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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-25942
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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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
(Title of class)
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant on April 5, 2002 (7,189,528 shares), was approximately
$29,477,000, based on the closing price of the common stock on the Nasdaq OTC
Bulletin Board.
As of April 12, 2002, 40,725,826 shares of the registrant's common stock
were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K 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 statements 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.
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TABLE OF CONTENTS
Page
no.
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Cautionary Statement Regarding Forward-Looking Statements.........................................................3
PART I
ITEM 1. Business........................................................................................5
ITEM 2. Properties.....................................................................................21
ITEM 3. Legal Proceedings..............................................................................21
ITEM 4. Submission of Matters to a Vote of Security Holders............................................22
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................22
ITEM 6. Selected Financial Data........................................................................23
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................27
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.....................................35
ITEM 8. Financial Statements and Supplementary Data....................................................36
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................74
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................................75
ITEM 11. Executive Compensation.........................................................................81
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters................................................................84
ITEM 13. Certain Relationships and Related Transactions.................................................88
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................89
SIGNATURES ......................................................................................................90
INDEX OF EXHIBITS ...............................................................................................91
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PART I
ITEM 1. BUSINESS.
HISTORICAL BACKGROUND
SVT Inc. (the "Company" or "SVT"), known until February 1998, as
SweetWater, Inc., and thereafter until February 1, 2002, as SWWT, Inc. was
incorporated in Colorado in March 1991 and re-incorporated in Delaware in
September 1993. The Company's principal office is located at 59 John Street, 3rd
Floor, New York, New York 10038, and its telephone number is (212) 571-6904.
Prior to February 1998, the Company (under the name SweetWater, Inc.) was
engaged in the manufacture and sale of portable water filtration and
purification devices. On February 6, 1998, the Company sold substantially all of
its assets to Cascade Designs, Inc., a Washington corporation, for $1,633,425 in
cash. The Company had no further operating business, and reduced its management
and administrative staff to one part-time employee. After completing this sale,
the Company pursued potential business combination transactions.
On April 14, 2000, the Company and its wholly-owned subsidiary, ENWC
Acquisition, Inc. entered into a merger agreement with E-Newco, Inc.
("E-Newco"). Under the terms of this agreement, the Company issued 757,778
shares of its series B convertible preferred stock to the stockholders of
E-Newco in exchange for their shares of E-Newco common stock. On August 24,
2000, E-Newco merged with ENWC Acquisition Inc. and became a wholly-owned
subsidiary of the Company. The series B preferred stock was automatically
convertible into an aggregate of 75,777,162 shares of the Company's common stock
upon the receipt by the Company of additional equity financing of at least $15
million. The holders of the series B preferred stock voted with the holders of
the Company's common stock on an as-converted basis and possessed approximately
95.5% of the outstanding voting power of the Company's stockholders.
Upon consummation of the transactions contemplated by the E-Newco merger
agreement, including payment of a one-time cash dividend to its pre-merger
stockholders in the aggregate amount of $740,635, the Company's only significant
asset was cash and cash equivalents of approximately $2.5 million.
During 2000, the Company purchased certain exchangeable promissory notes
and warrants of SchoolNet, Inc., an application service provider to school
districts, for $500,000. In addition, during 2000 the Company made a $1,000,000
advance to DigaFuel, Inc., an e-commerce solutions provider, in anticipation of
making an investment in DigaFuel. DigaFuel subsequently repaid $565,000 of the
Company's advance in December 2000. In the fourth quarter of 2000, the Company
reduced the carrying value of the SchoolNet investment by $250,000 due to
impairment in value resulting primarily from changing market conditions of
companies in SchoolNet's industry sector. Also, the Company wrote off the
remaining $435,000
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balance of the DigaFuel advance in the fourth quarter of 2000 as a result of the
Company's assessment of DigaFuel's limited prospects for long term liquidity and
the current difficulty encountered by early stage companies in raising
additional equity financing.
The Company has now resumed active business operations as a result of a
series of interrelated transactions which resulted in the combination, effective
February 1, 2002 (the "Combination"), of the Company and SanVision Technology
Inc. ("SanVision"). These transactions consisted of
o the merger of E-Newco, Inc. with and into SanVision (the "Merger"). At
the effective time of the Merger, (1) the separate corporate existence
of E-Newco ceased, (2) SanVision remained as the surviving corporation
in the Merger and became a wholly-owned subsidiary of the Company, and
(3) each share of SanVision common stock was converted into a right to
receive 0.99228 of a share of the Company's common stock (with the
aggregate number of shares of common stock issued to any one person
rounded up to the nearest whole number). The terms of the Merger were
provided for in detail in the Second Amended and Restated Agreement and
Plan of Merger dated as of December 18, 2001, by and among SanVision,
the Company and E-Newco (the "Merger Agreement"), which is incorporated
by reference as an exhibit to this Form 10-K.
o amendments to the Company's certificate of incorporation to (1) effect
immediately before the Merger a 1-for-2 reverse split of the Company's
common stock outstanding before the Merger (the "Reverse Split"), (2)
change the Company's name from SWWT, Inc. to SVT Inc., and (3) reduce
the total number of shares of capital stock which the Company has the
authority to issue, from 800,000,000 shares consisting of 750,000,000
shares of common stock and 50,000,000 shares of preferred stock, to
120,000,000 shares consisting of 100,000,000 shares of common stock and
20,000,000 shares of preferred stock.
o amendments to the certificate of designations of the Company's series B
preferred stock to, among other things, (1) effect immediately before
the Merger and the 1-for-2 Reverse Split a change in the conversion
ratio of the series B preferred stock into common stock from
approximately 1-to-100 to approximately 1-to-10, and (2) provide for
the automatic conversion of the series B preferred stock into common
stock immediately before the Merger. Each share of series B preferred
stock, after giving effect to the Reverse Split and the change in the
conversion ratio, was converted into approximately five shares of the
Company's common stock immediately before the Merger.
In the Combination, taking into account the Merger, the Reverse Split, the
change in the series B conversion ratio and other transactions contemplated in
the Merger Agreement, 36,071,064 shares of SanVision common stock outstanding
before the Merger were converted into 35,792,599 shares of Company common stock,
which shares represent approximately
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87.50% of the sum of the 40,725,826 outstanding shares of common stock after the
merger and the 180,000 shares issuable upon exercise of outstanding Company
stock options. See Item 11 of this report.
On March 13, 2002, SanVision was merged into SVT and ceased to exist as a
subsidiary of SVT.
BUSINESS OF SVT
Until the Combination with SanVision, the Company was not conducting any
operations and had only one part-time employee. Since the Combination, SVT has
owned SanVision and operated its business. As a result, the following is a
description of SanVision's business prior to and since the Combination. As used
below in this Item 1 only, "SVT" therefore will refer to SanVision prior to the
Combination, and to the Company combined with SanVision after the Combination.
SVT provides Information Technology ("IT") related professional services to
businesses. These services enable its clients to combine the scope and
efficiencies of the new web-based technologies with their existing business
processes, such as managing procurement, selling products and services,
providing customer service, conducting supplier transactions and communicating
with their employees over the web. SVT offers a broad range of IT services to
its clients who desire to outsource any such services or retain outside
consultants to supplement their in-house IT initiatives. SVT's application
development services include all facets of IT solutions, from writing custom
codes for new applications to web enabling existing applications to seamless
systems integration. SVT also provides post-production managed services for
maintenance of its clients' applications and systems infrastructure, including
databases, networks and operating systems administration to help maintain,
monitor, support and upgrade complex and high performance systems and
applications 24 hours a day, 7 days a week. Currently, SVT focuses on marketing
its IT solutions and managed services primarily to large companies in industries
that have historically devoted relatively large percentages of their overall
operating budgets to information technology, such as the financial services,
insurance, media and telecommunications. We believe that SVT offers a number of
benefits and differentiated services to its clients, which enables SVT to
capitalize on the rapid growth in the IT services industry. In all of SVT client
engagements, it applies its methodology and quality assurance process to deliver
these services, so as to maintain a high level of quality demanded by major
corporations and global institutions that use its services, at a reasonable
cost.
SVT began operation of its current lines of business in October 1997. It
currently has approximately 125 employees and approximately 40 independent
contractors in the U.S. In addition, there are approximately 20 employees in
India as well as five trainees in North America.
For purposes of Statement of Financial Accounting Standards (SFAS) 131,
"Disclosures about Segments of an Enterprise and Related Information," we
believe that SVT operates in one segment because substantially all of SVT's
revenues are attributed to, and substantially all its assets are located in, the
United States. In addition, as of December 31, 1999 and 2000, substan-tially all
of SVT's long-lived assets were located in the United States. As of December 31,
2001,
7
a total of approximately $3,709,000 of long-lived assets (a substantial portion
of which relates to 2001 acquisitions) were recorded in SVT's subsidiary in
India.
