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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____to ___
Commission file number: 0-25942
SVT INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1167603
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
59 John Street, 3rd Floor, New York, New York 10038
---------------------------------------------------
(Address of principal executive offices)
(212) 571-6904
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 [ ]
As of August 16, 2002, 40,725,826 shares of common stock, par value $.001 per
share of the registrant were outstanding.
SVT INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001........................................................................3
Consolidated Statements of Operations for the Three and
Six Months ended June 30, 2002 and 2001 (unaudited)..........................................4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited).....................................................5
Notes to Consolidated Financial Statements (unaudited) ........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations...................................................................16
Item 3. Quantitative and Qualitative Disclosure about Market Risk.....................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................21
Item 2. Changes in Securities and Use of Proceeds.....................................................21
Item 3. Defaults upon Senior Securities...............................................................21
Item 4. Submission of Matters to a Vote of Security Holders...........................................21
Item 5. Other Information.............................................................................21
Item 6. Exhibits and Reports on Form 8-K..............................................................21
Signatures ..............................................................................................21
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SVT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002
December 31, 2001 (UNAUDITED)
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 526,076 $ 2,823,110
Accounts receivable, net of allowance of
$50,000 and $250,000, respectively.......................... 5,368,383 3,333,418
Deferred income taxes.......................................... 577,535 577,535
Due from stockholder ...................................... 86,508 -
Other current assets ......................................... 452,330 400,249
----------------- ----------------
Total current assets ........................................... 7,010,832 7,134,312
Property and equipment, net of accumulated
depreciation of $128,459 and $168,926, respectively............ 138,028 299,943
Goodwill........................................................... 1,548,947 1,548,947
Intangible assets, net of accumulated amortization
of $69,595 and $350,379, respectively.......................... 1,284,331 1,740,957
Deposit on acquisition ......................................... 800,000 -
Other long-term assets ......................................... 93,151 325,171
----------------- ----------------
$10,875,289 $ 11,049,330
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $1,062,792 $ 725,144
Accrued expenses ........................................... 2,854,383 2,451,768
Due to stockholder .......................................... - 166,875
Line of credit ............................................... 51,614 -
----------------- ----------------
Total current liabilities ......................................... 3,968,789 3,343,787
----------------- ----------------
Deferred income taxes ............................................. 2,050,421 2,050,421
----------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized,
no shares issued or outstanding............................... - -
Common stock, $0.001 par value, 100,000,000 shares
authorized, 29,887,454 and 40,725,826 shares issued and
outstanding................................................... 29,887 40,726
Additional paid-in capital....................................... 700,613 26,319,706
Cumulative translation adjustments............................... (163,840) (181,288)
Retained earnings (deficit)...................................... 4,289,419 (20,524,022)
----------------- ----------------
Total stockholders' equity......................................... 4,856,079 5,655,122
----------------- ----------------
$10,875,289 $ 11,049,330
================= ================
The accompanying notes are an integral part of these financial statements.
3
SVT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2001 2002 2001 2002
-------------- -------------- --------------- --------------
Revenues............................................ $ 5,833,665 $ 4,390,348 $ 13,254,856 $ 9,215,225
Cost of revenues.................................... 4,166,978 3,234,890 9,448,828 6,979,362
-------------- -------------- --------------- --------------
Gross profit........................................ 1,666,687 1,155,458 3,806,028 2,235,863
Operating expenses:
General and administrative
expenses..................................... 834,832 1,683,404 1,600,753 2,758,390
Stock option compensation expense............... - 1,875,000 - 6,125,000
Merger-related costs and expenses............... - 34,818 - 18,808,068
-------------- -------------- --------------- --------------
Operating income (loss)............................. 831,855 (2,437,764) 2,205,275 (25,455,595)
Grant income - 150,000 - 150,000
Interest (expense) income, net...................... (29,763) 20,141 (28,183) 11,567
-------------- -------------- --------------- --------------
Income (loss) before income taxes................... 802,092 (2,267,623) 2,177,092 (25,294,028)
Income taxes (benefit).............................. 362,864 (50,810) 984,911 (480,587)
-------------- -------------- --------------- --------------
Net income (loss)................................... $ 439,228 $ (2,216,813) $ 1,192,181 (24,813,441)
============== ============== =============== ==============
Basic earnings per share............................ $0.01 $(0.05) $0.04 $(0.64)
============== ============== =============== ==============
Diluted earnings per share.......................... $0.01 $(0.05) $0.04 $(0.64)
============== ============== =============== ==============
Basic weighted average
shares outstanding.............................. 29,887,454 40,725,826 29,887,454 38,869,543
============== ============== =============== ==============
Diluted weighted average shares outstanding......... 29,887,454 40,725,826 29,887,454 38,869,543
============== ============== =============== ==============
The accompanying notes are an integral part of these financial statements.
