U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended April 30, 1999
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.)
7625 EAST REDFIELD ROAD
SUITE 200
SCOTTSDALE, ARIZONA 85260
(480) 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: $3,405,313
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
August 5, 1999 - $1,064,212
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of August 5, 1999 - 3,351,064
Documents incorporated by reference: Not Applicable.
<PAGE>
SC&T INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-KSB
FISCAL PERIOD ENDED APRIL 30 ,1999
TABLE OF CONTENTS
Page
PART I
ITEM 1. STATEMENT TO SHAREHOLDERS - BUSINESS 3
ITEM 2. FACILITIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 19
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 19
ITEM 10. EXECUTIVE COMPENSATION 20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
2
<PAGE>
PART I
ITEM 1. STATEMENT TO SHAREHOLDERS
This past year has not met the expectations of the Company. Since the untimely
resignation in September 1997 by Toback & Company, the Company's accounting
firm, and its subsequent de-listing by the NASDAQ in October 1997, the Company
has struggled to achieve its planned future growth. Due to the de-listing the
Company found it impossible to attract additional financing, through traditional
channels, to operate effectively and the Company has endured through tough
times. The Company filed suit against Toback & Company on June 21, 1999 seeking
substantial damages for their actions.
This past year has proven equally difficult for the Company, as it has for every
vendor in the industry. Once again operating cash shortages, resulted in late
development and product deliveries, which culminated in reduced revenues and
increased losses. Coupled with alleged predatory marketing activities by
industry leader InterAct, a division of Recoton Corp., the years target
objectives were not achieved. InterAct allegedly spearheaded an aggressive
marketing campaign of buying retailer shelf space exclusively for its own
products with key national retailers during the 1998 Fall selling season. This
activity had a dramatic effect on the entire industry, causing severe price cuts
and profit erosion. The net result of these alleged actions caused most of the
vendors in this industry to report large scale losses and market cap erosion.
InterAct did gain market share, but also suffered huge looses and severe erosion
of its own share price, which dropped from over $39. to under $9. It is the
belief of SC & T like other industries (airline, oil, and communications
sectors) our own industry is going through a major shakeout.
Despite a difficult year, the Company sees future improvement as a more level
playing field emerges, once the accessory and peripheral category consolidation
is complete. The company believes there will be a thinning of the industry as
smaller suppliers exit this category over the next six to eight (6-8) months.
This will open up the market to the remaining vendors.
The good news is SC & T survived this period, reporting much smaller losses (SC
& T's accumulated six year losses are less than some larger suppliers posted
last year alone) among its competitors.
Despite the less than desirable annual results, SC & T was acknowledged for its
development reputation within the industry. In May of 1999, the company entered
into two strategic marketing alliances for it's own accessory products with VM
Labs Inc., of Mountain View Ca., developers of the NUON interactive
entertainment platform for consumer electronics. The Nuon technology is designed
to be imbedded onto the next generation of digital products such as DVD players
and set-top boxes. The powerful NUON operating system provides the ability for
DVD players (unlike VHS players which only play and record movies) the ability
to Play Movies, play Audio CD's and to play Video Games, all from one system. As
DVD players replace VHS units over the next 3-5 years, the enhanced capabilities
of the NUON technology will revolutionize the home entertainment category.
SC & T's two strategic licensing agreements are critical for the Company, and
represent a major marketing coup for the Company. The first is a license to
market six of its current Per4mer and Air Racer racing wheel and game controller
products incorporating the NUON technology. The second is a co-development and
global marketing license for VM Labs standard NUON gaming controller. This
controller will be exclusively marketed by SC & T and one other company on a
worldwide basis.
With DVD emerging as the replacement product for the Beta and VHS formats (91%
of USA homes currently have VHS players) with DVD players projected to exceed
units of 200 million players worldwide over the next five (5) years With the
NUON technology estimated for incorporation into over fifty plus (50+%) percent
of DVD players (Toshiba is a lead supplier) will not be subject to the
traditional pricing practices of retail mass marketed products. The full line of
NUON enhanced accessory products from SC & T will become a market leader as a
supplier of these products. These products should garner higher retail prices,
and improved gross margins for the Company. The Company sees growth potential
and revenue opportunities associated to this emerging category through its
licensing agreements with VM Labs.
In May of 1999, SC & T elected to focus its development efforts on offering its
products at the sub $50.00 retail price level. This segment of the retail mass
market accounts for over fifty (50%) percent of product sales. As its
competitors introduce similar products at higher price points ($79.95 and up) in
an effort to recoup past losses, SC & T hopes the category will offer larger
distribution opportunities for its products.
The Company also announced plans to form a software publishing unit to
distribute NUON software programs. The Company hopes to secure the required
investment for this project and NUON developers looking for publishers and
distributors for their products.
The Company is working to secure additional working capital, and is also
pursuing new distribution alliances it hopes will reduce costs and expand it's
product depth while strengthening its position in the industry. The Company is
also looking for ways it can diversify its interests, so it does not rely on its
existing products for all revenues. The Company has identified areas (NUON and
other alliances) in this regard. The Company continues to shed overhead costs,
and is confident that it can prevail in its efforts to grow the business.
3
<PAGE>
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, PER4MER, ULTIMATE PER4MER and AIR RACER
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 Company's racing wheel and other game controller devices
are marketed under the PER4MER and AIR RACER brand names. The Company's sound
products primarily comprise a volume controller, sub-woofer and amplified
speaker systems. The PER4MER line consists of racing wheel and game controller
products, designed for all IBM PC's, Nintendo, Sony Playstation game consoles,
with products soon to be available for the NUON DVD player category. This line
also includes unique game controller devices such as AIR RACER. The company has
developed a new Voice Recognition keyboard which it plans to release during the
next 4-6 months. Based on the increasing demands of the Internet, the company
believes it is time to re-launch this product under its new format. The Company
will do so by aligning itself with a major keyboard supplier. PLATINUM SOUND,
PER4MER, ULTIMATE PER4MER, AIR RACER are 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, NUON
and Video Game user. The Company began operations in June 1993 and achieved
sales of approximately $4,733,000 and $3,405,000 during the years ended April
30, 1998 and April 30, 1999, respectively.
Since the Company's de-listing from the NASDAQ in October 1997, the Company's
ongoing growth initiatives have not materialized. Since that time, the Company
has suffered through difficult times. Cut off from normal financing channels,
the Company has continued without proper operating finances, has seen its share
value erode and has suffered declines in sales revenues. Despite hitting a
revenue high of $7,346,000 during the year ended June 30 1997, and the
introduction of new and exciting products, the stigma associated to the Toback
resignation and the inability to secure needed operating funds has impacted the
Company's ability to grow its market as planned. However, it has survived and
has secured new alliances which will benefit the Company moving forward.
INDUSTRY OVERVIEW
The market for multimedia PC's and video game console equipment continues to
grow, 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 100% of their products offer
multimedia and gaming capabilities. With the emerging DVD market and the
enhanced NUON technology for DVD players, coupled with SC & T's licensing
agreements with VM Labs, new growth opportunities exist for the company.
This Report also refers to other manufacturers, retailers and vendors as it
applies to the current marketplace.
PLATINUM SOUND PRODUCTS
The Company's 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 its mission of delivering fully featured products at aggressive
retail prices has been successful. Product offerings have been well received by
both retailers and the industry media. Currently, Platinum Sound products
account for approximately 10% of the Company's annual sales revenues. The
Company expects this number to grow in proportion to overall sales revenues.The
demand for greater sound (at affordable prices) by gamers and PC users alike,
has allowed SC&T a presence in this growth market. The Company believes that it
will increase revenues from this category as it expands its distribution over
the next twelve (12) months.