INDUSTRY INFORMATION
The following discussion includes data concerning the information
technology professional services industry that SVT obtained from material
published by International Data Corporation, Software Productivity Research,
McKinsey & Company and the Gartner Group. These sources generally indicate that
they have obtained information from sources that they believe are reliable, but
that they do not guarantee the accuracy and completeness of the information.
Although we believe that these industry sources are reliable, it has not
independently verified their data. SVT also has not sought the consent of any of
these sources to refer to their data in this report as they are in the public
domain.
Worldwide demand for IT services is growing rapidly, and certain segments
within the information technology services market are experiencing particularly
rapid growth. According to International Data Corporation, an information
technology market research firm, the market for web-based IT professional
services will grow from $16 billion in 1999 to approximately $99 billion in
2004. Despite recent downward pressure on IT spending, the pace of technological
advance has accelerated. In order to remain competitive, companies are
increasingly required to adopt emerging technologies, such as e-CRM
technologies, e-business and e-commerce applications, data warehousing, supply
chain management and middleware / enterprise application integration. These
emerging technologies offer the promise of faster, more responsive, lower cost
business operations.
In recent years, the explosive growth of the IT services industry has been
achieved mainly by the widespread acceptance of the Internet by businesses. The
Internet is one of the fastest growing means of communication, reaching
consumers and businesses globally. Companies are increasingly using web-based
technologies to improve their core business processes, lower operating costs and
acquire new capabilities. Many companies have identified new possibilities to
extend and complement their existing products and services. Other companies have
adopted the Internet as the primary platform to conduct transactions with their
customers, suppliers and business partners. We believe that the Internet
represents a revolutionary and powerful technology through which larger
businesses will conduct day-to-day operations, eventually replacing to a large
extent the current manual processes, such as communication with suppliers and
customers by phone, fax and mail. As a result, many senior executives rank their
Internet strategy among their highest corporate priorities as new web-based
technology is replacing old processes, but is still changing and rapidly
developing.
IT Services Outsourcing Trend
As the Internet started gaining acceptance for e-commerce, most businesses
initially created their web pages as their digital brochures with static product
and services information. However, in order to take full advantage of the
opportunities presented by the Internet for conducting actual business on the
web, merely creating attractive web pages is insufficient. Businesses must use
web-based applications that enable them to conduct sophisticated business
transactions in real time. However, development, integration and on-going
management of such
8
web-based technologies and applications present major challenges and require a
large number of highly skilled individuals trained in many diverse, new and
developing technologies, which can be inefficient, inflexible and costly. To
develop and run effective new web-based applications, enhance and re-engineer
the core legacy systems for e-business, larger companies need business
strategists, Internet technology experts, creative designers, application
developers, systems integrators and application support personnel. Increasingly,
therefore, companies turn to solutions providers such as SVT to provide these
services, either by outsourcing entire projects, or by retaining outside
consulting talents to supplement in-house IT initiatives. These outsourcing
needs have generated a substantial demand for professional services vendors and
consultants.
Off-Shore Trend
Many non-technology companies have made the strategic decision to focus on
their core business and reduce their operating cost structures rather than
invest in the additional large IT staffs that are necessary to evaluate,
implement and manage IT initiatives in a rapidly changing environment. As the
global demand for IT services has increased, the number of qualified technical
professionals in the U.S. has not kept pace with such demand. As a result, some
IT service providers have attempted to access the large talent pool in certain
developing countries, particularly India. India is widely acknowledged as a
leader in off-shore software development and has the second largest pool of IT
talent after the U.S. According to a study released in December 1999 by McKinsey
& Company, Inc. on behalf of India's National Association of Software and
Services Companies (or "NASSCOM"), India falls in the "high quality - low-cost"
quadrant, whereas most high quality provider countries like Israel, Ireland and
Singapore serving the U.S. market carry higher costs; and most of the other
low-cost countries like China, Philippines, Hungary and Russia do not provide
high quality. Historically, IT service providers have used the off-shore labor
pool primarily to supplement the internal staffing needs of customers. However,
evolving customer demands have led to the utilization of off-shore resources for
higher value-added services. Such services include providing IT solutions and
outsourcing application development, systems integration and maintenance. The
Internet allows skilled Indian professionals to provide such services for
clients in the U.S. from India.
The use of off-shore personnel can offer a number of benefits, including
faster delivery of new IT solutions, more flexible scheduling and lower costs.
Furthermore, according to NASSCOM, India, currently has the second largest
English-speaking pool of scientific professionals, second only to the United
States. There are a large number of educational institutions, including
engineering colleges, technical institutes and polytechnics that annually train
over 73,500 computer professionals. In addition, we believe that the quality of
technical training in India is among the highest in the world. According to the
McKinsey study, overall annual revenues from the Indian information technology
software and service industry have grown from $150 million in 1988-1989 to $3.9
billion in 1998-1999 and, assuming that the right policies be put in place, may
grow to approximately $87 billion in 2008.
9
SVT VERTICAL EXPANSION PLAN
SVT's current business is concentrated in the financial services and
insurance industries. This segment of the market was targeted by SVT primarily
because it is by far the largest vertical segment in the U.S. The IT services
market for financial institutions is estimated by the Gartner Group to remain a
significant portion of the entire industry in the foreseeable future. More
importantly, major financial institutions have historically been early in
adopting new technologies. The industry is dominated by a limited number of
global institutions and, during the last decade, technology has been a key
driver of competitive advantage among them. Therefore, the same institutions
have been early adapters of all major break-through technologies, first to
client-server configuration (away from mainframe computing), then ERP systems,
networking etc. Now that these older technologies are giving way to web-based
technologies, providing web technology services to the financial services
industry gives SVT an advantage of lead time on its competitors, who may not be
so active in this industry since they may have built their company and clientele
around a skill base and expertise in other technologies, or a different vertical
segment. As SVT has gained valuable experience with financial clients who are in
the leading edge of technology, we intend to use this competitive advantage by
expanding into other industries that may be behind the technology curve and are
looking to outsource services to vendors who have already designed and
implemented IT solutions based on the latest technologies.
The IT solution vendor marketplace in SVT's industry niche has historically
been very fragmented. This is primarily because most large financial
institutions have been reluctant to outsource their mission critical systems and
have preferred to retain control by owning the "brain trust" and
institution-specific systems. Therefore, they have traditionally spread the work
among many vendors, some of them smaller public and private companies operating
in specialized horizontal niches and many staff augmentation companies. However,
having established credibility with global institutions in this vertical, as
well as in the media and telecommunication vertical, we believe that SVT can
successfully expand its target market both to other verticals and geographically
within the same verticals.
COMPETITION
Historically, SVT has operated in a large but highly fragmented competitive
environment, which does not have many leaders. Most of its direct competitors
were small to medium sized companies, both public and private, who operated in
certain technologies, certain vertical markets, and/or certain geographic areas,
but did not provide a full service offering. SVT's goal was to provide
end-to-end solutions in the chosen vertical, technology and geographic area to
build a niche that is defensible against larger, better capitalized competitors.
The pace of consolidation in this segment has increased significantly in the
recent years, especially due to the dot-com "melt-down", the recent slow down in
the U.S. economy and the slackening demand for IT services. As SVT's business
was not focused on dot-com start-ups, unlike many of SVT's competitors, the
demise of dot-coms has not materially affected its revenues and profits.
However, as SVT grew rapidly, it faced a much higher level of competitive
pressure, which has and will continue to intensify. Many of SVT's current and
potential competitors have
10
longer operating histories and substantially greater financial, marketing,
technical and other resources. Some of these competitors have a greater ability
to provide services on a national or international basis and may be able to
adjust more quickly to changes in customer needs or to devote greater resources
to providing Internet professional services. Such competitors may attempt to
build their presence in SVT's markets by forming strategic alliances with other
competitors or its customers, offering new or improved products and services to
SVT's customers or increasing their efforts to gain and retain market share
through competitive pricing. Some companies have developed particularly strong
reputations in niche service offerings or local markets, which may provide them
with a competitive advantage. In addition, there is intense competition for
quality technical personnel at the high end, resulting in increased personnel
costs for SVT. Such competition may adversely affect SVT's gross profits,
margins and results of operations. Furthermore, we believe the barriers to entry
into SVT's markets are relatively low, which enables new competitors to offer
competing services. Currently, SVT faces competition from the following:
o Major Indian information technology services companies, such as HCL
Technologies, Infosys Technologies Ltd., Satyam Computer Services
Limited, Silverline Technologies Ltd., Tata Consultancy Services and
Wipro Limited, all of which have significant off-shore capabilities and
are well established in the U.S.;
o U.S. information technology services companies with off-shore
capabilities, such as Cognizant Technology Solutions Corp., Complete
Business Solutions Inc. and iGate Capital Corporation;
o Internet professional services and systems integration firms, such as
Cambridge Technology Partners Inc., Viant Inc., Scient Inc., Proxicom
Inc., and Sapient Corp.;
o Large international accounting firms and their consulting affiliates,
such as Accenture LLP, KPMG, Deloitte and Touche LLP and
PricewaterhouseCoopers LLP;
o Outsourcing firms, such as Computer Sciences Corp., Electronic Data
Systems Corp., International Business Machines Corp. and Perot Systems
Corp.; and
o In-house information technology departments.
