UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x | QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-23590
SUPER VISION INTERNATIONAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE | 59-3046866 | |
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
8210 PRESIDENTS DR., ORLANDO, FLORIDA 32809
(Address of Principal Executive Offices) (Zip Code)
(407) 857-9900
(Issuers Telephone Number, Including Area Code)
Securities registered under Section 12 (b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
CLASS A COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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 ¨
State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date.
Class |
Outstanding at November 11, 2004: | |
Class A Common Stock, $.001 par value | 2,058,814 shares | |
Class B Common Stock, $.001 par value | 483,264 shares |
Transitional Small Business Disclosure Format Yes ¨ No x
Super Vision International, Inc.
Page | ||||||
PART I. |
FINANCIAL INFORMATION |
|||||
Item 1. |
Condensed Consolidated Financial Statements |
|||||
Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003 |
1 | |||||
2 | ||||||
3 | ||||||
Notes to Condensed Consolidated Financial Statements (unaudited) |
4 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
9 | ||||
Item 3. |
17 | |||||
PART II |
||||||
Item 1. |
18 | |||||
Item 6. |
18 | |||||
EXHIBITS |
Super Vision International, Inc.
Condensed Consolidated Balance Sheets
September 30, 2004 |
December 31, 2003 |
|||||||
Unaudited | ||||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 950,674 | $ | 1,507,360 | ||||
Investments |
897,700 | 873,099 | ||||||
Trade accounts receivable, less allowance for doubtful accounts of $139,120 and $127,830 |
1,778,482 | 1,342,997 | ||||||
Inventories, less reserve of $210,031 and $130,885 |
2,613,342 | 2,194,452 | ||||||
Prepaid expense |
151,873 | 100,099 | ||||||
Other assets |
14,349 | 8,719 | ||||||
Total current assets |
6,406,420 | 6,026,726 | ||||||
Property and Equipment |
7,425,003 | 7,378,636 | ||||||
Accumulated depreciation and amortization |
(4,433,157 | ) | (4,068,719 | ) | ||||
Net property and equipment |
2,991,846 | 3,309,917 | ||||||
Goodwill |
17,781 | 17,781 | ||||||
Patents and trademarks, less amortization of $78,785 and $65,469 |
132,463 | 130,773 | ||||||
Other assets |
134,394 | 137,451 | ||||||
$ | 9,682,904 | $ | 9,622,648 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 1,519,394 | $ | 1,214,206 | ||||
Accrued compensation and benefits |
74,050 | 79,510 | ||||||
Deposits |
19,484 | 14,805 | ||||||
Current portion of obligation under capital lease with related party |
173,027 | 142,780 | ||||||
Total current liabilities |
1,785,955 | 1,451,301 | ||||||
Obligation under capital lease with related party, less current portion |
2,570,410 | 2,709,571 | ||||||
Stockholders Equity: |
||||||||
Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued |
| | ||||||
Class A common stock, $.001 par value, 6,610,866 shares authorized, 2,058,814 and 2,057,314 issued and outstanding |
2,059 | 2,058 | ||||||
Class B common stock, $.001 par value, 3,389,134 shares authorized, 483,264 issued and outstanding. Each share of Class B common stock is entitled to five votes per share. |
483 | 483 | ||||||
Additional paid-in-capital |
10,564,358 | 10,556,883 | ||||||
Accumulated deficit |
(5,229,910 | ) | (5,076,838 | ) | ||||
Accumulated other comprehensive loss |
(10,451 | ) | (20,810 | ) | ||||
Total stockholders equity |
5,326,539 | 5,461,776 | ||||||
$ | 9,682,904 | $ | 9,622,648 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
Super Vision International, Inc.
Condensed Consolidated Statements of Operations Unaudited
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Revenues |
$ | 2,991,329 | $ | 2,931,830 | $ | 8,870,065 | $ | 7,918,309 | ||||||||
Cost of sales |
1,875,883 | 1,508,208 | 5,447,036 | 4,512,108 | ||||||||||||
Gross margin |
1,115,446 | 1,423,622 | 3,423,029 | 3,406,201 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
1,014,171 | 1,069,363 | 3,041,177 | 3,148,747 | ||||||||||||
Research and development |
108,869 | 88,401 | 340,935 | 304,698 | ||||||||||||
Total operating expenses |
1,123,040 | 1,157,764 | 3,382,112 | 3,453,445 | ||||||||||||
Operating income (loss) |
(7,594 | ) | 265,858 | 40,917 | (47,244 | ) | ||||||||||
Non-Operating Income (Expense): |
||||||||||||||||
Interest income |
7,612 | 7,197 | 20,054 | 22,212 | ||||||||||||
Interest expense |
(97,147 | ) | (101,137 | ) | (295,108 | ) | (306,873 | ) | ||||||||
Loss on disposal of fixed assets |
| (12,967 | ) | (21,451 | ) | (2,621 | ) | |||||||||
Other income |
34,284 | 47,487 | 102,516 | 214,544 | ||||||||||||
Total non-operating expense |
(55,251 | ) | (59,420 | ) | (193,989 | ) | (72,738 | ) | ||||||||
Net Income (Loss) |
$ | (62,845 | ) | $ | 206,438 | $ | (153,072 | ) | $ | (119,982 | ) | |||||
Net Income (Loss) Per Common Share: |
||||||||||||||||
Basic and diluted |
$ | (0.02 | ) | $ | 0.08 | $ | (0.06 | ) | $ | (0.05 | ) | |||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
2,542,078 | 2,540,578 | 2,541,441 | 2,540,426 | ||||||||||||
Diluted |
2,542,078 | 2,556,486 | 2,541,441 | 2,540,426 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Super Vision International, Inc.
