U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended June 30, 1996
Commission file number 0-27382
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SC&T INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
ARIZONA 86-0737579
(State of incorporation) (I.R.S. Employer Identification No.)
3837 E. LaSalle Street
Phoenix, Arizona 85040
(602) 470-1334
(Address, including zip code, and telephone number, including area code,
of issuer's executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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
--- ---
Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X].
Issuer's revenues for its most recent fiscal year: $3,771,123.
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days:
As of September 10, 1996 - $3,273,080.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of September 10, 1996 - 5,015,313.
Documents incorporated by reference: Not Applicable.
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SC&T INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-KSB
FISCAL YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 18
ITEM 10. EXECUTIVE COMPENSATION 20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 25
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PART I
ITEM 1. BUSINESS
General
The Company develops and markets accessory and peripheral products for
the multimedia, interactive, and communications segments of the PC and video
game industries. The Company's products include fully-integrated multimedia
stereo keyboards, CD-ROM storage systems, various aftermarket
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 SEGA, Nintendo, Sony Playstation, and IBM PCs.
The Company focuses on the multimedia, interactive, and communications
segments of the industry, developing technology to furnish one-step, integrated
solutions for the PC user interested in updating existing equipment. The Company
began operations in June 1993 and achieved sales of approximately $3,517,000 and
$3,771,000 during the years ended June 30, 1995 and June 30, 1996, respectively.
Although the Company's revenue has increased significantly since inception, the
Company recorded a loss of approximately $792,000 and $2,688,000 for the years
ended June 30, 1995 and June 30, 1996, respectively.
Industry Overview
The market for multimedia applications and equipment is evolving
rapidly and is characterized by rapid technological change. Unlike certain other
segments of the computer market, the multimedia segment is consumer driven. As a
result, many PC manufacturers have redesigned their product mix to dramatically
increase the multimedia portion of their product line. Some have reconfigured
their product lines so that 100% of their products offer multimedia
capabilities.
BIS Strategic Decisions ("BIS") estimates that the total sales of
multimedia home personal computers in the United States totaled 4.6 million
units in 1995, up 29% from the 3.5 million units sold in 1994. Total growth in
the installed base of home personal computers in the United States in 1995 was
estimated by BIS at 12% or approximately 3.6 million computers. By 2000, BIS
predicts the installed base of home personal computers will be in excess of 50
million units, representing a compounded annual increase of 45% from the
installed base in 1995.
Further growth of the consumer market is expected if multimedia
applications successfully integrate home computing, entertainment, and
communication activities. BIS indicates that home computers accounted for
approximately 26% of the 1995 PC market in the United States, up from
approximately 24% in 1994. The Company believes that consumer demand for
high-powered multimedia computers for the home will fuel projected growth in the
multimedia computer market, resulting in an increase in potential demand for the
Company's products.
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PLATINUM SOUND is a trademark of the Company. This Report also refers
to SEGA, Nintendo, Sony Playstation, IBM, Macintosh, Microsoft Windows 95, NMB,
Maxiswitch, Silitek, Altec Lansing, Yamaha, Labtech, Best Data Products, Inc.,
Objix Multimedia Corp., GDT Softworks, Inc., Best Buy Products, Fry's
Electronics, Inc., Babbages, Software, Etc., PC Connections, TigerDirect, Micro
Warehouse, Inc., Dell Computer Corporation, Dell Products Ireland, Dell Products
Malaysia, Computer 2000, Interdiscount, Actebis, Macrotron, Santech, Leader
Distribuzeone, Maxiswitch, Virtual Realty Laboratories Inc., Thrustmaster and
MadCatz, which are registered or unregistered trademarks of companies other than
SC&T International, Inc., and the SRS symbol which is a registered trademark of
SRS Labs, Inc.
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Products
Integrated Multimedia Stereo Keyboard Products
The Company currently produces two integrated multimedia stereo
keyboards compatible with all IBM systems, CD-ROM drives, and sound cards. The
PLATINUM SOUND model MSK-200 serves the high end of the market, and the PLATINUM
SOUND model MAK-100 provides a low end, more affordable product. The Company
intends to replace the MAK-100 with a mid-range model incorporating an AM-FM
stereo radio. See "Business New Product Development" contained in Item 1 of this
Report.
Both models are teleconferencing ready and feature
magnetically-shielded, four inch, full range, 16 watt stereo speakers, a
built-in, high-density microphone, external microphone and headphone jacks, and
a sliding volume control. In addition, the MSK-200 model features a 13 watt
stereo amplifier, LED readout, an ergonomic wrist rest and sliding controls for
bass-treble and left-right balance. The suggested retail price for the MSK-200
is $99.95 and for the MAK-100 is $49.95.
CD-ROM Storage Systems
The Company offers CD-ROM and 3 1/2" computer diskette storage units.
The units are available in black or white. The CD-ROM storage units hold up to
40 CD-ROM discs and the computer diskette storage units hold up to 40 diskettes.
The suggested retail price for the CD-ROM storage units is $19.95. The suggested
retail price for the computer diskette storage units is $14.95.
Multimedia Equalizer/Amplifier
The Company offers a 100 watt peak performance Omni(TM) SRS(R) 3D
Surround Sound equalizer/amplifier. This product features volume and balance
controls and 7-band graphic equalization. This product offers high-fidelity
SRS(R) Surround Sound, compatible with IBM and Macintosh PCs as well as with all
computer sound cards. The equalizer/amplifier installs into a 3.5" drive bay or
may be used externally, and has an autoswitch universal power supply that can be
connected to a portable tape or compact disc player. The suggested retail price
for the equalizer/amplifier is $49.95.
Base Sub-Woofer System
The Company offers a 160 watt peak performance sub-woofer satellite
speaker sound system. This product features volume and base controls and is
available for the home stereo and PC markets. The suggested retail price for
this product is $99.95.
Multimedia Volume Controller
The Company markets a volume controller that allows easy access volume
control, eliminating the inconvenience of adjusting volume at the sound card or
with software volume control. The suggested retail price for the volume
controller is $9.99.
CD-ROM Audio Cables
The Company's original product is its universal twin head CD-audio
cable featuring a universal twin head design and shielded cable. The universal
twin head design allows retailers and OEMs to carry a significantly lower amount
of inventory while maintaining the ability to provide cable that is compatible
with any combination of sound card and CD-ROM drive.
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Video Arcade Racing Wheels
The Company's newest product, the PER4MER(TM) Turbo Wheel, is a line
of video arcade racing wheels compatible with SEGA, Nintendo, Sony Playstation
and IBM PCs. The wheel is an arcade style input device featuring analog and
digital controls for the Sony Playstation and analog controls for all other
platforms. The wheel plugs directly into the game port connection. The suggested
retail price for this product is $49.95.
Marketing
The Company markets its products internationally to the retail, OEM,
corporate, and video game segments of the market through a combination of direct
sales, a network of independent sales representatives, and its wholly owned
European and U.K. marketing subsidiaries. The Company's products currently are
marketed in 12 countries, including the United States, Belgium, Germany, France,
Italy, Switzerland, the United Kingdom, Spain, Canada, and Russia. For the years
ended June 30, 1995 and June 30, 1996, sales in the United States accounted for
approximately 60% and 49%, respectively, of the Company's consolidated revenue,
and sales in Europe accounted for approximately 40% and 51%, respectively, of
the Company's consolidated revenue. Sales by SC&T Europe of products other than
the Company's products represented approximately 22% of the Company's
consolidated revenue for each of the years ended June 30, 1995 and June 30,
1996. In February 1996, the Company hired a Regional Sales Manager to oversee
sales by its U.S. independent sales representatives. The Company has engaged
approximately 10 independent sales representatives in the United States and
approximately five in the U.K. and Europe. In the United States, a sales
representative is typically paid a 4% commission and in the U.K. and Europe a
10% commission on sales. The Company has written agreements with its United
States independent sales representatives, but has not entered into written
agreements with its European independent sales representatives. Agreements with
independent sales representatives have a term of one year, with certain
cancellation provisions. The Company expects to renew its agreements as they
expire.
Retail outlets and catalogue companies in the United States which
carry the Company's products include Best Buy Products, Fry's Electronics, Inc.,
Babbages, Software, Etc., PC Connections, TigerDirect and Micro Warehouse, Inc.
The Company's OEM customers include Dell Computer Corporation, Dell Products
Ireland and Dell Products Malaysia. Typically, the Company's customers carry a
limited number of the Company's products.
During 1996, the Company expanded its retail product line to focus
mainly on products for sale to the retail market at prices under $100. The
Company redirected its focus so that a majority of its product lines retail
under $100. To achieve this product mix, the Company has identified suppliers
able to supply product at lower costs and make design modifications that reduced
manufacturing costs. While the Company believes it will continue to maintain
reduced manufacturing costs, there can be no assurance that the Company will be
successful in its efforts.
During 1996, the Company hired marketing managers for its U.K. and
European subsidiaries. The Company's current marketing efforts include
advertising in trade and business publications, participation in domestic and
international industry trade shows, and production of product literature and
sales support tools. The Company's products are marketed under the registered
trade name PLATINUM SOUND Multi-Media Products(TM). Packaging and operating
manuals are produced in five languages, including Spanish, French, German,
Italian, and English.
The Company's European sales are invoiced in U.S. dollars and Belgian
francs. The Company's sales from the United Kingdom will be invoiced in U.S.
dollars and pounds sterling. Expenses of the Company's international operations
are incurred in various foreign currencies, principally pounds sterling and the
Belgian franc. Accordingly, the Company is subject to the risk of fluctuations
in currency exchange rates. To date, the Company has not experienced any
material net gain or loss due to foreign currency fluctuations. There can be no
assurance that the Company will not experience material adverse effects on
operations from foreign currency fluctuations in the future. See "Special
Considerations - Risks Associated With International Sales; Currency
Fluctuations" contained in Item 1 of this Report.
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In addition to sales to retail outlets, the Company currently markets
its CD-ROM audio cables through OEMs. The Company also intends to expand sales
of its products through the OEM and corporate segments of the market. There can
be no assurance that the Company will be successful in this endeavor.
During the years ended June 30, 1995 and June 30, 1996, Dell Computer
Corporation represented approximately 22% and 12%, respectively, of the
Company's revenue. The Company sells in response to purchase orders issued by
Dell Computer Corporation. If Dell Computer Corporation discontinues or
materially decreases its orders from the Company and the Company is unable to
replace it with new customers, the Company's results of operations could be
materially adversely effected.
New Product Development
The Company currently is developing two new keyboard products which it
expects to introduce in the fourth quarter of fiscal 1997; a keyboard that will
incorporate an AM-FM stereo radio and an ergonomic styled keyboard with a dual
clock calculator enhancement. The Company also is developing new sound
enhancement product bundles to expand its current line of retail and OEM
products. There can be no assurance that the Company will complete development
of these products and introduce them on a timely basis.
The Company has entered into a two-phase design and engineering
services agreement with Design Continuum, Inc., a San Francisco based firm
("DCI"). Under the first phase, DCI designed the Company's next generation of
integrated multimedia and communication keyboard products. Under the second
phase of the agreement, DCI currently is performing mechanical engineering
services needed to build the tooling for manufacture of the new products.
