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 September 30, 2003
[ ] 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.)
50 Broadway, 8th Floor, New York, New York 10004
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X]
As of November 24, 2003, 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 September 30, 2003 (Unaudited) and
December 31, 2002...................................................................................3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2003 and 2002 (Unaudited).......................................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited).............................................................5
Notes to Consolidated Financial Statements..........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations..........................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................17
Item 4. Controls and Procedures............................................................................17
Part II Other Information
Item 1. Legal Proceedings..................................................................................18
Item 6. Exhibits, Financial Statements and Reports on Form 8-K.............................................18
Signatures ...................................................................................................19
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
SVT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,341,598 $ 2,106,778
Accounts receivable, net of allowance of $100,000 for both periods
Respectively 1,571,325 2,270,573
Deferred income taxes 263,000 1,364,000
Income tax refund receivable 1,711,608 864,000
Other current assets 279,461 127,064
---------------- ----------------
Total current assets 5,166,992 6,732,415
Property and equipment, net of accumulated depreciation of $250,929 and
$191,006, respectively 278,741 318,817
Other long-term assets 45,026 72,396
---------------- ----------------
$ 5,490,759 $ 7,123,628
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 455,840 $ 721,856
Accrued expenses 2,811,628 2,901,685
Other liabilities 1,351 5,201
---------------- ----------------
Total current liabilities 3,268,819 3,628,742
Deferred income taxes 42,444 160,444
---------------- ----------------
3,311,263 3,789,186
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,
40,725,826 shares issued and outstanding 40,726 40,726
Additional paid-in capital 26,319,706 26,319,706
Cumulative translation adjustments (115,820) (170,351)
Retained earnings (deficit) (24,065,116) (22,855,639)
---------------- ----------------
Total stockholders' equity 2,179,496 3,334,442
---------------- ----------------
$ 5,490,759 $ 7,123,628
================ ================
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 For the nine months ended
September 30, September 30,
---------------------------------- -----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Revenues $ 2,345,196 $ 4,451,646 $ 7,870,994 $ 13,666,871
Cost of revenues 1,933,833 3,105,104 6,221,058 10,084,466
---------------- ---------------- ---------------- ----------------
Gross profit 411,363 1,346,542 1,649,936 3,582,405
Operating expenses:
General and administrative expenses 706,252 3,694,148 2,573,948 6,452,538
Goodwill impairment - 1,548,947 1,548,947
Stock option compensation expense - - - 6,125,000
Merger-related costs and expenses - (120,650) - 18,687,418
---------------- ---------------- ---------------- ----------------
Operating (loss) (294,889) (3,775,903) (924,012) (29,231,498)
Grant income - - - 150,000
Interest income, net 274 45,764 1,591 57,331
---------------- ---------------- ---------------- ----------------
(Loss) before income taxes (294,615) (3,730,139) (922,421) (29,024,167)
Income taxes (benefit) expense (18,339) 385,810 287,056 (94,777)
---------------- ---------------- ---------------- ----------------
Net (loss) $ (276,276) $ (4,115,949) $ (1,209,477) $ (28,929,390)
================ ================ ================ ================
Basic and diluted (loss) per share $ (0.01) $ (0.10) $ (0.03) $ (0.73)
================ ================ ================= ================
Basic and diluted weighted average shares outstanding 40,725,826 40,725,826 40,725,826 39,495,108
================ ================ ================= ================
The accompanying notes are an integral part of
these financial statements.
