UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: March 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number ______________________
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
---------------------------------------
(Exact name of small business issuer
as specified in its charter)
DELAWARE 80-0025175
------------------------------ --------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
91 HILL AVENUE NW,
FORT WALTON BEACH, FLORIDA 32548
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number (850) 796-0909
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
As of May 21, 2004 there were 40,029,300 shares of the registrant's common
stock, par value $0.0001, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
MARCH 31, 2004 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Special Note Regarding Forward Looking Statements 3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet as of March 31, 2004(unaudited) 4
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (unaudited) 5
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2004 (unaudited) 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2 Management's Discussion and Analysis or Plan of Operations 19
Item 3 Controls and Procedure 23
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 2 Changes in Securities 25
Item 3 Defaults Upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 27
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2004, discusses financial
projections, information or expectations about our products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. We are making these forward-looking statements in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These risks and uncertainties
are described, among other places in this Quarterly Report, in "Management's
Discussion and Analysis or Plan of Operations."
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report
3
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Balance Sheet
March 31, 2004
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 1,402,237
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . 2,114,878
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 244,916
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . 126,554
-------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 3,888,585
-------------
Property, plant, and equipment, net . . . . . . . . . . . . . . . 1,979,344
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . 40,034
Cash surrender value of life insurance. . . . . . . . . . . . . . 38,665
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 13,802
-------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,960,430
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 1,110,586
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 931,940
Contract deposits . . . . . . . . . . . . . . . . . . . . . . . 58,306
Current portion of long-term debt . . . . . . . . . . . . . . . 200,511
Due to related parties. . . . . . . . . . . . . . . . . . . . . 379,238
-------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 2,680,581
-------------
Long-term liabilities:
Long-term debt, less current portion. . . . . . . . . . . . . . 1,711,617
-------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 4,392,198
-------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $0.0001 par value; 20,000,000 authorized,
none issued . . . . . . . . . . . . . . . . . . . . . . . . . -
Common stock, $0.0001 par value; 80,000,000 shares authorized,
21,651,000 issued and outstanding . . . . . . . . . . . . . . 2,165
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 16,117,184
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (14,551,117)
-------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 1,568,232
-------------
Total liabilities and stockholders' equity. . . . . . . . . . . . $ 5,960,430
=============
See accompanying notes to the consolidated financial statements.
4
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statements of Operations
For the three months ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------- ------------
Revenues . . . . . . . . . . . . . . . . . . . . $ 3,596,578 $ 3,273,029
Cost of revenues . . . . . . . . . . . . . . . . (3,274,381) (3,090,799)
------------- ------------
Gross profit . . . . . . . . . . . . . . . . . . 322,197 182,230
Operating expenses . . . . . . . . . . . . . . . (13,951,585) (124,932)
------------- ------------
Income (loss) from operations. . . . . . . . . . (13,629,388) 57,298
Other income (expense):
Building rent. . . . . . . . . . . . . . . . . 49,560 45,351
Interest income. . . . . . . . . . . . . . . . 365 199
Other income . . . . . . . . . . . . . . . . . 1,985 4,802
Interest expense . . . . . . . . . . . . . . . (63,851) (66,752)
Other expense. . . . . . . . . . . . . . . . . (1,010) (6,249)
------------- ------------
Total other income (expense) . . . . . . . . . (12,951) (22,649)
Income (loss) before provision for income taxes. (13,642,339) 34,649
Income tax benefit . . . . . . . . . . . . . . . 61,330 -
------------- ------------
Net income (loss). . . . . . . . . . . . . . . . $(13,581,009) $ 34,649
============= ============
Weighted average common shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . 19,316,934 16,276,222
============= ============
Earnings (loss) per share:
Basic and diluted. . . . . . . . . . . . . . . $ (0.70) $ -
============= ============
See accompanying notes to the consolidated financial statements.
5
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statement of Stockholders' Equity
For the three months ended March 31, 2004
(Unaudited)
Common Stock
------------------- Additional Accumulated
Shares Amount paid-in capital deficit Total
---------- ------- ---------------- ------------- -------------
Balances at January 1, 2004 18,851,000 $ 1,885 $ 79,426 $ (970,108) $ (888,797)
Stock options issued
for consulting services . - - 11,418,038 - 11,418,038
Exercise of stock options . 2,800,000 280 4,619,720 - 4,620,000
Net loss. . . . . . . . . . - - - (13,581,009) (13,581,009)
---------- ------- ---------------- ------------- -------------
Balances at March 31, 2004. 21,651,000 $ 2,165 $ 16,117,184 $(14,551,117) $ 1,568,232
========== ======= ================ ============= =============
See accompanying notes to the consolidated financial statements.
