As filed with the Securities and Exchange Commission on September 26, 1996
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
Registration Statement Under
The Securities Act of 1993
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SC&T International, Inc.
(Name of small business issuer in its charter)
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<S> <C> <C>
Arizona 3577 86-0737579
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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3837 E. LaSalle Street, Phoenix, Arizona 85040; (602) 470-1334
(Address and telephone number of principal executive offices)
JAMES L. COPLAND, PRESIDENT
3837 E. LaSalle Street, Phoenix, Arizona 85040; (602) 470-1334
(Name, address and telephone number of agent for service)
Copies to:
SARA R. ZISKIN, ESQ.
O'CONNOR, CAVANAGH, ANDERSON,
KILLINGSWORTH & BESHEARS, P.A.
One East Camelback Road, Suite 1100
Phoenix, Arizona 85012
Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box: [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered Proposed maximum aggregate offering price (1) Amount of registration fee
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Common Stock(2)................................... $9,680,924 $3,338.27(3)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. Average closing price on Nasdaq SmallCap Market for
the ten trading days ended September 10, 1996 was $1.21.
(2) This Registration Statement covers an additional indeterminate amount of
shares of Common Stock which may be issued in accordance with Rule 416.
(3) $3,338.27 enclosed herewith.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Exhibit Index is located on page _____. Page 1 of _____ pages.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1996
SC&T International, Inc.
8,000,764 Shares of Common Stock
This Prospectus relates to up to 8,000,764 shares of common stock, par
value $0.01 per share (the "Common Stock"), of SC&T International, Inc. (the
"Company") issuable upon conversion of the Company's Series A Preferred Stock
(see "Selling Shareholders" and "Recent Developments") that may be sold from
time to time by certain selling shareholders (the "Selling Shareholders") of the
Company. Additional shares may be issued upon conversion of Series A Preferred
Stock due to accretion or fluctuation in the price of the Company's Common
Stock.
To the extent required by applicable law or Securities and Exchange
Commission regulations, this Prospectus shall be delivered upon resale of such
Common Stock by the Selling Shareholders. The Company will not receive any
proceeds from the sale of shares by the Selling Shareholders.
The Company's Common Stock and the stock purchase warrants issued to the
public in connection with the Company's initial public offering (the "IPO
Warrants") are traded on the National Association of Securities Dealers'
Automated Quotation System ("Nasdaq") SmallCap Market under the symbol "SCTI"
and "SCTIW," respectively. On September 10, 1996, the last sale price of the
Common Stock and the IPO Warrants as reported by Nasdaq was $1.16 and $0.34,
respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" WHICH BEGINS ON PAGE 5 OF THIS PROSPECTUS AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Company, pursuant to agreements with certain of the Selling
Shareholders, has agreed to pay substantially all of the expenses of any
offering and sale hereunder (not including commissions and discounts of
underwriters, dealers, or agents), estimated to be $42,000.
The Securities will be sold directly, through agents, underwriters, or
dealers as designated from time to time, or through a combination of such
methods on terms to be determined at the time of sale, at market prices
obtainable at the time of sale or otherwise in privately negotiated transactions
at prices determined by negotiation.
The date of this Prospectus is ____________, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
and information statements, and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the public reference section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 upon payment of the prescribed fees. The Commission also maintains a
Web site that contains reports, proxy and information statements, and other
materials that are filed through the Commission's Electronic Data Gathering,
Analysis and Retrieval System. This Web site can be accessed at
http://www.sec.gov.
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the currently outstanding options and warrants to acquire up to an aggregate of
1,596,335 shares of Common Stock.
The Company
SC&T International, Inc. (the "Company") develops and markets accessory
and peripheral products for the multimedia, interactive, and communications
segments of the personal computer ("PC") and video game industries. The
Company's products include fully-integrated, multimedia stereo keyboards, CD-ROM
storage systems, various aftermarket equalizer/amplifier 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 majority of the Company's products are compatible
with both IBM PC and Macintosh operating platforms. All new keyboard products
offered by the Company are compatible with the Microsoft Windows 95 platform.
A major factor in the growing market for computer peripheral equipment
is the availability of integrated solutions to adapt existing computers to
perform new functions. The Company focuses on the interactive, multimedia market
and the computer and video game markets, developing technology to furnish
one-step, integrated solutions for the PC user interested in updating existing
equipment. The Company began operations in July 1993. 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.
The Company's strategy is to develop new niche products while
continuing to increase sales of existing products. The Company recently entered
into the computer and video game markets with the introduction of a line of PC
and video arcade racing wheels. The Company's initial principal products, its
PLATINUM SOUNDTM multimedia keyboards, were introduced to the market in May
1995. The Company's integrated design eliminates the need for external speakers
and microphones which otherwise compete for limited desktop space and offers the
IBM PC user an integrated, single source solution for audio and
voice-recognition computer applications. In addition, the Company has expanded
its keyboard line to include a standard Windows 95 replacement keyboard and an
ergonomic-styled keyboard with a dual clock calculator enhancement. The Company
is developing enhanced keyboard products which include a keyboard that will
incorporate an AM/FM stereo radio. The Company also is developing new sound
enhancement product bundles to expand its current line of retail and original
equipment manufacturer ("OEM") products. Furthermore, the Company continues to
focus on reducing the manufacturing cost of its products.
On December 31, 1994, the Company acquired SC&T Europe, N.V., formerly
Westex N.V. ("SC&T Europe"), a marketing company located in Antwerp, Belgium
responsible for sales in Europe. The Company increased revenue through this
acquisition. In August 1996, the Company established a wholly owned marketing
subsidiary, SC&T U.K., Ltd. ("SC&T U.K.") to be located in northern England,
responsible for sales in the United Kingdom and Eastern Europe. In September
1996, the Company established a wholly owned marketing subsidiary, SC&T America,
Inc. ("SC&T America"), responsible for sales in the United States and Canada.
The Company was incorporated in Arizona in June 1993. The Company's
corporate headquarters are located at 3837 E. Lasalle Street, Phoenix, Arizona
85040 and its telephone number is (602) 470-1334.
3
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The Offering
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Securities offered by Selling Shareholders........................... 8,000,764 shares of Common Stock
Common Stock outstanding prior to the conversion
of the Series A Preferred Stock outstanding on
the date of this Prospectus........................................ 5,015,313 shares.
Risk Factors/Dilution................................................ Investors should carefully consider the factors under
"Risk Factors" and "Dilution."
Nasdaq symbols....................................................... Common Stock: SCTI; IPO Warrants: SCTIW.
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Summary Financial Data
The following table summarizes certain selected financial data and is
qualified in its entirety by the more detailed financial statements contained
elsewhere in this Prospectus.
Year Ended June 30,
1995 1996
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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
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Balance Sheet Data:
Working capital $10,684,389
Total assets 12,686,458
Shareholders' equity 11,159,592
(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.
PLATINUM SOUND is a trademark of the Company. This Prospectus 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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RISK FACTORS
The securities offered by this Prospectus are highly speculative, and
the purchase of such securities involves a high degree of risk. In addition to
the other information in this Prospectus, prospective investors should carefully
consider the following factors in evaluating an investment in the securities
offered by this Prospectus.
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, prospective investors
have 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."
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."
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. See "Capitalization." 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 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."
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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 "Risk Factors -
Litigation." 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."
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."
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 "Management - Executive
Officers and Directors," and "Management - Employment Agreements."
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 of operations
could be materially and adversely effected. See "Business - Marketing."
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
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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."
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."
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."
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."
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.
7
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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."
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
"Principal Shareholders."
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. See "Description of Securities."
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. See "Dividend Policy."
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. See "Description of Securities - Statutory Provisions Affecting
Persons Who Acquire a Substantial Amount of the Company's Securities."
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. See "Management -
Limitation of Director's Liability and Indemnification."
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Possible Volatility of Stock Price
The Company's Common Stock and IPO Warrants have traded on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") for the
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.
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. 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 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. See "Description of Securities - Preferred Stock."
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. See "Management - 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
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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. See "Management - Stock Option Plan," "Description of
Securities - Shares Eligible for Future Sale," and "Description of Securities -
Other Warrants."
Future Sales of Common Stock; Possible Future Sales by Selling Shareholders
This Prospectus forms a part of 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
securities offered by this Prospectus. 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 Registration Statement of
which this Prospectus forms a part 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 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. See "Description of Securities - Shares
Eligible for Future Sale."
