US SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
Commission File Number: 0-27382.
SC&T International, Inc.
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(Exact name of small business as specified in its charter)
Arizona 86-0737579
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(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
15695 North 83rd Way, Scottsdale, Arizona 85260
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(Address of principal executive offices)
(602) 368-9490
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 23,135,263 shares of Common
Stock, par value $0.01 per share.
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
1
<PAGE>
SC&T INTERNATIONAL, INC.
------------------------
AND SUBSIDIARY
--------------
Page
Part I Financial Information
Item 1 Financial Information
Consolidated Balance Sheet as of September 30, 1997 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1997 and September 30, 1996 5
Consolidated Statement of Shareholders' Equity for the Three
Months Ended September 30, 1997 6
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1997 and September 30, 1996 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis 11
Part II Other Information
Item 1 Litigation 16
Item 2 Change in Securities 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security-Holders 17
Item 5 Other Information 17
Item 6 Exhibits & Reports on Form 8-K 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 1997
ASSETS
Current assets:
Cash $ 460,729
Receivables 761,933
Inventory 2,699,347
Other current assets 226,316
----------
Total current assets 4,148,325
Product development costs, less accumulated amortization of $573,863 327,833
Property and equipment, less accumulated depreciation of $468,132 482,915
Other assets 158,266
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$5,117,339
==========
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 1997
UNAUDITED LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 168,425
Common stock payable 103,130
Accrued expenses 241,686
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Total current liabilities 513,241
----------
Commitments and contingencies -
Shareholders' equity:
Common stock, $0.01 par; authorized 25,000,000 shares;
23,135,263 shares issued and 22,940,823 shares
outstanding 231,353
Series A preferred stock, $0.01 par; authorized 5,000,000
shares; 718 shares issued and outstanding 7
Additional paid-in capital 14,932,461
Treasury stock - at cost, 194,440 shares (29,166)
Currency translation (74,539)
Accumulated deficit (10,456,018)
----------
Total shareholders' equity 4,604,098
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$5,117,339
==========
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1997 and 1996
1997 1996
------------ ------------
Net sales $ 1,070,785 $ 1,727,947
Cost of goods sold 959,156 1,178,717
------------ ------------
Gross profit 111,629 549,230
Selling, general and administrative expenses:
Payroll and payroll taxes 386,780 229,062
Selling and promotion 491,876 262,893
Office and administrative 395,811 149,432
Research and development 70,531 59,987
Consulting fees 72,839 36,653
Other 37,351 79,080
------------ ------------
1,455,188 817,107
------------ ------------
Loss from operations (1,343,559) (267,877)
Other income (expense):
Interest income 10,743 95,655
Interest expense (5,476) (17,642)
------------ ------------
Loss before income tax (1,338,292) (189,864)
Income tax expense -- --
------------ ------------
Net loss $ (1,338,292) $ (189,864)
============ ============
Net loss from operations per common share $ (0.06) $ (0.05)
============ ============
Net loss per common share $ (0.06) $ (0.04)
============ ============
Weighted average common shares outstanding 22,940,823 4,961,564
============ ============
The accompanying notes are an integral part of these
financial statements.
5
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended September 30, 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Treasury Stock
------------ --------------- paid-in -------------- Currency Accumulated
Shares Amount Shares Amount capital Shares Amount translation deficit
------ ------ ------ ------ ------- ------ ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 23,135,263 $231,353 718 $ 7 $14,932,461 (194,440) $(29,166) $(45,660) $ (9,117,726)
Currency translation - - - - - - - (28,879) -
Net loss - - - - - - - - (1,338,292)
---------- -------- --- ---- ----------- -------- -------- -------- ------------
Balance at September 30, 1997 23,135,263 $231,353 718 $ 7 $14,932,461 (194,440) $(29,166) $(74,539) $(10,456,018)
========== ======== === ==== =========== ======== ======== ======== ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
6
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,338,292) $ (189,864)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 107,206 50,534
(Increase) decrease in accounts receivable 1,288,515 (531,423)
Decrease in allowance for doubtful accounts 12,265 --
Increase (decrease) in inventories 435,255 (98,325)
Increase in advances on purchases of
inventory (313,871) (621,014)
Increase in other current assets -- (73,981)
Loan amortization 1,950 --
Increase in prepaid expenses (44,823) --
(Increase) decrease in other assets 463 (38,902)
Decrease in accounts payable (611,892) (246,971)
(Decrease) increase in accrued expenses 24,980 (65,404)
----------- -----------
Net cash used in operating activities (438,244) (1,815,350)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (109,412) (217,560)
Development costs (98,235) (122,113)
Loans to related parties -- 9,374