Condensed Consolidated Statements of Cash Flows unaudited
Nine Months Ended September 30, |
||||||||
2004 |
2003 |
|||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (153,072 | ) | $ | (119,982 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation |
430,291 | 487,814 | ||||||
Amortization of intangible assets and other assets |
44,702 | 31,894 | ||||||
Bond premium amortization |
| 1,021 | ||||||
Loss on disposal of fixed assets |
21,451 | 2,621 | ||||||
Changes in operating assets and liabilities: |
||||||||
(Increase) decrease in: |
||||||||
Trade accounts receivable, net |
(435,485 | ) | 376,381 | |||||
Inventories |
(418,890 | ) | 799,246 | |||||
Prepaid expense |
(51,774 | ) | 2,395 | |||||
Other assets |
(33,960 | ) | 1,651 | |||||
Increase (decrease) in: |
||||||||
Accounts payable |
305,188 | (985,375 | ) | |||||
Accrued compensation and benefits |
(5,460 | ) | (17,635 | ) | ||||
Deposits |
4,679 | (42,751 | ) | |||||
Total adjustments |
(139,258 | ) | 657,262 | |||||
Net cash (used in) provided by operating activities |
(292,330 | ) | 537,280 | |||||
Cash Flows from Investing Activities: |
||||||||
Purchase of property and equipment |
(133,671 | ) | (114,089 | ) | ||||
Purchase of investments |
(14,242 | ) | (19,027 | ) | ||||
Proceeds from sale of investments |
| 546,295 | ||||||
Proceeds from disposal of fixed assets |
| 18,817 | ||||||
Acquisition of patents and trademarks |
(15,005 | ) | (2,440 | ) | ||||
Net cash (used in) provided by investing activities |
(162,918 | ) | 429,556 | |||||
Cash Flows from Financing Activities: |
||||||||
Payments on capital lease obligation |
(108,914 | ) | (84,588 | ) | ||||
Proceeds from exercise of employee stock options |
7,476 | 748 | ||||||
Net cash used in financing activities |
(101,438 | ) | (83,840 | ) | ||||
Net (Decrease) Increase in Cash and Cash Equivalents |
(556,686 | ) | 882,996 | |||||
Cash and Cash Equivalents, beginning of period |
1,507,360 | 363,234 | ||||||
Cash and Cash Equivalents, end of period |
$ | 950,674 | $ | 1,246,230 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Super Vision International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
The accompanying condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Companys financial position, results of operations, and cash flows as of and for the dates and periods presented. The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.
These unaudited condensed consolidated financial statements should be read in conjunction with the Companys audited financial statements and footnotes included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003 filed with the Securities and Exchange Commission. The results of operations for the nine month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2004 or for any future period.
1. | Summary of Significant Accounting Policies |
Our accounting policies are as set forth in the notes to consolidated financial statements referred to above.
Basis of Consolidation - The consolidated financial statements include the accounts of Super Vision International, Inc. and its wholly owned subsidiary Oasis Waterfalls, LLC (collectively, the Company). All significant inter-company balances and transactions have been eliminated. Effective May 31, 2003, Oasis Waterfalls LLC was merged with and into Super Vision International, Inc.
Investments Marketable equity securities and debt securities are classified either as available-for-sale or held to maturity. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders equity. The amortized costs of debt securities in this category are adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in other income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income. The costs of securities sold are based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income. The Company accounts for investments in debt securities as held-to-maturity and records the investments at amortized cost when the Company has the positive intent and ability to hold those securities to maturity. The Company had no debt securities at September 30, 2004.
The amortized cost, unrealized gains, and fair values of the Companys investments held at September 30, 2004 are summarized as follows:
Amortized Costs |
Gross Unrealized Gains |
Estimated Value | |||||||
Available-for-sale securities: |
|||||||||
Fixed Income Funds |
$ | 826,361 | $ | 10,127 | $ | 836,488 | |||
Money Market Funds |
60,888 | 324 | 61,212 | ||||||
$ | 887,249 | $ | 10,451 | $ | 897,700 | ||||
Stock-based compensation - The Company accounts for its stock-based employee compensation plans under the accounting provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and has furnished the pro forma disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure.
4
Super Vision International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. | Summary of Significant Accounting Policies (continued): |
Stock-based compensation contd:
The Company applies the disclosure-only provisions of SFAS No. 123, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based employee compensation plans. Accordingly, no compensation expense has been recognized for stock options granted under the plans since they were granted at or above market price. If the Company had elected to recognize compensation expense for stock options based on the fair value at grant date, consistent with the method prescribed by SFAS No. 123, net income (loss) and income (loss) per share would have been adjusted to the pro forma amounts shown below:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income (loss), as reported |
$ | (62,845 | ) | $ | 206,438 | $ | (153,072 | ) | $ | (119,982 | ) | |||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |
(15,429 | ) | (17,723 | ) | (155,638 | ) | (69,703 | ) | ||||||||
Pro forma net income (loss) |
$ | (78,274 | ) | $ | 188,715 | $ | (308,710 | ) | $ | (189,685 | ) | |||||
Income (Loss) per share: |
||||||||||||||||
Basic as reported |
$ | (0.02 | ) | $ | 0.08 | $ | (0.06 | ) | $ | (0.05 | ) | |||||
Basic pro forma |
$ | (0.03 | ) | $ | 0.07 | $ | (0.12 | ) | $ | (0.07 | ) | |||||
Diluted as reported |
$ | (0.02 | ) | $ | 0.08 | $ | (0.06 | ) | $ | (0.05 | ) | |||||
Diluted pro forma |
$ | (0.03 | ) | $ | 0.08 | $ | (0.12 | ) | $ | (0.07 | ) |
These pro forma amounts were determined using the Black-Scholes Valuation model with the following key assumptions: (a) an average discount rate of 3% and 6.17% for 2004 and 2003; (b) a volatility factor of 42.6% and 53% for 2004 and 2003, respectively; and (c) an average expected option life of 7 years for 2004 and 2003.
New accounting pronouncements The Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting guidance during 2004. The Company has carefully considered the new pronouncements that altered generally accepted accounting principles and, other than disclosed in these notes to the consolidated financial statements, does not believe that any new or modified principles will have a material impact on the Companys reported financial position or operations in the near term.
Reclassifications- Certain items in the financial statements of the prior period have been reclassified to conform with current period presentation.
