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 June 30, 1997
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: $7,346,471.
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
October 1997 - $14,083,187.
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of November 23, 1997 - 22,953,684.
Documents incorporated by reference: Not Applicable.
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SC&T INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-KSB
FISCAL YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 15
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 20
ITEM 10. EXECUTIVE COMPENSATION 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
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PART I
ITEM 1. BUSINESS
General
The Company develops and markets accessory and peripheral products for the
personal computer and video game segments of the retail and Corporate markets
under the company's PLATINUM SOUND and PER4MER registered trademarks. The
company segregates its products into two distinctive product categories. The
sound products are marketed under the Platinum Sound brand name, while the
companies racing wheel and other input device accessories are marketed under the
PER4MER brand name. The Company's sound products include sub-woofer, sound
enhancement systems, and a broad line up of headphones, microphones, and
amplified speaker systems. The PER4MER line consists of racing wheel products,
designed for all IBM PC's , SEGA, Nintendo and Sony Playstation game consoles.
This line also includes game controller devices, Volume Controllers, and a new
Voice Recognized keyboard, targeted to the Corporate market. The Company's first
generation multimedia keyboards have been discontinued, in favor of a second
generation Voice Recognized product. This product, the VRK-500 features enhanced
Voice Recognition capabilities, but has not yet been introduced into the market.
PLATINUM SOUND and the PER4MER brand names, are both registered trademarks of
the Company.
The Company focuses on the multimedia, interactive, communications and the video
gaming segments of the PC and consumer electronics industry. The company
develops technology to furnish one-step, integrated solutions for the PC, MAC
and Video Game user. The Company began operations in June 1993 and achieved
sales of approximately $3,771,000 and $7,346,000 during the years ended June 30,
1996 and June 30, 1997, respectively. Although the Company's revenues has
increased significantly since inception, the Company has recorded losses of
approximately $2,688,000 and $6,097,000 for the years ended June 30, 1996 and
June 30, 1997, respectively.
Industry Overview
The market for multimedia PC's and video game console equipment is evolving
rapidly and is characterized by rapid technological change. Unlike certain other
segments of these markets, the multimedia and gaming segments are consumer
driven. As a result, many PC manufacturers have redesigned their product mix to
dramatically increase the multimedia and entertainment portion of their product
line. Some have reconfigured their product lines so that 100% of their products
offer multimedia and gaming capabilities.
This Report also refers to other manufacturers, retailers and vendors as it
applies to the current marketplace.
Platinum Sound Products
The company' sound category consists of a well rounded line up of Sub Woofer,
Equalizer-Amplifiers, Headphones, Microphones, Volume Controllers and Amplified
Speaker systems. This product assortment was designed to compete head to head
with top selling products offered by Altec Lansing, Yamaha, Labtec and Sony. The
company's development focus was on bringing Unique and Innovative products to
the market under the banner of "Twice the Product For Half The Price." The
company feels that its mission of delivering fully featured products at
aggressive retail prices has been successful. Initial product offerings have
been well received by both retailers and the industry media. Currently, Platinum
Sound products account for approximately 20% of the company's annual sales
revenues. The company expects this number to grow in proportion to overall sales
revenues.The demand for greater sound (at affordable prices) by gamers and PC
users alike, have allowed SC&T entry into this high growth market category.
At present, the company offers three sub woofer products, one graphic
equalizer-amplifier, a PC volume controller, 3 microphones, 3 headphones and six
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.
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 suggested
retail price (SRP) for the SRS-OMNI is $69.95.
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Sub Woofer Systems
Platinum Sound's low end entry product is the SWX-1200. This 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 will add an enhanced version of the SWX-1200, with full 3-D sound in
January 1998. It will establish this product as the industries only retail sub
woofer system with 3D-Sound at under $100.00. This product will have an SRP of
$89.95.
The second 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.
The SRS-2000, rounds out the line as an enhanced version of the SWX-1600,
offering full 3-D Surround Sound. Higher power and larger speakers. The system
maintains its wood cabinet and has a SRP of $ 149.95.
Many of the company's sub woofer products are available in either a black or
white exterior finish, for both the PC and Home Stereo segments.
Amplified Speaker Products
Platinum Sound's speaker line currently consists of six speaker products. The
line ranges in peak power ratings of 40 watts at the low end to 140 watts of
peak power. From your basic replacement computer speaker product, the PS-610
right up to the company's newly introduced high end PS-490. This innovative
product, apart from incorporating every user features found in the more
expensive speaker offerings, also includes a 3-D sound capability. SRP for the
PS-490 is only $ 69.95, which is approximately $ 30-40 less than other
competitive products with similar features.
This acceptance at retail of this line is growing rapidly within the U.S.
marketplace. The Platinum Sound line will be a category with a heavy marketing
focus for the company during the next year. In 1998, the company plans a major
launch of its Platinum Sound line into the European market through its UK
subsidiary.
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.
CD-ROM Audio Cables
The Company's original product was its universal twin head CD-audio cable
featuring a universal twin head design and shielded cable. The universal twin
head design allows retailers and OEMs to carry a significantly lower amount of
inventory while maintaining the ability to provide cable that is compatible with
any combination of sound card and CD-ROM drives. Over the past 2 years as the
industry reached a universal solution for CD ROM cables, the profit associated
to this product has dropped dramatically. As a result, the company has been
reducing its focus on this product. In 1998, the company intends to eliminate
CD-ROM audio cables from its mix, and re-apply the cash requirements in favor of
more profitable PER4MER and Platinum Sound products.
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PER4MER PRODUCTS
The PER4MER Racing Wheel, 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.
In October of 1997 the Company introduced its second generation product,
identified as the "ULTIMATE PER4MER" line of racing wheel products. A more
advanced, ergonomically designed product, this new line also includes a Forced
Feed Back model, which addresses the latest technology to hit the video game/PC
marketplace. Forced Feed Back allows the end user to feel all of the real action
(bumps, hits, and accidents) as displayed on the screen of the game/program
being run.
Unlike the original PER4MER products, the new ULTIMATE PER4MER line up has
greater gross margins and SRPs ranging from $69.95 -$199.95. The company expects
this line to account for approximately 70+ % of sales revenues over the next
year.
Marketing
The Company markets its products to the retail video game,OEM, and corporate
segments internationally, through a combination of direct sales personnel,
independent sales representatives, and its wholly owned US, European and U.K.
subsidiaries.
The Company's products are currently sold in over 20 countries, including the
United States, Belgium, Germany, France, Italy, Finland, Holland, Switzerland,
Turkey, the United Kingdom, Argentina, Brazil, Spain, Hong Kong, Canada, and
Russia. For the years ended June 30, 1996 and June 30, 1997, sales in the United
States accounted for approximately 49% and 48%, respectively, of the Company's
consolidated revenue, and sales in Europe accounted for approximately 51% and
52%, respectively, of the Company's consolidated revenue.
Sales by SC&T Europe of products other than the Company's PER4MER and PLATINUM
SOUND products represented approximately 22% of the Company's consolidated
revenue for each of the years ended June 30, 1996 and June 30, 1997.
In the United States, a sales representative is typically paid a 3-4%
commission. In the U.K. and Europe the company utilizes direct sales personnel.
The Company has written agreements with its United States independent sales
representatives. Agreements with independent sales representatives have a term
of one year, with certain cancellation provisions. The Company expects to renew
its agreements as they expire, providing the appropriate sales revenue
objectives are achieved by each group.
In 1998, the company intends to open up distribution alliances-networks serving
the South American marketplace. With a consumer market of over 300 million
people, the company feels that revenues for its products exist in these and
Japanese markets. The company hopes to increase current sales revenues by at
least 15% through these marketing efforts during 1998. However, there are no
assurances that this increase can be realized.