4
SVT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
---------------------------------------
September 30,
2003 2002
------------------ ------------------
Operating activities:
Net (loss) $ (1,209,477) $ (28,929,390)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities-
Depreciation and amortization 59,923 1,942,710
Bad debt expenses 202,717 1,015,324
Goodwill impairment - 1,548,947
Deferred income taxes 983,000 (733,442)
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 in accounts receivable 496,531 788,898
(Increase) decrease in other current assets (152,397) 204,388
(Increase) decrease in other assets (820,238) 17,939
(Decrease) in accounts payable (266,016) (405,112)
(Decrease) increase in accrued expenses and other liabilities (93,907) 770,942
------------------ ------------------
Net cash (used in) provided by operating activities (799,864) 1,674,307
------------------ ------------------
Investing activities:
Cash paid for business acquisitions, net of cash acquired - 10,000
Purchase of property and equipment (19,847) (183,077)
------------------ ------------------
Net cash (used in) investing activities (19,847) (173,077)
------------------ ------------------
Financing activities:
Decrease in due from stockholder - 86,508
Net (repayments) on line of credit - (51,614)
------------------ ------------------
Net cash provided by financing activities - 34,894
------------------ ------------------
Effect of exchange rate changes on cash flows 54,531 (878)
------------------ ------------------
Net (decrease) increase in cash and cash equivalents (765,180) 1,535,246
Cash and cash equivalents, beginning of period 2,106,778 526,076
------------------ ------------------
Cash and cash equivalents, end of period $ 1,341,598 $ 2,061,322
================== ==================
Supplemental disclosures of cash flow information:
Cash paid for interest $ - $ 8,042
================== ==================
Cash paid for income taxes $ 210,649 $ 604,000
================== ==================
The accompanying notes are an integral part of
these financial statements.
5
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
23
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 40,725,826 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.
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
=============
6
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Background (continued):
Unaudited pro forma summary information is not presented for the
consolidated results of operations as if the merger between SanVision and SWWT,
Inc. had occurred as of January 1, 2002 because 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.
2. Basis of presentation:
The accompanying unaudited consolidated interim 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 accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, the
consolidated financial statements reflect all adjustments considered necessary
for a fair statement of the results of operations and financial position for the
interim periods presented.
For a summary of significant accounting policies (which have not changed
from December 31, 2002) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, including the
consolidated financial statements and notes thereto which should be read in
conjunction with these financial statements.
3. New accounting pronouncements:
During April 2003, the Financial Accounting Standards Board issued SFAS
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires that contracts with
comparable characteristics be accounted for similarly and clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, except in certain circumstances, and for hedging
relationships designated after June 30, 2003. The Company does not expect that
the adoption of this standard will have a material effect on its financial
position or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not expect the adoption of SFAS 150 to have a material impact on our
consolidated financial position, results of operations or cash flows.
7
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
4. Accrued expenses:
September 30, 2003 December 31, 2002
--------------------- --------------------
Accrued payroll and bonuses $ 1,141,826 $ 1,244,055
Accrued income taxes 40,000 -
Other 1,629,802 1,657,630
--------------------- --------------------
$ 2,811,628 $ 2,901,685
===================== ====================
5. Stockholders' equity:
The Company, under its 2000 Stock Incentive Plan (the "Plan"), has
8,400,000 shares of common stock available for awards in the form of
non-qualified stock options, incentive stock options, restrictive stock,
restrictive stock units, and other awards.
During the three and nine months ended September 30, 2003, the Company did
not grant options and no options expired, were cancelled or exercised.
6. 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. The Company, from time to time, 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 60 percent of total revenues (37 percent and
23 percent, respectively) for the nine months ended September 30, 2003, and the
three largest customers represent approximately 69 percent of total revenues (27
percent, 30 percent and 12 percent, respectively) for the nine months ended
September 30, 2002.The total accounts receivable from these customers as of
September 30, 2003 was $441,949 ($5,162 and $436,787, respectively).
7. 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 nine months ended September 30, 2003 and 2002, majority of the
Company's revenues are attributed to customers in the United States. Sales in
the amount of $299,031 and $255,431 for the nine months ended September 30, 2003
and 2002, respectively, were attributed to customers in the United Kingdom. As
of September 30, 2003 and 2002, a total of approximately $106,227 and $245,638
of long-lived assets remained after goodwill and other intangible impairment,
the majority of which relate to the 2001 acquisitions, and were reflected in the
Company's subsidiary in India.
8
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
8. Income taxes:
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires the asset and liability method of
accounting for deferred income taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the tax rate expected to be in effect when taxes are
actually paid or recovered.
