SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 2005 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 Registrant as Specified in its Charter)
Delaware 52-2258371
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(State of Incorporation) (IRS Employer Identification No.)
1650 W. Jackson
Ozark, Missouri 65721
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (417) 883-4549
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
N/A Yes [ ] No [ ]
On August 10, 2005, 44,808,310 shares of our common stock were outstanding.
EXPLANATORY NOTE
SLS International, Inc. is filing this Amendment No. 2 to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the U.S.
Securities and Exchange Commission on August 15, 2005 and previously amended on
August 30, 2005, to re-classify warrants issued in January 2005 as a long-term
liability in accordance with EITF 00-19. This Amendment No. 2 responds to
comments of the Staff of the Securities and Exchange Commission in connection
with its review of our Annual Report on Form 10-KSB for the year ended December
31, 2004. This re-classification has resulted in the following changes to our
financial statements:
o On our balance sheet, we now show a new long-term liability
"Accrued liability - D Warrants."
o On our balance sheet dated June 30, 2005, total liabilities
increased, contributed capital - common decreased, retained
deficit decreased, and total shareholders' equity decreased.
o On our statement of operations for each of the three months
ended June 30, 2005 and the six months ended June 30, 2005, we
now show a "Gain on valuation of D warrants," which resulted
in an increase in other income, and decreases in loss before
income tax, net loss, net loss available to common
shareholders, and basic and diluted loss per share.
o On our statement of cash flows, the net loss is decreased, and
is completely offset by a new line for "Gain on valuation of D
warrants."
A further description of this classification as a long-term liability
is provided in the revised tenth paragraph of Note 3 to the financial
statements.
This Amendment No. 2 affects the original financial statements and the
footnotes as originally filed, only to the extent described above. We have also
made revisions to Management's Discussion and Analysis of Financial Condition
and Results of Operations to reflect these changes in our financial statements.
This Amendment No. 2 does not reflect events that have occurred after the
original filing of the Quarterly Report on Form 10-Q filed on August 15, 2005
and does not modify or update the disclosures in the Quarterly Report on Form
10-Q as filed in any way except with regard to the specific modifications
described in this Explanatory Note. This Amendment No. 2 should be read in
conjunction with the original filing of our Quarterly Report on Form 10-Q,
Amendment No. 1 thereto filed August 30, 2005, and our other filings made with
the Securities and Exchange Commission subsequent to the filing of the original
Quarterly Report on Form 10-Q.
SLS INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statements of Operations 4-5
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
Signatures 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2005 2004
------------ ------------
(unaudited) (audited)
Assets
Current assets:
Cash $ 1,807,915 $ 10,712,858
Certificates of deposit 4,500,000 --
Accounts receivable, less allowance for
doubtful accounts of $45,000 as of
June 30, 2005 and December 31, 2004 497,554 271,429
Inventory 2,708,115 1,908,588
Deposits - inventory 194,240 50,000
Deposits - merger -- 100,000
Prepaid expenses and other current assets 950,754 192,817
------------ ------------
Total current assets 10,658,579 13,235,692
------------ ------------
Fixed assets:
Building 4,161,230 --
Vehicles 283,233 51,949
Equipment 405,833 234,805
Leasehold improvements -- 245,681
------------ ------------
4,850,296 532,435
Less accumulated depreciation 177,277 105,131
------------ ------------
Net fixed assets 4,673,019 427,304
------------ ------------
Prepaid expenses 126,186 --
------------ ------------
$ 15,457,784 $ 13,662,996
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt $ 760 $ 29,101
Accounts payable 921,215 346,980
Customer deposits 150,275 --
Accrued liabilities 23,410 630,503
------------ ------------
Total current liabilities 1,095,660 1,006,584
Accrued liability - D warrants 237,662 --
Notes payable, less current maturities 8,512 10,951
------------ ------------
1,341,834 1,017,534
------------ ------------
Commitments and contingencies:
Shareholders' equity:
Preferred stock, Series A, $.001 par, 2,000,000 shares
authorized; 153,000 and 346,873 shares issued as of
June 30, 2005 and December 31, 2004 153 347
Preferred stock, Series B, $.001 par, 1,000,000 shares
authorized; 182,200 and 196,050 shares issued as of
June 30, 2005 and December 31, 2004 182 196
Preferred stock, Series C, $.001 par, 25,000 shares
authorized; 14,450 and no shares issued as of
June 30, 2005 and December 31, 2004 14 --
Deposits on Preferred stock, Series C -- 8,849,420
Contributed capital - preferred 19,943,041 6,776,665
Common stock, $.001 par; 75,000,000 shares authorized;
44,488,310 shares and 41,751,080 shares issued as of
June 30, 2005 and December 31, 2004 44,489 41,752
Common stock not issued but owed; 1,428,071 and
300,000 shares at June 30, 2005 and December 31, 2004 1,428 300
Contributed capital - common 28,326,499 21,882,091
Unamortized cost of stock issued for services (1,656,168) (1,363,973)
Unamortized cost of stock issued for compensation (2,390,034) --
Retained deficit (30,153,654) (23,541,337)
------------ ------------
Total shareholders' equity 14,115,950 12,645,461
------------ ------------
$ 15,457,784 $ 13,662,996
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months
Ended June 30,
------------------------------
2005 2004
------------ ------------
Revenue $ 855,353 $ 505,306
Cost of sales 632,716 228,266
------------ ------------
Gross profit 222,637 277,040
General and administrative expenses 1,987,485 2,912,239
------------ ------------
Loss from operations (1,764,848) (2,635,199)
Other income (expense):
Interest expense -- (514)
Interest and miscellaneous, net 18,162 11,327