Forward-Looking Information May Prove Inaccurate
This Prospectus 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 Prospectus, 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
"Risk Factors." 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
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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.
DIVIDEND POLICY
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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
shares of the Common Stock offered hereby for the account of the Selling
Shareholders. Any proceeds from shares of Common Stock offered hereby issued
pursuant to the exercise of Warrants will be used for general corporate
purposes. See "Selling Shareholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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 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.
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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.
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
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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.
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.
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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.
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.
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
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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 the year 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.
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."
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.
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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 OmniTM 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.
Video Arcade Racing Wheels
The Company's newest product, the PER4MERTM 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.
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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 ProductsTM. 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 Belgium
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 "Risk Factors -
Risks Associated With International Sales; Currency Fluctuations."
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
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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. See "Use of Proceeds."
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.
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-
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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 "Risk Factors - Competition."
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.
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.
20
<PAGE>
None of the Company's employees is represented by a labor union. The
Company believes its relations with its employees are good.
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.
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 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.
21
<PAGE>
MANAGEMENT
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
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.
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<PAGE>
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.
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
Transactions."
Commencing September 1, 1995, Mr. Copland's employment agreement with
the Company provides for an annual salary of $104,000. Mr. Copland's employment
agreement also provides for payment to Mr. Copland, in the event of termination
for any reason other than for cause prior to February 28, 1997, of all unpaid
salary under the agreement through February 28, 1997, and for the purchase by
the Company of Mr. Copland's shares of Common Stock or rights to purchase shares
of Common Stock of the Company at their fair market value based on the then
average trading price, less any unpaid exercise price on the date of
termination. The employment agreement also provides for bonuses based upon
performance to be paid to Mr. Copland at the discretion of the Company's Board
of Directors. The Company granted 250,000 options and 50,000 options to James
Copland and Catherine Copland, respectively, during the fiscal year ended June
30, 1995.
The following table provides information on stock options granted to
the Company's Named Officer during the fiscal year ended June 30, 1995. No stock
options were granted to the named officer during the fiscal year ended June 30,
1996.
Option Grants in Last Fiscal Year
(Individual Grants)
Number of % of Total
Securities Options Exercise
Underlying Options Granted in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- ---- ---------- ----------- ------ ----
James L. Copland(1)(2)...... 250,000 35% $1.10 2/6/05
- --------------
(1) One-third of such options become exercisable on each of the first,
second, and third anniversaries of the February 6, 1995 grant date.
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<PAGE>
(2) Does not include 50,000 options granted to Mrs. Copland exercisable at
$1.00 per share and expiring on February 6, 2005.
Limitation of Director's Liability and Indemnification
Under Arizona law, the Company is empowered, under certain
circumstances, to indemnify the directors, officers, employees, and agents of
the Company. Section 10-851 of the Arizona Business Corporation Act authorizes
the Company, generally, to indemnify directors, officers, employees and agents
against expenses and liabilities (including amounts paid in settlement) in
connection with any lawsuit or proceeding involving any such director, officer,
employee, or agent if he or she acted, or failed to act, in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful. However, if
the lawsuit is by or in the right of the Company (a shareholders' derivative
suit on behalf of the Company), no director, officer, employee or agent can be
indemnified against judgments or amounts paid in settlement, and no
indemnification for expenses may be made with respect to any claim, issue or
matter as to which such director, officer, employee or agent shall have been
adjudged to be liable to the Company (unless a court determines that
indemnification is appropriate for reasonable expenses incurred).
Under Arizona law, unless ordered by a court, indemnification pursuant
to the foregoing may only be made by the Company as authorized in a specific
case upon a determination that indemnification is proper under the circumstances
because the director, officer, employee or agent has met the applicable standard
of conduct. Such determination shall be made generally (i) by the Board of
Directors of the Company, acting by a majority vote of a quorum consisting of
directors who were not parties to the lawsuit or proceeding; (ii) by independent
legal counsel appointed by a majority of the disinterested directors for that
purpose or, if there are no disinterested directors, then as selected by
majority vote of the Board of Directors; or (iii) by the shareholders.
In addition, under Arizona law, the Company is required, unless limited
by its Articles, to (i) indemnify a director or officer of the Company against
reasonable expenses incurred by the officer or director in connection with any
lawsuit or proceeding if such director or officer has been successful on the
merits or otherwise in the defense of such lawsuit or proceedings and (ii)
indemnify, subject to certain conditions, outside directors, as defined by
Arizona law, against liability and pay an outside director's expenses in advance
of a final disposition of a proceeding. The Company may advance or pay expenses
incurred by a director, officer, employee or agent in defense of any such
lawsuit or proceeding upon the receipt of (i) a written affirmation from the
director, officer, employee, or agent of such person's good faith belief that he
or she has met the applicable standard of conduct; (ii) an undertaking by or on
behalf of such director, officer, employee or agent to repay such amount if it
is ultimately determined that he or she is not entitled to be indemnified by the
Company; and (iii) a determination is made that the facts then known would not
preclude indemnification under Arizona law.
Pursuant to Arizona law, the Company's Articles of Incorporation
provide that the Company shall indemnify and persons who incurs liability or
expense by such person acting as an officer or director of the Company. Arizona
law does not permit the elimination of liability for (a) the amount of a
financial benefit received by the director to which the director is not
entitled; (b) an intentional infliction of harm on the Company or its
shareholders; (c) certain unlawful distributions to shareholders; and (d) an
intentional violation of criminal law. The effect of this provision in the
Articles of Incorporation is to eliminate the rights of the Company and its
shareholders (through shareholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (a) through (d) above.
This provision will not alter the liability of directors under federal
securities laws.
The Company's Articles of Incorporation do not permit indemnification
or advancement of expenses with respect to any action, suit, or proceeding
whether civil, criminal, administrative, or investigative ("Proceeding"), or any
claims therein brought or made by him or her against the Company, unless such
Proceeding or claim is
24
<PAGE>
approved by the Board of Directors of the Company. The Company maintains
directors' and officers' liability insurance.
Pursuant to the terms of the Registration Rights Agreement between the
Company and each of the Selling Shareholders, the directors and officers of the
Company also are indemnified against certain civil liabilities that they may
incur under the Securities Act in connection with this offering. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to officers, directors or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is therefore unenforceable.
Stock Option Plan
The Stock Option Plan (the " Plan") provides for the grant of options
to acquire the Company's Common Stock ("Options"). Options under the Plan may be
issued to executives, key employees, and others providing valuable services to
the Company and its subsidiaries. The Options issued may be incentive stock
options or nonqualified stock options. The Company believes that the Plan
represents an important factor in attracting and retaining executives and other
key employees and constitutes a significant part of the compensation program for
employees. A maximum of 1,010,500 shares of Common Stock of the Company may be
issued under the Plan. If any change is made in the stock subject to the Plan,
or subject to any Option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Plan provides that appropriate adjustments will be made as to the maximum number
of shares subject to the Plan and the number of shares and exercise price per
share of stock subject to outstanding options. There are currently outstanding
options to acquire 636,585 shares of the Company's Common Stock under the Stock
Option Plan. These options were granted in February 1995, September 1995 and
August 1996 to eleven individuals and/or entities, including options for 250,000
shares to Mr. Copland, options for 50,000 shares to Mrs. Copland, options for
100,000 shares to Mr. Devers, which have since been cancelled, and options for
50,000 shares to Mr. Stocker, at exercise prices ranging from $1.00 per share to
$5.70 per share. Of these currently outstanding options, 4,500 will vest over a
four year period from the date of grant, 522,085 will vest over three years from
the date of grant, and 110,000 will vest over a two year period from the date of
grant. As of June 30, 1995, no options had been granted to any other executive
officers of the Company.
Eligibility and Administration
Options may be granted only to persons ("Eligible Persons") who at the
time of grant are either (i) key personnel (including officers and directors) of
the Company or subsidiaries of the Company or (ii) consultants and independent
contractors who provide valuable services to the Company or to subsidiaries of
the Company. Options that are incentive stock options may be granted only to key
personnel of the Company (and its subsidiaries) who are also employees of the
Company (or its subsidiaries).