4
SVT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------
2001 2002
-------------- ----------------
OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 1,192,181 $ (24,813,441)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities-
Depreciation and amortization.......................................... 13,864 321,251
Bad debt provision .................................................... - 215,324
Compensation charge for stock option issuance.......................... - 6,125,000
Non-cash charge for merger-related expenses............................ - 19,328,103
Changes in assets and liabilities-
Decrease (increase) in accounts receivable............................. 1,270,684 1,819,641
Decrease (increase) in due from stockholder............................ 293,645 86,508
Decrease (increase) in other current assets............................ (67,471) 52,081
Decrease (increase) in other assets.................................... (566) 17,980
(Decrease) increase in accounts payable................................ (1,180,818) (337,648)
(Decrease) increase in accrued expenses................................ 1,031,964 (475,785)
(Decrease) increase in due to stockholder.............................. - 166,875
-------------- ----------------
Net cash provided by operating activities................................. 2,553,483 2,505,889
-------------- ----------------
INVESTING ACTIVITIES:
Cash paid for business acquisitions,
net of cash acquired.................................................. - 10,000
Purchase of property and equipment.................................... (8,205) (164,349)
-------------- ----------------
Net cash (used in) investing activities................................... (8,205) (154,349)
-------------- ----------------
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit.......................... (11,645) (51,614)
-------------- ----------------
Net cash (used in) financing activities................................... (11,645) (51,614)
-------------- ----------------
Effect of exchange rate changes on cash flows............................. (148,799) (2,892)
-------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 2,384,834 2,297,034
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.............................................................. 1,184,499 526,076
-------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 3,569,333 $ 2,823,110
============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest................................................. $ 55,300 $ 8,042
============== ================
Cash paid for income taxes............................................. $ 640,425 $ 604,000
============== ================
The accompanying notes are an integral part of these financial statements.
5
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. BACKGROUND:
SVT Inc. (SVT), formerly SWWT, Inc., is a Delaware corporation which
together with its wholly-owned subsidiaries (see Note 2) is herein referred to
as the Company. The Company is an information technology consulting, network,
and systems management outsourcing business. To date, the Company has
specialized in e-commerce applications and web-based systems management for the
financial services, insurance, media and telecommunications industries.
On July 23, 2001, SanVision Technology Inc. (SanVision) entered into a
merger agreement with SWWT, Inc. under which a wholly-owned subsidiary of the
Company (E-Newco, Inc.) was merged into SanVision and SanVision became a
wholly-owned subsidiary of SWWT. Under the merger agreement, SanVision
stockholders received 35,792,599 shares of the Company's common stock in
exchange for their shares of SanVision. Upon completion of the transactions
contemplated by the merger agreement, including (A) a one-for-two reverse stock
split of the Company's common stock, (B) a change in the conversion ratio
applicable to the Company's series B preferred stock into common stock from
approximately 1-to-100 to approximately 1-to-10 and (C) the conversion of all
shares of series B preferred stock into shares of common stock, the Company had
outstanding 40,905,826 shares of common stock on an as-converted and fully
diluted basis, of which the former stockholders of SanVision have 87.5 percent.
On January 29, 2002, the Company's stockholders approved the reverse
stock split, the change in the conversion ratio of the series B preferred stock
and the conversion of all series B preferred stock into common stock. Effective
on February 1, 2002, the merger between SanVision and E-Newco was completed, and
on March 15, 2002, SanVision was merged into the Company and ceased to exist.