5
Super Vision International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
2. | Inventories: |
Inventories consist of the following:
September 30, 2004 |
December 31, 2003 |
|||||||
Raw materials |
$ | 1,922,919 | $ | 1,594,494 | ||||
Work in process |
12,958 | 895 | ||||||
Finished goods |
887,496 | 729,948 | ||||||
2,823,373 | 2,325,337 | |||||||
Less: Reserve for obsolescence |
(210,031 | ) | (130,885 | ) | ||||
Net inventories |
$ | 2,613,342 | $ | 2,194,452 | ||||
3. | Capital Lease Obligation with Related Party: |
The Company leases its operating facility from a corporation owned by the Companys chief executive officer. The lease has a fifteen-year term extending through June 15, 2012. Assets recorded under this capital lease included in property and equipment are as follows:
September 30, 2004 |
December 31, 2003 |
|||||||
Office/Warehouse building |
$ | 3,081,000 | $ | 3,081,000 | ||||
Less accumulated amortization |
(1,489,150 | ) | (1,335,100 | ) | ||||
$ | 1,591,850 | $ | 1,745,900 | |||||
Future minimum annual lease payments for the remainder of 2004 and years subsequent thereto in the aggregate are as follows:
2004 |
$ | 160,281 | ||
2005 |
659,821 | |||
2006 |
673,176 | |||
2007 |
692,811 | |||
2008 |
706,836 | |||
2009 and thereafter |
2,558,420 | |||
Minimum lease payments |
5,451,345 | |||
Less amount representing interest and executory costs |
(2,707,908 | ) | ||
Present value of net minimum lease payments under capital lease |
$ | 2,743,437 | ||
Deposits included in other assets paid under this lease agreement totaled $59,167 at September 30, 2004.
6
Super Vision International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
4. | Stock Option Plan: |
The Company adopted a stock option plan in 1994 (the 1994 Plan) that provided for the grant of incentive stock options and nonqualified stock options, and reserved 450,000 shares of the Companys Class A Common Stock for future issuance under the plan. The option price must be at least 100% of market value at the date of the grant and the options have a maximum term of 10 years.
The following table summarizes activity of the 1994 Plan for the nine months ended September 30, 2004:
Number of Shares Under Option |
Option Price Per Share | |||||
Balance, January 1, 2004 |
272,817 | $ | 1.90 -$9.00 | |||
Options exercised |
(1,500 | ) | $ | 5.00 | ||
Options cancelled |
(14,100 | ) | $ | 2.50 -$6.50 | ||
Balance, September 30, 2004 |
257,217 | $ | 1.90 -$9.00 | |||
Options granted typically vest ratably over a three-year period or vest based on achievement of performance criteria. As of September 30, 2004, options to purchase 235,685 shares of Class A common stock were vested and exercisable under this plan. The Board of Directors has determined that no new options will be granted under the 1994 Plan.
On September 18, 2003, the Company adopted a new stock option plan (the 2003 Plan) that provides for the grant of incentive stock options and nonqualified stock options, and reserved 450,000 additional shares of the Companys Class A Common Stock for future issuance under the plan. The option price of incentive stock options must be at least 100% of market value at the date of the grant and incentive stock options have a maximum term of 10 years.
The following table summarizes activity of the 2003 Plan for the nine months ended September 30, 2004:
Number of Shares Under Option |
Option Price Per Share | |||||
Balance, January 1, 2004 |
82,100 | $ | 3.45 -$4.05 | |||
Options granted |
17,700 | $ | 3.95 -$6.06 | |||
Options cancelled |
(5,000 | ) | $ | 3.87 | ||
Balance, September 30, 2004 |
94,800 | $ | 3.45 -$6.06 | |||
Options granted typically vest ratably over a three-year period or vest based on achievement of performance criteria. As of September 30, 2004, options to purchase 51,033 shares of Class A common stock were vested and exercisable under this plan.
7
Super Vision International, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
5. | Earnings (Loss) per Share: |
The following is a reconciliation of basic net earnings (loss) per share to diluted net earnings (loss) per share:
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) (numerator for basic and diluted loss per share) |
$ | (62,845 | ) | $ | 206,438 | $ | (153,072 | ) | $ | (119,982 | ) | |||||
Denominator: |
||||||||||||||||
Denominator for basic loss per share -weighted average shares |
2,542,078 | 2,540,578 | 2,541,441 | 2,540,426 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
In-the-money shares under warrants and stock option agreements |
| 53,334 | | | ||||||||||||
Less: shares assumed repurchased under treasury stock method |
| (37,426 | ) | | | |||||||||||
Weighted average shares outstanding-diluted |
2,542,078 | 2,556,486 | 2,541,441 | 2,540,426 | ||||||||||||
Basic earnings (loss) per share |
$ | (0.02 | ) | $ | 0.08 | $ | (0.06 | ) | $ | (0.05 | ) | |||||
Diluted earnings (loss) per share |
$ | (0.02 | ) | $ | 0.08 | $ | (0.06 | ) | $ | (0.05 | ) | |||||
Employee stock options and certain outstanding warrants are not included in the computation of earnings (loss) per share for the three and nine months ended September 30, 2004 and 2003 because the related shares are contingently issuable or to do so would have been anti-dilutive. At September 30, 2004 and 2003, the Company had 819,729 and 812,946 potentially dilutive common shares, respectively.
6. | Contingencies: |
In the ordinary course of business the Company has various pending legal proceedings generally involving contractual matters, infringement actions, product liability claims and other matters. There has been no material change in the Companys pending legal proceedings from the descriptions contained in Part I, Item 3 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003 and Footnote 11 to the Companys Consolidated Financial Statements contained therein, as supplemented by the descriptions contained in Part II, Item I of the Companys Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 and Footnote 6 to the Companys Condensed Consolidated Financial Statements contained therein.
8
I tem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information that management believes is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report and in the audited Consolidated Financial Statements and related Notes to Consolidated Financial Statements contained in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003.
