UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from ________ to _________
Commission file number: 333-42036
Soyo Group, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 95-4502724
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
41484 Christy Avenue, Fremont, California 94538
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(510) 226-7696
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Registrant's telephone number, including area code
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). [ ]
As of March 31, 2003, the registrant had 40,000,000 shares of common
stock issued and outstanding.
Documents incorporated by reference: None.
1
SOYO GROUP, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2003
(Unaudited) and December 31, 2002
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Three Months Ended March 31, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
2
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 239,402 $ 623,296
Certificate of deposit, restricted 1,000,000 1,000,000
Accounts receivable, net of
allowance for doubtful accounts
of $620,605 at March 31, 2003
and December 31, 2002 5,361,680 6,725,425
Inventories, including $9,854,834
and $9,359,190 purchased from
Soyo Computer, Inc. at March 31,
2003 and December 31, 2002,
respectively 11,665,301 12,358,255
Prepaid expenses 52,535 50,714
Income tax refund receivable 47,000 47,000
------------ ------------
18,365,918 20,804,690
------------ ------------
OTHER
Property and equipment, net of
accumulated depreciation and
amortization of $35,335 and
$31,300 at March 31, 2003 and
December 31, 2002, respectively 56,059 60,094
Deposits 50,000 50,000
------------ ------------
106,059 110,094
------------ ------------
$ 18,471,977 $ 20,914,784
============ ============
(continued)
3
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Balance Sheets (continued)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
LIABILITIES
CURRENT
Accounts payable -
Soyo Computer, Inc. $ 10,874,396 $ 12,803,935
Other 3,377,732 4,554,820
Accrued liabilities 1,410,540 1,508,224
Advances from officer,
director and major
shareholder 360,000 --
Revolving note payable 1,200,000 1,200,000
Income taxes payable 36,000 --
------------ ------------
17,258,668 20,066,979
------------ ------------
NON-CURRENT
Long-term payable - Soyo
Computer, Inc. 12,000,000 12,000,000
------------ ------------
SHAREHOLDERS' DEFICIENCY
Preferred stock, $0.001 par value
Authorized - 10,000,000 shares
Issued and outstanding -
1,000,000 shares of Class A
Convertible Preferred Stock,
$1.00 per share stated
liquidation value
($1,000,000 aggregate
liquidation value) 1,000 1,000
Common stock, $0.001 par value
Authorized - 75,000,000 shares
Issued and outstanding -
40,000,000 shares 40,000 40,000
Additional paid-in capital 459,000 459,000
Accumulated deficit (11,286,691) (11,652,195)
------------ ------------
(10,786,691) (11,152,195)
------------ ------------
$ 18,471,977 $ 20,914,784
============ ============
See accompanying notes to condensed consolidated financial statements.
4
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,
------------------------------
2003 2002
------------ ------------
Net revenues $ 9,584,386 $ 15,338,684
Cost of revenues, including
inventories purchased from Soyo
Computer, Inc. of $4,934,401
and $13,489,480 in 2003 and
2002, respectively 8,166,142 15,795,621
------------ ------------
Gross margin (deficit) 1,418,244 (456,937)
------------ ------------
Costs and expenses:
Sales and marketing 212,946 415,284
General and administrative 790,115 730,778
Provision for doubtful accounts -- 700,000
Depreciation and amortization 4,035 2,284
------------ ------------
Total costs and expenses 1,007,096 1,848,346
------------ ------------
Income (loss) from operations 411,148 (2,305,283)
------------ ------------
Other income (expense):
Interest income 5 11
Other income -- 13,114
Interest expense (9,399) (16,017)
------------ ------------
Other expense, net (9,394) (2,892)
------------ ------------
Income (loss) before income taxes 401,754 (2,308,175)
Provision for income taxes 36,250 --
------------ ------------
Net income (loss) $ 365,504 $ (2,308,175)
============ ============
Net income (loss) per common share -
Basic $ 0.01 $ (0.08)
============ ============
Diluted
$ 0.01 $ (0.08)
============ ============
Weighted average number of common
shares outstanding -
Basic 40,000,000 28,182,750
============ ============
Diluted 42,272,727 28,182,750
============ ============
See accompanying notes to condensed consolidated financial statements.