Current U.S. based retail and catalogue customers of the company include, but
are not limited to; Best Buy, Babbages, Data Vision, PC Connections, Egghead
Software, Fry's Electronics, The Good Guy's, Costco Wholesale, Tiger Direct and
Micro Warehouse, Inc. The Company's OEM customer for CD ROM audio cables is Dell
Computer Corporation.
During 1997, 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 suppliers able to supply product at lower costs and make design
modifications that reduce manufacturing costs. While the Company believes it
will continue to maintain reduced manufacturing costs, there can be no assurance
that the Company will be successful in its efforts.
During 1997, the Company hired a managing director for its U.K. subsidiary. The
Company's current marketing efforts include advertising in trade and business
publications, participation in domestic and international industry trade shows,
and production of product literature and sales support tools. The Company's
products are marketed under the registered trade name PLATINUM SOUND Multi-Media
Products, PER4MER, and ULTIMATE PER4MER racing wheel brand names. Packaging and
operating manuals are produced in six languages, Spanish, French, German,
Italian, Portuguese and English.
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The Company's European sales are typically invoiced in U.S. dollars, Pounds
sterling, and Belgian francs. The Company's sales from the United Kingdom will
be invoiced in U.S. dollars and pounds sterling. Expenses of the Company's
international operations are incurred in various foreign currencies, principally
pounds sterling and the Belgian franc. Accordingly, the Company is subject to
the risk of fluctuations in currency exchange rates. To date, the Company has
not experienced any material net gain or loss due to foreign currency
fluctuations. There can be no assurance that the Company will not experience
material adverse effects on operations from foreign currency fluctuations in the
future. See "Special Considerations - Risks Associated With International Sales;
Currency Fluctuations" contained in Item 1 of this Report.
During the years ended June 30, 1996 and June 30, 1997, Dell Computer
Corporation represented approximately 12% of the Company's revenue. The Company
sells in response to purchase orders issued by Dell Computer Corporation.
Despite the withdrawal by the company of supplying CD-ROM audio cables to Dell
in 1998, it is the opinion of management that this reduction in sales revenues
will be replaced by the growing demand for its other products.
New Product Development
The Company's multimedia keyboards line have been discontinued, in favor of a
second generation product targeted at the corporate market. This second
generation 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 on its line of Platinum Sound and PER4MER racing wheel
products.
During the years ended June 30, 1996 and June 30, 1997, the Company spent
approximately $327,000 and $859,000, respectively, on research and development.
The Company expects to incur approximately $200,000 in research and development
expenses in connection with development of new products during fiscal 1998.
Subsidiaries
On December 31, 1994, the Company purchased all of the outstanding shares of
SC&T Europe for 210,000 shares of the Company's Common Stock. This agreement was
renegotiated in June 1996, resulting in the forfeiture of 200,000 shares and the
obligation, subject to certain contingencies, to issue 25,000 shares of the
Company's Common Stock. SC&T Europe was incorporated in Belgium in March 1989.
SC&T Europe markets the Company's products and distributes other computer
related products throughout Europe. The Company, in an effort to reduce its
European operating costs, has consolidated its European distribution operations
into one central facility located in the United Kingdom in May 1997. The Company
formed SC&T Europe Limited, located in Portsmouth England. The Belgium office
remains open at this time, solely as a sales office for mainline Europe. All
current marketing and distribution operations, including a United Kingdom
domestic sales force, is now being handled out of the United Kingdom. For the
year ended June 30, 1996 and June 30, 1997, sales by SC&T Europe accounted for
approximately $1,905,000 and $3,795,260 respectively, of the Company's
consolidated revenue.
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 the Company. The Company's major
competitors in the multimedia accessory and peripheral market are NMB,
Maxiswitch, Silitek, Altec Lansing, Yamaha, Sony, and Labtech. The Company's
major competitors in the video game racing wheel market will come from
Thrustmaster, MadCatz, and Inter-Act.
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
the product that can be sold at a low price and to diversify its product
assortment over its competition. In effect, 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 its
product diversity offers it stronger retail opportunities over many of its
competitors. Unlike its competitors whose market penetration is much larger,
every new account represents new revenue and growth to the Company.
The Company believes the market for its fully-integrated voice recognition
keyboards is an emerging market. The Company faces direct competition as well as
indirect competition from various combinations of non- integrated product
solutions for audio and voice-
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recognition computer applications. If the Company's products gain market
acceptance and the voice recognition market matures as expected, the Company
knows that other companies will attempt to develop competing products.
The Company competes primarily on the basis of design, quality, reliability, and
the ease of use of its products. The Company also competes on value relative to
the features offered by its products. Competitive price reductions may, however,
have an adverse effect on the Company's revenue and profitability. See "Special
Considerations - Competition" contained in Item 1 of this Report.
Intellectual Property Rights
The Company's success is dependent, in part, on its proprietary information,
technology and know-how. The Company relies on a combination of patents,
copyrights, trademarks, trade secrets, and confidentiality agreements to
establish and protect its proprietary rights. Despite these efforts, it may be
possible for competitors or users to copy aspects of the Company's products or
to obtain information that the Company regards as a trade secret.
The Company has applied for a utility patent for the functional aspects of its
multimedia stereo keyboards in the United States and has filed an international
patent application designating Europe, Japan, Australia, Canada, Brazil, China,
and South Korea.
In September of 1997, the Company was informed that the U.S Patent office had
awarded the company a U.S. Patent on its Multimedia Keyboard technology. The
company expects the patent to be issued by January 1998, at which point it feels
that additional revenues will be achieved through licensing agreements from
those other manufacturers who will be in violation of its new Patent.
In addition the Company filed applications for registration of the trademark
PLATINUM SOUND and its PER4MER logos-brand names. The U.S. patent office has
granted registration rights to the company for both brand names. Registered and
certain copyrights in the United States and in foreign countries have been
filed.
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 and UK facilities. The Company tests a sample of all delivered
products for compliance with specifications. The Company's principal suppliers
are Can Technology, Fujikon, and Kaylee Computing.
Although the Company has not experienced any material difficulties in obtaining
supplies in the past, any reduction or interruption in supply could adversely
affect the Company's ability to supply certain of its products. As a result, the
Company maintains a 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 , but feels this
will not be a major factor moving forward due to its ability to focus on the key
products in its product line assortment. In addition, the Company has
experienced certain delays in anticipated delivery schedules for the
introduction of new products. It is currently in discussions with its
manufacturers to determine better methods to avoid future deliveries of its
products.
Employees
As of November 20, 1997, the Company's United States operation had 12 full-time
employees, two of whom were employed in inspection-quality control and
warehousing, four in engineering, sales, marketing and customer support, one in
research and development, and five in administration. In addition, the Company's
UK and European subsidiaries employed four full-time employees, two in sales,
one in finance, one in warehousing, and two part time employees in warehousing
and administration.
None of the Company's employees are represented by a labor union. The Company
believes its relations with its employees are in good standing.
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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 $2,688,000 and $6,097,000 for the years ended June 30,
1996 and June 30, 1997, respectively. As of June 30, 1997, the Company had an
accumulated deficit of over $10,000,000. 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 . The Company also incurred severe losses associated to
its legal case against Maxi Switch, Silitek, and the Lite On Group. To date,
operating revenues have not been sufficient to cover these costs. Although the
Company had revenue of approximately $7,346,000 for the year ended June 30,
1997, an increase of approximately $3,575,000 over revenue of approximately
$3,771,000 for the year ended June 30, 1996, the Company reported a net loss for
the year ended June 30, 1997. 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.
The Company has always elected to write down and report obsolete inventories. It
has continued to develop new products, at a cost to the companies bottom line.