At present, the Company offers three sub woofer products, a graphic
equalizer-amplifier, a PC volume controller, and three 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.
4
<PAGE>
PER4MER - AIR RACER PRODUCTS
PER4MER Racing Wheels is a full line of video arcade racing wheels compatible
with Nintendo, Sony Playstation video game consoles, all IBM PCs, and will soon
be compatible to the NUON technology platform. The wheels are 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 $39.95 - $ 49.95
level.
AIR RACER is an innovative 3 in 1 game controller. Designed to be used for
racing, flight and general game controlling needs. This product introduced in
late Fall of 1998, despite a late delivery, was well received in both the
Company's North American and European operations. The products SRP ranges
between $39.99 - $49.99.
In 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 products have
SRPs ranging from $59.95-$149.95.
MARKETING
The Company offers 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 Asian
subsidiaries.
The Company's products are currently sold in over 25 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 April 30, 1998 and April 30, 1999, sales in the
United States accounted for approximately 51% and 60%, respectively, of the
Company's consolidated revenue, and sales in Europe accounted for approximately
49% and 40%, respectively, of the Company's consolidated revenue.
In the United States, a sales representative is typically paid a 3-5%
commission. In the U.K. 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 opened up a distribution alliance in South America, with a
consumer market of over 300 million people. Due to the economic conditions that
have effected this region sales did not reach expected levels. The Company sees
recovery in the market and greater revenue contributions over the next twelve
(12) months.
Current U.S. based retail and catalogue customers of the Company include, but
are not limited to; Best Buy, Babbages, Electronic Boutique, Data Vision,
Egghead Direct, Fry's Electronics, COMP USA, and Cyberian Outpost. The Company
is targeting numerous larger retail accounts for increased distribution over the
next year, and plans to diversify into other product categories.
The Company is in negotiations with other vendors who have shown an interest in
producing the Company's line of products, on time, and at a reduced cost. Even
though the Company believes it will continue to reduce its manufacturing costs,
and align itself with suppliers that can deliver on time, there can be no
assurance that the Company will be successful in its efforts.
During 1998, the Company replaced its managing director for its U.K. subsidiary.
To curb additional costs during the 98-99 shakeout period, the Company has
reduced its advertising expenses by ninety-five (95%) since January of this
year. The Company's current marketing efforts include limited advertising in
trade and business publications, and limited participation in domestic and
international industry trade shows, coupled with the production of product
literature and sales support tools. The Company's products are marketed under
the registered trade names; PLATINUM SOUND Multi-Media Products, PER4MER,
ULTIMATE PER4MER and AIR RACER. Packaging and operating manuals are produced in
six languages, Spanish, French, German, Italian, Portuguese, and English.
5
<PAGE>
The Company's sales from the United Kingdom are invoiced in U.S. dollars and UK
pounds sterling. Expenses of the Company's international operations are incurred
in various foreign currencies, principally UK pounds sterling . 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.
NEW PRODUCT DEVELOPMENT
The Company's multimedia keyboard line has 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 has not yet been introduced into the market. The Company
plans to do so in 1999, however, wishes to do so in partnership with a major
keyboard manufacturer. Over the past year, the Company has applied its primary
market focus on building the awareness on its line of PLATINUM SOUND, PER4MER,
ULTIMATE PER4MER, and AIR RACER products.
During the years ended April 30, 1998 and April 30, 1999, the Company spent
approximately $317,000 and $53,000 respectively, on research and development.
The Company expects to incur approximately $150,000 in research and development
expenses in connection with development of new products during fiscal 2000.
SUBSIDIARIES
On December 31, 1994, the Company purchased all of the outstanding shares of
Westex N.V. 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. Westex N.V. was incorporated in Belgium in March 1989.
During 1998, in an effort to reduce operating costs, the Company consolidated
its European distribution operations into one central facility located in the
United Kingdom. In May,1997 the Company formed SC&T Europe Limited, located in
Portsmouth England. 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 April 30, 1998 and April 30, 1999, sales by SC&T
Europe accounted for approximately $2,342,000 and $1,372,000 respectively, of
the Company's consolidated revenue.
In June of 1998, the Company opened a wholly owned subsidiary in Hong Kong. This
facility was established to oversee all manufacturing issues of the Company's
products.
The Company has independent distribution networks in Canada and South America.
Neither of these facilities are wholly owned subsidiaries of the Company.
The Company's European sales are typically invoiced in U.S. dollars or U.K.
pounds sterling. The Company's sales from the United Kingdom are invoiced in
U.S. dollars and pounds sterling. Expenses of the Company's international
operations are incurred in various foreign currencies, principally UK pounds
sterling and in U.S. dollars. Accordingly, the Company is subject to the risk of
fluctuations in currency exchange rates. To date the Company has not experienced
any material net gain or loss due to foreign currency fluctuations. There can be
no assurance the Company will not experience material adverse effects on
operations from foreign currency fluctuations in the future.
6
<PAGE>
COMPETITION
The PC, multimedia, and video game retail markets in general are highly
competitive. The events of this past year were detailed in the opening section
of this report. 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, Altec Lansing, Yamaha, Sony, and Labtech. The Company's major
competitors in the video game racing wheel market will come from InterAct,
Thrustmaster and MadCatz. This highly competitive arena in 1998 generated huge
losses for every major player within the category. By virtue of SC & T's size,
limited operating capital and decision to sell less product last year, these
actions resulted in substantially lower losses for the company than were
experienced by other suppliers in this category. The Company survived this
period, and is continuing to fight towards increased sales and profitability. In
an effort to reduce its reliance on its current line of products, the Company
plans to expand its product line by incorporating a wider range of products
which will target a broader base of customers.
INTELLECTUAL PROPERTY RIGHTS
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 preventing others from designing, assembling, or reverse
engineering products similar to those sold by the Company.
To defend against its competition, the Company's philosophy is to design and
market products of high quality and features, which can be sold for lower
prices. The Company is also focussing efforts to identify other marketing areas
so it can diversify its reliance on a single product niche. The Company feels
continued product diversity offers stronger long-term opportunities, and reduces
the inherent downside risk to more competitive and seasonal product offerings.
Unlike its competitors whose market penetration is much larger, every new
customer account represents new revenue and growth for the Company. Due to the
expanding Internet sector, the company sees the market for its new integrated
voice recognition keyboard as a new product-category opportunity. The Company
plans to align itself with a brand name keyboard supplier for the
re-introduction of this product.
7
<PAGE>
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.
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.
In February, 1998 the U.S. Patent Office granted numerous patents on the
Company's Multimedia-Telephony keyboard technology. The Company has filed an
international patent application designating Europe, Japan, Australia, Canada,
Brazil, China, and South Korea. Presently the Company is finalizing license
agreements with Maxi Switch, Silitek and NMB. All are marketers of similar
technologies which infringe on the Company's patent. The Company has started to
receive Royalty revenues and believes it has the potential to generate strong
annual revenues for it's technology as the demand by corporations to reduce
workspace clutter and improve productivity will result in increased demand for
keyboards which integrate the Company's technologies.. The company has entered
into two royalty agreements to date, which should generate royalty revenues of
approximately $200,000 USD per annum.
Although the Company believes 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 -DELIVERY
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 supplier
has not had a good on time delivery record, and its quality has not been up to
standard on numerous products. As such, the Company is negotiating with other
suppliers to correct this problem. The interruption of supply has adversely
affected the Company's ability to supply certain of its products in a timely
manner, and the Company has suffered lost revenues as a result. 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 key products in its product
line assortment.
EMPLOYEES
As of April 30, 1999, the Company's United States operation had ten full-time
employees. The Company's UK subsidiary employed five full-time employees. It's
Hong Kong office employed two persons. None of the Company's employees are
represented by a labor union. The Company believes its employee relations are in
good standing. The company also has contracts with independent sales rep
organizations for sales of its products within the U.S. market.