Gain on valuation of D warrants 368,522 --
Gain (loss) on disposal of fixed assets (234,158) 3,000
------------ ------------
152,527 13,813
------------ ------------
Loss before income tax (1,612,322) (2,621,386)
Income tax provision -- --
------------ ------------
Net loss (1,612,322) (2,621,386)
------------ ------------
Deemed dividend associated with
beneficial conversion of preferred stock -- (1,737,908)
------------ ------------
Net loss availiable to common shareholders $ (1,612,322) $ (4,359,294)
============ ============
Basic and diluted loss per share $ (0.04) $ (0.15)
============ ============
Weighted average shares outstanding 44,552,714 29,280,447
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months
Ended June 30,
------------------------------
2005 2004
------------ ------------
Revenue $ 1,680,073 $ 926,222
Cost of sales 1,118,878 481,182
------------ ------------
Gross profit 561,195 445,040
General and administrative expenses 5,019,915 5,868,928
------------ ------------
Loss from operations (4,458,720) (5,423,888)
Other income (expense):
Interest expense (438) (1,019)
Interest and miscellaneous, net 66,339 16,703
Gain on valuation of D warrants 1,268,450 --
Gain (loss) on disposal of fixed assets (234,158) 3,000
------------ ------------
1,100,193 18,684
------------ ------------
Loss before income tax (3,358,526) (5,405,204)
Income tax provision -- --
------------ ------------
Net loss (3,358,526) (5,405,204)
------------ ------------
Deemed dividend associated with
beneficial conversion of preferred stock (3,246,112) (2,709,385)
Premium - preferred series C (7,678) --
------------ ------------
Net loss availiable to common shareholders $ (6,612,316) $ (8,114,589)
============ ============
Basic and diluted loss per share $ (0.15) $ (0.28)
============ ============
Weighted average shares outstanding 43,535,818 29,067,313
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
SLS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months
Ended June 30,
------------------------------
2005 2004
------------ ------------
Operating activities:
Net loss $ (3,358,526) $ (5,405,203)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 83,668 25,309
Amortization of cost of stock issued for services 427,805 140,008
Expense of stock & options granted for services 916,335 2,416,569
Compensation expense for stock sold to employees 475,000 --
Gain on disposal of fixed assets 234,158 (3,000)
Goodwill impairment charge -- 1,148,502
Gain on valuation of D warrants (1,268,450) --
Change in assets and liabilities:
Accounts receivable, less allowance for doubtful accounts (226,125) (77,975)
Inventory (799,527) (427,969)
Deposits - inventory (144,240) (220,457)
Deposits - merger 100,000 --
Prepaid expenses and other current assets (884,124) --
Accounts payable 574,234 (101,130)
Customer deposits 150,275 --
Accrued liabilities (607,092) 16,437
------------ ------------
Cash used in operating activities (4,326,608) (2,488,909)
------------ ------------
Investing activities:
Investment in certificates of deposit (4,500,000) --
Proceeds from disposal of fixed assets -- 3,000
Additions of fixed assets (4,563,541) (148,458)
------------ ------------
Cash provided by (used in) investing activities (9,063,541) (145,458)
------------ ------------
Financing activities:
Sale of stock, net of expenses 4,515,988 4,928,350
Acquistion of subsidiary -- (400,000)
Repayments of notes payable (30,780) (2,107)
------------ ------------
Cash provided by financing activities 4,485,208 4,526,243
------------ ------------
Increase (decrease) in cash (8,904,942) 1,891,876
Cash, beginning of period 10,712,858 1,482,786
------------ ------------
Cash, end of period $ 1,807,915 $ 3,374,662
============ ============
Supplemental cash flow information:
Interest paid $ 8,388 $ --
Premium -preferred series C paid in common stock 7,678 --
Noncash investing activities:
Stock issued and options granted for services $ 916,335 $ 2,416,569
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
at June 30, 2005 have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
financial position as of June 30, 2005 and results of operations and
cash flows for the six months ended June 30, 2005. 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 2004 financial statements have
been reclassified to conform to the 2005 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, 2004.
NOTE 2 - NOTES PAYABLE
At December 31, 2004 there is a note payable to an individual in the
amount of $25,000. This note was paid in the quarter ended June 30,
2005. There is also a note payable for equipment in the amount of
$15,052 and $9,272 as of December 31, 2004 and June 30, 2005,
respectively. This note bears interest of 5.16% and matures in
September of 2008. Interest expense for the year ended December 31,
2004 and the six months ended June 30, 2005 was $1,907 and $438
respectively.
NOTE 3 - STOCK TRANSACTIONS
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 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 was recorded over the two-year period of
the agreement beginning July 31, 2003 and ended June 30, 2005. Expense
was 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. Factors used in
the Black-Scholes pricing model included; risk-free interest rates of
3.65% to 3.73%; strike price of $0.25; market prices of $2.04 to $2.26;
volatility rate of 22.13%; and a yield rate of 0.00%. Consulting
expense relating to this agreement was $110,600 for the six months
ended June 30, 2005. As of June 30, 2005 all of the 1,100,000 options
have been earned and expensed.
In November 2003, an agreement was signed with William Fischbach for
consulting services to be performed November 10, 2003 to November 10,
7
2006. As compensation for consulting services we issued 400,000 shares
of common stock 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 $130,000 for the six months ended June
30, 2005. On June 30, 2005 there was $353,671 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 of each year based on the previous year's
performance levels. No options were issued on January 1, 2004 or 2005
under this agreement. As of June 30, 2005, Mr. Fischbach had earned no
options based on his performance in the six months ended June 30, 2005.