5
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
-----------------------------
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 365,504 $(2,308,175)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 4,035 2,284
Provision for doubtful
accounts -- 700,000
Changes in operating
assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,363,745 877,934
Inventories 692,954 (960,035)
Prepaid expenses (1,821) (67,040)
Increase (decrease) in:
Accounts payable -
Soyo Computer, Inc. (1,929,539) 3,320,679
Accounts payable -
other (1,177,088) (969,174)
Accrued liabilities (97,684) 101,486
Income taxes payable 36,000 (75,044)
----------- -----------
Net cash provided by (used in)
operating activities (743,894) 622,915
----------- -----------
INVESTING ACTIVITIES
Purchase of property and
equipment -- (7,500)
----------- -----------
Net cash used in investing
activities -- (7,500)
----------- -----------
(continued)
6
Soyo Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended March 31,
-----------------------------
2003 2002
----------- -----------
FINANCING ACTIVITIES
Advances from officer,
director and major
shareholder $ 360,000 $ --
Net increase (decrease) in
revolving note payable -- (260,000)
----------- -----------
Net cash provided by (used
in) financing activities 360,000 (260,000)
----------- -----------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (383,894) 355,415
At beginning of period 623,296 168,450
----------- -----------
At end of period $ 239,402 $ 523,865
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest $ 9,461 $ 12,230
=========== ===========
Cash paid for income taxes $ 1,050 $ 49,156
=========== ===========
See accompanying notes to condensed consolidated financial statements.
7
Soyo Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2003 and 2002
1. Organization and Basis of Presentation
Organization - Effective October 24, 2002, Vermont Witch Hazel Company, Inc., a
Nevada corporation ("VWHC"), acquired Soyo, Inc., a Nevada corporation ("Soyo
Nevada"), from Soyo Computer, Inc., a Taiwan corporation ("Soyo Taiwan), in
exchange for the issuance of 1,000,000 shares of convertible preferred stock and
28,182,750 shares of common stock, and changed its name to Soyo Group, Inc.
("Soyo"). The 1,000,000 shares of preferred stock were issued to Soyo Taiwan and
the 28,182,750 shares of common stock were issued to certain members of Soyo
Nevada management.
Subsequent to this transaction, Soyo Taiwan maintained an equity interest in
Soyo, continues to be the primary supplier of inventory to Soyo, and was owed
$24,803,935 at December 31, 2002. In addition, there was no change in the
management of Soyo and no new capital invested, and there is a continuing family
relationship between certain members of the management of Soyo and Soyo Taiwan.
As a result, this transaction was accounted for as a recapitalization of Soyo
Nevada, pursuant to which the accounting basis of Soyo Nevada continued
unchanged subsequent to the transaction date. Accordingly, the pre-transaction
financial statements of Soyo Nevada are now the historical financial statements
of the Company.
In conjunction with this transaction, Soyo Nevada transferred $12,000,000 of
accounts payable to Soyo Taiwan to long-term payable, without interest, due
December 31, 2005.
Soyo Taiwan also agreed to continue to provide computer parts and components to
Soyo on an open account basis at the quantities required and on a timely basis
to enable Soyo to continue to conduct its business operations at budgeted 2003
levels, which is not less than a level consistent with the operations of Soyo
Nevada's business in 2001 and 2000. This supply commitment is effective through
December 31, 2005.
On December 9, 2002, Soyo's Board of Directors elected to change Soyo's fiscal
year end from July 31 to December 31 to conform to Soyo Nevada's fiscal year
end.
Ming Tung Chok, the Company's President, Chief Executive Officer and Director
and Nancy Chu, the Company's Chief Financial Officer, Secretary and Director,
are husband and wife. Andy Chu, the President and major shareholder of Soyo
Taiwan, is the brother of Nancy Chu.
Unless the context indicates otherwise, Soyo and its wholly-owned subsidiary,
Soyo Nevada, are referred to herein as the "Company".
Basis of Presentation - The accompanying condensed consolidated financial
statements include the accounts of Soyo and Soyo Nevada. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Comments - The accompanying interim condensed consolidated financial statements
are unaudited, but in the opinion of management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to present
8
fairly the financial position at March 31, 2003, the results of operations for
the three months ended March 31, 2003 and 2002, and cash flows for the three
months ended March 31, 2003 and 2002. The condensed consolidated balance sheet
as of December 31, 2002 is derived from the Company's audited consolidated
financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
condensed consolidated financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
2002, as filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates primarily relate to the realizable value
of accounts receivable, vendor programs and inventories. Actual results could
differ from those estimates.