Except for the historical information contained here, the discussions in this report contain certain forward-looking statements within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended, the attainment of which involve various risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking terminology such as may, will, should, expect, plan, believe, estimate, anticipate, continue, predict, forecast, intend, potential, or similar terms, variations of those terms or the negative of those terms. The Companys actual results may differ materially from those described in these forward-looking statements due to, among other factors, competition in each of the Companys product areas, dependence on suppliers, the Companys limited manufacturing experience, the condition of the international marketplace and the evolving nature of the Companys fiber optic and LED lighting technology. Additional information concerning these or other factors which could cause actual results to differ materially from those contained or projected in, or even implied by, such forward-looking statements is contained in this report and also from time to time in the Companys other Securities and Exchange Commission filings. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking information will prove to be accurate. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company is under no duty to update any of the forward-looking statements after the date of this report on Form 10-QSB to conform its prior statements to actual results.
Overview
The Company designs, manufactures, markets and sells LED and fiber optic lighting products for applications in the signage, swimming pool, architectural, and retail industries. The Company derives its revenues primarily from sales of SIDE-GLOW® and END-GLOW® fiber optic lighting cables, and fiber optic lighting sources, accessories, endpoint signs and displays and LED lighting products and systems. The Company also designs, manufactures, markets and sells fiber optically lit waterfalls and water features. The Company markets and distributes products both in the domestic and international markets primarily through a network of independent sales representatives and distributors.
Sales of fiber optic lighting products and systems accounted for 47% and 69% of the Companys revenue during the quarters ended September 30, 2004 and 2003, respectively, while sales of LED lighting products and systems accounted for 49% and 26% of the Companys revenue for the quarters ended September 30, 2004 and 2003, respectively. Sales of waterfall products accounted for 4% and 5% of the Companys revenue during the quarters ended September 30, 2004 and 2003, respectively. Although we anticipate that revenue share for our LED applications will continue to increase, we believe that sales of our fiber optic applications will remain strong in certain markets such as international, pools and certain architectural and specialized applications such as display case and other unique accent lighting. The Company continues working towards broadening market applications for both product lines through the development of products designed to capture markets that have not been traditionally serviced by either fiber optic or LED lighting. The Company believes that this may result in a strong source of additional revenue in the future.
Management focuses on key indicators in order to measure the Companys performance. In the short-term (1-3 years), management is working towards achieving and maintaining positive trends in the following areas:
| Operating cash flow |
| Gross margin in dollars and percentage of gross sales |
| Operating expenses |
| Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) |
| Liquidity |
| Key balance sheet ratios (Accounts Receivable/Accounts Payable/Inventory turnover) |
9
| Profitability |
| Shareholder Value |
| Developing new LED and fiber optic lighting products |
In the long term (over 3 years), management is striving to generate consistent and predictable net sales growth while incrementally enhancing net cash flow from operations.
Three months ended September 30, 2004 vs. 2003
Results of Operations
(Unaudited) Quarter Ended September 30, |
|||||||||||||||
2004 |
2003 |
Change |
% Change |
||||||||||||
Revenues |
$ | 2,991,329 | $ | 2,931,830 | $ | 59,499 | 2 | % | |||||||
Cost of Sales |
1,875,883 | 1,508,208 | 367,675 | 24 | % | ||||||||||
Gross Margin |
$ | 1,115,446 | $ | 1,423,622 | $ | (308,176 | ) | (22 | )% | ||||||
Gross Margin % |
37 | % | 49 | % | |||||||||||
Revenues for the three months ended September 30, 2004 were approximately $2,991,000 as compared to approximately $2,932,000 for the three months ended September 30, 2003, an increase of approximately $59,000 or 2%. Revenue growth in the period was seen primarily in the pool & spa market, $429,000, and the international market, $61,000. The increase in revenue in the pool and spa market was primarily due to original equipment manufacturer (OEM) sales of LED based products to major spa manufacturers. The increase in revenue in the international market was mainly due to sales in the Asia Pacific region and Latin America where the Company had little or no prior market presence. These increases were offset by decreases in national account sales, and sales in the architectural lighting and the sign lighting markets (now combined as commercial lighting) of approximately $56,000 and $375,000, respectively. The decrease in revenue in the national accounts market was primarily a result of an initiative to absorb most of these accounts into the architectural division to further streamline operations. The decrease in revenue in the commercial lighting market was primarily driven by decreases in sign lighting sales volume as a result of the consolidation of sign and architectural lighting divisions into the commercial lighting division at the beginning of the quarter ended September 30, 2004. Management anticipates that this consolidation, while initially causing a temporary decline in revenue from signs, will eventually lead to a more focused and broader approach on servicing sign lighting customers through our current network of commercial lighting agents across the US and Canada. This change allows our network of eighty one independent lighting sales representatives to sell the Companys LED and fiber optic lighting systems and other products to the commercial market. We expect to see benefits from this strategy during late 2004 and the 1st quarter of 2005 as our independent agents are trained and equipped with basic knowledge of the products and effective selling tools. We also plan to focus on national accounts by encouraging key national account personnel to devote efforts to promoting growth in this market. Revenues from the sale of LED lighting systems, fiber optic lighting systems and waterfall products were 49%, 47% and 4% of total revenue during the three month period, respectively.
Gross margin for the quarter ended September 30, 2004 was approximately $1,115,000 or 37% as compared to approximately $1,424,000 or 49% for the quarter ended September 30, 2003. Gross margin is dependent, in part, on product mix, revenue mix among our three markets commercial, pools & spas and international, as well as the demands of customers, which fluctuate from time to time. The decrease in gross margin percent primarily resulted from the decline in revenues from the sale of fiber optic products, particularly within the commercial lighting market, which are normally sold at higher gross margins, and the increase in sales of lower gross margin LED products, particularly to recently established pool and spa OEM accounts. Price discounts offered on both product lines during the period due to market competition further contributed to the reduction in gross margin.