SPECIAL CONSIDERATIONS
LIMITED OPERATING HISTORY
The Company commenced operations in June of 1993 as a producer and marketer of
CD-ROM audio cables. In October 1993, the Company began developing PC multimedia
accessory products. In 1996, the Company 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,
competitive activity and the absence of an operating history. Despite
significant obstacles, the Company has continued operations, and against all
odds, has succeeded in moving forward. However, there can be no assurance 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.
8
<PAGE>
HISTORY OF LOSSES
The Company has incurred operating losses since inception, and reported net
losses of $2,085,756 and $3,255,945 for the years ended April 30, 1998 and April
30, 1999, respectively. As of April 30, 1999, the Company had an accumulated
deficit of over $15,000,000. 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, 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. The Company had revenue of approximately $3,405,000 for the year ended
April 30, 1999, a decrease of approximately $1,328,000 over revenue of
approximately $4,733,000 for the year ended April 30, 1998. The Company reported
a net loss for the year ended April 30, 1999. Competitive activities for the
last year intensified. There can be no assurance the Company will generate
sufficient operating revenue, expand sales of its products, or control its costs
sufficiently to achieve or sustain profitability. However, the Company continues
to explore additional investment opportunities, as it believes with the proper
financing in place, its future ability to reach profitability can be achieved.
The Company policy has always been to write down, and report obsolete
inventories. It has continued to develop new products, at a cost to the
Company's bottom line. The Company has maintained an open book with industry
press releases on all material aspects of the Company's operations. Management
of the company firmly believes the two primary roadblocks for the Company have
been its inability to obtain the necessary operating capital to ensure its
product development and customer orders are produced and delivered in a timely
manner. Had this not been a problem, results would have greatly improved.
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 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 Opening Statement and
"Special Considerations - Litigation" contained in Item 1 of this Report. The
Company expects direct and indirect competition is likely to intensify in the
future. There can be no assurance the Company will be able to compete
successfully. See "Business - Competition" contained in Item 1 of this Report.
YEAR 2000 READINESS
The year 2000 (Y2K) is an issue putting at risk systems, products and
specialized hardware utilizing date sensitive computer chips or software with
two-digit date fields will fail to properly recognize the year 2000. As a direct
result of this concern the Company has upgraded all hardware and software to be
Y2K compliant. Management has taken these measures to insure all computer
hardware and software will be able to function as the year 2000 approaches.
However, there is no assurance all the suppliers and vendors of the Company are
Y2K compliant, and therefore it is possible some business interruption may occur
as a result.
9
<PAGE>
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The PC, internet, 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 its
future success will depend on its ability to anticipate such changes and to
offer the market responsive products on a timely basis which meet these evolving
industry standards and achieve market acceptance. Due to insufficient operating
capital, the Company has been hindered in its ability to achieve profitability.
There can be no assurance 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 could adversely affect the Company's
operating results in the future. The Company has experienced delays in delivery
schedules on new product introductions. 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 maintains 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. Mr. Struthers, the Company's Executive Vice President, also
maintains a five year agreement. Ms. Catherine Copland maintains a three year
agreement. Similar terms and conditions apply for these two individuals. 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 CUSTOMERS
Three customers were responsible for 9-11% each of the Company's net revenue for
the year ended April 30, 1999. The total of these three customers for the year
ended April 30, 1999 represented 30% of the net revenue for the year ended April
30, 1999.
DEPENDENCE ON THIRD PARTY SUPPLIERS
The Company does not have supply agreements with any of these suppliers. The
Company has not experienced any material difficulties in obtaining supplies in
the past with the exception of timely delivery of new products from its primary
manufacturer. The Company believes additional suppliers are identifiable, and
accepts any reduction or interruption in supply from its vendors or suppliers
would adversely affect the Company's ability to supply orders in a timely
manner. See "Business - Raw Materials and Supplies" contained in Item 1 of this
Report.
RISKS ASSIOCIATED 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 April 30, 1998, and 36% of the Company's expenses
for the year ended April 30, 1999. 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.
10
<PAGE>
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 which 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 the 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 - ALLIANCES
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 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. The Company is actively pursuing additional investment
capital, however, there is no assurance that management will be able to obtain
such financing.
The Company has a factoring agreement to finance its U.S. receivables through
Sun Capital Inc. The Company's need to factor it's receivables is a direct
result of a lack of working capital by the Company. Such an arrangement is
expensive and has an adverse effect on the Company's operational expenses.
Similar arrangements for the Company's European receivables do not exist at this
time.
Over the past year the Company has incurred large legal costs due to the
resolution efforts it's past preferred shareholder and de-listing problems,
coupled with other issues arising from the latter. The Company has also written
down large inventories in the past. The Company does not feel that such expenses
or product write-downs are likely to occur during the next fiscal period.
LITIGATION
The Company is currently involved in various legal proceedings. To the extent
that these lawsuits 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 - 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, in 1998, entered into agreements with the holders
of all 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 did not have an adequate number of common shares
to convert all the new warrants, all the previously issued warrants outstanding
and employee stock options. On or about October, 1997, James Copland, the
Chairman of the Board, President, Treasurer and Chief Executive Officer of the
Company, turned in 1,500,000 shares of common stock held by him to allow the
Company to issue common stock in conversion of preferred shares. In return
therefore, the Board of Directors voted to issue Mr. Copland 15 shares of of
$100,000 face value preferred stock. The Board of Directors determined this was
a fair price for the surrender of the shares based on the fact prior offers by
other shareholders would have been sufficient at a substantially higher cost to
the Company if it had accepted these offers and due to the fact the return of
the shares resulted in reducing the outstanding convertible preferred shares.
The preferred shares are convertible into common stock at the rate of 12 shares
for every $1 of face value of the Series B Preferred stock. In addition, the
President received $150,000 in cash for the additional 148,444 shares returned.
11
<PAGE>
The Company believes 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 any future transactions with
affiliated parties be on such terms and approved by a majority of the
disinterested directors.
PROXY APPROVAL
In July of 1998 shareholders of the Company approved two Motions. The first, to
increase the number of authorized shares by 50,000,000, bringing the total to
75,000,000. The second motion approved by the shareholders was a reverse stock
split. On April 23, 1999 the Company initiated a reverse stock split in a ratio
of one (1) new share for eighteen (18) of its shares of common stock.
LACK OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
anticipate 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 which 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 COMPANY 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 the Company's de-listing
it's common stock has traded on the Over the counter bulletin board. The trading
price of the Company's Common Stock 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. 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 de-listed 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. The Company has since retained
King, Weber and Associates, P.C. who has now acted as the Company's independent
accounting firm for the audit of the current years financial statements. The
Company is appealing its de-listing and has asked NASDAQ to relist the common
stock of the Company. The Company is unable to predict whether NASDAQ will act
favorably on such request.
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. This
de-listing has prohibited the company from seeking additional operating capital
through traditional channels. These rules create a "less willingness" by brokers
to engage in transactions in the Company's securities due to an OTC listing,
therefore increasing the difficulty the company to raise funds and for those
investors to dispose of their securities.
12
<PAGE>
SHARES OUTSTANDING
Due to the issuance of shares of common stock to convert the Series A Preferred
Stock, the Company had approximately 25 million shares of common stock trading.
This amount of "trading stock" had an adverse affect for the prevailing market
price of the Company's common stock. To improve shareholder value, the Company
effected a 1 for 18 stock reverse on April 23, 1999. This in turn, reduced the
number of common "trading shares" to an amount equal to approximately 1.5
million common shares.