The Eligible Persons under the Plan are divided into two groups, and
there may be a separate administrator (each, a "Plan Administrator") for each
group. One group consists of Eligible Persons who are executive officers and
directors of the Company and all persons who own 10% or more of the Company's
issued and outstanding stock. The power to administer the Plan with respect to
those persons may be vested either with the Board of Directors or with a
committee ("Senior Committee") comprised of two or more disinterested directors
who are appointed by the Board. The second group consists of Eligible Persons
who are not executive officers or directors of the Company and those who do not
own 10% or more of the Company's issued and outstanding stock. The power to
administrate the Plan with respect to the second group of Eligible Persons may
be vested with the Board of Directors of the Company or with a committee
appointed by the Board of Directors. Each Plan Administrator will determine (a)
which of the Eligible Persons in its group will be granted Options and Awards,
(b) the amount and timing of the grant of such Options and Awards, and (c) such
other terms and conditions as may be imposed by the Plan Administrator
consistent with the Plan.
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<PAGE>
To the extent that granted Options are incentive stock options, the
terms and conditions of those Options must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986, as amended (the
"Code"). There is no restriction as to the number of Options or Awards that can
be granted to any one employee or as to the maximum number of shares with
respect to which Options or Awards can be granted to any one employee.
Exercise of Options
The expiration date, maximum number of shares purchasable, and the
other provisions of the Options, including vesting provisions, are established
at the time of grant. Options may be granted for terms of up to 10 years and
become exercisable in whole or in one or more installments at such time as may
be determined by the Plan Administrator upon the grant of the Options. The
exercise prices of Options are determined by the Plan Administrator, but may not
be less than 100% (110% if the Option is granted to a shareholder who at the
time the Option is granted owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of its
subsidiaries) of the fair market value of the Common Stock at the time of the
grant.
Options granted under the Plan are nontransferable other than by will
or by the laws of descent and distribution upon the death of the Option holder
and, during the lifetime of the Option holder, are exercisable only by such
Option holder. Termination of employment at any time for cause immediately
terminates all Options held by the terminated employee.
Duration and Modification
The Plan will remain in force until February 6, 2006. The Board of
Directors of the Company at any time may suspend, amend, or terminate the Plan
except that, without the approval by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock of the Company, the Board of
Directors may not (i) increase, except in the case of certain organic changes to
the Company, the maximum number of shares of Common Stock subject to the Plan,
(ii) reduce the exercise price at which Options may be granted or the exercise
price for which any outstanding Option may be exercised, (iii) extend the term
of the Plan, (iv) change the class of persons eligible to receive Options or
Awards under the Plan, or (v) materially increase the benefits accruing to
participants under the Plan. Notwithstanding the foregoing, the Board of
Directors may amend the Plan from time to time as it deems necessary in order to
meet the requirements of any amendments to Rule 16b-3 under the Securities
Exchange Act of 1934 without the consent of the shareholders of the Company.
Plan Not Exclusive
The Plan provides that it is not intended to be the exclusive means by
which the Company may issue options to acquire its Common Stock. To the extent
permitted by applicable law, the Company may issue any options other than
pursuant to the Plan without shareholder approval.
CERTAIN 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 is identical in all respects to the
Company's Common Stock except that each share of Preferred Stock is entitled to
votes equal to 230,000 shares of Common Stock. The shares were reconverted into
10 shares of Common Stock as of December 14, 1995. An additional 15,822 shares
were issued
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<PAGE>
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.
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.
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<PAGE>
PRINCIPAL SHAREHOLDERS
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) 400,000 8.18%
Banque Scandinave En Suisse(4)(16) 619,835 11.00%
Cameron Capital Ltd.(5)(17) 1,239,669 19.82%
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 was converted the following shareholders would
hold the following percent of the total number of outstanding shares of
the Company.
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%
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<PAGE>
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.
(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.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, par value $0.01 per share (the "Common Stock") and 5,000,000
shares of Serial Preferred Stock, par value $0.01 per share (the "Preferred
Stock") and 517,500 IPO Warrants entitling the holder thereof to purchase
one-half share of Common Stock for $7.00 per share. Prior to this offering,
there were outstanding 5,015,313 shares of Common Stock and 1,033 shares of
Series A Preferred Stock.
29
<PAGE>
Common Stock
The holders of Common Stock are entitled to one vote for each share on
all matters submitted to a vote of shareholders other than the election of
directors. In elections of directors, Arizona law requires cumulative voting,
which means that each shareholder may cast the number of votes as is equal to
the number of shares held of record, multiplied by the number of directors to be
elected. Each shareholder may cast the whole number of votes for one candidate
or distribute such votes among two or more candidates. Subject to preferences
that may be applicable to any then outstanding Preferred Stock, the holders of
Common Stock will be entitled to receive such dividends, if any, as may be
declared by the Board of Directors from time to time out of legally available
funds. Upon liquidation, dissolution, or winding up of the Company, the holders
of Common Stock will be entitled to share ratably in all assets of the Company
that are legally available for distribution, after payment of all debts and
other liabilities and subject to the prior rights of holders of any Preferred
Stock then outstanding. The holders of Common Stock have no preemptive,
subscription, redemption, or conversion rights. The rights, preferences, and
privileges of holders of Common Stock will be subject to the rights of the
holders of shares of any series of Preferred Stock that the Company may issue in
the future.
Redeemable Common Stock Purchase Warrants
The Company issued 517,500 IPO Warrants in connection with its initial
public offering. In addition, a Warrant was issued to the IPO Underwriter to
purchase 45,000 IPO Warrants. The IPO Warrants are subject to the terms and
conditions of a Warrant Agreement between the Company and American Securities
Transfer, Inc., as Warrant Agent. The following description of the IPO Warrants
is not complete and is qualified in all respects by the Warrant Agreement which
was filed as an exhibit to the Company's Registration Statement Number 33-
96812-LA filed in connection with the Company's initial public offering. The
shares of the Company's Common Stock underlying the IPO Warrants, when issued
upon exercise thereof and payment of the purchase price, will be fully paid and
nonassessable.
Each IPO Warrant entitles the holder to purchase one-half share of
Common Stock at any time during the three years commencing December 15, 1995 for
$7.00 per share. The number and kind of securities or other property for which
the IPO Warrants are exercisable are subject to adjustments in certain events,
such as mergers, reorganizations or stock splits, to prevent dilution. The IPO
Warrants will be redeemable by the Company at a price of $.05 per IPO Warrant
upon 30 days notice if the closing bid price of the Company's Common Stock (as
quoted on the principal exchange on which the Company's Common Stock is then
traded) equals or exceeds $8.00 per share for a period of 20 consecutive trading
days. All IPO Warrants not exercised or redeemed will expire three years from
the date of this Prospectus, unless the exercise date is extended by the Company
in its discretion. Holders of IPO Warrants will not, as such, have any of the
rights of shareholders of the Company.
The IPO Warrants may be exercised by filling out and signing the
appropriate form on the IPO Warrants and mailing or delivering the IPO Warrants
to the Warrant Agent in time to reach the Warrant Agent by the expiration or any
redemption date, accompanied by payment in full of the exercise price for the
IPO Warrants being exercised in United States funds (in cash or by check or bank
draft payable to the order of the Company). Common Stock certificates will be
issued as soon as practicable after exercise and payment of the exercise price
as described above.
The Underwriter's Warrants
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
(the "Underwriter's Warrants"), 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 (the "Exercise Price") equal to $6.25 per share of Common
Stock and $.125 per IPO Warrant. The Underwriter's Warrants may not be sold,
transferred, assigned, or hypothecated for a period of one year from the
effective date
30
<PAGE>
of the offering except to officers of the IPO Underwriter. The Underwriter's
Warrants contain anti-dilution provisions for adjustment of the Exercise Price
upon the occurrence of certain events, including stock dividends, stock splits
and recapitalizations. The holders of Underwriter's Warrants have no voting,
dividend or other right as shareholders of the Company with respect to shares
underlying the Underwriter's Warrants, unless and until the Underwriter's
Warrants have been exercised.
Other Warrants
In connection with the Company's private placement of $1,000,000 in
principal amount of unsecured notes for inventory financing, the Company issued
warrants to purchase an aggregate of 588,500 shares of Common Stock. 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 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.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Serial
Preferred Stock, par value $0.01 per share. Subsequent to this offering, the
Company will have no class of Preferred Stock issued or outstanding.
