U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended April 30, 1998
Commission file number 0-27382
SC&T INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
ARIZONA 86-0737579
(State of incorporation) (I.R.S. Employer Identification No.)
15695 N. 83rd Way
Scottsdale, Arizona 85260
(602) 368-9490
(Address, including zip code, and telephone number, including area code,
of issuer's executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X].
Issuer's revenues for its most recent fiscal year: $4,733,558
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days: As of June
15, 1998 - $2,938,611.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of May 21,1998 - 24,553,684 .
Documents incorporated by reference: Not Applicable.
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SC&T INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-KSB
FISCAL YEAR ENDED APRIL 30 ,1998
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 17
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 18
ITEM 10. EXECUTIVE COMPENSATION 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 20
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
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PART I
ITEM 1. BUSINESS
General
The Company develops and markets innovative accessory and peripheral products
for the personal computer and video game categories. Its products are compatible
to the multimedia and internet user and focus on the retail and Corporate market
sectors. The Company markets its products under the Company's PLATINUM SOUND,
PER4MER and AIR RACER registered trademarks. The Company `s products fall into
three distinctive product categories. It's sound enhancement products are
marketed under the Platinum Sound brand name, and its racing wheel and game
controller products, under its PER4MER and AIR RACER brand names.
The Company's sound products include sub-woofer, equalzer-amplifier enhancement
systems, and a broad line up of amplified speaker systems, headphone and
microphones. The PER4MER line consists of racing wheel products, designed for
all IBM PC's , SEGA, Nintendo and Sony Playstation game consoles. This Per4mer
family also includes a new universal game controller device, AIR RACER, which is
compatible to these same categories. The line also includes a Multimedia Volume
Controller for IBM PC's and Mackintosh computer systems and a new Voice
Recognized - Telephonic adaptable PC Keyboard, designed for the Corporate
market.
The Company's first generation multimedia keyboards have been discontinued, in
favor of this second generation product, referred to as the VRK-500. The VRK-500
features enhanced Voice Recognition and Telephony capabilities, but has not yet
been introduced into the market, as the Company has been focusing its efforts on
the Platinum Sound, Per4mer and Air racer products. PLATINUM SOUND and the
PER4MER brand names, are both registered trademarks of the Company. Registration
has been filed for its AIR RACER product.
The Company strategic focus is targeted at the multimedia, interactive,
communications and the video gaming segments of the PC and consumer electronics
industry. The Company develops unique and innovative technologies that offer
one-step, integrated solutions for the PC, MAC and the rapidly growing Video
Gaming arenas.
The Company has changed its fiscal year end to April 30 from June 30. Subsequent
commentary will refer to the ten month period ended April 30, 1998, as the
period ended April 30.
The Company began operations in June 1993 and achieved sales of approximately
$7,346,000 and $4,733,000 during the year ended June 30, 1997 and the period
ended April 30,1998, respectively. Although the Company's revenues has increased
significantly since inception, the Company has recorded losses of approximately
$6,097,000 and $2,086,000 for the year ended June 30, 1997 and April 30, 1998,
respectively.
In Review
The period ended April 30, 1998 has been a very difficult time frame for the
Company. The accounting firm issues, preferred shareholder, Nasdaq de-listing,
and other related issues greatly impacted the company's revenue performance for
this period. For the first time since its inception, Company management was
unable to address all of these issues, and at the same time increase sales
revenues. Despite the effort, the period ended April 30, 1998 concluded with
results unacceptable to the Company. Net revenues for the ten month period
totaled $ 4,733,000 as compared to $ 7,346,000 for the fiscal year ended June
30, 1997. The ten month period represents 64% of last years sales. On a more
positive note, with many past problems resolved, the Company's primary objective
and management focus will be redirected towards its goal of profitability in
fiscal 1999. Management believes that this can be achieved through a number of
elements, which include; new products, new personnel, new manufacturing and
marketing alliances and a growing account based on a direct result of furthering
acceptance of the company's expanding product assortment. Management hopes that
1999 will allow the Company to apply a 100% focus on the future, and its
profitability objective.
Proxy Approval
In July of 1998 shareholders of the Company approved two motions. The first, to
increase the number of authorized shares by 50,000,000 bringing the total to
75,000,000, and the second, to authorize a reverse split. Management's current
intent is not to reverse the stock until the company's share price has improved
and the Company reaches profitability. At this time the Company has not set a
date for a reverse stock split, but expects no split until early in calendar
year 1999.
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Patent Granting
In February, 1998 the U.S. patent office granted numerous patents on the
company's Multimedia - Telephony keyboard technology. Presently the Company is
negotiating license agreements with maxi Switch, Silitek and NMB. All are
marketers of similar technology/s which infringe on the company's patent. The
Company believes that it has a potential to generate respectable monthly
licensing revenues for its technology as the demand by corporations to reduce
workspace clutter will result in more keyboards integrating SC & T's
technologies. The patent issued is in effect for a period of 22 years.
Industry Overview
The market for multimedia PC's and video game console equipment is growing very
rapidly. It is characterized by rapid technological change and lower product
prices. Unlike the Corporate arena, the multimedia and video gaming segments are
consumer driven. As a result, many PC manufacturers have redesigned their
product mix to dramatically increase the multimedia and entertainment
capabilities of their products. Currently, most product lines are 100%
multimedia and gaming compatible.
SC & T's Platinum Sound, Per4mer and Air Racer products are primarily targeted
at the mass merchant consumer segment. However, the current trend by many PC and
PC accessory manufacturers is in developing product offerings specifically aimed
at the mass market. The Company is currently discussing sales of its Per4mer and
Air Racer products to such manufacturers on both a direct sale and OEM basis.
The OEM category is new for the Company and could increase revenues dramatically
for the coming year.
PLATINUM SOUND PRODUCTS
The Company' sound category comprises an extensive product range incorporating
Sub Woofers, Equalizer-Amplifiers, Headphones, Microphones, Volume Controllers
and Amplified Speaker Systems. This product assortment was designed to service
the multimedia and video gamer. Every PC system needs speakers, sub woofers,
microphones and headphones. Platinum Sound products will compete head to head
with the top tier manufacturers such as Altec Lansing, Yamaha and Labtec.
The Company's development focus is on bringing increased value to the consumer
at lower prices. This demands unique and innovative products that as the Company
says offers; "Twice the Product For Half The Price." The Company feels that its
mission of delivering fully featured products at aggressive retail prices is
improving. Initial product offerings have been well received by retailers and
the industry media. Currently, Platinum Sound products account for approximately
10% of the Company's annual sales revenues. The Company expects this number to
grow more rapidly during 1999 in proportion to overall sales revenues. The
demand for greater sound (at more affordable prices) by gamers and PC users
alike, have allowed SC&T entry into this high growth market category.
To ensure that we succeed, SC & T recently hired the former Director of Sales
for Labtec, a major competitor, as its new Director of Sales for North America.
Rick Strain, a seven year veteran of Labtec and a fifteen year veteran in this
industry is expected to spearhead the company's growth expectations for its line
of Platinum Sound products.
The Company has added numerous new products to its product assortment. The
Company now offers three sub woofer products, one graphic equalizer-amplifier, a
PC volume controller, 3 microphones, 5 headphones and 8 amplified PC speaker
products. All products are compatible to IBM-PC's, Macintosh PC's, TV's,
Stereos, CD-ROM Players, or other electronic devices utilizing RCA mini-jack
connectors.
Product Assortment
7-Band Graphic Equalizer-Amplifier with SRS. The Company offers a 100 watt peak
performance 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 and is compatible with IBM and Macintosh PC's, and 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 compact disc player, or any other electronic device
utilizing RCA mini-jacks. It still remains the only product of this type
available worldwide. The SRP for the SRS-OMNI is $69.95.
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Product Assortment (Continued)
Sub Woofer Systems. Platinum Sound has three products in this category. The low
end entry product is now the SWX-1000, a very unique 16 watt book-shelf styled
sub woofer was designed for use in the bedroom, kitchen, family room and with
all PC's. This unit was created to enhance the sound of Digital Clock Radios, CD
Rom players, TV's, Stereos, Micro Stereo Systems and PC's. The retail price will
range from $ 49.95 to $ 59.95 making it the lowest priced product in the sub
woofer category. Enclosed in a wood cabinet, the SWX-1000 will ship in mid
August 1998.
The SWX-1200 launched in mid 1997 is a unique product offering, capable of 120
watts of peak power. Incorporating both a front and rear base/venting port, this
item has a SRP of $79.95. The Company has enhanced this product without altering
its retail price by adding the dynamic 3 D sound technology. This new unit will
commence shipping in August 1998.
The third product is the SWX-1600, a 160 watt peak performance sub-woofer
satellite speaker sound system. This product features wood cabinet, volume and
base controls and is available for the home stereo and PC markets. The SRP for
this product is $99.95.
Under Mr. Strain SC & T is redirecting its marketing efforts on its Platinum
Sound products to products that will retail for under $100.00, where over 75% of
the retail business is done. The company's strategy is to capture a larger
percentage of the mass consumer market.
Amplified Speaker Products
Platinum Sound's speaker line has increased to 8 speaker products. The line
offers products that fit each of the critical retail price levels from $ 19.95
to $ 49.95. The products range in speaker power from 7 watts to 120 watts of
peak power. It is this pricing segment that accounts for close to 75% of all
retail sales. Many of the company's speaker products include the latest 3
Dimensional sound technology.
Headsets & Microphones
Primarily an add on sale to consumers, these products are purchased in the
millions annually by consumers throughout the world. The Company has a complete
line up of products that range in retail price from $ 9.99 to $ 39.95.