Management expects to see improvement in gross margin in the fourth quarter of 2004 and beyond through continuing new product cost management, improving product quality, continuing manufacturing process improvements and introducing new LED product applications that the Company expects to introduce to the market at higher gross margins as part of its plans to maximize market share. Management also anticipates increased revenues to come from its international
10
and commercial markets at their normal higher gross margin levels. Management recognizes that continued competitive market pressures remain on its fiber optic products in both international and domestic markets. However, management expects modest price increases on fiber optic products in the near future as part of an anticipated price increase within the lighting industry to offset certain raw material price increases. The Company also anticipates that increased sales volume will help compensate for the lost gross margin dollars resulting from increased revenue and reduced product costing for LED products. Specific initiatives which management is implementing include, but are not limited to, the following:
1. Product Quality:
a. Continuing improvement of product quality through a more specific checklist-driven ongoing inspection of products from our offshore manufacturing partners.
b. Continuing product quality review by the Company and focused follow through and closure of quality issues, as well as documented, preventive procedures to mitigate possible recurrences.
c. Clearly defined accountability for manufacturing personnel and supervisors regarding quality control within the Company.
2. Product Pricing and Sourcing:
a. Continuing drive for more favorable product costing and sourcing through value-added re-engineering and manufacturing efficiencies.
b. Proper product specifications during the early stages of product development leading to objective product costing and leveraged pricing negotiations prior to production.
3. Inventory Management
a. Focusing on the Companys need to maintain proper inventory levels to ensure competitive lead times versus the risk of inventory obsolescence due to changing technology and customer requirements.
b. Focusing on reducing inventory levels and implementing improved inventory planning to avoid excessive shipping charges.
4. Lean Manufacturing and Cross Functional Training
a. Review and assessment of existing manufacturing processes by an independent outside consultant aimed at identifying key weaknesses or breakdowns in the processes as well as potential duplications or absence of controls.
b. Documentation of processes in manufacturing and implementation of periodic evaluation of existing procedures to ensure adherence and consistency.
c. Cross functional training among production personnel to ensure fluid flow of work during peak production times.
Operating Income (Loss)
(Unaudited) Quarter Ended September 30, |
||||||||||||||
2004 |
2003 |
Change |
% Change |
|||||||||||
Gross Margin |
$ | 1,115,446 | $ | 1,423,622 | $ | (308,176 | ) | (22 | )% | |||||
Less operating expenses: |
||||||||||||||
Selling, general & administrative |
1,014,171 | 1,069,363 | (55,192 | ) | (5 | )% | ||||||||
Research & development |
108,869 | 88,401 | 20,468 | 23 | % | |||||||||
Total operating expenses |
1,123,040 | 1,157,764 | (34,724 | ) | (3 | )% | ||||||||
Operating income (loss) |
$ | (7,594 | ) | 265,858 | $ | (273,452 | ) | (103 | )% | |||||
Selling, general and administrative (SGA) expenses were approximately $1,014,000 during the three months ended September 30, 2004 as compared to approximately $1,069,000 for the same period in 2003, a decrease of approximately $55,000 or 5%. Decreases in bad debt expense of $57,000, building maintenance of $20,000, labor & fringe charges of $16,000, commission expense of $12,000, travel expenses of $14,000 and office expenses of $3,000 were offset by increases in advertising expenses of $44,000, and temporary staffing expenses of $23,000. Reductions in bad debt were a result of focused collection efforts. The reduction in repairs and maintenance expense was related to the timing of periodic maintenance on equipment used during production processes, and other building equipment such as the air conditioning
11
units, elevator and other office equipment such as computers and printers. Labor & fringe costs decreased due to changes in the organizational structure resulting in decreased head count. Reductions in travel expenses, office expenses and other discretionary charges were the result of managements continued efforts to reduce cost. The decreases were offset by increases in advertising and promotional expenses in preparation for the launch of our new SaVi TM LED lighting system. Temporary staff charges increased in order to fill staffing needs in key administrative functions such as accounting and sales support.
Research and development costs were approximately $109,000 during the three months ended September 30, 2004 as compared to approximately $88,000 during the same period in 2003. Management expects to see increased research and development expenses in the future due to more aggressive product development initiatives primarily related to the development of LED products and testing and certification of the Companys new SaVi TM LED lighting system which will be introduced to the commercial lighting market in the fourth quarter of 2004. Management believes that the Companys long-term success will depend, in large measure, on its new product design and development efforts and thus expects to see further increases in R&D expenses in the future as a result of these initiatives.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a non-GAAP measure which management uses as part of its performance appraisal in reviewing the Companys current ongoing operations and business trends related to its financial condition and results of operations. It is also used to measure the Companys cash-based performance.
The $286,926 reduction in EBITDA for the three months ending September 30, 2004, down to $197,752 from $484,678 for the same period in 2003, was primarily due to the reduction in gross margin as a result of price discounts offered during the period and the shift in sales mix to LED lighting products from fiber optic lighting systems. Revenues from the sale of LED lighting products were 49% of total revenue, while fiber optic lighting products represented 47% of total revenues. LED lighting systems generate lower gross margins than fiber optic lighting products.
The following table reconciles GAAP to non-GAAP financial measures:
(Unaudited) Quarter Ended September 30, |
|||||||||||||||
2004 |
2003 |
Change |
% |
||||||||||||
Net Income (Loss) |
$ | (62,845 | ) | $ | 206,438 | $ | (269,283 | ) | (130 | )% | |||||
Plus: |
|||||||||||||||
Interest |
97,147 | 101,137 | (3,990 | ) | (4 | )% | |||||||||
Depreciation |
142,806 | 164,110 | (21,304 | ) | (13 | )% | |||||||||
Amortization |
20,644 | 12,993 | 7,651 | 59 | % | ||||||||||
EBITDA |
$ | 197,752 | 484,678 | $ | (286,926 | ) | (59 | )% | |||||||
% of Revenues |
7 | % | 17 | % | |||||||||||
Interest expense of approximately $97,000 for the quarter ended September 30, 2004, as compared to approximately $101,000 for the same period in 2003, relates to the capital lease for the Companys facility in Orlando, Florida.