SFAS 109 also requires that a valuation allowance be established when it is
more likely than not that all or a portion of a deferred tax asset will not be
realized. A review of all available positive and negative evidence needs to be
considered, including a company's current and past performance, the market
environment in which the company operates, length of carryback and carryforward
periods and existing contracts that will result in future profits.
Forming a conclusion that a valuation allowance is not needed is difficult
when there is negative objective evidence such as cumulative losses in recent
years. Cumulative losses weigh heavily in the overall assessment. As a result,
it was determined that it was appropriate to establish a valuation allowance for
the deferred tax assets. As of September 30, 2003, a valuation allowance of
approximately $1,387,000 has been established. The Company will maintain such
valuation allowance until such time when management could conclude that it is
more likely than not that a portion of the deferred tax assets would be
realized.
9. 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 nine months ended
September 30, 2003 the Company had no potentially dilutive securities. For the
three and nine months ended September 30, 2003 and 2002 the dilutive impact of
outstanding stock options was not included in diluted EPS as it would be
anti-dilutive.
Earnings per share are calculated as follows:
For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
-------------- -------------- ------------- -------------
Net (loss) $ (276,276) $ (4,115,949) $ (1,209,477) $(28,929,390)
============== ============== ============= =============
Weighted average shares outstanding - basic 40,725,826 40,725,826 40,725,826 39,495,108
Impact of stock options and warrants - - - -
-------------- -------------- ------------- -------------
Weighted average shares outstanding -
diluted 40,725,826 40,725,826 40,725,826 39,495,108
============== ============== ============= =============
Loss per share - basic and diluted $ (0.01) $ (0.10) $ (0.03) $ (0.73)
============== ============== ============= =============
9
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
10. 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 For the nine months ended
September 30, September 30,
-------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- ---------------- ---------------- ----------------
Net (loss) $ (276,276) $ (4,115,949) $ (1,209,477) $ (28,929,390)
Other comprehensive income (loss):
Unrealized gain (loss) from foreign currency
translation adjustments 6,399 2,054 54,531 (15,434)
-------------- ---------------- ---------------- ----------------
Comprehensive (loss) $ (269,877) $ (4,113,895) $ (1,154,946) $ (28,944,824)
============== ================ ================ ================
11. Legal proceedings:
Velocity Express Corporation ("Velocity") as plaintiff has asserted claims
against the Company for breach of contract, conversion and breach of fiduciary
duty. Plaintiff and the Company are parties to three contracts under which the
Company agreed to manage Velocity's technology function and to create and
maintain new software to permit Velocity to operate a state of the art website
and a "package tracking system" to monitor its delivery services. The complaint
alleges that under one of these contracts, the Professional Services Outsourcing
Agreement, there were alleged "service failures" that allegedly resulted in
disruptions in the plaintiff's information technology systems. The complaint
further alleged that the Company allegedly manipulated plaintiff's technology
system so that the plaintiff's customers could not access plaintiff's website
and software. Plaintiff has not specified the amount of damages that the Company
allegedly caused.
The Company denies the allegations of the complaint and has filed
counterclaims against the plaintiff seeking payment approximately in the amount
of $2.5 million owed to the Company under the above-mentioned contracts and for
damage. Management intends to vigorously defend this action.
Extensive settlement discussions have been held and a mediation session
with court-appointed mediator also has been held. No settlement has been made.
Ultimately, counsel to the Company believes SVT may recover all or part of the
sum due even though the entire amount has been reserved against. The exact
amount of the recovery cannot be predicted at this time.
10
SVT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
12. Subsequent Event:
In December 2003, subsequent to the balance sheet date, the Company entered
into a separation agreement with its COO, Amit Sarkar and JNA Holdings, Inc, an
affiliated entity through which Mr. Sarkar holds all the Company common stock
that he owns (Approximately 2,045,000 shares). Terms of the separation agreement
call for the Company to pay a minimum of $200,000 ($150,000 upon signing and
$50,000 upon settlement of the Company's ongoing litigation with Velocity, Inc
(see note 11)).