Multimedia Volume Controller
The Company markets its own Volume Controller, a product that allows easy
"finger control" access to a PC's volume control. This item may be mounted to
the monitor, keyboard or PC tower. It eliminates the inconvenience of adjusting
volume through the sound card or software volume control menu. The SRP is
$11.99.
PER4MER, ULTIMATE PER4MER and AIR RACER PRODUCTS
The company's line of Per4mer racing wheels continues to grow. The Company
boasts a total line up greater than all of its competitors combined. Presently
SC & T has over 7 individual racing wheel products. The Company has also
developed a revolutionary new game controller called Air Racer. This product
will be available in 3 models for the Sony, IBM and multi-platform video gaming
categories.
In March of 1998 the Company launched its UP-300, a Force Feed Back racing
wheel. This product, the first of its kind worldwide has met with rave reviews
from the media. Force feed back allows the user to feel the jolts, bumps and
jerks as experienced on the screen by the software being played. It is clearly
the next level of racing technology. The Company believes that it has the
strongest and most realistic product of any other competitor.
Air Racer is yet another innovative development of SC & T. This product will
ship in August 1998. This unique new product is both a flight yoke and racing
wheel combined into one hand held game controller. No other product encompassing
these features exists anywhere in the market today. The Company has high
expectations for its Air Racer products and believes that sales through year end
will exceed 100,000 units worldwide.
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PER4MER, ULTIMATE PER4MER and AIR RACER PRODUCTS
(Continued)
The PER4MER Racing Wheel line accounts for approximately 90% of the company's
current revenues. It is a full line of video arcade racing wheels compatible
with SEGA, Nintendo, Sony Playstation video game consoles and all IBM PCs. The
wheel is an arcade style input device featuring analog and digital controls. The
wheel plugs directly into the game port connection. The SRP for this line ranges
in the $49.95 - $ 59.95 level.
The ULTIMATE Per4mer Racing Wheel was introduced in October of 1997. This
represented the company's second generation of racing wheel products. SC & T
identified this line as the "ULTIMATE PER4MER" line of racing wheels. These
products have an SRP range of $ 69.95 to $ 89.95
The ULTIMATE Per4mer Force Feed Back Racing wheel is yet a more advanced,
ergonomically designed product. This new technology incorporates Forced Feed
Back which addresses the latest technology to hit the PC marketplace. Force Feed
Back allows the end user to feel all of the real action (bumps, jerks, jolts) as
displayed on the screen of the game/program being run. The UP-300 has a current
street price of $ 179.95, but will likely drop to below the $ 150.00 level
during the 1998 Christmas selling season. It comes complete with 2 free force
feed back racing titles from Sega entertainment.
AIR RACER is also part of the Per4mer family of products. A very unique product
that we feel revolutionizes the way consumers will utilize traditional joysticks
and game controllers with their PC's and Video game consoles. Embodying two
optical sensors, Air Racer allows a consumer to play flight, racing and numerous
other action games with a single game controller. Never before (and not to date)
available from other manufacturers, the Company feels that its first generation
of Air racer products will have a major impact on increasing corporate revenues
over the next 6-12 months. Designed for both the video gaming and PC platforms,
the SRP for Air Racer is $ 79.95, however, this product should retail for under
$ 60.00 during the upcoming 1998 Christmas selling season. The Company has filed
numerous technology patents on Air Racer .
MARKETING
The Company markets its products primarily through the retail channel. In 1998
the Company expects to expand its focus into the OEM and Corporate sectors.
Strong interest is forming for the company's Per4mer and Air Racer products by
numerous companies in the OEM sector. The addition of these categories over the
next 12-18 months should have a positive effect on the company's future revenue
expectations.
In North America, the Company markets its products through a combination of
direct sales personnel, independent sales representatives. In the UK, Europe and
the Asian Pacific Rim all sales are handled by direct employees of the Company.
In Canada and South America sales are handled through marketing agreements with
the Company.
The Company has wholly owned subsidiaries in the U.S., U.K and Hong Kong. The
Hong Kong office officially opened in June of 1998. SC & T also has independent
operations in Canada and South America.
Future Efforts
With the addition of new sales and marketing personnel coupled with the opening
of our Hong Kong office and alliance in South America, SC & T feels strongly
that it will increase sales revenues and reach profitability during the next
fiscal year. The Hong Kong office was established to oversee all manufacturing
for the companies products and to establish a distribution network in Hong Kong,
Taiwan, Malaysia, Japan, China, Thailand, Indonesia, Australia, and India.
Global Distribution
SC & T products are currently sold in over 25 countries, including the United
States, Belgium, Germany, France, Italy, Finland, Holland, Switzerland, Turkey,
Taiwan, the United Kingdom, Argentina, Brazil, Spain, Hong Kong, Canada, and
Russia. For the year ended June 30, 1997 and the period ended April 30, 1998,
sales in North America accounted for approximately 50% and 62%, respectively, of
the Company's consolidated revenue, and sales in Europe accounted for
approximately 50% and 38%, respectively, of the Company's consolidated revenue.
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Customers & Company Focus
The Company has increased customers of the Company over the past few months as
new products and our growing line has caught there attention. Current North
American retail customers include, but are not limited to; Radio Shack, Best
Buy, Babbages, Software Etc., Data Vision, Computer City, Compusmart, Comp USA,
Micro Center, Fry's Electronics, The Good Guy's, Sam's Club, Meryvn's, Costco
Wholesale, Compucenter and Musicland.
During early 1998, the Company modified its retail product line to focus mainly
on products for sale to the retail market at prices under $100. This was done to
capitalize on the mass market. To achieve this product mix, the Company has
identified new suppliers able to supply product at lower costs, and offer more
favorable payment terms. 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.
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 ,
PER4MER, ULTIMATE PER4MER racing wheel and AIR RACER brand names. Packaging and
operating manuals are produced in seven languages, Spanish, French, Japanese,
German, Italian, Portuguese and English.
Product Development
SC&T's second generation product incorporates enhanced Voice Recognition
features. Even though completed, this product the VRK-500, has not yet been
introduced into the market. Over the past year, the Company has applied its
primary market focus on building the awareness of its line of Platinum Sound,
PER4MER, and ULTIMATE Per4mer racing wheel products.
The Company continues its new product development plans, and has dedicated the
majority of three Operations staff members' efforts toward the management of
research and development of advanced applications in the expanding multi-media
arena. The continuation of product development is key to the potential of the
Company's products and market share. In addition, the Company has also dedicated
additional staff to the ongoing product design and approval process, which has
brought existing unique products to fruition, and continues to produce favorable
results.
We expect new product to be released on a regular basis, as has been the
practice of the Company over the last 18 months. During the years ended June 30,
1997 and the period ended April 30, 1998, the Company spent approximately
$859,000 and $317,000, respectively, on research and development. The Company is
projecting to spend $500,000 in research and development expenses in connection
with development of new products during fiscal 1999.
Subsidiaries
In late 1997, the Company 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, but is expected to close by August 1998. All current
marketing and distribution operations, including a United Kingdom domestic sales
force, is now being handled out of the United Kingdom. For the year ended June
30, 1997 and the period ended April 30, 1998, sales by SC&T Europe accounted for
approximately $3,795,000 and $2,343,000 respectively, of the Company's
consolidated revenue. Management believes that current changes affected with the
Company's European staff and operating infrastructure will correct past
deficiencies, and position the United Kingdom Operation for growth in both sales
and customer service.
In June of 1998, SC&T opened a Hong Kong office. This facility was established
to oversee all manufacturing issues of the company's products, and to expand
SC&T's distribution efforts in the Asian Pacific regions.
The Company has independent operations in Canada and in South America. Neither
of these facilities are wholly owned subsidiaries of the Company.
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Subsidiaries (Continued)
The Company's European sales are typically invoiced in U.S. dollars or pounds
sterling. 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 U.S
dollars. Accordingly, the Company is subject to the risk of fluctuations in
currency exchange rates. To date, the Company has not experienced any material
net gain or loss due to foreign currency fluctuations. There can be no assurance
that the Company will not experience material adverse effects on operations from
foreign currency fluctuations in the future. See "Special Considerations - Risks
Associated With International Sales; Currency Fluctuations" contained in Item 1
of this Report.
Competition
The PC, multimedia, and video game retail markets in general are highly
competitive. Many of the Company's competitors have greater financial,
technical, marketing, and sales resources than SC & T. The Company's major
competitors in the multimedia sound category are Altec Lansing, Yamaha, and
Labtech. In the video gaming and PC racing wheel category our competitors are
Thrustmaster, MadCatz, Inter-Act and Microsoft. Only Thrustmaster and Microsoft
will enter the Force feed back market, with planned introductions sometime
during the 4th quarter of 1998.
Although the Company considers certain of its products to be proprietary, 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, assembling, or reverse
engineering products similar to those sold by the Company.
To defend against its competition, the Company's design philosophy is to develop
products that can be sold at lower prices and to diversify its product
assortment over its competition. The Company's competitors in the sound category
do not market racing wheel products, and those in the racing wheel categories,
do not market sound products. The Company feels that this product diversity
offers it greater protection and stronger retail opportunities over many of its
competitors. Unlike its competitors whose market penetration is much larger,
every new retail account represents new revenue growth to the Company.
The Company competes primarily on the basis of design, quality, reliability, and
the ease of use of its products. The Company also competes on value relative to
the features offered by its products. Competitive price reductions may, however,
have an adverse effect on the Company's revenue and profitability. See "Special
Considerations - Competition" contained in Item 1 of this Report.
Intellectual Property Rights
The Company's success is dependent, in part, on its proprietary information,
technology and know-how. The Company relies on a combination of patents,
copyrights, trademarks, trade secrets, and confidentiality agreements to
establish and protect its proprietary rights. Despite these efforts, it may be
possible for competitors or users to copy aspects of the Company's products or
to obtain information that the Company regards as a trade secret.