For accounting and financial reporting purposes, SanVision is the
acquirer through a reverse merger. The combination of SVT and SanVision was
treated as an issuance of shares, primarily for cash, by SanVision. The Company
reflects, in its consolidated financial statements, the assets and liabilities
of SanVision at their historical book values and the tangible assets and
liabilities of SWWT, Inc. at their fair values. The Company has not combined the
historical earnings of SWWT, Inc. with those of SanVision, but reports
SanVision's operations through the effective date of the merger.
In accordance with the Securities and Exchange Commission Accounting
Disclosure Rules and Practices, the transaction costs incurred in connection
with the merger were charged directly to stockholders' equity to the extent of
the cash received in the merger (which was equal to $785,648) and the excess
(which was equal
6
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
to $18,808,068) has been charged to merger related costs and expenses.
The assets, liabilities and stockholders' equity amounts that were
combined with SanVision as of the merger date as part of the reverse merger
transaction were as follows:
ASSETS
Cash and cash equivalents $ 785,648
Investment 250,000
-----------
Total assets $ 1,035,648
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 73,171
Common Stock 49,332
Additional paid-in capital 913,145
-----------
Total liabilities and stockholders' equity $1,035,648
===========
The following unaudited pro forma summary information presents the
consolidated results of operations as if the merger between SanVision and SWWT,
Inc. had occurred as of January 1, 2001. The unaudited pro forma summary
information excludes the merger related costs and expenses of $18,808,068 which
was recognized as of the merger date related to the issuance of 6,135,873 shares
of the Company's common stock (see Note 4) and other professional fees related
to merger expenses incurred during the six months ended June 30, 2002 . These
unaudited pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the merger been
completed as of January 1, 2001 or results which may occur in the future.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Revenues $ 5,833,665 $ 4,390,348 $13,254,856 $ 9,215,225
=========== =========== =========== ===========
Gross profit 1,469,703 1,155,458 3,399,441 2,235,863
=========== =========== =========== ===========
Net income (loss) $ 263,902 $(2,302,805) $ 834,336 $(6,126,182)
=========== =========== =========== ===========
Basic and diluted earnings per share $0.01 $(0.06) $0.03 $(0.16)
=========== =========== =========== ===========
For the period from January 1, 2002 through the merger date on February
1, 2002, there was no activity and no expenses were incurred by SWWT, Inc. As a
result, the pro forma summary information included above for the six months
ended June 30, 2002 is not impacted by the inclusion of SWWT, Inc.
7
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying unaudited financial statements for the Company have
been prepared in accordance with (1) accounting principles generally accepted in
the United States of America for interim financial information and (2) the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments considered
necessary for a fair statement of the results of operations and financial
position for the interim periods presented.
The accompanying financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
audited financial statements as of December 31, 2001, and filed with the
Securities and Exchange Commission (the "SEC") on April 16, 2002, as part of the
Company's Form 10-K for the fiscal year ended December 31, 2001.
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of SanVision, Apex Software Private Ltd., SVT Cayman, Inc. and SanVision
Technologies Canada Inc., the Company's wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
Revenue recognition and customer concentration
Historically, the Company's revenue from consulting services has been
generated under time and materials contracts. Revenue from consulting services
that are billed on a time and materials basis is recognized in the period during
which the services are provided. During 2001 and 2002, SanVision entered into
contracts based on a fixed fee amount. Revenue from the fixed fee contracts are
recognized using a percentage of completion method based on the total costs
incurred to date compared to the total costs to be incurred for the contracts.
The majority of the Company's services are performed for large
companies located in the New York City area. Revenues from the Company's two
largest customers represent approximately 74 percent of total revenues (49
percent and 25 percent, respectively) for the six months ended June 30, 2001,
and the three largest customers represent approximately 68 percent of total
revenues (29 percent, 28 percent and 11 percent, respectively) for the six
months ended June 30, 2002. The total accounts receivable from these customers
as of June 30, 2002 was $2,462,133 ($618,350, $1,322,497 and $521,286,
respectively).
8
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Segment disclosures
For purposes of Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
management believes that the Company operates in one segment.
For the six months ended June 30, 2001 and 2002, all of the Company's
revenues are attributed to customers in the United States. As of June 30, 2001
substantially all of the Company's long-lived assets were located in the United
States. As of June 30, 2002, a total of approximately $3,407,000 of long-lived
assets, the majority of which relate to the 2001 acquisitions, were recorded in
the Company's subsidiary in India and its subsidiary in the United Kingdom.