Over the past year the company suffered two major setbacks. The first was a
defective racing pedal problem which was realized by the company during the late
part of December 1996 Christmas selling period. The company experienced severe
revenue losses, estimated to have exceeded $ 1.5 million during the December
1996 through April 97' time frame. The company also incurred over $ 350,000 in
re-work and replacement costs associated to this problem. The second problem was
associated to 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.
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.
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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. See "Business New Product - Development" contained in Item 1 of
this Report.
Dependence on Key Personnel; Need to Attract New Personnel
The loss of the services of James L. Copland, the Company's President,
Treasurer, Chairman of the Board and Chief Executive Officer, 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. The Company's success also
is dependent on its ability to identify, recruit, and retain additional
experienced management, engineering, and marketing personnel. There can be no
assurance that the Company will be able to hire or retain necessary personnel.
The failure of the Company to attract and retain personnel with the requisite
expertise or to internally develop personnel with such expertise could adversely
affect the prospects of the Company's success. See "Directors and Executive
Officers of the Registrant; Compliance with Section 16(a) of the Securities
Exchange Act of 1934" contained in Item 9 of this Report and "Executive
Compensation - Employment Agreements" contained in Item 10 of this Report
Reliance Upon Major Customer
Sales of the Company's product to one customer represented approximately 12% of
the Company's revenue during the years ended June 30, 1996 and June 30, 1997,
respectively. No other customer accounted for more than 10% of the Company's
revenue during these periods.
Dependence on Third-Party Suppliers
The Company does not have supply agreements with any of these suppliers.
Although the Company has not experienced any material difficulties in obtaining
supplies in the past with the exception of timely delivery of new products, the
Company believes that additional suppliers are readily identifiable, any
reduction or interruption in supply from its vendors or suppliers could
adversely affect the Company's ability to supply orders for certain of its
products. See "Business - Raw Materials and Supplies" contained in Item 1 of
this Report.
Risks Associated with International Sales; Currency Fluctuations
Expenses from foreign operations are not denominated in U.S. dollars. Expenses
denominated in foreign currency accounted for approximately 26% of the Company's
expenses for the year ended June 30, 1996, computed on a pro forma basis as if
the foreign subsidiary was owned by the Company for the entire period, and 14%
of the Company's expenses for the year ended June 30, 1997. The Company's
operations abroad expose the Company to risks such as exposure to currency
fluctuations, exchange rates, tariffs and other barriers, differing standards
requirements, difficulties in staffing and managing international operations,
differing regulatory requirements, potentially adverse tax consequences, and
country-specific product requirements. In addition, the Company is exposed to
gains and losses on international currency transactions. Currently, the Company
does not engage in international currency hedging transactions. There can be no
assurance that these factors will not have an adverse impact on the Company's
future revenue or operating results. See "Business - Marketing" contained in
Item 1 of this Report.
Intellectual Property; Patents
The Company's success is dependent, in part, on its proprietary information,
technology, know-how and the company's ability to deliver its products in a
timely manner. The Company relies on a combination of patents, copyrights,
trademarks, trade secrets, and confidentiality agreements to establish and
protect its proprietary rights. Despite these efforts, it may be possible for
competitors or users to copy aspects of the Company's products or to obtain
information that the Company regards as a trade secret. See "Business -
Intellectual Property Rights" and "Business - Legal Proceedings" contained in
Item 1 of this Report.
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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.
Subsequent to year ended June 30, 1997, the Company entered into a factoring
agreement to finance operations by factoring its United states receivables.
Over the past year the company has incurred large legal costs due to the
resolution efforts for its past preferred shareholder problem. The company also
wrote down large inventories of its multimedia keyboard products due to
introduction of competitive keyboard products introduced by Maxi Switch and its
parent Silitek. These products, which were the basis for the company's
successful legal battle with Maxi Switch, caused the company to sustain millions
of dollars in lost revenues. The company does not feel that such expenses or
product write downs are likely to occur during this current 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 94% of the Series A Preferred Stock whereby all of their shares of
Series A Preferred Stock are tendered for conversion at a fixed conversion price
of $1.00 per share (the "Fixed Conversion"). 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'). 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. The Company intends to ask shareholders in the near future offer,
pursuant to a proxy statement, to approve amendment of the articles of
Incorporation of the Company to authorize additional common shares.
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In order to allow the Company to have sufficient authorized shares of common
stock to issue shares to preferred shareholders that converted their preferred
shares pursuant to the settlement, James Copland returned his shares to the
Company. In return, the Company has agreed to either repurchase the shares at
the price of up to $1.00 per share if the Company is unable to obtain authority
to issue additional shares or, in the alternative, to issue shares to Mr.
Copland to replace said shares.
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.
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. 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. The Company immediately began a search for a
new accounting firm, retaining Evers & Company,who has now acted as the
Companys's independent accounting firm for the audit of the financial
statements. The Company intends to appeal its delisting and ask NASDAQ to relist
the common stock of the Company. The Company is unable to predict whether NASDAQ
will act favorably on such request. It is expected that upon the filing of the
company's 10-KSB, that it's stock will commence trading on the Electronic Board,
which will enable ongoing trading of the company's shares.
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.
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Large Number of Shares Outstanding
Because of the recent issuance of shares of common stock to convert the Series A
Preferred Stock, the company has 23,135,273 shares of common stock available for
trading, thus could adversely affect the prevailing market price of the
Company's common stock.
Rights to Acquire Shares
Because the Company has recently issued a large number of shares in conversion
of the series A Preferred Stock, and these shares are not subject to
restriction, there is a large amount of common stock of the Company available
for sale. The Company is unable to predict the affect this large amount of
common stock outstanding will have on the price of the common stock of the
Company.
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 01, 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 expires on January 31, 1998.
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.
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. The Company v. Maxi Switch
On May 13, 1997, a Pima County jury awarded SC&T $3,000,000.00 against
Maxi Switch, Inc., Silitek Corporation, and Lite-On Peripherals, Inc. for the
defendants' breach of contract and misappropriation of SC&T's trade secrets
related to SC&T's Platinum Sound Multimedia Keyboard products. On June 30, 1997,
a formal Judgment was signed by the Judge for $3,160,885.10, which amount
included attorneys's fees and court costs. The defendants posted a $3,200,000.00
bond pending post trial motions, and the post trial motions were denied. On
January 5, 1998, the Court ordered the defendants to add a further $500,000.00
to the bond for additional costs on appeal, and also ordered that the 5.15%
interest being earned on the principal amount to be added to the bond. Thus, the
total bonded amount is now $3,700,000.00, plus 5.15% accruing interest.
Resolution of the appeal should take approximately one year.
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b. Home Arcade v. the Company
In September of 1997, Home Arcade filed suit in San Jose, California,
against the Company re a license dispute. The Company has denied breaching the
contract and instructed counsel to vigorously defend the case. Due to the recent
filing of the case, counsel has not yet been able to develop an opinion with
regard to the timing or likely results of this litigation. However, management
believes it has committed no wrongdoing.
c. Lake Management v. the Company
In June of 1997, Lake Management filed suit against the Company in Phoenix,
Arizona, seeking specific performance requiring the Company to issue common
stock to Lake pursuant to a preferred shareholder conversion agreement. The
Company has resolved a similar problem with 94% of the entities in Lake's class.