We believe that the principal competitive factors in the market for IT
services include technical expertise, breadth of service offerings, reputation,
financial stability and price. To be competitive, it must respond promptly and
effectively to the challenges of technological change, evolving standards and
its competitors' innovations by continuing to enhance its service offerings and
expand its sales channels. Any pricing pressure, reduced margins or loss of
market share resulting from its failure to compete effectively could materially
affect its business.
11
SVT PRODUCTS AND SERVICES
SVT offers its clients two broad lines of business for IT services: (1)
application development, including migration and maintenance, e-business
solutions and post-production maintenance; and (2) managed services, including
databases, operating systems and network administration. It has also begun to
focus on customer relationship management or CRM services, which enable its
clients to manage their customers as key assets more effectively. Generally, on
application development and systems integration project engagements, a SVT
project team not only designs the application on a customized basis, but also
integrates it with the clients' complex proprietary systems and databases.
Sometimes these applications also need to be integrated with major third party
vendor products, such as IBM server software packages and e-CRM products. SVT
undertakes client engagements both on a project management basis, where SVT has
complete responsibility for managing the project, and also by providing a team
of consultants working under a client's or a third party project manager's
supervision.
On managed services engagements, SVT project teams provide ongoing
monitoring, performance reviews, maintenance and technical support for client
applications, databases, system infrastructure and networks. For example, SVT is
a part of the so-called "Pinnacle Alliance" with Computer Services Corporation,
AT&T, Verizon and Accenture LLP, to which JP Morgan has outsourced all managed
services for 7 years. In addition, SVT teams help manage high performance
websites like www.cablevision.com and provide various web related managed
services like firewall, security, database management and technical help desk.
In the last three fiscal years, application development services accounted
for 43.5% (1999), 52% (2000) and 48.2% (2001) of SVT's consolidated revenues,
and managed services accounted for 56.5% (1999), 48% (2001) and 51.8% (2001) of
SVT's consolidated revenues.
Many of SVT's projects are executed exclusively on-site at the clients'
offices or data centers. Due to the current slowdown in the U.S. economy and the
pressure on client IT service budgets, the marketplace has recorded a sharp rise
in the demand for lower cost off-shore services, notably for services performed
in India. As most of SVT's projects require continuous management of
deliverables and user interface, it is unlikely that they could be efficiently
executed entirely off-shore without any on-site presence. Therefore, SVT has
developed methodologies and processes for flexible on-site/off-shore delivery
capabilities, by engaging a "virtual" project team located at various locations
both in the U.S. and India, which it intends to increasingly use in its
projects, allowing it to access highly skilled, relatively low cost information
technology professionals in India and to integrate their work on a client
project either on their site or at SVT facilities in the U.S. We believe that
this methodology reduces project cost for clients without sacrificing quality of
execution.
One example of how SVT distinguishes itself from similar IT service firms
is SVT's flagship product e-Framework. This is a complete framework and
architecture for rapid e-business application development, originally developed
by SVT for the financial services industry, and can be customized for various
industries and product lines by building "modules" to serve specific purposes.
This can not only significantly reduce developmental time (and hence costs), but
also shortens the learning curve since the application does not need to be built
from scratch. Two such modules have already been developed, one for an insurance
line of business
12
and one for an investment banking product, and several other modules are under
development. As these modules are completed, each becomes a complete and
separate specific product, for example for property & casualty insurance or
fixed income securities etc., which can be licensed separately. However, SVT
being an IT services company, it has neither applied for a patent for this
product, nor yet attempted to collect a license fee from clients. Rather, SVT
uses it to its advantage while competing with major competitors, like "Big 5"
accounting firms, to win application development project assignments. In
addition, SVT has developed several developmental tools, methodologies and
processes that it uses to deliver the projects successfully on time and on or
below budget. These tools cut down either on development time, increase
flexibility or reduce complexity of e-business or other web related application
development.
SVT'S COMPETITIVE ADVANTAGE
We believe that SVT offers a number of benefits and differentiated services
to its clients, which enables it to capitalize on the rapid growth in the
information technology services industry:
A broad range of information technology services offering
Increased demand for IT professional services has attracted many firms to
this market. We believe that only a few firms provide a comprehensive set of
offerings that are required by larger clients. For example, many traditional IT
service providers do not have the skills required to create interesting
web-based content and provide a favorable user-experience. Advertising and
design firms typically lack the technical expertise and integration skills
necessary to deliver sophisticated software applications that are required to
run increasingly complex business transactions. Most application development
firms and systems integrators do not typically provide a comprehensive range of
post-production managed services. SVT can provide a comprehensive suite of
service offerings delivering the entire end-to-end solution from design to
implementation to integration to maintenance.
Proven scalable processes with leading methodologies, architecture,
developmental tools/products
SVT's proven processes, methodologies and quality assurance, which it uses
against major competitors who enjoy a more established reputation and brand-name
recognition, have been successful with global multinational clients in the
financial services industry, such as AIG, Citigroup and JP Morgan. For example,
SVT has successfully used its architecture, products such as e-Framework (see
"SVT Products and Services" above) and developmental tools to win projects
bidding against major competitors.
Highly skilled, relatively low cost information technology professionals
SVT's value proposition is that it can deliver comparable quality as its
major brand name competitors at a significantly lower cost. By virtue of having
global recruitment capability and importing foreign talent from India, Sri
Lanka, Russia, Eastern Europe and Israel, under the H1-B visa category, SVT is
capable of providing very high quality service with relatively low-cost
professionals, even for projects done on-site at client location. The U.S.
marketplace prices
13
foreign software engineers temporarily in the U.S. on H1-B visa status
significantly lower than American engineers with comparable skills and
experience.
SVT's off-shore delivery capability and methodology
SVT has developed a virtual project management methodology whereby it is
able to effectively manage professional teams in geographically disperse areas,
such as various client sites, and SVT's off-shore development teams in India
that can provide 24- hour a day development and technical support (due to the
time difference) without sacrificing quality or performance. SVT's Indian
recruitment and training facility provides access to a very deep talent pool at
a much lower cost. Average annual wages in India have historically been
approximately 15-20% of that of their U.S. counterparts. This enables SVT to
deliver the same quality of execution as on-site projects at a significantly
lower cost.
SVT's in-house training facilities
SVT is committed to in-house training facilities in India and in the U.S.
that allow the employees to learn their specialized technical skills in-depth,
with the focus being on practical, hands-on training on live systems and latest
software actually used by clients. SVT's focus on continuous training not only
increase SVT's cost effectiveness vis-a-vis competitors since clients are
willing to pay more for similarly skilled and trained consultants, but also
provides it with a competitive advantage in recruiting and retaining information
technology professionals who wish to work on state-of- the-art technology.
SVT's client engagement methodology
SVT has a number of executive consultants who are not only adept in
technology but, in addition to their role as project manager or technical lead,
also perform the duties of a client relationship manager. Therefore, by gaining
client confidence with ideas that help the business, such as automating certain
processes that result in cost savings or improved efficiency, they are often
able to generate new projects for SVT.
SVT's industry-specific knowledge and experience
SVT has developed extensive knowledge and experience in the insurance,
banking, media and telecommunications industries, which reduces SVT's learning
curve on new engagements in these industries, and allows it to accurately define
and deliver tailored solutions that effectively address the challenges that its
clients face.
BUSINESS STRATEGY
SVT's goal is to be a leading global provider of information technology
services. We intend to achieve this goal through business strategies which
emphasize
o expanding SVT's services offerings geographically,
o expanding its target market vertically,
14
o building "brand equity" and market recognition,
o attracting and retaining outstanding professionals, especially in the
high-end,
o developing and enhancing partner relationships with clients,
o broadening industry knowledge and technology offering,
o pursuing and developing strategic relationships, and
o supplementing organic growth by external acquisitions.