The results of operations for the three months ended March 31, 2003 is not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2003.
Business - The Company sells computer components and peripherals to distributors
and retailers primarily in North, Central and South America, and Taiwan. The
Company operates in one business segment. A substantial majority of the
Company's products are purchased from Soyo Taiwan pursuant to an exclusive
distribution agreement effective through December 31, 2005, and are sold under
the "Soyo" brand.
Soyo Nevada was a wholly-owned subsidiary of Soyo Taiwan during the years ended
December 31, 2000 and 2001, and the period from January 1, 2002 through October
24, 2002.
Income (Loss) Per Share - Basic income (loss) per share is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted income per share is calculated assuming
the issuance of common shares, if dilutive, resulting from the conversion of
preferred stock. These potentially dilutive securities were not included in the
calculation of loss per share for the three months ended March 31, 2002 because
the Company incurred a loss during such period and thus their effect would have
been anti-dilutive. The loss per common share calculation for the three months
ended March 31, 2002 reflects the retroactive restatement of the shareholders'
equity section to reflect the October 2002 recapitalization. As of March 31,
2003 and December 31, 2002, potentially dilutive securities consisted of
1,000,000 shares of convertible preferred stock with a stated liquidation value
of $1.00 per share that are convertible into common stock at the fair value of
the underlying common stock. As of March 31, 2003, 2,272,727 shares of common
stock were issuable upon conversion of the convertible preferred stock, based on
the average trading price of $0.44 per common share during the three months
ended March 31, 2003, which information was utilized to calculate diluted income
per share.
9
Comprehensive Income (Loss) - Since the Company did not have any items of
comprehensive income (loss) during the three months ended March 31, 2003 and
2002, a statement of comprehensive income (loss) is not presented.
Significant Risks and Uncertainties - The Company operates in a highly
competitive industry subject to aggressive pricing practices, pressures on gross
margins, frequent introductions of new products, short product life cycles,
rapid technological advances, continual improvement in product price/performance
characteristics, and changing consumer demand. As a result of the dynamic nature
of the business, it is possible that the Company's estimates with respect to the
realizability of inventories and accounts receivable may be materially different
from actual amounts. These differences could result in higher than expected
allowance for bad debts or inventory reserve costs, which could have a
materially adverse effect on the Company's financial position and results of
operations.
Pro Forma Financial Disclosure - Since the Company has not adopted a stock
option plan, nor has it issued any stock options, no pro forma financial
disclosure has been presented.
2. Advances from Officer, Director and Major Shareholder
During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made short-term advances to the Company of $360,000 for
working capital purposes, which are expected to be repaid by June 30, 2003.
3. Significant Concentrations
a. Customers
The Company sells to both distributors and retailers. Sales through such
distribution channels are summarized as follows:
Three Months Ended March 31,
---------------------------------
2003 2002
----------- -----------
Revenues
Distributors $ 1,870,020 $ 2,673,747
Retailers 7,714,366 12,664,937
----------- -----------
$ 9,584,386 $15,338,684
=========== ===========
During the three months ended March 31, 2003 and 2002, the Company offered price
protection to certain customers under specific programs aggregating $867,254 and
$49,775, respectively, which reduced net revenues and accounts receivable
accordingly.
Information with respect to customers that accounted for 10% or more of the
Company's revenues is presented below.
During the three months ended March 31, 2003, the Company had two customers that
accounted for revenues of $2,871,751 and $1,286,767, equivalent to 30.0% and
13.4% of net revenues, respectively. During the three months ended March 31,
2002, the Company had one customer that accounted for revenue of $4,182,334,
equivalent to 27% of net revenues.
10
b. Geographic Segments
Financial information by geographic segments is summarized as follows:
Three Months Ended March 31,
------------------------------
2003 2002
----------- -----------
Revenues
North America $ 8,437,361 $14,058,770
Central and South America 1,147,025 1,047,841
Taiwan -- 212,500
Other locations -- 19,573
----------- -----------
$ 9,584,386 $15,338,684
=========== ===========
c. Suppliers
A substantial majority of the Company's inventories are manufactured by Soyo
Taiwan and are purchased from Soyo Taiwan or an affiliate of Soyo Taiwan on an
open account basis.