Lake has refused to negotiate a reasonable settlement and, therefore, the
Company will continue to defend this litigation on the basis of Lake's market
manipulation. It is anticipated that this litigation will be concluded within a
year.
d. Jack Of All Games v. the Company
In June of 1997, Jack Of All Games Entertainment, Inc., sued the Company in
Cincinnati, Ohio, for breach of contract regarding a purchase order for 5,000
steering wheel accessories. Jack Of All Games is seeking $179,272.80, plus
interest and attorneys fees. Management intends to vigorously defend this case
or settle it based on the provision of replacement product. The parties had
previously agreed to a product exchange and the Company expects a product
exchange to occur. This litigation should be concluded within two years.
e. Network Technical Services v. the Company
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 subsequent to
year end for $45,000 and the corresponding liability has been reflected in the
accompanying financial statements.
f. Activision v. the Company
In September of 1997, Activision filed suit against the Company for breach of
contract seeking $43,250. This dispute arose out of a nonexclusive distribution
agreement between Activision and the Company. The Company has denied breaching
the contract and instructed counsel to vigorously defend the case. Due to the
recent filing of the case, the Company's legal counsel has not yet been able to
develop an opinion with regard to the timing of likely results of this
litigation.
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 might have to seek a license from 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.
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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
--- ---
1995:
Fourth Quarter ....................................... 6.00 7.75
1996:
First Quarter ........................................ 6.50 8.75
Second Quarter ....................................... 3.38 8.88
Third Quarter ........................................ .69 4.88
Fourth Quarter ....................................... .09 .97
1997:
First Quarter ........................................ .22 .56
Second Quarter ....................................... .19 .81
Third Quarter ........................................ .25 1.34
Fourth Quarter (as of October 22, 1997) .............. .56 .91
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 and
are now traded on the over the counter market. See Part I, Item 1 for further
discussion. The Company has never paid any cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future.
Instead, the Company intends to retain any earnings to provide funds for use in
its business.
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ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data of
the Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements and Notes thereto appearing elsewhere herein. The data has
been derived from the financial statements of the Company audited by Evers &
Company, Certified Public Accountants.
Year Ended June 30,
1997 1996
---- ----
Operating Data:
Net sales $7,346,471 $3,771,123
Net loss 6,097,193 2,688,145
Loss per share .38 .58
Average shares outstanding(1) 16,164,835 4,625,086
June 30,
1997
----
Balance Sheet Data:
Working capital $ 3,375,166
Total assets 6,157,616
Shareholders' equity 5,026,818
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 to approximately $612,000 in June, 1997. On December 31,
1994, the Company purchased SC&T Europe, a marketing and distribution company
located in Antwerp, Belgium. The Company, in an effort to reduce its European
operating costs, has consolidated its European distribution operations into one
central facility located in the United Kingdom in May 1997. The Company formed
SC&T Europe 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.
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Despite the expansion in the number of customers and the corresponding
increase in revenue since commencing operations, the Company's total operating
expenses have exceeded revenues, resulting in a net loss of approximately
$6,097,193 for the year ended June 30, 1997. The Company's primary costs are for
research and development, tooling for new products, inventory, trade shows,
selling and promotion activities, writedown of obsolete inventory, and legal
expenses, which increased significantly for the period ended June 30, 1997 due
to the resolution of the preferred shareholder issue. See "Conversion of
Preferred Stock" contained in Item 1 of this report. The Company expects certain
of these costs to decrease in connection with the anticipated expansion of
sales. In addition, operating results may be influenced by factors such as the
demand for the Company's products, the timing of new product introductions by
both the Company and its competitors, pricing by both the Company and its
competitors, inventory levels, the Company's ability to develop and market new
products, the Company's ability to manufacture its products at high quality
levels and at commercially reasonable costs, the timing and levels of sales and
marketing expenditures, and general economic conditions.
Results of Operations of the Company for the Years Ended June 30, 1997 and 1996
Net Sales
Net sales for the year ended June 30, 1997 were approximately $7,346,000 or
approximately $3,575,000 greater than net sales for the year ended June 30,
1996. In addition, the Company had a backlog of orders totaling approximately
$422,000 at June 30, 1997 and $637,800 at November 30, 1997. The increase in net
sales for the years ended June 30 1996 and 1997 resulted from a variety of
factors including growing acceptance of the Company's products in the
marketplace, sales by SC&T Europe and expansion of the Company's product lines.
Net sales for the year ended June 30, 1997 were negatively impacted by a delay
in the manufacture and release of new products the Company is bringing to the
market. The products expected for delivery in spring of 1997 were delayed and
delivery is anticipated in the second quarter of fiscal 1998.
Gross Profit
The Company's gross profit percentage for the years ended ended June 30, 1996
and 1997 reflects the Company's decision to greatly reduce the price of certain
of its first generation products remaining in inventory in anticipation of the
introduction of second generation products. The gross profit percentage for the
year ended June 30, 1997 was also affected by the writedown of certain inventory
of approximately $1,395,000. The writedown for inventory obsolescence was
adjusted to reflect concern about increased inventory and possible price
adjustments to improve market acceptance of the Company's products. The
Company's gross profit percentage for the year ended June 30, 1997, prior to the
writedown, was 26%. The gross profit percentage for the year ended June 30, 1996
was affected by the writedown of certain inventory of approximately $670,000.
The Company's gross profit percentage for the year ended June 30, 1996, prior to
this writedown was 31%. The Company anticipates that new products will initially
sell at higher profit margins. However, there can be no assurance, nor does the
Company expect that such margins will be maintained over the life of the
product.
Payroll and Payroll Taxes
The Company's payroll and payroll tax expense increased from approximately
$732,000 in the year ended June 30, 1996 to approximately $1,302,000 in the year
ended June 30, 1997, or approximately 78%. A significant portion of the increase
was due to the additions of the Company CEO and Vice president of Operations as
of December 1996 and a CFO as of March 1997, all of which have been eliminated.
See Summary Compensation Table in Item 10. Although the total dollar amount
increased, payroll and payroll tax expense decreased as a percentage of sales,
from 19% for the year ended June 30, 1996 to 18% for the year ended June 30,
1997. The company's payroll and payroll tax expense increased from approximately
$558,000 in the year ended June 30, 1995 to approximately $732,000 in the year
ended June 30, 1996. This represented an increase in sales and operations
personnel. The Company is required to employ a base staff of qualified personnel
to maintain its operations.
Selling and Promotion
The Company's selling and promotion expenses increased from approximately
$854,000 in the year ended June 30, 1996 to approximately $2,074,000 in the year
ended June 30, 1997, or approximately 143%. This represents an increase in
selling and promotion expenses as a percentage of sales, from 23% for the year
ended June 30, 1996 to 28% for the year ended June 30, 1997. A portion of these
expenses were utilized to continue promoting new products and creating new
packaging for new products in addition to exhibiting the Company's products at
several trade shows, in an effort to expand their brand name awareness and
market penetration. Approximately $833,000 of the increase was associated with
the Company's sponsorship of a Formula Atlantic Racing Team in the 1997 Kool
Toyota Racing series versus other forms of tradtional industry advertising.
Management has determined to expense the entire cost of the sponsorship as
incurred. The Company's selling and promotion expenses increased from
approximately $413,000 in the year ended June
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30, 1995 to approximately $854,000 in the year ended June 30, 1996. This
increase was due to continuing to promote new products and creating new
packaging for the Company's PLATINUM SOUND line.
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Office and Administration
The Company's office and administrative expenses increased from approximately
$496,000 in the year ended June 30, 1996 to approximately $1,299,000 in the year
ended June 30, 1997, or approximately 162%. As a percentage of net sales, office
and administrative expenses were 13% for the years ended June 30, 1996 and 18%
for the year ended June 30, 1997. A significant portion of the increase in
office and administrative expenses is a result of legal expenses relating to the
resolution of the preferred shareholder issue, and th Maxi Switch legal case.
See "Conversion of Preferred Stock" contained in Item 1 of this report. The
Company's office and administrative expenses increased from approximately
$465,000 in the year ended June 30, 1995 to approximately $496,000 in the year
ended June 30, 1996.
Research and Development
Expenditures for research and development increased from approximately $327,000
in the year ended June 30, 1996 to approximately $860,000 in the year ended June
30, 1997 or approximately 163%. During the year ended June 30, 1996, development
costs were amortized over a 12 month period commencing with the first sale of
the product. However, for the year ended June 30, 1997, management decided to
expense the entire cost of research and development expenditures as incurred.