6
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------- ----------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $(13,581,009) $ 34,649
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Issuance of stock options to related party for
consulting services . . . . . . . . . . . . . . . . . . . . . 11,418,038 -
Investor relations expenses paid by a related party. . . . . . . . 2,065,000 -
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,327 38,082
Accrued interest payable due to related parties. . . . . . . . . . 7,792 -
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . (28,594) -
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 445
(Increase) decrease in:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . (386,994) (77,004)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (122,524) 66,309
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . (107,831) (75,358)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,000
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (160,273) (62,103)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 373,359 (111,792)
Contract deposits. . . . . . . . . . . . . . . . . . . . . . . . . 8,306 (2,077)
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . (36,966) -
------------- ----------
Net cash used in operating activities. . . . . . . . . . . . . . (518,924) (187,849)
------------- ----------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . . . (7,817) (30,204)
------------- ----------
Net cash used in investing activities. . . . . . . . . . . . . . (7,817) (30,204)
------------- ----------
Cash flows from financing activities:
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . (544,171) (41,996)
Net repayments on bank line of credit. . . . . . . . . . . . . . . . - (108,596)
Repayment of short-term debt . . . . . . . . . . . . . . . . . . . . (307,726) -
Advances from related party. . . . . . . . . . . . . . . . . . . . . 598,916 163,392
Repayments of advances from a related party. . . . . . . . . . . . . - (200,061)
Proceeds from the exercise of stock options. . . . . . . . . . . . . 1,485,000 -
------------- ----------
Net cash provided by (used in) financing activities. . . . . . . 1,232,019 (187,261)
------------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . 705,278 (405,314)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . 696,959 633,909
------------- ----------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . $ 1,402,237 $ 228,595
============= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,919 $ 73,512
============= ==========
Supplemental schedule of non-cash financing and investing activities:
Reduction in due to related party in lieu of cash payment for
exercise of stock options . . . . . . . . . . . . . . . . . . . . $ 3,135,000 $ -
============= ==========
Reclasification of short-term debt to accrued expenses . . . . . . . $ 17,635 $ -
============= ==========
See accompanying notes to the consolidated financial statements.
7
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) ORGANIZATION AND NATURE OF BUSINESS
Silva Bay International, Inc., a Delaware corporation, was formed in 1998 for
the purpose of locating and recovering rare and valuable aircraft. Silva Bay
International, Inc. had no operations and no revenue from inception in 1998 to
the time of the acquisition of Spectrum Sciences & Software, Inc. in April,
2003.
Spectrum Sciences & Software, Inc. was incorporated in the State of Florida on
October 8, 1982. Headquartered in Fort Walton Beach, Florida, the Company has
three reportable segments - management services, manufacturing, and engineering
and information technology services. Management services include providing
engineering, technical, and operational services in the area of defense range
management specializing in bombing and gunnery training range operation and
maintenance. Manufacturing operations include the design and construction of
munitions ground support equipment and containers for the shipping and storage
of munitions and equipment. The Company's engineering and information technology
services segment consists of the sale of computer software developed to assist
in hazard management and weapons impact analysis.
On April 2, 2003, Silva Bay International, Inc. acquired Spectrum Sciences &
Software, Inc., a Florida corporation, in exchange for the issuance of 2,500,000
shares of common stock (taking into account the forward two for one stock split
of April 9, 2003) (see Note 3). Spectrum Sciences & Software, Inc. is now the
wholly owned subsidiary of Silva Bay International, Inc. (now collectively
referred to as the "Company").
On April 8, 2003, Silva Bay International, Inc. changed its name to Spectrum
Sciences & Software Holdings Corp. On April 9, 2003, the Company effectuated a
two for one forward split of its common stock. On November 4, 2003, the
Company's registration statement for the public trading of its shares became
effective.
The Company's contracts are primarily fixed price contracts with the United
States Department of Defense (DOD). The Company currently has contracts in
Florida and Arizona. During the three months ended March 31, 2004 and 2003, 99%
of the Company's revenues were derived from contracts with the DOD.
(B) INCOME TAXES
The Company accounts for income taxes utilizing the asset and liability method.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enacted date. Valuation allowances are
8
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
The Company currently has a net operating loss carryforward of approximately
$10,900,000, which would equate to a deferred tax asset of approximately
$3,700,000 at March 31, 2004. The Company has not recorded that federal tax
benefit in the accompanying financial statements, as management does not have
sufficient information to estimate when or if the Company will realize the
future tax benefit.
(C) EARNINGS (LOSS) PER SHARE
The Company utilizes Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which requires the
presentation of basic and diluted earnings (loss) per share on the face of the
statement of operations. Basic earnings (loss) per share is computed by
dividing the net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share reflects the
potential dilution that could occur if stock options were exercised.
The Company's common stock equivalents consist of consultant stock options to
purchase common stock. As of March 31, 2004, stock options to purchase 6,200,000
shares of the Company's common stock at an exercise price of the lesser of $1.65
per share or the fair market value at the time of exercise were not included in
the computation of diluted earning per share for the three months ended March
31, 2004 because the effect of their exercise would have been anti-dilutive. The
Company had no common stock equivalents as of March 31, 2003.
The weighted average number of common shares outstanding for computing basic and
diluted earnings (loss) per share for the three months ended March 31, 2004 and
2003 was 19,316,934 and 16,276,222, respectively.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 2004 and 2003 have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the rules and regulations of the
U.S. Securities and Exchange Commission for Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring accruals, considered necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows for the
periods presented.
The results of operations for the interim periods ended March 31, 2004 and 2003
are not necessarily indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in conjunction
with the December 31, 2003 consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2003.
9
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
3. ACQUISITION OF SPECTRUM SCIENCES & SOFTWARE, INC.:
On April 3, 2003, Spectrum Sciences & Software Holdings Corp. (formerly Silva
Bay International, Inc.) entered into an amended and restated agreement and plan
of merger with Spectrum Sciences & Software, Inc., pursuant to which Spectrum
Sciences & Software, Inc. became Spectrum Sciences & Software Holdings Corp.'s
wholly owned subsidiary. As part of this agreement, 2,500,000 shares of the
Company's common stock was issued to the sole stockholder of Spectrum Sciences &
Software, Inc., which was Donal Myrick.