Currency translation
The accounts of the Company's international subsidiaries are translated
in accordance with SFAS No. 52, "Foreign Currency Translation," which requires
that assets and liabilities of international operations be translated using the
exchange rate in effect at the balance sheet date, and that the results of
operations be translated at average exchange rates during the period. The
effects of exchange rate fluctuations in translating assets and liabilities of
international operations into U.S. dollars are accumulated and reflected in
cumulative translation adjustments included in stockholders' equity. The effects
of exchange rate fluctuations in translating the foreign currency transactions
are included in general sales and administrative expenses. There were no
material transaction gains or losses related to the foreign currency
transactions in the accompanying Consolidated Statements of Operations.
Earnings per share
The Company utilizes SFAS No. 128, "Earnings Per Share," to compute
earnings per share. SFAS No. 128 requires dual presentation of basic and diluted
earnings per share (EPS) for complex capital structures on the statements of
operations. Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from the exercise or conversion of securities into common
stock unless they are anti-dilutive. For the three and six months ended June 30,
2001 the Company had no potentially dilutive securities. For the three and six
months ended June 30, 2002 the dilutive impact of outstanding stock options was
not included in diluted EPS as it would be anti-dilutive.
9
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Earnings per share (continued)
Earnings per share are calculated as follows:
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2001 2002 2001 2002
------------ ------------ ------------ -------------
Net income (loss) - basic and diluted.................... $ 439,228 $(2,216,813) $ 1,192,181 $(24,813,441)
============ ============ ============ =============
Weighted average shares outstanding - basic.............. 29,887,454 40,725,826 29,887,454 38,869,543
Impact of stock options and warrants..................... - - - -
------------ ------------ ------------ -------------
Weighted average shares outstanding - diluted............ 29,887,454 40,725,826 29,887,454 38,869,543
============ ============ ============ =============
Earnings per share - basis............................... $0.01 $(0.05) $0.04 $(0.64)
============ ============ ============ =============
Earnings per share - diluted............................. $0.01 $(0.05) $0.04 $(0.64)
============ ============ ============ =============
Accumulated other comprehensive income
SFAS No. 130, "Reporting Comprehensive Income," established the concept
of comprehensive income. Comprehensive income is defined as net income plus
revenues, expenses, gains and losses that, under accounting principles generally
accepted in the United States, are excluded from net income. The Company's
accumulated other comprehensive income is comprised of unrealized gains and
losses from foreign currency translation adjustments and is presented in the
consolidated statements of stockholders' equity.
Other comprehensive income (loss) is calculated as follows:
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2001 2002 2001 2002
----------- -------------- --------------- ---------------
Net income (loss) $ 439,228 $ (2,216,813) $ 1,192,181 $ (24,813,441)
Other comprehensive income (loss):
Unrealized gain (loss) from foreign currency
translation adjustments (17,232) (751) (140,799) (17,448)
----------- -------------- --------------- ---------------
Comprehensive income (loss) $ 421,996 $ (2,338,374) $ 1,051,382 $ (24,951,698)
=========== ============== =============== ===============
10
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Stock Split
As disclosed above in the background note, there was a reverse stock
split and change to the conversion ratio for SWWT common and preferred stock,
and a conversion adjustment for the SanVision common stock (with 36,071,064
shares of SanVision common stock converted into 35,792,599 shares of SVT common
stock) as part of the merger transaction. All references to the number of common
shares and per share amounts have been restated as appropriate to reflect the
effect of these transactions for all periods presented.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations." SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method of accounting as the only acceptable method on
all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement modifies existing generally accepted
accounting principles related to the amortization and impairment of goodwill and
other intangible assets. Upon adoption of the new standard, goodwill, including
goodwill associated with equity method investments, will no longer be amortized.
In addition, goodwill, other than goodwill associated with equity method
investments, must be assessed at least annually for impairment using a
fair-value based approach. The provisions of this statement are required to be
adopted as of the beginning of the first fiscal year after December 15, 2001.