During the years ended June 30, 1995 and June 30, 1996, the Company
spent approximately $90,000 and $215,000, respectively, on research and
development. The Company expects to incur approximately $200,000 in research and
development expense in connection with development of new products during fiscal
1997.
Subsidiaries
On December 31, 1994, the Company purchased all of the outstanding
shares of SC&T Europe for 210,000 shares of the Company's Common Stock. This
agreement was renegotiated in June 1996, resulting in the forfeiture of 200,000
shares and the obligation, subject to certain contingencies, to issue 25,000
shares of the Company's Common Stock. SC&T Europe was incorporated in Belgium in
March 1989. SC&T Europe markets the Company's products and distributes other
computer related products throughout Europe. For the year ended June 30, 1995
and June 30, 1996, sales by SC&T Europe accounted for approximately $1,414,000
and $1,905,000, respectively, of the Company's consolidated revenue.
In August 1996, the Company established a wholly owned subsidiary,
SC&T UK, responsible for sales in the United Kingdom and Eastern Europe. In
September 1996, the Company established a wholly owned subsidiary, SC&T America,
responsible for sales in the United States and Canada.
Competition
The PC retail industry in general and the multimedia and video game
markets in particular are highly competitive. Many of the Company's competitors
have greater financial, technical, marketing, and sales resources than the
Company. The Company's major competitors in the multimedia accessory and
peripheral market are NMB, Maxiswitch, Silitek, Altec Lansing, Yamaha, and
Labtech. The Company's major competitors in the video game market are
Thrustmaster and MadCatz.
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Although the Company considers certain of its products to be
proprietary, because the Company manufactures certain of its product lines
through the assembly of component parts which are readily available in the world
marketplace, there are few barriers that would prevent others from designing and
assembling products similar to those sold by the Company.
The Company believes the market for its fully-integrated multimedia
stereo keyboards is an emerging market. The Company faces direct competition as
well as indirect competition from various combinations of non- integrated
product solutions for audio and voice-recognition computer applications. If the
Company's products gain market acceptance and the multimedia market matures as
expected, the Company anticipates that other companies will attempt to develop
competing products.
The Company competes primarily on the basis of design, quality,
reliability, and the ease of use of its products. The Company also competes on
value relative to the features offered by its products. Competitive price
reductions may, however, have an adverse effect on the Company's revenue and
profitability. See "Special Considerations - Competition" contained in Item 1 of
this Report.
Intellectual Property Rights
The Company's success is dependent, in part, on its proprietary
information, technology and know-how. The Company relies on a combination of
patents, copyrights, trademarks, trade secrets, and confidentiality agreements
to establish and protect its proprietary rights. Despite these efforts, it may
be possible for competitors or users to copy aspects of the Company's products
or to obtain information that the Company regards as a trade secret.
The Company has applied for a utility patent for the functional
aspects of its multimedia stereo keyboards in the United States and has filed an
international patent application designating Europe, Japan, Australia, Canada,
Brazil, China, and South Korea. However, there can be no assurance that either
the United States patent or any of the foreign patents will be granted or that
the Company will have sufficient funds to enforce its intellectual property
rights, or that the Company is not infringing on the proprietary rights of
others. In addition, the Company filed an application for registration of the
trademark PLATINUM SOUND and design, and has registered certain copyrights in
the United States and in foreign countries.
Although the Company believes that patent, trade secret, and copyright
protection are significant to its competitive position, other factors such as
the knowledge, ability, and experience of the Company's personnel, the Company's
success at new product development and enhancements, and name recognition are
more significant to its competitive position.
Raw Materials and Supplies
The Company receives and inspects finished products and component
parts at its United States facility. The Company tests a sample of all delivered
products for compliance with specifications.
Although the Company has not experienced any material difficulties in
obtaining supplies in the past, any reduction or interruption in supply could
adversely affect the Company's ability to supply certain of its products. As a
result, the Company maintains a large inventory of its keyboard products. While
this decreases the risk that the Company will be unable to supply its keyboard
products in the event of any reduction or interruption in supply, it increases
that risk associated with obsolescence due to technological change. During the
year ended June 30, 1996, the Company wrote down its inventory in the amount of
approximately $670,000 representing the Company's decision to reduce the price
of certain of its first generation products remaining in inventory in
anticipation of the introduction of second generation products to be released.
In addition, the Company has experienced certain delays in anticipated delivery
schedules for the introduction of new products.
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Employees
As of September 10, 1996, the Company's United States operation had 12
full-time employees, two of whom were employed in assembly and warehousing, four
in engineering, sales, marketing and customer support, two in research and
development, and four in administration. In addition, the Company's U.K. and
European subsidiaries employ six full-time employees, four in sales, and two in
administration.
None of the Company's employees is represented by a labor union. The
Company believes its relations with its employees are good.
SPECIAL CONSIDERATIONS
Limited Operating History
The Company commenced operations in July 1993 as a producer and
marketer of CD-ROM audio cables. In October 1993, the Company began developing
multimedia, accessory, and peripheral computer equipment products, none of which
were introduced into the market until April 1994. In addition, the Company
recently entered the computer and video game markets, with the introduction of a
line of PC and video arcade racing wheels. Accordingly, there is limited
historical financial information about the Company upon which to base an
evaluation of the Company's performance and an investment in shares of the
Company's Common Stock. In addition, the Company's business will be subject to
many of the problems, expenses, delays, and risks inherent in the establishment
of a new business enterprise, including limited capital, possible cost overruns,
uncertain market acceptance, and the absence of an operating history. Therefore,
there can be no assurance that the Company's business will be successful or that
the Company will be able to achieve or maintain profitable operations. See
"Business" contained in Item 1 of this Report.
Weaknesses in Financial Controls
The Company's independent certified public accountants reported to the
Company that, in the course of audit of the Company's financial statements for
the year ended June 30, 1995, they discovered various conditions that they
believed constituted material weaknesses in the financial controls of the
Company but which did not cause them to modify their reports on such financial
statements. These conditions consisted of the following: lack of formal
documentation of operational and accounting policies and procedures; lack of
formal documentation of significant transactions; lack of enforcement of
policies and procedures in place to ensure the timely and accurate recording and
reporting of significant transactions; lack of adequate segregation of duties;
lack of adequate recordkeeping and record retention policies; and inadequate
provision for the physical safeguarding of certain of the Company's assets. The
Company has begun implementation of certain steps it has determined to be
necessary to correct such weaknesses in its financial controls. In this regard,
the Company engaged the Company's independent certified public accountants to
assist in the design, development, and implementation of new policies and
procedures and hired a Vice President of Finance in September 1995 (subsequent
to substantially all of the operations reflected in the Company's financial
statements for fiscal 1995). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Weaknesses in Financial Control"
contained in Item 6 of this Report.
History of Losses
The Company has incurred operating losses since inception, and
reported net losses of approximately $792,000 and $2,688,000 for the years ended
June 30, 1995 and June 30, 1996, respectively. As of June 30, 1996, the Company
had an accumulated deficit of approximately $3,963,000. Losses incurred since
inception are attributable primarily to start-up costs incurred in developing
the Company's product line, the costs of introducing new products to market,
inventory adjustments and costs associated with financing activities prior to
the Company's initial public offering. To date, operating revenues have not been
sufficient to cover these costs. Although the
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Company had revenue of approximately $3,771,000 for the year ended June 30,
1996, an increase of approximately $254,000 over revenue of approximately
$3,517,000 for the year ended June 30, 1995, the Company reported a net loss for
the year ended June 30, 1996. There can be no assurance that the Company will
generate sufficient operating revenue, expand sales of its products, or control
its costs sufficiently to achieve or sustain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 6 of this Report.
Competition
The Company faces competition from several major competitors that
market multimedia, accessory, and peripheral computer products, and computer and
video game products. Many of these products are marketed by companies that are
well established, have reputations for success in the development and sale of
products, and have significantly greater financial, marketing, distribution,
personnel, and other resources than the Company. See "Special Considerations -
Litigation" contained in Item 1 of this Report. The Company expects that direct
and indirect competition is likely to intensify in the future. There can be no
assurance that the Company will be able to compete successfully. See "Business -
Competition" contained in Item 1 of this Report.
Technological Change and New Products
The PC retail industry in general, and the multimedia and computer and
video game markets in particular, have been characterized by rapid technological
change, frequent introduction of product upgrades, and evolving industry
standards. The Company believes that its future success will depend on its
ability to anticipate such changes and to offer the market responsive products
on a timely basis that meet these evolving industry standards and achieve market
acceptance. There can be no assurance that the Company will have sufficient
resources to develop or otherwise acquire new technology or to introduce new
products that would satisfy an expanded range of customer needs. Additionally,
delays in new product introductions or product enhancements, or the introduction
of unsuccessful products, could adversely affect the Company's operating results
in the future. The Company has experienced certain delays in anticipated
delivery schedules on the introduction of new products. See "Business New
Product - Development" contained in Item 1 of this Report.
Dependence on Key Personnel; Need to Attract New Personnel
The loss of the services of James L. Copland, the Company's President,
Treasurer, Chairman of the Board and Chief Executive Officer, could have a
material adverse effect upon the Company. The Company has entered into a
five-year employment agreement with Mr. Copland. The agreement includes
non-competition and non- solicitation provisions for a 12-month period following
termination of employment. The Company maintains key man life insurance on Mr.
Copland in the amount of $1,000,000. The Company has assigned one-half of the
proceeds of this policy to the estate of the insured. The Company's success also
is dependent on its ability to identify, recruit, and retain additional
experienced management, engineering, and marketing personnel. There can be no
assurance that the Company will be able to hire or retain necessary personnel.
The failure of the Company to attract and retain personnel with the requisite
expertise or to internally develop personnel with such expertise could adversely
affect the prospects of the Company's success. See "Directors and Executive
Officers of the Registrant; Compliance with Section 16(a) of the Securities
Exchange Act of 1934" contained in Item 9 of this Report and "Executive
Compensation - Employment Agreements" contained in Item 10 of this Report
Reliance Upon Major Customer
Sales of the Company's product to one customer represented
approximately 22% and 12% of the Company's revenue during the years ended June
30, 1995 and June 30, 1996, respectively. No other customer accounted for more
than 10% of the Company's revenue during these periods. If this customer
discontinues or materially decreases its orders from the Company and the Company
is unable to replace it with new customers, the Company's results
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of operations could be materially and adversely effected. See "Business -
Marketing" contained in Item 1 of this Report.
Dependence on Third-Party Suppliers
The Company historically has purchased keyboards and certain other
components from a single source. In October 1995 this supplier gave notice of
termination of its agreement with the Company. In December 1995, this supplier
made a demand for payment by the Company of approximately $750,000. In January
1996, this supplier filed a complaint against the Company seeking damages of
$1,000,000. The Company disputes that it is responsible for the claims as made
and intends to vigorously defend against these claims. Subsequently, the Company
received a settlement offer from this supplier requiring the payment by the
Company of $114,000 and granting the supplier certain distribution rights. The
Company has identified and placed orders with three alternate suppliers for its
products and component parts. The Company does not have supply agreements with
any of these suppliers. Although the Company has not experienced any material
difficulties in obtaining supplies in the past with the exception of timely
delivery of new products, and the Company believes that additional suppliers are
readily identifiable, any reduction or interruption in supply from its vendors
or suppliers could adversely affect the Company's ability to supply orders for
certain of its products. See "Business - Raw Materials and Supplies" contained
in Item 1 of this Report.
