September 15, 1998
SC&T INTERNATIONAL INC (SCTIE)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this report on form 10SB that are not purely historical are forward-looking statements within the
meaning of the 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
the fiscal year 1999 and thereafter; future products or 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.
Overview
SC&T International, Inc. (the "Company") was formed in June 1993. The Company develops and markets accessory and
peripheral products for the computer and video game industries under its PLATINUM SOUND and PER4MER registered
trademarks.. The Company's products include sub-woofer and speaker sound enhancement systems, PC volume controllers,
and a line of PC and video arcade racing wheels for SEGA, Nintendo, Sony Playstation and IBM-PC's. The Company's
multimedia keyboards line has been discontinued, in favor of a second generation product targeted at the corporate market.
This second generation, featuring an enhanced Voice Recognition product, has been completed but at this time has not been
introduced into the market.
On December 31, 1994, the Company purchased SC&T Europe, a marketing and distribution company located in Antwerp,
Belgium. The Company, in an effort to reduce its European operating costs, consolidated its European distribution operations
into one central facility located in the United Kingdom, in May 1997. The Company formed SC&T Europe Limited, located in
Portsmouth England. The Belgium office was closed in August, 1998. All current marketing and distribution operations,
including a United Kingdom domestic sales force, is now being handled out of the United Kingdom operations.
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 $917,000 for the three
months ended July 31,1998. The Company's primary costs are for research and development, tooling for new products,
inventory, trade shows, and selling and promotion activities. Although these expenses were kept to a minimum during the
quarter, the Company expects these costs to increase at a reduced rate when compared to the expected rate of increase in
sales. In addition, operating results may be influenced by factors such as 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. Operating results of the Company for the three month period ended July 31,1998 and 1997.
Net Sales
Net sales for the three months ended July 31,1998 decreased to approximately $1,079,000 or approximately $99,000 less
than net sales for the three months ended July 31,1997. The net change in sales was approximately 8%.
Gross Profit
The Company's gross profit percentage for the three months ended July 31,1998 before special inventory adjustments was
approximately 25%. The Company's cost of sales includes inventory write-downs, returns and special adjustments. The
Company charged operations over $400,000 for the period ended July 31,1997. Gross profit for the period before inventory
write downs was 26%. Gross profit margins are affected by several factors, including the product mix between the Company's
products. Typically, products sell at gross profit margins ranging from 20% to 40%. The Company anticipates that new
products will initially sell at higher gross profit margins. However, there can be no assurance that higher margins will be
maintained over the life of the product.
Payroll and Payroll Taxes
The Company's payroll and payroll tax expense decreased from approximately $517,000 in the three months ended July
31,1997 to approximately $325,000 for the three months ended July 13,1998, or approximately 37%. Substantial cost
reductions were made in executive salaries, relocation costs and employment expenses for advertising and fees.
Selling and Promotion
The Company's selling and promotion expenses decreased from approximately $757,000 for the three months ended July
31,1997 to approximately $215,000 for the three months ended July 31,1998, or a decrease of approximately 71%. This
represents an decrease in selling and promotion expenses, as a percentage of sales from 64% for the three months ended July
31,1997 to 20% for the three months ended July 31,1998. Approximately one-third of the decrease was due to a reduction in
expenses for packaging new products, decreased trade show expenses and discontinuance of sponsorship expenses of Kool
Toyota Racing Series. Office and Administration
The Company's office and administrative expenses decreased from approximately $573,000 for the three months ended July
31,1997 to approximately $352,000 for the three months ended July 31,1998, or approximately 39%. As a percentage of net
sales, office and administrative expenses decreased from 48% to 32%. Major cost reductions were made in legal expense
$193,000 and general office overhead expenses $28,000.
Development Cost Amortization
Development cost amortization decreased from approximately $55,000 for the three months ended July 31, 1997 to
approximately $21,000 for the three month period ended July 31, 1998. 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.
Consulting Fees
Expenditure for consulting fees decreased from approximately $106,000 for the three months ended July 31, 1997 to less than
$1,000 for the three months ended July 31,1998. Most of the consulting fees for 1997 were in conjunction with the conversion
of Series A preferred stock to common stock.
Net Loss
As a result of the factors described above, the Company's loss from operations decreased from approximately $2,186,000 for
the three months ended July 31,1997 to approximately $917,000 for the three months ended July 31,1998. The operating
results for the period ended July 31,1997 include extraordinary expenses recorded in June, 1997 which was formerly the fiscal
year end.
Net Loss Per Share
Net loss per share from operations decreased from $0.08 for the three months ended July 31,1997 to $0.04 for the three
months ended July 31,1998.
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 $3,635,084 at September 30, 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 approximately $182,000
denominated in Belgian francs. 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, 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.
Business Outlook and Risk Factors
Management believes there is a growing acceptance in the global marketplace for the Company's expanding product line.
SC&T products are currently sold in over 25 countries worldwide. The Company plans four to six new product introductions
over the next six months. The Company has developed new manufacturing alliances which have reduced costs due to
economies of scale production environments. 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.
Business Outlook and Risk Factors, Continued
The Company believes the accessory and peripheral products markets for the personal computer and video gaming industries
has a strong outlook. These markets are characterized by sales growth, rapid technological change, frequent introduction of
new products, product upgrades and evolving industry standards. The Company strives to provide market-leading solutions
that address the personal computer 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.
The Company's 10K report for the year ended April 30,1998 contained a going concern qualification. The Company does not
dispute this qualification. Without a substantial increase in revenues the Company will require additional working capital through
external sources to continue to fund its operations. Management plans to actively explore debt and equity financing as well as
holding discussions with potential merging partners to obtain required financing.
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