Other income was approximately $34,000 for the three months ended September 30, 2004 compared to approximately $47,000 for the same period in 2003. The source of other income for the period was primarily rental income from subleasing excess warehouse capacity. Subleasing agreements in place during the quarter ended September 30, 2003 have subsequently been terminated in accordance with the agreements and were not renewed. The Company was not able to obtain new tenants during the quarter ended September 30, 2004, resulting in a reduction in other income from subleasing activities compared to the same period in 2003.
The Company has provided a full valuation allowance against income tax benefits resulting from losses incurred and accumulated on operations and as a result there was no provision for income tax during the three months ended September 30, 2004 and 2003, respectively.
Net loss for the three months ended September 30, 2004 was approximately $63,000 or $0.02 per basic and diluted common share, as compared to net income of approximately $206,000, or $0.08 per basic and diluted common share, for the quarter ended September 30, 2003. The loss for the period was primarily due to the decline in the Companys gross margin due to the shift in product mix. Revenues from the sale of LED lighting products were 49% of total revenue, while fiber optic
12
lighting products represented 47% of total revenues. LED lighting systems generate a lower gross margin than fiber optic lighting products. Pricing discounts on fiber optic lighting systems sold during the period to encourage an increase in demand further reduced gross margin.
Nine months ended September 30, 2004 vs. 2003
Results of Operations
(Unaudited) Nine Months Ended September 30, |
||||||||||||||
2004 |
2003 |
Change |
% Change |
|||||||||||
Revenues |
$ | 8,870,065 | $ | 7,918,309 | $ | 951,756 | 12 | % | ||||||
Cost of Sales |
5,447,036 | 4,512,108 | 934,928 | 21 | % | |||||||||
Gross Margin |
$ | 3,423,029 | $ | 3,406,201 | $ | 16,828 | 0.5 | % | ||||||
Gross Margin % |
39 | % | 43 | % | ||||||||||
Total revenues for the nine months ended September 30, 2004 were approximately $8,870,000 as compared to approximately $7,918,000 for the nine months ended September 30, 2003 an increase of approximately $952,000 or 12%. Revenue growth in the period was seen primarily in the pool & spa market, $1,343,000, and the international market, $401,000. Increase in revenue in the pool and spa market was primarily due to original equipment manufacturer (OEM) sales to major spa manufacturers while the increase in revenue in the international market was mainly due to sales in the Asia Pacific region and Latin America where the Company had little or no prior market presence. The increases in revenue for the period were offset by decreases in national accounts of $241,000 and architectural lighting and signs (now commercial lighting) of $551,000. The decrease in revenue in the commercial lighting market was primarily driven by decreases in sign lighting sales volume as a result of the consolidation of sign and architectural lighting divisions into the commercial lighting division. Management anticipates that this consolidation, while initially causing a temporary decline in revenue from signs, will eventually lead to a more focused and broader approach on servicing sign lighting customers through our current network of commercial lighting agents across the US and Canada. This change allows our network of eighty one independent lighting sales representatives to sell the Companys LED and fiber optic lighting systems to the sign lighting market in addition to selling products to the commercial market. We expect to see benefits from this strategy during late 2004 and the first quarter of 2005 as the independent agents are trained and equipped with basic knowledge of the products and effective selling tools. We also plan to focus on national accounts by encouraging key national account personnel to devote efforts to promoting growth in this market. Although sales of fiber optic lighting products and systems continues to be the Companys primary source of revenue, the gap between revenue share from sales of LED lighting products and systems continued to narrow in the current period. Sales of fiber optic and LED lighting products and systems, and waterfall products were 54%, 42% and 4% of the Companys revenue during the nine months ended September 30, 2004, respectively. During the same period in 2003, sales of fiber optic and LED lighting products and systems were 73% and 22% of the Companys revenues, respectively, while sales of waterfall products accounted for 5% of the Companys revenues.
Gross margin for the nine months ended September 30, 2004 was approximately $3,423,000 or 39% as compared to approximately $3,406,000 or 43% for the nine months ended September 30, 2003. Gross margin is dependent, in part, on product mix, revenue mix among our three markets commercial, pools & spas and international, as well as the demands of customers, which fluctuate from time to time. The decrease in gross margin percent primarily resulted from the decline in revenues from the sale of fiber optic products, particularly within the commercial lighting market, which are normally sold at higher gross margins, and the increase in sales of lower gross margin LED products, particularly to recently established pool and spa OEM accounts. Price discounts offered on both product lines during the period due to market competition further contributed to the reduction in gross margin. Management recognizes that continued competitive market pressures remain on the Companys fiber optic products in both international and domestic markets. However management expects modest price increases on fiber optic products and light sources in the near future as part of an anticipated price increase within the lighting industry to offset certain raw material price increases. The Company also anticipates that increased sales volume will help compensate for the lost gross margin dollars resulting from increased revenue and reduced product costing for LED products.
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Operating Income (Loss)
(Unaudited) Nine Months Ended September 30, |
||||||||||||||
2004 |
2003 |
Change |
% Change |
|||||||||||
Gross Margin |
$ | 3,423,029 | $ | 3,406,201 | $ | 16,828 | 0.5 | % | ||||||
Less operating expenses: |
||||||||||||||
Selling, general & administrative |
3,041,177 | 3,148,747 | (107,570 | ) | (3 | )% | ||||||||
Research & development |
340,935 | 304,698 | 36,237 | 12 | % | |||||||||
Total operating expenses |
3,382,112 | 3,453,445 | (71,333 | ) | (2 | )% | ||||||||
Operating income (loss) |
$ | 40,917 | $ | (47,244 | ) | $ | 88,161 | 187 | % | |||||
Selling, general and administrative expenses were approximately $3,041,000 for the nine months ended September 30, 2004 as compared to approximately $3,149,000 for the same period in 2003, a decrease of approximately $108,000 or 3%. This decrease is primarily due to decreases in labor and fringe of $93,000, travel costs of $50,000, advertising expense of $37,000, royalty expense of $29,000 and insurance cost of $25,000. Royalty expense declined due to the decline in certain sales subject to royalty fees in the pool and spa market. All other reductions were primarily due to managements efforts to control certain discretionary charges. These decreases were offset in part by increases in commission expense of $53,000 mainly due to increase in pool and spa revenue for the period, temporary staffing of $31,000, legal expenses of $26,000 and taxes other than federal income tax of $16,000. Temporary staff charges increased in order to fill staffing needs in administrative functions such as accounting and sales support. Legal fees associated with the lawsuit the Company filed (case number 6:02-CV-270-ORL-19JGG) in the United States District Court for the Middle District of Florida against Color Kinetics Incorporated accounted for the increase in legal expense. Increases in Delaware franchise tax accounted for the increase in taxes during the period. Super Vision is a Delaware corporation. The Company currently expects that selling, general and administrative expenses will continue to decrease as management focuses on long-term measures to lower expenses and implement operational improvements in both selling and administrative functions.
