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 December 31, 1996.
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 of (IRS Employer Identification)
incorporation or organization)
3837 E. LaSalle Street, Phoenix, Arizona 85040
----------------------------------------------
(Address of principal executive offices)
(602) 470-1334
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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
SC&T INTERNATIONAL, INC.
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AND SUBSIDIARY
--------------
Page
Part I Financial Information
Item 1 Financial Information
Consolidated Balance Sheet as of December 31, 1996 3
Consolidated Statements of Operations for the Three and Six
Months Ended December 31, 1996 and December 31, 1995 5
Consolidated Statement of Shareholders' Equity for the Six
Months Ended December 31, 1996 6
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1996 and December 31, 1995 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis 15
Part II Other Information
Item 1 Litigation 22
Item 2 Change in Securities 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security-Holders 22
Item 5 Other Information 22
Item 6 Exhibits & Reports on Form 8-K 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1996
(Unaudited)
ASSETS
Current assets:
Cash $ 5,432,203
Receivables (Note 2 & 7) 2,120,918
Inventory (Note 3 ) 2,492,629
Other current assets 474,461
---------------
Total current assets 10,520,211
Product development costs, less accumulated amortization of $78,346 454,357
Property and equipment, less accumulated depreciation of $156,882 (Note 4 ) 886,622
Other assets 97,062
---------------
$ 11,958,252
===============
The accompanying notes are an integral part of these
consolidated financial statements.
3
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1996
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, bank (Note 5 ) $
Accounts payable 890,682
Accrued expenses 157,959
--------------
Total current liabilities 1,048,641
--------------
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 (45,659)
Accumulated deficit (4,141,509)
--------------
Total shareholders' equity 10,909,611
--------------
$ 11,958,252
==============
The accompanying notes are an integral part
of these consolidated financial statements.
4
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month and Six Month Periods Ended December 31, 1996 and 1995
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- --------------- ----------------- --------------
Net sales $ 3,125,865 $ 875,366 $ 4,853,811 $ 1,913,073
Cost of goods sold 2,099,993 723,600 3,278,710 1,368,606
---------------- --------------- ----------------- --------------
Gross profit 1,025,872 151,766 1,575,101 544,467
Selling, general and administrative expenses:
Payroll and payroll taxes 232,911 148,679 461,973 315,667
Selling and promotion 300,986 164,107 563,879 271,152
Office and administrative 262,051 70,484 411,483 175,467
Research and development 24,621 12,630 57,633 8,859
Development cost amortization 44,200 44,128 71,174 79,994
Consulting fees 51,165 13,254 87,818 22,116
Other 180,866 10,692 259,946 78,873
---------------- --------------- ----------------- --------------
1,096,800 463,974 1,913,906 952,128
---------------- --------------- ----------------- --------------
Loss from operations (70,928) (312,208) (338,805) (407,661)
Other income (expense):
Interest income 86,555 5,660 182,210 5,660
Interest expense (3,967) (36,221) (21,609) (81,492)
----------------- ---------------- ----------------- --------------
Income (Loss) before income tax & financing costs 11,660 (342,769) (178,204) (483,493)
Interest associated with short-term bridge financing (37,511) (56,011)
Loan amortization cost resulting from repayment of debt (211,155) (244,136)
Income tax expense - - - -
---------------- --------------- ----------------- --------------
Net Income (Loss) $ 11,660 $ (591,435) (178,204) (783,640)
================ =============== ================= ==============
Net Income (Loss) from operations per common share $ 0.00 $ (0.07) (0.04) (0.10)
================ =============== ================= ==============
Net Income (Loss) per common share $ 0.00 $ (0.14) (0.02) (0.19)
================ =============== ================= ==============
Weighted average common shares outstanding 9,022,062 4,166,961 9,022,062 4,166,961
================ =============== ================= ==============
The accompanying notes are an integral part of these
consolidated financial statements.