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 June 30, 2005, Mr. Fischbach had earned
no cash fee based on the value provided to us in the six months ended
June 30, 2005.
In December 2004, an agreement was signed with W. Curtis Hargis Co.
(Hargis) for consulting services. As compensation for consulting
services we agreed to issue 100,000 options upon reaching an agreement
with a retailer introduced to us by Hargis. This occurred on March 21,
2005. We also agreed to issue Hargis one option to purchase one share
of common stock for every $100 in sales from the retailer provided that
Hargis shall not be entitled to receive in excess of 500,000 options.
The options have a term of three years and have a strike price equal to
the average price of the Company's common stock for the five trading
days immediately prior to the day the options are earned. As of June
30, 2005, Hargis had earned 101,529 options to purchase common stock.
Using the Black-Scholes pricing method, the options were valued at
$62,886 and recorded as consulting expense in the six months ended June
30, 2005. Factors used in the Black-Scholes pricing model included;
risk-free interest rate of 3.93%; strike price of $2.11; market price
of $2.30; volatility rate of 25.87%; and a yield rate of 0.00%. The
agreement also calls for additional compensation to Hargis in the form
of a cash fee of 2% of the net sales realized from the retailer. As of
June 30, 2005, Hargis had earned no cash fee based on the value
provided to us in the six months ended June 30, 2005.
In October of 2004, an agreement was signed with Atlantic Services,
Ltd. for consulting services to be performed October 15, 2004 to
January 15, 2005. As compensation for consulting services the Company
agreed to issue 300,000 shares of common stock. As of June 30, 2005
these shares have not been issued and are therefore listed in these
financial statements as common stock not issued but owed to buyers.
8
Using the market value on the date the agreement was signed, the shares
were valued at $480,000 and recorded as a debit in the equity section
of the balance sheet as unamortized cost of stock issued for services.
The expense is amortized over the three-month period of the agreement.
Consulting expense relating to this agreement was $80,000 for the six
months ended June 30, 2005. On June 30, 2005, there was no remaining
balance in unamortized cost of stock issued for services for this
agreement.
In February of 2005, an agreement was signed with 3CD Consulting, LLC
for consulting services to be performed November 18, 2004 to November
17, 2007. As compensation for consulting services the Company agreed to
issue 1,000,000 options for shares of common stock. The options have a
term of 3 years and a strike price of $2. Using the Black-Scholes
pricing model, the options were valued at $814,781 and recorded as a
debit in the equity section of the balance sheet as unamortized cost of
stock issued for services. Factors used in the Black-Scholes pricing
model included; risk-free interest rate of 3.08%; strike price of
$2.00; market price of $2.45; volatility rate of 29.73%; and a yield
rate of 0.00%. The expense is amortized over the three-year period of
the agreement. Consulting expense relating to this agreement was
$135,796 for the six months ended June 30, 2005. On June 30, 2005,
there was $646,989 remaining in unamortized cost of stock issued for
services for this agreement.
In January of 2005, an agreement was signed with New AV Ventures, LLC
(AV) for consulting services to be performed January 31, 2005 to
January 31, 2010. As compensation for consulting services the Company
agreed to issue 300,000 shares of common stock. Using the market value
on the date the agreement was signed, the shares were valued at
$720,000 and recorded as a debit in the equity section of the balance
sheet as unamortized cost of stock issued for services. The cost will
be amortized over the five-year period of the agreement. Consulting
expense relating to this agreement was $72,000 for the six months ended
June 30, 2005. On June 30, 2005 there was $648,000 remaining in
unamortized stock issued for services for this agreement. The Company
also agreed to give AV a percentage of future sales to certain vendors
and one option to purchase one share of common stock for each $100 of
sales to vendors generated by AV provided that AV shall not be entitled
to receive in excess of 700,000 options. The options will have a term
of five years and have a strike price equal to the average price of the
Company's common stock for the five trading days immediately prior to
January 1 of the following year. As of June 30, 2005, New AV Ventures,
LLC has earned no cash fee or options under this agreement.
In January of 2005, the Company completed a private placement of 15,000
shares of its Series C Preferred Stock for an aggregate purchase price
of $15,000,000. The proceeds were $13,340,408, net of expenses.
Expenses associated with the offering, are legal costs of $132,558 and
9
expenses related to a finder's fee. The finder was compensated 6% of
the gross offering funds received, $900,000, and 40,000 warrants for
every $1,000,000 raised in the offering. The finder received 600,000
warrants, which were valued at $627,034 using the Black-Scholes pricing
model. Factors used in the Black-Scholes pricing model included;
risk-free interest rate of 3.64%; strike price of $2.50; market price
of $2.79; volatility rate of 29.73%; and a yield rate of 0.00%.
The Series C Preferred Stock contains a beneficial conversion feature.
The feature allows the holder to convert each share of preferred to 400
shares of common stock and accrues a 6% premium to the stated face
value of the shares of preferred stock, which would be convertible into
additional shares of common stock. A discount on preferred shares of
$3,246,112 relating to the beneficial conversion feature was recorded.
As of June 30, 2005, the full discount had been amortized to retained
earnings.
The 6% premium accrues to the face value of the preferred stock and
compounds quarterly. As of June 30, 2005, the face value of the 14,450
outstanding shares is $14,873,530, of which $423,530 is premium. The
face value of the preferred stock is convertible into common stock at
$2.50 per share. As a result, on June 30, 2005, the 14,450 outstanding
shares of preferred stock were convertible into 5,949,412 shares of
common stock.