Specifically, it is pursuing the following strategies to achieve this
objective:
Geographic Expansion
Since inception, SVT has sought and developed clients and relationships
almost exclusively in the Wall Street community in the downtown Manhattan area,
where many of the global financial institutions have their IT operations
located. However, having established credibility with these institutions, SVT is
seeking geographic expansion, both to other large institutions located elsewhere
in the U.S. and Europe, as well as to other locations of the same institutions
where client relationships already exist. We believe that our track record
established with major clients like AIG, JP Morgan, Deutsche Bank, Merrill Lynch
and Citigroup will be helpful, but we are also aware that SVT has grown so far
without a sales force and minimal expenditure on infrastructure, and this
strategy will require an increased level of expenditure in sales and marketing
efforts as well as a higher level of fixed costs that may be required for
opening sales offices around the U.S. and Europe.
Expanding Target Market
While SVT has developed considerable vertical industry experience in the
financial services industry, particularly in insurance and investment banking,
and to a lesser extent in media and telecommunication, many of the web-based
technologies that SVT specializes in are applicable to other industries, such as
transportation, automotive, industrial and retail. In particular, SVT's managed
services and technical support offerings are industry neutral and are just as
equally applicable to any medium to large organization. Therefore, we believe
that SVT's target market should be much broader to encompass various other
industries, as long as they meet the "need for service" criteria in terms of
size, outsourcing philosophy and IT services budgets.
Building Brand Equity
Management plans to establish and build recognition of the SVT brand name
through an aggressive marketing strategy, which will emphasize its value
proposition, client roster, full range of services, industry expertise, broad
knowledge of business processes, off-shore capability and its global delivery
model. To this end, we believe that SVT's advisors and its new board members
will be very helpful.
15
Attracting and Retaining Outstanding Professionals
SVT's rapid growth in the past has been materially influenced by its
executive consultants which constitute about 10% of its workforce. These
executive consultants are outstanding professionals who not only understand
technology and business processes, but also perform client relationship
management functions, which often leads to generation of new business with the
existing clients. SVT treats them as business partners and compensates them by
means of profit sharing bonuses for new business. To continue to fuel future
growth in business, SVT needs to attract and retain more executive consultants
of their caliber since SVT's ability to build meaningful competitive advantages
is dependent on its ability to attract and retain highly skilled, dedicated and
experienced professionals like them.
Client Partnerships
SVT seeks to establish close and long term relationships with its clients.
To the extent its clients are global institutions with massive IT related
spending budgets, we believe that SVT, by partnering with its existing client
base, could deepen existing relationships and gain additional business in the
future. For example, SVT partnered with a large client which had cancelled
building a critical application when 80% of the first phase was completed, due
to a reduction of their IT budgets this year. SVT completed the remaining
portion of this phase of the project at its own expense and allowed the client
to put it in production so that the future phases of the project would be
awarded to SVT, as and when such budget is approved. We believe that partnering
with similar major institutions, especially where SVT is currently a vendor of
insignificant size, could lead to becoming one of their primary vendors.
Broadening Industry Knowledge and Technology Offering
SVT is targeting other industries to gain business knowledge and expertise
to complement what it has done for the financial services industry. SVT's
strategy in this respect is to begin a partnership with one major client in the
industry and develop its knowledge base of the industry, technology preference
and business processes and practices, as it has learned about the insurance
industry by partnering with AIG. It is also investing in learning more about the
latest technologies that are gaining widespread acceptance, such as the newer
e-CRM software and applications and is closely following technology marketplace
trends.
Strategic Relationships
We intend to develop strategic relationships with major technology
providers and complementary service providers and explore joint marketing
opportunities with strategic partners. On the technology side, currently SVT is
a Microsoft Certified Solution Provider and has been certified by Sun
Professional Services as a preferred provider. On the managed services business,
SVT has established a strategic relationship with Globix Inc. for hosting and
co-locating client hardware as well as Data Access Inc. for other data center
services that are complementary to SVT's services, so that it can provide
comprehensive outsourcing of managed services. SVT intends to establish similar
relationships with other providers, such as e-CRM and web-based EDI software
companies, who have already been successful in establishing themselves in the
marketplace.
16
External Growth
SVT's business plan includes an aggressive strategy of acquiring other
companies in similar or complementary business. While remaining opportunistic in
terms of availability and price, the ideal candidates from SVT's perspective are
companies with successful track record, major client base and sound management,
so that synergies can be achieved and the growth potential realized without
having to run the day-to-day operations of the acquired companies, which may
strain SVT's senior management. SVT is aware that it will need to raise
substantial additional capital to implement this strategy of aggressive external
growth.
SALES AND MARKETING
To date, SVT has generated significant growth in revenues without an
organized sales force. Historically, client engagements and, consequently,
revenues were created primarily by the efforts of Sanjay Sethi, SVT's chief
executive officer, and other senior technology professionals within SVT who were
managing existing client relationships. SVT has a number of executive
consultants who are not only adept in technology but, in addition to their role
as project manager or technical lead, also perform the duties of a client
relationship manager. Therefore, by gaining client confidence with ideas that
help the business, such as automating certain processes that result in cost
savings or improved efficiency, they are often able to generate new projects for
SVT during or upon completion of their current engagement. In addition, new
business has also been generated from customer referrals within the industry and
introductions made by the diverse network of contacts of SVT management. These
efforts have allowed SVT to grow until now without a large full-time sales team.
Currently, SVT has a national sales manager and three sales support personnel.
However, as SVT seeks to expand its business out of the New York area to
other parts of the U.S. and Western Europe (see "Business Strategy" above), as
well as to other industry segments, a more formal sales and marketing
infrastructure will need to be organized in order to promote SVT's value-added
services and competitive advantages. Additionally, as a result of the
Combination of SanVision and the Company and the expansion of the Company's
board of directors, we expect to have more extensive resources and network to
leverage in gaining access to senior decision makers at prospective clients who
might have a need for SVT's services.
One of SVT's objectives in its sales and marketing efforts is to build
"brand equity" since we believe that SVT can provide the same quality of IT
services as its global competitors who enjoy a much more established reputation
and brand name recognition in the marketplace. SVT has a value proposition for
potential clients as it can provide such services at a significantly reduced
cost (see "SVT's Competitive Advantage" above). Therefore, the task of SVT's
sales and marketing team is to emphasize the following major benefits to
prospective clients:
o a broad range of service offering providing end-to-end solutions,
o proven, scalable methodologies, processes, technology architecture,
products and developmental tools,
17
o off-shore/on-site project management capability with virtual project
teams in geographically disperse locations, which reduces cost without
sacrificing quality of execution,
o blue chip client list and history of partnership with clients to
deliver projects on time and on or under budget, and
o capability of globally recruiting high quality technology professionals
and training them extensively on latest technologies.
SVT'S APPLICATION DEVELOPMENT METHODOLOGY
Generally, in application development engagements, SVT follows the
following methodology outlined in the steps below with a view to providing an
end-to-end solution to the client. This involves understanding client business
objectives, current business processes and practices, advising on the technical
strategy for project execution, designing, coding, quality assurance, testing
and debugging, deployment in production systems, as well as ongoing maintenance,
upgrading and technical support:
Business Objectives
In this phase, SVT identifies overall business objectives, assesses current
business practices and processes, and analyzes automation opportunities for
improvement of efficiency and/or cost reduction. SVT business analysts work with
users and managers to define the relevant criteria to automate and improve their
business processes and eventually come up with a business requirement document,
which is signed off by the client as well as the project manager in charge of
the project execution, to serve as the blue-print of the project.
Design Phase
In this phase, SVT consultants define the technical requirements and scope
for a specific project, evaluate existing systems infrastructure and recommend
appropriate technology architecture. Based on the client's objectives and input,
SVT design professionals produce a very detailed technical design that is both
scalable and flexible, using appropriate technology architecture, hardware,
relevant server based software packages, developmental tools and methodologies.
The SVT project team also carefully creates a plan to deploy the application,
development objectives and testing criteria.
Implementation
In this phase, SVT software engineers and programmers write custom codes,
interfaces with software packages, use various developmental tools, build and
deploy the application through incremental releases. The project team tests each
release to ensure proper functionality, performance, scalability, flexibility,
adherence to the technical design and reliability.
18
Quality Assurance
At every incremental release, the application goes through rigorous quality
assurance to ensure that it performs well under various live systems conditions.
Any deficiencies, malfunctions or failures under stress are flagged back to the
project team to debug, correct and modify until it meets the rigorous quality
assurance criteria.