The acquisition was accounted for under the purchase method of accounting;
accordingly, the purchase price has been allocated to reflect the fair value of
assets and liabilities acquired at the date of acquisition. Due to the
composition of the majority of the governing body and senior management of the
Company being the same as Spectrum Sciences & Software, Inc. prior to the April
3, 2003 acquisition, Spectrum Sciences & Software, Inc. has been deemed to be
the accounting acquirer (a reverse acquisition).
The financial statements of the Company prior to April 3, 2003 are those of
Spectrum Sciences & Software, Inc. The results of operation of the acquired
business have been included in the accompanying consolidated financial
statements from the date of acquisition.
4. RECEIVABLES:
Receivables, which are primarily comprised of amounts due to the Company for
work performed on contracts directly related to the U.S. Department of Defense
and through U.S. Department of Defense contractors, consisted of the following
at March 31, 2004:
Contracts - billed $ 1,851,541
Contracts - unbilled 263,337
--------------
Total receivables $ 2,114,878
==============
10
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
5. INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out method. The major components of inventories at March
31, 2004 are summarized as follows:
Raw materials, net of reserve $ 92,217
Work in progress 151,699
Finished goods 1,000
----------
Total inventories $ 244,916
==========
6. PROPERTY AND EQUIPMENT:
A summary of property and equipment at March 31, 2004 is as follows:
Land $ 175,000
Buildings and improvements 1,565,301
Manufacturing and other equipment 737,912
Investment property 220,900
Computer equipment 140,350
Software 60,353
Vehicles 34,890
Furniture and fixtures 28,721
Construction in progress 38,714
-------------
Total 3,002,141
Accumulated depreciation (1,022,797)
-------------
Property and equipment, net $ 1,979,344
=============
7. ACCRUED EXPENSES:
The major components of accrued expenses at March 31, 2004 are summarized as
follows:
Accrued payroll, payroll taxes and
related benefits $ 776,872
Accrued vacation and sick leave 121,662
Accrued interest payable 12,579
Accrued property taxes 8,165
Other 12,662
-------------
Total accrued expenses $ 931,940
=============
The major components of the accrued salaries and related benefits is $102,740
owed to Gila Bend employees for wage rates which were recalculated based on job
conformity required by the Department of Labor in 2003, and wage increases of
$365,094 for the Service Contract Act employees.
11
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
8. LONG TERM DEBT
Long-term debt consisted of the following:
March 31, 2004
--------------
Priority loans payable to a bank, due in monthly installments of $50,000
including interest at prime plus 2.00% (6.00% at March 31, 2004). Final payment
due April 1, 2005. Cross-collateralized with non-priority real estate loans and
personal guarantee of the former Company President, held by the same bank.
Collateral includes two real estate mortgages, security agreement, assignment of (1)
contracts and assignment of rents and leases. $ 90,549
Non-priority loan payable to a bank, due in monthly installments of $14,870,
including interest at 8.50%. Final balloon payment of $1,473,662 due April 1,
2005, collateralized by real estate and a personal guarantee of the former
Company President. Cross-collateralized with priority loans. 1,526,018
Non-priority loan payable to a bank, due in monthly installments of $1,588,
including interest at 8.75%. Final balloon payment of $186,457 due April 1,
2005, collateralized by a condominium and a personal guarantee of the former
Company President. Cross-collateralized with priority loans. 189,123
Non-priority loan payable to a bank, due in monthly installments of $4,347,
including interest at prime + .25% (4.25% at March 31, 2004). Final balloon
payment of $49,661 due April 1, 2005, collateralized by equipment and inventory. (2)
Cross-collateralized with priority loans. 96,548
(1)
Other 9,890
--------------
1,912,128
Less current portion (200,511)
--------------
Total long-term debt $ 1,711,617
==============
(1) Final payment was made on April 5, 2004.
(2) Final payment was made on May 5, 2004.
12
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
9. DUE TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS:
$52,000 due to the spouse of the President of the Company including accrued
interest of $500. Interest at 12% per annum. The payable is due upon demand, is
unsecured, and was paid in full on April 7, 2004. $ 52,500
$326,738 due to a stockholder of the Company. Represents net amount due as a
result of the stockholder paying certain investor relations expenses on behalf
of the Company. This payable does not bear interest, is payable upon demand, and
is unsecured. 326,738
--------------
$ 379,238
==============
The Company was provided management consulting services by Endeavor Capital
Group, LLC, which is owned by Robert Genovese. The terms of the original
consulting agreement between Endeavor Capital Group, LLC and the Company were
from March 1, 2003 to March 1, 2004. Consulting fees of $4,000 a month for
January and February, 2004 and expenses of $15,106 are reported as consulting
fees in the accompanying financial statements.
On March 11, 2004, the Company entered into a new consulting agreement with Mr.
Genovese. The term of the agreement is for a one year period, and Mr. Genovese
is tasked with bringing to the Company's attention potential or actual
opportunities which meet its business objectives or logical extensions thereof,
alert the Company to new or emerging high potential forms of production and
distribution, comment on corporate development, identify respective suitable
merger or acquisition candidates and related due diligence and other such
planning and development services as shall be requested by the Company.
Mr. Genovese received 9,000,000 stock options of the Company's common stock at
an exercise price of equal to the lesser of $1.65 or the fair market value at
the time of exercise as a result of the execution of the agreement. In
accordance with FASB Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation", the Company has recorded consulting
expense of $11,418,038 based on the fair value of the stock options at the date
of grant using the Black-Scholes pricing model in the accompanying financial
statements.