5
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1996
(Unaudited)
Common Stock Preferred Stock Additional Treasury Stock
--------------------- ----------------- paid-in ------------------ Currency Accumulated
Shares Amount Shares Amount capital Shares Amount translation deficit
---------- --------- ------ ------ ----------- -------- --------- ------------ ------------
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 (22,388)
Net loss (178,204)
---------- --------- ------ -------- ----------- -------- --------- ------------ ------------
Balance at December 31, 1996 23,135,263 $ 231,353 718 $ 7 $14,894,834 (200,000) $ (29,415) $ (45,659) $(4,141,509)
========== ========= ====== ======== =========== ======== ========= ============= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1996 and 1995
(Unaudited)
1996 1995
----------------- -----------------
Cash flows from operating activities:
Net loss $ (178,204) $ (783,640)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 128,328 248,981
(Increase) decrease in accounts receivable (1,465,200) 740,348
Increase (decrease) in allowance for doubtful accounts 81,414 (83,000)
Increase in inventories (833,963) (104,315)
(Increase) decrease in advances on purchases of
inventory (226,587) (130,981)
Increase in other current assets (399,518) (16,110)
Increase in other assets (60,286) (729)
Decrease in accounts payable (203,129) (380,325)
Decrease in accrued expenses (38,874) (32,388)
------------------ ------------------
Net cash used in operating activities (3,196,019) (542,159)
------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment (714,091) (16,273)
Development costs (315,522) (105,468)
Loans to related parties 3,322 (8,095)
----------------- ------------------
Net cash used in investing activities (1,026,291) (129,836)
------------------ ------------------
Cash flows from financing activities:
Currency translation (22,388) -
Net repayments under line of credit agreement (78,528) (116,316)
Principal payments on debentures - (875,000)
Principal payments on short-term debt (5,556) -
Principal payments on long-term debt (1,266) (11,731)
Net repayments on related party loans (29,166) (1,000,000)
Proceeds from stock issuance - 4,545,000
7
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1996 and 1995
(Unaudited)
Stock issuance costs (49,726) (884,629)
Stock issued for related party services - 15,822
Proceeds from sale of debentures - 875,000
Repayments to factor (121,368) (196,198)
------------------ ------------------
Net cash (used in)provided by financing activities (307,998) 2,351,948
------------------ -----------------
Net (decrease)increase in cash (4,530,308) 1,679,953
Cash, beginning of period 9,962,511 289,707
----------------- -----------------
Cash, end of period $ 5,432,203 $ 1,969,660
================= =================
Supplemental Disclosure of Cash Flow Information
1996 1995
--------------- ---------------
Interest paid $21,609 $137,503
Supplemental Information of Noncash Investing and Financing Activities
On September 12, 1995, the Company issued 87,500 shares of Common Stock
associated with short-term bridge financing raised with a private placement of
8% Subordinated Debentures (Note 7 ).
The accompanying notes are an integral part
of these consolidated financial statements.
8
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 six month period
ended December 31, 1996 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 December 31, 1996 consist of the following:
Trade accounts receivable $ 2,167,151
Related party (Note 7) 61,181
Allowance for returns and doubtful accounts (107,414)
--------------
$ 2,120,918
==============
3. Inventory:
Inventory at December 31, 1996 consists of the following:
Finished goods $ 1,620,581
Advances on purchases of inventory 926,909
Reserve for obsolescence (54,861)
--------------
$ 2,492,629
==============
9
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
3. Inventory, Continued:
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 & equipment:
Property and equipment at December 31, 1996 consists of the following:
Land $ 362,760
Building $ 205,463
Office Furniture & Equipment 262,903
Tools & Dies 212,378
------------
1,043,504
Less Accumulated Depreciation (156,882)
------------
$ 886,622
============
Depreciation expense totaled $57,154 and $29,727 for the six months
ended December 31, 1996 and December 31, 1995, respectively.
5. Notes payable, bank:
The Company has a revolving line of credit with a bank in Arizona
secured by a CD. The line of credit is used to back international letters of
credit issued manufacturer's 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
December 31, 1996.
6. Commitments and contingencies:
Operating leases:
The Company leases an office and warehouse from an unrelated third
party under an operating lease that expires in August 1997. Under the lease, the
monthly rental is approximately $4,800, and the Company is responsible for
certain expenses. 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 commenced construction of a warehouse facility
and executive offices on this site pursuant to an agreement calling for payment
of $800,000 over a seven month period ending in April 1997. The facility will
contain approximately 12,000 sq. ft. of warehousing facilities and approximately
6,000 sq. ft. of executive offices.