Research and development costs were approximately $341,000 for the nine months ended September 30, 2004 as compared to approximately $305,000 for the same period in 2003. Management expects to see increased research and development expenses in the future due to more aggressive product development initiatives primarily related to the development of LED products, testing and certification of the Companys new SaVi TM LED lighting system which will be introduced in the commercial lighting market in the fourth quarter of 2004. Management believes that the Companys long-term success will depend, in large measure, on its new product design and development efforts and thus expects to see further increases in R&D expenses in the future as a result of these initiatives.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is a non-GAAP measure which management uses as part of its performance appraisal in reviewing the Companys current ongoing operations and business trends related to its financial condition and results of operations. It is also used to measure the Companys cash-based performance. The primary contributor to the $89,477 decrease in EBITDA for the nine months ended September 30, 2004 compared to the same period in the prior year was lower gross margin dollars due to the shift in product mix. Revenues from fiber optic lighting products and LED lighting products for the nine months ended September 30, 2004 were 54% and 42%, respectively, compared to 73% and 22% in the prior year. Revenues from LED lighting systems generate lower gross margin dollars.
14
The following table reconciles GAAP to non-GAAP financial measures:
(Unaudited) Nine Months Ended September 30, |
|||||||||||||||
2004 |
2003 |
Change |
% |
||||||||||||
Net Loss |
$ | (153,072 | ) | $ | (119,982 | ) | $ | (33,090 | ) | 28 | % | ||||
Plus: |
|||||||||||||||
Interest |
295,108 | 306,783 | (11,675 | ) | (4 | )% | |||||||||
Depreciation |
430,294 | 487,814 | (57,520 | ) | (12 | )% | |||||||||
Amortization |
44,702 | 31,894 | 12,808 | 40 | % | ||||||||||
EBITDA |
$ | 617,032 | $ | 706,509 | $ | (89,477 | ) | (13 | )% | ||||||
% of Revenues |
7 | % | 9 | % | |||||||||||
Interest expense of approximately $295,000 for the nine months ended September 30, 2004, as compared to approximately $307,000 for the same period last year, relates to the capital lease for the Companys facility in Orlando, Florida.
Other income was approximately $103,000 for the nine months ended September 30, 2004 compared to approximately $215,000 for the same period in 2003. The source of other income for the nine months ended September 30, 2004 was primarily rental income from subleasing excess warehouse capacity. Income from subleasing activities declined $40,000 during the period. In addition, other income declined due to the absence of a one-time, non-recurring activity related to inventory claimed from a court ordered release of certain fiber optic lighting products held in warehouses of certain defendants named in a lawsuit filed by the Company on November 18, 1999 (case number CI-99-9392) valued at approximately $48,000, and a write-off of old credit balances in accounts receivable accounts of approximately $24,000. Both of these transactions transpired during 2003.
The Company has provided a full valuation allowance against income tax benefits resulting from losses incurred on operations and as a result there was no provision for income tax for the nine months ended September 30, 2004 and 2003.
The net loss for the nine months ended September 30, 2004 was approximately $153,000, or $0.06 per basic and diluted common share, as compared to a net loss of approximately $120,000, or $0.05 per basic and diluted common share, for the nine months ended September 30, 2003.
Liquidity and Capital Resources
At September 30, 2004 the Company had working capital of approximately of $4,620,000 compared to working capital of approximately $4,575,000 at December 31, 2003. During the nine months ended September 30, 2004, the Company financed its operations primarily from working capital and cash on hand.
Cash Flows from Operating Activities
(Unaudited) September 30, 2004 |
|||||||||||||
December 31, 2003 |
|||||||||||||
Selected Balance Sheet Items |
Change |
% Change |
|||||||||||
Cash and investments |
$ | 1,848,374 | $ | 2,380,459 | $ | (532,085 | ) | (22 | )% | ||||
Trade accounts receivable, net |
$ | 1,778,482 | $ | 1,342,997 | $ | 435,485 | 32 | % | |||||
Inventories, net |
$ | 2,613,342 | $ | 2,194,452 | $ | 418,890 | 19 | % | |||||
Accounts payable |
$ | 1,519,394 | $ | 1,214,206 | $ | 305,188 | 25 | % |
Net cash used in operations amounted to approximately $292,000 for the nine months ended September 30, 2004 as compared to approximately $537,000 provided by operating activities for the nine months ended September 30, 2003. The most significant use of cash was generated by increases in inventories and accounts receivable of approximately $419,000
15
and $435,000, respectively. The increase in inventory was primarily due to new LED lighting system products developed by the Company for the OEM spa market. Control measures have been implemented to maintain inventory at levels designed to balance competitive lead-time versus the risk of inventory obsolescence due to changing technology and customer requirements. Management implemented cycle-counting and enhanced incoming quality inspection on products received from domestic sources as well as overseas. The increase in accounts receivable was primarily due to the timing of payments from customers. The use of cash was offset by increases in accounts payable of approximately $305,000. The increase in accounts payable was due to timing of payments to suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2004 amounted to approximately $163,000 and was primarily related to the acquisition of approximately $134,000 in tooling, manufacturing equipment, and computers and the investment of approximately $15,000 in patents and trademarks. The Company also reinvested interest and dividend income of approximately $14,000 in a fixed income mutual fund during the nine months ended September 30, 2004.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2004 was approximately $101,000 relating to payments on the capital lease obligation on the Companys facility of $109,000, offset by proceeds from exercise of employee stock options of $7,000.