LOOKING FORWARD 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. FACILITIES
In March, 1999 the Company relocated its US operations to a facility located in
the Scottsdale Airpark in Scottsdale, Arizona. The facility leases approximately
6500 square feet of warehouse space and approximately 2,000 square feet of
executive office space for approximately $7000 per month. The lease expires
February 28, 2002.
The Company's European subsidiary is located in Portsmouth in the U.K. The U.K.
office 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 are sufficient for its current
needs. 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 attorney'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. The
company settled this award in 1998 for approximately $ 1,825,000.
13
<PAGE>
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. The company is preparing for litigation at this
time.
c. 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 wheels. 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 the year, and if settled through
arbitration, the maximum exposure to the company would be reduced to $ 100,000.
d. The Company v. Toback & Company
In June 1999 SC&T filed suit against Toback & Company seeking substantial
damages for the firms untimely resignation in September of 1997. These actions
caused the de-listing of SC &T's shares from the NASDAQ Stock Exchange. The
Company alleges Toback's actions were premeditated and unnecessary, causing
severe damage to the Company. The Company is seeking damages against Toback &
Company in this regard. The Company believes it will prevail in it's action
against Toback & Company.
e. The Company v. Santiago Villa
SC &T has filed suit against its former landlord seeking to collect
approximately $20,000 in escrow funds not disbursed to the Company when it
vacated it's former offices. The Company believes it will prevail in this
action.
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 has been 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.
14
<PAGE>
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 company now trades on the OTC Bulletin board
under the symbol "SCTU".
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. (Adjusted for reverse stock split.)
COMMON STOCK
-----------------
BID ASK
----- -----
1997
Fourth Quarter 10.68 16.24
1998
First Quarter .72 5.62
Second Quarter 2.47 6.84
Third Quarter 1.44 3.60
Fourth Quarter 1.26 2.79
1999:
First Quarter .91 1.62
Second Quarter .90 2.63
Third Quarter .68 .75
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.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data of
the Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements and Notes thereto appearing elsewhere herein. The data has
been derived from the financial statements of the Company audited by King, Weber
& Associates, P.C. for the year ended April 30, 1999 and Evers & Company, Ltd.
for the ten months ended April 30, 1998
Year Ended April 30, 10 Months Ended April 30,
1999 1998
---------- ----------
Operating Data:
Net sales $3,405,313 $4,733,558
Net loss 3,255,945 2,085,756
Loss per share 2.10 1.61
Average shares outstanding 1,554,018 1,296,972
April 30, 1999
--------------
Balance Sheet Data:
Working capital $ (390,744)
Total assets 2,728,092
Shareholders' equity 111,895
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.
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 which handles
all marketing and distribution operations for Europe and the UK. The Company
established a subsidiary as of June 1, 1998, in Hong Kong, known as SC&T Asia
Limited.
16
<PAGE>
Despite the expansion in customers and the corresponding increase in revenue
since commencing operations, the Company's total operating expenses exceeded
revenues, resulting in a net loss of approximately $3,255,000 for the year ended
April 30, 1999. The Company's primary costs are for R & D, tooling of new
products, inventory, trade shows, selling and promotion, write-down of obsolete
inventory, and legal expenses, which increased significantly for the period
ended April 30, 1998 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 along with anticipated
expansion of sales. In addition, operating results may be influenced by factors
such as demand for products, timing of new products by both the Company and its
competitors, pricing by both the Company and its competitors, inventory levels,
the ability to develop and market new products, the Company's ability to supply
products at high quality levels and at reasonable costs, the timing and levels
of sales and marketing expenditures, and general economic conditions.
NET SALES
Net sales for the year ended April 30, 1999 were approximately $3,405,000,
approximately a $1,328,000 decrease, 28%, from net sales for the year ended
April 30, 1998. Of the $1,328,000 decrease $970,000 was due to reduced sales by
the Company's Uk subsidiary. Continued poor performance by the UK subsidiary has
caused Management to seriously review how it does business in Europe and look
for more cost effective methods to secure European sales with reduced costs. The
decrease in net sales for the years ended April 30 1999 and April 30, 1998
resulted from a variety of factors including a lack of operating capital which
resulted in delays in manufacturing and delivery in the fourth quarter of new
products scheduled for sale during the 1998 Christmas selling season. Such
delays increased the costs to deliver products and in product returns by
retailers and increased sales discounts given to customers to complete sales
agreements.
GROSS PROFIT
The Company's gross profit percentage for the years ended April 30, 1999 and
April 30, 1998 reflects the Company's decision to reduce the price for certain
first generation products remaining in inventory in anticipation of newer second
generation products. The gross profit percentage for the year ended April 30,
1998 was also affected by the write-down of certain inventory of approximately
$835,000. The write-down 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 April 30, 1999 was 10%, which resulted in no
change from the gross profit percentage for the year ended April 30, 1998, 10%.
PAYROLL & PAYROLL TAXES
The Company's payroll and payroll tax expense decreased significantly from
approximately $1,140,000 in the year ended April 30, 1998, to approximately
$725,000 in the year ended April 30, 1999, or approximately 36%. A significant
portion of the decrease was due to a continued effort by management to reduce
expenses and increase employee productivity. Payroll and payroll tax expense
decreased as a percentage of sales, from 24% for the year ended April 30, 1998
to 21% for the year ended April 30, 1999. The Company is required to employ a
base staff of qualified personnel to maintain its operations.
SELLING & PROMOTION
The Company's selling and promotion expenses increased from approximately
$1,072,000 in the year ended April 30, 1998 to approximately $1,144,462 in the
year ended April 30, 1999, or approximately 7%. This represents an increase in
selling and promotion expenses, as a percentage of sales, from 23% for the ten
months ended April 30, 1998 to 33% for the year ended April 30, 1999. A portion
of these expenses were utilized to continue promoting new products and creating
new packaging for new products. The increase in selling and promotional expenses
were a direct result of the competitive nature of the industry and the need to
give retailers additional discounts and coop advertising fees. The Company plans
to make dramatic reductions in travel, trade show, and all advertising expenses
in fiscal year 2000.
17
<PAGE>
OFFICE & ADMINISTRATION
The Company's office and administrative expenses showed a small increase from
approximately $1,705,000 in the year ended April 30, 1998 to approximately
$1,760,000 in the year ended April 30, 1999, or approximately a 3% increase. As
a percentage of net sales, office and administrative expenses were 36% for the
year ended April 30, 1998 and 51% for the year ended April 30, 1999. A
significant portion of the increase in office and administrative expenses were a
result of employee turnover and the need to hire temporary office and warehouse
help at greater cost.
RESEARCH & DEVELOPMENT
Expenditures for research and development showed a decrease from approximately
$318,000 in the year ended April 30, 1998, to approximately $53,000 in the year
ended April 30, 1999 or approximately a 83% reduction. During the year ended
April 30, 1998 and April 30, 1999 Management elected to expense the entire cost
of research and development expenditures as incurred. 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 $120,000 in the
year ended April 30, 1998 to $0 for the year ended April 30, 1999, or a 100%
reduction. The Company has been able to rely upon staff for services which were
formerly contracted to outside sources.
NET LOSS
As a result of the factors described above, the Company's loss from operations
increased from approximately $2,086,000 in the year ended April 30, 1998 to
approximately $3,256,000 in the year ended April 30, 1999. The net loss from
1998 includes $1,825,000 in revenue from a legal settlement. The loss of
$3,256,000 is a direct result of a significant reduction in sales and increased
expenses from the Company's UK subsidiary . The Company's total operating
expenses decreased from approximately $4,355,000 for the ten months ended April
30, 1998 to approximately $3,681,000 for the year ended April 30, 1999. This
decrease, $674,000 (16%), was accomplished through drastic reductions in
operating costs in the US of approximately $1,091,000 for the current year.