11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Current Business Environment
The IT services industry has been impacted by the Internet-related downturn
and the rapid slowdown of the technology sector after the terrorist attacks of
September 11, 2001. In the application development area, new spending on
technology initiatives has virtually stopped and existing IT budgets are being
drastically reduced. The trend in the marketplace now is to fund only mission
critical IT projects and continue only the essential IT services and to defer or
cancel all other initiatives. Another adverse trend for IT vendors is that many
of their existing customers are terminating their higher priced non-employee
consultants and either replacing them with new employees or exercising their
"right to hire" to absorb some consultants into permanent positions to reduce
costs, which results in lower revenue for the vendor even from their existing
clients.
Under the circumstances, SVT has also lost some business in the second and
third quarters of 2003, mainly due to further cutbacks from AIG, formerly its
largest customer, which decided not to renew contracts for some of SVT's
consultants after the expiration of their contract term or completion of their
projects. In some cases, AIG also cancelled in midstream projects being serviced
by SVT and laid off entire project teams, writing off large amounts of
investment. Moreover, AIG has shifted many IT projects off-shore to major Indian
companies, and continues to do so. SVT was able to avoid a very substantial
decline in revenue primarily by focusing on managed services offerings and new
business development.
Going forward, management believes that the pressure on IT budgets will
continue at least through the end of 2003, if not much longer, primarily due to
the war in Iraq and its consequent effect on the domestic economy. It is likely
that more IT services work, including existing and new application development
projects, will also continue to be shifted offshore, primarily to India.
Therefore, SVT will continue its emphasis on new business development in the
managed services area.
New accounting pronouncements:
During April 2003, the Financial Accounting Standards Board issued SFAS
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires that contracts with
comparable characteristics be accounted for similarly and clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, except in certain circumstances, and for hedging
relationships designated after June 30, 2003. The Company does not expect that
the adoption of this standard will have a material effect on its financial
position or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not expect the adoption of SFAS 150 to have a material impact on our
consolidated financial position, results of operations or cash flows.
Critical Accounting Policies
12
The consolidated financial statements of SVT Inc. are prepared in
conformity with accounting principles generally accepted in the United States.
As such, we are required to make certain estimates, judgments and assumptions
that we believe are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities
as of the date of the financial statements and the reported amounts of revenue
and expenses during the periods presented. The significant accounting policies
which we believe are the most crucial to aid in fully understanding and
evaluating SVT Inc.'s reported financial results include the following:
Revenue Recognition
Historically, SVT'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. Occasionally, SVT 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. While our
estimates of the total costs to be incurred have historically been within our
expectations, any significant increase in the expected total costs to be
incurred on our fixed fee contracts could have a material adverse impact on our
operating results for the period or periods in which the revised estimates
arise.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
other than described below have historically been within our expectations and
the provisions established, we cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past. Since our
accounts receivable are concentrated in a relatively few number of customers, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectability of our
accounts receivable and our future operating results. Specifically, the Company
is in litigation with Velocity Express Corporation, a company that we believe is
presently facing financial difficulties, to recover approximately $2.5 million
(written of as uncollectible in December 2002) of defaulted accounts receivable
plus damages; it is uncertain how much the Company could recover from Velocity
(if at all), assuming the Company is successful with this litigation.
Deferred Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". SFAS No.109 requires the asset and liability method of accounting for
deferred income taxes. Deferred tax assets and liabilities are determined based
on the difference between financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are reflected on the
balance sheet when it is determined that it is more likely than not that the
asset will be realized.