The Company 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. This was granted by the U.S. Patent office in February 1998.
The Company is currently negotiating numerous licensing agreements with keyboard
manufacturers who are infringing on the company's patents.
The Company believes the market for its fully-integrated voice recognition
keyboards is an emerging market. The Company faces competition from various
manufacturers who combine similar features for audio and voice- recognition
computer applications. However, as the Company has patent rights, the Company
will seek licensing agreements from all who enter the market with like products.
The Company has also filed patents on its new Air Racer game controller
technology.
In addition the Company has filed applications for registration of the trademark
PLATINUM SOUND, PER4MER and its AIR RACER brand names. At this time, the U.S.
patent office has granted registration rights to the Company for the first two
brand names. Registered and certain copyrights in the United States and in
foreign countries have been filed.
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Intellectual Property Rights (Continued)
Although the Company believes that patent, trade secret, and copyright
protection are significant to its competitive position, other factors also
exist. 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 & Supplies
The Company receives and inspects finished products and component parts at its
United States, Hong Kong and UK facilities. The Company tests a sample of all
delivered products for compliance with specifications. The Company's principal
suppliers are located in Australia, Hong Kong, Taiwan and China.
Due to material difficulties in obtaining supplies on time and at the right
price over the past 6-8 months, the Company has made numerous changes in its
source of manufacturing. These new alliances are deemed to be in the best
interests of the Company. At present the Company maintains a suitable inventory
of its Platinum Sound and PER4MER products. While this decreases the risk that
the Company will be unable to supply its products, in the event of any reduction
or interruption in supply, it increases that risk associated with obsolescence
due to technological change. The Company has incurred large write down costs in
the past and will do so once again this year, as it realigns itself with new
manufacturers and adjusts to late and non deliveries of product. The Company
does not foresee this being a major factor moving forward, as its new alliances
are meeting all terms as required by the Company.
Employees
As of April 30, 1998 the Company's United States operation had 16 full-time
employees. The Company's United Kingdom subsidiary employed five full-time
employees, and its Hong Kong office, established in June, 1998, had two
employees.
None of the Company's employees are represented by a labor union. The Company
believes its relations with its employees are in good standing.
SPECIAL CONSIDERATIONS
Limited Operating History
The Company commenced operations in July 1993 as a producer and marketer of
CD-ROM audio cables. In October 1993, the Company began developing multimedia,
accessory, and peripheral computer equipment products, none of which were
introduced into the market until April 1994. In addition, the Company recently
entered the computer and video game markets, with the introduction of a line of
PC and video arcade racing wheels. Accordingly, there is limited historical
financial information about the Company upon which to base an evaluation of the
Company's performance. In addition, the Company's business will be subject to
many of the problems, expenses, delays, and risks inherent in the establishment
of a new business enterprise, including limited capital, possible cost overruns,
uncertain market acceptance, and the absence of an operating history. Therefore,
there can be no assurance that the Company's business will be successful or that
the Company will be able to achieve or maintain profitable operations. See
"Business" contained in Item 1 of this Report.
History of Losses
The Company has incurred operating losses since inception, and reported net
losses of approximately $6,097,000 and $2,086,000 for the year ended June 30,
1997 and the period ended April 30, 1998, respectively. As of April 30, 1998,
the Company had an accumulated deficit of over $12,000,000. Losses incurred
since inception are attributable primarily to start-up costs incurred in
developing the Company's product line, the costs of introducing new products to
market, inventory adjustments, costs associated with financing activities prior
to the Company's initial public offering and legal costs associated with the
preferred shareholder resolution To date, operating revenues have not been
sufficient to cover these costs. The Company had revenue of approximately
$4,733,000 for the ten month period ended April 30, 1998. Average monthly sales
decreased from $612,000 in fiscal 1997 to $473,000 for fiscal 1998. The Company
reported a net loss for the period ended April 30, 1998. 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.
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History of Losses (Continued)
The Company has always elected to write down and report obsolete inventories. It
has continued to develop new products, at a cost to the Company's bottom line.
Over the past year the Company suffered a major setback associated with its new
ULTIMATE PER4MER RACING products. The product was planned for a June 1997
release date, unfortunately, due to technological changes within the industry,
coupled with engineering delays, culminated in an October 1997 release date,
some five months behind schedule. This delay has resulted in revenue losses,
estimated by the Company to be close to $ 2.5 million. Currently the Company has
approximately $1.5 million in backorders for products. Even though the Company
feels that the above problems have been corrected, and as such will enhance
future revenues and profit figures, the Company can make no assurances that
similar problems may not arise with its the new line of products.
Over the past 10 months, management of the Company has been forced to spend a
considerable amount of time on legal matters and other issues relating to its
Preferred Shareholder, Accounting Firm dilemma, NASDAQ De-Listing procedures,
and other issues as they related to the previously mentioned problems. For the
first time since the company's inception, this attention to issues, by
management, has impacted sales revenues for the current fiscal period.
Profit Projections
Management is committed to generating a profit in fiscal year 1999, which would
be the first profitable year since the company's inception. Factors that point
to this ability center on the company's current product line assortment, new
sales, marketing and management personnel, growing account base, new product
introductions, expanded market opportunities and newer and more stable
manufacturing alliances. With the past problems addressed, management feels
confident, coupled with the current state of the North American and European
economies that profitability can be achieved during this fiscal period. No
guarantee can be made that this will materialize, but with the current focus on
operating costs, against future sales, profitability represents the number one
objective for the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Item 6 of this Report.
Competition
The Company faces competition from several major competitors that market
multimedia, accessory, and peripheral computer products, and computer and video
game products. Many of these products are marketed by companies that are well
established, have reputations for success in the development and sale of
products, and have significantly greater financial, marketing, distribution,
personnel, and other resources than the Company. See "Special Considerations -
Litigation" contained in Item 1 of this Report. The Company expects that direct
and indirect competition is likely to intensify in the future. There can be no
assurance that the Company will be able to compete successfully. See "Business -
Competition" contained in Item 1 of this Report.
Technological Change and New Products
The PC, multimedia, computer, and video game markets in general, 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 in the past.
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, would 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.
10
<PAGE>
Dependence on Key Personnel; Need to Attract New Personnel
(Continued)
The Company's success also is dependent on its ability to identify, recruit, and
retain additional experienced management, engineering, and marketing personnel.
There can be no assurance that the Company will be able to hire or retain
necessary personnel. The failure of the Company to attract and retain personnel
with the requisite expertise or to internally develop personnel with such
expertise could adversely affect the prospects of the Company's success. See
"Directors and Executive Officers of the Registrant; Compliance with Section
16(a) of the Securities Exchange Act of 1934" contained in Item 9 of this Report
and "Executive Compensation - Employment Agreements" contained in Item 10 of
this Report .
Seasonality; Fluctuations in Quarterly Operating Results
As new standards or significant new products are introduced in the industry,
sales may slow significantly while the market reacts to these factors.
Therefore, the Company's revenue may vary significantly from quarter to quarter.
Additional factors that may affect revenue include the timing of customer
orders, changes in the Company's product and customer mix, the introduction of
new products by the Company, pricing pressures, and economic conditions. The
Company also incurs significant development, sales, and marketing expenses in
anticipation of future sales. If demand for the Company's products weakens, or
if orders are not shipped in any quarter as anticipated, the Company's results
of operations for that quarter could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 6 of this Report.
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 to 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. It is currently anticipated that the
Company will require additional working capital to continue to fund its
operations. Management is actively exploring 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 such financing.
The Company has a favorable factoring agreement, to finance its U. S.
receivables through Norwest Business Credit. Similar arrangements for the
company's European receivables do not exist at this time.
Over the past year the Company has incurred large legal costs due to the
resolution efforts for its past preferred shareholder and de-listing problems,
coupled with other issues arising from the latter. The Company has also written
down large inventories in the past. The Company based on previous statements,
does not feel that such expenses or product write downs are likely to occur
during the next fiscal period.
Litigation
The Company is currently involved in various legal proceedings. To the extent
that these law suits requires management time and other resources, results of
operations may be negatively impacted. see "Business Legal proceedings"
contained in Item 3 of this Report.
Conversion of Preferred Stock
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. The
private placement was made to a group of institutional investors under
Regulation S as promulgated by U.S. Securities and Exchange Commission. The
Series A Preferred Stock was convertible into common stock at a conversion ratio
based upon the average closing bid price of the Company's common stock for the
ten trading days prior to conversion. Because of the steep decline in the price
of the Company's common stock, the preferred stock became convertible into more
shares than the amount of common stock of the Company authorized by the Articles
of Incorporation. The Company has recently entered into agreements with the
holders of 98% 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"). In addition to the fixed Conversion
Price, the holders of the Series A Preferred Stock will also receive warrants to
purchase one-third of the number of shares which they receive pursuant to the
Fixed Conversion price at a price of $1.75 per share subject to ordinary
anti-dilution provisions (the "Warrant Shares').
11
<PAGE>
Conversion of Preferred Stock (Continued)
The holders of the Series A Preferred Stock waived all other conversion rights
which they may have pursuant to any agreement. The Company does not have an
adequate number of common shares to convert all the new warrants, all the
previously issued warrants outstanding and employee stock options. Further, it
should be noted that the Company does not have adequate authorized shares to
cover the conversion by holders of the 6% of series A Preferred Stock with whom
the Company has not entered into an agreement.