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.
10
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
6. Commitments and contingencies, Continued:
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 January
1997, 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
December 31, 1996 are as follows:
1997 $ 52,000
1998 3,000
1999 0
-------------
$ 55,000
=============
Total rental expenses for the three months ended December 31, 1996 and
December 31, 1995 were approximately $23,170 and $27,052, 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.
11
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
6. Commitments and contingencies, continued:
Inventory:
At December 31, 1996, the Company has outstanding purchase commitments
for inventory acquisitions of approximately $3,238,000. The Company has advanced
funds against the purchase commitments totaling approximately $414,000.
7. Related party transactions:
Related party receivables:
The Company has a related party receivable from its prior President,
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 $42,398 at December 31, 1996, of which $6,000 is current
and $36,398 is long-term.
The Company also advances funds to employees for traveling purposes.
These advances are due on demand and are non-interest bearing. The balance at
December 31, 1996 was approximately $17,000.
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.
Upon compliance with the terms of the agreement, 25,000 shares of common stock
may be issued to the former General Director.
Employment agreement:
In September 1995, the Company entered into an employment agreement
with its prior President, 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 prior President's stock and
guaranteed salary payments.
12
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
7. Related party transactions, continued:
In January 1997 the Company entered into an amendment to its agreement with its
prior President 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 prior President'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.
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 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.
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 three years from December 1995. 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
13
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
8. Issuance of Common Stock, Continued:
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 prior President 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
convertable 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 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
11% of the Company's total revenues for the six months ended December 31, 1996.
The accounts receivable balance for this customer totaled approximately $37,000
at December 31, 1996. The Company had no significant customers for the six
months ended December 31, 1995.
11. Subsequent Events:
In January 1997 the Company hired a new president and CEO pursuant to
an offer of Employment providing for a salary of $150,000 per year.
14
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 for use with SEGA, Sega Saturn,
Nintendo 64, Sony Playstation and IBM-PC's.
Since July 1996, the Company's monthly revenue has grown from
approximately $580,000 to approximately $1,178,000 in December, 1996. On
December 31, 1994, the Company purchased SC&T Europe, a marketing and
distribution company located in Antwerp, Belgium. Revenue from SC&T Europe
represented 48% of the Company's consolidated revenue for the six months ended
December 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
$178,204 for the six months ended December 31, 1996. The Company's primary costs
are for research and development, tooling for new products, inventory, trade
shows, and selling and promotion activities. The Company expects these costs to
increase in connection with the anticipated expansion of sales. In addition,
operating results may be influenced by factors such as turnover in the Company's
sales personel, 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.
15
Results of Operations of the Company for the Six-Month Periods Ended December
31, 1996 and 1995
Net Sales
Net sales for the six months ended December 31, 1996 increased to
approximately $4,854,000 or approximately $2,941,000 more than net sales for the
six months ended December 31, 1995. In addition, the Company has a backlog of
orders totaling approximately $695,000 at December 31, 1996. In comparison, the
Company had no backlog of orders as of December 31, 1995. 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. Net sales during the
six months ended December 31, 1996 reflect seasonally high sales during the
Christmas season and are not necessarily indicative of net sales for future
quarters.
Gross Profit
The Company's gross profit percentage increased from 28.5% for the six
months ended December 31, 1995 to 32.5% for the six months ended December 31,
1996. 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 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 $316,000 in the six months ended December 31, 1995 to
approximately $462,000 in the six months ended December 31, 1996, or
approximately 46.2%. Although the total dollar amount increased, payroll and
payroll tax expense decreased as a percentage of sales, from 16.5% for the six
months ended December 31, 1995 to 9.5% for the six months ended December 31,
1996.