Risks Associated with International Sales; Currency Fluctuations
Expenses from foreign operations are not denominated in U.S. dollars.
Expenses denominated in foreign currency accounted for approximately 11% of the
Company's expenses for the year ended June 30, 1995, computed on a pro forma
basis as if the foreign subsidiary was owned by the Company for the entire
period, and 26% of the Company's expenses for the year ended June 30, 1996. The
Company's operations abroad expose the Company to risks such as exposure to
currency fluctuations, exchange rates, tariffs and other barriers, differing
standards requirements, difficulties in staffing and managing international
operations, differing regulatory requirements, potentially adverse tax
consequences, and country-specific product requirements. In addition, the
Company is exposed to gains and losses on international currency transactions.
Currently, the Company does not engage in international currency hedging
transactions. There can be no assurance that these factors will not have an
adverse impact on the Company's future revenue or operating results. See
"Business - Marketing" contained in Item 1 of this Report.
Intellectual Property; Patents
The Company's success is dependent, in part, on its proprietary
information, technology, and know-how. The Company relies on a combination of
patents, copyrights, trademarks, trade secrets, and confidentiality agreements
to establish and protect its proprietary rights. Despite these efforts, it may
be possible for competitors or users to copy aspects of the Company's products
or to obtain information that the Company regards as a trade secret. See
"Business - Intellectual Property Rights" and "Business - Legal Proceedings"
contained in Item 1 of this Report.
Seasonality; Fluctuations in Quarterly Operating Results
As new standards or significant new products are introduced in the
industry, sales may slow significantly while the market reacts to these factors.
Therefore, the Company's revenue may vary significantly from quarter to quarter.
Additional factors that may affect revenue include the timing of customer
orders, changes in the Company's product and customer mix, the introduction of
new products by the Company, pricing pressures, and economic conditions. The
Company also incurs significant development, sales, and marketing expenses in
anticipation of future sales. If demand for the Company's products weakens, or
if orders are not shipped in any quarter as anticipated, the Company's results
of operations for that quarter could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 6 of this Report.
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Need for Additional Financing; Absence of Financing
The Company completed its initial public offering in December 1995. In
addition, the Company completed a private placement of preferred stock in June
1996. The Company's continued viability will be dependent upon its ability to
generate cash from operations or obtain additional financing sufficient to meet
its obligations as they become due. Unless the Company can generate cash from
operations sufficient to fund all of its operating needs, the Company will be
required to obtain additional financing. The Company recently established a
revolving bank line of credit. In addition the Company's European subsidiary
maintains a small line of credit with a Belgian bank. There can be no assurance
that additional financing, if required, may be available to the Company on
acceptable terms, if at all. Any inability by the Company to obtain additional
financing, if required, may have a material adverse effect on the operations of
the Company.
Litigation
The Company currently is suing a competitor in the keyboard industry
alleging, among other things, misappropriation of trade secrets. The Company
further alleges that the competitor, through its parent company, has infringed
upon the Company's proprietary technology by its introduction of a multimedia
keyboard product. In response, the defendant named the Company in a counterclaim
for defamation. To the extent that this lawsuit requires management time and
other resources, results of operations may be negatively impacted. See "Business
Legal Proceedings" contained in Item 1 of this Report.
Control by Principal Shareholder
James L. Copland, President of the Company, currently owns
approximately 34% of the outstanding shares of Common Stock assuming no exercise
of currently outstanding options or warrants or conversion of currently
outstanding Series A Preferred Stock into shares of Common Stock. Consequently,
Mr. Copland initially may have the power to effectively control the Company. See
"Security Ownership of Certain Beneficial Owners and Management" contained in
Item 11 of this Report.
Possible Issuance of Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Serial
Preferred Stock, par value $0.01 per share. The Serial Preferred Stock may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the Board of Directors, without further action by the Company's
shareholders, and may include voting rights, preferences as to dividends and
liquidation, conversion and redemption rights and sinking fund provisions as
determined by the Board of Directors. In June 1996 the Company issued 1,051
shares of Series A Preferred Stock in a private placement resulting in proceeds
to the Company of $10,510,000. Although the Company has no present plans to
issue any additional shares of Serial Preferred Stock, the issuance of Serial
Preferred Stock in the future could adversely affect the rights of the holders
of Common Stock, and therefore, reduce the value of the Common Stock. In
particular, specific rights granted to future holders of Serial Preferred Stock
could be used to restrict the Company's ability to merge with or sell its assets
to a third party, thereby preserving control of the Company by the present
owners.
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the expansion and
development of its business.
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Change in Control Provisions
The Arizona General Corporation Law contains provisions that may have
the effect of making more difficult or delaying attempts by others to obtain
control of the Company, even when these attempts may be in the best interests of
shareholders.
Limited Liability of Directors
The Company's Amended and Restated Articles of Incorporation eliminate
the personal liability of a director to the Company and its shareholders for
monetary damages for breach of fiduciary duty of care as a director, subject to
certain exceptions, to the fullest extent allowed by Arizona law. Accordingly,
except in such circumstances, the Company's directors will not be liable to the
Company or its shareholders for breach of such duty.
Possible Volatility of Stock Price
The Company's Common Stock and Warrants issued to the public in
connection with the Company's initial public offering ("IPO Warrants") have
traded on The Nasdaq Stock Market, Inc. ("Nasdaq") SmallCap Market since
December 14, 1995. The trading price of the Company's Common Stock and IPO
Warrants in the future could be subject to wide fluctuation in response to
factors such as technological innovations, new product developments, general
trends in the Company's industry, as well as quarterly variations in the
Company's results of operations and market conditions in general. During certain
periods, the stock markets have experienced extreme price and volume
fluctuations which have particularly affected the market prices for many small
companies and which often have been unrelated to the operating performance of
such companies. These broad market fluctuations and other factors may adversely
affect the market price of the Company's Common Stock and IPO Warrants. See
"Market for the Registrant's Common Equity and Related Stockholder Matters"
contained in Item 5 of this Report.
Maintenance Criteria for Nasdaq Securities;
Penny Stock Rules
The Company's Common Stock and IPO Warrants trade on Nasdaq. There is
no assurance that the Company will be able to sustain the maintenance standards
for Nasdaq SmallCap Market listing with respect to the shares of Common Stock in
the future. If the Company's shares of Common Stock fail to maintain Nasdaq's
SmallCap Market listing, the market value of the securities likely would decline
and holders of these securities likely would find it more difficult to dispose
of or to obtain accurate quotations as to the market value of the securities.
In addition, if the Company fails to maintain Nasdaq's SmallCap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Exchange Act is available, then any broker engaging in a
transaction in the Company's Common Stock would be required to provide any
customer with a risk disclosure document, disclosure of market quotations, if
any, disclosure of the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market value of the
Company's securities held in the customer's accounts. The bid and offer
quotation and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation. If brokers
become subject to the "penny stock" rules when engaging in transactions in the
Company's securities, they likely would become less willing to engage in such
transactions, thereby making it more difficult for purchasers in this offering
to dispose of their securities.
Rights to Acquire Shares
Future sales of substantial amounts of Common Stock could adversely
affect the prevailing market price of the Company's Common Stock. In June 1996,
the Company issued 1,051 shares of Series A Preferred Stock.
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The Series A Preferred Stock is convertible into Common Stock at a conversion
rate based upon the average closing bid price of the Company's Common Stock for
the ten trading days prior to conversion. If all of the outstanding shares of
Series A Preferred Stock had been converted on September 10, 1996 based on the
average closing bid price of the Common Stock for the ten trading days ended
September 10, 1996 (including accretion through that date), approximately
8,842,063 shares of Common Stock representing approximately 64% of the Common
Stock following such conversion, would have been issued as a result of the
conversion. Furthermore, should the trading price of the Common Stock decline
prior to the conversion of all shares of the Series A Preferred Stock, the
number of shares issuable upon conversion will increase proportionately.
A total of 1,010,500 shares of Common Stock have been reserved for
issuance upon exercise of options granted or which may be granted under the
Company's Stock Option Plan. Options to acquire 636,585 shares of Common Stock
at an exercise price ranging from $1.00 per share to $5.70 per share currently
are outstanding. Stock purchase warrants to acquire 588,500 shares of Common
Stock at an exercise price of $1.20 per share currently are outstanding. IPO
Warrants to acquire 258,750 shares of Common Stock at an exercise price of $7.00
per share are currently outstanding. In addition, warrants to acquire 90,000
shares of Common Stock and 45,000 IPO Warrants were issued to Sovereign Equity
Management Corporation (the "IPO Underwriters") in connection with the Company's
initial public offering. During the terms of such options and stock purchase
warrants, if the market price of the Company's Common Stock exceeds the
applicable exercise price, the holders thereof will have the opportunity to
profit from an increase in the market price of the Common Stock. The existence
of such stock options and stock purchase warrants may adversely affect the terms
on which the Company can obtain additional financing, and the holders of such
options and stock purchase warrants can be expected to exercise or convert such
options and stock purchase warrants at a time when the Company, in all
likelihood, would be able to obtain additional capital by offering shares of its
Common Stock on terms more favorable to the Company than those provided by the
exercise of such options and stock purchase warrants.
Future Sales of Common Stock; Possible Future Sales by Selling Shareholders
The Company filed a Registration Statement that registers 8,000,764
shares of Common Stock for offer and sale by Selling Shareholders, issuable upon
conversion of the Company's Series A Preferred Stock. The Selling Shareholders
may concurrently elect to sell their shares into the public market, which could
have a depressing or overhanging effect on the market price of the Company's
securities. Should the trading price of the Company's Common Stock decline prior
to the conversion of all shares of the Series A Preferred Stock, the number of
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
will increase proportionately.
Of the 5,015,313 shares of Common Stock currently outstanding,
3,415,313 will be deemed to be "restricted securities" as that term is defined
in Rule 144 under the Securities Act ("Restricted Shares") and may not be sold
unless such sale is registered under the Securities Act or is made pursuant to
an exemption from registration under the Securities Act, including the exemption
provided by Rule 144. Of such shares, 1,756,178 are available for sale pursuant
to Rule 144, subject to the lock-up described below. An additional 18,000 shares
and 25,822 shares will be available for sale pursuant to Rule 144 in January
1997 and October 1997, respectively. An additional 1,300,000 shares, 75,000
shares, 87,500, and 129,898 shares will be available for sale pursuant to Rule
144 in April 1997, May 1997, September 1997, and September 1998, respectively.