On or about October, 1997, James Copland, the Chairman of the Board, President,
Treasurer and Chief Executive Officer of the Company, turned in 1,500,000 shares
of common stock held by him to allow the Company to issue common stock in
conversion of preferred shares. In return therefore, the Board of Directors
voted to issue Mr. Copland 15 shares of $100,000 face value preferred stock. The
Board of Directors determined that this was a fair price for the surrender of
the shares based on the fact that prior offers by other shareholders would have
been sufficient at a substantially higher cost to the Company if it had accepted
these offers and due to the fact that the return of the shares resulted in
reducing the outstanding convertible preferred shares. Mr. Copland's preferred
shares are convertible into common stock at the rate of 12 shares of common
stock for each dollar face value.
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.
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.
Change in Control Provisions
The Arizona General Corporation Law contains provisions that may have the effect
of making more difficult or delaying attempts by others to obtain control of the
Company, even when these attempts may be in the best interests of shareholders.
Limited Liability of Directors
The Company's Amended and Restated Articles of Incorporation eliminate the
personal liability of a director to the Company and its shareholders for
monetary damages for breach of fiduciary duty of care as a director, subject to
certain exceptions, to the fullest extent allowed by Arizona law. Accordingly,
except in such circumstances, the Company's directors will not be liable to the
Company or its shareholders for breach of such duty. Indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of a small business registrant
pursuant to the provisions of the Securities Act of 1933, unless the officers
and controlling persons have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is unenforceable. The Company has received no such
opinion, or advice, on indemnification under Arizona law.
Possible Volatility of Stock Price
The Company's Common Stock and Warrants issued to the public in connection with
the Company's initial public offering ("IPO Warrants") were traded on The NASDAQ
Stock Market, Inc. ("NASDAQ") SmallCap Market since December 14, 1995. The
trading price of the Company's Common Stock and IPO Warrants in the future could
be subject to wide fluctuation in response to factors such as technological
innovations, new product developments, general trends in the Company's industry,
as well as quarterly variations in the Company's results of operations and
market conditions in general. During certain periods, the stock markets have
experienced extreme price and volume fluctuations which have particularly
affected the market prices for many small companies and which often have been
unrelated to the operating performance of such companies. These broad market
fluctuations and other factors may adversely affect the market price of the
Company's Common Stock and IPO Warrants. See "Market for the Registrant's Common
Equity and Related Stockholder Matters" contained in Item 5 of this Report.
Maintenance Criteria for NASDAQ Securities;
On October 22, 1997, the Company's shares of common stock, which were traded on
the NASDAQ Smallcap market under the symbol "SCTI," were delisted by NASDAQ.
This action was taken on account of the Company's failure to file its form
10-KSB in a timely manner. Management believes the failure of the Company to
meet this filing requirement was the direct result of the untimely resignation
of the Company's accounting firm, Toback CPAs, P.C.
12
<PAGE>
Maintenance Criteria for NASDAQ Securities (Continued)
The Company immediately began a search for a new accounting firm, retaining
Evers & Company, who has now acted as the Company's independent accounting firm
for the audit of the financial statements. The Company has appealed this
delisting and is awaiting a hearing date from the SEC. The Company is unable to
predict whether NASDAQ or SEC will act favorably on such request. The Company
filed its 10-KSB and the company's stock has been trading on the Electronic
Board, enabling ongoing trading of the Company's shares. The company's shares
can also be seen in Investors Business Daily each Monday as listed under the
Small cap listings.
Penny Stock Rules
Because the Company is no longer listed on the NASDAQ Smallcap market, the
common stock of the Company falls within the definition of "penny stock" under
the Securities Exchange Act of 1934. Accordingly, brokers engaging in
transactions in the Company's common stock are required to provide a customer
with risk disclosure documents, disclosure of market quotations, if any,
disclosure of compensation of the broker/dealer and the salesperson of the
transaction and monthly accounting statements showing the accounts. These rules
may make the brokers less willing to engage in transactions in the Company's
securities, therefore making it more difficult for purchasers to dispose of
their securities.
Large Number of Shares Outstanding - Proxy Motion Approved
Because of the recent issuance of shares of common stock to convert the Series A
Preferred Stock, the Company has 24,553,684 shares of common stock available for
trading, thus could adversely affect the prevailing market price of the
Company's common stock.
In July of 1998 the shareholders approved a motion to issue an additional
50,000,000 common shares, and allow the Company to reverse the stock at a time
deemed necessary by the Board of Directors. It is the intent of management to do
a reverse once the current share price has risen, and in an amount that will
increase shareholder value, not dilute the existing shareholder base. A second
purpose behind the split is to raise the stock price to an amount that could
have the company's' shares relisted on the NASDAQ exchange.
Forward-Looking Information May Prove Inaccurate
This Report contains various forward-looking statements that are based on the
Company's beliefs as well as assumptions made by and information currently
available to the Company. When used in this Report, the words "believe,"
"expect," "anticipate," "estimate," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties, and assumptions, including those identified under "Special
Considerations." Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. In addition to the
other risk factors set forth above, among the key factors that may have a direct
bearing on the Company's results are competitive practices in the multimedia,
interactive, and communications segments of the PC and video game industries
(generally and particularly in the Company's principal product markets), the
ability of the Company to meet existing financial obligations in the event of
adverse industry or economic conditions or to obtain additional capital to fund
future commitments and expansion, the Company's relationship with employees, and
the impact of current and future laws and governmental regulations affecting the
PC and video game industries and the Company's operations.
ITEM 2. PROPERTIES
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 July 1, 1997 and effective July 1,
1997 leased the facility back from the buyer. The lease expires June 30, 2007.
The Company's European subsidiary is located in Gent, Belgium, and Portsmouth
,in the U.K. The office in Belgium currently leases approximately 200 square
feet of office space primarily as a Sales office for approximately $818 per
month. The lease is on a month-to-month basis.
13
<PAGE>
PROPERTIES (Continued)
The office in the U.K. which is the primary Sales, Marketing, and Distribution
Center for SC&T's European operations, currently leases approximately 11,000
square feet for approximately $9,435 per month. The lease expires May 12, 2003,
with a three year break option.
In June the Company leased office space in Hong Kong. A modest facility of
approximately 475 sq. Ft. The monthly costs are approximately $ 1500 USD. The
office is located in Sha Tin about 20 minutes north of the city.
The Company anticipates that its facilities will be sufficient to serve its
needs for the next 12 months. To the extent additional warehousing space is
required, the Company intends to lease off-site, short-term storage facilities.
ITEM 3. LEGAL PROCEEDINGS
Pending or Threatened Litigation
A. Home Arcade v. SC&T
-------------------
In 1997, Home Arcade filed suit for breach of a license agreement, a suit which
alleges bad faith and fraud claims. The complaint seeks damages in excess of
$900,000.00, however the principal amounts are far less. The requested relief
includes trebling and punitive damages. Management has positively evaluated the
issues of breach and vigorously disputes the principal amounts. Management
intends to vigorously defend the case. Further, Management is in the process of
filing Counterclaims alleging that SC&T, among other things, actually incurred
significant losses as a result of Home Arcade's misrepresentations and breach of
the licensing agreement. The litigation is pending in Santa Clara County, San
Jose, California. It is expected to last approximately two years.
B. SC&T v. Brian Johnson
---------------------
In 1998, SC&T filed suit against a former sales person for recovery of moving
expenses pursuant to the moving expense agreement, which expenses became due
when Mr. Johnson resigned prior to one year from the agreement. SC&T also
alleged that Mr. Johnson submitted fraudulent reimbursement vouchers. Mr.
Johnson filed a counterclaim alleging he did not receive full compensation
during his tenure. Management has evaluated the claims and intends to vigorously
prosecute its claims against Mr. Johnson, and expects a positive judgment within
one to one and one half years.
C. Federal Insurance Company v. SC&T
---------------------------------
SC&T constructed an office building in 1996 with LMB Contractors as the general
contractor. Pursuant to contract, SC&T held back funds pending completion of the
construction project. LMB has neared completion of all residual performance
under the contract, but has not paid certain of LMB's subcontractors. Federal
Insurance Company held a bond on LMB and has paid certain of LMB subcontractors.
Federal now has an assignment from LMB for the proceeds due from SC&T, and
Federal has also asserted claims under the doctrine of equitable subrogation to
the effect that Federal is entitled to the hold back moneys SC&T owes to LMB.
Federal has filed suit and SC&T's Answer is not yet due at the time of this
correspondence. Management has indicated its commitment to pay all moneys due to
LMB at the times due, and Management is in the process of analyzing the escrow
documentation controlling the issues, as well as any deductions in the amounts
owed to LMB which should also be deducted from amounts owed to Federal. Federal
has sued for approximately $90,000.00, but there are certain deductions from
that amount which will be appropriate. The amounts have not yet been determined.
Management expects this matter to be resolved in a mutually acceptable manner
within the next several months.
D. Jack of All Games v. SC&T
-------------------------
In June, 1997, Jack of All Games Entertainment, Inc., sued the Company in
Hamilton County, Ohio, for breach of contract regarding the purchase of 5,000
steering wheel accessories. Jack of All Games is seeking approximately $180,000
in damages. Plaintiff claims the steering wheels it received were not
merchantable for the purpose for which they were intended. The Company has
answered the complaint and denied all material allegations. It is anticipated
that the litigation of these issues will be concluded within one year.
14
<PAGE>
Unasserted Claims and Assessments
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 may consider engaging in a licensing agreement with Atari.
As disclosed in Note 11 to the financial statements, the Company was delisted
from the NASDAQ Stock Market in October, 1997. In the event the Company's stock
does not commence trading on the NASDAQ stock market again, the Company may be
exposed to claims from its Preferred Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and IPO Warrants were quoted on the NASDAQ SmallCap
Market under the symbols "SCTI" and "SCTIW," respectively, from December 14,
1995 through October 22, 1997.