Selling and Promotion
The Company's selling and promotion expenses increased from
approximately $271,000 in the six months ended December 31, 1995 to
approximately $564,000 in the six months ended December 31, 1996, or an increase
of approximately 108.1%. Although the total dollar amount increased, selling and
promotion expenses decreased as a percentage of sales, from 14.2% for the six
months ended December 31, 1995 to 11.6% for the six months ended December 31,
1996. 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 Company expects selling and promotion
expense to increase during the nine months ending September 1997 due to the
Company's sponsorship of a Formula Atlantic Team in the 1997 KOOL Toyota Racing
Series. The Company expects to offset a portion of these additional costs by
reducing other expenditures for selling and promotion.
16
Office and Administration
The Company's office and administrative expenses increased from
approximately $175,000 in the six months ended December 31, 1995 to
approximately $411,000 in the six months ended December 31, 1996, or
approximately 134.9%. As a percentage of net sales, office and administrative
expenses decreased from 9.1% for the six months ended December 31, 1995 to 8.5%
for the six months ended December 31, 1996.
Research and Development
Expenditures for research and development increased from approximately
$8,900 in the six months ended December 31, 1995 to approximately $58,000 for
the six months ended December 31, 1996. 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.
Development Cost Amortization
Development cost amortization decreased from approximately $80,000 for
the six months ended December 31, 1995 to approximately $71,000 for the six
months ended December 31, 1996. Development cost amortization represents
amortization of costs associated with development of new products. Such costs
are amortized over a 12 month period commencing with the first sale of the
product.
Net Loss
As a result of the factors described above, the Company's loss from
operations decreased from approximately $408,000 in the six months ended
December 31, 1995 to approximately $339,000 in the six months ended December 31,
1996. However, the Company's net loss decreased from approximately $784,000 in
the six months ended December 31, 1995 to approximately $178,000 in the six
months ended December 31, 1996.
Net Loss Per Share
Net loss per share from operations decreased from $0.10 for the six
months ended December 31, 1995 to $0.04 for the six months ended December 31,
1996. The loss per share from operations for the six months ended December 31,
1995, includes a $0.03 per share loss due to a $116,000 adjustment to inventory
as a result of a reduction in price of certain of the Company's products. The
effect of this adjustment was an increase in net loss per share from operations
from $0.07 per share to $0.10 per share for the six months ended December 31,
1995.
17
Net Loss Per Share, continued
Net loss per share decreased from $0.19 for the six months ended
December 31, 1995 to $0.02 for the six months ended December 31, 1996. The loss
per share of $0.19 for the six months ended December 31, 1995 includes the $0.03
per share loss due to adjustments to inventory and an additional $0.07 loss per
share resulting from a non-recurring financing charge incurred in the six months
ended December 31, 1995. The aggregate effect of these adjustments was an
increase in net loss per share from $0.09 per share to $0.19 per share for the
six month period ended December 31, 1995. The decrease in net loss per share
during the six months ended December 31, 1996 as compared to the same period in
the prior year was due primarily to an increase in interest income, a decrease
in interest expense, and the effect of additional shares of common stock issued
in connection with the Company's private placements and initial public offering
in December 1995 and June 1996, respectively.
Results of Operations of the Company for the Three-Month Periods Ended December
31, 1996 and 1995
Net Sales
Net sales for the three months ended December 31, 1996 increased to
approximately $3,126,000 or approximately $2,251,000 more than net sales for the
three months ended December 31, 1995. In addition, the Company has a backlog of
orders totaling approximately $695,000 at December 31, 1996, and approximately
$656,000 as of January 31, 1997. In comparison, the Company had no backlog of
orders as of December 31, 1995. 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. Net sales during the three
months ended December 31, 1996 reflect seasonally high sales for the Christmas
season and are not necessarily indicative of net sales for future quarters.
Gross Profit
The Company's gross profit percentage increased from 17.3% for the
three months ended December 31, 1995 to 32.8% for the three months ended
December 31, 1996. 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 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 $149,000 in the three months ended December 31, 1995 to
approximately $233,000 in the three months ended December 31, 1996, or
approximately 56%. Although the total dollar amount increased, payroll and
payroll tax expense decreased as a percentage of sales, from 17.0% for the three
months ended December 31, 1995 to 7.5% for the three months ended December 31,
1996.