The Board of Directors is authorized, subject to any limitations
prescribed by the laws of the State of Arizona, but without further action by
the Company's shareholders, to provide for the issuance of Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designations, powers, preferences, and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the shareholders.
The Board of Directors may authorize and issue Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. In addition, the issuance of
Preferred Stock may have the effect of delaying, deferring, or preventing a
change in control of the Company. The Company has no current plan to issue any
shares of Preferred Stock.
Series A Preferred Stock
In June 1996, the Company issued Series A Preferred Stock. The
following description of the Series A Preferred Stock is not complete and is
qualified in all respects by the Certificate of Designation which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary ("an Event"), the
holders of Series A Preferred Shares shall be entitled to receive, immediately
after any distributions to senior securities and prior and in preference to any
distribution to junior securities but in parity with any distribution to parity
securities, an amount per share equal to the sum of (i) $10,000 for each
outstanding Share (the "Original Series A Issue Price") and (ii) an amount equal
to 8% of the Original Series A Issue Price per annum for the period that has
passed since the date of issuance of any Series A Preferred Stock (such amount
being referred to herein as the "Accretion"). If upon the occurrence of such
Event and after any distributions to senior securities, the assets and funds
thus distributed among the holders of the Series A Preferred Stock and parity
securities shall be insufficient to permit the payment of such holders of the
full preferential amounts due to the holders of the Series A Preferred Stock and
the parity securities, respectively, then the entire remaining assets and funds
of the Company legally available for distribution shall be distributed among the
holders of the Series A Preferred Stock and the parity securities, pro rata,
based on the respective liquidation
31
<PAGE>
amounts to which each such series of stock is entitled by the Company's Articles
of Incorporation and the Certificate of Designation. Upon the completion of this
distribution, if assets remain in the Company, they shall be distributed to
holders of junior securities in accordance with the Company's Articles of
Incorporation including any duly adopted Certificate(s) of Designation. A
consolidation or merger of the Company with or into any other corporation or
corporations, or a sale, conveyance or disposition of all or substantially all
of the assets of the Company or the effectuation by the Company of a transaction
or series of related transactions in which more than 50% of the voting power of
the Company is disposed of, shall not be deemed to be a liquidation, dissolution
or winding up.
Voting Rights. The holders of the Series A Preferred Stock have no
voting rights except as otherwise required by Arizona statute.
Optional Conversion. The record holder of the Series A Preferred Stock
shall be entitled, subject to the Company's right of redemption and the
restrictions on conversion, to convert the shares held by such holder into that
number of fully-paid and nonassessable shares of the Common Stock at the
Conversion Rate as set forth below. The minimum number of shares of Series A
Preferred Stock that may be converted is the lesser of (i) two shares or (ii)
all of the holder's remaining shares. The number of shares of Common Stock to be
issued upon conversion of one share of Series A Preferred Stock is computed as
follows:
(8%)(N/365)(10,000) + 10,000
----------------------------
Conversion Price
where
N = the number of days between (i) the date that, in connection with the
consummation of the initial purchase of the Series A Preferred Stock from the
Company, the escrow agent first had in its possession funds representing full
payment for the Series A Preferred Stock for which conversion is being elected,
and (ii) the Date of Conversion;
Conversion Price = the lesser of (x) $7.75, or (y) 85% of the average Closing
Bid Price, as that term is defined below, of the Company's Common Stock for the
ten trading days immediately preceding the Date of Conversion. For purposes
hereof, the term "Closing Bid Price" shall mean the closing bid price of the
Company's Common Stock as reported by Nasdaq (or, if not report by Nasdaq, as
reported by such other exchange or market where traded).
Restrictions on Conversion. No shares of Series A Preferred Stock may
be converted prior to August 20, 1996. Thereafter, each holder of Series A
Preferred Stock may convert one-third of such shares on or after August 20,
1996, an additional one-third on or after September 19, 1996, and all additional
remaining shares on or after October 19, 1996. All conversions are also subject
to the Company's right of redemption, as described below.
Automatic Conversion. The shares shall automatically be converted into
Common Stock (in accordance with the conversion price provisions above) on June
21, 1999.
Redemption at Option of Company. In the event the Conversion Price of
the Company's Common Stock is less than $7.75, the Company shall have the right,
in its sole discretion, upon receipt of a Notice of Conversion, to redeem in
whole or in part any Series A Preferred Stock submitted for conversion. If the
Company elects to redeem some, but not all, of the Series A Preferred Stock
submitted for conversion, the Company shall redeem from among the Series A
Convertible Preferred Stock submitted for conversion on the applicable date, a
pro-rata amount from each shareholder submitting Series A Preferred Stock for
conversion. The redemption price shall equal the sum of the Conversion Price.
At any time after June 22, 1997, the Company has the right to redeem
the Series A Preferred Stock in increments of $1.5 million by giving 30 business
days written notice of its intention to do so. The redemption price per share of
Series A Preferred Stock shall be as follows:
32
<PAGE>
130% of Stated Value 12 months and 1 day - 18 months
125% of Stated Value 18 months and 1 day - 24 months
120% of Stated Value 24 months and 1 day - 30 months
115% of Stated Value 30 months and 1 day - 36 months
"Stated Value" shall equal $10,000 plus 8% of $10,000 per annum for the
period that has passed since the date that the escrow agent first had possession
of funds representing full payment for the redeemed shares.
Statutory Provisions Affecting Persons Who Acquire a Substantial Amount of the
Company's Securities
Upon completion of this offering, the Arizona Corporate Takeover Act
(Arizona Revised Statues Sections 10-1201 et seq.) will apply to the Company.
The Arizona Corporate Takeover Act includes certain protections for corporations
to ward off or prevent unfriendly corporate takeover attempts by third parties.
The Arizona Corporate Takeover Act is comprised of three articles: Article 1,
which deals with, among other things, greenmail; Article 2, which deals with
voting rights of Acquiring Persons (as defined below); and Article 3, which
deals with Business Combinations (as defined below). Each one of these articles
is discussed in more detail below. Arizona corporations may "opt out" of the
provisions of Articles 2 and/or 3 of the Arizona Corporate Takeover Act by
amending their articles of incorporation or bylaws to state that they will not
be governed by Articles 2 and/or 3 of the Arizona Corporate Takeover Act.
The Company is presently subject to Articles 1, 2, and 3 of the Arizona
Corporate Takeover Act.
Greenmail
The Arizona Corporate Takeover Act prohibits the Company from
purchasing any shares of capital stock from any beneficial owner of more than
five percent of the voting power of the Company (the "5% Owner") at a per share
price in excess of the "average market price" (during the 30 trading days prior
to the purchase), unless the 5% Owner beneficially owned his or her shares for
three years or more or unless the purchase is approved by the Company's
shareholders (excluding the 5% Owner). Shareholder approval is not required for
such purchases if the offer is made available on the same terms to all holders
of shares of capital stock.
Voting Rights
Under the Arizona Corporate Takeover Act, within ten days after a
Control Share Acquisition (as defined below), an Acquiring Person is required to
deliver to the Company an information statement containing, among other things,
his or her identity, the number of shares beneficially owned or proposed to be
acquired by the Acquiring Person, the terms of the Control Share Acquisition and
the Acquiring Person's plans for the Company such as a merger of the Company,
the liquidation of the Company, a change of location of its principal executive
office, a change in management, or a change in the business activity to be
conducted by the Company.
The shares acquired by the Acquiring Person will be entitled to the
same voting rights as shares held by other persons only with respect to
elections of directors. Unless the Company's shareholders approve greater voting
rights, the shares acquired by the Acquiring Person in excess of the percentage
contained in the definition of Control Share Acquisition below will not be
entitled to voting rights on any other matters (until such time as they are
transferred to a person that is not an Acquiring Person).
Provided that the Acquiring Person has entered into a definitive
financing agreement pursuant to which the Acquiring Person will obtain the
necessary third-party funds to finance the Control Share Acquisition, and has
delivered a copy thereof to the Company, the Acquiring Person may require the
Company to call a special meeting of the Company's shareholders for the purpose
of considering the voting rights to be accorded to the shares acquired by the
Acquiring Person. Alternatively, this matter may be determined at the next
special or annual meeting of the Company's shareholders. The affirmative vote of
the holders of a majority of the voting power of all shares,
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<PAGE>
excluding shares owned by the Acquiring Person and by the Company's directors
and officers, will be required with respect to this issue.