Through October 24, 2002, Soyo Nevada was a wholly-owned subsidiary of Soyo
Taiwan (Note 1). Subsequent to that date, Soyo Taiwan has continued to provide
inventory to Soyo, and has represented that it will continue to provide
inventory to Soyo on an open account basis through December 31, 2005.
The following is a summary of the Company's transactions and balances with Soyo
Taiwan as of March 31, 2003 and December 31, 2002, and for the three months
ended March 31, 2003 and 2002:
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Purchases from Soyo Taiwan $ 5,967,371 $ 16,546,633
Payments to Soyo Taiwan 7,607,000 10,498,147
March 31, December 31,
2003 2002
------------ ------------
Accounts payable to Soyo Taiwan $ 10,874,396 $12,803,935
Long-term payable to Soyo Taiwan 12,000,000 12,000,000
During the three months ended March 31, 2003, the Company received price
protection from Soyo Taiwan aggregating $92,000, which reduced inventory and
accounts payable to Soyo Taiwan accordingly. The Company did not receive any
price protection from Soyo Taiwan during the three months ended March 31, 2002.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, including statements that include the words
"believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, but are not limited to, statements
concerning the Company's expectations regarding its working capital
requirements, financing requirements, business prospects, and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2003 involve known and unknown risks,
uncertainties and other factors that could cause the actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Background and Overview:
The Company sells computer components and peripherals to distributors and
retailers in North, Central and South America, and Taiwan. The Company operates
in one business segment. A substantial majority of the Company's products are
purchased from Soyo Taiwan pursuant to an exclusive distribution agreement
effective through December 31, 2005, and are sold under the "Soyo" brand.
Effective October 24, 2002, Vermont Witch Hazel Company, Inc., a Nevada
corporation ("VWHC"), acquired Soyo, Inc., a Nevada corporation ("Soyo Nevada"),
from Soyo Computer, Inc., a Taiwan corporation ("Soyo Taiwan), in exchange for
the issuance of 1,000,000 shares of convertible preferred stock and 28,182,750
shares of common stock, and changed its name to Soyo Group, Inc. ("Soyo"). The
1,000,000 shares of preferred stock were issued to Soyo Taiwan and the
28,182,750 shares of common stock were issued to certain members of Soyo Nevada
management. During October 2002, certain members of the management of Soyo
Nevada also separately purchased 6,026,798 shares of the 11,817,250 shares of
common stock of VWHC outstanding prior to VWHC's acquisition of Soyo Nevada, for
$300,000 in personal funds. The 6,026,798 shares represented 51% of the
outstanding shares of VWHC common stock. Accordingly, Soyo Taiwan and Soyo
Nevada management currently own 34,209,548 shares of the 40,000,000 shares of
the Company's common stock outstanding at March 31, 2003.
Subsequent to this transaction, Soyo Taiwan maintained an equity interest in
Soyo, continues to be the primary supplier of inventory to Soyo, and was owed
$24,803,935 at December 31, 2002. In addition, there was no change in the
management of Soyo and no new capital invested, and there is a continuing family
relationship between certain members of the management of Soyo and Soyo Taiwan.
As a result, for financial reporting purposes, this transaction was accounted
for as a recapitalization of Soyo Nevada, pursuant to which the accounting basis
of Soyo Nevada continued unchanged subsequent to the transaction date.
Accordingly, the pre-transaction financial statements of Soyo Nevada are now the
historical financial statements of the Company.
In conjunction with this transaction, Soyo Nevada transferred $12,000,000 of
accounts payable to Soyo Taiwan to long-term payable, without interest, due
December 31, 2005.
12
Soyo Taiwan also agreed to continue to provide computer parts and components to
Soyo on an open account basis at the quantities required and on a timely basis
to enable Soyo to continue to conduct its business operations at budgeted 2003
levels, which is not less than a level consistent with the operations of Soyo
Nevada's business in 2001 and 2000. This supply commitment is effective through
December 31, 2005.
On December 9, 2002, the Company's Board of Directors elected to change the
Company's fiscal year end from July 31 to December 31 to conform to Soyo
Nevada's fiscal year end.