Attached to each Series C Preferred share are 400 Class D warrants.
Each Class D warrant has a term of five years and provides the right to
purchase one share of our common stock at $6.00 per share, subject to
certain adjustments. The Company may redeem the warrants and may
require the holders to convert the preferred stock to common stock if
certain conditions are met. Using the Black-Scholes model for pricing,
the Class D warrants were valued at $1,506,112. Factors used in the
Black-Scholes pricing model included; risk-free interest rate of 3.64%;
strike price of $6.00; market price of $2.79; volatility rate of
29.73%; and a yield rate of 0.00%. In accordance with EITF 00-19, the
warrants were recorded as a long-term liability and will be revalued at
the end of each future quarter. As of June 30, 2005, the warrants were
valued at $237,662. A gain from the valuation of D warrants of
$1,268,450 has been recognized in the six months ended June 30, 2005.
In the six months ended June 30, 2005, 197,873 shares of preferred
stock, series A, were converted to 1,978,730 shares of common stock.
There are 153,000 shares of series A preferred stock outstanding as of
June 30, 2005.
In the six months ended June 30, 2005, 13,850 shares of preferred
stock, series B, were converted to 138,500 shares of common stock.
There are 182,200 shares of series B preferred stock outstanding as of
June 30, 2005.
In the six months ended June 30, 2005, 550 shares of preferred stock,
series C, were converted into 220,000 shares of common stock. There are
14,450 shares of series C preferred stock outstanding as of June 30,
2005. The premium on these converted shares was $7,678 and is recorded
in these financial statements as a stock dividend. The premium
converted at $2.50 per share into an additional 3,071 shares of common
10
stock. These shares were not issued as of June 30, 2005 and are
therefore shown in these financial statements as stock not issued but
owed.
In the six months ended June 30, 2005, 60,000 options were granted for
consulting services. The options have a strike price equal to the
market price on their grant date, ranging from $2.04 to $2.51. Using
the Black-Scholes pricing model, the options were valued at $61,250 and
recorded as consulting expense. Factors used in the Black-Scholes
pricing model included; risk-free interest rates of 3.94% to 4.50% ;
strike prices of $2.04 to $2.51; market prices of $2.04 to $2.51;
volatility rate of 25.87%; and a yield rate of 0.00%.
In the six months ended June 30, 2005, 930,000 options were granted to
directors of the Company. The options have a strike price of $2.50.
Using the Black-Scholes pricing model, the options were valued at
$686,868 and recorded as compensation expense. Factors used in the
Black-Scholes pricing model included; risk-free interest rates of 3.71%
to 4.06%; strike prices of $2.27 to $2.50; market prices of $2.27 to
$2.38; volatility rate of 22.13%; and a yield rate of 0.00%. In the
second quarter of 2005, 730,000 options issued in the first quarter
automatically expired upon resignation of two directors. Therefore,
compensation expense for the quarter ended June 30, 2005 was reduced by
$490,868 in credits from the expiration of such options for a net
expense of $196,000 for the six months ended June 30, 2005.
In June of 2005, an agreement was signed with JMBP, Inc. and Mark
Burnett for consulting services. As compensation for consulting
services the Company agreed to issue 1,000,000 options for shares of
common stock and 1,000,000 warrants for shares of common stock. The
options have a term of five years and a strike price of $2.05. The
warrants have a term of five years and a strike price of $6.50. 400,000
options and 400,000 warrants vested on the date the agreement was
signed. The remaining options and warrants vest upon various events as
set forth in the agreement. As of June 30, 2005, none of the vesting
events had taken place. Using the Black-Scholes pricing model, the
vested options and warrants were valued at $236,000 and recorded as
consulting expense for the six months ended June 30, 2005. Factors used
in the Black-Scholes pricing model included; risk-free interest rate of
3.89%; strike price of $2.05 for the options and $6.50 for the
warrants; market price of $2.05; volatility rate of 22.13%; and a yield
rate of 0.00%. Expenses to be recorded in future quarters are unknown
at this time because the value of the vesting options and warrants will
be partly based on the market price on the date the vesting events take
place.
In June of 2005, we entered into employment agreements with Mike
Maples, Steven Lamar, and John Gott. Each agreement has a term of three
11
years. In the agreements we agreed to pay an aggregate of $150,000 in
signing bonuses, agreed to issue an aggregate of 1,125,000 shares of
common stock, and agreed to issue an aggregate of 1,250,000 options.
The signing bonuses were paid and capitalized as a prepaid expense,
which will be amortized over the three-year term of each agreement. In
the six months ended June 30, 2005, $1,780 was recorded in compensation
expense. There is $148,220 remaining in prepaid expense as of June 30,
2005. The 1,125,000 shares of common stock are required to be issued in
January 2006 and are therefore shown in these financial statements as
"stock not issued but owed". The shares were valued at $2,418,750,
using the market price on the date the agreement was signed, and
recorded as unamortized cost of stock issued for compensation in the
equity section of these financial statements. The cost will be
amortized over the three-year term of the agreements. For the six
months ended June 30, 2005, $28,716 was amortized into compensation
expense. Unamortized cost of stock issued for compensation was
$2,390,034 as of June 30, 2005. The 1,250,000 options will be earned
evenly over the three-year agreement. Each option is convertible into
one share of common stock at a strike price of $2.50 and is exercisable
for a period of ten years. Expense associated with the options will be
recorded over the three-year period of the agreement at fair market
value, using the Black-Scholes pricing model. Compensation expense
relating to options earned for the six months ended June 30, 2005 was
$11,872. Factors used in the Black-Scholes pricing model included;
risk-free interest rate of 4.09%; strike price of $2.50; market price
of $2.15; volatility rate of 22.13%; and a yield rate of 0.00%. As of
June 30, 2005, 14,840 of the 1,250,000 options have been earned and
expensed. Expenses to be recorded in future quarters are unknown at
this time because the value of the earned options will be partly based
on the month-end market price.