The Company may redeem the shares acquired by the Acquiring Person at a
price equal to their fair market value if the Acquiring Person has not delivered
an information statement to the Company within the required time period or if
the Company's shareholders have voted not to accord the Acquiring Person's
acquired shares voting rights.
A "Control Share Acquisition" is defined generally as an acquisition
(direct or indirect) by a person of beneficial ownership of shares of the
Company that would, when added to other shares of the Company beneficially owned
by such person, entitle such person, immediately after the acquisition, to
exercise or direct the exercise of a new range of voting power, such ranges
being (a) at least 20%, but less than 33 1/3%; (b) at least 33 1/3%, but less
than or equal to 50%; and (c) more than 50%. Certain exceptions from these
requirements are specified by law. An acquisition of shares from the Company
would not constitute a Control Share Acquisition.
An "Acquiring Person" is defined generally as a person that makes or
proposes to make a Control Share Acquisition, together with such person's
affiliates and associates. If any persons are acting together or in concert for
such purpose, each such person constitutes an Acquiring Person.
Business Combinations
Under the Arizona Corporate Takeover Act, the Company may not engage in
any Business Combination, or authorize any subsidiary to engage in any Business
Combination, with an Interested Shareholder (as defined below) or any affiliate
or associate of an Interested Shareholder for a period of three years after the
date that the Interested Shareholder first acquired the shares of Common Stock
that qualify him or her as an Interested Shareholder, unless either the Business
Combination or the Interested Shareholder's acquisition of shares is approved by
a committee of the Company's Board of Directors before the Interested
Shareholder first acquired the shares that qualify him or her as an Interested
Shareholder. Certain exceptions from these requirements are specified by law.
The committee making such determination must be comprised of disinterested
directors or other persons, excluding expressly the Interested Shareholder and
officers and employees of the Company.
In addition, the Company may not engage in any Business Combination, or
authorize any subsidiary to engage in any Business Combination, with an
Interested Shareholder or any affiliate or associate of an Interested
Shareholder after such three-year period unless the Business Combination is
approved by the Company's shareholders (excluding the Interested Person) at a
meeting called after such three-year period or unless the Business Combination
satisfies each of certain statutory requirements (including, among other things,
(a) the per share consideration to be received by all shareholders is at least
equal to the greater of, generally, the price paid by the Interested Shareholder
to purchase his or her shares (plus interest), the market value of the shares on
the date that the Interested Shareholder acquired his or her stock (plus
interest) and the market value of the shares on the date of the announcement of
the Business Combination (plus interest), and (b) except under certain
circumstances, the Interested Shareholder has not acquired any additional shares
during such three-year period).
A "Business Combination" is defined generally as (a) a merger,
consolidation or share exchange between the Company and an Interested
Shareholder or a corporation or other entity that, as a result of such
transaction, would become an Interested Shareholder; (b) a sale, lease or other
disposition (in one transaction or a series of transactions) to or with an
Interested Shareholder of the Company's assets, provided that the assets have an
aggregate market value equal to ten percent or more of the aggregate market
value of the Company's assets or of the aggregate market value of the Company's
outstanding stock or the assets represent ten percent or more of the Company's
revenues or net income; (c) the issuance or transfer to an Interested
Shareholder of shares of the Company's (or a subsidiary) stock (in one
transaction or a series of transactions) that have an aggregate market value
equal to five percent or more of the aggregate market value of the Company's
outstanding stock; (d) the adoption of any plan or proposal for the liquidation
or dissolution of the Company, or any reincorporation of the
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<PAGE>
Company in another state, proposed by or pursuant to an agreement with an
Interested Shareholder; (e) any reclassification of securities (including stock
dividends and stock splits) or other distribution of shares with respect to
shares of the Company's capital stock, recapitalization of the Company, merger
or other transaction, whether or not involving an Interested Shareholder, that
has the direct or indirect effect of increasing the proportionate share of the
outstanding shares of the Company that is owned, directly or indirectly, by the
Interested Shareholder or (f) any receipt by an Interested Shareholder (other
than on a proportionate basis as a shareholder of the Company) of the direct or
indirect benefit of any loan or other financial assistance or tax advantage
provided by or through the Company.
An "Interested Shareholder" is defined generally as any person (other
than the Company and its subsidiaries) that either (a) beneficially owns ten
percent or more of the voting power of the outstanding shares of the Company or
(b) is an affiliate or associate of the Company and who, at any time within the
three-year period preceding the transaction, was the beneficial owner of ten
percent or more of the voting power of the outstanding shares of the Company,
together with such person's affiliate and associates.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American
Securities Transfer, Inc., Denver Colorado.
Shares Eligible For Future Sale
Of the 5,015,313 shares of Common Stock currently outstanding,
3,415,313 shares will be deemed to be "restricted securities" as that term is
defined under Rule 144 promulgated under the Securities Act, in that such shares
were sold by the Company in private transactions not involving a public
offering.
Generally, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, after at least two years have elapsed from the sale by the Company
of the restricted securities, may sell, within any three-month period, a number
of shares of restricted securities that does not exceed the greater of 1% of the
total number of outstanding shares of the same class, or, if the Common Stock is
quoted on Nasdaq or a stock exchange, the average weekly trading volume during
the four calendar weeks preceding the sale. After a period of three years has
elapsed from the date of sale of the restricted securities by the Company, any
person who has not been an affiliate of the Company for at least three months is
entitled to sell such restricted shares under Rule 144 without regard to any of
the above limitations.
Of the outstanding shares of Common Stock, 1,756,178 are available for
sale in the public market pursuant to Rule 144, subject to certain restrictions.
The Company, its affiliates, executive officers, and directors have agreed not
to sell or assign, or transfer any of their shares of Common Stock, including
any shares acquired by the exercise of options or warrants, until December 15,
1996, without the IPO Underwriter's prior written consent.
In addition, 129,898 shares of Common Stock, which were converted from
Series A Preferred Stock sold in an overseas offering prior to the date of this
Prospectus, and such additional shares as may be issued upon future conversions
of Series A Preferred Stock, have been included in the Registration Statement of
which this Prospectus forms a part. 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 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.
The IPO Underwriter has been granted warrants to purchase 90,000 shares
of Common Stock and 45,000 Warrants.
35
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock offered hereby may be sold by the Selling Shareholders
or by pledgees, donees, transferees or other successors-in-interest (including
sales after exercise of conversion privileges or warrants). Such sales may be
made in the over-the-counter market through the Nasdaq Stock Market, in
privately negotiated transactions, or otherwise, at prices and at terms then
prevailing, at prices related to the then current market prices or at negotiated
prices. The Common Stock may be sold by one or more of the following methods:
(a) a block trade in which the broker or dealer so engaged will attempt to sell
the stock as agent but may position and resell a portion of the block as
principal in order to consummate the transaction; (b) a purchase by a broker or
dealer as principal, and the resale by such broker or dealer for its account
pursuant to this Prospectus, including resale to another broker or dealer; or
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers or dealers engaged by a Selling
Shareholder may arrange for other brokers or dealers to participate. Any such
brokers or dealers will receive commissions or discounts from a Selling
Shareholder in amounts to be negotiated immediately prior to the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, as
amended. Any gain realized by such a broker or dealer on the sale of shares
which it purchases as a principal may be deemed to be compensation to the broker
or dealer in addition to any commission paid to the broker by a Selling
Shareholder.
The securities covered by this Prospectus may in the future also be
sold under Rule 144 instead of under this Prospectus. Rule 144 provides an
exemption from registration for the resale of securities by persons other than
the issuer after the securities have been held by persons for at least two years
from original issuance, and such securities are sold in strict compliance with
Rule 144 "Manner of Sale" requirements and maximum number of shares
requirements. The Company will not receive any portion of the proceeds of the
securities sold by the Selling Shareholders, but will receive amounts upon
exercise of Warrants, which funds will be used for working capital. There is no
assurance that warrantholders will exercise any or all of the Warrants or that
the Selling Shareholders will sell any or all of the shares offered hereby.