Mr. Genovese exercised 2,800,000 of the options during the first quarter of
2004. The Company received $1,485,000 of cash from Mr. Genovese and converted
outstanding debt of $3,135,000 owed to Mr. Genovese and related companies in
lieu of cash for exercise of these options.
The Company owed Mr. Genovese $792,030 at December 31, 2003. Mr. Genovese
advanced the Company $598,916 during the first quarter of 2004 to pay operating
expenses, and the Company had accrued interest of $7,792 on two interest-bearing
notes. In addition, Mr. Genovese paid for certain investor relations expenses
totaling $2,065,000 during the first quarter of 2004 on behalf of the Company.
Mr. Genovese debt totaled $3,461,738 prior to the conversion of $3,135,000 of
this debt. At March 31, 2004, the Company owed Mr. Genovese $326,738 for
investor relations expenses that had not been converted by option exercise at
the end of the first quarter.
13
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
10. STOCK OPTION PLAN:
On March 11, 2004 the board of directors approved and adopted a 2004
Non-Statutory Stock Option Plan for 10,000,000 common stock to be granted to
employees, non-employee Directors, consultants and advisors. Vesting and term
of all options is determined by the Board of Directors and may vary by optionee;
however, the term may be no longer than 10 years from the date of grant.
At March 31, 2004, 9,000,000 options had been granted to a non-employee
stockholder who provides consulting services to the Company. FASB Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation", requires these options be valued at fair value at the date of
grant. The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 1%; no dividend yields; volatility
factors of the expected market price of our common stock of 0.62; and an
expected life of the options of 2 years. This generates a fair value of $1.27
per option at the date of grant, which was March 11, 2004. As a result,
$11,418,038 of consulting expense and additional paid-in capital was recorded at
the date of grant.
At March 31,2004, 9,000,000 options had been granted and 2,800,000 had been
exercised at a strike price of $1.65 per option.
14
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
11. SEGMENT INFORMATION:
Segment information has been presented on a basis consistent with how business
activities are reported internally to management. Management solely evaluates
operating profit by segment by direct costs of its products and services with an
allocation of indirect costs. The Company has three operating segments -
management services, manufacturing, and engineering and information technology.
Management services include providing engineering, technical, and operational
services in the area of defense range management specializing in bombing and
gunnery training range operation and maintenance. Manufacturing operations
include the design and construction of munitions ground support equipment and
containers for the shipping and storage of munitions and equipment. The
Company's engineering and information technology segment consists of the sale of
computer software developed to assist in hazard management and weapons impact
analysis.
The following is a summary of certain financial information related to the three
segments during the three months ended March 31, 2004 and 2003:
Three months ended March 31
2004 2003
------------- -----------
Total revenues by segment
Management Services. . . . . . . . . . . . . . . . . $ 2,641,031 $2,293,100
Engineering and Information Technology . . . . . . . 320,090 329,353
Manufacturing. . . . . . . . . . . . . . . . . . . . 635,457 650,576
------------- -----------
Total revenues by segment. . . . . . . . . . . . . $ 3,596,578 $3,273,029
============= ===========
Operating profit (loss) by segment
Management Services. . . . . . . . . . . . . . . . . $ 17,546 $ 63,391
Engineering and Information Technology . . . . . . . 151,792 80,532
Manufacturing. . . . . . . . . . . . . . . . . . . . 152,859 38,307
Operating expenses . . . . . . . . . . . . . . . . . (13,951,585) (124,932)
Interest income (expense) net. . . . . . . . . . . . (63,486) (66,553)
Other income (expense), net. . . . . . . . . . . . . 50,535 43,904
------------- -----------
Net income (loss) before income tax benefit. .. . . . (13,642,339) 34,649
Income tax benefit . . . . . . . . . . . . . . . . . 61,330 -
------------- -----------
Net income (loss). . . . . . . . . . . . . . . . . $(13,581,009) $ 34,649
============= ===========
During the three months ended March 31, 2004 and 2003, all of the Company's
revenue was generated in the United States of America (USA). As of March 31,
2004, all of the Company's long-lived assets are located in the USA.
15
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
12. COMMITMENTS AND CONTINGENCIES:
IRS Tax Lien
--------------
On March 17, 2004, the Company made its final payment to the IRS and received
its release of lien of March 19, 2004.
Legal Matters
--------------
In December 2002, three Spectrum Sciences and Software, Inc. employees each
filed complaints for violation of civil rights, discrimination, harassment,
hostile work environment and retaliation in the United States District Court,
District of Arizona. The case numbers for these complaints are: CIV '02 2621
PHX MHM; CIV '02 2619 PHX DKD; and CIV '02 2620 PHX FJM. In January 2003,
Spectrum filed answers to all three complaints, denying all allegations of
wrongdoing. All three plaintiffs are claiming "undue stress and anxiety" from
Spectrum's actions. There are no damage amounts specified in any of the
actions. The plaintiffs are requesting the following: Compensatory damages,
plus special incidental damages in such a sum as may be proven at trial;
punitive damages in such a sum as may be proven at trial; for cost for the suit;
for attorney's fees; and for other such relief as the Court deems just and
proper. The Company intends to vigorously defend its position. As of May 13,
2004, the cases have progressed through the establishment of a case management
plan with the courts and a consolidation of all the cases into a single action.
Plaintiff and Defendant Depositions were taken and additional discovery is
ongoing. The Company currently does not know what the outcome of this
litigation will be.