13
Results of Operations
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------- ---------------------------------
2003 2002 2003 2002
------------------ ---------------- -------------- -----------------
Revenues $ 2,345,196 $ 4,451,646 $ 7,870,994 $ 13,666,871
Cost of revenues 1,933,833 3,105,104 6,221,058 10,084,466
------------------ ---------------- -------------- -----------------
Gross profit 411,363 1,346,542 1,649,936 3,582,405
Operating expenses:
General and administrative 706,252 3,694,148 2,573,948 6,452,538
Goodwill impairment - 1,548,947 - 1,548,947
Stock option compensation expense - - - 6,125,000
Merger-related costs and expenses - (120,650) - 18,687,418
------------------ ---------------- -------------- -----------------
Operating (loss) (294,889) (3,775,903) (924,012) (29,231,498)
Grant income - - - 150,000
Interest income, net 274 45,764 1,591 57,331
------------------ ---------------- -------------- -----------------
(Loss) before income taxes (294,615) (3,730,139) (922,421) (29,024,167)
Income taxes (benefit) (18,339) 385,810 287,056 (94,777)
------------------ ---------------- -------------- -----------------
Net (loss) $ (276,276) $ (4,115,949) $ (1,209,477) $ (28,929,390)
================== ================= =============== ==================
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 82.5 69.8 79.0 73.8
------------------ ---------------- --------------- -----------------
Gross profit 17.5 30.2 21.0 26.2
Operating expenses:
General and administrative 30.1 83.0 32.7 47.3
Goodwill impairment - 34.8 - 11.3
Stock option compensation expense - - - 44.8
Merger-related costs and expenses - (2.8) - 136.7
------------------ ---------------- --------------- -----------------
Operating (loss) (12.6) (84.8) (11.7) (213.9)
Grant income - - - 1.1
Interest income, net - 1.0 - 0.4
(Loss) before income taxes (12.6) (83.8) (11.7) (212.4)
------------------ ---------------- --------------- -----------------
Income taxes (benefit) (0.8) 8.7 3.6 (0.7)
------------------ ---------------- --------------- -----------------
Net (loss) (11.8)% (92.5)% (15.3)% (211.7)%
================== ================ =============== =================
Three and nine months ended September 30, 2003 compared to three and nine months
ended September 30,2002.
Revenues for the three and nine month periods ended September 30, 2003 were
$2.3 million and $7.9 million respectively, a decrease of $2.1 million and $5.8
million respectively, or 47.3% and 42.4%, from $4.5 million and $13.7 million
for the three and nine month periods ended September 30, 2002, respectively. The
decline in revenues is mostly attributable to a decline in business with AIG and
Velocity, two of the Company's main clients.
Cost of revenues for the three and nine month periods ended September 30,
2003 was $1.9 million and $6.2 million respectively, a decrease of $1.2 million
and $3.9 million respectively, or 37.7%, and 38.3%, respectively. However, on a
percentage of revenues basis, the cost of revenues increased to 82.5% and 79%
from 69.8% and 73.8% for the three and nine month periods ended September 30,
2003 and 2002, respectively, thus decreasing the gross operating margin by
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12.7% and 5.2%. The decrease in gross operating margin percentage was largely
due to fewer billable clients.
General and administrative expenses for the three and nine month periods
ended September 30, 2003 were $0.7 million and $2.6 million respectively, a
decrease of $3.0 million and $2.8 million respectively, or 80.9% and 60.1%, from
$3.7 and $6.5 million for the three and nine month periods ended September 30,
2002, respectively. This decrease is primarily due to decreased marketing and
administrative overhead as well as a decrease in payroll and rent expenses.
Stock option compensation expense of $0 and $6.1 million for the three and
nine months ended September 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 which were granted to an employee with
immediate vesting in February 2002.
Goodwill impairment for the three and nine month periods ended September
30, 2002 was $1,548,947. The long-lived assets impaired were related to the 2001
acquisitions and were reflected in the Company's subsidiary in India.
Merger-related costs and expenses for the nine months ended September 30,
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.
The effective tax rate was 31.1% for the nine months ended September 30,
2003 as compared with (0.3)% for nine months ended September 30, 2002. The
effective tax rate for the nine months ended September 30, 2002 was
significantly impacted by the non-deductible merger-related expenses described
above. The tax deduction for the shares issued was significantly less than the
expense charge for financial reporting purposes. In addition, the stock option
compensation expense of $6.1 million was not deductible for income tax purposes.
The effective tax rate for the nine months ended September 30, 2003 was
significantly impacted by the establishment of a valuation allowance for
deferred tax assets.
Liquidity and Capital Resources
As of September 30, 2003, the Company had net working capital of
$1,898,173, comprised primarily of accounts receivable and cash and cash
equivalents. SanVision 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 fund.