----------- -----------
Net cash used in investing activities (207,647) (330,299)
----------- -----------
Cash flows from financing activities:
Currency translation 50,127 (12,430)
Net borrowings under line of credit agreement -- 7,885
Principal payments on short-term debt -- (5,556)
Principal payments on long-term debt -- (1,266)
Proceeds from note payable, related party -- --
Net repayments on related party loans -- (29,166)
Net borrowings on notes payable, bank -- --
Preferred stock issuance costs -- (20,570)
Repayments to factor -- (121,368)
----------- -----------
Net cash (used in)provided by financing activities 50,127 (182,471
----------- -----------
Net decrease in cash (595,764) (2,328,120)
Cash, beginning of period 1,056,493 9,962,511
----------- -----------
Cash, end of period $ 460,729 $ 7,634,391
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
7
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Interim financial reporting:
The accompanying unaudited Consolidated Financial Statements for SC&T
International, Inc. (the "Company") have been prepared in accordance with the
generally accepted accounting principles for interim financial information and
the instructions to Form 10-QSB. Under a 10-Q filing, it is not necessary to
include all of the information and footnotes required in a 10-K filing. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented have been made. The results
of operations for the three month period ended September 30, 1997 is not
necessarily indicative of the operating results that may be expected for the
entire fiscal year ending June 30, 1998. These financial statements should be
read in conjunction with the Company's Form 10-KSB, which will be filed with the
Securities Exchange Commission in a few weeks. An amended 10-Q will be filed
after the 10-K filing, which will reflect any remaining adjustments to the
financial statements for the three months ended September 30, 1997.
Reclassification:
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Related party transactions:
Related party receivables:
The Company had 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. This note
was forgiven by the Board of Directors effective 7/1/97. The receivable balance
was $0 at September 30, 1997.
3. Common Stock:
On October 22, 1997, the Company's shares of common stock, which was
traded under the symbol SCTI, were delisted from the Nasdaq Small cap market.
This action was taken as a direct result of the Company's failure to meet the
filing requirement as stated in marketplace Rule 4310(c)(14). The failure to
meet the filing requirement was the result of the untimely resignation of the
Company's accounting firm, Toback & Company. This action by Toback & Company, as
noted by the Nasdaq, caused the delisting of the Company, and the Company will
pursue all legal options regarding Toback & Company's actions. The Company
followed the appropriate policy of Nasdaq by filing its form 8-K, began a search
9
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
for a new accounting firm, retaining Evers & Company, who is now working
diligently to complete the 10-K filing.
The Company has entered into agreements with the holders of 94% of the
Series A Preferred Stock whereby all of their shares of Series A preferred Stock
are tendered for conversion at a fixed conversion price of $1.00 per share (the
"Fixed Conversion"). The holders of Series A Preferred Stock waive all other
conversion rights which they may have pursuant to any agreement.
In addition to Fixed Conversion, the holders of Series A Preferred Stock will
also receive warrants to purchase one third (1/3) of the number of shares which
they receive pursuant to Section I of the Fixed Conversion at a price of $1.25,
subject to ordinary anti-dilution provisions (the "Warrant Shares"). The Warrant
Shares will be subject to ordinary registration rights and a warrant agreement
and registration rights agreement will be forwarded as promptly as is possible.
All such documents shall contain ordinary and reasonable terms, conditions,
presentations and warranties.
4. Commitments and contingencies:
Operating leases:
In October 1996, the Company purchased approximately 1.24 acres of
land located at the Scottsdale Airpark in Scottsdale, Arizona. The Company
completed construction of approximately 12,000 square feet of warehouse space
and approximately 6,000 square feet of executive office space in April 1997. The
Company has subsequently sold the facility on June 30, 1997 and effective July
1, 1997 leased the facility back from the buyer. The facility was sold by the
Company for a profit exceeding 20% of cost.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-QSB that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934,
including statements regarding the Company's "expectations," "anticipation,"
"intentions," "beliefs," or "strategies" regarding the future. Forward-looking
statements include statements regarding revenue, margins, expenses and earnings
analysis for the remainder of fiscal year 1998 and thereafter; future products
or product development; future research and development spending and the
Company's product development strategy; and liquidity and acticipated cash needs
and availability. All forward looking statements included in this document are
based on information available to the Company on the date of this Report, and
the Company assumes no obligation to update any such forward-looking statement.
It is important to note that the Company's actual results could differ
materially from those in such forward-looking statements.