These reductions were offset by increased expenses by the UK subsidiary of
approximately $417,000.
Over the past year Management has spent an inordinate amount of time and effort
in addressing administrative issues and legal matters which are now resolved.
Future results will benefit from a dedicated focus on sales and controlling
expenses, to maximize profitability and return on capital employed.
NET LOSS PER SHARE
Net loss per share increased from $1.61 for the year ended April 30, 1998 to
$2.10 for the year ended April 30, 1999. The increase in the net loss for the
year ended April 30, 1999 represents an increase of 30%.
LIQUIDITY & CAPITAL RESOURCES
The Company's working capital decreased from $2,062,000 for the year ended April
30, 1998 to deficit of $390,744 for the year ended April 30, 1999. This decrease
is due directly to the Company's net loss for the year ended April 30, 1999. 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. The Company has been unable to attract
additional sources of capital due to it's de-listing and must rely on factoring
of it's accounts receivable which dramatically increase costs and reduces
working capital.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the notes thereto and reports
thereon, commencing at page 23 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 49 President, Treasurer, Chairman of
the Board, and Chief Executive Officer
Catherine Copland 50 Secretary, Director
Steve Deckrow 53 Director
Greg Struthers 45 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.
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.
Gregory Struthers has been a director of the Company since January 1999. Mr.
Struthers has served as Executive Vice President of the Company since January
1999. Mr. Struthers served as Director of Asian Operations, based in Asia, for
the Company from January 1997 to January 1999. From 1991 to 1996 Mr. Struthers
served as Vice President of Operations for Lee Data. Mr. Struthers served as
Director of Quality Assurance from 1987 to 1990.
19
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers, and persons who own more than 10% of a registered class of
the Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Directors, officers and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file.
The Company believes that each person who, at any time during such fiscal year,
was a director, officer or beneficial owner of more than 10% of the Company's
Common Stock complied with all Section 16(a) filing requirements during such
fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation earned by the Company's Chief
Executive Officer (the ("Named Officer") for services rendered to the Company
during the two preceding fiscal years. No other executive officer of the Company
earned more than $90,000 in the prior fiscal years.
FISCAL ANNUAL
NAME AND PRINCIPAL POSITION YEAR COMPENSATION
- --------------------------- ---- ------------
James L. Copland 1999 $150,000
President, Treasurer, 1998 $276,500(1)
Chairman of the Board, and
Chief Executive Officer
Thomas Bednarik 1997 $150,000
Former Chief Executive Officer
and Director(2)
(1) Includes $150,000 paid for return of stock.
(2) Thomas Bednarik resigned as Director and Chief Executive Officer effective
July 18, 1997.
20
<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)(3) 1,914,000(3) 40.6%
Directors and key employees as a
group (four persons)(2)(3) 2,256,777(3) 47.7%
* Less than 1% of the outstanding Common Stock
(1) 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 7625 east
Redfield Road, Suite # 200 Scottsdale, Arizona 85260.
(3) 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 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.
21
<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.
On April 30, 1999, the registrant filed with the Securities and Exchange
Commission a Report on Form 8-K dated April 30, 1999 which reported the
engagement of King, Weber & Associates, P.C. as its new audit firm.
On April 23, 1999, the registrant filed with the Securities and Exchange
Commission a report on Form 8-K, dated April 23, 1999, which reported a
reverse stock split in a ratio of one (1) new share for eighteen (18) of
its shares of common stock.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SC&T INTERNATIONAL, INC.
Date: August 11, 1999 /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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ James L. Copland President, Treasurer, Chief August 11, 1999
- ------------------------- Executive Officer, and Director
James L. Copland
/s/ Catherine Copland Assistant Secretary and Director August 11, 1999
- -------------------------
Catherine Copland
/s/ Greg Struthers Director August 11, 1999
- -------------------------
Greg Struthers
/s/ Steve Decrow Director August 11, 1999
- -------------------------
Steve Decrow
23
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF
APRIL 30, 1999
AND INDEPENDENT AUDITORS' REPORT
24
<PAGE>
SC&T INTERNATIONAL, INC.
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 26
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998:
Consolidated Balance Sheet 28
Consolidated Statements of Operations 28
Consolidated Statements of Stockholder's Equity 30
Consolidated Statements of Cash Flows 31
NOTES TO FINANCIAL STATEMENTS 33
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SC&T International, Inc.
We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows of SC&T International,
Inc. and subsidiaries for the ten months ended April 30, 1998. 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 SC&T
Europe, NV (Belgium) and SC&T Europe, LTD (United Kingdom), wholly-owned
subsidiaries, which statements reflect total revenues of $2,343,000 for the ten
months then ended. Those statements were audited by other auditors whose reports
were furnished to us, and in our opinion, insofar as they relate to the amount
included for SC&T Europe, NV and SC&T Europe, LTD, is based solely on the report
of other auditors. The auditors of SC&T Europe LTD issued an adverse opinion on
the subsidiary's financial statements due to uncertainties about the Company's
ability to provide the necessary financial support to the subsidiary.
We conducted our 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 consolidated 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 on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly in all
material respects, the consolidated results of operations and cash flows of SC&T
International, Inc. and subsidiaries for the ten months ended April 30, 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the notes to
the financial statements, the Company has suffered losses from operations that
raised substantial doubt about its ability to continue as a going concern.
Management's plans with regard to these matters are discussed in the notes to
the financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Evers & Company, Ltd.
Phoenix, Arizona
August 6, 1998
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
SC&T International, Inc.
Scottsdale, Arizona:
We have audited the consolidated balance sheet of SC&T International, Inc. and
subsidiaries (the "Company"), as of April 30, 1999 and the related consolidated
statements of operations, comprehensive income, stockholders' 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 consolidated financial statements based on our audit. We did
not audit the financial statements of SC&T Europe Limited, a wholly owned
subsidiary, which statements reflect total assets of $1,280,739 as of March 31,
1999 and total revenues of $1,372,134 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for SC&T Europe Limited,
is based solely on the report of the other auditors. The auditors for SC&T
Europe Limited issued an adverse opinion due to uncertainties regarding the
subsidiary's ability to continue as a going concern and lack of evidence that
the parent company will provide sufficient financial support.
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 consolidated 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 the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SC&T International,
Inc. and subsidiaries as of April 30, 1999 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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a working
capital deficit of $390,744 at April 30, 1999 and has experienced significant
operating losses with uncertain cash flow to service trade debt and operating
expenses. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with regard to these matters are
discussed in Note 1. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
KING, WEBER & ASSOCIATES, P.C.