In June of 2005, an officer of the Company sold common stock, owned
personally by him, to employees. 275,000 shares of common stock were
sold at a price of $0.05 per share. The difference between the
estimated fair market values of the shares (estimated by taking a
discount from the closing market price on the day of the sales, with
the discount reflecting restrictions on transfer affecting the shares
pursuant to SEC rule 144) and the employee purchase price has been
recorded as compensation expense. Compensation expense relating to this
transaction was $475,000 in the six months ended June 30, 2005.
NOTE 4 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES AND COMPENSATION
As detailed in Note 3, we have issued or agreed to issue shares of
common stock and options as part of various consulting agreements. The
costs of these issuances are recorded as a debit in the equity 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 six months ended June 30, 2005,
12
$427,805 was amortized into consulting expense. Unamortized cost of
stock issued for services was $1,656,168 as of June 30, 2005.
As detailed in Note 3, we have agreed to issue common stock as part of
various employment agreements. The costs of these issuances are
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for compensation. The balance is
amortized into compensation expense over the three-year lives of the
employment agreements. For the six months ended June 30, 2005, $28,716
was amortized into compensation expense. Unamortized cost of stock
issued for compensation was $2,390,034 as of June 30, 2005.
NOTE 5 - CONSULTING, PROMOTIONAL AND INVESTOR RELATIONS SERVICES
Consulting and investor relation services expense was $1,470,956 for
the six months ended June 30, 2005. Consulting and investor relation
expenses incurred are detailed below:
Consulting expenses relating to stock issued for services were $427,805
(See Note 4) in the six months ended June 30, 2005. Consulting expenses
relating to options issued for services was $470,736 (See Note 3) for
the six months ended June 30, 2005.
Various individuals and corporations performed consulting services and
investor relation services for us during the six months ended June 30,
2005 and were paid $572,415 in cash.
NOTE 6 - BUILDING AND RELATED PARTY TRANSACTIONS
We paid rent of $18,750 for January of 2005 to a company 50% owned by
John Gott, our Chief Executive Officer.
In February of 2005, we exercised an option to purchase a building from
a company 50% owned by John Gott, our Chief Executive Officer. The
purchase price was $3,500,000.
NOTE 7 - SUBSEQUENT EVENTS
From July 1, 2005 through August 2, 2005, 8,000 shares of preferred
stock, series A, were converted to 80,000 shares of common stock.
From July 1, 2005 through August 2, 2005, 10,000 shares of preferred
stock, series B, were converted to 100,000 shares of common stock.
The Company intends to make a rescission offer to all warrant holders
who exercised warrants during the period from May 1, 2002 through May
10, 2004. During such period, the registration statement that the
Company filed with the US Securities and Exchange Commission to
13
register the common stock issuable upon exercise of the warrants may
not have been "current" because it had not been amended to include the
Company's most recent audited financial statements. As a result, the
former warrant holders may be entitled to rescind their purchases and
the Company has decided to make the rescission offer. Once made, the
rescission offer is open for 30 days. The rescission offer would
require the Company to repurchase shares of common stock issued upon
exercise of 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. 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, 2004 or the six
months ended June 30, 2005 has been made for the rescission offer. The
current market price is below the $3.00 exercise price of the Class B
warrants. Only 16,600 Class B warrants were issued in the period, so
any effect of the rescission offer would be immaterial to these
financial statements, therefore, no adjustment has been made. If all
warrant holders accepted the rescission offer, the Company 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 on
these financial statements.
From 2001 to 2003, we sold shares of our Convertible Preferred Stock,
which is reflected in these financial statements as our Series A
Preferred Stock. The Company discovered that the certificate of
designation for the Convertible Preferred Stock had not been filed, and
the Company made such filing in December of 2004. The delay in filing
the certificate of designation may have resulted in the shares of
Convertible Preferred Stock not being validly issued. The Company is
making an assessment of the effects of the delay and will determine
what actions it will take, if any, to remedy the effects of the delay.
Because the current stock price is well above the conversion price, no
adjustments to these financial statements have been recorded.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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; a line of in-wall, in-ceiling
and outdoor loudspeakers; and a line for the cinema and movie theater market.
From the early 1990'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 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.
We began selling loudspeakers in June 2000 when we introduced our Professional
Line. We introduced our other lines of speakers in subsequent years, with the
most recent being the Cinema line, which we started selling in 2004. Our
products are primarily sold through a network of approximately 200 dealers for
our Professional and Commercial lines, 20 dealers for our Home Theater line, and
15 foreign distributors. We recently began selling products directly through a
corporate sales department that targets major "big box" retailers.
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.
RESULTS OF OPERATIONS
Quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004 For
the quarter ended June 30, 2005, revenue increased to $855,353 from $505,306 in
the 2004 period, a 69% increase, resulting primarily from the positive results
of a marketing program we started in January 2004 and our increased production
capabilities resulting from facility expansions completed in 2004 and 2005. Our
gross profit percentage decreased to approximately 26% in the 2005 period from
approximately 55% in the 2004 period, primarily due to unusually high profit
margins in the 2004 period.
