SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 2004
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 333-43770
SLS INTERNATIONAL, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 52-2258371
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(State of Incorporation) (IRS Employer Identification No.)
3119 South Scenic
Springfield, Missouri 65807
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (417) 883-4549
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. N/A
Yes [ ] No [ ]
On May 4, 2004, 29,184,780 shares of SLS International, Inc. common
stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [x]
INTRODUCTORY NOTE
-----------------
This amendment to SLS International, Inc.'s Quarterly Report on Form 10-QSB,
initially filed with the Securities and Exchange Commission on May 17, 2004, is
being filed to reflect the addition of two additional paragraphs to Note 8,
Subsequent Events, of our unaudited condensed financial statements for the
quarter ended March 31, 2004. These additional paragraphs disclose a strategic
alliance agreement that we entered into on April 2, 2004 with
Bohlender-Graebener Corporation and the issuance of options to our directors.
Despite this addition to Note 8 to the financial statements, there have been no
changes directly on the financial statements.
SLS INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Balance Sheet 2
Condensed Statements of Operations 3
Condensed Statement of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
2004 2003
------------ ------------
(unaudited) (audited)
Assets
Current assets:
Cash $ 2,692,442 $ 1,482,786
Accounts receivable, less allowance for doubtful accounts of
$45,000 for March 31, 2004 and December 31, 2003 234,367 277,665
Inventory 848,365 590,297
Prepaid expenses and other current assets 19,348 6,850
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Total current assets 3,794,522 2,357,598
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Fixed assets:
Vehicles 73,376 73,376
Equipment 170,999 159,212
Leasehold improvements 220,577 175,621
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464,952 408,209
Less accumulated depreciation 98,839 88,016
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Net fixed assets 366,113 320,193
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$ 4,160,635 $ 2,677,791
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt and notes payable $ 28,871 $ 28,946
Accounts payable 303,804 357,287
Accrued liabilities 26,227 26,138
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Total current liabilities 358,902 412,371
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Notes payable, less current maturities 15,118 15,931
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Commitments and contingencies:
Shareholders' equity:
Preferred stock, Series A, $.001 par, 2,000,000 shares
authorized; 1,511,360 issued as of March 31, 2004 and
1,545,300 issued as of December 31, 2003 1,511 1,545
Preferred stock, Series B, $.001 par, 1,000,000 shares
authorized; 143,500 shares issued as of March 31, 2004
and no shares issued as of December 31, 2003 144 --
Discount on preferred stock (2,257,599) (1,886,576)
Contributed capital - preferred 10,952,719 7,411,585
Common stock, $.001 par; 75,000,000 shares authorized;
29,225,780 shares and 28,230,180 shares issued at
March 31, 2004 and December 31, 2003 29,226 28,231
Common stock not issued but owed to buyers; 18,000 shares and
183,000 shares at March 31, 2004 and December 31, 2003 18 183
Contributed capital - common 10,370,651 8,319,286
Unamortized cost of stock issued for services (711,199) (781,204)
Retained deficit (14,598,856) (10,843,561)
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Total shareholders' equity 3,786,615 2,249,489
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$ 4,160,635 $ 2,677,791
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Three Months
Ended March 31,
------------------------------
2004 2003
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(unaudited)
Revenue $ 420,916 $ 104,777
Cost of sales 252,916 57,436
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Gross profit 168,000 47,341
General and administrative expenses 2,956,689 502,149
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Loss from operations (2,788,689) (454,808)
Other income (expense):
Interest expense (505) (7,637)
Interest and miscellaneous, net 5,376 8,000
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4,871 363
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Loss before income tax (2,783,818) (454,445)
Income tax provision -- --
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Net loss (2,783,818) (454,445)
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Deemed dividend associated with
beneficial conversion of preferred stock (971,477) (133,278)
------------ ------------
Net loss availiable to common shareholders $ (3,755,295) $ (587,723)
============ ============
Basic and diluted earnings per share $ (0.13) $ (0.03)
============ ============