Tempe, Arizona
July 20, 1999
27
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 207,198
Accounts receivable (net of $339,453 allowance) 400,100
Inventories 1,413,069
Prepaid expenses and other assets 189,759
------------
Total current assets 2,210,126
PROPERTY AND EQUIPMENT, net 494,495
OTHER ASSETS 23,471
------------
TOTAL ASSETS $ 2,728,092
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 2,265,871
Accrued liabilities 257,795
Advances from factor 68,737
Capital lease obligations - current portion 8,467
------------
Total current liabilities 2,600,870
CAPITAL LEASE OBLIGATIONS - long-term portion 15,327
------------
Total liabilities 2,616,197
------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 3,000,000
shares authorized, none issued
Common stock, $.01 par value, 33,332,747
shares authorized, 3,351,064 issued and outstanding 33,512
Paid in capital 15,478,055
Currency translation 2,527
Accumulated deficit (15,402,199)
------------
Total stockholders' equity 111,895
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,092
============
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
NET SALES $ 3,405,313 $ 4,733,558
COST OF SALES
Cost of sales 3,039,341 3,424,081
Inventory adjustment to net realizable value -- 834,900
----------- -----------
3,039,341 4,258,981
Gross profit 365,972 474,577
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits expense 724,519 1,140,345
Selling and promotion expense 1,144,462 1,072,065
Office and administrative expense 1,759,036 1,705,369
Research and development expense 53,226 317,593
Consulting fees -- 120,005
----------- -----------
Total selling, general and
administrative expenses 3,681,243 4,355,377
----------- -----------
LOSS FROM OPERATIONS (3,315,271) (3,880,800)
----------- -----------
OTHER (INCOME) AND EXPENSES
Interest income (3,915) (17,125)
Interest expense and factoring charges 198,881 47,081
Royalty income (144,065) --
Gain on disposition of equipment and
sale lease back (110,227) --
Gain from legal settlement -- (1,825,000)
----------- -----------
Total other expenses (59,326) (1,795,044)
----------- -----------
NET LOSS $(3,255,945) $(2,085,756)
=========== ===========
NET LOSS PER COMMON SHARE
Basic $ (2.10) $ (1.61)
=========== ===========
Diluted $ (2.10) $ (1.61)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 1,554,018 1,296,972
=========== ===========
Diluted 1,554,018 1,296,972
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
NET LOSS $(3,255,945) $(2,085,756)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments 57,240 19,538
----------- -----------
Total Other Comprehensive Income 57,240 19,538
----------- -----------
COMPREHENSIVE INCOME (LOSS) $(3,198,705) $(2,066,218)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
---------------------------- ---------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE JULY 1, 1997 23,135,273 $ 231,353 718 $ 7 $ 14,959,622
Conversion of preferred stock 5,450,000 54,500 (545) (5) (54,495)
Conversion of president's common
stock to Series B preferred (1,648,444) (16,484) 15 1,500,000 (1,633,516)
Cancellation of treasury stock (3,783,145) (37,831) 8,416
Currency translation
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1998 23,153,684 $ 231,538 188 $ 1,500,002 $ 13,280,027
Conversion of Series A preferred 2,964,584 29,646 (173) (2) (29,644)
Conversion of Series B preferred 18,000,000 180,000 (15) (1,500,000) 1,320,000
Reverse stock split (1 for 18) (41,667,204) (416,672) 416,672
Stock issued for cash 900,000 9,000 491,000
Currency translation
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1999 3,351,064 $ 33,512 0 $ -- $ 15,478,055
============ ============ ============ ============ ============
<CAPTION>
TREASURY STOCK
---------------------------- CURRENCY ACCUMULATED
SHARES AMOUNT TRANSLATION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE JULY 1, 1997 (200,000) $ (29,415) $ (74,251) $(10,060,498) $ 5,026,818
Conversion of preferred stock --
Conversion of president's common
stock to Series B preferred (150,000)
Cancellation of treasury stock 200,000 29,415 --
Currency translation 19,538 19,538
Net loss (2,085,756) (2,085,756)
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1998 0 $ -- $ (54,713) $(12,146,254) $ 2,810,600
Conversion of Series A preferred --
Conversion of Series B preferred --
Reverse stock split (1 for 18) --
Stock issued for cash 500,000
Currency translation 57,240 57,240
Net loss (3,255,945) (3,255,945)
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1999 0 $ -- $ 2,527 $(15,402,199) $ 111,895
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
31
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEAR ENDED APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,255,945) $(2,085,756)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 216,048 141,055
Amortization of deferred gain on sale leaseback (145,864) (13,252)
Loss on disposal of property and equipment 6,228
Litigation settlement expense Changes in assets
and liabilities:
Accounts receivable 354,808 101,400
Inventories 663,836 417,884
Prepaid expenses and other current assets (59,325) 2,690
Other assets 141,317 (150,342)
Accounts payable 959,690 428,052
Accrued liabilities 68,853 (12,830)
----------- -----------
Net cash (used in) provided by
operating activities (1,050,354) (1,171,099)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale leaseback of building -- 1,408,577
Proceeds from sale of property and equipment 13,486
Purchase of property and equipment (60,591) (412,121)
----------- -----------
Net cash (used in) provided by
investing activities (47,105) 996,456
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash payment for stock acquired from president -- (150,000)
Currency translation -- 19,538
Payment of capital lease obligations (10,330) (8,225)
Proceeds from issuance of common stock 500,000
Advances from (repayments to) factor (47,515) 116,252
----------- -----------
Net cash provided by (used in)
financing activities 442,155 (22,435)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 942 --
DECREASE IN CASH AND EQUIVALENTS (654,362) (197,078)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 861,560 1,058,638
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 207,198 $ 861,560
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
32
<PAGE>
SC&T INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEAR ENDED APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998
1999 1998
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 196,400 $ 47,081
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment under capital lease $ 11,303
=========
The accompanying notes are an integral part of these
consolidated financial statements.
33
<PAGE>
SC&T INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEAR ENDED APRIL 30, 1999 AND TEN MONTHS ENDED APRIL 30, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
SC&T International, Inc. (the "Company") was formed in 1993 for the purpose
of developing and marketing accessory and peripheral products for the
computer and video game industries. The Company's primary product line,
steering wheels and foot controls for racing games, use infrared
connections, eliminating the need for computer cable hook-up directly to
the personal computers. Its products are compatible with SEGA, Nintendo and
Sony Playstation games. The Company also markets audio speakers for PC's.
The Company's customers include many of the major electronics retailers in
the United States and overseas. A substantial portion of the Company's
revenue is generated internationally. It has wholly owned subsidiaries in
the United Kingdom and Hong Kong.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As reflected in the
accompanying balance sheet, the Company had negative working capital of
$390,744 at April 30, 1999 and continues to suffer material operating
losses. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets and
liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company's continuation as a going concern
is dependent upon its ability to generate sufficient cash flow from
profitable operations or raise adequate capital to meet its obligations on
a timely basis. The Company is attempting to raise equity capital and is
pursuing other operating alliances to enhance its sales volume and
profitability. However, there can be no assurances that the Company will be
successful with these attempts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts
and activities of SC&T International, Inc. and its wholly owned
subsidiaries, SC&T Europe, Limited (United Kingdom), SC&T Asia, Limited
(Hong Kong) and SC&T Europe, NV (Belgium), SC&T America, Inc. and SC&T
Racing Enterprises, Limited. SC&T America, Inc. and SC&T Racing
Enterprises, Limited are dormant entities with no material assets or
liabilities. SC&T Europe, NV wound up its operations during the ten month
period ended April 30, 1998 and the remaining net assets of the Belgium
entity were transferred to SC&T Europe, Limited on September 1, 1998. All
significant intercompany transactions and balances have been eliminated in
consolidation. SC&T Europe, Limited has a fiscal year end of March 31,
1999. The effect of the one month intervening period is not material.
CASH AND CASH EQUIVALENTS includes all short-term highly liquid investments
that are readily convertible to known amounts of cash and have original
maturities of three months or less.
INVENTORIES are stated at the lower of cost (first-in, first-out) or
market. Allowances are made for returned inventory to reflect estimated net
realizable value of those items.
PROPERTY AND EQUIPMENT are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets ranging
from 3 to 10 years. Depreciation expense is not recorded for tooling
acquired and not yet been placed in service.
REVENUE RECOGNITION - The Company recognizes revenue when the product is
shipped. Products have warranties covering defects. Certain customers have
arrangements that provide the right to return unsold merchandise. The
Company provides an allowance to reflect estimated returns of product from
customers and warranty costs. The Company may also provide price protection
to certain customers. The Company records the price protection as a
reduction of revenue at the time of the price reduction.
34
<PAGE>
RESEARCH AND DEVELOPMENT COSTS FOR NEW PRODUCTS ARE EXPENSED AS INCURRED.