Ming Tung Chok, the Company's President, Chief Executive Officer and Director
and Nancy Chu, the Company's Chief Financial Officer, Secretary and Director,
are husband and wife, and are the primary members of Soyo Nevada management
referred to above. Andy Chu, the President and major shareholder of Soyo Taiwan,
is the brother of Nancy Chu.
Unless the context indicates otherwise, Soyo and its wholly-owned subsidiary,
Soyo Nevada, are referred to herein as the "Company".
The Company sells to both distributors and retailers. Sales to distributors were
$1,870,020 (19.5%) during the three months ended March 31, 2003, as compared to
$2,673,747 (17.4%) for the three months ended March 31, 2002. Sales to retailers
were $7,714,366 (80.5%) during the three months ended March 31, 2003, as
compared to $12,664,937 (82.6%) for the three months ended March 31, 2002.
During the three months ended March 31, 2003, the Company had two customers that
accounted for revenues of $2,871,751 and $1,286,767, equivalent to 30.0% and
13.4% of net revenues, respectively. During the three months ended March 31,
2002, the Company had one customer that accounted for revenue of $4,182,334,
equivalent to 27% of net revenues.
During the three months ended March 31, 2003, revenues from North America, and
Central and South America were $8,437,361 (88.0%) and $1,147,025 (12.0%),
respectively. During the three months ended March 31, 2002, revenues from North
America, Central and South America, Taiwan and Other were $14,058,770 (91.7%),
$1,047,841 (6.8%), $212,500 (1.4%) and $19,573 (0.1%), respectively.
Financial Outlook:
During the years ended December 31, 2000 and 2001, the Company generated sales
in excess of $62,000,000 in each such year, with gross margins ranging from 5%
to 7%. The Company incurred a net loss and a negative cash flow from operations
in each such year.
During the year ended December 31, 2002, the Company had sales of $49,664,417, a
negative net margin of $(4,003,972), and a net loss of $(10,733,459). Operations
during 2002 indicated a developing negative trend, with a negative gross margin
and an increasing net loss. During the three months ended December 31, 2002, the
Company experienced extreme pressures on its sales and gross margin as a result
of the effect of the West Coast dock strike in September and October 2002. The
impact of the initial supply interruption, combined with the abrupt release of
large amounts of inventory, caused a short-term price war in November and
December 2002. This price war resulted in the Company having to sell inventory
at below cost. The price war abated during January 2003, and the Company's gross
margin has returned to more normal levels.
13
As of March 31, 2003 and December 31, 2002, the Company was reliant upon the
cash flows from its operations. The Company does not have any external sources
of liquidity, other than advances from an officer, director and major
shareholder.
Since October 24, 2002, the date that Soyo Nevada became a wholly-owned
subsidiary of VWHC, Soyo has implemented various measures designed to improve
its operating results, cash flows and financial position, including the
following:
- The Company has reviewed its product mix, and has revised its sales plan to
focus on higher margin products.
- The Company is attempting to expand the number and credit quality of its
customer accounts.
- The Company is attempting to arrange additional supply sources and to reduce
its reliance on inventory purchases from Soyo Taiwan.
- The Company is reviewing its management structure and expects to retain
additional executives with industry experience.
- The Company is planning to move its office and warehouse operations into a
larger, more efficient facility in late 2003.
- The Company has deferred the payment of $12,000,000 of accounts payable to
Soyo Taiwan until December 31, 2005.
- The Company will attempt to increase its operating liquidity by exploring the
availability of outside debt and equity financing, to the extent such funding is
available under reasonable terms and conditions.
There can be no assurances that these measures will result in an improvement in
the Company's operations or liquidity. To the extent that the Company's
operations or liquidity does not improve, the Company may be forced to reduce
operations to a level consistent with its available working capital resources.
The Company may also have to consider a formal or informal restructuring or
reorganization.
As a result of these factors, as of December 31, 2002, the Company's independent
accountants expressed substantial doubt about the Company's ability to continue
as a going concern. The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The carrying amounts of assets and liabilities
presented in the condensed consolidated financial statements do not purport to
represent the realizable or settlement values, and do not include any
adjustments that might result from the outcome of this uncertainty.
Critical Accounting Policies:
The Company prepared its condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
14
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The Company operates in a highly competitive industry subject to aggressive
pricing practices, pressures on gross margins, frequent introductions of new
products, rapid technological advances, continual improvement in product
price/performance characteristics, and changing consumer demand.