In April 1, 2004, the Company paid the final payment of $10,000 to Business &
Commercial Brokerage Inc. and obtained a signed release acknowledging the
receipt of all sums for full compromise settlement against the previously filed
suit. On April 7, 2004, a Notice of Voluntary Dismissal was filed in the Circuit
Court for Escambia County Florida.
Letter of Intent to Acquire Inland Fabricators
----------------------------------------------------
On March 31, 2004, the Company signed a Letter of Intent (LOI) to acquire all of
the issued and outstanding membership interests (the "Members") of Inland
Fabricators, LLC, a Limited Liability Company organized under the laws of
Louisiana ("IFAB"), or its nominees or assignees, or acquire IFAB by merger with
a subsidiary of Acquiror. The LOI is not binding, and the transaction is
subject to the execution of a definitive acquisition agreement by both parties
and is further described in Part II, Item 1 of this filing.
Pursuant to the LOI, if the acquisition goes forward, the Company is to issue
shares of its common stock to the Members in consideration for their interests
in IFAB. The Company will place 4,000,000 shares of common stock in escrow and
the shares will be released from escrow in amounts and from time to time as
based on an agreed formula.
On May 6, 2004, the Company provided guarantees in the amount of $500,000 to
secure an Irrevocable Letter of Credit ("LOC") in favor of a major international
construction firm. The LOC provided the necessary performance guarantee for
IFAB under a previously negotiated Purchase Order with that major international
construction firm.
On May 6, 2004, a creditors group consisting of Modern Valve, Inc., Thomas Pipe
& Steel, L.L.C., Radnor Alloys, Inc., Portable Machine Works, Inc., Analytic
Stress Relieving, Inc. and Custom Blast Services, Inc. filed suit no. 519924 in
the 19th Judicial District court, Parish of East Baton Rouge, State of Louisiana
against various individuals and Members of IFAB. Spectrum Sciences & Software
Holdings Corporation was not named as a party to the suit, however, mention was
made of Spectrum's LOI for a purchase of Inland Fabricators, L.L.C. The suit
alleges among other issues that IFAB as successor to Thomas Inland Marine
L.L.C., Pipeworks, Inc., Pipeworks Reserve, Inc., and Pipeworks Venezuela owes
certain sums to the Creditor Group based on debt incurred by Thomas Inland
Marine and Pipeworks et al. Due diligence is continuing on the planned
Spectrum/IFAB merger. The potential outcome of the Creditors suit and its
impact on the potential merger is undetermined at this time.
16
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
13. SUBSEQUENT EVENTS:
On April 16, 2004, the Board of Directors amended and restated the stock option
plan to increase the number of shares from 10,000,000 to 30,000,000.
On April 16, 2004, the Company and Robert Genovese amended and restated their
March 11, 2004 consulting agreement (the "Amended Agreement"). The Amended
Agreement extended the term of the contract for an additional year to April 19,
2006 and added an exclusivity provision. As part of the Amended Agreement, Mr.
Genovese was issued options to acquire an additional 9,000,000 shares of common
stock at an exercise price of the greater of $1.95 or 60% of the closing price
on the day preceding notice to exercise. In addition, Mr. Genovese was issued an
option to acquire 5,000,000 shares of the Company's common stock at the lesser
of $1.65 or the fair market value of the shares at the time of the exercise as a
result of his role in the IFAB transaction.
On April 20, 2004, the Company awarded 677,500 stock options to certain
employees, officers and directors for services rendered.
On April 28, 2004, the Company was informed that the SEC was conducting an
informal inquiry into the Company as further described in Part II, Item 5 of
this filing.
In light of this inquiry and pending further review, the Company's Board of
Directors elected to suspend the current consulting agreement between the
Company and Robert Genovese.
As of May 21, 2004, Mr. Genovese and related companies had submitted expense
reimbursement claims in addition to those reflected on the Interim Consolidated
Financial Statements as of March 31, 2004 of $900,000 under the Amended
Agreement. The Company is reviewing the validity of those claims.
Between March 31, 2004 and May 21, 2004, Mr. Genovese has exercised 18,378,300
options. Of these options, 11,200,000 were exercised at a strike price of $1.65
per option, and 7,178,300 were exercised at a strike price of $1.95 per option.
Total proceeds payable to the Company relating to the exercise of these options
were $32,477,685. The Company received $29,232,685 of cash from Mr. Genovese. In
addition, Mr. Genovese and his related companies cancelled expense reimbursement
claims of $1,100,000 in lieu of cash for exercise of these options. As a result,
the Company believes that Mr. Genovese and his related companies have no
outstanding reimbursement claims as of May 21, 2004.
Between January 1, 2004 and May 21, 2004, Mr. Genovese has exercised 21,178,300
options. Of these options, 14,000,000 were exercised at a strike price of $1.65
per option, and 7,178,300 were exercised at a strike price of $1.95 per option.
Total proceeds payable to the Company relating to the exercise of these options
were $37,097,685. The Company received $30,717,685 of cash from Mr. Genovese and
Mr. Genovese and related companies cancelled expense reimbursement claims of
$4,035,000 in lieu of cash for exercise of these options.
17
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2004 and 2003
(Unaudited)
As of May 21, 2004, the Company has not received payment from Genovese in the
amount of $1,815,000 with respect to an exercise of 1,100,000 options at a
strike price of $1.65 per share on or about April 15, 2004. Additionally, with
respect to exercise of 1,100,000 options on or about April 26, 2004, the Company
received payment based on a strike price of $1.65 per share rather than the
$1.95 per share as provided for in the Amended Agreement. As a result, Mr.