The Selling Shareholders have been advised by the Company that during
the term each is engaged in distribution of the securities covered by this
Prospectus, each must comply with Rules 10b-5 and 10b-6 under the Securities
Exchange Act of 1934, as amended, and pursuant thereto: (i) each must not engage
in any stabilization activity in connection with the Company's securities; (ii)
each must furnish each broker through which securities covered by this
Prospectus may be offered the number of copies of this Prospectus which are
required by each broker; and (iii) each must not bid for or purchase any
securities of the Company or attempt to induce any person to purchase any of the
Company's securities other than as permitted under the Securities Exchange of
1934, as amended. Any Selling Shareholders who may be "affiliated purchasers" of
the Company as defined in Rule 10b-6, have been further advised that pursuant to
Securities Exchange Act Release 34-23611 (September 11, 1986), they must
coordinate their sales under this Prospectus with each other and the Company for
purposes of Rule 10b-6. The Company has agreed to indemnify certain selling
shareholders and other selling shareholders against certain liabilities,
including certain liabilities under the Securities Act of 1933, and, to the
extent any indemnification by an indemnifying party is prohibited or limited by
law, the Company has agreed to make the maximum contribution with respect to
extent permitted by law.
SELLING SHAREHOLDERS
Up to 7,859,508(1) shares of Common Stock may be offered by 26 Selling
Shareholders who acquired such shares in the Company's June 1996 private
placement of Series A Preferred Stock.
The following table sets forth certain information with respect to
holders for whom the Company is registering these shares for resale to the
public. None of the Selling Shareholders has held any position or office
36
<PAGE>
or has had a material relationship with the Company or any of its affiliates
within the past three years. Except as set forth below, the Company believes
that none of the holders listed below owns any other equity securities of the
Company. The Company will not receive any of the proceeds from the sale of these
shares by the Selling Shareholders.
<TABLE>
<CAPTION>
Number of
Number of Shares
Shares Beneficially
Beneficially Number of Shares Owned After the
Name Owned(1) Being Sold(1)(2) Offering
- ---- ------------ ---------------- ---------------
<S> <C> <C> <C>
AG Super Fund International 82,645 82,645 0
Partners L.P.(1)(3)
Banque Scandinave En Suisse(1)(4) 619,835 619,835 0
Cameron Capital Ltd.(1)(5) 1,239,669 1,239,669 0
Carousel Investments, Inc.(1)(6) 82,645 82,645 0
Cummins Investments Ltd.(1)(7) 247,934 247,934 0
Darissco Diversified Investments 123,967 123,967 0
Inc.(1)(8)
GAM Arbitrage Investments, 165,289 165,289 0
Inc.(1)(9)
Gracechurch & Co.(1)(10) 785,124 785,124 0
Gundyco in Trust for RRSP 550- 247,934 247,934 0
98866-19(1)(11)
KA Investments LDC(1)(12) 165,289 165,289 0
Lake Management LDC(1)(13) 247,934 247,934 0
Leib Stein(1)(14) 82,645 82,645 0
Leonardo, L.P.(1)(15) 867,769 867,769 0
Maslo Fund Ltd.(1)(16) 206,612 206,612 0
Raphael, L.P.(1)(17) 123,967 123,967 0
RIC Investment Fund Ltd.(1)(18) 330,579 330,579 0
Star High Yield Investment 82,645 82,645 0
Management(1)(19)
The Gifford Fund Ltd.(1)(20) 413,223 413,223 0
The Matthew Fund N.V.(1)(21) 247,934 247,934 0
The Otato Limited Partnership(1)(22) 173,554 173,554 0
The Tail Wind Fund Ltd.(1)(23) 289,256 289,256 0
Trustees (IFM Pension Plan 82,645 82,645 0
Ltd.)(1)(24)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Number of
Number of Shares
Shares Beneficially
Beneficially Number of Shares Owned After the
Name Owned(1) Being Sold(1)(2) Offering
- ---- ------------ ---------------- ---------------
<S> <C> <C> <C>
West Merchant Bank Nominees 206,612 206,612 0
Ltd.(1)(25)
Windward Island Limited(1)(26) 82,645 82,645 0
Wood Gundy in Trust for RRSP 550 247,934 247,934 0
99119(1)(27)
Wood Gundy London Ltd.(1)(28) 413,223 413,223 0
--------- --------- ------
Total 7,859,508 7,859,508 0
========= ========= ======
</TABLE>
- ------------------------
(1) Represents shares issuable upon the conversion of shares of Series A
Preferred Stock assuming a conversion price of $1.21, without giving
effect to the issuance of shares as a result of any accretion. The
actual conversion price may be higher or lower than $1.21 and the
amount of accretion will vary, depending upon the period over which
Series A Preferred Stock is outstanding. Thus, the number of shares
actually issued pursuant to the conversion of shares of Series A
Preferred Stock for any one Selling Stockholder may be higher or lower
than the number set forth in the table. See "Description of Capital
Stock - Series A Preferred Stock."
(2) The Company is paying all costs associated with registration.
(3) Includes shares issuable upon the conversion of 10 shares of Series A
Preferred Stock.
(4) Includes shares issuable upon the conversion of 75 shares of Series A
Preferred Stock.
(5) Includes shares issuable upon the conversion of 150 shares of Series A
Preferred Stock.
(6) Includes shares issuable upon the conversion of 10 shares of Series A
Preferred Stock.
(7) Includes shares issuable upon the conversion of 30 shares of Series A
Preferred Stock.
(8) Includes shares issuable upon the conversion of 15 shares of Series A
Preferred Stock.
(9) Includes shares issuable upon the conversion of 20 shares of Series A
Preferred Stock.
(10) Includes shares issuable upon the conversion of 95 shares of Series A
Preferred Stock.
(11) Includes shares issuable upon the conversion of 30 shares of Series A
Preferred Stock.
(12) Includes shares issuable upon the conversion of 20 shares of Series A
Preferred Stock.
(13) Includes shares issuable upon the conversion of 30 shares of Series A
Preferred Stock.
(14) Includes shares issuable upon the conversion of 10 shares of Series A
Preferred Stock.
(15) Includes shares issuable upon the conversion of 105 shares of Series A
Preferred Stock.
(16) Includes shares issuable upon the conversion of 25 shares of Series A
Preferred Stock.
(17) Includes shares issuable upon the conversion of 15 shares of Series A
Preferred Stock.
(18) Includes shares issuable upon the conversion of 40 shares of Series A
Preferred Stock.
(19) Includes shares issuable upon the conversion of 10 shares of Series A
Preferred Stock.
(20) Includes shares issuable upon the conversion of 50 shares of Series A
Preferred Stock.
(21) Includes shares issuable upon the conversion of 30 shares of Series A
Preferred Stock.
(22) Includes shares issuable upon the conversion of 21 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 10 shares of Series A
Preferred Stock.
(25) Includes shares issuable upon the conversion of 25 shares of Series A
Preferred Stock.
(26) Includes shares issuable upon the conversion of 10 shares of Series A
Preferred Stock.
(27) Includes shares issuable upon the conversion of 30 shares of Series A
Preferred Stock.
(28) Includes shares issuable upon the conversion of 50 shares of Series A
Preferred Stock.
38
<PAGE>
This Registration Statement shall also cover additional shares of
Common Stock which become issuable in connection with the shares registered for
sale hereby by reason of any stock dividend, stock split, recapitalization or
other similar transaction effected without the receipt of consideration which
results in an increase in the number of the Company's outstanding shares of
Common Stock.
On June 17, 1996, the Company entered into Subscription Agreements with
each of the Selling Stockholders who participated in the Private Placement
pursuant to which such persons purchased an aggregate of 1,051 shares of Series
A Preferred Stock. Each person that purchased Preferred Stock pursuant to a
Subscription Agreement represented to the Company that it would acquire the
shares for investment and with no present intention of distributing any of such
shares except pursuant to this Prospectus. Pursuant to the Subscription
Agreements, the Company agreed to file, and has filed, with the Commission,
under the Act, a Registration Statement on Form SB- 2, of which this Prospectus
forms a part, with respect to the resale of the shares and agreed to use its
best efforts to keep such Registration Statement effective until such date as
all of the shares have been resold, or such time as all of the shares held by
the Selling Stockholders can be sold immediately without compliance with the
registration statement of the Securities Act pursuant to Rule 144.
In May 1996, the Company engaged Swartz Investments to advise the
Company in connection with the structure, terms, and conditions of a preferred
stock offering and to introduce the Company to potential investors. In
consideration for their services, Swartz Investments was paid a placement fee of
$630,600 plus a non-accountable expense allowance of $210,200 for its expenses,
including legal expenses, in connection with the offering and also issued to
persons affiliated with Swartz Investments warrants to purchase 108,490 shares
of Common Stock. Such warrants are exercisable for a term of five years at $7.75
per share of Common Stock. The Company has also agreed to indemnify Swartz
Investments against certain liabilities, including liabilities under the
Securities Act.