Weighted average shares outstanding 28,743,930 23,095,528
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Three Months
Ended March 31,
--------------------------
2004 2003
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(unaudited)
Operating activities:
Net loss $(2,783,818) $(454,445)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 10,823 2,704
Amortization of cost of stock issued for services 70,005 246,371
Expense of stock options granted for services 718,088 --
Goodwill impairment charge 1,148,502 --
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 43,298 138,828
Inventory (258,068) (62,929)
Prepaid expenses and other current assets -- 1,539
Accounts payable (53,483) 69,019
Due to shareholders -- (94)
Accrued liabilities 90 25,007
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Cash used in operating activities (1,104,563) (34,000)
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Investing activities:
Additions of fixed assets (56,743) --
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Cash used in investing activities (56,743) --
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Financing activities:
Sale of stock, net of expenses 2,671,850 82,350
Acquisition of subsidiary (300,000) --
Repayments of notes payable (888) (570)
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Cash provided by financing activities 2,370,962 81,780
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Increase in cash 1,209,656 47,780
Cash, beginning of period 1,482,786 4,240
----------- ---------
Cash, end of period $ 2,692,442 $ 52,020
=========== =========
Supplemental cash flow information:
Interest paid $ -- $ 1,295
Income taxes paid (refunded) -- --
Noncash investing activities:
Stock issued and options granted for services $ 718,088 $ 93,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
at March 31, 2004 have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
financial position as of March 31, 2004 and results of operations and
cash flows for the three months ended March 31, 2004. All such
adjustments are of a normal recurring nature. The results of operations
for the interim period are not necessarily indicative of the results
expected for a full year. Certain amounts in the 2003 financial
statements have been reclassified to conform to the 2004 presentations.
The statements should be read in conjunction with the financial
statements and footnotes thereto included in our Form 10-KSB for the
year ended December 31, 2003.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited condensed consolidated financial statements
at March 31, 2004 have been prepared in conformity with U.S. generally
accepted accounting principles which contemplate our continuance as a
going concern. We have suffered losses from operations during the three
months ended March 31, 2004 and the years ended December 31, 2003,
2002, and 2001. Our cash position may be inadequate to pay all of the
costs associated with establishing a market for sales of its
loudspeakers. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can
be given that debt or equity financing , if and when required, will be
available. The unaudited condensed consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities
that might be necessary if we are unable to continue in existence.
NOTE 3 - NOTES PAYABLE
At December 31, 2003 and March 31, 2004, there is a note payable to an
individual in the amount of $25,000. This note bears interest of 7% and
is past due. There is also a note payable for equipment in the amount
of $19,877 and $18,989 as of December 31, 2003 and March 31, 2004,
respectively. This note bears interest of 5.16% and matures in
September of 2008. Interest expense for the year ended December 31,
2003 and the quarter ended March 31, 2004 was $5,763 and $505,
respectively.
5
NOTE 4 - STOCK TRANSACTIONS
In the quarter ended March 31, 2004, 181,000 shares shown at December
31, 2003 as "stock not issued but owed to buyers" were issued.
In July 2003, we entered into an endorsement agreement with the
recording artist Sting through Steerpike Ltd. The agreement grants
1,100,000 options in exchange for future endorsements of our products.
Each option is convertible into one share of common stock at a strike
price of $0.25 and is exercisable for a period of five years. Expense
associated with the options will be recorded over the two-year period
of the agreement beginning July 31, 2003 and ending July 31, 2005.
Expense will be recorded at fair market value, using the Black-Scholes
pricing model, on an accelerated method, thereby recording a larger
portion of the costs in the earlier months of the two year period.
Consulting expense relating to this agreement was $469,638 for the
quarter ended March 31, 2004. As of March 31, 2004 approximately
790,000 of the 1,100,000 options have been earned and expensed.
Expenses to be recorded in the remaining quarters of the year ended
December 31, 2004 and 2005 are unknown at this time because they are
partly based on the market price over those periods.
