able to
successfully penetrate these markets in the future.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM I. LITIGATION
None
ITEM 2. CHANGES IN SECURITIES
In the nine month period ended March 31, 1997 the Company issued an
aggregate of 41,247 shares of Common Stock to Atom & Associates, Inc.
in connection with the exercise of options previously issued under the
Company's Stock Option Plan. The options were exercised at an exercise
price of $1.50 per share. The shares were issued without registration
under the Securities Act in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
21
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
SC&T INTERNATIONAL, INC.
/s/ Thomas S. Bednarik President and May 15, 1997
- ----------------------------- Chief Executive Officer
Thomas S. Bednarik
/s/ William A. Pendley Chief Financial Officer May 15, 1997
- ------------------------------
William A. Pendley
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,677,636
<SECURITIES> 0
<RECEIVABLES> 1,494,013
<ALLOWANCES> 67,000
<INVENTORY> 3,924,376
<CURRENT-ASSETS> 8,367,884
<PP&E> 1,332,967
<DEPRECIATION> 190,939
<TOTAL-ASSETS> 10,182,144
<CURRENT-LIABILITIES> 567,273
<BONDS> 0
0
7
<COMMON> 231,353
<OTHER-SE> 9,383,511
<TOTAL-LIABILITY-AND-EQUITY> 10,182,144
<SALES> 6,530,022
<TOTAL-REVENUES> 6,530,022
<CGS> 4,648,735
<TOTAL-COSTS> 4,648,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,038
<INCOME-PRETAX> (1,472,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,472,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,472,879)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