Production Phase
This final phase coincides with the end of the application development
phase and the application goes into live production. Generally, a smaller SVT
production management and support team continues to provide technical support
for the users, monitoring performance, reviewing and fixing integration problems
with client system infrastructure changes and upgrades, and run the help desk.
MAJOR CLIENTS AND SAMPLE PROJECTS
SVT currently has a limited number of clients with high concentration among
its top five clients. During the year ended December 31, 2001, the top five
clients were AIG, CSC, CableVision, World Wrestling Federation and Salomon Smith
Barney (Citigroup), accounting for approximately 38.22%, 25.47%, 5.23%, 4.55%
and 4.49% of SVT's revenues, respectively, or approximately 77.96% in the
aggregate. We expect that a small number of clients will continue to account for
a substantial portion of SVT's revenue for the foreseeable future.
The following are representative samples of projects SVT has either
completed or is continuing to work on for these and other clients:
AIG
We are involved in several critical projects with AIG, one of the world's
largest insurance companies in terms of market capitalization and revenue.
Flagship Internet Underwriting Application and Architecture
Senior management at AIG understands the potential of the Internet
technology. To help bring about an on-line transformation of their business
processes and execution, eWriter was its first and most important online
underwriting application. The technology architecture and process that eWriter
is built on is now being adopted by some other business and technology units.
Internet Surety Bond Underwriting Engine
The surety bond market is one of the largest and most liquid in the world.
AIG is a major participant in this market, underwriting surety of dams, bridges
and major infrastructure project around the globe. SVT consultants are building
a state of the art Internet application that will allow AIG underwriters and
brokers to quote and bind new surety business from various parts of the world.
19
CSC/JP Morgan Chase
As subcontractor of CSC, SVT has provided at JP Morgan Chase state of the
art engineering in the disciplines of Internet and Intranet infrastructure
management. Our consultants and project managers help manage several high
performance systems, such as foreign exchange, emerging markets, fixed income
and commodities trading desks and Intranet servers.
CableVision
Long Island-based CableVision is one of the most innovative and aggressive
cable operators in the country. SVT is helping CableVision build and maintain
some of the most creative Internet applications in the world of media and cable.
World Wrestling Federation
The World Wrestling Federation is a global entertainment multi-media
company. SVT provides application development services for its corporate systems
as well as managed services in support of its data center, the 24 hours a day 7
days a week monitoring system and its help desk.
Salomon Smith Barney (Citigroup)
One of the largest financial institutions of the world, Citigroup's Salomon
Smith Barney unit retained SVT to design and build a prototype system that would
track, monitor and generate custom reports manipulating massive amounts of data
from existing corporate databases as well as various live feeds in real time.
SVT is using a web based architecture, methodology and developmental tools that
could be extended to various other areas of Salomon Smith Barney after
successful completion of this prototype project.
Deutsche Bank
This largest German financial institution is now among the largest in the
world after its acquisition of BT Alex Brown. SVT consultants build and help
manage the complex and real-time environment of the main equities trading floor.
Merrill Lynch
SVT consultants help manage the heterogeneous network of Intranet servers
and applications for one of the largest foreign exchange trading operations in
the world. We have consultants working at Merrill Lynch actively engaged in
making sure that the high performance floor trading system performs smoothly on
a daily basis without any down time.
Lucent Technologies (IBM Global Services)
Lucent Technologies owns one of the largest global computer networks. SVT,
alongside IBM GS, helps operate and support this global network of some of the
world's most powerful
20
and mission critical computers. Every voice and data call made through Lucent's
network goes through one of the networked computers managed by SVT employees.
INTELLECTUAL PROPERTY RIGHTS
Substantial litigation regarding intellectual property rights exists in the
software industry. SVT licenses software from, and develops software
applications for, various third parties. Although we believe that SVT's services
do not infringe upon the intellectual property rights of third parties, we
cannot assure you that such a claim will not be asserted against SVT in the
future by third parties from whom it has licensed software or by other third
parties who allege misappropriation of their products and processes. SanVision
expects that the risk of infringement claims against it and its clients will
increase if more of its competitors are able to obtain patents for software
products and processes.
Further, a portion of SVT's business involves the development of software
for clients. Ownership of client-specific software is generally retained by the
client. We cannot assure you that SVT's clients or assignees will not assert
intellectual property claims against it and that disputes will not arise that
will affect its ability to resell or reuse these applications. SVT typically
indemnifies its clients against third party intellectual property claims for the
services performed. Assertion of claims against SVT or its clients could result
in litigation, and SVT may not prevail in the litigation or be able to obtain a
license for the use of any infringed intellectual property from a third party on
commercially reasonable terms. Any of these claims, regardless of their outcome,
could harm SanVision's reputation, damage its relationships with clients, result
in substantial costs to SanVision or divert management's attention from its
operations and could adversely affect its business, results of operations and
financial condition.
ITEM 2. PROPERTIES.
As noted in Item 1 above, many of SVT's projects are executed exclusively
on-site at the clients' offices or data centers.
SVT is headquartered at 59 John Street in New York City in approximately
5,000 square feet of leased space. It also has leased office space in South
Amboy, New Jersey, and a residential unit in Jersey City, New Jersey, which is
used to temporarily house SVT employees coming to the U.S. from abroad. In
addition, SVT leased software development and training facility in New Delhi,
India, as well as small recruitment facilities in Calcutta and Madras, India,
and Colombo, Sri Lanka.
ITEM 3. LEGAL PROCEEDINGS.
In November 2000, DSQ Europe plc, an IT services company incorporated in
the U.K. and an affiliate of the India-based DSQ Group ("DSQ"), approached
SanVision with a proposal that they acquire SanVision and a number of other
companies with a view to completing an initial public offering in the London
Main Exchange for the merged entity. SanVision demanded and received a good
faith deposit of $1 million in escrow with the law firm of Pepper Hamilton LLP
as the escrow agent, as documented by an escrow agreement. DSQ failed to produce
any definitive acquisition agreement by the December 15, 2000 deadline, as
required by the escrow agreement. When the escrow agent served a notice to
release the funds to SanVision, DSQ sued
21
the escrow agent and SanVision in New Jersey Federal Court to recover the escrow
funds. SanVision countersued and DSQ subsequently asked for a summary judgment
in its favor. The litigation was settled in February 2002. DSQ agreed to pay to
SVT a total amount of $262,155, of which $200,000 is payable in cash and the
balance will be satisfied by releasing SVT of payment obligations in the amount
of $62,155. The SanVision/SWWT Merger Agreement provides that the Company will
pay this $200,000 to Sanjay Sethi, the Chief Executive Officer of the Company.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 2001 to a vote
of the Company's securityholders, through the solicitation of proxies or
otherwise.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Trading in the shares of the Company's common stock has been sporadic and
in small volumes since its initial public offering in January 1994. The common
stock traded in the over-the-counter market under the symbol "SWWT" from May
1997 until February 6, 2002, and since then has been trading under the symbol
"SVTV." We cannot predict that an established public trading market will develop
or be sustained. The following table sets forth, for the calendar quarters
indicated, the range of high and low bid quotations for the common stock since
January 1, 2000, as reported by dealers appearing as market makers on the OTC
Bulletin Board. These quotations represent inter-dealer prices, without retail
mark-up, mark-down or commissions and do not necessarily represent actual
transactions:
COMMON STOCK
--------------------
CALENDAR QUARTER HIGH LOW
---------------- ---- ---
2000
First quarter..................... $6.7500 $0.7813
Second quarter.................... 6.8750 2.7500
Third quarter..................... 4.8750 3.0000
Fourth quarter.................... 3.1250 0.6250
2001
First quarter .................... 3.1563 0.7500
Second quarter ................... 2.5500 1.3750
Third quarter..................... 3.1500 1.5500
Fourth quarter ................... 3.5500 1.6000
The dollar amounts in this table do not reflect the 1-for-2 Reverse Split
effective February 1, 2002. See Item 1 of this report under the caption
"Historical Background."
22
In May 2000, in connection with the merger of the Company's subsidiary ENWC
Acquisition, Inc. with and into E-Newco, Inc., the Company paid a one-time cash
dividend to its pre-E-Newco merger stockholders aggregating $740,635. This
dividend payment consisted of the cash on the Company's balance sheet
immediately prior to the consummation of the E-Newco merger, less expenses
related to the merger and the settlement of certain claims.
We do not anticipate that the Company will pay dividends in the foreseeable
future.
As of April 1, 2002, there were 145 holders of record of common stock, as
shown on the records of the Company's transfer agent.
As noted in Item 1 of this report, effective February 1, 2002, pursuant to
the Merger Agreement, the Company issued to the seven stockholders of SanVision
35,792,599 shares of the Company's common stock in exchange for 36,071,064
shares of SanVision common stock. The issuance of these shares was not
registered under the Securities Act of 1933 in reliance upon the exemption
provided for in Section 4(2) of the Act for transactions by an issuer not
involving any public offering.