Impairment losses that arise due to the initial application of this statement
are to be reported as a cumulative effect of change in accounting principle.
In order to complete the transitional assessment of goodwill as
required by SFAS No. 142, the Company was required to determine by the end of
the second quarter of 2002 the fair value of its reporting units and compare it
to the reporting units' carrying amount. To the extent a reporting units'
carrying amount exceeds its fair value, an indication exists that the reporting
units' goodwill assets may be impaired and the Company must perform the second
step of the
11
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
New accounting pronouncements
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting units' goodwill, determined by allocating
the reporting units' fair value to all of its assets and liabilities in a manner
similar to a purchase price allocation in accordance with SFAS No. 141, to its
carrying amount, both of which would be measured as of the date of adoption.
This second step is required to be completed as soon as possible, but no later
than the end of 2002. Any transitional impairment charge will be recognized as
the cumulative effect of a change in accounting principle in the Company's
consolidated statement of operations. As of June 30, 2002, the Company has
determined that the fair value of its reporting units exceeds the reporting
units' carrying amounts and therefore, goodwill is not impaired. The required
continued impairment tests of goodwill may result in future period write-downs.
No goodwill amortization was recorded for the three and six months
ended June 30, 2001 since there was no goodwill recorded by the Company prior to
the acquisition which took place in December 2001 (see Note 3), therefore no
pro-forma disclosures are required. As of June 30, 2002, the net book value for
goodwill was $1,548,947.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The statement supersedes both SFAS
No. 121 and the provisions of Accounting Principles Board Opinion No. 30 that
are related to the accounting and reporting for the disposal of a segment of a
business. SFAS No. 144 establishes a single accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale. This statement retains most of the requirements in SFAS No. 121 related
to the recognition of impairment of long-lived assets to be held and used.
However, SFAS No. 144 eliminates the requirement to allocate goodwill to
long-lived assets to be tested for impairment. Instead, as previously mentioned,
beginning in 2002 the Company will test the impairment of its goodwill under the
provisions of SFAS No. 142. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company believes that the adoption of this
statement had no material impact on its financial position, cash flows or
results of operations.
12
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
3. ACQUISITION:
On December 30, 2001, the Company paid a deposit of $800,000 related to
a Purchase Agreement to acquire from Euro Tech, Inc. all of the outstanding
stock of Euro Tech (U.K.) Private Ltd. (Euro U.K.). Euro U.K. is an information
technology consulting company located in the United Kingdom. The total purchase
price was $800,000 and the acquisition was effective on January 2, 2002. The
purchase price has been allocated as follows:
Cash........................................................... $ 10,000
Property and equipment......................................... 40,000
Intangible assets.............................................. 750,000
---------
Net assets acquired............................................ 800,000
Less - Cash acquired........................................... (10,000)
---------
Net cash paid for acquisition.................................. $ 790,000
=========
The purchase price allocation is based upon information available at
this time and is subject to reallocation.
The acquisition has been accounted for as a purchase and the operating
results of Euro U.K. have been consolidated with the Company's results since the
effective date of the acquisition of January 2, 2002. The purchase price of the
acquisition has been allocated to the assets acquired based upon their estimated
fair value at the date of acquisition.
4. STOCKHOLDERS' EQUITY:
Stock issuance
On July 17, 2001 SanVision entered into restricted stock agreements
with three entities which include the issuance of 6,183,610 shares of
SanVision's common stock for consulting and advisory services provided to it.
These agreements included provisions for forfeiture of the shares if a business
combination of SanVision and SWWT, Inc. was not completed within a specified
period. Since the business combination was completed within the specified
period, the Company is recording an expense amount as part of the merger related
expenses which is based on the fair value of the shares issued to these entities
based on the trading price of SWWT, Inc. common stock. As discussed in Note 1,
the combination of SanVision and SWWT, Inc. was effective as of February 1,
2002, at which time the risk of forfeiture on these shares lapsed and these
shares and SanVision common stock were converted into 6,135,873 shares of the
Company's common stock. As of February 1, 2002, the Company recorded a charge
for these shares of $19,328,103 based on the trading price of the Company common
stock on that date.