As a result of the dynamic nature of the business, it is possible that the
Company's estimates with respect to the realizability of inventories and
accounts receivable may be materially different from actual amounts. These
differences could result in higher than expected allowance for bad debts or
inventory reserve costs, which could have a materially adverse effect on the
Company's financial position and results of operations.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's condensed consolidated
financial statements.
Vendor Programs:
Funds received from vendors for price protection, product rebates, marketing and
training, product returns and promotion programs are generally recorded as
adjustments to product costs, revenue or sales and marketing expenses according
to the nature of the program. The Company records estimated reductions to
revenues for incentive offerings and promotions. Depending on market conditions,
the Company may implement actions to increase customer incentive offerings,
which may result in an incremental reduction of revenue at the time the
incentive is offered.
Accounts Receivable:
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable.
The Company records estimated reductions to revenue for incentive offerings and
promotions. Depending on market conditions, the Company may implement actions to
increase customer incentive offerings, which may result in an incremental
reduction of revenue at the time the incentive is offered.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of outstanding
accounts receivable.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined by
using the average cost method. The Company maintains a perpetual inventory
system which provides for continuous updating of average costs. The Company
evaluates the market value of its inventory components on a regular basis and
reduces the computed average cost if it exceeds the component's market value.
Inventories consist primarily of computer parts and components purchased from
Soyo Taiwan.
15
Income Taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. In the event the Company
was to determine that it would be able to realize its deferred tax assets in the
future in excess of its recorded amount, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to operations in the period such
determination was made.
Results of Operations:
Three Months Ended March 31, 2003 and 2002:
Net Revenues. Net revenues decreased by $5,754,298 or 37.5%, to $9,584,386 in
2003, as compared to $15,338,684 in 2002. The decrease in net revenues was a
result of a general slow-down in the market and the Company's decision to
de-emphasize sales volume and focus on the sale of higher margin products.
During the three months March 31, 2003 and 2002, the Company offered price
protection to certain customers under specific programs aggregating $867,254 and
$49,775, respectively, which reduced net revenues and accounts receivable
accordingly.
Gross Margin (Deficit). Gross margin (deficit) was $1,418,244 or 14.8% in 2003,
as compared to $(456,937) or (3.0)% in 2002. During the three months ended March
31, 2003, the Company recorded inventory write-downs of $30,000, as compared to
$1,500,000 for the three months ended March 31, 2002. Gross margin increased in
2003 as compared to 2002 as a result of the change in product mix to higher
margin products and substantially reduced inventory write-downs.
Sales and Marketing Expenses. Selling and marketing expenses decreased by
$202,338 or 48.7%, to $212,946 in 2003, as compared to $415,284 in 2002,
reflecting reduced vendor support programs funded by the Company, since these
programs are generally based on a percentage of revenues. The Company has also
reduced sales and marketing expenses in response to the general slow-down in the
market. Co-operative marketing program expense was $131,382 in 2003, as compared
to $312,744 in 2002, a decrease of $181,362 or 58.0%.
General and Administrative Expenses. General and administrative expenses
increased by $59,337 or 8.1%, to $790,115 in 2003, as compared to $730,778 in
2002, primarily as a result of increased legal, accounting and consulting costs
related to the operation of a public company.
Provision for Doubtful Accounts. The Company recorded a provision for doubtful
accounts of $700,000 for the three months ended March 31, 2002. The Company did
not record a provision for doubtful accounts for the three months ended March
31, 2003.
Depreciation and Amortization. Depreciation and amortization of property and
equipment was $4,035 in 2003, as compared to $2,284 in 2002.
Income (Loss) from Operations. Income from operations was $411,148 for the three
months ended March 31, 2003, as compared to a loss from operations of $2,305,283
for the three months ended March 31, 2002.
16
Interest Expense. Interest expense decreased to $9,399 in 2003, as compared to
$16,017 in 2002, as a result of a reduction in the interest rate on the
revolving note payable.
Interest Income. Interest income was $5 in 2003, as compared to $11 in 2002.
Other Income. Other income was $13,114 in 2002. There was no other income in
2003.
Provision for Income Taxes. The provision for income taxes was $36,250 in 2003.
There was no provision for income taxes in 2002.
Net Income (Loss). Net income was $365,504 for the three months ended March 31,
2003, as compared to a net loss of $2,308,175 for the three months ended March
31, 2002.