Also effective February 1, 2002, the 674,423 shares of the Company's series
B preferred stock outstanding on that date were automatically converted into
6,744,177 shares of common stock, which were not registered under the Securities
Act of 1933 in reliance upon both (1) the exemption provided for in Section 4(2)
of the Act, and (2) the exemption provided for in Section 3(a)(9) of the Act for
any security exchanged by the issuer with its existing security holders
exclusively.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA OF SANVISION
The following table contains certain selected consolidated financial data
of SanVision prior to the Combination and is qualified by the more detailed
consolidated financial statements and notes thereto included elsewhere in this
report. The consolidated statement of operations data for the years ended
December 31, 1999, 2000 and 2001, and the consolidated balance sheet data as of
December 31, 2000 and 2001 have been derived from the consolidated financial
statements of SanVision which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included in Item 8
of this report. The consolidated statement of operations data for the year ended
December 31, 1998 and the consolidated balance sheet data as of December 31,
1999, were derived from the consolidated financial statements of SanVision which
were audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report not included in this report. The consolidated
statement of operations data for the year ended December 31, 1997 and the
consolidated balance sheet data as of December 31, 1997 and 1998 were derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting only of normal adjustments, that SanVision considers
necessary for a fair presentation of the financial position and results of
operation for such period. This data should be read in conjunction with
SanVision's consolidated financial statements and notes thereto and "SanVision
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this report.
23
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
STATEMENTS OF
OPERATIONS DATA:
Revenues............................ $1,386,462 $4,689,678 $15,104,788 $26,394,191 $23,983,485
Cost of revenues.................... 1,032,824 4,155,022 11,735,407 19,266,748 17,643,151
---------- ---------- ----------- ----------- -----------
Gross profit........................ 353,638 534,656 3,369,381 7,127,443 6,340,334
Operating expenses:
General and
administrative................ 270,648 468,185 1,795,526 3,099,730 3,658,506
---------- ---------- ----------- ----------- -----------
Operating income................. 82,990 66,471 1,573,855 4,027,713 2,681,828
Interest expense, net............... -- -- -- 4,803 38,818
---------- ---------- ----------- ----------- -----------
Income before
income taxes.................. 82,990 66,471 1,573,855 4,022,910 2,643,010
Income taxes........................ 77,397 63,662 833,613 1,842,935 1,224,379
---------- ---------- ----------- ----------- -----------
Net income ......................... $ 5,593 $ 2,809 $ 740,242 $2,179,975 $1,418,631
========== ========== =========== =========== ===========
Earnings per share
(basic and diluted).............. $ -- $ -- $ 0.02 $ 0.07 $ 0.05
========== ========== =========== =========== ===========
Weighted average
number of shares
outstanding...................... 29,887,454 29,887,454 29,887,454 29,887,454 29,887,454
========== ========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF YEAR):
Current assets...................... $322,919 $1,384,689 $5,898,599 $9,238,662 $ 7,010,832
Current liabilities................. 255,729 1,470,412 5,303,908 4,437,345 3,968,789
Working capital..................... 67,190 (85,723) 594,691 4,801,317 3,042,043
Total assets........................ 357,138 1,460,937 6,006,904 9,423,332 10,875,289
Long term debt, excluding
current portion.................. - - - - -
Stockholders' equity
(deficit)........................ 15,544 (46,929) 693,313 3,621,949 4,856,079
24
SELECTED FINANCIAL DATA OF SWWT
The following table contains selected financial data of SWWT and is
qualified by the more detailed financial statements and notes thereto included
elsewhere in this report. The statement of operations data for the period from
January 7, 2000 (inception) through December 31, 2000, and the balance sheet
data as of December 31, 2000, have been derived from the financial statements of
SWWT which were audited by Ernst & Young LLP, independent public accountants, as
indicated in their report included in Item 8 of this report. The statement of
operations data for the year ended December 31, 2001 and the balance sheet data
as of December 31, 2001 have been derived from the financial statements of SWWT
which were audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report included in Item 8 of this report. The financial data
set forth below should be read in conjunction with SWWT's financial information
and "SWWT Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this report.
PERIOD FROM
JANUARY 7, 2000
STATEMENTS OF (INCEPTION) TO YEAR ENDED
OPERATIONS DATA: DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------------
OPERATING EXPENSES $1,589,605 $1,170,836
Interest income ................................. 86,455 78,703
----------- -----------
Net loss ........................................ $(1,503,150) $(1,092,133)
=========== ===========
Net loss per common share -
basic and diluted........................... ($0.96) ($0.70)
=========== ===========
Weighted average common
shares outstanding.......................... 1,561,127 1,561,127
=========== ===========
DECEMBER 31,
-----------------------------------
2000 2001
---------- ----------
BALANCE SHEET DATA (AT END OF YEAR):
Current assets.................................. $1,768,614 $1,080,880
Current liabilities............................. 446,764 851,163
Working capital................................. 1,321,850 229,717
Total assets.................................... 2,018,614 1,330,880
Redeemable preferred stock...................... 3,485,955 3,485,955
Accumulated deficit............................. (1,506,272) (2,598,405)
Stockholders' deficit........................... (1,914,105) (3,006,238)
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SANVISION 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
starting in early 2000. However, SanVision strictly adhered to its target market
focus and avoided marketing its services to high-risk "dot-com" start-up
businesses, which enabled SanVision to avoid significant deterioration in its
business. By contrast, major competitors of SanVision, such as Scient, U.S. Web
and iXL declined as a result of this negative exposure.
However, the overall slowdown in the U.S. economy during 2001 had a major
impact on the demand for IT services in general, not only in terms of intense
and increasing competition among vendors, 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 now is to fund only mission critical IT projects and services
and to defer or cancel all other initiatives. 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.
SanVision 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.
SanVision was able to withstand the pressure and avoid any major decline in
revenue during 2001 primarily by focusing on new business development.
Specifically, cutbacks from two major clients, AIG and CableVision, were roughly
offset by the revenue generated from three new clients, the Salomon Smith Barney
unit of Citigroup, the World Wrestling Federation and Velocity Express.
Going forward, management believes that the pressure on IT budgets will
continue at least through the third 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,
SVT will continue its emphasis on new business development and will revamp its
off-shore capability.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of SanVision 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
26
the most crucial to aid in fully understanding and evaluating SanVision's
reported financial results include the following:
Revenue Recognition
Historically, SanVision'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, SanVision entered into two
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
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.
Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires the purchase method of accounting for all business combinations and
that certain acquired intangible assets in a business combination be recognized
as assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles determined to have an indefinite life are no longer to be amortized
but are to be tested for impairment at least annually. We have applied SFAS No.
141 in our preliminary allocation of the purchase price of the two acquisitions
completed late in 2001. Accordingly, we identified and allocated a value to
intangible assets totaling $1,852,888 related to customer contracts and acquired
technology. The valuation of these intangible assets required us to use our
judgment and is based on information available as of this time. We also recorded
goodwill related to the two acquisitions completed late in 2001 of $1,061,056.
The annual impairment testing required by SFAS No. 142 will also require us to
use our judgment and could require us to write down the carrying value of our
goodwill and other intangible assets in future periods.
27
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 2000 2001
------------- ------------- -------------
Revenues ...................................... $ 15,104,788 $ 26,394,191 $ 23,983,485
Cost of revenues .............................. 11,735,407 19,266,748 17,643,151
------------- ------------- -------------
Gross profit .................................. 3,369,381 7,127,443 6,340,334
Operating expenses:
General and administrative ................ 1,795,526 3,099,730 3,658,506
------------- ------------- -------------
Operating income ........................ 1,573,855 4,027,713 2,681,828
Interest expense, net ......................... -- 4,803 38,818
------------- ------------- -------------
Income before income taxes .............. 1,573,855 4,022,910 2,643,010
Income taxes .................................. 833,613 1,842,935 1,224,379
------------- ------------- -------------
Net income .................................... $ 740,242 $ 2,179,975 $ 1,418,631
============= ============= =============
Revenues ...................................... 100.0% 100.0% 100.0%
Cost of revenues .............................. 77.7% 73.0% 73.6%
------------- ------------- -------------
Gross profit .................................. 22.3% 27.0% 26.4%
Operating expenses:
General and administrative ................ 11.9% 11.7% 15.2%
------------- ------------- -------------
Operating income ........................ 10.4% 15.3% 11.2%
Interest expense, net ......................... 0.0% 0.0% 0.2%
------------- ------------- -------------
Income before income taxes ................ 10.4% 15.2% 11.0%
Income taxes .................................. 5.5% 7.0% 5.1%
------------- ------------- -------------
Net income .................................... 4.9% 8.3% 5.9%
============= ============= =============
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000
Revenues for the year ended December 31, 2001 were $24.0 million, a
decrease of $2.4 million, or 9.1%, from $26.4 million for the year ended
December 31, 2000. Revenues increased in most major accounts, however that was
offset by a decline in AIG revenues from its peak in early 2001 due to
cancellation of several projects.