In November 2003, an agreement was signed with William Fischbach for
consulting services to be performed November 10, 2003 to November 10,
2006. As compensation for consulting services we agreed to issue
400,000 shares of common stock. 400,000 shares of common stock were
issued on November 11, 2003. Using the market value of the date the
agreement was signed, the shares were valued at $780,000 and recorded
as a debit in the equity section of the balance sheet as unamortized
cost of stock issued for services. The cost is amortized over the
three-year period of the agreement. Consulting expense relating to this
agreement was $65,000 for the quarter ended March 31, 2004. On March
31, 2004 there was $678,671 remaining in unamortized stock issued for
services for this agreement. The agreement also calls for the issuance
of options, not to exceed an aggregate of 800,000, to Mr. Fischbach on
January 1 or each year based on the previous year's performance levels.
No options were issued on January 1, 2004 under this agreement. As of
March 31, 2004, Mr. Fischbach had earned no options based on his
performance in the quarter ended March 31, 2004. The agreement also
calls for additional compensation to Mr. Fischbach in the form of a
cash fee of 2% of the dollar amount of value provided in a merger,
acquisition, or other transaction resulting directly from Mr.
Fischbach's services. As of March 31, 2004, Mr. Fischbach had earned no
cash fee based on the value provided to us in the quarter ended March
31, 2004.
In the quarter ended March 31, 2004, 185,200 Class A warrants were
exercised for 185,200 shares of common stock for a total of $92,600. As
of March 31, 2004, 18,000 shares had not been issued and are thereby
6
shown in these financial statements as stock not issued but owed to
buyers. 565,200 Class A warrants are outstanding as of March 31, 2004.
The expiration date of the Class A warrants has been extended to August
5, 2004.
In the quarter ended March 31, 2004, 6,000 Class B warrants were
exercised for 6,000 shares of common stock for a total of $18,000.
3,977,400 Class B warrants are outstanding as of March 31, 2004. The
expiration date of the Class B warrants has been extended to August 5,
2004.
In the quarter ended March 31, 2004, we commenced an offering of Series
B preferred stock and sold 143,500 shares of preferred stock, series B,
for $2,561,250, net of expenses. This preferred stock contained a
beneficial conversion feature. The feature allows the holder to convert
the preferred to 10 shares of common stock six months after buying the
shares. Attached to each preferred share is ten Class C warrants. Each
Class C warrant has a term of three years and provides the right to
purchase one share of our common stock at $7.00 per share. If the
average closing market price for our common stock is equal to or
greater than $10.50 for a period of 30 days, then such warrants are
capable of being repurchased with a 30-day notice, at a price of $.001
per warrant. A discount on preferred shares of $1,342,500 relating to
the beneficial conversion feature was recorded and will be amortized
over the six month period beginning with the date the shareholders
purchased their shares.
In the quarter ended March 31, 2004, $971,477 of the unamortized
discount on preferred shares, series A and B, has been amortized to
retained earnings. At March 31, 2004, the unamortized discount on
preferred shares, series A and B, was $2,257,599.
In the quarter ended March 31, 2004, 33,940 shares of preferred stock,
series A, were converted to 339,400 shares of common stock.
In the quarter ended March 31, 2004, 70,000 options were granted for
consulting services. The options have a strike price equal to the
market price on their grant date, ranging from $2.73 to $3.10. Using
the Black-Scholes pricing model, the options were valued at $114,700
and recorded as consulting expense.
NOTE 5 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES
During the years ended December 31, 2003 and 2002, we issued or agreed
to issue 3,215,452 shares of common stock, granted 500,000 options for
common stock, and 100,000 options for preferred stock, series A, as
part of consulting agreements. The value of stock issued and options
granted totaled $913,036 and $1,599,213 for the years ended December
31, 2003 and 2002. This cost is recorded as a debit in the equity
7
section of the balance sheet as unamortized cost of stock issued for
services. The balance is amortized into consulting expense over the
lives of the various consulting agreements. For the quarter ended March
31, 2004, $70,005 was amortized into consulting expense. Unamortized
cost of stock issued for services was $711,200 as of March 31, 2004.
NOTE 6 - CONSULTING, PROMOTIONAL AND INVESTOR RELATIONS SERVICES
Consulting and investor relation services expense was $1,015,943 for
the quarter ended March 31, 2004. Consulting and investor relation
expenses incurred are detailed below:
Consulting expenses relating to stock issued for consulting agreements
was $70,005 (See Note 5) in the quarter ended March 31, 2004.