All officers and directors of the Company (who collectively hold 1,703,692
shares) have agreed that they will not sell any of their shares, including any
shares acquired by the exercise of any options or warrants, for a period of 18
months from December 14, 1995, the date of the Company's initial public offering
without the prior written consent of the IPO Underwriters. In addition, 129,898
shares of Common Stock issued upon conversion of 18 shares of Series A Preferred
Stock eligible for resale pursuant to Rule 144 in 1998, and 7,870,866 shares of
Common Stock issuable upon future conversion of 1,033 outstanding shares of
Series A Preferred Stock, have been included in the Company's Registration
Statement and may be sold from time to time pursuant to such registration. The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. The Company is unable to predict the effect that sales
made under Rule 144 or otherwise may have on the market price of the Common
Stock. However, the possibility that
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<PAGE>
substantial amounts of Common Stock may be sold in the public market may have an
adverse effect on the market prices for the Company's Common Stock.
Forward-Looking Information May Prove Inaccurate
This Report contains various forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this Report, the words
"believe," "expect," "anticipate," "estimate," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties, and assumptions, including those identified under
"Special Considerations." Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. In addition
to the other risk factors set forth above, among the key factors that may have a
direct bearing on the Company's results are competitive practices in the
multimedia, interactive, and communications segments of the PC and video game
industries (generally and particularly in the Company's principal product
markets), the ability of the Company to meet existing financial obligations in
the event of adverse industry or economic conditions or to obtain additional
capital to fund future commitments and expansion, the Company's relationship
with employees, and the impact of current and future laws and governmental
regulations affecting the PC and video game industries and the Company's
operations.
ITEM 2. PROPERTIES
The Company's warehouse and executive offices are located in
approximately 7,700 square feet of leased space in Phoenix, Arizona. The Company
leases this space for approximately $4,900 per month pursuant to a lease
expiring on August 31, 1997. The Company is reviewing alternatives for
additional office and warehouse space to meet the demands related to the
Company's anticipated growth. The Company has placed an earnest money deposit on
a potential future office site in the Scottsdale Airpark, as it evaluates the
various options available.
The Company's European subsidiary has relocated to Gent, Belgium. The
Company currently leases approximately 535 square feet of office space for
approximately $1,600 per month, denominated in Belgian francs. The lease expires
on December 31, 1996. In addition, the Company and its European subsidiary
leases offsite storage facilities as needed.
In August 1996, the Company established a wholly owned marketing and
sales subsidiary, SC&T U.K. to be located in northern England. The Company
intends to lease premises for its U.K. subsidiary during the first quarter of
fiscal year 1997.
The Company anticipates that its facilities will be sufficient to
serve its needs for the next 12 months. To the extent additional warehousing
space is required, the Company intends to lease off-site, short-term storage
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a complaint against a competitor in the keyboard
industry, Maxiswitch, in May 1995 in Pima County Superior Court alleging, among
other things, misappropriation of trade secrets. In response, the defendant
named the Company in a counterclaim for defamation. In October 1995, the Company
was granted leave to amend its complaint to further allege that the competitor,
through its Taiwanese parent company, infringed upon the Company's proprietary
technology through the introduction of a multimedia keyboard product, and to
allege violations of Arizona's Racketeering Influenced and Corrupt Practices Act
("RICO") and to name the Taiwanese parent company as a second defendant. The
Company is seeking damages in an unspecified amount as well as injunctive relief
to enjoin the defendants from further violations of the Company's proprietary
information. The defamation counterclaim seeks unspecified damages. The Company
believes that the counterclaim is without merit
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<PAGE>
and will vigorously defend the claim. The Company also intends to vigorously
defend its proprietary information. Although the Company does not believe this
proceeding will have a material adverse effect on the Company's operations, a
failure to prevent the defendant from manufacturing and selling this product
could result in increased competition for the Company's products.
In January 1996, Seo Won K-Tec ("SWKT"), a former Korean supplier,
filed a complaint against the Company in the Superior Court of the State of
Arizona in and for the County of Maricopa, alleging that the Company was
obligated to reimburse SWKT for inventory purchased in reliance upon alleged
projections of sales, for unfilled purchase orders issued by the Company, and
for tooling costs. The complaint seeks damages of approximately $1,000,000. The
Company disputes that it is responsible for the claims as made and intends to
vigorously defend against the claims. The Company has received a settlement
offer from SWKT requiring payment by the Company of $114,000 and granting SWKT
certain distribution rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and IPO Warrants have been quoted on the
Nasdaq SmallCap Market under the symbols "SCTI" and "SCTIW," respectively, since
December 14, 1995.
The following table sets forth the quarterly low bid and high ask
prices of the Company's Common Stock for the calendar periods indicated on the
Nasdaq SmallCap Market.
Common Stock
------------
Bid Ask
--- ---
1995:
Fourth Quarter (from December 14, 1995)....... 6.00 7.75
1996:
First Quarter................................. 6.50 8.75
Second Quarter................................ 3.38 8.88
Third Quarter (through September 10, 1996).... 1.19 4.88
As of August 14, 1996, there were 50 holders of record and 822
beneficial holders of the Company's Common Stock. On September 10, 1996, the
closing bid price of the Common Stock on the Nasdaq SmallCap Market was $1.19.
The Company has never paid any cash dividends on its capital stock and
does not anticipate paying any cash dividends in the foreseeable future.
Instead, the Company intends to retain any earnings to provide funds for use in
its business.
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ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data of the Company and is qualified in its entirety by the more detailed
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
The data has been derived from the financial statements of the Company audited
by Toback CPAs, P.C., certified public accountants.
Year Ended June 30,
1995 1996
---------- -------
Operating Data:
Net sales $3,517,557 3,771,123
Net loss 792,331 2,688,145
Loss per share .21 .58
Average shares outstanding(1) 3,714,542 4,625,086
June 30,
1996
-----------
Balance Sheet Data:
Working capital $10,657,228
Total assets 12,686,458
Shareholders' equity 11,132,431
(1) Does not include an aggregate of 1,596,335 additional shares of Common
Stock that may be issued upon exercise of outstanding options and
warrants.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Overview
SC&T International, Inc. (the "Company") was formed in June 1993. Since
July 1993, the Company's monthly revenue has grown from approximately $8,000 to
approximately $580,000 in July, 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 40% of the Company's consolidated
revenue for the year ended June 30, 1995 and 51% of the Company's consolidated
revenue for the year ended June 30, 1996. SC&T Europe's revenue from products
other than the Company's products represented approximately 22% of the Company's
consolidated revenue for the year ended June 30, 1995 and the year ended June
30, 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 net losses of approximately
$792,000 for the year ended June 30, 1995 and approximately $2,688,000 for the
year ended June 30, 1996, respectively. The loss recorded for the year ended
June 30, 1996 includes an aggregate of approximately $1,300,000 which consists
principally of: (i) non-recurring expenses of approximately $300,000 which
represent interest associated with, and amortization of loan acquisition costs
due to the repayment of debt financing in the
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amount of $1,875,000; (ii) an adjustment of $670,000 to inventory, representing
the Company's decision to reduce the price of certain of its products in order
to reposition its first generation products at lower, more aggressive suggested
retail prices, and to increase the products' distribution and exposure at the
retail outlets; (iii) $165,000 in noncash payments for consulting services
provided by a former sales representative; and (iv) $114,000 in cost associated
with tooling and parts for discontinued products.
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 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.
Results of Operations of the Company for the Years Ended June 30, 1996 and 1995
Net Sales
Net sales for the year ended June 30, 1996 were approximately
$3,771,000 or approximately $254,000 greater than net sales for the year ended
June 30, 1995. In addition, the Company had a backlog of orders totaling
approximately $443,000 at June 30, 1996 and $1,642,000 at August 31, 1996. The
Company had no material backlog at June 30, 1995. The increase in net sales
resulted from a variety of factors including growing acceptance of the Company's
products in the marketplace, limited sales during the Company's initial months
of operation, sales by SC&T Europe subsequent to its acquisition on December 31,
1994, and expansion of the Company's product lines. Net sales for the year ended
June 30, 1996 were negatively impacted by a delay in the manufacture and release
of new products the Company is bringing to the market. The products expected for
delivery in spring of 1996 were delayed by three to four months and delivery is
anticipated in the first quarter of fiscal 1997. Approximately $537,000 of the
Company's net sales during the year ended June 30, 1996 represents sales by SC&T
Europe of products other than the Company's products.
Gross Profit
The Company's gross profit percentage for the year ended June 30, 1996
reflects the Company's decision to reduce the price of certain of its first
generation products remaining in inventory in anticipation of the introduction
of second generation products. The Company's gross profit percentage for the
year ended June 30, 1996, prior to adjustment for this price reduction, was 31%.
However, the Company's gross profit percentage after adjustment for this price
reduction declined from 29% for the year ended June 30, 1995 to 13% for the year
ended June 30, 1996. Gross profit is affected by several factors, including the
mix of sales between CD-ROM audio cables, which typically sell at gross profit
margins between 40% and 60%, and sales of the Company's other products, which
typically sell at gross profit margins of 25% to 40%. The Company continued to
offer reduced distributor pricing on certain of its products, thereby offering
greater incentive to its customers to increase the exposure and distribution of
the Company's products at retail outlets.
Payroll and Payroll Taxes
The Company's payroll and payroll tax expense increased from
approximately $558,000 in the year ended June 30, 1995 to approximately $732,000
in the year ended June 30, 1996, or approximately 31%. This resulted in an
increase in payroll and payroll tax expense as a percentage of sales from 16%
for the year ended June 30, 1995 to 19% for the year ended June 30, 1996. This
represents an increase in sales and operations personnel. In addition, a
significant portion of the increase in payroll and payroll taxes is a result of
additional employees due to the acquisition of SC&T Europe on December 31, 1994.
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Selling and Promotion
The Company's selling and promotion expenses increased from
approximately $413,000 in the year ended June 30, 1995 to approximately $854,000
in the year ended June 30, 1996, or approximately 107%. This represents an
increase in selling and promotion expenses as a percentage of sales, from 12%
for the year ended June 30, 1995 to 23% for the year ended June 30, 1996. A
portion of these expenses were utilized to continue promoting new products and
creating new packaging for the Company's PLATINUM SOUND line. In addition, the
Company exhibited its products at several trade shows in the United States and
Europe.
Office and Administration
The Company's office and administrative expenses increased from
approximately $465,000 in the year ended June 30, 1995 to approximately $496,000
in the year ended June 30, 1996, or approximately 6%. As a percentage of net
sales, office and administrative expenses remained the same at 13% for the years
ended June 30, 1995 and June 30, 1996.
Research and Development
Expenditures for research and development increased from approximately
$90,000 in the year ended June 30, 1995 to approximately $215,000 in the year
ended June 30, 1996 or approximately 140%. The Company's expenditures for
research and development vary from period to period depending upon the number of
new 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 increased from approximately $14,000 for
the year ended June 30, 1995 to approximately $112,000 for the year ended June
30, 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 first sale of the product.
Consulting Fees
Expenditures for consulting fees increased from approximately $39,000
for the year ended June 30, 1995 to approximately $283,000 for the year ended
June 30, 1996. Approximately $165,000 of this increase represents consulting
services provided by a former sales representative who will be compensated by
payment in common stock.