Cost of revenues for the year ended December 31, 2001 was $17.6 million, a
decrease of $1.6 million, or 8.4%. However, on a percentage of revenues basis,
the cost of revenues increased from 73.0% in 2000 to 73.6% in 2001, thus
decreasing the gross operating margin by 0.6%. The slight decrease in gross
operating margin percentage was largely due to lower revenue growth and the
impact of direct costs.
General and administrative expenses for the year ended December 31, 2001
were $3.7 million, an increase of $0.6 million, or 18.0%, from $3.1 million for
the year ended December 31, 2000, primarily due to increased sales, marketing
and administrative overhead and increased legal and professional fees.
28
The effective tax rate was 46.3% for the year ended December 31, 2001 which
is consistent with 45.8% for year ended December 31, 2000.
Year Ended December 31,2000 Compared To Year Ended December 31,1999
Revenues for the year ended December 31, 2000 were $26.4 million, an
increase of $11.3 million, or 74.7 %, from $15.1 million for the year ended
December 31, 1999. The increase was primarily due to a substantial increase in
billings to several existing customers for new projects related to e-business
systems as well as increases in consultant billing rates, partially offset by
the loss of MessageClick as a client account due to the restructuring and sale
of MessageClick.
Cost of revenues for the year ended December 31, 2000 was $19.3 million, an
increase of $7.5 million, or 64.2%, primarily due to increased salaries and
benefits paid to a larger number of consultants on billing. In addition,
included in cost of revenues for the year ended December 31, 2000 is $0.4
million related to a non-cash compensation charge for the issuance of common
stock to an officer of SanVision by its majority shareholder. However, on a
percentage of revenues basis, the cost of revenues declined from 77.7% in 1999
to 73.0% in 2000, thus increasing the gross operating margin by 4.7%. The
increase in gross operating margin percentage was largely due to higher revenue
growth versus the increase in direct costs.
General and administrative expenses for the year ended December 31, 2000
were $3.1 million, an increase of $1.3 million, or 72.6%, from $1.8 million for
the year ended December 31, 1999, primarily due to increased sales, marketing
and administrative overhead costs, increased legal and professional fees, as
well as a write off of approximately $0.4 million resulting from the settlement
of accounts receivable in connection with the restructuring and sale of
MessageClick, a former client of SVT. In addition, included in general and
administrative expenses for the year ended December 31, 2000 is $0.4 million
related to a non-cash compensation charge for the issuance of common stock to an
officer of SanVision by its majority shareholder.
The effective tax rate was 45.8% for the year ended December 31, 2000 as
compared with 53.0% for the year ended December 31, 1999. The higher effective
rate in 1999 was due to the impact of certain non-deductible expenses based on
the lower taxable income in 1999 as compared to 2000.
Quarterly Results of Operations
The following tables present certain unaudited consolidated quarterly
financial information for each quarter in the years ended December 31, 2000 and
2001. In the opinion of SanVision's management, this information has been
prepared on the same basis as the consolidated financial statements appearing
elsewhere in this report and includes all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial results set
forth herein. Results of operations for any previous quarter are not necessarily
indicative of results for any future period.
29
MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31
2000 2000 2000 2000 2001
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 5,777,938 $ 5,893,813 $ 6,985,961 $ 7,736,479 $ 7,421,191
Cost of revenues ................ 4,230,815 4,287,704 5,020,113 5,728,116 5,281,850
----------- ----------- ----------- ----------- -----------
Gross profit .................... 1,547,123 1,606,109 1,965,848 2,008,363 2,139,341
Operating expenses:
General and administrative ...... 821,690 506,903 933,731 837,406 765,921
----------- ----------- ----------- ----------- -----------
Operating income (loss) ......... 725,433 1,099,206 1,032,117 1,170,957 1,373,420
Interest expense, net ........... 136 3,667 (1,498) 2,498 (1,580)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 725,297 1,095,539 1,033,615 1,168,459 1,375,000
Income taxes .................... 332,266 501,877 473,509 535,283 622,047
----------- ----------- ----------- ----------- -----------
Net income (loss) ............... $ 393,031 $ 593,662 $ 560,106 $ 633,176 $ 752,953
=========== =========== =========== =========== ===========
Earnings per share (basic
and diluted) ................. $ 0.01 $ 0.02 $ 0.02 $ 0.02 $ 0.03
Weighted average number of shares
outstanding .................. 29,887,454 29,887,454 29,887,454 29,887,454 29,887,454
JUNE 30 SEP. 30 DEC. 31
2001 2001 2001
----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 5,833,665 $ 5,292,381 $ 5,436,248
----------- ----------- -----------
Cost of revenues ................ 4,166,978 3,867,148 4,327,175
Gross profit .................... 1,666,687 1,425,233 1,109,073
Operating expenses:
General and administrative ...... 834,832 935,792 1,121,961
----------- ----------- -----------
Operating income (loss) ......... 831,855 489,441 (12,888)
Interest expense, net ........... 29,763 (18,249) 28,884
----------- ----------- -----------
Income (loss) before income taxes 802,092 507,690 (41,772)
Income taxes .................... 362,864 223,241 16,227
----------- ----------- -----------
Net income (loss) ............... $ 439,228 $ 284,449 $ (57,999)
=========== =========== ===========
Earnings per share (basic
and diluted) ................. $ 0.01 $ 0.01 $ --
Weighted average number of shares
outstanding .................. 29,887,454 29,887,454 29,887,454
30
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, SanVision had net working capital of $3,042,000
composed primarily of accounts receivable and cash and cash equivalents.
SanVision has historically financed, and 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, collection of accounts receivable
and tax payments. For this reason, in May 2000, SanVision obtained a revolving
credit facility for $3,000,000 which provided for borrowings up to the available
borrowing base, based on the amount of eligible accounts receivable outstanding
at the end of the previous month. This credit facility was terminated in early
2002 as a result of the lender's filing for bankruptcy protection. SVT has been
negotiating a new revolving credit facility for $3.5 million which we anticipate
will be available beginning in May of 2002.
Net cash provided by operating activities was $3,497,000 for the year ended
December 31, 2001, as compared to net cash used in operating activities of
$55,000 for the year ended December 31, 2000. The increase in cash provided by
operating activities is due primarily to a significant decrease in accounts
receivable offset by a decrease in accounts payable.
Net cash used in investing activities was $4,023,000 for the year ended
December 31, 2001, as compared to $82,000 for the year ended December 31, 2000.
The net cash used in investing activities for 2001 was related to the net cash
paid of $3,207,000 for two business acquisitions completed in late 2001, a
deposit payment of $800,000 for a business acquisition which was effective in
January, 2002 and purchases of property and equipment of $17,000. The cash for
2000 was used for purchases of property and equipment.
Net cash provided by financing activities was $40,000 for the year ended
December 31, 2001, as compared to $12,000 provided by financing activities for
the year ended December 31, 2000. The cash provided by financing activities in
2001 and 2000 was in connection with borrowings under SanVision's $3,000,000
revolving line of credit facility.
Due to the September 11th tragedy, SanVision's offices in downtown
Manhattan were inaccessible for about two weeks and the communication links were
down for almost four weeks. Most of SanVision's consultants work on projects at
client locations in downtown Manhattan. Business was disrupted primarily at five
clients who are located in the New York City downtown area and who accounted for
a substantial part of SanVision's revenues in the year ended December 31, 2001.
Management estimates that SanVision's total financial loss was approximately
$200,000. While one client formerly located in 7 World Trade Center has
temporarily relocated to New Jersey, no loss of business is expected from this
client as a result of the relocation, and none of SanVision's other clients have
advised SanVision that they intend to relocate permanently from downtown
Manhattan.
31
In the normal course of business, the Company has entered into obligations
and commitments to make future payments under debt and lease agreements as
summarized in the table below:
PAYMENTS DUE BY PERIOD
------------------------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
-------- -------- -------- --------- ---------
Line of credit . ............ $ 51,614 $ 51,614 $ -- $ -- $ --
Operating leases ............ 273,890 175,668 98,222 -- --
-------- -------- -------- --------- ---------
$325,504 $227,282 $ 98,222 $ -- $ --
======== ======== ======== ========= =========
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
SanVision 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.