Consulting expenses relating to options issued for services was
$584,338 (See Note 4) for the quarter ended March 31, 2004.
In the quarter ended March 31, 2004, we settled a lawsuit brought by a
former consultant. The former consultant returns 100,000 shares of
common stock for cancellation in exchange for $250,000 payable in March
and April of 2004. This settlement was expensed as consulting expense
in the quarter ended March 31, 2004.
Various individuals and corporations performed consulting services and
investor relation services for us during the quarter ended March 31,
2004 and were paid $111,600.
NOTE 7 - ACQUISITIONS
We entered into an agreement with the owners of SA Sound B.V. and SA
Sound USA, Inc. giving us an option to acquire said companies at any
time prior to February 27, 2004 for a purchase price of 370,000 euros,
approximately $467,000. We paid 50,000 euros, approximately $63,000 for
this option. The option agreement entitled us to a refund of the option
price if the due diligence performed disclosed any material adverse
facts. After completion of the due diligence, we determined not to
exercise the option to purchase and we have asserted a right to a
refund of the option price. The sellers have challenged the return of
the option fee. $109,165 has been recorded as acquisitions expense in
the quarter ended March 31, 2004 in relation to the option price and
related legal fees for this acquisition attempt.
On March 12, 2004, we acquired Evenstar, Inc., by a merger with and
into our newly formed, wholly owned subsidiary, Evenstar Mergersub,
Inc. (Mergersub). In consideration for Evenstar, Inc., we paid $300,000
in cash and issued 300,000 shares of common stock to the stockholders
of Evenstar, Inc. Using the market value of the common stock on the day
of the acquisition and the amount of cash given, the total acquisition
price was $1,161,000. An asset was recorded on these financial
statements in the amount of $12,498 for a patent acquired in the
8
merger. Evenstar had no other assets or liabilities, therefore, the
remaining $1,148,502 was recorded as goodwill on these financial
statements.
On March 12, 2004 we performed an impairment test on the goodwill
recorded in the merger with Evenstar, Inc. We determined that the
goodwill was impaired and an impairment charge of $1,148,502 was
recorded. This charge is shown on the condensed consolidated statement
of operations in the general and administrative expenses.
NOTE 8 - SUBSEQUENT EVENTS
From April 1 to May 4, 2004, we sold 30,700 shares of preferred stock,
series B, for $614,000.
From April 1 to May 4, 2004, 4,000 shares of preferred stock, series A,
were converted to 40,000 shares of common stock.
On April 12, 2004, we issued 25,000 options to purchase common stock to
each of our three directors for a total of 75,000 options. The strike
price is 2.21 and the options vest immediately.
On April 2, 2004, we entered into a strategic alliance agreement with
Bohlender-Graebener Corporation ( BG ). We agreed to pay BG $100,000
for this agreement, which was paid on April 2, 2004. The agreement
terms are for one year and can be extended for any length of time after
the first year by mutual agreement between BG and us. During the time
of the agreement BG will work with us, diligently and in good faith, to
consummate a merger. During the first six months of the agreement, BG
will not solicit any offer to purchase BG, and will not respond to any
unsolicited offer. In addition to the above, BG will grant us exclusive
sales and marketing rights to certain BG products and we have committed
to purchase certain minimum quantities of various BG products at agreed
upon prices. Those purchase commitments are as follows; $175,000 in the
third quarter of 2004, $175,000 in the fourth quarter of 2004, and
$200,000 in the first quarter of 2005. In the event no agreement to
merge the Companies on mutually acceptable terms can be reached before
termination of the agreement, BG will be entitled to keep the $100,000
cash payment as consideration for its performance under the agreement.
In the second quarter of 2004, we intend to make a rescission offer to
all warrant holders who exercised warrants during the period from May
1, 2002 through the current period. We are doing this because the
registration statement filed with the US Securities and Exchange
Commission to register the common stock issuable upon exercise of the
warrants may not have been "current" because it had not been amended to
include our most recent audited financial statements. The former
warrant holders will be entitled to rescind their purchases. Once made,
the rescission offer is open for 30 days. The rescission offer would
require us to purchase warrants back at their original exercise price,
$.50 for the Class A warrants and $3.00 for the Class B warrants, at
each warrant holder's option. The current market price is well above
the $.50 exercise price of the Class A warrants so no adjustment to the
financial statements for the year ended December 31, 2003 and the
quarter ended March 31, 2004 have been made for the rescission offer.