Genovese owes the Company an additional $330,000 with respect to that exercise.
Under the terms of the relevant option agreements and assuming the validity of
cancelled claims, total payment owed to the Company from Mr. Genovese relating
to these option exercises is $2,145,000.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company's discussion and analysis of its financial condition and results of
operations are based upon its Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements requires
management to make estimates and assumptions which affect the amounts reported
in the financial statements and determine whether contingent assets and
liabilities, if any, are disclosed in the financial statements. On an ongoing
basis, we evaluate our estimates and assumptions, including those related to
long-term contracts, product returns, bad debts, inventories, fixed asset lives,
income taxes, environmental matters, litigation and other contingencies. We base
our estimates and assumptions on historical experience and on various factors
that are believed to be reasonable under the circumstances, including current
and expected economic conditions, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
our estimates under different assumptions or conditions.
We believe that the following critical accounting policies, among others, affect
our more significant estimates and assumptions used in the preparation of our
financial statements:
Revenue recognition. We recognize revenue and profit on substantially all of
our contracts using the percentage-of-completion method of accounting, which
relies on estimates of total expected contract revenues and costs. We follow
this method since reasonably dependable estimates of the revenues and costs
applicable to various stages of the contracts can be made. Recognized revenues
and profit are subject to revisions as the projects progress to completion.
Revisions to the profit estimates are charged to income in the period in which
the facts that give rise to the revisions become known.
Inventory Valuation. We review our inventory balances to determine if
inventories can be sold at amounts equal to or greater than their carrying
value. The review includes identification of slow-moving inventories, obsolete
inventories, and discontinued products or lines of products. The identification
process includes analysis of historical performance of the inventory and current
operational plans for the inventory as well as industry and customer-specific
trends. If our actual results differ from management expectations with respect
to the selling of our inventories at amounts equal to or greater than our
carrying amounts, we would be required to adjust our inventory values
accordingly.
Net operating loss carryforwards. We have not recognized the benefit in our
consolidated financial statements with respect to the approximately $10,900,000
net operating loss carryforward for federal income tax purposes as of March 31,
2004. This benefit was not recognized due to the possibility that the net
operating loss carryforward would not be utilized, for various reasons,
including the potential that we might not have sufficient profits to use the
carryforward or that the carryforward may be limited as a result of changes in
our equity ownership. We intend to use this carryforward to offset our future
taxable income. If we were to use any of this net operating loss carryforward to
reduce our future taxable income and the Internal Revenue Service were to then
successfully assert that our carryforward is subject to limitation as a result
of capital transactions occurring in 2003 or otherwise, we may be liable for
back taxes, interest and, possibly, penalties prospectively.
Impairment of Long-Lived Assets. We assess the impairment of long-lived assets
on an ongoing basis and whenever events or changes in circumstances indicate
that the carrying value may not be recoverable based upon an estimate of future
undiscounted cash flows. Factors we consider that could trigger an impairment
review include the following: (i) significant underperformance relative to
expected historical or projected future operating results;(ii) significant
changes in the manner of our use of the acquired assets or the strategy for our
19
overall business; (iii) significant negative industry or economic trends;(iv)
significant decline in our stock price for a sustained period; and (v) our
market capitalization relative to net book value. When we determine that the
carrying value of any long-lived asset may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure
impairment based on the difference between an asset's carrying value and an
estimate of fair value, which may be determined based upon quotes or a projected
discounted cash flow, using a discount rate determined by our management to be
commensurate with our cost of capital and the risk inherent in our current
business model, and other measures of fair value.
You should read the following discussion and analysis in conjunction with the
unaudited financial statements (and notes thereto) and other financial
information of our company appearing elsewhere in this report.
CONSOLIDATED OVERVIEW:
For the three months ended March 31
----------------------------------------
2004 2003
------------------- -------------------
Revenues. . . $ 3,596,578 100.0% $ 3,273,000 100.0%
Cost of revenues 3,274,381 91.0% 3,091,000 94.4%
----------- ------ ----------- ------
Gross Profit. $ 322,197 9.0% $ 182,000 5.6%
=========== ====== =========== ======
Overall, revenues for the three-months ended March 31, 2004 increased by 10%
compared to the same period in 2003 due to increased marketing activity and the
Management Services segment's growth of 15%. Gross profit as a percentage of
sales was 9% for the 3-month period ended March 31, 2004. The increases in
revenue are primarily due to scheduled increases in reimbursable labor cost
under the Service Contract Act in the management services division and
additional company-wide cost controls put in place.
MANAGEMENT SERVICES
For the three months ended March 31
-----------------------------------------
2004 2003
-------------------- --------------------
Revenues. . . $ 2,641,031 100.0% $ 2,293,000 100.0%
Cost of revenues 2,623,485 99.3% 2,230,000 97.3%
------------ ------ ------------ ------
Gross Profit. $ 17,546 .7% $ 63,000 2.7%
============ ====== ============ ======
Revenues in the Management Services segment increased approximately 15% for the
three-month period ended March 31, 2004 compared to 2003. The increases in
revenue and expenses are primarily due to the scheduled increases in
reimbursable labor cost under the Service Contract Act and collective bargaining
agreement for Spectrum's largest subcontractor, Washington Group International.