Overview
SC&T International, Inc. (the "Company") was formed in June 1993. The
Company develops and markets accessory and peripheral products for the computer
and video game industries under its PLATINUM SOUND name. The Company's products
include sub-woofer and speaker sound enhancement 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-PC's. The Company's multimedia keyboards line
has been discontinued, in favor of a second generation product targeted at the
corporate market. This second generation, features an enhanced Voice Recognition
product, has been completed but at this time has not been introduced into the
market.
Since July 1993, the Company's monthly revenue has grown from
approximately $8,000 to approximately $ 448,000 in September, 1997. On December
31, 1994, the Company purchased SC&T Europe, a marketing and distribution
company located in Antwerp, Belgium. The Company, in an effort to reduce its
European operating costs, has consolidated its European distribution operations
into one central facility located in the United Kingdom in May 1997. The Company
formed SC&T Europe Limited, located in Portsmouth England. The Belgium office
remains open at this time, solely as a sales office for mainline Europe. All
current marketing and distribution operations, including a United Kingdom
domestic sales force, is now being handled out of the United Kingdom operations.
Despite the expansion in the number of customers and the corresponding
increase in revenue since commencing operations, the Company's total operating
expenses have exceeded revenues, resulting in a net loss of approximately
$1,338,000 for the three months ended September 30, 1997. The Company's primary
costs are for research and development, tooling for new products, inventory,
trade shows, selling and promotion activities, writedown of obsolete inventory,
and legal expenses, which increased significantly for the period ended September
30, 1997 due to the resolution of the preferred shareholder issue described in
Note 3. The Company expects certain of 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.
11
<PAGE>
Results of Operations of the Company for the Three-Month Periods Ended September
30, 1997 and 1996
Net Sales
Net sales for the three months ended September 30, 1997 decreased to
approximately $1,070,785 or approximately $657,000 less than net sales for the
three months ended September 30, 1996. Net sales for the month ended September
30, 1997 were negatively impacted by a delay in the manufacture and release of
new products the Company is bringing to the market.
Gross Profit
The Company's gross profit percentage for the three months ended
September 30, 1997 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. In addition, the gross profit
percentage also reflects the Company's encounter with the purchase of a
defective wheel pedal product. The Company bore the cost of the replacement of
these pedals, including freight charges. The Company's gross profit percentage
for the three months ended September 30, 1997, prior to these adjustments for
the price reductions and pedal problem, was 26%. However, the Company's gross
profit percentage after the adjustments for the price reduction and pedal
problem declined from 32% for the three months ended September 30, 1996 to 10.4%
for the three months ended September 30, 1997. Gross profit margins are affected
by several factors, including the mix of sales between the Company's products,
which typically sell at gross profit margins ranging from 20% to 40%. The
Company anticipates that new products will initially sell at higher profit
margins. However, there can be no assurance that such margins will be maintained
over the life of the product.
Payroll and Payroll Taxes
The Company's payroll and payroll tax expense increased from
approximately $229,000 in the three months ended September 30, 1996 to
approximately $387,000 in the three months ended September 30, 1997, or
approximately 68.8%. Payroll and payroll tax expense also increased as a
percentage of sales, from 13% for the three months ended September 30, 1996 to
36% for the three months ended September 30, 1997. 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
operations of SC&T Europe. The Company is required to employ a base staff of
qualified personnel to maintain its operations.
Selling and Promotion
The Company's selling and promotion expenses increased from
approximately $263,000 in the three months ended September 30, 1996 to
approximately $492,000 in the three months ended September 30, 1997, or a
increase of approximately 87%. This represents an increase in selling and
promotion expenses, as a percentage of sales from 15% for the three months ended
September 30, 1996 to 46% for the three months ended September 30, 1997. A
portion of these expenses were utilized to continue promoting and creating
packaging for new products in addition to exhibiting the Company's products at
several trade shows, in an effort to expand their brand name awareness and
market penetration. Approximately $255,000 of the increase was associated with
the Company's sponsorship of a Formula
12
<PAGE>
Atlantic Racing Team in the 1997 Kool Toyota Racing Series. Management has
determined to expense the entire cost of the sponsorship as incurred.
Office and Administration
The Company's office and administrative expenses increased from
approximately $149,000 in the three months ended September 30, 1996 to
approximately $396,000 in the three months ended September 30, 1997, or
approximately 164%. As a percentage of net sales, office and administrative
expenses increased from 9% for the three months ended September 30, 1996 to 36%
for the three months ended September 30, 1997. A significant portion of the
increase in office and administrative expenses is a result of legal expenses
relating to the resolution of the preferred shareholder issue, described in Note
3, which exceeded approximately $140,000.