In connection with the offering made hereby, the Company and the
Selling Stockholders have entered into an agreement that contains certain
indemnity and contribution provisions between the Company and such Selling
Stockholders against certain liabilities, including liabilities arising under
the Securities Act.
LEGAL OPINIONS
Certain legal matters with respect to the shares of Common Stock
offered hereby will be passed upon for the Company by O'Connor, Cavanagh,
Anderson, Killingsworth & Beshears, a Professional Association, Phoenix,
Arizona.
EXPERTS
The financial statements of SC&T International, Inc. included in this
Prospectus and the Registration Statement have been audited by Toback CPAs,
P.C., independent certified public accountants, to the extent and for the
periods indicated in their reports appearing elsewhere herein and are included
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.
39
<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
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation, not contained in this Prospectus, and, if given or made, . such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities covered by this Prospectus
in any jurisdiction or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company or that the information contained
herein is correct as of any date subsequent to the date hereof.
---------------
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ....................................................... 3
RISK FACTORS ............................................................. 5
DIVIDEND POLICY .......................................................... 11
USE OF PROCEEDS .......................................................... 11
PRICE RANGE OF COMMON STOCK .............................................. 11
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS .............................................................. 12
BUSINESS ................................................................. 15
MANAGEMENT ............................................................... 22
CERTAIN TRANSACTIONS ..................................................... 26
PRINCIPAL SHAREHOLDERS ................................................... 28
DESCRIPTION OF SECURITIES ................................................ 29
PLAN OF DISTRIBUTION ..................................................... 36
SELLING SHAREHOLDERS ..................................................... 36
LEGAL OPINIONS ........................................................... 39
EXPERTS .................................................................. 39
INDEX TO FINANCIAL STATEMENTS ............................................ F-1
================================================================================
SC&T International, Inc
8,000,764 Shares of
Common Stock
----------
PROSPECTUS
----------
____________, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Arizona law, the Registrant is empowered, under certain
circumstances, to indemnify the directors, officers, employees, and agents of
the Registrant. Section 10-851 of the Arizona Business Corporation Act
authorizes the Registrant, generally, to indemnify directors, officers,
employees, and agents against expenses and liabilities (including amounts paid
in settlement) in connection with any lawsuit or proceeding involving any such
director, officer, employees, or agents if he or she acted, or failed to act, in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Registrant and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. However, if the lawsuit is by or in the right of the
Registrant (a shareholders' derivative suit on behalf of the Registrant), no
director, officer, employee, or agent can be indemnified against judgments or
amounts paid in settlement, and no indemnification for expenses may be made with
respect to any claim, issue or matter as to which such director, officer,
employee, or agent shall have been adjudged to be liable to the Registrant
(unless a court determines that indemnification is appropriate for reasonable
expenses incurred).
Under Arizona law, unless ordered by a court, indemnification pursuant
to the foregoing may only be made by the Registrant as authorized in a specific
case upon a determination that indemnification is proper under the circumstances
because the director, officer, employee, or agent has met the applicable
standard of conduct. Such determination shall be made generally (i) by the Board
of Directors of the Registrant, acting by a majority vote of a quorum consisting
of directors who were not parties to the lawsuit or proceeding; (ii) by
independent legal counsel appointed by a majority of the disinterested directors
for that purpose or, if there are no disinterested directors, then as selected
by majority vote of the Board of Directors; or (iii) by the shareholders.
In addition, under Arizona law, the Registrant is required, unless
limited by its Articles, to (i) indemnify a director or officer of the Company
against reasonable expenses incurred by the officer or director in connection
with any lawsuit or proceeding if such director or officer has been successful
on the merits or otherwise in the defense of such lawsuit or proceedings and
(ii) indemnify, subject to certain conditions, outside directors against
liability and pay an outside director's expenses in advance of a final
disposition of a proceeding. The Registrant may advance or pay expenses incurred
by a director, officer, employee, or agent in defense of any such lawsuit or
proceeding upon the receipt of (i) a written affirmation from the director,
officer, employee, or agent of such person's good faith belief that he or she
has met the applicable standard of conduct; (ii) an undertaking by or on behalf
of such director, officer, employee, or agent to repay such amount if it is
ultimately determined that he or she is not entitled to be indemnified by the
Registrant; and (iii) a determination is made that the facts then known would
not preclude indemnification under Arizona law.
Pursuant to Arizona law, the Company's Articles of Incorporation
provide that the Company shall indemnify any person who incurs liability or
expense by such person acting as an officer or director of the Company. However,
the Registrant's Articles of Incorporation do not permit indemnification or
advancement of expenses with respect to any action, suit, or proceeding whether
civil, criminal, administrative, or investigative ("Proceeding"), or any claims
therein brought or made by him or her against the Registrant, unless such
Proceeding or claim is approved by the Board of Directors of the Registrant.
The Registrant maintains directors' and officers' liability insurance.
Arizona law does not permit the elimination of liability for (a) the
amount of a financial benefit received by the director to which the director is
not entitled; (b) an intentional infliction of harm on the Company or its
shareholders; (c) certain unlawful distributions to shareholders; and (d) an
intentional violation of criminal law.
II-1
<PAGE>
The effect of this provision in the Articles of Incorporation is to eliminate
the rights of the Registrant and its shareholders (through shareholders'
derivative suits on behalf of the Registrant) to recover monetary damages
against a director for breach of fiduciary duty as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (a) through (d) above. This provision will not
alter the liability of directors under federal securities laws.
Pursuant to the terms of Registration Rights Agreements between the
Registrant and each of the Selling Shareholders, the directors and officers of
the Company also are indemnified against certain civil liabilities that they may
incur under the Securities Act in connection with this offering. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to officers, directors, or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The expenses incurred or to be incurred in connection with the
preparation and filing of this Registration Statement are estimated to be as
follows:
Printing and engraving expenses........................ $ 10,000*
Registration and NASD filing fees ..................... 10,838*
Legal fees and expenses ............................... 12,000*
Accounting fees and expenses........................... 3,500*
Miscellaneous.......................................... 5,662*
--------
Total............................................. $ 42,000
========
*Estimated
Item 26. Recent Sales of Unregistered Securities.
In connection with its incorporation and initial organization in 1993,
the Company issued and sold an aggregate of 1,677,870 shares of Common Stock to
James L. Copland in exchange for cash, equipment, and past services valued at
$31,918, without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption from registration provided by
Sections 3(a)(11) and/or 4(2) of the Securities Act.
In April 1995, the Company issued and sold an aggregate of 2,000,000
shares of Common Stock to Maraval and Associates, Bauman, Ltd., Robert Adams,
Caspian Consulting, Ltd., Roddy Diprimo, Ltd., Umbiquity Holdings, S.A. and
Thomas Vittor for a total of $1,500,000 in cash, without registration under the
Securities Act, in reliance upon the exemptions from registration provided by
Section 4(2) of the Securities Act.
In April 1995, the Company issued an aggregate of 8,000 shares of
Common Stock to Ronald Fry and Leonard Vitiritto for a total of $20,000
represented by notes payable from the Company without registration under the
Securities Act in reliance upon the exemption from registration provided by
Sections 4(2) and/or 4(6) of the Securities Act.
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., without registration under
the Securities Act, in reliance upon exemptions from registration provided by
Sections 3(a)(3) and/or 4(2) of the Securities Act.
II-2
<PAGE>
In August and September 1995, the Company issued and sold $875,000 in
principal amount of 8% subordinated notes and 87,500 shares of Common Stock to
Andrew and Tracy Krantz, Italo Renauld, Richard H. Davimos, TTEE UAD 5/12/92 FBO
Richard H. Davimos, Frank Quinn, Ileana Brown, Toby Miller, Ken Kirschenbaum,
William Clark, Neil L. Bellett, Laura Quinn, Larry R. Kuhnert and Jackie L.
Kuhnert, Don Brennan, Timothy Gulla, John F. McKinney, John Hunter, Sally
Hauser, Romilda Abramo, Donald E. Millard, Donna Browning and Walter Browning,
and Richard Jay Rasmussen without registration under the Securities Act in
reliance upon exemptions from registration provided by Sections 3(a)(3) and/or
4(2) of the Securities Act.