Financing Costs - Interest and Amortization
In April, May, and September 1995 the Company completed two private
placements of short-term bridge financing totaling $1,875,000. An aggregate of
162,500 shares of Common Stock were issued in connection with this debt. As a
result, approximately $244,000 was recorded by the Company as loan acquisition
costs which are amortizable over the life of the debt. In December 1995, the
Company used approximately $1,875,000 of the proceeds of its initial public
offering to repay this debt. Upon repayment, the unamortized amount recorded as
loan acquisition costs was expensed. This amount, together with interest
associated with the short-term bridge financing, resulted in an aggregate
expense of approximately $300,000 during the year ended June 30, 1996. There was
no comparable expense incurred during the year ended June 30, 1995 and there is
no comparable expense anticipated in future reporting periods.
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Net Loss
As a result of the factors described above, the Company's loss from
operations increased from approximately $678,000 in the year ended June 30, 1995
to approximately $2,277,000 in the year ended June 30, 1996. The Company's net
loss increased from approximately $792,000 in the year ended June 30, 1995 to
approximately $2,688,000 in the year ended June 30, 1996. The loss of $2,688,000
includes an aggregate of approximately $1,300,000 which consists principally of:
(i) $300,000 of non-recurring amortization costs associated with debt that was
retired with proceeds of the Company's initial public offering; (ii)
approximately $670,000 of adjustments relating to the Company's decision to
reduce the price of certain of its first generation products remaining in
inventory in anticipation of the introduction of second generation products to
be released; (iii) $165,000 in noncash payments for consulting services provided
by a former sales representative; and (iv) $114,000 in cost associated with
tooling and parts for discontinued products. The net loss, prior to the
inclusion of the $1,300,000 of adjustments was approximately $1,388,000 for the
year ended June 30, 1996, as compared to the net loss of approximately $792,000
for the year ended June 30, 1995.
Net Loss Per Share
Net loss per share from operations increased to $0.49 for the year
ended June 30, 1996 from $0.18 for the year ended June 30, 1995. The loss per
share from operations of $0.49 includes a $0.22 per share loss due to
approximately $1,000,000 of the adjustments described above. The effect of these
adjustments were an increase in net loss per share from operations from $0.27
per share to $0.49 per share for the year ended June 30, 1996.
Net loss per share increased to $0.58 for the year ended June 30, 1996
from $0.21 for the year ended June 30, 1995. The loss per share of $0.58
includes the $0.28 per share loss due to approximately $1,300,000 in adjustments
described above. The aggregate effect of these adjustments was an increase in
net loss per share from $.30 per share to $0.58 per share for the period ending
June 30, 1996.
Liquidity and Capital Resources
As a result of the Company's initial public offering in December 1995,
and its private placement of Series A Preferred Stock in June 1996, the
Company's working capital improved to approximately $10,684,000 at June 30,
1996. Historically, the Company has experienced a working capital deficiency
primarily due to operating losses and investment in research and development and
has incurred losses since inception. In addition, 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 $168,000,
denominated in Belgian francs. During the year ended June 30, 1996, this line of
credit was increased to approximately $182,000 denominated in Belgium francs. In
addition, to raise funds to meet its expenses, the Company obtained inventory
financing in April and May 1995 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.
An aggregate of 162,500 shares of Common Stock were issued in connection with
the placement of the inventory financing and the 8% Subordinated Debentures. In
December 1995, the Company used approximately $1,875,000 of the proceeds of its
initial public offering to repay the inventory financing and the 8% Subordinated
Debentures. In August 1996, the Company established a revolving line of credit
of $500,000.
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Weaknesses in Financial Controls
The Company's independent certified public accountants reported to the
Company that, in the course of the audit of the Company's financial statements
for the year ended June 30, 1995, they discovered various conditions that they
believed constituted material weaknesses in the financial controls of the
Company but which did not cause them to modify their reports on such financial
statements. These conditions consisted of the following: lack of formal
documentation of operational and accounting policies and procedures; lack of
formal documentation of significant transactions; lack of policies and
procedures to ensure the timely and accurate recording and reporting of
significant transactions; lack of adequate segregation of duties; lack of
adequate recordkeeping and record retention policies; and inadequate provisions
for the physical safeguarding of certain of the Company's assets. The Company
has begun implementation of certain steps it has determined to be necessary to
correct such weaknesses in its financial controls. In this regard, the Company
has engaged the Company's independent public accountants to assist in the
design, development, and implementation of new policies and procedures, and
hired a Vice President of Finance in September 1995 (subsequent to substantially
all of the operations reflected in the Company's financial statements for fiscal
1995). In addition, the Company has implemented procedures for the retention and
safekeeping of key documents and files, for the timely recording of
transactions, and for the accurate posting and tracking of cash receipts. As
discussed above, the Company engaged its independent certified public
accountants to assist in the design, development, and implementation of new
policies and procedures. This engagement is currently in process and the Company
is working closely with the independent public accountants to address the
deficiencies discussed above.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and
reports thereon, commencing at page F-1 of this report, which financial
statements, report, notes and data are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Directors and Executive Officers
The following table sets forth information concerning each of the
directors and executive officers of the Company:
Name Age Position
- ---- --- --------
James L. Copland 46 President, Treasurer, Chairman of the Board,
and Chief Executive Officer
Catherine Copland 47 Assistant Secretary, Director
Timothy J. Stocker 37 Vice President of Finance, Secretary
Harry G. Wilson 44 Director
Tommie E. Moxley 57 Director
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<PAGE>
James L. Copland has served as President, Treasurer, and Chairman of
the Board since its inception. From February until May 1993, Mr. Copland served
as Vice President of Sales and Marketing for North and South America for Aztech
Labs, Inc., a manufacturer and marketer of multimedia sound cards. From 1990
until 1992, Mr. Copland served as Vice President, Sales of Bondwell Industrial,
Inc., a manufacturer and distributor of notebook computers and joy sticks. From
1986 until 1989, Mr. Copland served as President for North American Operations
of Laser Friendly, US, and from 1984 until 1986 he served as Vice President,
Sales and Marketing, of Atari (U.S.) Corporation. From 1982 until 1984, Mr.
Copland served as General Sales and Marketing Manager of Commodore Computers, a
Canadian company. Mr. Copland is the husband of Catherine Copland.
Catherine Copland has served as a director of the Company since
December 1994, as Assistant Secretary since April 1995, and as Manager of
Customer Service since January 1995. Prior to this, Mrs. Copland has held
various part-time administrative positions with Sun Life Insurance Company of
Canada, Munich ReInsurance Company of Canada, and Pantek (US) Corp. Mrs. Copland
is the wife of James L. Copland.
Timothy J. Stocker has served as Vice President of Finance of the
Company since September 1995. From 1988 until joining the Company, Mr. Stocker
served as Vice President - Controller of Evans Withycombe Residential, Inc., a
publicly traded REIT, and as Vice President - Controller of Evans Withycombe,
Inc., its predecessor. Prior to joining Evans Withycombe, Mr. Stocker served as
Controller for the Phoenix Division of a large single family home builder and
was responsible for the overall financial reporting of that company. Mr. Stocker
received his Bachelor of Science degree in accounting from the University of
Arizona.
Harry G. Wilson has served as a director of the Company since December
1994. Since 1984, Reverend Wilson has served as President and was the founder of
Extended Hands, Inc., a non-profit organization of 250 volunteers performing
missionary activities and supplying medical services to widows and orphans in
Guatemala and Haiti.
Tommie E. Moxley has served as a director of the Company since November
1995. Since 1979, Mr. Moxley has served as President of Compass Marketing Sales,
Inc. ("Compass"), a manufacturer's representative for high technology
components. Compass has offices located in the Southwestern and Rocky Mountain
regions of the United States. In addition, Mr. Moxley consults with start-up
companies, manufacturer's representatives and distribution companies. Prior to
founding Compass, Mr. Moxley served in various positions in the electronics
industry including 15 years with TRW Electronics. Mr. Moxley serves on the
Boards of three privately-held corporations.
At the time of the Company's initial public offering, Mr. Copland and
Mr. Rudi Devers, former President of SC&T Europe, agreed that if the Company
does not record a cumulative net profit, adjusted for costs incurred in
connection with the Company's initial public offering, in the fiscal years
ending June 30, 1996 and June 30, 1997, they will forfeit a total of 500,000
shares of Common Stock, which shares will be returned to the Company's treasury.
Upon Mr. Devers separation from the Company and SC&T Europe, Mr. Devers agreed
to the early forfeiture of his shares and, as a result, 200,000 shares held by
him were returned to the Company's treasury.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, officers, and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Directors,
officers and greater than 10% shareholders are required to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by the
Company during the fiscal year ended September 30, 1994, and written
representations that no other reports were required, the Company believes that
each
19
<PAGE>
person who, at any time during such fiscal year, was a director, officer or
beneficial owner of more than 10% of the Company's Common Stock complied with
all Section 16(a) filing requirements during such fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation earned by the Company's
Chief Executive Officer (the ("Named Officer") for services rendered to the
Company during the two preceding fiscal years. No other executive officer of the
Company earned more than $100,000 in the prior fiscal years.
Fiscal Annual
Name and Principal Position Year Compensation
- --------------------------- ---- ------------
James L. Copland 1996 $104,000
President, Treasurer, 1995 $102,000(1)
Chairman of the Board, and
Chief Executive Officer
___________________
(1) A portion of Mr. Copland's compensation set forth in the table above
was accrued and not paid during the period it was earned. Subsequent to
June 30, 1995, the Company issued 15,822 shares of Common Stock to Mr.
Copland as partial payment for accrued but unpaid salary. See "Certain
Relationships and Related Transactions" contained in Item 12 of this
Report.
Commencing September 1, 1995, Mr. Copland's employment agreement with
the Company provides for an annual salary of $104,000. Mr. Copland's employment
agreement also provides for payment to Mr. Copland, in the event of termination
for any reason other than for cause prior to February 28, 1997, of all unpaid
salary under the agreement through February 28, 1997, and for the purchase by
the Company of Mr. Copland's shares of Common Stock or rights to purchase shares
of Common Stock of the Company at their fair market value based on the then
average trading price, less any unpaid exercise price on the date of
termination. The employment agreement also provides for bonuses based upon
performance to be paid to Mr. Copland at the discretion of the Company's Board
of Directors. The Company granted 250,000 options and 50,000 options to James
Copland and Catherine Copland, respectively, during the fiscal year ended June
30, 1995.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 10, 1996 by (i) each
person known by the Company to be the beneficial owner of more than five percent
of the Common Stock, (ii) each director of the Company, and (iii) all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares
Name and Address Beneficially Owned(1) Percent of Total(1)
---------------- --------------------- -------------------
<S> <C> <C>
James L. and Catherine Copland(2)(13)(14) 1,793,692 33.36%
Harry Wilson(2) --- *
Tommie E. Moxley(2) --- *
Thomas Vittor(3)(6)(15) 400,000 8.18%
Banque Scandinave En Suisse(4)(16) 619,835 11.00%
Cameron Capital Ltd.(5)(17) 1,239,669 19.82%
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Capital Ventures International(6)(18) 826,446 14.15%
Gracechurch & Co.(7)(19) 785,124 13.54%
Leonardo, L.P.(8)(20) 867,769 14.75%
RIC Investment Fund Ltd.(9)(21) 330,579 6.18%
The Gifford Fund Ltd.(10)(22) 413,223 7.61%
The Tail Wind Fund Ltd.(11)(23) 289,256 5.45%
Wood Gundy London Ltd.(12)(24) 413,223 7.61%
All directors and officers as a group
(five persons)(4) 1,820,358 35.73%
</TABLE>
___________________
*Less than 1% of the outstanding Common Stock
(1) The number of shares and percentages shown include the shares of Common
Stock which each named shareholder has the right to acquire within 60
days of September 10, 1996. In calculating percentage ownership, all
shares of Common Stock which the named shareholder has the right to
acquire upon exercise of stock options are deemed to be outstanding for
the purpose of computing the percentage of Common Stock owned by such
shareholder, but are not deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by any other
shareholder. Percentages may be rounded. In the event that all of the
Series A Preferred Stock is converted assuming a conversion price of
$1.21 per share, the following shareholders would hold the following
percent of the total number of outstanding shares of the Company. The
actual conversion price may be higher or lower than $1.21.