Development Cost Amortization
Development cost amortization increased from approximately $60,000 for
the three months ended September 30, 1996 to approximately $71,000 September 30,
1997. Development cost amortization represents amortization of costs associated
with development of new products. Such costs are amortized over a 12 month
period commencing with the first sale of the product.
Consulting Fees
Expenditure for consulting fees increased from approximately $37,000
for the three months ended September 30, 1996 to $73,000 for the three months
ended September 30, 1997, or approximately 98%. A significant portion of the
increase in consulting fees is a result of the resolution of the preferred
shareholder issue described in Note 3.
Net Loss
As a result of the factors described above, the Company's loss from
operations increased from approximately $268,000 in the three months ended
September 30, 1996 to approximately $1,343,559 in the three months ended
September 30, 1997. The Company's net loss increased from approximately $190,000
in the three months ended September 30, 1996 to approximately $1,338,292 in the
three months ended September 30, 1997.
Net Loss Per Share
Net loss per share from operations increased from $0.05 for the three
months ended September 30, 1996 to $0.06 for the three months ended September
30, 1997. Net loss per share increased from $0.04 for the three months ended
September 30, 1996 to $0.06 for the three months ended September 30, 1997. The
loss per share of $0.02 is due to the increase in expenses and the reduction of
the gross profit margin as described above. In addition, the decrease in the net
loss during the three months ended September 30, 1997 was affected by the
increase in the weighted average common shares outstanding from approximately
4.9 million to 22.9 million. the increase in weighted average common shares was
due to additional shares of common stock issued in connection with the Company's
private placements and conversion of Series A Preferred Stock.
13
<PAGE>
Liquidity and Capital Resources
As a result of the Company's initial public offering, and its private
placement of Series A Preferred Stock in June 1996, the Company's working
capital improved to approximately $3,635,084 at September 30, 1997. The Company
is required to pay the costs of stocking inventory before the Company receives
orders and payment from its customers. Typically, the Company's customers do not
pay the Company for its products until approximately 60 days following delivery
and billing. As a result, the receipt of cash from operations typically lags
substantially behind the payment of the costs for purchase and delivery of the
Company's products.
Through July 1996, the Company financed operations by factoring its
United States receivables. Historically, the Company's European subsidiary
financed operations through a line of credit of approximately $182,000
denominated in Belgian francs. In addition, to raise funds to meet its expenses,
the Company obtained inventory financing in April and May 1995 for an aggregate
of $1,000,000, completed a private placement in April 1995 of $1,500,000 for
2,000,000 shares of Common Stock, completed a private placement in September
1995 of $875,000 of 8% Subordinated Debentures. In December 1995, the Company
used approximately $1,875,000 of the $4,500,000 gross proceeds of its initial
public offering to repay the inventory financing and the 8% Subordinated
Debentures. In June 1996 the Company received gross proceeds of $10,510,000 for
an issuance of 1,051 shares of Series A Preferred Stock. The preferred
shareholders earn 8% accretion per annum up to the date of conversion.
Business Outlook and Risk Factors
Management believes that there is growing acceptance in the global marketplace
for the Company's expanded product line and that the Company success in entering
into new manufacturing relationships that take advantage of savings due to
economies of scale will result in decreases in manufacturing costs. The
Company's total revenue and product mix could be materially and adversely
affected by many factors, some of which are beyond the control of the Company.
Those factors include, but are not limited to, turnover in the Company's sales
force, competition from existing or new products, production delays, the
Company's ability to penetrate new markets and attract new customers, unexpected
postponement or cancellation of significant orders, lack of market acceptance of
the Company's products, manufacturing defects and seasonality of sales and
general economic conditions.
Although the Company has focused on controlling administrative costs, it
recognizes the added costs associated with attracting and retaining key
personnel. Because it operates in an industry that is characterized by high cost
of recruiting and a current lack of qualified personnel, the Company constantly
evaluates employee benefits and the work environment that it provides its
employees. The high cost associated with industry hiring practices could have a
material adverse affect on the Company's quarterly operating results. The
Company intends to continue to moderate general and administrative costs so that
revenue growth will begin to exceed operating expenses. There can be no
assurance, however, that the Company will be able to predict or respond to a
shortfall in sales during any given quarter in order to reduce its fixed general
and administrative expenses on a timely basis.
14
<PAGE>
Business Outlook and Risk Factors, Continued
The Company believes that the industry in which it markets its
products has a strong outlook, with expanding markets characterized by rapid
technological change, frequent introduction of product upgrades and evolving
industry standards. The Company strives to provide market-leading solutions that
address the PC user interested in upgrading existing equipment. Due to the risk
factors discussed and to other factors that generally affect high technology
companies, there can be no assurance that the Company will be able to
successfully penetrate these markets in the future.