13
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
4. STOCKHOLDERS' EQUITY:
Stock options
During the three months ended March 31, 2002, the Company granted
options to purchase 1,000,000 shares of the Company's common stock at an
exercise price of $0.25 per share under the Company's 2000 Stock Incentive Plan
(the "Plan"). These options were vested upon grant and have a term of not more
than ten years. The grant of these options was approved by the Company's Board
of Directors, which is responsible for administering the Plan.
Based on the trading price ($4.50) of the Company's common stock on the
grant date for these options as compared to the exercise price ($0.25) of the
options, the statement of operations reflects a compensation expense charge of
$4,250,000 for these options which were vested on the grant date.
During the three months ended June 30, 2002, the Company granted
options to purchase 500,000 shares of the Company's common stock at an exercise
price of $0.25 per share under the Company's 2000 Stock Incentive Plan (the
"Plan"). These options were vested 60 days from the date of grant and have a
term of not more than ten years. The grant of these options was approved by the
Company's Board of Directors, which is responsible for administering the Plan.
Based on the trading price ($4.00) of the Company's common stock on the
grant date for these options as compared to the exercise price ($0.25) of the
options, the statement of operations reflects a compensation expense charge of
$1,875,000 for these options.
5. COMMITMENTS:
Employment Agreement
During June of 2002, the Company entered into a two-year employment
agreement with an employee to serve as the Company's Chief Information
Officer/Chief Technology Officer at a base salary of $100,000.
The agreement also calls for an annual discretionary bonus based upon
certain performance objectives. In addition, upon satisfactory performance, the
employee received an option to purchase 500,000 shares of the Company's common
stock (see Note 4) at an exercise price of $0.25 per share. These options vest
60 days after date of the employment agreement and have a 10-year life from the
date of grant.
14
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
5. COMMITMENTS (CONTINUED):
Line of Credit
Per a revised proposed Line of Credit agreement dated May 31, 2002, the
Company has a non-contractual line of credit for $3.5 million, with interest at
the lender's prime rate or LIBOR plus 2.75%, at the Company's option. Available
borrowings under the agreement are based on the lesser of $3.5 million or 75% of
eligible accounts receivable, as defined.
The proposed line of credit will be secured by all assets of the
Company and guaranteed by all subsidiaries of the Company. Under the agreement,
the Company is required to maintain compliance with certain financial and
non-financial covenants. Furthermore, the agreement places restrictions on
additional indebtedness and advances to affiliates, shareholders, and employees.
The proposed agreement is scheduled to expire on September 30, 2002 unless
renewed.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CURRENT BUSINESS ENVIRONMENT
The IT services industry continues to be impacted by the
Internet-related downturn starting in early 2000. However, SVT strictly adhered
to its target market focus and avoided marketing its services to high-risk
"dot-com" start-up businesses, which enabled SVT to avoid significant
deterioration in its business. Additionally, SVT's business mix of Managed
Services and Application Development has helped it weather the downturn better
than many companies that are not as diversified.
However, the overall slowdown in the U.S. economy during 2001and 2002
had a major impact on the demand for IT services in general, not only in terms
of intense and increasing competition among vendors and pricing pressures from
clients, but also drastic budget cutting measures initiated by major corporate
customers, which have cancelled or deferred many IT initiatives until the
economy improves. In fact, the trend in the marketplace to fund only mission
critical IT projects and services and to defer or cancel all other initiatives
continues. Another major current trend among customers is to terminate higher
priced non-employee consultants and either replace them with new employees or
absorb the consultants into permanent positions to reduce costs.
SVT also lost some business in 2001, mainly from AIG, its largest
customer, which decided not to renew contracts for some of the consultants after
the expiration of their contract term or completion of their projects. In some
cases, AIG also cancelled projects in midstream and laid-off entire project
teams, writing off large amounts of investment.
Going forward, management believes that the pressure on IT budgets will
continue at least through the fourth quarter of 2002, if not longer. It is
likely that more IT services work, including existing and new application
development projects, will continue to be shifted offshore, primarily to India.
Therefore, the Company will continue its emphasis on new business development
and will revamp its off-shore capability. It will focus on mid-sized companies
and verticals where we currently have a strong presence to take advantage of our
functional knowledge. Further, while SVT is a services company, it is
investigating ways where it can generate greater revenue from existing products.