Financial Condition - March 31, 2003:
Liquidity and Capital Resources:
Transactions with Soyo Taiwan. Since the formation of Soyo Nevada in October
1998, the Company has relied on the financial support from Soyo Taiwan for
inventory and capital to provide the resources necessary to conduct operations.
Through October 24, 2002, Soyo Nevada was a wholly-owned subsidiary of Soyo
Taiwan. Subsequent to that date, Soyo Taiwan continues to provide inventory to
Soyo, and has represented that it will continue to provide inventory to Soyo on
an open account basis through December 31, 2005.
In conjunction with October 2002 transaction, Soyo Nevada transferred
$12,000,000 of accounts payable to Soyo Taiwan to long-term payable, without
interest, due December 31, 2005. Soyo Taiwan also agreed to continue to provide
computer parts and components to Soyo on an open account basis at the quantities
required and on a timely basis to enable Soyo to continue to conduct its
business operations at budgeted 2003 levels, which is not less than a level
consistent with the operations of Soyo Nevada's business in 2001 and 2000. This
supply commitment is effective through December 31, 2005.
During the three months ended March 31, 2003 and 2002, the Company purchased
inventory from Soyo Taiwan aggregating $5,967,371 and $16,546,633. At March 31,
2003, the Company had short-term accounts payable to Soyo Taiwan of $10,874,396
and a long-term payable to Soyo Taiwan of $12,000,000. At December 31, 2002, the
Company had short-term accounts payable to Soyo Taiwan of $12,803,935 and a
long-term payable to Soyo Taiwan of $12,000,000.
During the three months ended March 31, 2003, the Company received price
protection from Soyo Taiwan aggregating $92,000, which reduced inventories and
accounts payable to Soyo Taiwan accordingly. The Company did not receive any
price protection from Soyo Taiwan during the three months ended March 31, 2002.
The Company does not have any formal price protection agreement with Soyo
Taiwan. The Company periodically negotiates price protection adjustments with
Soyo Taiwan based on current market conditions.
Operating Activities. The Company utilized cash of $743,894 in operating
activities during the three months ended March 31, 2003, as compared to
generating cash of $622,915 during the three months ended March 31, 2002. The
decrease in operating cash flow in 2003 as compared to 2002 was primarily a
result of an increase in payments to Soyo Taiwan for inventories, offset in part
by an improvement in cash flows from accounts receivable.
17
At March 31, 2003, the Company had cash and cash equivalents of $239,402, as
compared to $623,296 at December 31, 2002. The cash balance at March 31, 2003
included a short-term advance of $360,000 from Nancy Chu, the Company's Chief
Financial Officer, Secretary and Director, that was received during March 2003.
The Company had working capital of $1,107,250 at March 31, 2003, as compared to
$737,711 at December 31, 2002, resulting in current ratios of 1.06:1 and 1.04:1
at March 31, 2003 and December 31, 2002, respectively.
Accounts receivable decreased to $5,982,285 at March 31, 2003, as compared to
$7,346,030 at December 31, 2002, a decrease of $1,363,745 or 18.6%, as a result
of a combination of reduced sales and increased cash collections during the
three months ended March 31, 2003. The Company did not record a provision for
doubtful accounts for the three months ended March 31, 2003.
Inventories decreased to $11,665,301 at March 31, 2003, as compared to
$12,358,255 at December 31, 2002, a decrease of $692,954 or 5.6%, as a result of
reduced inventory purchases during the three months ended March 31, 2003,
reflecting decreased sales during such period and the implementation of
management's plans in 2003 to increase inventory turnover of higher margin
products. At March 31, 2003 and December 31, 2002, $9,854,834 and $9,359,190 of
such inventories had been purchased from Soyo Taiwan.
Accounts payable - Soyo Computer, Inc., excluding $12,000,000 of accounts
payable for which payment has been deferred until December 31, 2005, decreased
to $10,874,396 at March 31, 2003, as compared to $12,803,935 at December 31,
2002, a decrease of $1,929,539 or 15.1%, as a result of reduced inventory
purchases, reflecting reduced sales and attempts to improve inventory turnover.
Accounts payable - other decreased to $3,377,732 at March 31, 2003, as compared
to $4,554,820 at December 31, 2002, a decrease of $1,177,088 or 25.8%, as a
result of reduced inventory purchases, reflecting reduced sales and attempts to
improve inventory turnover.