Contractual Obligations
Related Party Capital Lease Obligations
On September 27, 1996, we entered into a lease agreement with Max King Realty, an entity controlled by Mr. Kingstone, our President, Chief Executive Officer and Chairman of the Board, for approximately 70,000 square feet of warehouse and office space. We began occupying this facility in August 1997. The lease term expires in June 2012. Rental payments for each of the nine months ended September 30, 2004 and 2003 amounted to approximately $481,000 and $468,000, respectively. The lease agreement was approved by all of the disinterested directors of Super Vision, with Mr. Kingstone abstaining from the vote. At the time we entered into the lease agreement, based on then current economic conditions, the real estate market, and our prospects, we believed that the transaction was on terms, when taken as a whole, no less favorable to Super Vision than could generally be obtained from unaffiliated third parties.
Future minimum annual lease payments for the remainder of 2004 and years subsequent thereto in the aggregate are as follows:
2004 |
$ | 160,281 | ||
2005 |
659,821 | |||
2006 |
673,176 | |||
2007 |
692,811 | |||
2008 |
706,836 | |||
2009 and thereafter |
2,558,420 | |||
Minimum lease payments |
5,451,345 | |||
Less amount representing interest and executory costs |
(2,707,908 | ) | ||
Present value of net minimum lease payments under capital lease |
$ | 2,743,437 | ||
16
Related Party Funding for Collection Activities
On November 18, 1999, the Company filed a lawsuit (case number CI-99-9392) (the Lawsuit) in the Circuit Court of the 9th Judicial Circuit in and for Orange County Florida against various defendants (the Wu Defendants). The Company is also pursuing litigation against certain parties related to the Wu Defendants (the Related Litigation). In June 2003, the Court issued an order of final judgment against all parties in the Lawsuit. Pursuant to the final judgment, the Company was awarded $38,405,978.17 and further awarded an additional amount for legal fees and costs of $834,297.40. As of the date of entry of the final judgment, these amounts will accrue interest at a rate of six percent per year. The Company believes that the monetary judgment awarded in the Lawsuit, and any amounts that may be awarded in the Related Litigation, will be very difficult and costly to collect, if collectable at all. The Company may not be successful in collecting any amounts awarded in the Lawsuit or that may be awarded in the Related Litigation. The Board of Directors of the Company has elected not to use Company funds to pursue collection activities in the Lawsuit or Related Litigation (the Collection Activities). The Company has reached an agreement with Mr. Kingstone regarding funding for Collection Activities. Mr. Kingstone has the option of providing personal funds (Kingstone Funds), or arranging for funds from third parties (Third Party Funds), to pursue Collection Activities. As of September 30, 2004, Mr. Kingstone had provided $350,000 in the form of a Letter of Credit, and arranged for $350,000 of Third Party Funds, to further the Collection Activities. The Kingstone Funds and Third Party Funds were subsequently returned after being used for bonding in connection with Collection Activities. Mr. Kingstone has also notified the Company that he has available, on a standby basis, up to an additional $3,000,000 of bonding capacity to pursue further Collection Activities. In consideration for providing Kingstone Funds and/or Third Party Funds for Collection Activities, the Company has agreed to pay Mr. Kingstone 25% of amounts actually received by the Company from all Collection Activities less all costs and expenses incurred from time to time by the Company in connection with the Lawsuit, the Related Litigation and the Collection Activities, which have not been recovered by the Company. To date, the Company has not recovered any funds from Collection Activities.
Purchase Obligations
We are not a party to any significant long-term service or supply contracts. We refrain from entering into any long-term purchase commitments in the ordinary course of business.
Critical Accounting Policies
We use certain accounting policies and procedures to manage changes that occur in our business environment that may affect accounting estimates made in preparation of our financial statements. These estimates relate primarily to our allowance for doubtful accounts receivable and provision for inventory obsolescence. Our strategy for managing doubtful accounts includes stringent, centralized credit policies and collection procedures for all customer accounts. We use a credit risk rating system in order to measure the quality of individual credit transactions. We strive to identify potential problem receivables early, take appropriate collection actions, and maintain adequate reserve levels. Our strategy for providing for inventory obsolescence includes the evaluation of existing inventory usage and realizable value. Typically, no provision is recorded for inventory that is currently used and sold within six months of purchase. We believe that our allowance for doubtful accounts and provision for inventory obsolescence was adequate at September 30, 2004 and December 31, 2003.
Item 3. Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for recording, processing, summarizing and reporting the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SECs rules, regulations and forms. Our management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding managements control objectives.
There have been no significant changes in our internal control over financial reporting during our last quarter, identified in connection with the evaluation referred to above, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
17
In the ordinary course of business the Company has various pending legal proceedings generally involving contractual matters, infringement actions, product liability claims and other matters. There has been no material change in the Companys pending legal proceedings from the descriptions contained in Part I, Item 3 of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003 and Footnote 11 to the Companys Consolidated Financial Statements contained therein, as supplemented by the descriptions contained in Part II, Item 1 of the Companys Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 and Footnote 6 to the Companys Condensed Consolidated Financial Statements contained therein.
Exhibit Number |
Document Description | |
31.1 | Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
18
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunder duly authorized.
SUPER VISION INTERNATIONAL, INC. | ||||
By: |
/s/Brett M. Kingstone |
Date: November 12, 2004
| ||
Brett M. Kingstone, Chief Executive Officer |
||||
(Principal Executive Officer) |
||||
By: |
/s/Danilo Regalado |
Date: November 12, 2004
| ||
Danilo Regalado, Chief Financial Officer |
||||
(Principal Financial and Accounting Officer) |
19