General and administrative expenses for the 2005 second quarter decreased to
$1,987,485 from $2,912,239 in the 2004 second quarter, a decrease of $924,754.
The decrease resulted primarily from lower non-cash charges for consulting. The
following table compares categories of our general and administrative expenses
in the second quarter of 2005 to the second quarter of 2004:
THREE MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2005 2004
--------- ---------
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for consulting
and investor relation services 473,342 1,680,698
Charges for options and stock issued and
sold to directors/employees 220,720 87,786
Impairment charge - Evenstar, Inc. -- --
--------- ---------
Total non-cash G&A expense 694,062 1,768,484
CASH G&A EXPENSE ITEMS:
Consulting and investor relation services 676,244 421,395
Advertising and promotion 218,596 37,902
Acquisitions - SA Sound -- --
Acquisitions - BG deal expired -- --
Impairment charge - Evenstar, Inc. -- --
Other cash G&A expenses 398,583 684,458
--------- ---------
Total cash G&A expense 1,293,423 1,143,755
--------- ---------
Total G&A expense 1,987,485 2,912,239
========= =========
Other income (expense) increased to net other income of $152,527 in the 2005
second quarter as compared to net other income of $13,813 in the 2004 second
quarter, primarily due to a non-cash gain on valuation of D warrants in the
amount of $368,522, partially offset by a $234,158 loss on the disposal of
leasehold improvements made to our previous office and factory facility.
Due principally to the decrease in general and administrative expense, our net
loss decreased to $1,612,322 in the second quarter of 2005 as compared to a net
loss of $2,621,386 in the comparable quarter of 2004.
Six months ended June 30, 2005 as compared to the six months ended June 30, 2004
For the first six months of 2005, revenue increased to $1,680,073 from $926,222
15
in the first six months of 2004, an 81% increase, resulting primarily from the
positive results of a new marketing program we started in January 2004 and our
increased production capabilities resulting from facility expansions completed
in 2004 and 2005. Our gross profit percentage decreased to approximately 33% in
the 2005 period from approximately 48% in the 2004 period, primarily due to
unusually high profit margins in the 2004 period.
General and administrative expenses for the first six months of 2005 decreased
to $5,019,915 from $5,868,928 in the 2004 period. The decrease resulted
primarily from lower non-cash consulting and investor relations services
expenses and an impairment charge of $1,148,502 recognized in the first half of
2004 related to the Evenstar, Inc. acquisition which was partially offset by an
increase of $911,075 in advertising and promotion expenses. The following table
compares categories of our general and administrative expenses in the first half
of 2005 to the second half of 2004:
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2005 2004
--------- ---------
NON-CASH G&A EXPENSE ITEMS:
Charges for stock and options issued for consulting
and investor relation services 898,541 2,335,041
Charges for options and stock issued and
sold to directors/employees 711,588 87,786
Impairment charge - Evenstar, Inc. -- 848,502
--------- ---------
Total non-cash G&A expense 1,610,129 3,271,329
CASH G&A EXPENSE ITEMS:
Consulting and investor relation services 997,614 782,995
Advertising and promotion 1,031,343 120,268
Acquisitions - SA Sound -- 109,165
Acquisitions - BG deal expired 100,000 --
Impairment charge - Evenstar, Inc. -- 300,000
Other cash G&A expenses 1,280,829 1,285,171
--------- ---------
Total cash G&A expense 3,409,786 2,597,599
--------- ---------
Total G&A expense 5,019,915 5,868,928
========= =========
Other income (expense) increased to net other income of $1,100,193 in the 2005
period as compared to net other income of $18,684 in the 2004 period, primarily
due to a non-cash gain on valuation of D warrants in the amount of $899,928 and
interest earned on cash and certificates of deposit related to cash received
from our private placement of Series C Convertible Preferred Stock, partially
offset by a $234,158 loss on the disposal of leasehold improvements made to our
previous office and factory facility.
Due primarily to the decrease in general and administrative expenses and the
increase in net other income, our net loss decreased to $3,358,526 in the first
half of 2005 as compared to a net loss of $5,405,204 in the first half of 2004.
FINANCIAL CONDITION
On June 30, 2005, our current assets exceeded current liabilities by $9,562,919,
compared to an excess of $12,229,108, on December 31, 2004. Total assets
exceeded total liabilities by $14,115,950, compared to an excess of total assets
over total liabilities of $12,645,461 on December 31, 2004. The changes in
working capital, total assets, and total liabilities were principally due to the
receipt of $13,340,408 in net proceeds from the closing of our January 2005
private placement ($8,849,420 of which had been received prior to December 31,
2004) and the purchase of our new headquarters and manufacturing facility for
$3,500,000. In the first half of 2005, we also invested $231,284 for new
vehicles, $661,209 for improvements to the new headquarters and manufacturing
facility, and $171,028 for new equipment.
Our operations used cash of $4,326,628 for the first half of 2005 which was
primarily attributable to the net loss of $4,626,976 recognized during the
period; an increase in inventory of $799,527; a reduction of accrued liabilities
by $607,092, as we paid a $600,000 liability accrued at December 31, 2004 for a
finder's fee in connection with the January 2005 private placement; and an
increase in prepaid expenses and other current assets of $884,124 primarily
related to prepaid advertising associated with our national branding campaign.