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
--- ---
1997:
First Quarter............................................. .22 .56
Second Quarter............................................ .19 .81
Third Quarter............................................. .25 1.34
Fourth Quarter (as of October 22, 1997)................... .56 .91
1998:
First Quarter............................................. .06 .19
Second Quarter............................................ .14 .38
Third Quarter............................................. .09 .16
April 1998............................................... .09 .16
On October 22, 1997, the Company's shares of common stock, which were traded on
the NASDAQ Smallcap market under the symbol "SCTI", were de-listed by NASDAQ,
and are now traded on the over the counter market. See Part I, Item 1, for
further discussion. The Company has, to date, not paid a cash dividends on its
capital stock, and does not anticipate declaring, or paying, any cash dividends
in the foreseeable future. Instead, the Company intends to retain any earnings
from operation, and other sources, to provide funds for further capitalization
of anticipated growth of the business.
As of July 31, 1998 the Company's number of common shareholders was 1860.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data of
the Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements and Notes thereto appearing elsewhere herein. The data has
been derived from the financial statements of the Company audited by Evers &
Company, Certified Public Accountants.
Period Ended April 30 Year Ended June 30
1998 1997
---- ----
Operating Data:
Net sales $4,733,558 $ 7,346,471
Net loss 2,085,756 6,097,193
Loss per share .09 .38
Average shares outstanding (1) 23,345,491 16,164,835
Period Ended April 30,
1998
----
Balance Sheet Data:
Working capital $2,145,388
Total assets 4,621,814
Shareholders' equity 2,810,600
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Overview
SC&T International, Inc. (the "Company") was formed in June 1993. The Company
develops and markets accessory and peripheral products for the computer and
video game industries under its PLATINUM SOUND and PER4MER registered
trademarks. The Company's products include sub-woofer and speaker sound
enhancement systems, PC volume controllers, and a line of PC and video arcade
racing wheels for SEGA, Nintendo, Sony Playstation and IBM-PC's. The Company's
multimedia keyboards line has been discontinued, in favor of a second generation
product targeted at the corporate market. This second generation, 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 compared to an average of $473,000 for the ten month period ended April
30, 1998. 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, Ltd., 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. The Company established a
subsidiary as of June 1, 1998, in Hong Kong, known as SC&T Asia Limited.
Sales for the ten month period ended April 30, 1998, were $4,733,000, compared
to $7,346,000 for the year ended June 30, 1997. Average monthly sales decreased
$139,000, or 19%. The primary reasons for the decrease in sales were
attributable to the delays in manufacturing and delivery in the fourth quarter,
of new products scheduled for sale during the 1997 Christmas selling season. The
Company had a gross profit percentage of 28%, before inventory write-downs. This
compares with the gross profit percentage of 26% for the year ended June 30,
1997. The Company charged operations with $834,000 in inventory obsolescence and
write-downs during the ten month period. The Company expects 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.
The Company reduced monthly operating expenses from $551,000, for fiscal 1997,
to $436,000, for the period ended April 30, 1998. This reduction of 21% kept
expenses in line with the decrease in sales of 19%.
16
<PAGE>
Overview (Continued)
The Company experienced operating losses of $2,086,000, or $.09 per share,
compared to $6,097,000, or $.38 per share, for the previous fiscal year. Losses
decreased 66% from the previous year.
Over the past ten months, Management has spent an inordinate amount of time and
effort in addressing administrative issues and legal matters which are now
resolved. Future results will benefit from a dedicated focus on sales and
controlling operating expenses, to maximize profitability and return on capital
employed.
The Company's total operating expenses decreased from $6,610,000 to $4,355.000
for the ten month period ended April 30, 1998. Average monthly expenses were
down 21%, and were in line with the 19% decrease in sales for the period. Major
spending reductions were made in legal, trade show, advertising and sales
promotion activities. Resulting operating losses of $2,086,000 were down from
$4,011,000 from fiscal year 1997. Decreased expenses and inventory costs, along
with a favorable legal settlement of $1,825,000, were the primary reason for the
decrease in operating losses. Net loss per share decreased from (.38) to (.09)
for the period ended April 30, 1998.
Net sales for the year ended June 30, 1997 were $7,346,000, or $3,575,000 over
net sales for the year ended June 30, 1996. Sales increases were due to a
growing acceptance of the Company's products in the marketplace, and sales by
European operations. Operating losses increased from $2,688,000, for fiscal year
June 30, 1996, to $6,097,000 for fiscal year June 30, 1997. Losses for fiscal
year 1997 included write-offs of non-recurring expenses of $3,700,000. These
expenses included $833,000 for auto racing team expenses, $628,000 in legal
expenses, $1,395,000 inventory adjustments and $860,000 in research and
development expense for new products. Operating loss per share decreased from
$(.58), for the year ended June 30, 1996, to $(.38), for the year ended June 30,
1997.
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
decreased from $3,375,000 for the year ended June 30, 1997 to $2,062,000 for the
year ended April 30, 1998. This decrease is due to the Company's net loss at
April 30, 1998. 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.
During the year the Company settled a lawsuit with Maxiswitch, Inc. The Company
received $1,825,000 in April 1998. The Company also received $1,500,000 as
proceeds resulting from a building sale and lease-back transaction negotiated by
previous management, in July 1997.
Subsequent to year ended April 30, 1998, the Company entered into a factoring
agreement to finance operations by factoring its North American receivables.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and reports
thereon, commencing at page F-1 of this report, which financial statements,
report, notes and data are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Directors and Executive Officers
Directors of the Company serve for a term of five years from their date of
election to the Board of Directors.
The following table sets forth information concerning each of the directors and
executive officers of the Company:
Name Age Position
- ---- --- --------
James L. Copland 48 President, Treasurer, Chairman of the Board,
and Chief Executive Officer
Catherine Copland 49 Secretary, Director
Harry G. Wilson 47 Director
Steve Deckrow 52 Director
Chris F. Richards* 39 Director and Vice President of Sales and Marketing
Richard W. Elwood 59 Director of Finance and Operations
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, and as Secretary since January 1997. 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.
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.
Steve Deckrow has been a director of the Company since September 1997. >From
1989 until 1992, Mr. Deckrow served as President for the publicly and privately
held LAN VAR Systems Integration Company. From 1992 until 1994, Mr. Deckrow
served as Vice President of Sales and Marketing for Next Link LLC., a
telecommunications Company that provides client/server computing and systems
integration services. Mr. Deckrow is presently an independent consultant,
assisting companies in the launch of Internet services designed to link buyers
with sellers in local markets through an on-line business/residential listings
and integrated mapping directory services.
*Chris F. Richards served as Vice President of Sales and Marketing from July
1997. From April 1994 until June 1997, Mr. Richards served as Vice President of
Sales and Marketing and acting General Manager of Elecom Computing Products, a
manufacturer of computer and audio peripherals and accessories. From 1989 until
April of 1994, Mr. Richards served as both a Regional and national Sales manager
for Panasonic Communication and Systems Corporation. Mr. Richards resigned as
director and Vice President of Sales and Marketing, effective July 31, 1998.
Richard W. Elwood has served as Director of Finance and Operations since
February, 1998. From January, 1995 to August, 1997 Mr.Elwood served as General
Manager of Government Computer Sources, Inc. Prior to this, Mr. Elwood served a
27 year career with Eaton Corporation, serving in various management capacities,
including Division Controller of Fluid Power Operations and Plant Manager in the
Engine Components Division.
18
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers, and persons who own more than 10% of a registered class of
the Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Directors, officers and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file.
The Company believes that each person who, at any time during such fiscal year,
was a director, officer or beneficial owner of more than 10% of the Company's
Common Stock complied with all Section 16(a) filing requirements during such
fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation earned by the Company's Chief
Executive Officer (the ("Named Officer") for services rendered to the Company
during the two preceding fiscal years. No other executive officer of the Company
earned more than $90,000 in the prior fiscal years.
Fiscal Annual
Name and Principal Position Year Compensation
- --------------------------- ---- ------------
James L. Copland 1998 $126,250
President, Treasurer, 1997 $250,000
Chairman of the Board, and
Chief Executive Officer (1)
Thomas Bednarik
Former Chief Executive Officer
and Director (2) 1997 $150,000
William A. Pendley
Chief Financial Officer (3) 1997 $100,000
William Cunningham
Vice President of Operations (3) 1997 $100,000
(1) 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.
(2) Thomas Bednarik resigned as director and Chief Executive Officer effective
July 18,1997
(3) No longer employed by the Company subsequent to June 30, 1997
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to beneficial
ownership of the Common Stock as of November 20, 1997 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) 18,345,258 (3) 43.1%
Harry Wilson (2) *
Steve Deckrow (2) *
All directors and officers as a group
(four persons)(2) 18,365,258 43.2%
Less than 1% of the outstanding Common Stock
</TABLE>
(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 April 30, 1998. 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.
(2) Each of such persons may be reached through the Company at 15695 N. 83rd
way Scottsdale, Arizona 85260.
(3) Includes common stock owned, stock options and convertible preferred stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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.
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.
The Company had entered into 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 July 1, 1997.
James L. Copland converted 148,888 shares of common stock for $150,000 cash. The
transaction has been retroactively applied to the fiscal year 1998 financial
statements, and included in this filing.
20
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
- ------ -------
1.3(1) Form of Underwriter's Warrants
1.4(1) Form of Warrant Agreement
3.1(1) Restated Articles of Incorporation
3.2(1) Bylaws
4.1(2) Form of Certificate evidencing shares of Common Stock
4.2(2) Form of Certificate evidencing Stock Purchase Warrant
4.3(2) Certificate of Designation of Series A Preferred Stock
4.4(2) Form of Certificate evidencing Series A Preferred Stock
4.5(2) Form of Certificate evidencing Series B Preferred Stock
10.1 Form of Employment Agreement between the Company and James L.
Copland dated July 1, 1997
21.0(2) Subsidiaries of the Registrant
27.0* Financial Data Schedule
- ----------
* Filed Herewith
(1) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-96812 LA).