ADVERTISING COSTS, WHICH INCLUDE THE COSTS OF SPONSORING RACING EVENTS, ARE
EXPENSED AS INCURRED. ADVERTISING EXPENSE FOR THE YEAR ENDED APRIL 30, 1999 AND
THE TEN MONTHS ENDED APRIL 30, 1998 WAS APPROXIMATELY $332,000 AND $570,000,
RESPECTIVELY.
INCOME TAXES - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, which among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
FOREIGN CURRENCY TRANSLATION - The foreign subsidiaries maintain their
financial statements in the local currencies which have been determined to
be the functional currencies. Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the rates in effect at the
balance sheet date. Revenues and expenses are translated at average rates
for the year. Related translation adjustments are reported as a separate
component of stockholders' equity, whereas, gains and losses resulting from
foreign currency transactions are included in the results of operations.
FINANCIAL INSTRUMENTS - Financial instruments consist primarily of cash,
accounts receivable, and obligations under accounts payable, accrued
expenses, advances from factor, and capital lease instruments. The carrying
amounts of cash, accounts receivable, accounts payable, accrued expenses
and advances from factor approximate fair value because of the short
maturity of those instruments. The carrying value of the Company's capital
lease arrangements approximates fair value because the instruments were
valued at the retail cost of the equipment at the time the Company entered
into the arrangements.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts 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.
LOSS PER SHARE - Basic loss per share is computed using the weighted
average number of shares of common stock outstanding for the period.
Diluted loss per share is computed using the weighted average number of
shares of common stock plus dilutive potential common shares outstanding
for the period.
35
<PAGE>
3. INVENTORIES
Inventories consisted of the following at April 30, 1999:
Finished goods $ 1,305,750
Advances on purchases of inventory 138,747
In-transit items 73,568
Allowance for obsolescence (104,996)
-----------
Total inventory $ 1,413,069
===========
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 one primary
manufacturer for the production of its products. Its suppliers and
manufacturer are located in Hong Kong, China and Taiwan.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at April 30, 1999:
Office furniture and equipment $ 294,448
Tools, dies and molds 508,830
Computer equipment 168,881
Warehouse equipment 11,303
---------
Total 983,462
Less accumulated depreciation and amortization 488,967
Property and equipment - net $ 494,495
=========
5. ADVANCES FROM FACTOR
In May 1998, the Company changed factors which resulted in an early
termination penalty of $12,000 to the prior factor. The new factoring
arrangement provided for a fee equal to 1.5% of all invoices factored plus
interest equal to the bank's base rate plus 2% on all outstanding balances
advanced. The factor assumed credit risk related to receivables factored,
however, the Company was responsible for all customer disputes and
counterclaims. The agreement was secured by accounts receivable, inventory,
certain other assets of the Company and the personal guarantees of certain
officers.
The Company entered into an agreement with another new factor in October
1998. The terms of the agreement provide for advances up to 75% of
receivables factored and a 2% discount payable upon submission of invoices
to factor. A discount fee of 10% per day up to 90 days is charged from date
of advance until payment by customer. A 15% fee is charged for accounts
unpaid after 90 days. Credit risk remains with the Company except for
account debtor bankruptcy. The agreement is secured by all accounts
receivable whether or not specifically purchased by the factor. The balance
at April 30, 1999 of $68,737 represents funds advanced in excess of
customer payments received by factor and allowance reserve maintained by
factor.
6. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the year ended and ten months ended April 30, 1999, and 1998,
respectively, consisted of the following:
36
<PAGE>
1999 1998
----------- -----------
Current tax provision (benefit) $(1,370,442) $(1,420,000)
Deferred tax provision (benefit) 1,370,442 1,420,000
----------- -----------
Total income tax provision (benefit) $ -0- $ -0-
=========== ===========
There was no deferred tax liability at April 30, 1999. There was a deferred
tax asset of $6,570,441 at April 30, 1999, which consists of the following:
Net operating loss carryforwards $ 6,342,345
Allowance for doubtful accounts 135,781
Accrued compensation 10,317
Inventory reserves 41,998
Property and equipment 40,000
-----------
Subtotal 6,570,441
Valuation allowance (6,570,441)
-----------
Total $ -0-
===========
Deferred income taxes for the year ended April 30, 1999, primarily relate
to temporary differences for the increase in the valuation allowance for
the deferred income tax asset related to the net operating loss
carryforward of $1,622,345 less reversal of temporary differences in the
allowances for doubtful accounts and inventory reserves of $251,904.
The Company files a consolidated income tax return in the United States.
There is no effect of foreign income taxes since the foreign subsidiaries
incurred operating losses for income tax purposes. Any effect of foreign
income taxes would be recognized in the U.S income tax return.
Net operating loss carryforwards of $15,362,727 expire from 2010 through
2018.
A reconciliation for the differences between the effective and statutory
income tax rates is as follows:
1999
--------------------------
Federal statutory rates $(1,107,021) (34)%
State income taxes - net of federal benefit (260,476) (8)%
Valuation allowance for operating loss
carryforwards 1,370,441 42 %
Other (2,944) -- %
----------- -----------
Effective rate $ -0- -0-%
=========== ===========
7. LEASES
OPERATING LEASES
The Company leases its facilities and certain office equipment under
long-term operating leases that expire through February 2002. Rent expense
under these leases was approximately $256,000 and $216,000 for the year
ended April 30, 1999 and ten months ended April 30, 1998, respectively.
Minimum annual lease payments under these agreements are as follows:
Years ended April 30:
---------------------
2000 $ 211,071
2001 100,389
2002 73,000
---------
Total $ 384,460
=========
37
<PAGE>
On July 1, 1997, the Company completed a sales-leaseback transaction
involving the land and building on which the Company's former headquarters
were located. The sales price of the property was $1,500,000 which resulted
in a gain of approximately $159,000 that was being deferred and amortized
over the lease term. The leaseback was for a ten-year period and granted
the Company the right of first refusal to purchase the building. The
Company terminated the lease in February 1999, in an agreed-upon settlement
with the landlord and moved to new headquarters under a three year lease.
The remaining unamortized gain of $145,864 was recognized in 1999 offset by
the loss of the security deposits of approximately $38,000.
CAPITAL LEASES
The Company leases office and warehouse equipment under capital leases
expiring through 2001. Minimum required lease payments under the lease
agreements for the years ending April 30 are as follows:
2000 $ 15,333
2001 11,643
---------
Total future minimum lease payments 26,976
Less amount representing interest 3,182
---------
Total future minimum lease payments-net 23,794
Current portion 8,467
---------
Long-term portion $ 15,327
=========
Assets capitalized under the capital leases included in property and
equipment balances totaled $26,104 (net of accumulated amortization of
$17,030) at April 30 1999.
8. LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. The Company has adopted
SFAS No. 128 Earnings Per Share.
<TABLE>
<CAPTION>
Per
Income/Loss Shares Share
-------------------------- --------------------- -----------------
1999 1998 1999 1998 1999 1998
----------- ----------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net (Loss) $(3,255,945) $(2,085,756)
BASIC (LOSS) EARNINGS PER SHARE:
Income available to Common
Shareholders $(3,255,945) $(2,085,756) 1,554,018 1,296,972 $ (2.10) $ (1.61)
EFFECT OF DILUTIVE SECURITIES N/A N/A
DILUTED (LOSS) EARNINGS PER SHARE $(3,255,945) $(2,085,756) 1,554,018 1,296,972 $ (2.10) $ (1.61)
</TABLE>
Common equivalent shares of 1,061,444 stock options and warrants
outstanding at April 30, 1999, are excluded from the computation because
the effect of inclusion would be anti-dilutive. Subsequent to April 30,
1999, 1,200,000 shares of common stock were issued.