20
ENGINEERING AND INFORMATION TECHNOLOGY SERVICES
For the three months ended March 31
-----------------------------------
2004 2003
---------------- -----------------
Revenues. . . . $320,090 100.0% $ 329,000 100.0%
Cost of revenues 168,298 52.6% 248,000 75.4%
-------- ------ --------- ------
Gross Profit. . $151,792 47.4% $ 81,000 24.6%
======== ====== ========= ======
Revenues in the Engineering and Information Technology Services segment
decreased 2.8% for the period ended March 31, 2004 as compared to the same
period in 2003. This slight decrease in revenues resulted from planned internal
suspension of production schedules due to staff travel overseas undertaken to
client sites and scheduled completion of backlog software development tasks for
the Safe-Range program.
Gross profit as a percent of sales was 47.4%, an increase of 87%. This increase
in gross profit was due to reductions of management salary costs due to the
departure of Donald Garrison, Vice President, and additional cost controls put
in place during the first quarter of 2004 as compared to the first quarter of
2003.
MANUFACTURING SEGMENT
For the three months ended March 31,
----------------------------------
2004 2003
---------------- ----------------
Revenues. . . $635,457 100.0% $651,000 100.0%
Cost of revenues 482,598 75.9% 613,000 94.2%
-------- ------ -------- ------
Gross Profit. $152,859 24.1% $ 38,000 5.8%
======== ====== ======== ======
Revenues in the Manufacturing segment decreased 2% for the three-month period
ended March 31, 2004 as compared to the same period in 2003.
Gross profit improved significantly to 24.1% due to the streamlining in
manufacturing processes brought about by the Company obtaining longer term
contracts, which led to cost efficiencies in both overhead labor, purchasing and
production.
21
OPERATING EXPENSES
Three months Three months
ended ended
March 31, 2004 March 31, 2003 Increase
---------------- ---------------- --------
Selling, general and
administrative expenses $ 13,951,585 $ 124,900 11070%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("SG&A") expenses increased 11070% for the three-month period
ended March 31, 2004 as compared to the same period in 2003.
During the quarter ended March 31, 2004, there was $11,418,038 recorded for
stock-based consulting compensation. The impact caused an expense to the
Company. However, the grant of the options to Mr. Robert Genovese also increased
additional paid-in capital by $11,418,038. In addition, the Company recorded
approximately $2,065,000 of investor relations expenses during the first quarter
of 2004. These expenses relate to the implementation of the initial investor
awareness/relations services such as broker/analyst meetings, contracts,
mailings to brokers and analysts, investment advisors and individual investors.
The wholly-owned subsidiary, Spectrum Sciences & Software, Inc. also had
increased legal and accounting costs of $162,720. This is due to costs
associated with the filings with the Securities and Exchange Commission.
These types of expenses were not present in the quarter ended March 31, 2003.
22
OTHER INCOME AND EXPENSES
INTEREST INCOME AND EXPENSE, NET - Net interest expense was $63,486 and $66,553
for the three-month period ended March 31, 2004 and 2003, respectively. The
reduction of $3,067 is due to the decrease of principal balances due.
OTHER INCOME AND EXPENSE, NET - Net other income was $50,535 and $43,904 for the
three-month period ended March 31, 2004 and 2003, respectively. The increase of
$6,631 is attributed primarily to the increase in monthly rental income from L-3
Communications which was $15,117 per month in 2003 to $16,520 per month in 2004.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents increased $705,278 as of March 31, 2004, as compared
to December 31, 2003. At March 31, 2004, cash and equivalents totaled
$1,402,237, as compared with $696,959 at December 31, 2003. As of May 18, 2004,
the Company had $28,848,525 in a money market account as a result of the
exercise of stock options.
At March 31, 2004, working capital was $1,208,004, as compared to negative
working capital of <$1,182,912> at December 31, 2003.
At March 31, 2004, the current ratio was 1.45, as compared to a ratio of 0.69 at
December 31, 2003.
ITEM 3. CONTROLS AND PROCEDURES
The effectiveness of our or any system of disclosure controls and procedures is
subject to certain limitations, including the exercise of judgment in designing,
implementing and evaluating the controls and procedures, the assumptions used in
identifying the likelihood of future events, and the inability to eliminate
misconduct completely. As a result, there can be no assurance that our
disclosure controls and procedures will prevent all errors or fraud or ensure
that all material information will be made known to appropriate management in a
timely fashion. By their nature, our or any system of disclosure controls and
procedures can provide only reasonable assurance regarding management's control
objectives.
Our current principal executive officer and principal financial officer
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of March 31, 2004, the end of the period covered by this
report. Based on this evaluation, subject to limitations identified below, the
Company's current principal executive officer and principal financial officer
concluded that the Company's controls and procedures (as referenced in paragraph
4(c) of their certifications filed as exhibits hereto) were generally effective
in providing reasonable assurance that the information required to be disclosed
in this report has been recorded, processed, summarized and reported as of March
31, 2004. During the three month period ended March 31, 2004, the Company has
not made any change in its internal controls over financial reporting (as
referenced in paragraph 4(d) of their certifications filed as exhibits hereto)
23
that has materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
As disclosed in substance in the Company's FORM 10-KSB filed with the Securities
and Exchange Commission on March 14, 2004, the Company historically has not
employed certain controls and procedures other public companies use to provide
assurance as to disclosure. For example, the Company does not have a standing
audit committee of the Board of Directors or a financial expert serving on the
Board of Directors or employed as an officer who meets the criteria for a
financial expert under Item 401(e) of Regulation S-B. In addition, there has
been substantial turnover in our senior management and Board of Directors.