(2) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 filed with the U.S. Securities and
Exchange Commission on or about September 23, 1996.
(b) Reports on Form 8-K;
On March 12, 1998, the registrant filed with the Securities
Exchange Commission to change its fiscal year from June 30 to
March 31.
On June 17, 1998, the registrant filed with the Securities
Exchange Commission to change its fiscal year from March 31 to
April 30.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SC&T INTERNATIONAL, INC.
Date: August 10, 1998 /s/ James L. Copland
--------------------
James L. Copland, Chairman of the Board,
President, Treasurer, Chief Executive
Officer, and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James L. Copland President, Treasurer, Chief Executive August 10, 1998
- ----------------------------
James L. Copland
/s/ Catherine Copland Assistant Secretary and Director August 10, 1998
- ----------------------------
Catherine Copland
/s/ Harry G. Wilson Director August 10, 1998
- ----------------------------
Harry G. Wilson
/s/ Steve Decrow Director August 10, 1998
- ----------------------------
Steve Decrow
/s/ Chris F. Richards Director August 10, 1998
- ----------------------------
Chris F. Richards
</TABLE>
22
<PAGE>
SC&T INTERNATIONAL, INC.
------------------------
AND SUBSIDIARY
--------------
Page
----
Part I Financial Information
Item 1 Financial Information
Independent Auditor's Report F - 1
Consolidated Balance Sheet as of
April 30, 1998 F - 2
Consolidated Statements of Operations for the Years
Ended April 30, 1998 and June 30, 1997 F - 3
Consolidated Statements of Shareholders' Equity for the
Years Ended April 30, 1998 and June 30, 1997 F - 4
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1998 and June 30, 1997 F - 5
Notes to Consolidated Financial Statements F - 6
23
<PAGE>
Independent Auditor's Report
----------------------------
The Board of Directors
SC&T International, Inc.
We have audited the accompanying consolidated balance sheet of SC&T
International, Inc. and subsidiaries as of April 30, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the ten month period ended April 30, 1998 and the year ended June 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of both
SC&T Europe, NV, (Belgium) and SC&T Europe, LTD., (United Kingdom), wholly-owned
subsidiaries, which statements reflect total assets of $1,448,000 and total
revenues of $2,343,000 for the year then ended. Those statements were audited by
other auditors whose reports have been furnished to us, and in our opinion,
insofar as it relates to the amounts included for SC&T Europe, NV and SC&T
Europe, LTD., is based solely on the report of the other auditors. The auditors
of SC&T Europe, LTD., issued an adverse opinion on the subsidiary's financial
statements, due to uncertainties about the Company's ability to provide the
necessary financial support to the subsidiary.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SC&T International,
Inc. and subsidiaries as of April 30, 1998 and the consolidated results of their
operations and their cash flows for the ten months ended April 30, 1998 and the
year ended June 30, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered losses from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
EVERS & COMPANY, LTD
August 6, 1998
Phoenix, Arizona
F-1
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
April 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 861,560
Receivables 741,709
Inventory 2,047,639
Other current assets 136,037
------------
Total current assets 3,786,945
Property and equipment 670,080
Other assets 164,789
------------
$ 4,621,814
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,324,511
Accrued expenses 190,463
Advances from factor 116,252
Current portion of capital lease obligation 10,331
------------
Total current liabilities 1,641,557
------------
Capital lease obligation, net of current portion 23,793
Deferred gain on sale/leaseback of building 145,864
Shareholder's equity:
Preferred stock, 5,000,000 shares authorized
Series A, $.01 par, 173 shares issued and outstanding 2
Series B, $.100,000 stated value, 15 shares issued and outstanding 1,500,000
Common stock, $.01 par value, 75,000,000 shares authorized
23,153,684 shares issued and outstanding 231,538
Additional paid-in capital 13,280,027
Currency translation (54,713)
Accumulated deficit (12,146,254)
------------
2,810,600
------------
$ 4,621,814
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Ten Month Period Ended April 30, 1998 and the Year Ended June 30, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Sales $ 4,733,558 $ 7,346,471
Cost of goods sold
Cost of goods sold 3,424,081 5,497,851
Inventory adjustment to carrying value 834,900 1,395,975
------------ ------------
4,258,981 6,893,826
------------ ------------
Gross profit 474,577 452,645
------------ ------------
Selling, general and administrative expenses
salaries and benefits 1,140,345 1,302,239
Selling and promotion 1,072,065 2,074,097
Office and administrative 900,206 1,298,976
Research and development 317,593 859,971
Consulting fees 120,005 260,685
Other 805,163 814,362
------------ ------------
4,355,377 6,610,330
------------ ------------
Loss from operations (3,880,800) (6,157,685)
------------ ------------
Other income (expense):
Interest income 17,125 273,623
Interest expense (47,081) (213,131)
Gain from legal settlement 1,825,000 --
------------ ------------
1,795,044 60,492
------------ ------------
Net loss $ (2,085,756) $ (6,097,193)
============ ============
Net loss per common share $ (0.09) $ (0.38)
============ ============
Weighted average common shares outstanding $ 23,345,491 $ 16,164,835
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Shareholders Equity
For the Ten Month Period Ended April 30, 1998 and the Year Ended June 30, 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
------------ --------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 5,085,415 50,854 1,051 11 15,097,557
Issuance of stock for liabilities 18,332 183 -- -- 27,315
Conversion of preferred stock 18,031,526 180,316 (333) (4) (165,250)
Currency translation -- -- -- -- --
Net Loss -- -- -- -- --
---------------------------------------------------------------
Balance at June 30, 1997 23,135,273 231,353 718 7 14,959,622
Conversion of preferred stock 5,450,000 54,500 (545) (5) (54,495)
Conversion of president's common
stock to Series B Preferred (1,648,444) (16,484) 15 1,500,000 (1,633,516)
Cancellation of treasury stock (3,783,145) (37,831) -- -- 8,416
Currency translation -- -- -- -- --
Net Loss -- -- -- -- --
----------------------------------------------------------------
Balance at April 30, 1998 23,153,684 231,538 188 1,500,002 13,280,027
================================================================
Treasury Stock
-------------- Currency Accumulated
Shares Amount Translation Deficit
------ ------ ----------- -------
Balance at June 30, 1996 (200,000) (29,415) (23,271) (3,963,305)
Issuance of stock for liabilities -- -- -- --
Conversion of preferred stock -- -- -- --
Currency translation -- -- (50,980) --
Net Loss -- -- -- (6,097,193)
------------------------------------------------------
Balance at June 30, 1997 (200,000) (29,415) (74,251) (10,060,498)
Conversion of preferred stock -- -- -- --
Conversion of president's common
stock to Series B Preferred -- -- -- --
Cancellation of treasury stock 200,000 29,415 -- --
Currency translation -- -- 19,538 --
Net Loss -- -- -- (2,085,756)
------------------------------------------------------
Balance at April 30, 1998 -- -- (54,713) (12,146,254)
======================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SC & T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Ten Month Period Ended April 30, 1998 and the Year Ended June 30, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,085,756) $(6,097,193)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 141,055 142,149
Amortization of deferred gain on sale leaseback (13,252) 0
Loss on disposition of property and equipment 0 138,944
Decrease (increase) in accounts receivable 101,400 (102,655)
Decrease (increase) in inventory 417,884 (1,033,442)
Decrease (increase) in other assets (147,652) 168,553
Increase (decrease) in accounts payable 428,052 (169,854)
Decrease in accrued expenses (12,830) (50,205)
----------- -----------
Net cash used in operating activities (1,171,099) (7,003,703)
----------- -----------
Cash flows from investing activities:
Proceeds from sale leaseback of building 1,408,577 0
Purchase of property and equipment (412,121) (1,656,749)
----------- -----------
Net cash provided by (used in) investing activities 996,456 (1,656,749)
----------- -----------
Cash flows from financing activities:
Repayment of debt 0 (85,350)
Cash payment for stock acquired from president (150,000) 0
Currency translation 19,538 (50,980)
Payment of capital lease obligations (8,225) (785)
Proceeds from issuance of stock 0 15,062
Advances from (repayments to) factor 116,252 (121,368)
----------- -----------
Net cash provided by financing activities (22,435) (243,421)
----------- -----------
Net increase (decrease) in cash (197,078) (8,903,873)
Cash, beginning of period 1,058,638 9,962,511
----------- -----------
Cash, end of period $ 861,560 $ 1,058,638
=========== ===========
Supplement disclosure of cash flow information
- ----------------------------------------------
Cash paid for interest $ 47,081 $ 213,131
=========== ===========
</TABLE>
Supplementary schedule of non cash investing and financing
- ----------------------------------------------------------
During 1998, the Company converted preferred and treasury stock into common
stock. The Company also converted the president's common stock to Series B
preferred.
During 1997, the Company issued 18,332 shares of common stock in partial
satisfaction of a liability for $27,498.