Selling and Promotion
The Company's selling and promotion expenses increased from
approximately $164,000 in the three months ended December 31, 1995 to
approximately $301,000 in the three months ended December 31, 1996, or an
increase of approximately 84%. This represents a decrease in selling and
18
Selling and Promotion, continued
promotion expenses, as a percentage of sales from 18.7% for the three months
ended December 31, 1995 to 9.6% for the three months ended December 31, 1996. 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 Company expects selling and promotional expenses to
increase during the nine months ending September 1997 due to the Company's
sponsorship of a Formula Atlantic Team in the 1997 KOOL Toyota Racing Series.
The Company expects to offset a portion of these additional costs by reducing
other expenditures for selling and promotion.
Office and Administration
The Company's office and administrative expenses increased from
approximately $70,000 in the three months ended December 31, 1995 to
approximately $262,000 in the three months ended December 31, 1996, or
approximately 274%. As a percentage of net sales, office and administrative
expenses increased from 8.0% for the three months ended December 31, 1995 to
8.4% for the three months ended December 31, 1996.
Research and Development
Expenditures for research and development increased from approximately
$13,000 in the three months ended December 31, 1995 to approximately $25,000 for
the three months ended December 31, 1996. 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.
Development Cost Amortization
Development cost amortization remained constant at approximately
$44,000 for the three months ended December 31, 1995 and December 31, 1996.
Development cost amortization represents amortization of costs associated with
development of new products. Such costs are amortized over a 12 month period
commencing with the first sale of the product.
Net Loss
As a result of the factors described above, the Company's loss from
operations decreased from approximately $312,000 in the three months ended
December 31, 1995 to approximately $71,000 in the three months ended December
31, 1996. In addition, the Company generated approximately $12,000 of net income
for the three months ended December 31, 1996. This compares to a net loss of
$591,435 for the three months ended December 31, 1995.
Net Loss Per Share
Net loss per share from operations decreased from $0.07 for the three
months ended December 31, 1995 to $0.0 for the three months ended December 31,
1996. The loss per share of $0.07 for the
19
Net Loss Per Share, continued
three months ended December 31, 1995 includes a $0.03 per share loss due to a
$116,000 adjustment to inventory as a result of a reduction in price of certain
of the Company's products. The effect of this adjustment was an increase in net
loss per share from operations from $0.04 per share to $0.07 per share for the
three month period ended December 31, 1995. Net loss per share decreased from
$0.14 for the three months ended December 31, 1995 to $0.0 for the three months
ended December 31, 1996. The loss of $0.14 per share for the three months ended
December 31, 1995 includes the $0.03 per share loss due to the adjustment to
inventory and an additional $0.06 loss per share resulting from non-recurring
financing charges incurred in the three months ended December 31, 1995. The
aggregate effect of these adjustments was an increase in net loss per share from
$0.05 per share to $0.14 per share for the three month period ended December 31,
1995. The decrease in net loss per share during the three months ended December
31, 1996 as compared to the same period in the prior year was due primarily to
an increase in interest income, a decrease in interest expense, and the effect
of additional shares of common stock issued in connection with the Company's
private placements and initial public offering in December 1995 and June 1996,
respectively.
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 improved to approximately $9,454,000 at December 31, 1996. 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 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 six
months ended December 31, 1996 reflect the Company's belief that (i) there is
growing acceptance in the 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. In addition, the results of operations for the six
months ended December 31, 1996 reflect an increase in seasonal orders leading up
to the Christmas selling season. 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, seasonality of
sales, and general economic conditions.
20
Business Outlook and Risk Factors, Continued.
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 the 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 acceptance, delays in product
development and/or delivery of product that could result in loss of market
acceptance, loss of sales, reduction of 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 a 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.
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 interesed in updating 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.
21
PART II - OTHER INFORMATION
ITEM I. LITIGATION
None
ITEM 2. CHANGES IN SECURITIES
In the six month period ended December 31, 1996 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
22
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 Chief Executive February 13, 1997
- ------------------------ Officer
Thomas S. Bednarik
/s/ James L. Copland Chairman of the Board February 13, 1997
- ------------------------
James L. Copland
/s/ Timothy J. Stocker Chief Financial Officer February 13, 1997
- ------------------------
Timothy J. Stocker
23