This amounted to $860,000 for the year ended June 30, 1997. The Company's
expenditures for research and development increased from approximately $90,000
in the year ended June 30, 1995 to approximately $ 215,000 in the year ended
June 30, 1996. The Company's expenditures for research and development vary from
period to period depending upon the number of new products under development and
the stage of the development and vary as a percentage of sales depending upon
sales achieved in that period.
Consulting Fees
Expenditures for consulting fees decreased from approximately $283,000 for the
year ended June 30, 1996 to approximately $261,000 for the year ended June 30,
1997, or approximately 8%. The Company's expenditures for consulting fees
increased from approximately $39,000 for the year ended June 30, 1995 to
approximately $238,000 for the year ended June 30, 1996. Approximately $165,000
of this increase represents consulting services provided by a former sales
representative.
Net Loss
As a result of the factors described above, the Company's loss from operations
increased from approximately $2,277,000 in the year ended June 30, 1996 to
approximately $6,158,000 in the year ended June 30, 1997. The Company's net loss
increased from approximately $2,688,000 in the year ended June 30, 1996 to
approximately $6,097,000 in the year ended June 30, 1997. The loss of $6,097,000
includes an aggregate of approximately $3,700,000 which consists principally of:
(I) $833,000 of non-recurring Racing expenses which the Company has no
significant Racing commitments for fiscal year 1998, (ii) approximately
$1,395,000 of non-recurring inventory adjustments to reflect concern about
increased inventory and possible price adjustments to improve market adjustments
to improve market acceptance of the Company's products, (iii) approximately
$628,000 of non-recurring legal expenses and (iv) approximately $860,000 of
non-recurring R&D expenses relating to the Company's decision to expense the
entire cost of research and development expenditures as incurred.
Net Loss Per Share
Net loss per share decreased from $0.58 for the year ended June 30, 1996 to
$0.38 for the year ended June 30, 1997. The decrease in the net loss for the
year ended June 30, 1997 was affected by the increase in the weighted average
common shares outstanding from approximately 4.9 million to 16.1 million. The
increase in weighted average common shares was due to additional shares of
common shares issued in connection with the Company's private placements and
conversion of Series A Preferred Stock.
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 $10,684,000 for the year ended June 30, 1996 to $3,375,000 for
the year ended June 30, 1997. This decrease is due to the Company's net loss at
June 30, 1997. The Company is required to pay the costs of stocking inventory
before the Company receives orders and payment from its customers. Typically,
the Company's customers do not pay the Company for its products until
approximately 60 days following delivery and billing. As a result, the receipt
of cash from operations typically lags substantially behind the payment of the
costs for purchase and delivery of the Company's products.
In December 1995, the Company used approximately $1,875,000 of the $4,500,000
gross proceeds of its initial public offering to repay the inventory financing
and the 8% Subordinated Debentures. In June 1996 the Company received gross
proceeds of $10,510,000 for an
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issuance of 1,051 shares of Series A Preferred Stock. The preferred shareholders
earn 8% accretion per annum up to the date of conversion.
Subsequent to year-ended June 30, 1997, the Company entered into a factoring
agreement to finance operations by factoring its North American receivables.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and reports
thereon, commencing at page F-1 of this report, which financial statements,
report, notes and data are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Directors and Executive Officers
The following table sets forth information concerning each of the directors and
executive officers of the Company:
Name Age Position
- ---- --- --------
James L. Copland 47 President, Treasurer, Chairman of the Board,
and Chief Executive Officer
Catherine Copland 48 Secretary, Director
Harry G. Wilson 46 Director
Steve Deckrow 51 Director
Chris F. Richards (1) 38 Vice President of Sales and Director
James L. Copland has served as President, Treasurer, and Chairman of the Board
since its inception. From February until May 1993, Mr. Copland served as Vice
President of Sales and Marketing for North and South America for Aztech Labs,
Inc., a manufacturer and marketer of multimedia sound cards. From 1990 until
1992, Mr. Copland served as Vice President, Sales of Bondwell Industrial, Inc.,
a manufacturer and distributor of notebook computers and joy sticks. From 1986
until 1989, Mr. Copland served as President for North American Operations of
Laser Friendly, US, and from 1984 until 1986 he served as Vice President, Sales
and Marketing, of Atari (U.S.) Corporation. From 1982 until 1984, Mr. Copland
served as General Sales and Marketing Manager of Commodore Computers, a Canadian
company. Mr. Copland is the husband of Catherine Copland.
Catherine Copland has served as a director of the Company since December 1994,
as Assistant Secretary since April 1995, and as Manager of Customer Service
since January 1995 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.
(1)Chris F. Richards has served as Vice president of Sales and Marketing since
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.
20
<PAGE>
(1) Mr. Richards became a board member effective September 1997
At the time of the Company's initial public offering, Mr. Copland and Mr. Rudi
Devers, former President of SC&T Europe, agreed that if the Company does not
record a cumulative net profit, adjusted for costs incurred in connection with
the Company's initial public offering, in the fiscal years ending June 30, 1996
and June 30, 1997, they will forfeit a total of 500,000 shares of Common Stock,
which shares will be returned to the Company's treasury. Upon Mr. Devers
separation from the Company and SC&T Europe, Mr. Devers agreed to the early
forfeiture of his shares and, as a result, 200,000 shares held by him were
returned to the Company's treasury.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers, and persons who own more than 10% of a registered class of
the Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Directors, officers and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file.
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 1997 $250,000(3)
President, Treasurer, 1996 $104,000
Chairman of the Board, and
Chief Executive Officer
Thomas Bednarik
Former Chief Executive Officer,
and Director (1) 1997 $150,000
William A. Pendley
Chief Financial Officer(2) 1997 $100,000
William Cunningham
Vice President of Operations(2) 1997 $100,000
(1) Thomas Bednarik resigned as director and Chief Executive Officer effective
July 18, 1997.
(2) No longer employed by the Company subsequent to June 30, 1997.
(3) This amount includes base salary of $150,000, vacation accrual of $60,000
for 4 years, and loan forgiveness of $40,000.
21
<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.
Number of Shares
Name and Address Beneficially Owned(1) Percent of Total(1)
---------------- --------------------- -------------------
James L. and Catherine Copland(2) 1,993,702(4) 8.68%
Harry Wilson(2) --- *
Steve Deckrow(2) --- *
Cameron Capital Ltd.(3) 1,400,000 6.10%
All directors and officers as a group
(four persons)(2) 2,013,702 8.77%
*Less than 1% of the outstanding Common Stock
(1) The number of shares and percentages shown include the shares of Common
Stock which each named shareholder has the right to acquire within 60
days of November 20, 1997. 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) May be reached c/o Mr. Alan Dunkle, 10 Cavendish Road, Hamilton,
Bermuda HM 19.
(4) Includes common stock owned and stock options.
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 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.
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.
22
<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
10.3 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
(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 October 9, 1997, the Registrant filed with the Securities and
Exchange Commission a Report on Form 8-K dated September 17, 1997,
which reported the resignation of the Company's certified public
accountants, Toback CPAs, P.C. and the resignation of the Company's
Chief Executive Officer, Thomas Bednarik.