The current market price is below the $3.00 exercise price of the Class
B warrants. 22,600 Class B warrants have been exercised as of March 31,
2004, so the rescission offer would not have a material liability
effect on these financial statements. Therefore, no adjustment has been
made. If all warrant holders accepted the rescission offer, we would be
required to pay $1,340,700 plus interest, which amount would be reduced
to the extent of the proceeds from any sales of the underlying common
stock by the former warrant holders. Acceptance of the rescission offer
by all former warrant holders could have a material adverse effect of
these financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
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OVERVIEW
We manufacture premium-quality loudspeakers and sell them through our
dealer networks. The speakers use our proprietary ribbon-driver technology and
are generally recognized in the industry as high-quality systems. We sell a
Professional Line of loudspeakers, a Commercial Line of loudspeakers, Home
Theatre systems, a line for recording and broadcast studios, a line for
contractor installations and touring companies, and a line of in-wall,
in-ceiling and outdoor loudspeakers.
From the early 1970's through 1999 we derived substantially all of our
revenue from marketing, renting, selling and installing sound and lighting
systems under the name Sound and Lighting Specialist Inc. In June 1999, due to
the favorable customer acceptance of our new custom-designed loudspeaker
systems, we ceased these historical operations and began focusing all efforts
towards becoming a loudspeaker manufacturer and selling to dealers and
contractors on a wholesale basis. As a result, we have been essentially in a
development stage, as we are bringing to market products that we introduced in
2000 and 2001 and designing and bringing to market additional products.
In June 2000, we asked dealers and distributors to sell our
Professional Line of products. These dealers and distributors started to form
our current network of approximately 50 dealers and 7 foreign distributors and
we began shipping to them. However, most of the Professional Line required new
ribbon drivers that we completed and implemented into the product line in early
2001.
In September 2000, we introduced our Home Theatre systems, and sales
for those systems began immediately. From September through December 2000, we
added 20 new Home Theatre dealers in the US and began marketing efforts to
establish distributors and dealers outside the US.
In June 2001, we introduced a Commercial Line of loudspeakers that use
our PRD500 Ribbon Driver and, in September 2001, we finished the development of
our PRD1000 Ribbon Driver and began implementing it into our Professional Line.
Our PRD drivers, which we manufacture, upgraded the previous drivers that we
purchased from third-party manufacturers; and our cost is approximately
one-sixth of the price that we had been paying for the previous drivers.
The information in this section should be read together with the
financial statements, the accompanying notes to the financial statements and
other sections included in this report.
10
RESULTS OF OPERATIONS
Quarter ended March 31, 2004 as compared to the quarter ended March 31,
2003. For the quarter ended March 31, 2004, revenue increased to $420,916 from
$104,777 in the 2003 period, a 302% increase, resulting primarily from the
positive results of a new marketing program we started in January 2004 and our
increased production capabilities resulting from a facilities expansion
completed in December 2003. Our gross profit percentage decreased to
approximately 40% in the 2004 period from approximately 45% in the 2003 period,
primarily as a result of new personnel that were in training and sales of
several large systems at a high promotional discount.
General and administrative expenses for the 2004 first quarter
increased to $2,956,689 from $502,149 in the 2003 first quarter, an increase of
$2,454,540. The increase resulted primarily from a non-cash charge of $1,148,502
for the impairment of goodwill (as further described in Note 7 to the financial
statements); $1,015,943 in consulting and investor relation services expenses
(as further described in Note 6 to the financial statements), $654,343 of which
was non-cash charges for the amortization of stock and options issued under
consulting agreements; and $109,165 in acquisitions expense (as further describe
in Note 7 to the financial statements).
Due to the increase in general and administrative expenses, partially
offset by the revenue increase, our net loss increased to $2,783,818 in the
first quarter of 2004 as compared to a net loss of $454,445 in the comparable
quarter of 2003.