In February and September 1995, and August 1996, the Company issued
options to purchase 793,500 shares of Common Stock to certain employees of the
Company and its wholly owned subsidiary under the Company's Stock Option Plan.
The options are exercisable at a price ranging from $1.00 per share to $5.70 per
share. The options were issued without registration under the Securities Act in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act and/or Rule 701 promulgated thereunder.
In September 1995, the Company issued and sold 15,822 of Common Stock
to James L. Copland in partial payment of amounts owed to Mr. Copland, such
portion valued at $15,822, without registration under the Securities Act, in
reliance upon the exemptions from registration provided by Sections 3(a)(11)
and/or 4(2) of the Securities Act.
In June 1996 the Company issued 22,915 shares of Common Stock to Atom &
Associates, Inc. Upon exercise of a stock option, without registration under the
Securities Act in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
In June 1996, the Company issued 1,051 shares of Series A Preferred
Stock to 28 non-U.S. persons at a price of $10,000 per share and 108,490 options
to representatives of the Placement Agent. The shares and options were issued
without registration under the Securities Act in reliance upon exemptions from
registration provided by Section 4(2) of the Securities Act and/or Regulation S
promulgated thereunder.
Item 27. Exhibits.
(a) The following exhibits to this Registration Statement are filed
herewith:
1.1+ Form of Underwriting Agreement
1.2+ Form of Selling Agreement
1.3+ Form of Underwriter's Warrants
1.4+ Form of Warrant Agreement
3.1+ Restated Articles of Incorporation
3.2+ Bylaws
4.1* Form of Certificate evidencing shares of Common Stock
4.2* Form of Certificate evidencing Stock Purchase Warrant
4.3* Certificate of Designation of Series A Preferred Stock
4.4* Form of Certificate evidencing Series A Preferred Stock
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth
& Beshears, P.A.
10.1+ Lease Agreement between the Company and LaSalle
Business Properties, dated February 1, 1994
10.2+ Lease Agreement between Westex N.V. and Marc Devers and
Rudi Devers
10.3+ Form of Employment Agreement between the Company and
James L. Copland dated September 1, 1995
10.4+ Deleted
10.5+ Stock Option Plan
10.6+ Form of Option Agreement
10.7+ Agreement between the Company and Sound Retrieval
System dated March 31, 1995
10.8+ Agreement between the Company and Design Continuum, Inc.
dated June 8, 1995
II-3
<PAGE>
10.9+ Agreement between the Company and Design Continuum, Inc.
dated October 13, 1995
10.10* Exclusive Distribution Agreement between the Company and
Home Arcade Systems, Inc. dated December 29, 1995
10.11* Exclusive Purchase and Manufacturing Agreement between
the Company and Home Arcade Systems, Inc. dated March
19, 1996
21.0 Subsidiaries of the Registrant
23.1 Consent of Toback CPAs, P.C.
23.2 Consent of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. (included as Exhibit 5.1 hereto)
24.0 Powers of Attorney of Directors and Executive Officers
(included on the Signature Page of the Registration
Statement)
+ Filed previously as an exhibit to Registration Statement Number 33-96812 LA.
* To be filed by Amendment.
(b) All financial statement schedules that might otherwise be required
to be filed as part of this Registration Statement have been omitted because the
required information is shown in the financial statements or notes thereto, the
amounts involved are not significant, or the schedules are not applicable.
Item 28. Undertakings.
(a) The small business issuer will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(d) The small business issuer hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer, or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(f) The small business issuer will:
(1) For determining any liability under the Securities
Act, treat the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430(A) and contained in a
form of prospectus filed by the small business issuer pursuant to Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the date the Commission declared it effective.
(2) For determining any liability under the Securities
Act, treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to believe the
registrant meets all of the requirements of filing on Form SB-2 and authorizes
this registration statement to be signed on its behalf by the undersigned, in
the City of Phoenix, State of Arizona, on September 23, 1996.
SC&T International, Inc.
By: /s/ James L. Copland
----------------------------------------------
James L. Copland
President, Treasurer, Chief Executive Officer,
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints jointly and severally, James L.
Copland and Catherine Copland, and each one of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including pre-effective and
post-effective amendments) to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all which said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do, or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of
1933, this registration statement was signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James L. Copland President, Treasurer, Chief Executive Officer, September 23, 1996
- -------------------------- and Director
James L. Copland
/s/ Catherine Copland Assistant Secretary and Director September 23, 1996
- --------------------------
Catherine Copland
/s/ Timothy J. Stocker Vice President of Finance, Chief Financial Officer September 23, 1996
- -------------------------- and Secretary
Timothy J. Stocker
/s/ Harry G. Wilson Director September 23, 1996
- --------------------------
Harry G. Wilson
/s/ Tommie E. Moxley Director September 23, 1996
- --------------------------
Tommie E. Moxley
</TABLE>
II-6
EXHIBIT 5.1
Opinion of O'Connor Cavanagh
[O'CONNOR CAVANAGH LETTERHEAD]
September 25, 1996
SC&T International, Inc.
3837 East LaSalle Street
Phoenix, Arizona 85040
Re: SC&T International, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
As legal counsel to SC&T International, Inc., an Arizona
corporation (the "Company") we have assisted in the preparation of the Company's
Registration Statement on Form SB-2 (the "Registration Statement"), to be filed
with the Securities and Exchange Commission (the "Commission") on or about
September 20, 1996, in connection with the registration by the Company under the
Securities Act of 1933, of the Company's shares of common stock, par value $.01
per share, issuable upon conversion of the Company's Series A Preferred Stock,
that may be sold from time to time by certain selling shareholders (the
"Shares"). The facts, as we understand them, are set forth in the Registration
Statement.
With respect to the opinions set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The Amended and Restated Articles of Incorporation of
the Company, as filed with the Arizona Corporation
Commission on November 3, 1994 and the Articles of
Amendment to the Articles of Incorporation of the
Company, as filed with the Arizona Corporation
Commission on October 30, 1995;
B. The Certificate of Designation of Series A Preferred
Stock, as filed with the Arizona Corporation
Commission on June 17, 1996 ("Certificate of
Designation");
C. The Amended and Restated Bylaws of the Company;
<PAGE>
SC&T International, Inc.
September 25, 1996
Page 2
D. The Registration Rights Agreement dated as of June
17, 1996, by and among the Company and the
subscribers of the Company's Series A Preferred Stock
(the "Registration Rights Agreement");
E. The Registration Statement;
F. The Resolutions of the Board of Directors of the
Company relating to the approval of the Certificate
of Designation and the Registration Rights Agreement
and the transactions in connection therewith.
Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to the further limitations and qualifications set forth
below, it is our opinion that, when the Shares have been duly issued, executed,
authenticated, and delivered by the Company as described in the Registration
Statement and in accordance with the provisions of the Certificate of
Designation, the Shares will be validly issued, fully paid and nonassessable.
Please be advised that we are members of the State Bar of
Arizona, and our opinion is limited to the legality of matters under the laws of
the State of Arizona. Further, our opinion is based solely on existing laws,
rules and regulations, and we undertake no obligation to advise you of any
changes that may have been brought to our attention after the date hereof.
We hereby expressly consent to any reference to our firm in
the Registration Statement, inclusion of this opinion as an exhibit to the
Registration Statement, and to the filing of this opinion with any other
appropriate governmental agency.
Very truly yours,
LIST OF SUBSIDIARIES
SC&T Europe, NV
SC&T U.K., Ltd.
SC&T America, Inc.
EXHIBIT 23.1
[TOBACK CPAs, P.C. LETTERHEAD]
September 11, 1996
James L. Copland
SC & T International, Inc.
and Subsidiary
3837 East La Salle Street
Phoenix, AZ 85040
Dear Mr. Copland:
We consent to the use in this Registration Statement of SC & T Internationa,
Inc. and Subsidiary on Form SB-2 of our report dated August 20, 1996 appearing
in the Prospectus which is a part of this Registration Statement, and our
reports dated August 20, 1996 relating to the financial statement schedules
appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading, Selected Financial
Data and Experts in such Prospectus.
Very truly yours,
TOBACK CPAs, P.C.
/s/ TOBACK CPAs, P.C.
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