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. SVT
has not yet determined what the impact of the impairment tests will be upon
implementing the provisions of this statement.
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 SVT will test the impairment of its goodwill under the
provisions of SFAS No. 142. SFAS No. 144 is effective for fiscal years
32
beginning after December 15, 2001. SVT management does not believe that adoption
of this statement will materially impact its financial position, cash flows or
results of operations.
SWWT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On April 14, 2000, SWWT and its newly-formed wholly-owned subsidiary ENWC
Acquisition, Inc. entered into a merger agreement with E-Newco. The merger,
which became effective on April 24, 2000, was accounted for as a purchase of
SWWT by E-Newco in a "reverse acquisition" because the pre-merger stockholders
of SWWT did not have voting control of the combined entity after the merger. In
a reverse acquisition, the accounting treatment differs from the legal form of
transaction, because the continuing legal parent company, SWWT, is not assumed
to be the acquirer and the financial statements of the combined entity are those
of the accounting acquirer (E-Newco), including any comparative prior year
financial statements presented by the combined entity after the business
combination. Consequently, the December 31, 2000 financial statements included
herein are those of E-Newco as adjusted for the recapitalization described
below. No pro-forma information giving effect to the acquisition is required
because SWWT, prior to the merger, was a public corporation without substantial
business operations. In accordance with the reverse acquisition accounting
treatment, the capital accounts of E-Newco were recapitalized to give effect to
the merger exchange ratio (757,778 shares of series B convertible preferred
stock of SWWT for each share of common stock of E-Newco).
RESULTS OF OPERATIONS
SWWT had no operations for the period ended December 31, 2000. For the
period from January 7, 2000 (inception) through December 31, 2000, SWWT incurred
a net loss of $(1,503,150) or $(.96) per share. Operating costs of $1,589,605
consisted primarily of accrued payroll expenses ($241,000), insurance expense
($210,000), professional fees ($365,000), write down due to permanent impairment
of SWWT's investment in SchoolNet ($250,000) and write-off of the advance
receivable from DigaFuel ($435,000). Offsetting these costs was other income of
$86,455 principally related to interest income from the notes receivable and
short-term cash investments.
SWWT had no operations in the year ended December 31, 2001, and incurred a
net loss of $(1,092,133) or $(.70) per share. General and administrative costs
of $1,170,836 principally related to professional fees, insurance expenses and
payroll expenses. Offsetting these costs was other income of $78,703,
principally related to interest income from the note receivable and short-term
cash investments.
General and administrative expenses increased $266,231 or 29.4% for the
year ended December 31, 2001, as compared to the period from January 7, 2000
(inception) through December 31, 2000, due mainly to an increase in professional
fees in 2001 related to the merger.
33
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $616,797 for the year ended
December 31, 2001, as compared with $735,017 for the year ended December 31,
2000. SWWT had working capital of $229,117 at December 31, 2001.
In connection with the Combination with SanVision, the shareholders of
SWWT rescinded their election that SWWT redeem the series B preferred stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As discussed in the notes to the SanVision financial statements in Item 8
of this report, until earlier this year SanVision's only interest-bearing debt
obligation was a $3.0 million revolving line of credit which bore interest at
the lender's prime rate plus 1%. There were only minimal borrowings under this
line of credit, which terminated in early 2002.
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.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
SWWT, INC. Page
Report of Independent Public Accountants...................................................................... 36
Report of Independent Auditors................................................................................ 37
Balance Sheets as of December 31, 2000 and 2001............................................................... 38
Statements of Operations for the period from January 7, 2000 (inception) to
December 31, 2000, and for the year ended December 31, 2001.............................................. 39
Statements of Changes in Stockholders' Deficit for the period from January 7, 2000 (inception) to December 31,
2000, and for the year ended December 31, 2001........................................................... 40
Statements of Cash Flows for the period from January 7, 2000 (inception) to
December 31, 2000, and for the year ended December 31, 2001.............................................. 41
Notes to Financial Statements................................................................................. 42
SANVISION TECHNOLOGY INC.
Report of Independent Public Accountants...................................................................... 51
Consolidated Balance Sheets as of December 31, 2000 and 2001.................................................. 52
Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001.................... 53
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 2000
and 2001................................................................................................. 54
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001.................... 55
Notes to Consolidated Financial Statements................................................................... 56
SVT INC. PRO FORMA (UNAUDITED)
Pro Forma Condensed Combined Financial Information............................................................ 70
Pro Forma Condensed Combined Balance Sheet as of December 31, 2001............................................ 71
Pro Forma Condensed Statement of Operations for the year ended December 31, 2001.............................. 73
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SWWT, Inc.:
We have audited the accompanying balance sheet of SWWT, Inc. (a Delaware
corporation) as of December 31, 2001, and the related statements of operations,
changes in stockholders' deficit and cash flows for the year ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SWWT, Inc. as of December
31, 2001, and the results of its operations and its cash flows for the year
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 20, 2002
36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SWWT, Inc.:
We have audited the accompanying balance sheet of SWWT, Inc. as of December
31, 2000 and the related statements of operations, changes in stockholders'
deficit and cash flows from January 7, 2000 (date of inception) to December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SWWT, Inc. at December 31,
2000 and the results of its operations and its cash flows from January 7, 2000
(date of inception) to December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
SWWT, Inc. will continue as a going concern. As more fully described in Note 1,
the Company had a substantial net loss since inception and may be required to
redeem its Series B Preferred Stock, which would eliminate the Company's cash
balance and negatively impact the Company's ability to satisfy its obligations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
New York, New York
April 12, 2001
37
SWWT, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
2000 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 1,654,983 $ 1,038,186
Prepaid expenses ......................................... 95,594 --
Interest receivable ...................................... 18,037 42,694
----------- -----------
Total current assets ................................. 1,768,614 1,080,880
Investment ................................................... 250,000 250,000
----------- -----------
Total assets ......................................... $ 2,018,614 $ 1,330,880
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses .......................................... $ 446,764 $ 851,163
----------- -----------
Series B Preferred stock, $.001 par value;
1,000,000 shares authorized, 757,778 shares
issued and outstanding .................................... 3,485,955 3,485,955
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value;
50,000,000 shares authorized,
757,778 shares of Series B shares issued
and outstanding ........................................... -- --
Common stock, $.001 par value;
750,000,000 shares authorized,
1,561,127 shares issued and outstanding ................... 1,561 1,561
Additional paid-in capital ................................... 1,561 1,561
Accumulated deficit .......................................... (1,506,272) (2,598,405)
Note receivable .............................................. (410,955) (410,955)
----------- -----------
Total stockholders' deficit .......................... (1,914,105) (3,006,238)
----------- -----------
Total liabilities and stockholders' deficit .......... $ 2,018,614 $ 1,330,880
=========== ===========
The accompanying notes are an integral part of these financial statements.
38
SWWT, INC.
STATEMENTS OF OPERATIONS
JANUARY 7, 2000
(INCEPTION) TO YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
----------------- -----------
Operating expenses:
General and administrative expenses ....................... $ 904,605 $ 1,170,836
Impairment charge for investment .......................... 250,000 --
Write-off of advance related to investment ................ 435,000 --
----------------- -----------
Total operating expenses ..................................... 1,589,605 1,170,836
Other income:
Interest income ........................................... 86,455 78,703
----------------- -----------
Net loss ..................................................... $ (1,503,150) $(1,092,133)
================= ===========
Net loss per share - basic and diluted ....................... $ (0.96) $ (0.70)
================= ===========
Basic and diluted weighted average shares
outstanding ............................................... 1,561,127 1,561,127
================= ===========
The accompanying notes are an integral part of these financial statements.
39
SWWT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN NOTE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT DEFICIT
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 7, 2000 .......... -- $ -- $ -- $ -- $ -- $ --
Contributed capital from
SWWT as a result of the
merger ......................... 1,561,127 1,561 1,561 -- (3,122) --
Note receivable on sale
of restricted stock ............ -- -- -- (410,955) -- (410,955)
Net loss .......................... -- -- -- -- (1,503,150) (1,503,150)
----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2000 .............. 1,561,127 1,561 1,561 (410,955) (1,506,272) (1,914,105)
Net loss .......................... -- -- -- -- (1,092,133) (1,092,133)
----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2001 .............. 1,561,127 $ 1,561 $ 1,561 $ (410,955) $(2,598,405) $(3,006,238)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
40
SWWT, INC.
STATEMENTS OF CASH FLOWS
JANUARY 7, 2000 YEAR ENDED
(INCEPTION) TO DECEMBER 31,