However, the cash flow from operations varies significantly from month to
month primarily due to changes in net income (loss) and collection of accounts
receivable.
Net cash used in operating activities was approximately $800,000 for the
nine months ended September 30, 2003, as compared to net cash provided by
operating activities of $1,674,000 for the nine months ended September 30, 2002.
The decrease in cash provided by operating activities as compared to the
comparable period last year is due primarily to less income from operations
after adjustments for non-cash items.
Net cash used in investing activities was $19,847 for the nine months ended
September 30, 2003, as compared to net cash used in investing activities of
$173,077 for the nine months ended September 30, 2002. The net cash used in
investing activities for 2002 was related primarily to asset purchases.
15
Net cash used in financing activities was $0 for the nine months ended
September 30, 2003, as compared to net cash provided by financing activities of
$34,894 for the nine months ended September 30, 2002. The cash provided by
financing activities in 2002 was in connection with repayments on a former
credit agreement and stockholder borrowings.
Management believes that future cash will be 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 the Company 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.
Forward-Looking Statements; Business Risks and Uncertainties
This Form 10-Q contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs relating to the Company's or
industry's future performance, its future operating results, its sales,
products, services, markets and industry, market conditions and/or future events
relating to or effecting the Company and its business and operations, including
SVT's attainment of new customers and success with new business opportunities
and global expansion. If and when used in this Form 10-Q, the words "believes,"
"estimates," "plans," "expects," "attempts," "intends," "anticipates," "could,"
"may," "explore" and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements. The actual
performance, results or achievements of the Company could differ materially from
those indicated by the forward-looking statements because of various risks and
uncertainties. Factors that could adversely affect the Company's future results,
performance or achievements include, without limitation: continuing or worsening
in the overall economic weakness; the level of effectiveness of the Company's
business and marketing strategies, including those outside North America; an
increase in the allowance for doubtful accounts receivable and bad debts or
further write-offs of accounts receivable as a result of the weakened and/or
further weakening financial condition of certain of the Company's customers; a
reduction in the Company's development of new customers, existing customer
demand as well as the level of demand for services of its customers; the
inability of the Company to generate revenue commensurate with the level of
personnel and size of its infrastructure; decreases in gross profit margins; the
impact from changes in accounting rules; the adverse impact of war and terrorism
on the economy; and the other risks and factors detailed in this Form 10-Q and
in the Company's Form 10-K for the fiscal year ended December 31, 2002 and other
filings with the Securities and Exchange Commission. These risks and
uncertainties are beyond the ability of the Company to control. In many cases,
the Company cannot predict the risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking
statements. The Company undertakes no obligation to update publicly or revise
any forward-looking statements, business risks and/or uncertainties.
16
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 foreign
subsidiaries. We do not anticipate any material currency risk to the Company's
financial condition or results of operations resulting from currency
fluctuations.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including our chief
executive officer and the chief financial officer, the effectiveness of the
design and operation of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)). Based
on this evaluation, our chief executive officer and chief financial officer have
concluded that as of the date of the evaluation our disclosure controls and
procedures are effective to ensure that all material information required to be
filed in this report has been made known to them.
Change in Internal Controls
There have been no changes in internal controls over financial reporting
that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The information required by this Item was previously reported, as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, in Item 3 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002. The Company is still in litigation with Velocity Express Corporation and
there have been no material developments in this matter since it has been
previously reported. Other than the Velocity Express litigation, we are not
involved in any material legal proceedings.
ITEM 6. Exhibits, Lists and Reports on Form 8- K
(a) Exhibits
Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Exhibit 32.1 Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements.*
Exhibit 32.2 Certification by the Chief Financial Officer Relating to a Periodic
Report Containing Financial Statements.*
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the period covered by this
report.
The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or
otherwise subject to liability under that section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933, as
amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
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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)
/s/ Sanjay Sethi
--------------
Sanjay Sethi
Chief Executive Office
Date: March 12, 2004 /s/ Dhir Sarin
----------------
Dhir Sarin
Chief Financial Officer
19