Banque Scandinave En Suisse 4.76%
Cameron Capital Ltd. 9.52%
Capital Ventures International 6.35%
Gracechurch & Co. 6.03%
Leonardo, L.P. 6.67%
RIC Investment Fund Ltd. 2.54%
The Gifford Fund Ltd. 3.17%
The Tail Wind Fund Ltd. 2.22%
Wood Gundy London Ltd. 3.17%
(2) Each of such persons may be reached through the Company at 3837 E.
LaSalle Street, Phoenix, Arizona 85040.
(3) May be reached at 5 Vermeer Court, Suffern, New York 10901.
(4) May be reached c/o Mr. Sunder Advani, KERNCO Trust SA, 2, rue
Jargonnant, P.O. Box 6432, 1211 - Geneva 6 Switzerland
(5) May be reached c/o Mr. Alan Dunkle, 10 Cavendish Road, Hamilton,
Bermuda HM 19.
(6) May be reached c/o Mr. Johanne Koehne, Oberlindau 7, 60323 Frankfurt Am
Main, Germany.
(7) May be reached c/o Mr. Robert Villiers, IFM Asset Management, 159 New
Bond Street, London, UK W1Y 0RR.
(8) May be reached c/o Mr. Gary Wolf, Angelo, Gordon & Company, 245 Park
Avenue, 26th Floor, New York, NY 10167.
(9) May be reached c/o Mr. Fahad Almubarak, P.O. Box 60148, Olaya Street,
Riyadh 11545 Saudi Arabia.
(10) May be reached c/o Mr. Bill Breck, M.I.T., 1711 E. Putnam Road,
Riverside, CT 06878.
(11) May be reached c/o Mr. David Crook, 2 Rosemead Road, London, England
W112JG.
(12) May be reached c/o Mr. Steve Ryder, Cottons Center, Cottons Lane,
London, England SE1 2QA.
21
<PAGE>
(13) Does not include 166,667 shares issuable to Mr. Copland and 33,334
shares issuable to Mrs. Copland upon exercise of options granted under
the Company's Stock Option Plan, but does include 83,333 shares
issuable to Mr. Copland and 16,666 shares issuable to Mrs. Copland upon
exercise of options granted under the Company's Stock Option Plan and
are exercisable within 60 days of September 10, 1996. Also does not
include 78,308 shares which have been transferred to Klaus Muerzl, an
employee of the Company, which may revert back to Mr. Copland under
certain conditions, and with regard to which Mr. Copland, and
thereafter the Company, have the right of first refusal should Mr.
Muerzl elect to sell any of the shares.
(14) Does not include 10,000 shares which have been transferred to Timothy
J. Stocker, an officer of the Company, which may revert back to Mr.
Copland under certain conditions and with regard to which Mr. Copland,
and thereafter the Company, have the right of first refusal should Mr.
Stocker elect to sell any of the shares.
(15) Thomas Vittor is the father of Glen T. Vittor, President of the IPO
Underwriter.
(16) Includes shares issuable upon the conversion of 75 shares of Series A
Preferred Stock.
(17) Includes shares issuable upon the conversion of 150 shares of Series A
Preferred Stock.
(18) Includes shares issuable upon the conversion of 100 shares of Series A
Preferred Stock.
(19) Includes shares issuable upon the conversion of 95 shares of Series A
Preferred Stock.
(20) Includes shares issuable upon the conversion of 105 shares of Series A
Preferred Stock.
(21) Includes shares issuable upon the conversion of 40 shares of Series A
Preferred Stock.
(22) Includes shares issuable upon the conversion of 50 shares of Series A
Preferred Stock.
(23) Includes shares issuable upon the conversion of 35 shares of Series A
Preferred Stock.
(24) Includes shares issuable upon the conversion of 50 shares of Series A
Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the incorporation and initial organization of the
Company and a subsequent purchase of equity securities of the Company in
December 1993, James L. Copland, the Company's President, Treasurer, Chairman of
the Board, and Chief Executive Officer, purchased 1,677,870 shares of Common
Stock in exchange for cash, equipment, and past services. In connection with the
Company's private placement of securities in April 1995, Mr. Copland converted
10 shares of Common Stock into 10 shares of Series A Preferred Stock (the
"Preferred Stock"). The Preferred Stock was identical in all respects to the
Company's Common Stock except that each share of Preferred Stock was entitled to
votes equal to 230,000 shares of Common Stock. The shares of Preferred Stock
were reconverted into 10 shares of Common Stock as of December 14, 1995. An
additional 15,822 shares were issued to Mr. Copland in September 1995 in partial
payment of salary accrued by the Company for past services rendered by Mr.
Copland.
In February 1995, James L. Copland and Catherine Copland were granted
250,000 options and 50,000 options, respectively, under the Company's Stock
Option Plan. In addition, the Company owed Mr. Copland approximately $90,000 at
September 30, 1995, representing accrued but unpaid salary less sums advanced
previously to Mr. Copland. There was no remaining unpaid balance at June 30,
1996.
Until April 1996, the building in which the Company's European office
and warehouse were located was 50% owned by Rudi Devers, then a director and
shareholder of the Company. The Company leased approximately 5,400 square feet
at a rate, denominated in Belgian francs, that translated to approximately
$3,700 per month. The Company believes that the terms of the lease were no less
favorable to the Company than would be the case in a transaction with an
unrelated person.
In April and May 1995, the Company issued and sold $1,000,000 in
principal amount of 6% notes, 75,000 shares of Common Stock, and warrants to
purchase 588,500 shares of Common Stock at a price of $1.20 per share, to
Maraval and Associates, Bauman, Ltd., Robert Adams, Caspian Consulting, Ltd.,
Roddy Diprimo, Ltd., and Umbiquity Holdings, S.A. The Company retired the
$1,000,000 principal amount of these notes with proceeds from its initial public
offering.
22
<PAGE>
In June 1996, the Company entered into an agreement with Rudi Devers,
whereby Mr. Devers resigned as an officer, director and employee of the Company
and of SC&T Europe. Under the terms of the agreement, Mr. Devers will receive
$29,166. In addition, Mr. Devers is entitled to purchase a vehicle currently
owned by SC&T Europe for $12,000. Mr. Devers forfeited 200,000 shares of Common
Stock in the Company owned by him on the date of the agreement. Mr. Devers also
agreed to nonsolicitation and non-competition arrangements for a period of 24
months from the date of the agreement. Upon compliance with the terms of the
agreement, up to 25,000 shares of Common Stock may be issued to Mr. Devers.
The Company believes that all of the foregoing transactions were on
terms no less favorable to the Company than could have been obtained from
unrelated third parties. The Company intends to continue to require that any
future transactions with affiliated parties be on such terms and approved by a
majority of the disinterested directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
- ------ -------
1.1(1) Form of Underwriting Agreement
1.2(1) Form of Selling Agreement
1.3(1) Form of Underwriter's Warrants
1.4(1) Form of Warrant Agreement
3.1(1) Restated Articles of Incorporation
3.2(1) Bylaws
4.1(2) Form of Certificate evidencing shares of Common Stock
4.2(2) Form of Certificate evidencing Stock Purchase Warrant
4.3(2) Certificate of Designation of Series A Preferred Stock
4.4(2) Form of Certificate evidencing Series A Preferred Stock
10.1(1) Lease Agreement between the Company and LaSalle Business
Properties, dated February 1, 1994
10.2(1) Lease Agreement between Westex N.V. and Marc Devers and Rudi
Devers
10.3(1) Form of Employment Agreement between the Company and James L.
Copland dated September 1, 1995
10.4(1) Deleted
10.5(1) Stock Option Plan
10.6(1) Form of Option Agreement
10.7(1) Agreement between the Company and Sound Retrieval System dated
March 31, 1995
10.8(1) Agreement between the Company and Design Continuum, Inc. dated
June 8, 1995
10.9(1) Agreement between the Company and Design Continuum, Inc. dated
October 13, 1995
10.10(2) Exclusive Distribution Agreement between the Company and Home
Arcade Systems, Inc. dated December 29, 1995
10.11(2) Exclusive Purchase and Manufacturing Agreement between the Company
and Home Arcade Systems, Inc. dated March 19, 1996
21.0(2) Subsidiaries of the Registrant
27.0 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-96812 LA).
23
<PAGE>
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (Registration No. ___________) filed with
the U.S. Securities and Exchange Commission on or about September
23, 1996.
(b) Reports on Form 8-K;
On July 3, 1996, the Registrant filed with the Securities and Exchange
Commission a Report on Form 8-K dated June 21, 1996, which reported,
under Item 5, the private placement of $10,510,000 of Series A
Preferred Stock to a group of institutional investors under Regulation
S.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
SC&T INTERNATIONAL, INC.
Date: September 26, 1996 /s/ James J. Copland
-----------------------------------------------
James L. Copland, Chairman of the Board,
President, Treasurer, Chief Executive Officer,
and Director
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James L. Copland President, Treasurer, Chief Executive September 26, 1996
- ----------------------------------------- Officer, and Director
James L. Copland
/s/ Catherine Copland Assistant Secretary and Director September 26, 1996
- -----------------------------------------
Catherine Copland
/s/ Timothy J. Stocker Vice President of Finance, Chief Financial September 26, 1996
- ------------------------------------------ Officer and Secretary
Timothy J. Stocker
/s/ Harry G. Wilson Director September 26, 1996
- -----------------------------------------
Harry G. Wilson
/s/ Tommie E. Moxley Director September 26, 1996
- ---------------------------------------
Tommie E. Moxley
</TABLE>
25
<PAGE>
SC&T INTERNATIONAL, INC.
------------------------
AND SUBSIDIARY
--------------
Page
Part I Financial Information
Item 1 Financial Information
Independent Auditor's Report F - 2
Consolidated Balance Sheet as of
June 30, 1996 F - 3
Consolidated Statements of Operations for the Years
Ended June 30, 1996 and June 30, 1995 F - 5
Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 1996 and June 30, 1995 F - 6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996 and June 30, 1995 F - 7
Notes to Consolidated Financial Statements F - 9
F-1
<PAGE>
Board of Directors and Shareholders
SC&T International, Inc.
Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of
SC&T International, Inc. and Subsidiary as of June 30, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of SC&T
International, Inc. and Subsidiary as of June 30, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
Toback CPAs, P.C.