In the second quarter of 2002, SVT received a $150,000 grant under the
WTC Business Recovery Grant Program as a result of the September 11 terrorist
attacks. Management is investigating other grant and tax credit programs for
which SVT may qualify.
16
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2001 2002 2001 2002
------------- ----------- ------------ -----------
Revenues............................................. $5,833,665 $4,390,348 $ 13,254,856 $ 9,215,225
Cost of revenues..................................... 4,166,978 3,234,890 9,448,828 6,979,362
------------- ----------- ------------ -----------
Gross profit......................................... 1,666,687 1,155,458 3,806,028 2,235,863
Operating expenses:
General and administrative...................... 834,832 1,683,404 1,600,753 2,758,390
Stock option compensation expense............... - 1,875,000 - 6,125,000
Merger-related costs and expenses............... - 34,818 - 18,808,068
------------- ----------- ------------ -----------
Operating income(loss).......................... 831,855 (2,437,764) 2,205,275 (25,455,595)
Grant income......................................... - 150,000 - 150,000
Interest income, net................................. 29,763 20,141 28,183 11,567
------------- ----------- ------------ -----------
Income (loss) before income taxes............... 802,092 (2,267,623) 2,177,092 (25,294,028)
Income taxes (benefit)............................... 362,864 (50,810) 984,911 (480,587)
------------- ----------- ------------ -----------
Net income (loss).................................... $ 439,228 $(2,216,813) $ 1,192,181 $(24,813,441)
============= =========== ============ ===========
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................... 71.4 73.7 71.3 75.7
------------- ----------- ------------ -----------
Gross profit......................................... 28.6 26.3 28.7 24.3
Operating expenses:
General and administrative...................... 14.4 38.3 12.1 29.9
Stock option compensation expense............... - 42.7 - 66.5
Merger-related costs and expenses............... - 0.8 - 204.1
------------- ----------- ------------ -----------
Operating income (loss)......................... 14.2 55.5 16.6 276.2
Grant income......................................... - 3.4 - 1.6
Interest income, net................................. 0.5 0.4 0.2 0.1
------------- ----------- ------------ -----------
Income (loss) before income taxes 13.7 51.7 16.4 274.5
Income taxes (benefit)............................... 6.2 1.2 7.4 5.2
------------- ----------- ------------ -----------
Net income (loss).................................... 7.5% 50.5% 9.0% 269.3%
============= =========== ============ ===========
Revenues for the three and six month periods ended June 30, 2002 were
$4.4 and $9.2 million, a decrease of $1.4 and $4.1 million, or 24.7% and 30.5%,
from $5.8 and $13.3 million for the three and six month periods ended June 30,
2001, respectively. The decline in revenues is mostly attributable to a decline
in business with AIG, one of the Company's main clients.
Cost of revenues for the three and six month periods ended June 30,
2002 was $3.2 and $7.0 million, a decrease of $1.0 and $2.4 million, or 22.4%,
and 26.1%, respectively, reflecting fewer billable consultants from one year ago
General and administrative expenses for the three and six month periods
ended June 30, 2002 were $1.7 and $2.8 million, an increase of $0.8 and $1.2
million, or 101.6% and 72.3%, from $0.83 and $1.6 million for the three and six
month periods ended June 30, 2001,
17
respectively. In the latest quarter SVT took a $200,000 bad debt reserve
specifically related to one client. Also, our costs increased this year by about
$200,000 due to additional legal and accounting costs incurred because of our
public entity status.
Stock option compensation expense of $1.875 and $6.125 million for the
three and six months ended June 30, 2002 relates to a non-cash charge for the
difference between the trading price of the Company's common stock and the
exercise price for stock options that were granted to employees during the
respective periods.
The six month results are heavily impacted by the merger between SWWT,
Inc. and SanVision Technology that consummated in the first quarter.
Merger-related costs and expenses for the three months ended March 31, 2002 of
$18.8 million were incurred related to the combination of SWWT, Inc. and
SanVision Technology Inc. These merger costs of $18,542,455 related to the
issuance of 6,135,873 shares of the Company's common stock which was contingent
on the merger transaction and other professional fees related to the merger of
$230,795. Residual merger costs of $34,818 were reflected in the second quarter.