23
<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: December 31, 1997 /s/ James J. Copland
--------------------
James L. Copland, Chairman of the Board,
President, Treasurer, Chief Executive
Officer, and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James L. Copland President, Treasurer, Chief Executive December 31, 1997
- -------------------- Officer, and Director
James L. Copland
/s/ Catherine Copland Assistant Secretary and Director December 31, 1997
- ---------------------
Catherine Copland
/s/ Harry G. Wilson Director December 31, 1997
- -------------------
Harry G. Wilson
/s/ Steve Decrow Director December 31, 1997
- ----------------
Steve Decrow
/s/Christopher Richards Director December 31, 1997
- -----------------------
Christopher Richards
</TABLE>
24
<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
June 30, 1997 F - 2
Consolidated Statements of Operations for the Years
Ended June 30, 1997 and June 30, 1996 F - 4
Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 1997 and June 30, 1996 F - 5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997 and June 30, 1996 F - 6
Notes to Consolidated Financial Statements F - 7
25
<PAGE>
Independent Auditors' 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 June 30, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. 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 $2,394,685 and total revenues of $3,795,260 for the year then ended.
Those statements were audited by other auditors whose report has 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audit 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 June 30, 1997 and the consolidated results of their
operations and their cash flows for the year then ended 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
December 31, 1997
Phoenix, Arizona
F-1
<PAGE>
[TOBACK CPA's P.C. LETTERHEAD]
The Board of Directors and Shareholders
SC&T International, Inc.
Scottsdale, Arizona
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of SC & T International, Inc. and Subsidiary
for the year ended June 30, 1996. These 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 conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of SC & T International, Inc. and Subsidiary for the year ended June 30,
1996 in conformity with generally accepted accounting principles.
TOBACK CPAs, P.C. /s/ TOBACK CPAs, P.C.
Phoenix, Arizona
August 25, 1996
F-1a
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1997
ASSETS
Current Assets:
Cash, including cash equivalents $ 1,058,638
Receivables 843,109
Inventory 2,465,523
Other current assets 114,178
--------------
Total current assets 4,481,448
Property and equipment 1,637,172
Other assets 38,996
--------------
$ 6,157,616
==============
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Capital lease obligation, current portion $ 6,530
Accounts payable 896,459
Accrued expenses 203,293
---------------
Total current liabilities 1,106,282
Capital lease obligation, net of current portion 24,516
---------------
Shareholders' equity:
Series A preferred stock, $0.01 par, authorized 5,000,000 7
shares, issued and outstanding 718
Common stock, $0.01 par; authorized 25,000,000 shares; 231,353
23,135,273 issued
Additional paid-in capital 14,959,622
Treasury stock - at cost, 200,000 shares (29,415)
Currency translation (74,251)
Accumulated deficit (10,060,498)
---------------
Total shareholders' equity 5,026,818
---------------
$ 6,157,616
===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1997 and 1996
1997 1996
---- ----
Net Sales $7,346,471 $3,771,123
Cost of goods sold:
Cost of goods sold 5,497,851 2,619,048
Inventory adjustment to carrying value 1,395,975 669,579
------------- ------------
6,893,826 3,288,627
------------- ------------
Gross profit 452,645 482,496
Selling, general and administrative expenses:
Payroll and payroll taxes 1,302,239 731,832
Selling and promotion 2,074,097 854,046
Office and administrative 1,298,976 495,889
Research and development 859,971 327,011
Consulting fees 260,685 282,706
Other 814,362 67,957
------------- ------------
6,610,330 2,759,441
------------- ------------
Loss from operations (6,157,685) (2,276,945)
Other income (expense):
Interest income 273,623 36,484
Interest expense (213,131) (147,539)
------------- ------------
Loss before income tax & financing costs (6,097,193) (2,388,000)
Interest associated with short-term -- (56,011)
bridge financing
Write-off of loan acquisition costs resulting from -- (244,134)
repayment of debt
Income tax expense -- --
------------- ------------
Net loss $(6,097,193) $(2,688,145)
============= ============
Net loss per common share $ (0.38) $ (0.58)
============= ============
Weighted average common shares outstanding 16,164,835 4,625,086
============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
SC&T INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Shareholders Equity
For the Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Treasury Stock
------------------- ---------------- Paid-in ---------------- Currency Accumulated
Shares Amount Shares Amount Capital Shares Amount Translation Deficit
------ ------ ------ ------ ---------- ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 4,059,178 $ 40,592 10 -- $ 1,682,589 -- -- -- ($ 1,275,160)
Stock Issuance
Issuance of additional stock 1,003,322 10,033 (10) -- 3,759,870 -- -- -- --
Issuance of preferred stock -- -- 1,051 11 9,620,955 -- -- -- --
Exercise of options 22,915 229 -- -- 34,143 -- -- -- --
Forfeiture of common stock -- -- -- -- -- (200,000) (29,415) -- --
Currency translation -- -- -- -- -- -- -- (23,271) --
Net Loss -- -- -- -- -- -- -- -- (2,688,145)
---------- -------- ------ ------- ----------- -------- --------- ---------- ------------
Balance at June 30, 1996 5,085,415 $ 50,854 1,051 $ 11 $15,097,557 (200,000) ($ 29,415) ($ 23,271) ($ 3,963,305)
Stock Issuance
Issuance of additional stock 18,332 183 -- -- 27,315 -- -- -- --
Conversion of preferred stock 18,031,516 180,316 (333) (4) (165,250) -- -- -- --
Currency translation -- -- -- -- -- -- -- (50,980) --
Net Loss -- -- -- -- -- -- -- -- (6,097,193)
---------- -------- ------ ------- ----------- -------- --------- ---------- ------------
Balance at June 30, 1997 23,135,273 $231,353 718 $ 7 $14,959,622 (200,000) ($ 29,415) ($ 74,251) ($10,060,498)
========== ======== ====== ======= =========== ======== ========= ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
SC & T INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,097,193) $ (2,688,145)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on disposition of property & equipment 138,944 0
Depreciation and amortization 142,149 192,269
Loan amortization 0 244,134
(Increase) decrease in accounts receivable (102,655) 270,483
Increase in inventories (1,033,442) (128,209)
Increase in other current assets (39,235) (55,264)
(Increase) decrease in other assets 207,788 (192,983)
Increase (decrease) in accounts payable (169,854) 352,423
Increase (decrease) in accrued expenses (50,205) 39,088
------------------ ------------------
Net cash used in operating activities (7,003,703) (1,966,204)
------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment (1,656,749) (105,347)
Loans to related parties 0 (16,673)
------------------ ------------------
Net cash used in investing activies (1,656,749) (122,020)
------------------ ------------------
Cash flows from financing activities:
Currency translation (50,980) (23,271)
Net repayments under line of credit agreement (78,528) (129,788)
Principal payments on debentures 0 (875,000)
Principal payments on long-term debt (6,822) (19,172)
Net repayments on related party loans 0 (1,000,000)
Payment of capital lease obligations (785) 0
Proceeds from stock issuance 15,062 13,337,491
Proceeds from sale of debentures 0 782,651
Advances from (repayments to) factor (121,368) (311,883)
------------------ ------------------
Net cash provided by financing activities (243,421) 11,761,028
------------------ ------------------
Net increase (decrease) in cash (8,903,873) 9,672,804
Cash, beginning of period 9,962,511 289,707
------------------ ------------------
Cash, end of period $ 1,058,638 $ 9,962,511
================== ==================
Supplement disclosure of cash flow information
- ----------------------------------------------
Cash paid for interest $ 213,131 $ 203,550
================== ==================
Supplementary schedule of non cash investing and financing
- ----------------------------------------------------------
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 $ 31,831
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
1. Summary of Significant Accounting Policies:
------------------------------------------
The following is a summary of the significant accounting policies followed
by SC&T International, Inc. The 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, Belgium and the United Kingdom.
c. Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform to the
current period presentation.
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 30 years.
F-7
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
1. Summary of Significant Accounting Policies, continued
-----------------------------------------------------
g. Revenue Recognition
-------------------
Salesare 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 until
feasibility of the product is established. Costs incurred
subsequent to feasibility are stated at cost and being amortized
over the twelve month period immediately subsequent to the
product's introduction, using the straight line method.
i. Advertising
-----------
Advertising costs, which include the costs of sponsoring racing events,
are expensed as incurred. Advertising costs for the years ended
June 30, 1997 and 1996 were approximately $883,000 and $262,000
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 carryforwards. 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.