Phoenix, Arizona
August 20, 1996
F-2
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1996
ASSETS
<TABLE>
<S> <C>
Current assets
Cash, including $49,123 of restricted cash $ 9,962,511
Receivables (Note 2): 740,454
Inventory (Notes 3 and 8) 1,432,081
Other current assets 74,943
-----------------
Total current assets 12,209,989
Product development costs, less accumulated amortization of $7,173 210,008
Property and equipment, net (Note 4) 229,685
Other assets 36,776
-----------------
$ 12,686,458
=================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5) $ 5,556
Notes payable, bank (Note 6) 78,528
Notes payable, bank (Note 6) 78,528
Accounts payable 1,093,811
Accounts payable 1,066,650
Accrued expenses 253,498
Advances from factor (Note 2) 121,368
-----------
Total current liabilities 1,552,761
-----------
Long-term debt, less current portion (Note 5) 1,266
-----------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $0.01 par; authorized 25,000,000 shares;
5,085,415 issued and 4,885,415 outstanding (Note 10) 50,854
Series A preferred stock, $0.01 par, authorized 5,000,000
shares, issued and outstanding 1,051 (Note 11) 11
Additional paid-in capital 15,097,557
Treasury stock - at cost, 200,000 shares (Note 9) (29,415)
Currency translation (23,271)
Accumulated deficit (3,963,305)
-----------
Total shareholders' equity 11,132,431
-----------
$12,686,458
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1996 and 1995
1996 1995
----------- -----------
Net sales $ 3,771,123 $ 3,517,557
Cost of goods sold:
Cost of goods sold 2,619,048 2,422,784
Inventory adjustment to carrying value (Note 3) 669,579 105,000
----------- -----------
3,288,627 2,527,784
----------- -----------
Gross profit 482,496 989,773
Selling, general and administrative expenses:
Payroll and payroll taxes 731,832 558,431
Selling and promotion 854,046 412,473
Office and administrative 495,889 464,549
Research and development 215,256 89,549
Development cost amortization 111,755 14,308
Consulting fees 282,706 39,000
Other 67,957 89,940
----------- -----------
2,759,441 1,668,250
----------- -----------
Loss from operations (2,276,945) (678,477)
Other income (expense):
Interest income 36,484 --
Interest expense (147,539) (113,854)
----------- -----------
Loss before income tax & financing costs (2,388,000) (792,331)
Interest associated with short-term
bridge financing (56,011) --
Write off of loan acquisition costs resulting from
repayment of debt (244,134) --
Income tax expense (Note 7) -- --
----------- -----------
Net loss $(2,688,145) $ (792,331)
=========== ===========
Net loss from operations per common share $ (0.49) $ (0.18)
=========== ===========
Net loss per common share $ (0.58) $ (0.21)
=========== ===========
Weighted average common shares outstanding 4,625,086 3,714,542
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
------------------------- -------------------------- paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1994 1,766,178 $ 17,662 10 $ -- $ 14,256
Purchase of subsidiary (Notes 10 and 12) 210,000 2,100 94,163
Issuance of additional stock (Note 10) 2,083,000 20,830 1,574,170
Net loss
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1995 4,059,178 $ 40,592 10 $ -- $ 1,682,589
Stock Issuance:
Issuance of additional stock (Note 10) 1,003,322 10,033 (10) -- 3,759,870
Issuance of preferred stock (Note 11) 1,051 11 9,620,955
Exercise of options (Note 14) 22,915 229 34,143
Forfeiture of common stock (Note 9)
Currency translation
Net loss
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 5,085,415 $ 50,854 1,051 $ 11 $15,097,557
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
-------------------------- Currency Accumulated
Shares Amount translation deficit
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at July 1, 1994 -- $ -- $ -- $ (482,829)
Purchase of subsidiary (Notes 10 and 12)
Issuance of additional stock (Note 10)
Net loss (792,331)
----------- ----------- ----------- -----------
Balance at June 30, 1995 -- $ -- $ -- $(1,275,160)
Stock Issuance:
Issuance of additional stock (Note 10)
Issuance of preferred stock (Note 11)
Exercise of options (Note 14)
Forfeiture of common stock (Note 9) (200,000) (29,415)
Currency translation (23,271)
Net loss (2,688,145)
----------- ----------- ----------- -----------
Balance at June 30, 1996 (200,000) $ (29,415) $ (23,271) $(3,963,305)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,688,145) $ (792,331)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 192,269 66,543
Loan amortization 244,134 10,715
(Increase) decrease in accounts receivable 377,483 (89,967)
Increase (decrease) in allowance for doubtful accounts (107,000) 68,000
Increase in inventories (172,311) (704,759)
(Increase) decrease in advances on purchases of
inventory 44,102 (231,495)
Increase in other current assets (55,264) (13,796)
(Increase) decrease in other assets 32,345 (23,210)
Increase (decrease) in accounts payable 352,423 (570,416)
Increase in accrued expenses 39,088 25,757
------------ ------------
Net cash used in operating activities (1,740,876) (2,254,989)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (105,347) (102,759)
Development costs (225,328) (110,742)
Loans to related parties (16,673) (6,519)
------------ ------------
Net cash used in investing activities (347,348) (220,020)
------------ ------------
Cash flows from financing activities:
Currency translation (23,271) --
Repayment on bank overdraft -- (14,393)
Net repayments under line of credit agreement (129,788) --
Repayments on notes payable, bank -- (57,534)
Principal payments on debentures (875,000) --
Principal payments on long-term debt (19,172) (10,668)
Proceeds from long-term debt -- 13,647
Net repayments on related party loans (1,000,000) --
Proceeds from note payable, related party -- 1,000,000
Proceeds from stock issuance - common stock 4,601,154 1,520,000
Proceeds from stock issuance - preferred stock 10,510,000 --
Cost of stock issuance - common stock (884,629) --
Cost of stock issuance - preferred stock (889,034) --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1996 and 1995
1996 1995
----------- ----------
Cash flows from financing activities, continued:
Loan fees associated with debentures $ (92,349) $ --
Proceeds from sale of debentures 875,000 --
Advances from (repayments to) factor (311,883) 313,664
----------- ----------
Net cash provided by financing activities 11,761,028 2,764,716
----------- ----------
Net increase in cash 9,672,804 289,707
Cash, beginning of period 289,707 --
----------- ----------
Cash, end of period $ 9,962,511 $ 289,707
=========== ==========
Supplemental Disclosure of Cash Flow Information
1996 1995
--------- ----------
Interest paid $ 203,550 $ 113,854
Taxes paid -- --
Supplemental Information of Noncash Investing and Financing Activities
Effective January 1, 1995, the Company acquired 100% of a corporation's stock
(See Note 12) whose operating assets and liabilities, based on the purchase
document, were as follows:
Cash $ -
Accounts receivable 518,996
Inventory 133,644
Property and equipment 73,905
Prepaid expenses and other 276,268
Accounts payable (560,513)
Accrued expense (57,172)
Long-term debt (288,865)
------------
Net $ 96,263
============
On May 31, 1995, the Company issued 75,000 shares of common stock to obtain
inventory financing (See Note 10).
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 (See Note 10).
In June of 1996, 200,000 shares were forfeited to the Company by the former
General Director of SC&T Europe, NV. (See Note 9)
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies:
Operations:
The Company sells, markets and distributes consumer electronic products
and personal computer accessory products, both wholesale and retail, from
operations in Arizona and Belgium.
Consolidation:
The consolidated financial statements include the accounts of S C & T
International, Inc. and its wholly-owned subsidiary, SC&T Europe, NV, (formerly
Westex, NV) a Belgium corporation (collectively, the "Company"). All significant
intercompany transactions and balances have been eliminated in the
consolidation.
Revenue recognition:
Revenue from sales is recognized from direct sales to retail customers.
A sale is recorded when the product is shipped. The Company sells product
through internal sales personnel, as well as independent sales representatives.
In accordance with Statement of Financial Accounting Standards No. 48, a reserve
is recorded to reflect estimated returns of products from retail customers.
Reclassification:
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Accounts receivable:
Accounts receivable are primarily due from retailers and commercial
accounts in the United States and internationally (See Note 2).
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first out (FIFO) method. The only major class of
inventory is finished goods (See Note 3).
Property, equipment, depreciation and amortization:
Property and equipment are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets. The
estimated useful lives range from 3 to 5 years. (See Note 4)
F-9
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies, continued:
Research and development:
Research and development costs for new products are expensed until
feasibility of the product is established.
Product development costs:
Product development costs are recorded when product feasibility is
established, and are stated at cost. Product development costs are being
amortized using the straight-line method over the 12 month period immediately
subsequent to the products introduction to market.
Advertising:
Advertising costs are charged to operations as incurred. Advertising
costs for the years ended June 30, 1996 and June 30, 1995 were $262,000 and
$107,000 respectively.
Income taxes:
The Company adopted the provisions of Financial Accounting Standards
Board No. 109, Accounting for Income Taxes. This statement provides for
calculating the provision for income taxes and the related assets and/or
liabilities using the liability method.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax benefit (expense) is the tax receivable (payable) for the period and
the change during the period in deferred tax assets and liabilities (See Note
7).
Foreign currency translation:
Assets and liabilities in foreign currencies are translated into
dollars at the rates in effect at the balance sheet date. Revenues and expenses
are translated at average rates for the year. The net exchange difference
resulting from these transactions is separately stated in the equity section of
the balance sheet.
Loss per common share:
Computation of loss per common share is based on the weighted average
number of common shares outstanding during the respective years.
F-10
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies, continued:
Financial instruments:
The fair value of Company financial instruments, including cash, the
short-term certificate of deposit and notes receivable from owners, approximate
their carrying value. In addition, based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the fair value approximates carrying value.
Financial statement estimates:
The preparation of financial statements in conformity with generally
accepted accounting principle requires management to make estimates and
assumptions that affect the reported values of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported values of revenues and expenses during the reporting
period. Actual results could differ from such estimates.
2. Receivables:
Receivables at June 30, 1996 consist of the following:
Trade accounts receivable $ 701,951
Related party (Note 9) 64,503
Allowance for returns and doubtful accounts (26,000)
------------
$ 740,454
============
Included in trade accounts receivable are approximately $155,000 of
factored receivables at June 30, 1996. Advances from factor consist of receipts
from the factoring company representing approximately 80% of the factored
receivable balances. The Company is obligated to buy back any receivable which
has not been paid to the factoring agency within 90 days.
3. Inventory:
Inventory at June 30, 1996 consists of the following:
Finished goods $ 1,403,688
Advances on purchases of inventory 187,393
Reserve for obsolescence (159,000)
-------------
$ 1,432,081
=============
F-11
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
3. Inventory, continued:
Advances on purchases of inventory are for inventory currently being
manufactured or anticipated to be manufactured in the near future.
The inventory adjustment to carrying value consists of adjustments
relating to the Company's decision to reduce the price of certain of its first
generation products remaining in inventory in anticipation of the introduction
of second generation products to be released.
4. Property and equipment:
Property and equipment at June 30, 1996 consists of the following:
Office Furniture and Equipment $ 263,372
Tools & Dies 63,828
Vehicles 21,673
------------
348,873
Less Accumulated Depreciation (119,188)
------------
$ 229,685
============
Depreciation expense totaled $80,515 and $39,887 for the years ended
June 30, 1996 and 1995, respectively.