We also recorded the warrants issued in the January 2005 private placement as a
long-term liability in accordance with EITF 00-19, and revalued the warrants on
June 30, 2005 at $237,662. Deposits - Merger decreased to $0, as we wrote off
the $100,000 paid to Bohlender-Graebener Corporation upon expiration of our
agreement. On June 30, 2005, we had a backlog of orders of approximately
$540,000.
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.
On June 17, 2005, we entered into employment agreements with John M. Gott, our
Chairman and Chief Executive Officer; Steven M. Lamar, our newly hired
President; and Michael L. Maples, our newly hired Chief Operating Officer and
Chief Financial Officer. Each employment agreement has a term of three years and
severance payments equal to six months of base salary following a termination by
us without "cause" or a termination by the executive for "good reason."
16
Mr. Gott's agreement provides for an annual salary of $180,000, an increase from
his previous salary of $96,000; a grant of options to purchase up to 500,000
shares of our common stock at $2.50 per share; and an agreement to grant 500,000
shares of our common stock to Mr. Gott in January 2006.
Mr. Lamar's agreement provides for an annual salary of $120,000, a signing bonus
of $100,000, a grant of options to purchase up to 500,000 shares of our common
stock at $2.50 per share, and an agreement to grant 500,000 shares of our common
stock to Mr. Lamar in January 2006.
Mr. Maples' agreement provides for an annual salary of $250,000, a signing bonus
of $50,000, a grant of options to purchase up to 250,000 shares of our common
stock at $2.50 per share, and an agreement to grant 125,000 shares of our common
stock to Mr. Maples in January 2006.
Each of the options described above were granted on June 21, 2005 and have a
term of ten years. The options vest in one-third increments on each of the
first, second and third anniversaries of the date of the option grant. The
options vest in full upon a "change of control" or termination of the
executive's employment by us without "cause."
On June 14, 2005, we entered into a Promotion Agreement with JMBP, Inc. and Mark
Burnett. In connection with the Promotion Agreement, we entered into an Option
Agreement and Warrant Certificate on June 14, 2005 with Mr. Burnett. Under the
Option Agreement, SLS granted Mr. Burnett 1,000,000 shares of our common stock
at an exercise price of $2.05 per share, subject to certain adjustments
specified in the Option Agreement. Under the Warrant Certificate, we granted to
Mr. Burnett warrants to purchase 1,000,000 shares of our common stock at an
exercise price of $6.50 per share, subject to certain adjustments specified in
the Warrant Certificate. Forty percent of the options and warrants vested as of
June 14, 2005 and the remainder of the options and warrants vest, if at all,
incrementally based on the achievement of specified milestones. The options and
warrants are exercisable at any time, and from time to time, during the term
beginning on June 14, 2005 and ending on June 14, 2010. SLS issued the options
and warrants as part of the consideration for the consulting and other services
SLS is entitled to receive under the Promotion Agreement.
In order to continue operations, we have been dependent on raising additional
funds, and as discussed above, on January 4, 2005, we completed a private
placement of 15,000 shares of our Series C Convertible Preferred Stock for an
aggregate purchase price of $15 million (net proceeds of $13,340,408). The
investors also received five-year warrants to purchase an aggregate of 6,000,000
shares of our common stock at an exercise price of $6.00 per share, subject to
certain adjustments. The preferred stock is initially convertible, at the
holder's option, into an aggregate of 6,000,000 shares of our common stock, at a
conversion price of $2.50 per share, subject to certain adjustments, and accrues
a 6% premium to the stated value of the shares of preferred stock, which would
be convertible into additional shares of common stock. We may redeem the
warrants (or require the holders to exercise them) and may require holders to
convert the preferred stock to common stock if certain conditions are met.
Through June 30, 2005, holders had converted 550 shares of the Series C
Preferred Stock into common stock, leaving 14,450 shares of Series C Preferred
Stock outstanding.
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, or
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.
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 was issued in September
2004. 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.
On April 2, 2004, we entered into a strategic alliance agreement with
Bohlender-Graebener Corporation ("BG"). We paid BG $100,000 on April 2, 2004 for
this agreement. The agreement term was for one year and could be extended for
any length of time after the first year by mutual agreement between BG and us.
During the term of the agreement BG was required to work with us, diligently and
in good faith, to consummate a merger. During the first six months of the
agreement, BG was not permitted to solicit any offer to purchase BG, and was not
permitted to respond to any unsolicited offer. In addition to the above, BG
granted us exclusive sales and marketing rights to certain BG products and we
committed to purchase certain minimum quantities of various BG products at
agreed-upon prices. Those purchase commitments were 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. We satisfied all of these purchase commitments. In
the event no agreement to merge the companies on mutually acceptable terms could
be reached before termination of the agreement, BG would be entitled to keep the
$100,000 cash payment as consideration for its performance under the agreement.
In October 2004, we agreed to pay BG an additional $100,000 to extend certain
terms of the strategic alliance agreement. In addition to the $100,000 payment,
we also agreed to purchase 500 additional units of product. In return BG agreed
to extend exclusive merger negotiations by six months, provide exclusivity for
one of its products to us, and provide $100,000 in discounts against future
product purchases. We are currently in negotiations with BG to extend the
agreement.
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
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 June 30, 2005, we had $1,807,915 in cash, a
17
certificate of deposit for $2,000,000 maturing on December 10, 2005, a
certificate of deposit for $2,000,000 maturing on January 7, 2006, and a
certificate of deposit for $500,000 maturing on August 21, 2005. We believe this
cash and these securities, totaling $6,307,915, are 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.