Other income (expense) increased to a net other income of $4,871 in the
2004 first quarter as compared to net other income of $363 in the 2003 first
quarter, primarily due to interest on cash retained upon completion of our
preferred stock private placement in July 2003.
FINANCIAL CONDITION
On March 31, 2004, our current assets exceeded current liabilities by
$3,435,620, compared to an excess of current assets over current liabilities of
$1,945,227, on December 31, 2003. Total assets exceeded total liabilities by
$3,786,615, compared to an excess of total liabilities over total assets of
$2,249,489 on December 31, 2003. The increased working capital was primarily due
to the sale of 143,500 shares of Series B Preferred Stock for net proceeds of
$2,561,250 in the first quarter of 2004. In addition to funding operations, the
proceeds from such sales of stock allowed us to increase cash by $1,209,656,
increase inventory by $258,068, increase net fixed assets by $45,920, and
decrease accounts payable by $53,483. On March 31, 2004, we had a backlog of
orders of approximately $50,000.
We have experienced operating losses and negative cash flows from
operating activities in all recent years. The losses have been incurred due to
the development time and costs in bringing our products through engineering and
to the marketplace. The report of our accountants contains an explanatory
paragraph indicating that these factors raise substantial doubt about our
ability to continue as a going concern.
11
In order to continue operations, we have been dependent on raising
additional funds, and as discussed above, we commenced a new private placement
of Series B Preferred Stock in the first quarter of 2004 to raise capital. Each
share is convertible into ten shares of our common stock six months after
purchase. Prior to conversion, the shares have no voting rights. Attached to
each preferred share are ten of our class C warrants. Each class C warrant has a
term of three years and provides the right to purchase one share of our common
stock at $7.00 per share. The class C warrants are immediately exercisable and
detachable from the preferred share. If the average closing market price for our
common stock is equal to or greater than $10.50 per share for a period of 30
days, then we are entitled to repurchase such warrants, with 30 days notice, at
a price of $.001 per warrant.
In the first quarter of 2004, we also received an aggregate of $110,600
in cash in payment of the exercise price for the exercise of outstanding
warrants. The shares of common stock were issued pursuant to a registration
statement declared effective by the U.S. Securities and Exchange Commission in
2001, registration statement number 333-43770. However, since May 1, 2002, such
registration statement may not have been "current" because the registration
statement had not been amended to include our most recent audited financial
statements. As a result, the former warrant holders may be entitled to demand a
rescission of their previous exercises of common stock. We intend to make a
rescission offer, in the second quarter of 2004, to all warrant holders who
exercised warrants during the period from May 1, 2002 through May 10, 2004 (the
date that an amendment to the registration statement was declared effective,
making the registration statement "current"). Once made, the rescission offer is
expected to remain open for 30 days. The rescission offer would require us to
repurchase the shares of common stock issued upon exercise of the warrants at
their original exercise price, $.50 for the Class A warrants and $3.00 for the
Class B warrants, at each warrant holder's option. If all warrant holders
accepted the rescission offer, we would be required to pay $1,340,700 plus
interest, which amount would be reduced to the extent of the proceeds from any
sales of the underlying common stock by the former warrant holders. Acceptance
of the rescission offer by all former warrant holders could have a material
adverse effect. The current market price is over the $.50 exercise price of the
Class A warrants, and if that remains true, we would expect no former holders of
Class A Warrants to accept the rescission offer. The current market price is
below the $3.00 exercise price of the Class B warrants. Only 22,600 Class B
warrants were exercised during the rescission offer period, making our potential
rescission liability to the former Class B warrant holders equal to $67,800 plus
interest, which amount would be reduced to the extent of any sales of the
underlying common stock by the former warrant holders.
In the 2004 first quarter, we entered into an agreement with the owners
of SA Sound B.V. and SA Sound USA, Inc. giving us an option to acquire said
companies at any time prior to February 27, 2004 for a purchase price of 370,000
euros, approximately $467,000. We paid approximately $63,000 for this option.