F-8
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
2. Contingency
-----------
The Company has reported net losses of approximately $6,000,000 for the
year ended June 30, 1997 and had an accumulated deficit of over
$10,000,000 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. Subsequent to year end, the Company entered into a factoring
agreement to finance operations by factoring its North American
Receivables.
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 June 30, 1997, the Company maintained cash accounts in financial
institutions that exceeded federally insured limits by approximately
$673,000. Additionally, a $525,000 certificate of deposit was use to
collateralize a line of credit. (Note 7)
4. Receivables
-----------
Receivables consist of the following at June 30, 1997:
Trade accounts receivable $ 1,166,282
Related party note 38,215
Other 35,217
Allowance for returns and allowances ( 228,870)
Allowance for doubtful accounts ( 167,735)
-------------
$ 843,109
=============
5. Inventory
---------
Inventory consists of the following at June 30, 1997:
Finished goods $ 3,397,305
Advances on purchases of inventory 179,563
Allowance for obsolescence (1,111,345)
-------------
$ 2,465,523
=============
F-9
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
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
has experienced delays in the anticipated delivery schedules for its
new products. 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. Management is currently in
discussions with its manufacturers to determine better methods to avoid
future delays in the delivery of its products.
6. Property and Equipment
----------------------
Property and equipment consist of the following at June 30, 1997.
Office furniture and equipment $ 427,808
Land 362,760
Building 893,279
Tools & dies 109,850
Warehouse equipment 13,167
-----------
1,806,864
Less accumulated depreciation (169,692)
-----------
$ 1,637,172
===========
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. Lease Commitments
-----------------
The Company leases office equipment under various capital and operating
leases which require monthly payments which range from $72 to $909,
that expire from October, 1997 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.
F-10
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
8. Lease Commitments, continued
----------------------------
The Company leased its office location in Belgium through April 30, 1996
from a former director, who was a shareholder and owned 50% of the
building where the office was located. The monthly rental was
approximately $3,700. The Company exercised its cancellation rights
described in the lease and relocated to a temporary facility, effective
May 1, 1996. As of September 1, 1996, the Belgian office relocated to
Gent, Belgium. The new operating lease provides for a monthly rental
rate of approximately $800 per month, with a 60 day cancellation clause
effective after December 31, 1996. The Company began to lease its U.K.
facility in May, 1997 for $9,435 per month through May, 2003, with an
option to break the lease after a three-year period.
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. 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, including the sales-leaseback
transaction, are as follows:
Year ending June 30, Capital Operating
-------------------- ------- ---------
1998 $11,196 $ 287,794
1999 10,905 277,383
2000 10,905 265,880
2001 9,088 171,670
2002 - 171,670
Thereafter - 923,739
------ ----------
42,094 $2,098,136
==========
Less amounts representing interest at 18% 11,048
------
Present value of capital lease obligations 31,046
Current portion 6,530
------
Capital lease obligations, net of current portion $24,516
======
Rent expense for the years ended June 30, 1997 and 1996, was approximately
$128,000 and $119,000, respectively.
F-11
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
9. Preferred Stock:
---------------
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 year ended June 30, 1997, 333 shares of preferred stock were
converted into 18,031,516 shares of common stock. Subsequent to year
end, the Company reached an agreement regarding the conversion with
shareholders of 680 shares of preferred stock. (See note 21)
10. Common Stock:
------------
During the quarter ended December 31, 1995, the Company completed a public
offering of common stock. The Company received net proceeds of
approximately $3,615,000 and issued a total of 900,000 shares of common
stock.
The Company also issued 450,000 redeemable common stock purchase warrants.
Each warrant represented the right to purchase one-half share of common
stock at a price of $7.00 per share, subject to adjustment under
certain circumstances. The warrants expire three years from December,
1995. Each warrant is immediately exercisable. The warrants are
redeemable by the Company for $.05 per warrant upon 30 days notice
mailed within 20 days after the closing bid price of the common stock
has equaled or exceeded $8.00 per share for a period of 20 consecutive
trading days. The Company received cash of approximately $45,000.
In January, 1996, the Company issued an additional 67,500 redeemable
common stock purchase warrants. The Company received cash of
approximately $6,750.
In October, 1995, the Company increased its authorized share capital to
25,000,000 shares of common stock and authorized 5,000,000 shares of
preferred stock.
F-12
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
10. Common Stock, continued
-----------------------
During the quarter ended September 30, 1995, the Company completed a
private placement for short-term bridge financing of 8% subordinated
debentures, due at the earlier of September 30, 1996 or upon completion
of the offering. The Company issued 87,500 shares of common stock at
$1.00 per share to obtain the short-term bridge financing.
In September, 1995, the President was issued 15,822 shares of common stock
at a value of $1.00 per share for past services provided to the
Company.
During the year ended June 30, 1997, 333 shares of preferred stock were
converted into 18,031,516 shares of common stock. The Company also
issued 18,332 shares of common stock for $27,315 and reduced a
liability for a corresponding amount in conjunction with a consulting
agreement from the prior year.
Subsequent to year end, the Company reached an agreement regarding the
conversion with shareholders of 680 shares of preferred stock. (See
note 21)
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, management believes
that due to the resignation of the Company's auditors and their
notification to the SEC dated 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.
F-13
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
12. Income Taxes
------------
The components of the net deferred tax assets at June 30, 1997, assuming
a 40% effective tax rate, are as follows:
Deferred tax assets
Allowance for doubtful accounts and sales returns $ 160,000
Allowance for inventory obsolescence 450,000
Net operating loss carryforward 3,150,000
Other 20,000
Less valuation allowance (3,780,000)
----------
$ -
==========
At June 30, 1997, the Company has net operating loss carryforwards of
approximately $8,000,000, which are available to offset future taxable
income for federal and state income tax purposes. These loss
carryforwards will begin to expire from 2010 to 2012 for federal
purposes and from 2000 to 2002 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 June 30, 1997, the Company had recorded a valuation allowance of
$3,780,000 for deferred tax assets because the benefit of those
temporary differences may not be realized. This represents and increase
of $2,530,000 over the prior year.
13. Related Party Transactions:
---------------------------
The Company has a receivable from its President and principal shareholder,
which bears interest at 8.25% and provides for principal payments of
$500 per month, with a balloon payment of $33,814 plus interest due at
the end of the term. Principal payments during fiscal 1997 were $3,000.
The balance due at June 30, 1997 was $38,215. Subsequent to year end,
the Board of Directors forgave all amounts due from the President.
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 are to receive a cash payment
for accumulated accrued vacation and forgiveness of all amounts owed by
them to the Company. The vacation and indebtedness were approximately
$60,000 and $40,000, respectively, at June 30, 1997. The agreement also
contains termination provisions and a one-year non-competition clause.
F-14
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
13. Related Party Transactions, continued
-------------------------------------
In June, 1996, the Company entered into a separation and settlement
agreement with the former General Director of the Belgian subsidiary,
whereby the former General Director resigned as an officer, director,
and employee of the Company. Under the terms of the agreement, the
former General Director received $29,415. In addition, the former
General Director forfeited 200,000 shares of common stock of the
Company owned by him on the date of the agreement.
In December, 1995, the Company used approximately $1,875,000 of the
proceeds from its initial public offering to repay two short-term
bridge financing arrangements with shareholders and all accrued
interest associated with the debt.
14. 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
June 30, 1997 and 1996. The accounts receivable balance for that
customer totaled approximately $81,000 at June 30, 1997. Additionally,
a significant portion of the Company's sales are generated from its
wheels and a limited number of other products.
15. Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
Fairvalue 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 June 30, 1997, 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. As described
in Note 5, inventory has been reduced by approximately $1,100,000 to
estimated market value.
F-15
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
16. Options and Warrants
--------------------
The Company has a qualified incentive stock option plan for its key
employees, consultants and independent contractors.
In connection with the Company's private placement of 1,051 shares of
Series A preferred stock in June, 1996, the Company issued warrants to
purchase an aggregate of 108,490 shares of common stock. The warrants
are exercisable immediately at $7.75 per share. The warrants expire on
June 17, 2001.
The Company issued 517,500 warrants in connection with its initial public
offering. In connection with the Company's initial public offering, the
Company sold warrants to the IPO underwriter at a purchase price $.001
per warrant, to purchase from the Company 90,000 shares of common stock
and 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.
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
(See note 21). Activity for 1996 and 1997 follows:
Options oustanding at July 1, 1995 723,500 $1.00-1.75
Granted 60,000 $1.50-5.70
Canceled (184,000) $1.00-1.75
Exercised 22,915 $1.50
Options oustanding at June 30, 1996 576,585 $1.00-5.70
---------
Granted 625,000 $1.00
Canceled or expired (226,585) $1.00-5.70
---------
Options oustanding at June 30, 1997 975,000 $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 year ended
June 30, 1997.
In connection with the Company's private placement of 1,501 shares of
Series A preferred stock in June 1996, the Company issued warrants to
purchase an aggregate of 108,490 shares of common stock. The warrants
are exercisable immediately at $7.75 per share. The warrants expire on
June 17, 2001. The Company issued 517,500 warrants in connection with
its initial public offering. In connection with the Company's initial
public offering, the Company sold warrants to the IPO underwriter at a
purchase price $0.001 per warrant, to purchase from the Company 90,000
shares of common stock and 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.
17. 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 subsequent to year end 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. This dispute arose out of a nonexclusive
distribution agreement between Activation and the Company. The Company
has denied breaching the contract and instructed counsel to vigorously
defend the case. Due to the recent filing of the case, the Company's
legal counsel has not yet been able to develop an opinion with regard
to the timing of likely results of this litigation.
F-16
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
17. Litigation and Unasserted Claims, continued
-------------------------------------------
In September of 1997, Home Arcade filed suit against the Company for
breach of a royalty agreement and bad faith breach of contract. Home
Arcade demanded $300,000 for breach of contract, requesting that the
amount be trebled to $900,000 based on the alleged bad faith aspects of
the breach. Management aggressively maintains that all royalties were
timely paid and management intends to vigorously defend this suit. It
is expected that this litigation will be concluded within two years.
In June of 1997, Lake Management filed suit against the Company, seeking
specific performance requiring the Company to issue common stock to
Lake pursuant to a preferred shareholder conversion agreement. The
Company has resolved a similar problem with 94% of the entities in
Lake's class. Management believes that Lake has refused to negotiate a
reasonable settlement and, therefore, the Company will continue to
defend this litigation on the basis of Lake's market manipulation.
Management anticipates that the litigation will be concluded within one
year.
In June of 1997, Jack of All Games Entertainment, Inc. sued the Company
for breach of contract regarding a purchase order for 5,000 steering
wheel accessories. Jack Of All Games is seeking approximately $179,000,
plus interest and attorneys fees. Management intends to vigorously
defend this case or settle based on the provision of replacement
product. The parties had previously agreed to a product exchange and
the Company expects a product exchange to occur. This litigation is in
the discovery phase and, therefore, no provision for any potential loss
has been provided in the accompanying financial statements. Management
expects that this litigation should be concluded within two years.
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, sale of the Company's force-feedback racing wheel would be
impacted, or the Company would have to seek a license form 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.
F-17
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
18. Gain Contingency
----------------
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.
Management intends to vigorously pursue collection of this judgment
through appeal, which may take one to two years.
19. Foreign Operations
------------------
The Company operates sales facilities in the United Kingdom and Belgium.
These offices distribute substantially the same product line as the
U.S. operations. During the year ended June 30, 1997, sales and net
income generated from foreign operations were approximately $3,795,000
and $231,000, respectively. Significant assets used in these
operations, at June 30, 1997, are as follows:
Cash $ 289,000
Receivables 507,000
Inventory 1,514,000
Other 85,000
The Company's foreign operations do not have any significant investment in
property and equipment.
20. Commitments
-----------
On October 1, 1996, the Company entered into an agreement with Phillips
Motorsports, Inc. to sponsor a race car for the 1997 racing season. The
Company agreed to provide $605,000 with an initial payment of $150,000
and payments of $368,000 from December, 1996 through June, 1997 and
$87,000 in July and August, 1997. This agreement has concluded.
The Company has entered into a consulting and royalty agreement with Kaylee
Computing Pty., the supplier of the computer chips for its wheel
products. The agreement provides for payments of a 5% royalty on the
base manufactured cost of the wheel products.
The Company has entered into a licensing agreement with Immersion
Corporation for the force feedback technology used in the second
generation of its wheel products.
F-18
<PAGE>
S C & T INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
21. Subsequent Events
-----------------
In July, 1997, the Company entered into a sales-leaseback transaction
involving the land and building on which the Company's headquarters are
located. The leaseback is for a ten-year period. The terms of the lease
require the Company to pay all operating expenses associated with the
leaseback. The terms of the lease also provide for increases in the
monthly rent based upon a stated schedule of increases.
Subsequent to year end, the Company reached agreements with preferred
shareholders owning 680 shares of preferred stock. The stock will be
tendered for conversion at a fixed conversion price of $1.00 per share.
In addition, the holders of the stock will also 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 does not have an adequate number of authorized shares to cover
the warrants, employee stock options and the remaining preferred
shareholders. The company intends to ask shareholders to approve
amendment to the Articles of Incorporation to authorize additional
common shares. In order to allow the Company to have sufficient shares
for these transactions, the President of the Company returned a portion
of his shares to the Company. In return, the Company intends to either
repurchase the shares at $.50 per share if the Company is unable to
obtain authority to issue additional shares or, in the alternative, to
issue replacement shares to the President. The Company expects to pay
interest on the shares at 9% per year. This agreement have not yet been
formalized.
In October, 1997, the Company's stock was delisted from the NASDAQ Small
Cap Market (See note 11).
In November, 1997, the Company entered into an agreement to factor
accounts receivable acceptable to the factor at a 2% discount rate
through May 17, 1998. In accordance with the terms of the agreement,
the factor will advance 50% of all invoices purchased from the Company
with the balance due upon settlement of all obligations with the
customer. The Company has also agreed to repurchase all invoices not
paid within 90 days. The agreement is secured by substantially all
assets of the Company and the personal guarantee of the President and
Secretary of the Company.
F-19
The Company has entered into a five-year employment agreement with Mr.
Copland. The agreement includes non-competition and non-solicitation provisions
for a 12-month period following termination of employment. The Company maintains
key man life insurance on Mr. Copland in the amount of $1,000,000. The Company
has assigned one-half of the proceeds of this policy to the estate of the
insured. The Company's success also is dependent on its ability to identify,
recruit, and retain additional experienced management, engineering, and
marketing personnel. There can be no assurance that the Company will be able to
hire or retain necessary personnel. The failure of the Company to attract and
retain personnel with the requisite expertise or to internally develop personnel
with such expertise could adversely affect the prospects of the Company's
success. See "Directors and Executive Officers of the Registrant; Compliance
with Section 16(a) of the Securities Exchange Act of 1934" contained in Item 9
of this Report and "Executive Compensation - Employment Agreements" contained in
Item 10 of this Report.
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<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<CASH> 1,058,638
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<RECEIVABLES> 843,109
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