The effective tax rate was (1.9)% for the six months ended June 30,
2002 as compared with 45.2% for six months ended June 30, 2001. The effective
tax rate for the six months ended June 30, 2002 was significantly impacted by
the non-deductible merger-related expenses described above. The tax deduction
for these shares was significantly less than the expense charge for financial
reporting purposes. In addition, the stock option compensation expense of $6.1
million is not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had net working capital of $3,790,525
comprised primarily of accounts receivable and cash and cash equivalents. SVT
historically financed, and the Company continues to finance, its business mainly
with cash flow from operations and has not obtained any outside institutional
equity funding, such as a venture capital or private equity funding.
However, the cash flow from operations varies significantly from month
to month primarily due to changes in net income, collection of accounts
receivable and tax payments.
Net cash provided by operating activities was $2,505,889 for the six
months ended June 30, 2002, as compared to $2,553,483 for the six months ended
June 30, 2001. The decrease in cash provided by operating activities is due
primarily to a significant decrease in sales and related accounts receivable.
Per a revised proposed Line of Credit agreement dated May 31, 2002, the
Company has a non-contractual line of credit for $3.5 million, with interest at
the lender's prime rate or LIBOR plus 2.75%, at the Company's option. Available
borrowings under the agreement are based on the lesser of $3.5 million or 75 %
of eligible accounts receivable, as defined.
The proposed line of credit is secured by all assets of the Company and
guaranteed by all subsidiaries of the Company. Under the agreement, the Company
is required to maintain compliance with certain financial and non-financial
covenants. Furthermore, the agreement
18
places restrictions on additional indebtness and advances to affiliates,
shareholders, and employees. The proposed agreement is scheduled to expire on
September 30, 2002 unless renewed.
Management believes that cash generated from operations and its current
cash balance will be sufficient to satisfy its projected working capital and
planned capital expenditure requirements for the foreseeable future. However, if
SVT requires additional funds to support working capital requirements or for
other purposes, it may seek to raise the funds through public or private equity
financings or from other sources. Additional financing may not be available, or,
if it is available, it may be dilutive or may not be obtainable on acceptable
terms.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q report contains forward-looking statements with respect
to the financial condition, results of operations and business of SVT, Inc. You
can find many of these statements by looking for words like "believes,"
"expects," "anticipates," "estimates" or similar expressions in this report.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by the forward-looking statements include:
o a prolonged continuation or worsening of the recent economic
slowdown and its impact on IT budgets,
o increasing competition,
o SVT's inability to get fundings for any major geographic
expansions or external growth,
o failure to expand across other industry verticals,
o loss of key personnel, and
o loss of major existing clients or decrease of business volume
with them.
Because forward-looking statements are subject to risks and
uncertainties, actual results of SVT may differ materially from those expressed
or implied in this report. We caution you not to place undue reliance on these
statements, which speak only as of the date of this report.
All future written and oral forward-looking statement attributable to
SVT or any person acting on its behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to in this section. SVT does
not undertake any obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flow are subject to fluctuations due
to changes in foreign currency exchange rates in connection with its subsidiary
in India. We do not anticipate any material currency risk to the Company's
financial condition or results of operations resulting from currency
fluctuations.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The index of exhibits to this report appears after the signature page.
(b) SVT filed no Current Reports on Form 8-K during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements 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.
SVT INC.
(Registrant)
By: /s/ Michael Bell
----------------------
Michael Bell
Chief Financial Officer
By: /s/ Dhir Sarin
----------------------
Dhir Sarin
Chief Accounting Officer
Date: August 19, 2002
21
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of SVT Inc. as of
January 31, 2002, filed as Exhibit 3.1 to SVT's Annual Report on Form
10-K for the fiscal year ended December 31, 2001 (Commission File No.
0-25942), and incorporated herein by reference.
3.2 Amended and Restated By-Laws of SVT Inc. as of August 1, 2000, filed
as Exhibit B to SWWT's Definitive Information Statement on Schedule
14C dated July 10, 2000 (Commission File No. 0-25942), and
incorporated herein by reference.
10 Employment Agreement dated as of June 1, 2002, between SVT Inc. and
Martin Burmeister.
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
22