The Company leased equipment with a cost of $11,303 in 1998 and $18,131 in 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
1. Summary of Significant Accounting Policies:
-------------------------------------------
The following is a summary of the significant accounting policies followed
by SC&T International, Inc. These policies conform with generally
accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
a. Consolidation
-------------
The consolidated financial statements include the accounts of SC&T
International, Inc. and its wholly-owned subsidiaries, SC&T
America, Inc., SC&T Racing Enterprises, LTD., SC&T Europe, NV, a
Belgium corporation and SC&T Europe, LTD., an English company
(collectively, the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.
b. Operations
----------
The Company sells, markets and distributes consumer electronic
products and personal computer accessory products, from facilities
located in Arizona and the United Kingdom. The Company closed its
offices in Belgium during 1998 and consolidated those operations
in the United Kingdom.
c. Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform to the
current period presentation. During 1998, the Company changed its
fiscal year from June 30 to April 30.
d. Cash Equivalents
----------------
Cash equivalents include money market accounts and other short-term
investments with an original maturity of three months or less.
e. Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
f. Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is provided,
on the straight-line method, over the estimated useful lives of
the assets, which range from 3 to 10 years.
F-6
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
1. Summary of Significant Accounting Policies, continued
-----------------------------------------------------
g. Revenue Recognition
-------------------
Sales are recorded when the product is shipped. The Company sells
product through internal sales personnel, as well as independent
sales representatives. An allowance is recorded to reflect
estimated returns of products from customers.
h. Research and Development
------------------------
Research and development costs for new products are expensed as
incurred.
i. Advertising
-----------
Advertising costs, which include the costs of sponsoring racing events,
are expensed as incurred. Advertising costs for the years ended
April 30, 1998 and June 30, 1997 were approximately $686,000 and
$883,000 respectively.
j. Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and
their respective tax bases, including operating loss and tax
credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect in deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
k. 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.
l. Loss Per Common Share
---------------------
Loss per common share is based on the weighted average number of common
shares outstanding during the respective years. Warrants, options
and convertible preferred stock were anti-dilutive at April 30,
1998 and June 30, 1997. The conversion of preferred stock to
common, including the surrender of the president's shares and the
re-issuance of treasury stock resulted in weighted average shares
of approximately 210,000 during 1998.
F-7
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
2. Contingency
-----------
The Company has reported net losses of approximately $2,100,000 for the
year ended April 30, 1998 and had an accumulated deficit of
approximately $12,300,000 at that time. Management attributes these
losses primarily to start-up costs incurred in developing the Company's
product line, the costs of introducing new products to market,
allowances for inventory obsolescence related to the limited
marketability of older generation products 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.
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 to continue 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
financing.
The Company has not yet developed and implemented a plan to ensure
compliance of its systems in the Year 2000.
These financial statements do not contain any adjustments to the carrying
value of assets and liabilities, related to recoverability, should the
Company be unable to continue as a going concern.
3. Cash Concentrations and Restrictions
------------------------------------
At April 30, 1998, the Company maintained cash accounts with a securities
broker that exceeded federally insured limits by approximately
$600,000.
4. Receivables
-----------
Receivables consist of the following at April 30, 1998:
<TABLE>
<S> <C>
Trade accounts receivable (see factoring agreement - Note 8) $1,267,875
Other 8,922
Allowance for returns and doubtful accounts (535,088)
----------
$ 741,709
==========
</TABLE>
5. Inventory
---------
Inventory consists of the following at April 30, 1998:
<TABLE>
<S> <C>
Finished goods $2,584,411
Advances on purchases of inventory 133,048
Allowance for obsolescence (669,820)
----------
$2,047,639
==========
</TABLE>
F-8
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
5. Inventory, continued
--------------------
Advances on purchases of inventory are for inventory currently being
manufactured or anticipated to be manufactured in the near future. The
Company relies on a limited number of suppliers and contract
manufacturers for the production of its products. As such, the Company
experienced delays in the anticipated delivery schedules for its
products during both 1998 and 1997. Subsequent to year end, the company
shifted the manufacturing of its products to a new manufacturer in Hong
Kong. The company also reached a verbal settlement with its prior
manufacturer. The settlement required the Company to pay $300,000 for
release of certain inventory and supplies.
The allowance for obsolescence and the inventory adjustment to carrying
value consist of reductions in the market value of the Company's
existing product line in anticipation of a new generation of products
to be released.
6. Property and Equipment
----------------------
Property and equipment consist of the following at April 30, 1998.
Office furniture and equipment $ 487,416
Tools & dies 475,530
Warehouse equipment 11,303
---------
974,249
Less accumulated depreciation (304,169)
---------
$ 670,080
=========
7. Bank Line of Credit
-------------------
On October 1, 1996, the Company obtained a $500,000 line of credit
agreement with a bank which was to be used for financing letters of
credit with an issuance date no later than September 30, 1997 and
maturity not to extend more than 180 days beyond the expiration date.
The line was collateralized by a $525,000 certificate of deposit and
accrued interest at the bank's reference rate. The agreement also
contained various liquidity and net worth ratios, with which the
Company was not in compliance at June 30, 1997. On September 23, 1997,
the Company and the bank agreed to terminate the agreement and the
restrictions on the cash were released.
8. Factoring Agreements
--------------------
In November, 1997, the Company entered into a factoring agreement with the
Commercial Financial Group (CFG) to factor its accounts receivable. The
terms of the agreement provided for advances of up to 50% of
receivables factored and a 2% discount factor payable to the factor
upon submission of invoices. Additional fees were charged when the
invoices remained unpaid after 30 days and the Company was also
required to repurchase any invoices outstanding over 90 days. The
agreement was secured by substantially all assets of the Company.
F-9
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
8. Factoring Agreements, continued
-------------------------------
In May, 1998, the Company changed factors which resulted in an early
termination penalty of $12,000 to CFG. The new factoring arrangement
provides for a fee equal to 1.5% of all invoices factored plus interest
equal to the bank's base rate plus 2% on all outstanding balances
advanced. The factor has assumed credit risk related to receivables
factored, however the Company is responsible for all customer disputes
and counterclaims. The agreement is secured by accounts receivable,
inventory, certain other assets of the Company and the personal
guarantees of certain officers.
9. Lease Commitments
-----------------
The Company leases office equipment under various capital and operating
leases which require monthly payments which range from $89 to $909,
that expire from November, 1998 through April, 2001. The Company also
leases its corporate apartment under an operating lease. Under the
lease, the monthly rent is approximately $750, and the Company is
responsible for certain expenses.
The Company leases its U.K. facility for $9,435 per month through May,
2003, with an option to break the lease in May, 2000.
On July 1, 1997, the Company completed a sales-leaseback transaction
involving the land and building on which the Company's headquarters are
located. The sales price of the property was $1,500,000, which resulted
in a gain of approximately $159,000, that is being deferred and
amortized over the lease term. The leaseback is for a ten-year period
and grants the Company the right of first refusal to purchase the
building. The terms of the lease also require the Company to pay all
operating expenses associated with the building.
Future minimum lease obligations are as follows:
<TABLE>
<CAPTION>
Year ending April 30, Capital Operating
--------------------- ------- ---------
<S> <C> <C>
1999 $ 15,333 $ 278,951
2000 15,333 277,201
2001 12,504 170,110
2002 - 171,670
2003 - 171,670
Thereafter - 780,680
--------- -----------
43,170 $ 1,850,282
===========
Less amounts representing interest at 18% 9,046
---------
Present value of capital lease obligations 34,124
Current portion 10,331
---------
Capital lease obligations, net of current portion $ 23,793
=========
</TABLE>
F-10
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
9. Lease Commitments, continued
----------------------------
Rent expense for the years ended April 30, 1998 and June 30, 1997, was
approximately $216,126 and $128,000, respectively.
10. Equity
------
In June 1996, the Company issued 1,051 shares of Series A preferred stock,
$.01 par value per share, for $10,000 per share with an accretion rate
of 8% per year up to the date of conversion. The Company received net
proceeds of approximately $9,621,000 for the 1,051 shares. The shares
were able to be converted to common stock at a conversion price which
was 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 preceding
the conversion date. One-third of the Series A preferred stock was
convertible on or after August 20, 1996, September 19, 1996 and October
19, 1996. All conversions are subject to the Company's right of
redemption, under a formula specified in the preferred stock agreement.
The Series A preferred stock will bear no dividends and have no voting
rights except as otherwise required by Arizona statute.
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 year since purchase. At any time commencing twelve
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.
During the years ended April 30, 1998 and June 30, 1997, 545 and 333 shares
of preferred stock were converted into 5,450,000 and 18,031,516 shares
of common stock, respectively.
During 1998, the Company reached agreements with preferred shareholders
owning 680 shares of preferred stock. The stock was tendered for
conversion at a fixed conversion price of $1.00 per share. In addition,
the holders of the stock are to receive warrants to purchase one-third
of the number of shares which they receive at a price of $1.75 per
share subject to anti-dilution provisions. The Company did not have an
adequate number of authorized shares to cover the warrants, employee
stock options and the remaining preferred shareholders. In order to
allow the Company to have sufficient shares for these transactions, the
President of the Company returned 1,648,444 of his shares to the
Company. Subsequent to year end, the shareholders of the Company
approved the issuance of 15 shares of $100,000 stated value preferred
stock to the president in exchange for 1,500,000 shares of common stock
returned. The preferred shares are convertible into common stock at the
rate of 12 shares for every $1 of face value of the Series B Preferred
Stock. In addition, the president received $150,000 in cash for the
additional 148,444 shares returned. The transaction has been
retroactively applied to the 1998 financial statements.
F-11
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
10. Equity, continued
-----------------
In conjunction with its public offering in 1995, the Company 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 $.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 July, 1998, the shareholders authorized an increase in the Company's
authorized common shares from 25,000,000 to 75,000,000. They also
approved a reverse stock split of the common stock in a ratio to be
determined by the board.