Net property and equipment located in Belgium is $36,452 at June 30,
1996.
5. Long-term debt:
Long-term debt at June 30, 1996 consists of the following:
Note payable, due in monthly installments of $463 plus interest
through November, 1997, collateralized by a vehicle.
$ 6,822
Less current portion 5,556
-----------
$ 1,266
===========
At June 30, 1996, the aggregate maturities of debt for the succeeding
years is as follows:
1997 $ 5,556
1998 1,266
---------
Total $ 6,822
=========
F-12
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
6. Notes payable, bank:
Notes payable, bank, consist of the following:
<TABLE>
<S> <C>
The Company has a line of credit due on demand with a bank in Belgium
at a variable rate of interest of approximately 11.5%. Borrowings
under the line of credit are collateralized by substantially all of
the assets of the subsidiary.
$ 51,528
The Company has a second line of credit with a bank in Belgium at a
variable rate of interest that fluctuates based on the transaction.
The bank advances approximately 93% of the specific invoices.
Repayment is due 10 days after the due date of the accounts receivable
invoice. Borrowing under this line of credit are collateralized by
substantially all of the assets of the
subsidiary. 27,000
---------------
$ 78,528
===============
</TABLE>
7. Income taxes:
The components of the net deferred tax assets and liabilities at June
30, 1996 are as follows:
1996
---------------
Deferred tax assets $ 1,250,000
Deferred tax liabilities -
Valuation allowance (1,250,000)
--------------
Net deferred assets and liabilities $ -
==============
The types of temporary differences between tax bases of assets and
liabilities and their financial reporting amounts that give rise to deferred tax
assets relate primarily to the accounts receivable and inventory allowances and
net operating loss carryforwards available.
At June 30, 1996, the Company has net operating loss carryforwards for
federal and state income tax reporting purposes of approximately $3,125,000 that
will begin to expire in 2010 for federal purposes and in 2000 for state
purposes. These are available to offset taxable income in subsequent years.
Due to changes in ownership during the year ended June 30, 1995, the
availability of net operating losses incurred totaling approximately $802,000
will be restricted as provided under Internal Revenue Code Section 382 and
related regulations.
F-13
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
7. Income taxes, continued:
Due to the Company's initial public offering during the year ended June
30, 1996, and the private offering of Series A Preferred Stock in June of 1996,
the remaining net operating loss carryforwards of approximately $2,323,000 may
be restricted as provided under Internal Revenue Code Section 382 and related
regulations.
At June 30, 1996, the Company has recorded a valuation allowance for
all deferred tax assets because the benefit of those temporary differences may
not be realized by the Company.
8. Commitments and contingencies:
Operating leases:
The Company leases an office and warehouse from an unrelated third
party under an operating lease which expires in August 1997. Under the lease,
the monthly rental is approximately $4,900, and the Company is responsible for
certain expenses.
The Company leased its office location in Belgium through April 30,
1996 from a former director, who was a shareholder, who 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.
The Company leases a corporate apartment from an unrelated third party
under an operating lease which expires December 31, 1996. Under the lease, the
monthly rental is approximately $700, 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
June 30, 1996 are as follows:
Operating leases:
1997 $ 79,000
1998 13,000
1999 1,000
-------------
$ 93,000
=============
F-14
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
8. Commitments and contingencies, continued:
Operating leases, continued:
Total rental expenses for the years ended June 30,1996 and June 30,1995
were approximately $119,000 and $103,000, respectively.
Pending or threatened litigation:
The Company, from time to time, is a party to various legal proceedings
which are incidental to its business. In the opinion of management, the ultimate
resolution of these proceedings will not have a materially adverse affect on the
Company's financial position or results of operations.
The Company is currently suing a competitor, who competes in the same
industry. Any potential benefit of this lawsuit is not reflected in these
financial statements.
Inventory:
At June 30, 1996, the Company has outstanding purchase commitments for
inventory acquisitions of approximately $1,700,000. The Company has advanced
funds against the purchase commitments totalling $187,393 (See Note 3).
9. Related party transactions:
Related party receivables:
The Company has a related party receivable from its 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 $42,400 at June 30, 1996, of which $6,000 is current and
$36,400 is long-term.
The related party receivable also includes $12,349 due from the former
General Director of SC&T Europe, NV. This receivable is non-interest bearing and
due on demand.
The Company also advances funds to employees for traveling purposes.
These advances are due on demand and are non-interest bearing. The balance at
June 30, 1996 was $9,754.
F-15
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
9. Related party transactions, continued:
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 will
receive $29,415. In addition, the former General Director has 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
will be issued to the former General Director.
Employment agreement:
In September 1995, the Company entered into an employment agreement
with its President, who is also a shareholder, for a period of five years. The
agreement provides for an annual salary of $104,000 and contains termination
provisions regarding the repurchase of the President's stock and guaranteed
salary payments.
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.
10. Issuance of common stock:
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.
In January 1996, the Company issued an additional 67,500 Redeemable
Common Stock Purchase Warrants. The Company received cash of approximately
$6,750.
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.
F-16
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
10. Issuance of common stock, continued:
During the quarter ended September 30, 1995, the Company completed a
private placement for short-term bridge financing of 8% Subordinated Debentures,
due at the earlier of September 30, 1996, or upon completion of the offering.
The Company issued 87,500 shares of Common Stock at $1.00 per share to obtain
the short-term bridge financing.
In September 1995, the President was issued 15,822 shares of Common
Stock at a value of $1.00 per share for past services provided to the Company.
In June 1995, the Company reissued its shares of stock at $0.01 par
instead of no par.
During the year ended June 30, 1995, the Company completed a private
offering of Common Stock, par value of $0.01 per share. The Company received net
proceeds of approximately $1,500,000, and issued a total of 2,000,000 shares of
Common Stock.
In addition, a $20,000 note payable was converted to 8,000 shares of
Common Stock.
The Company also issued 75,000 shares of Common Stock on May 31, 1995
at $1.00 per share to obtain inventory financing.
On December 31, 1994, the Company purchased all of the outstanding
shares of SC&T Europe, NV. (formerly Westex, NV) for 210,000 shares of common
stock, valued at $96,263. (See Note 9 & Note 12)
11. 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 preceeding the conversion date. The Series A Preferred Stock is
converted 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.
F-17
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
11. Issuance of preferred stock, continued:
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.
12. Purchase of subsidiary:
On December 31, 1994, the Company purchased all of the outstanding
shares of Westex NV of Antwerp, Belgium for 210,000 shares of common stock,
valued at $96,263. Westex NV is a distributor of consumer electronic products
and personal computer accessory products, both wholesale and retail. The
acquisition has been accounted for by the purchase method of accounting and the
purchase price of $96,263 approximates the fair value of the net assets
acquired. The operating results of this acquisition are included in the
company's consolidated results of operations from the date of acquisition. In
June, 1996, the subsidiary's name was changed to SC&T Europe, NV.
The following unaudited proforma summary presents the consolidated
results of operations for the year ended June 30, 1995 as if the acquisition had
occurred at the beginning of the year, July 1, 1994, and does not purport to be
indicative of what would have occurred had the acquisition been made as of that
date or of results which may occur in the future.
Net sales $ 4,883,925
==================
Net loss $ (842,973)
===================
Net loss per common share $ (0.23)
==================
13. Significant customer:
The Company had one significant customer which accounted for
approximately 12% of the Company's total revenues for the year ended June 30,
1996. The accounts receivable balance for that customer totaled approximately
$110,000 at June 30, 1996.
The Company had one significant customer which accounted for
approximately 22% of the Company's total revenues for the year ended June 30,
1995.
F-18
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. Options and warrants:
Incentive stock option plan:
The Company has a qualified incentive stock option plan for its key
employees, consultants and independent contractors. The grants expire in
February, 2005. As of June 30, 1996, 22,915 grants had been exercised.
The following summarizes the activity for the Plan at June 30, 1996:
Number Option
of Shares Price Per Share
--------- ---------------
Options outstanding at beginning of year 723,500 $1.00 - $1.75
Granted 60,000 $1.50 - $5.70
Canceled (184,000) $1.00 - $1.75
Exercised (22,915) $1.50
---------
Options outstanding at end of year 576,585 $1.00 - $5.70
=========
Options available for grant 433,915
=========
Warrants:
During the year ended June 30, 1995, the Company issued warrants to
purchase an aggregate of 588,500 shares of Common Stock. The Warrants were
issued to obtain $1,000,000 of bridge inventory financing. The warrants are
exercisable at $1.20 per share and vest over a three year period. The warrants
expire in September 1998.
In connection with the Company's private placement, in June 1996, of
1,051 shares of Series A Preferred Stock the Company issued warrants to purchase
an aggregate of 108,490 shares of Common Stock. The warrants are exercisable
immediately at $7.75 per share. The warrants expire on June 17, 2001.
The Company issued 517,500 IPO Warrants in connection with its initial
public offering.
In connection with the Company's initial public offering, the Company
sold warrants to the IPO Underwriter, at a purchase price of $.001 per warrant,
to purchase from the Company 90,000 shares of Common Stock and 45,000 IPO
Warrants. The Underwriter's Warrants are exercisable for a period of four years
commencing one year from December 15, 1995 at a per share exercise price equal
to $6.25 per share of Common Stock and $.125 per IPO Warrant.
F-19
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
15. Subsequent events:
The Company is reviewing alternatives for additional office and
warehouse space to meet the demands related to the Company's anticipated growth.
The Company has placed an earnest deposit on a potential future office site as
it evaluates the various options available.
In August 1996, the Company established a wholly-owned marketing and
sales subsidiary, SC&T U.K., Ltd., located in northern England. This subsidiary
is responsible for sales in the United Kingdom and Eastern Europe.
In August 1996, the Company established a $500,000 revolving line of
credit with a bank at a variable rate of interest. Borrowings under this line of
credit are subject to certain conditions including compensating balances. At
August 20, 1996 the Company had not drawn against this line of credit.
In September 1996, the Company established a wholly-owned marketing and
sales subsidiary, SC&T America, Inc. located in Phoenix, Arizona. The subsidiary
is responsible for sales in the United States and Canada.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,962,511
<SECURITIES> 0
<RECEIVABLES> 701,951
<ALLOWANCES> 26,000
<INVENTORY> 1,244,688
<CURRENT-ASSETS> 12,209,989
<PP&E> 229,685
<DEPRECIATION> 80,515
<TOTAL-ASSETS> 12,686,458
<CURRENT-LIABILITIES> 1,525,600
<BONDS> 6,822
0
11
<COMMON> 50,854
<OTHER-SE> 11,108,727
<TOTAL-LIABILITY-AND-EQUITY> 12,686,458
<SALES> 3,771,123
<TOTAL-REVENUES> 3,771,123
<CGS> 3,288,627
<TOTAL-COSTS> 3,288,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (63,159)
<INTEREST-EXPENSE> 447,684
<INCOME-PRETAX> (2,388,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,388,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (300,145)
<CHANGES> 0
<NET-INCOME> (2,688,145)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> .00
</TABLE>