38
<PAGE>
9. STOCKHOLDERS' EQUITY
Preferred Stock
At April 30, 1999 all issued shares of preferred stock had been converted
to common stock. During the year ended April 30, 1999, 173 shares of Series
A preferred were converted to 29,646 common and 15 shares of Series B
preferred were converted to 180,000 common shares.
Common Stock
During the year ended April 30, 1999, the Company's Board of Directors
approved a reverse stock split of 1 for 18. All share amounts in the
accompanying financial statements have been retroactively restated to
reflect the effect of the split.
Stock Options and Warrants
The Company issues stock options from time to time to executives and key
employees. The Company has a qualified stock option plan for its key
employees, consultants and independent contractors. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," and continues
to account for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, no compensation cost has been
recognized for the stock options granted. There were no options granted or
vested in the year ended April 30, 1999.
39
<PAGE>
A summary of activity for the Company's stock options and warrants is
presented below:
EXERCISE
OPTIONS PRICE
------- -----
Options outstanding at July 1, 1997 54,167 $0.06
Granted 15,000 $0.06
Exercised 0
Terminated/Expired (3,611) $0.06
-------
Options outstanding at April 30, 1998 65,556 $0.06
Granted 0 $0.06
Exercised 0
Terminated/Expired 38,889 $0.06
=======
Options outstanding at April 30, 1999 26,667 $0.06
=======
The option amounts and exercise prices have been adjusted to reflect the
stock split that occurred in the year ended April 30, 1999.
The Company has common stock warrants outstanding that were issued in
connection with certain equity raises.
WARRANTS PRICE EXPIRATION
-------- ----- ----------
Warrants issued in the
initial public offering 6,027 $ 0.43 June 2001
28,750 $ 0.35 December 2000
Issued in private placement in
the year ended April 30, 1999 600,000 $ 1.50 May 1999
200,001 $ 3.00 June 1999
200,001 $ 5.00 August 1999
10. RELATED PARTY TRANSACTIONS
During the ten months ended April 30, 1998, the Board of Directors forgave
a receivable of approximately $38,000 from the Company's 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 and certain benefits plus an incentive bonus to be determined
at the sole discretion of the Board of Directors. As part the agreement,
the officer and his wife received cash payments for accumulated accrued
vacation and forgiveness of all amounts owed by them to the Company. The
vacation and indebtedness were approximately $60,000 and $38,000,
respectively. The agreement also contains termination provisions and a
one-year non-competition clause.
40
<PAGE>
11. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable. The
accounts receivable balance at April 30, 1999 is comprised of accounts with
three customers in the U.S. totaling a net balance of $77,000 and of the
net balance in the U.K. of $323,000, approximately $144,000 is due from two
customers.
Three customers were responsible for 9% to 11% each of the Company's net
revenue for the year ended April 30, 1999. The total sales to those three
customers for the year ended April 30, 1999 represented approximately 30%
of the net revenue for the year ended April 30, 1999.
The Company acquires substantially all of its major product lines from one
Asian manufacturer. Certain components are acquired by the Company for the
manufacturer and those components can be obtained from numerous sources.
The Company also licenses certain technology for one of its product lines
from one licensor.
12. LEGAL SETTLEMENT
In May 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 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. The defendants filed a timely Notice
of Appeal in October 1997. However, in April 1998, Maxi Switch and the
Company agreed to settle the claim for $1,825,000. The gain is recorded in
the 1998 financial statements.
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into royalty and license agreements that require
minimum payments based on sales. If the Company does not meet those minimum
sales amounts in a specified period of time, the minimum royalty or license
fee must still be paid. At April 30, 1999, the Company had a minimum
license fee to one licensor of $373,000 which is to be paid as related the
products are sold.
The Company wrote off a debt of $140,000 to a licensor of technology used
in some of the Company's products. Management believes that the licensor
illegally licensed technology that it did not own. Management does not
believe that licensor has a valid claim against the Company and that it
actually overpaid the licensor. The Company has not received a demand for
payment from the licensor.
Another licensor has filed a claim that the Company did not purchase a
minimum amount of software under a licensing agreement. The balance of
software purchases due under the agreement is approximately $40,000. If an
agreement is not reached between the parties, the licensor has obtained a
$33,000 judgement against the Company. The Company believes that if the
licensor can provide the appropriate software, it will make those
purchases.
The Company is in a dispute with a former customer. The customer returned
merchandise on a $180,000 order claiming all were defective. The Company
claims that the customer returned merchandise that it alleged were
defective. The Company offered to replace any defective units. The Company
believes it has some defenses under the uniform commercial code. The
customer has yet to specifically identify defective units. This case has
been pending for two years and is scheduled for trial in October 1999. The
Company is attempting to seek arbitration on this matter. Due to the status
of the case, and the fact that the customer has not yet identified
defective merchandise that it believes was defective, no provision for
potential loss has been made in the accompanying financial statements.
41
<PAGE>
The Company is in dispute with a provider of certain technology regarding
the payment of royalties. The Company has asserted that royalties were paid
as required under the agreement and that the provider made material
misrepresentations under the royalty agreement. The Company has filed a
counterclaim. The case is set for mandatory arbitration. Management intends
to vigorously defend its position in this matter. The Company has accrued
$113,069 relative to this matter which represents its originally calculated
royalty due to the provider.
14. GEOGRAPHIC INFORMATION
The Company's revenue was generated from sales in two primary geographic
regions, the United States and Europe. There were no material operations in
the Company's Asian subsidiary. The European operations are based out of
the Company's wholly owned subsidiary in the U.K. The Company considers it
products to be fall within one product line.
The following table outlines the breakdown of sales to unaffiliated
customers domestically and internationally:
NET REVENUES 1999 % 1998 %
----------- -- ----------- --
United States $ 2,033,179 60% $ 2,391,142 51%
Europe 1,372,134 40% 2,342,416 49%
----------- -----------
Total $ 3,405,313 $ 4,733,558
=========== ===========
NET LOSS BEFORE INCOME TAXES
United States $(2,170,580) 66% $ (901,175) 43%
Europe (1,085,365) 34% (1,184,581) 57%
----------- -----------
$(3,255,945) $(2,085,756)
=========== ===========
ASSETS
United States $ 1,447,353 53% $ 3,152,827 68%
Europe 1,280,739 47% 1,468,987 32%
----------- -----------
$ 2,728,092 $ 4,621,814
=========== ===========
The Company completed the winding down of its subsidiary in Belgium in the
year ended April 30, 1999. The operating results of Europe include a charge
of approximately $243,000, including a charge for the cumulative
translation adjustment of $51,000, related to the closing of the Belgium
operations.
The U.S. entity had sales to the U.K. subsidiary of $ 787,000 in the year
ended April 30, 1999, which were eliminated in consolidation.
42
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 207,198
<SECURITIES> 0
<RECEIVABLES> 739,553
<ALLOWANCES> 339,453
<INVENTORY> 1,413,069
<CURRENT-ASSETS> 2,210,126
<PP&E> 983,462
<DEPRECIATION> 488,967
<TOTAL-ASSETS> 2,728,092
<CURRENT-LIABILITIES> 2,600,870
<BONDS> 0
0
0
<COMMON> 33,512
<OTHER-SE> 78,383
<TOTAL-LIABILITY-AND-EQUITY> 2,728,092
<SALES> 3,405,313
<TOTAL-REVENUES> 3,405,313
<CGS> 3,039,341
<TOTAL-COSTS> 3,681,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,881
<INCOME-PRETAX> (3,255,945)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,315,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,255,945)
<EPS-BASIC> 2.10
<EPS-DILUTED> 2.10
</TABLE>