CRITICAL ACCOUNTING POLICIES
Our discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that investors need to
be aware of these policies and how they impact our financial reporting to gain a
more complete understanding of our financial statements as a whole, as well as
our related discussion and analysis presented herein. While we believe that
these accounting policies are grounded on sound measurement criteria, actual
future events can and often do result in outcomes that can be materially
different from these estimates or judgments. The accounting policies and related
risks described in the notes to our financial statements for the year ended
December 31, 2004 are those that depend most heavily on these judgments and
estimates.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our only current borrowing is a note payable on equipment in the principal
amount of $9,272 at June 30, 2005, which bears interest at a fixed rate of 5.16%
and matures in September 2008.
We have invested $4,000,000 of current excess cash in two $2,000,000
certificates of deposit. One CD earns interest at 3.34% per annum and matures on
December 10, 2005, and the other earns interest at 3.00% per annum and matures
on January 7, 2006. The selection of this investment was made with the primary
goal of preservation of principal, while obtaining a fixed yield.
We purchased a $500,000 certificate of deposit that earns interest at 2.75% per
annum and matures on August 21, 2005. This CD is collateral for a line of credit
we have with a supplier.
We have no other investments that are subject to market risk.
18
ITEM 4. CONTROLS AND PROCEDURES.
As of June 30, 2005, our Chief Executive Officer and our 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 each concluded that our disclosure controls and
procedures were effective as of June 30, 2005.
As a result of the audit of our financial statements for the year ended December
31, 2002, we were required to make restatements and reclassifications of our
unaudited financial statements filed for the quarters ended March 31, June 30
and September 30, 2002. Such restatements and reclassifications call into
question the effectiveness of our disclosure controls and procedures. In 2004,
we hired a consultant to examine and consider enhancements to such controls and
procedures. The consultant's work will continue throughout 2005.
We have made no changes in our internal control over financial reporting during
the quarter ended June 30, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 2004, we completed a private placement of shares of our Series B Preferred
Stock. One of the investors in the private placement was Dr. Christopher H.
Brown. Dr. Brown purchased 20,000 shares of the Series B Preferred Stock for
$50,000. Months after closing the offering, Dr. Brown claimed that he submitted
two separate subscription agreements and two separate checks, one of which was
in the name of Dr. Brown and the other in the name of his professional
corporation, Christopher H. Brown, B.S. Dent., D.D.S., P.A. He specifically
claims that his professional corporation sought to purchase an additional 24,000
shares of our Series B preferred stock for $60,000. We have informed Dr. Brown
that we received only one subscription agreement and one check, and we have
cashed only the one check. Nevertheless, Dr. Brown filed suit against us,
alleging breach of contract and negligence, in the U.S. District Court for the
Western District of North Carolina (Christopher H. Brown, M.D., v. SLS
International, Inc., filed April 29, 2005). His First Amended Complaint seeks
24,000 preferred shares in exchange for his payment of $60,000, or alternatively
"money damages in an amount to be determined at trial, based on SLS' failure to
timely issue [him] 24,000 shares of preferred stock," in addition to other
unspecified relief. Dr. Brown filed his First Amended Complaint after we moved
to dismiss his original complaint and before the Court could rule on our motion.
We will shortly file a motion to dismiss the First Amended Complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our 2005 annual meeting of stockholders was held on June 20, 2005. At the
meeting:
John M. Gott, Robert H. Luke, and Michael L. Maples were re-elected as Directors
for a term of one year.
Votes cast in favor of Mr. Gott's selection totaled 21,638,829 votes, or 98.5%;
while 338,394 votes were withheld.
Votes cast in favor of Mr. Luke's selection totaled 21,636,729 votes or 98.5%;
while 340,494 votes were withheld.
Votes cast in favor of Mr. Maples' selection totaled 21,624,230 votes or 98.4%;
while 352,993 votes were withheld.
The stockholders also voted to:
Ratify the appointment of Weaver & Martin LLC as our independent registered
public accounting firm for the fiscal year ending December 31, 2005. Votes cast
in favor of this ratification were 21,612,979 votes, or 99.9% of the votes cast
on such resolution; while votes cast against were 21,411 and abstentions and
broker non-votes totaled 342,833.
Approve an amendment to the Corporation's Certificate of Incorporation to
increase the number of authorized shares of common stock from 75 million shares
to 125 million shares. Votes cast in favor of approval were 21,317,721 votes, or
97.0%; while votes cast against were 226,228, and abstentions and broker
non-votes totaled 330,274.
Approve the Corporation's 2005 Stock Incentive Plan. Votes cast in favor of
approval were 21,150,786 votes, or 98.1%; while votes cast against were 409,163,
and abstentions and broker non-votes totaled 414,274.
Item 6. Exhibits.
The following are being filed as exhibits to this Report:
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Employment Agreement, dated June 17, 2005, between SLS
International and John M. Gott*
10.2 Employment Agreement, dated June 17, 2005, between SLS
International and Steven Lamar*
10.3 Employment Agreement, dated June 17, 2005, between SLS
International and Michael L. Maples*
10.4 Form of Nonstatutory Stock Option Agreement under 2005
Stock Incentive Plan*
10.5 Form of Restricted Stock Agreement under 2005 Stock
Incentive Plan*
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Financial Officer
32 Section 1350 Certifications
----------
* Filed as an exhibit to our Form 10-Q for the quarter ended June 30, 2005,
filed August 15, 2005.
20
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: November 16, 2005 By /s/ Michael L. Maples
-----------------------------
Michael L. Maples
Chief Financial Officer
(Principal Financial Officer)
21