The option agreement entitled us to a refund of the option price if the due
diligence performed disclosed any material adverse facts. After completion of
the due diligence, we determined not to exercise the option to purchase and we
have asserted a right to a refund of the option price. The sellers have
challenged the return of the option fee.
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On March 12, 2004, we acquired Evenstar, Inc., by a merger with and
into our newly formed, wholly owned subsidiary, Evenstar Mergersub, Inc.
Evenstar is the owner of one issued patent and a second patent that has been
granted and is expected to be issued in the near future. The patents are for
Evenstar's digital amplification technology, which provides for substantially
reduced production costs compared to amplifiers of comparable quality. In
consideration for Evenstar, we paid $300,000 in cash and issued 300,000 shares
of common stock to the stockholders of Evenstar. In connection with the
acquisition, we hired the former president of Evenstar as the head of our new
electronics division, with responsibility for designing and developing new
electronics products. Our ability to integrate Evenstar into our operations will
have a substantial effect on our future performance.
There is intense competition in the speaker business with other
companies that are much larger and national in scope and have greater financial
resources than we have. We will require additional capital to continue our
growth in the wholesale speaker market. We are relying upon our ability to
obtain the necessary financing through the issuance of equity and upon our
relationships with our lenders to sustain our viability. On March 31, 2004, we
had $2,692,442 in cash. We believe this cash is more than sufficient to fund our
planned operations for at least the next twelve months.
In the past, we have been able to privately borrow money from
individuals by the issuance of notes, and we have been able to raise money by
the issuance of preferred stock and common stock. We intend to continue to do so
as needed. However, we cannot be certain that we will continue to be able to
successfully obtain such financing. If we fail to do so, we may be unable to
continue as a viable business.
FORWARD-LOOKING INFORMATION
This report, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,
financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the "Risk Factors" section of our
Annual Report on Form 10-KSB and economic, competitive and other factors
affecting our operations, markets, products and services, expansion strategies
and other factors discussed elsewhere in this report, our Annual Report on Form
10-KSB and the other documents we have filed with the Securities and Exchange
Commission. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this report will in fact prove
accurate, and our actual results may differ materially from the forward-looking
statements.
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ITEM 3. CONTROLS AND PROCEDURES.
-----------------------
As of March 31, 2004, our Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of March 31, 2004. However, as a
result of the continuing expansion of our business, we are currently considering
enhancements to our controls and procedures, particularly with respect to the
preparation of our quarterly unaudited financial statements.
We have made no changes in our internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
---------------------
In the quarter ended March 31, 2004, the Company sold 143,500 shares of
Series B Preferred Stock for $2,561,250 in net cash proceeds. All sales were
made to accredited investors. Each share of preferred stock is convertible into
ten shares of common stock after one year. Attached to each preferred share are
ten of our class C warrants. Each class C warrant has a term of three years and
provides the right to purchase one share of our common stock at $7.00 per share.
The sales were made in reliance on Section 4(2) of the Securities Act of 1933,
as amended.
The net proceeds from the sale of preferred stock in the first quarter
of 2004 are to be used for sales, marketing and advertising expenses, increases
in inventory, and working capital purposes. We used one registered broker-dealer
for the sale of approximately 125,000 shares of preferred stock and paid
commissions of $308,750 for such sales ($175,000 of which was cash and the
remainder was options valued at $133,750 using a Black-Scholes valuation
methodology). All of the foregoing uses of proceeds were direct or indirect
payments to nonaffiliates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits. The following are being filed as exhibits to this
Report: Exhibit No. Description of Exhibit
10.1 Stock Option Agreement, dated February 9, 2004,
between SLS International, Inc., and Ryan Schinman*
10.2 Letter Agreement, dated May 19, 2004, between SLS
International, Inc., and Kenny Securities Corp.*
10.3 Strategic Alliance Agreement, effective April 2,
2004, between SLS International, Inc., and
Bohlender-Graebener Corporation.
31 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
-------------
* Previously filed.
(b) Reports on Form 8-K. We filed a Report on Form 8-K on March 17,
2004 relating to our acquisition of Evenstar, Inc.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SLS INTERNATIONAL, INC.
(Registrant)
Date: July 23, 2004 By /s/ John Gott
-----------------------
John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
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