The Company has been advised by it's independent certified public accountants
that the audit report for the year ended June 30, 1997 will include a going
concern qualification. The Company does not dispute this qualification. Due to
the large number of preferred shares outstanding, the Company was unable to
raise additional equity funds in the past year. It is currently anticipated that
the Company will require additional working capital to continue to fund its
operations. Management intends to actively explore both debt and equity
financing as well as holding discussions with potential merging partners in
order to obtain such debt or equity financing. There is no assurance that
management will be able to obtain any such financing.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM I. LITIGATION
Pending or Threatened Litigation
a. The Company v. Maxi Switch
In May of 1995, the Company filed suit against Maxi Switch in Tucson,
Arizona, and its corporate affiliates for misappropriation of trade secrets and
breach of contract in connection with Company's multimedia keyboard technology.
In May of 1997, a Tucson jury awarded the Company $3 million, plus $125,000 in
attorneys' fees. The defendants had filed counterclaims for defamation, but the
jury denied those counterclaims in their entirety. In October of 1997, the
defendants filed a timely Notice of Appeal. Management intends to vigorously
pursue collection of this Judgment through appeal. The appeal may take one to
two years.
b. Network Technical Services v. the Company
In August of 1995, Network sued the Company in Phoenix, Arizona, for
approximately $150,000 in a breach of contract action alleging failure of the
Company to pay for certain cables delivered by Network. The Company filed
counterclaims for breach of confidentiality and other torts. Management intends
to vigorously defend plaintiff's claims on the basis that the cables delivered
by the Network were defective. Management further intends to pursue the
counterclaims and accomplish a net recovery for the Company in this litigation.
This litigation is expected to be concluded within one year.
c. Home Arcade v. the Company
In September of 1997, Home Arcade filed suit in San Jose, California,
against the Company for breach of contract seeking $43,250. This dispute arose
out of a nonexclusive distribution agreement between Activision and the Company.
The Company has denied breaching the contract and instructed counsel to
vigorously defend the case. Due to the recent filing of the case, undersigned
counsel has not yet been able to develop an opinion with regard to the timing or
likely results of this litigation. However, management believes it has committed
no wrongdoing.
e. Lake Management v. the Company
In June of 1997, Lake Management filed suit against the Company in Phoenix,
Arizona, seeking specific performance requiring the Company to issue common
stock to Lake pursuant to a preferred shareholder conversion agreement. The
Company has resolved a similar problem with 94% of the entities in Lake's class.
Lake has refused to negotiate a reasonable settlement and, therefore, the
Company will continue to defend this litigation on the basis of Lake's market
manipulation. It is anticipated that this litigation will be concluded within
two years.
f. Jack Of All Games v. the Company
In June of 1997, Jack Of All Games Entertainment, Inc., sued the Company in
Cincinnati, Ohio, for breach of contract regarding a purchase order for 5,000
steering wheel accessories. Jack Of All Games is seeking $179,272.80, plus
interest and attorneys fees. Management intends to vigorously defend this case
or settle it based on the provision of replacement product. The parties had
previously agreed to a product exchange and the Company expects a product
exchange to occur. This litigation should be concluded within one year.
Management has honored all it's obligations under the terms of this agreement
and firmly defends this action by Jack Off All Games as frivolous and without
merit.
Unasserted Claims and Assessments
16
<PAGE>
The Company has a wheel product which includes "force-feedback" technology as a
new version to its racing wheel. The Company was recently contacted by Atari.
Atari expressed a desire to evaluate the Company's force-feedback technology to
determine whether it violates a patent possessed by Atari. The Company is
presumptively protected under the circumstances because the Company obtained a
license for the force-feedback technology from another company, Immersion
Corporation. Immersion Corporation has indemnified the Company for patent
infringement liability. However, should Atari successfully enjoin Immersion,
sales of the Company's force-feedback racing wheel would be impacted, or the
Company would have to seek a license from Atari.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On October 9, 1997, the Company filed an 8-K form reporting the
resignation of Toback & Company as the Company's independent certified public
accountant and the appointment of Evers and Company as the principal accountant
to provide audit services to the Company. In addition, the form 8-K also
reported the resignation of Tom Bednarik as Chief Executive Officer of the
Company.
17
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----
SC&T INTERNATIONAL, INC.
/s/ James L. Copland Chairman of the Board November 14, 1997
- ----------------------------- and Chief Executive Officer
/s/ Thomas Carlini Director of Finance November 14, 1997
- -----------------------------
18
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