Accrued liabilities decreased to $1,410,540 at March 31, 2003, as compared to
$1,508,224 at December 31, 2002, a decrease of $97,684 or 6.5%.
Income taxes payable were $36,000 at March 31, 2003. The Company did not have
any income taxes payable at December 31, 2002.
Investing Activities. The Company expended $7,500 in 2002 for the purchase of
property and equipment. The Company did not purchase any property and equipment
in 2003.
Financing Activities. On June 4, 2001, the Company entered into a revolving loan
agreement with a financial institution for $1,200,000. This loan agreement was
renewed in June 2002. Borrowings under the loan agreement bear interest at 3.75%
per annum and are secured by a $1,000,000 certificate of deposit that matures in
June 2003. Borrowings under the loan agreement mature on June 4, 2003. Soyo
Taiwan has guaranteed $200,000 of borrowings under the loan agreement. The
Company has not determined whether it will attempt to renew or replace this
credit facility when it matures in June 2003. The Company does not expect that
the renewal or replacement of this credit facility will have a material effect
on the Company's liquidity and capital resources.
During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made a short-term advance to the Company of $360,000 for
working capital purposes, which is expected to be repaid by June 30, 2003.
18
As of March 31, 2003, the Company did not have any capital expenditure
commitments outstanding. However, the Company expects to incur as yet
undetermined costs with respect to relocation to a new office and warehouse
facility in late 2003 upon the expiration of its current operating lease on
September 30, 2003.
New Accounting Pronouncements:
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". FASB No. 143 addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The adoption of SFAS No. 143 effective
January 1, 2003 did not have any effect on the Company's consolidated financial
statement presentation or disclosures.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement made revisions to the accounting for gains and losses from the
extinguishment of debt, rescinded SFAS No. 44 and required certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The adoption
of SFAS No. 145 effective January 1, 2002 did not have any effect on the
Company's consolidated financial statement presentation or disclosures.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have any effect on
the Company's consolidated financial statement presentation or disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (and Interpretation of ARB No. 51)" ("FIN 46"). FIN
46 requires that the primary beneficiary in a variable interest entity
consolidate the entity even if the primary beneficiary does not have a majority
voting interest. The consolidation requirements of FIN 46 are required to be
19
implemented for any variable interest entity created on or after January 31,
2003. In addition, FIN 46 requires disclosure of information regarding
guarantees or exposures to loss relating to any variable interest entity
existing prior to January 31, 2003 in financial statements issued after January
31, 2003. The implementation of the provisions of FIN 46 effective January 31,
2003 did not have any effect on the Company's consolidated financial statement
presentation or disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors as
commodity prices, equity prices, and other market changes that affect market
risk sensitive investments.
As the Company's debt obligations are primarily short-term in nature, with fixed
interest rates, the Company does not have any risk from an increase in interest
rates. A 10 point basis change in the Company's average debt interest rate would
not have a material effect on the Company's consolidated results of operations.
However, to the extent that the Company arranges new borrowings in the future,
an increase in interest rates would cause a commensurate increase in the
interest expense related to such borrowings.
The Company does not have any foreign currency risk, as its revenues and
expenses, as well as its debt obligations, are denominated and settled in United
States dollars.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to the Company's management, including its principal executive and
financial officers, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its principal executive and financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported as and when
required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the Company's most recent evaluation.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
Three Months Ended March 31, 2003:
The Company filed Current Reports on Form 8-K on February 13, 2003 and
March 18, 2003 to report that it changed its independent accountants.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOYO GROUP, INC.
------------------------
(Registrant)
DATE: May 13, 2003 By: /s/ Ming Tung Chok
------------------------
Ming Tung Chok
President and Chief
Executive Officer
DATE: May 13, 2003 By: /s/ Nancy Chu
------------------------
Nancy Chu
Chief Financial Officer
22
CERTIFICATION
I, Ming Tung Chok, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Soyo Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and I have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to me
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date.
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 By: /s/ MING TUNG CHOK
-------------------
Ming Tung Chok
President and Chief
Executive Officer
23
CERTIFICATION
I, Nancy Chu, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Soyo Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and I have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to me
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date.
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 By: /s/ NANCY CHU
-----------------------
Nancy Chu
Chief Financial Officer
24
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
25