11. Delisting from NASDAQ Small Cap Market
--------------------------------------
During the year ended June 30, 1997, the NASDAQ Stock Market, Inc.
conducted reviews of the Company's public filings and responses to
previous comment letters and determined that sufficient public interest
concerns existed to warrant delisting of the Company's stock from the
NASDAQ stock market. Part of NASDAQ's concerns related to the issuance
of convertible preferred stock which granted those stockholders the
ability to convert their shares to common stock in an amount greater
than the Company's authorized capital. The Company responded to those
inquiries and was granted an extension until October 20, 1997 to reach
agreements with the preferred shareholders to eliminate the overhang in
the market.
The Company reached agreements with approximately 94% of the preferred
shareholders prior to October 20, 1997. However, due to the resignation
of the Company's auditors and their notification with the SEC on
September 17, 1997, the Company failed to file its 10-K with the
Securities and Exchange Commission in a timely manner. On October 21,
1997, NASDAQ notified the Company that it had determined to delist the
Company's securities from the NASDAQ Small Cap Market effective with
the close of business on October 21, 1997 due to the Company's
inability to comply with its filing requirements.
12. Income Taxes
------------
The components of the net deferred tax assets at April 30, 1998, assuming a
40% effective tax rate, are as follows:
Allowance for doubtful accounts and sales returns $ 210,000
Allowance for inventory obsolescence 270,000
Net operating loss carry-forward 4,720,000
Less valuation allowance (5,200,000)
-----------
$ -
===========
F-12
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
12. Income Taxes
------------
At April 30, 1998, the Company has net operating loss carry-forwards of
approximately $11,500,000, which are available to offset future taxable
income for federal and state income tax purposes. These loss
carry-forwards will begin to expire from 2010 to 2013 for federal
purposes and from 2000 to 2003 for state purposes.
Due to various changes in ownership, the Company's initial public offering
and the private offering of Series A Preferred Stock during the years
ended June 30, 1995, 1996 and 1997, the availability of these net
operating losses will be restricted as provided under Internal Revenue
Code Section 382 and related regulations.
At April 30, 1998, the Company had recorded a valuation allowance of
$5,200,000 for deferred tax assets because the benefit of those
temporary differences may not be realized. This represents an increase
of $1,420,000 over the prior year.
13. Legal settlement
----------------
In May of 1995, the Company filed suit against Maxi Switch and its
corporate affiliates for misappropriation of trade secrets and breach
of contract in connection with the Company's multimedia keyboard
technology. In May of 1997, a jury awarded the Company $3,000,000, 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.
However, in April 1998, Maxi Switch and the Company agreed to settle
the claim for $1,825,000. The gain has been recorded in the 1998
financial statements.
14. Related Party Transactions:
---------------------------
During 1998, the Board of Directors forgave a receivable from the Company's
President of approximately $38,000.
On July 1, 1997, the Company entered into a new five-year employment
agreement with its Chief Executive Officer. The agreement provides for
a base salary, certain benefits plus an incentive bonus to be
determined at the sole discretion of the Board of Directors. As part of
the agreement, the officer and his wife received cash payments for
accumulated accrued vacation and forgiveness of all amounts owed by
them to the Company. The vacation and indebtedness were approximately
$60,000 and $38,000, respectively. The agreement also contains
termination provisions and a one-year non-competition clause.
15. Significant Customer and Suppliers
----------------------------------
The Company had a significant customer which accounted for approximately
12% of the Company's total revenues for the years ended April 30, 1998.
The Company had a different customer during 1997 whose purchases
totaled 12% of sales as well. The accounts receivable balance from the
significant customer totaled approximately $50,000 at April 30, 1998.
Additionally, a significant portion of the Company's sales are
generated from its wheels and a limited number of other products.
F-13
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
16. Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties,
matters of judgment and, therefore, cannot be determined with
precision. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular instrument. Changes in assumptions could
significantly affect the estimates.
Since the fair value is estimated as of April 30, 1998, the amounts that
will actually be realized or paid at settlement of the instruments
could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the fair
value because of the liquidity of these instruments. Accounts
receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments. Inventory has
been reduced to estimated market value. Advances from the factor bear
interest at current market rates.
17. Options and Warrants
--------------------
The Company has a qualified incentive stock option plan for its key
employees, consultants and independent contractors. The grants
generally vest over three years and expire in 2005 or upon termination
of employment, if not utilized. Due to limited availability of the
Company's authorized stock, the options may not able to be exercised.
Activity for 1997 and 1998 follows:
Options Price
------- -----
Options outstanding at July 1, 1996 576,585 $1.00-5.70
Granted 625,000 $1.00
Canceled or expired (226,585) $1.00-5.70
---------
Options outstanding at June 30, 1997 975,000 $1.00
Granted 270,000 $1.00
Canceled or expired ( 65,000) $1.00
---------
Options outstanding at April 30, 1998 1,180,000 $1.00
=========
The Company continues to account for stock options in accordance APB
Opinion #25, whereby the option costs to employees are not recognized
in the statement of operations. The results of operations would not
have been significantly different, had the Company elected to reflect
the option cost in its statement of operations during the years ended
April 30, 1998 and June 30, 1997.
F-14
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
17. Options and Warrants, continued
-------------------------------
In connection with the Company's private placement in June, 1996, the
Company issued warrants to purchase 108,490 shares of common stock. The
warrants are exercisable immediately at $7.75 per share and expire on
June 17, 2001. The Company issued 517,500 warrants to its underwriter
in connection with its initial public offering 454,000 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.
18. Litigation and Unasserted Claims
--------------------------------
In August of 1995, Network Technical Services sued the Company for
approximately $150,000 in a breach of contract action alleging the
failure of SC&T to pay for certain cables delivered by Network. This
litigation was settled during 1998 for $45,000 and the corresponding
liability has been reflected in the accompanying financial statements.
In September of 1997, Activision filed suit against the Company for breach
of contract seeking $43,250 related to the cancellation of a shipment
of goods. Management denies responsibility due to the unavailability of
the second shipment. Both parties have agreed to explore the use of a
new bundling agreement to resolve the current litigation.
In September of 1997, Home Arcade filed suit against the Company for
breach of a license agreement, which alleges bad faith and fraud
claims. Home Arcade demanded $300,000 for breach of contract,
requesting that the amount be trebled to $900,000 for trebling and
punitive damages. Management has evaluated the issues of breach and
disputes the principal amounts. The Company is in the process of filing
counterclaims alleging that SC&T incurred significant losses as a
result of Home Arcade's misrepresentations and breach of licensing
agreement.
In June of 1997, Jack of All Games Entertainment, Inc. sued the Company
for breach of contract regarding a purchase order for wheel
accessories. Jack Of All Games is seeking approximately $180,000 in
damages. Management acknowledged difficulties with the wheels and
attempted to negotiate an amicable resolution with Jack of All Games.
Two weeks prior to the court date in June, JOAG dismissed its complaint
and refiled a new complaint. Management believes that it has certain
legal defenses, but legal counsel is unable to determine whether any
other of JOAG's claims have merit and to what extent JOAG may have been
damaged. It is, therefore, not possible to determine the Company's
potential exposure at present, and no provision for the liability has
been made in the accompanying financial statements.
In conjunction with the construction of its office building in 1996, the
Company held back certain funds from the contractor pending completion
of the contract. The contractor did not pay certain of its
subcontractors and consequently the contractor's bonding company was
required to pay the subcontractors. The bonding company has now filed
suit against SC&T for recovery of amounts due to the contractor.
Although management has not yet filed its answer to the claim, it has
indicated commitment to pay all amounts when due. The company has
provided for this liability in the April 30, 1998 financial statements.
F-15
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998 and June 30, 1997
18. Litigation and Unasserted Claims, continued
-------------------------------------------
SC&T filed suit against a former employee for recovery of moving expenses,
which expenses became due when the employee resigned prior to one year
from the agreement. The employee filed a counterclaim alleging that he
did not receive full compensation during his tenure. Management has
evaluated the claims and expects a positive judgment within one to one
and one half years.
As disclosed in note 11 to the financial statements, the Company was
delisted from the NASDAQ stock market in October, 1997. In the event
the Company's stock does not commence trading on the NASDAQ stock
market again, the Company may be exposed to claims from its preferred
shareholders.
19. Foreign Operations
------------------
The Company operated sales facilities in the United Kingdom and Belgium
during 1998 and 1997. These offices distribute substantially the same
product line as the U.S. operations. During the year ended April 30,
1998, sales and net loss generated from foreign operation were
approximately, $2,340,000 and $1,200,000, respectively. For the year
ended June 30, 1997, sales and net income generated from foreign
operations were approximately $3,795,000 and $231,000, respectively.
The Company closed its offices in Belgium during 1998. Significant
assets used in these operations, at April 30, 1998, are as follows:
Cash $64,000
Receivables 338,000
Inventory 883,000
Other 161,000
The Company's foreign operations do not have any significant investment in
property and equipment.
20. Commitments
-----------
The Company has entered into a consulting and royalty agreement with
various companies, which require payments based upon either the sales
or purchases the vendor's products.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 861,560
<SECURITIES> 0
<RECEIVABLES> 1,276,797
<ALLOWANCES> 535,088
<INVENTORY> 2,047,639
<CURRENT-ASSETS> 3,786,945
<PP&E> 974,249
<DEPRECIATION> 304,169
<TOTAL-ASSETS> 4,621,814
<CURRENT-LIABILITIES> 1,641,557
<BONDS> 0
0
2
<COMMON> 1,731,538
<OTHER-SE> 1,079,060
<TOTAL-LIABILITY-AND-EQUITY> 4,621,814
<SALES> 4,733,558
<TOTAL-REVENUES> 4,733,558
<CGS> 4,258,981
<TOTAL-COSTS> 5,258,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 535,088
<INTEREST-EXPENSE> 47,081
<INCOME-PRETAX> (2,085,756)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,085,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,085,756)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