In response to the SEC inquiry discussed in Note 13 to the Consolidated
Financial Statements and Item 5 of Part II of this report, the Company has
retained counsel to represent the Company in the SEC inquiry. Through counsel,
the Company is reviewing transactions and other matters that appear to be the
subject of the SEC inquiry and is unable to predict at this time the outcome of
its review or the SEC inquiry or the potential impact on the assessment of the
adequacy of our internal controls and procedures.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Trident Metals
---------------
As of March 31, 2004, the balance of the debt to The Trident Company is $17,635.
All funds due to The Trident Company were paid in full on April 6, 2004. The
subsequent Dismissal with Prejudice was filed with the District Court of Tulsa
County, State of Oklahoma on April 29, 2004.
Harassment Suit
----------------
In December 2002, three Spectrum Sciences and Software, Inc. employees each
filed complaints for violation of civil rights, discrimination, harassment,
hostile work environment and retaliation in the United States District Court,
District of Arizona. The case numbers for these complaints are: CIV '02 2621
PHX MHM; CIV '02 2619 PHX DKD; and CIV '02 2620 PHX FJM. In January 2003,
Spectrum filed answers to all three complaints, denying all allegations of
wrongdoing. All three plaintiffs are claiming "undue stress and anxiety" from
Spectrum's actions. There are no damage amounts specified in any of the
actions. The plaintiffs are requesting the following: Compensatory damages,
plus special incidental damages in such a sum as may be proven at trial;
punitive damages in such a sum as may be proven at trial; for cost for the suit;
for attorney's fees; and for other such relief as the Court deems just and
proper. The Company intends to vigorously defend its position.
As of May 13, 2004, the cases have progressed through the establishment of a
case management plan with the courts and a consolidation of all the cases into a
single action. Plaintiff and Defendant Depositions were taken and additional
discovery is ongoing. Spectrum does not know what the outcome of this
litigation will be.
Inland Fabricators
-------------------
On March 31, 2004, Spectrum Sciences & Software Holdings Corp. (the "Company")
signed a Letter of Intent (LOI) to acquire all of the issued and outstanding
membership interests (the "Members") of Inland Fabricators, LLC, a Limited
Liability Company organized under the laws of Louisiana ("IFAB"), or its
nominees or assignees, or acquire IFAB by merger with a subsidiary of Acquiror.
The LOI is not binding, and the transaction is subject to the execution of a
definitive acquisition agreement by both parties.
Pursuant to the LOI, if the acquisition goes forward, the Company is to issue
shares of its common stock to the Members in consideration for their interests
25
in IFAB. The Company will place 4,000,000 shares of common stock in escrow and
the shares will be released from escrow in amounts and from time to time as
based on an agreed formula.
On May 6, 2004, the Company provided guarantees in the amount of $500,000 to
secure an Irrevocable Letter of Credit ("LOC") in favor of a major international
construction firm. The LOC provided the necessary performance guarantee for
IFAB under a previously negotiated Purchase Order with that major international
construction firm.
On May 6, 2004, a creditors group consisting of Modern Valve, Inc., Thomas Pipe
& Steel, L.L.C., Radnor Alloys, Inc., Portable Machine Works, Inc., Analytic
Stress Relieving, Inc. and Custom Blast Services, Inc. filed suit no. 519924 in
the 19th Judicial District court, Parish of East Baton Rouge, State of Louisiana
against various individuals and Members of IFAB. Spectrum Sciences & Software
Holdings Corporation was not named as a party to the suit, however, mention was
made of Spectrum's LOI for a purchase of Inland Fabricators, L.L.C. The suit
alleges amongst other issues that IFAB as successor to Thomas Inland Marine
L.L.C., Pipeworks, Inc., Pipeworks Reserve, Inc., and Pipeworks Venezuela owes
certain sums to the Creditor Group based on debt incurred by Thomas Inland
Marine and Pipeworks et al. Due diligence is continuing on the planned
Spectrum/IFAB merger. The potential outcome of the Creditors suit and its
impact on the potential merger is undetermined at this time.
Business & Commercial Brokerage Inc. Settlement
----------------------------------------------------
In April 1, 2004, the Company paid the final payment of $10,000 to Business &
Commercial Brokerage Inc. and obtained a signed release acknowledging the
receipt of all sums for full compromise settlement against the previously filed
suit. On April 7, 2004, a Notice of Voluntary Dismissal was filed in the Circuit
Court for Escambia County Florida.
Loan Modification and Extension Agreement Debt Repayment
--------------------------------------------------------------
All unsecured debt to SouthTrust Bank has been paid, leaving only the mortgages
for the 91 Hill Ave. headquarters building, and the corporate condominium. A
payment of $371,250 was made to SouthTrust on March 31, 2004, which was 25% of
the first cash exercise of options by Robert Genovese, ($1,485,000 X .25%=
$371,250). This 25% was required in the SouthTrust Loan Modification and
Extension Agreements. A payment of $190,628 was made to SouthTrust on April 15,
2004, which paid all other unsecured debt with SouthTrust Bank.
IRS Tax Lien
--------------
On March 17, 2004, the company made its final payment to the IRS and received
its release of lien on March 19, 2004.
ITEM 2. CHANGES IN SECURITIES
Exercise of Options by Mr. Robert Genovese
-----------------------------------------------
Mr. Robert Genovese was awarded options to purchase 9,000,000 shares of Spectrum
stock on March 11, 2004. As of March 31, 2004, Mr. Genovese filed Notices of
Exercise for 2,800,000 options. Those shares had an exercise price of $1.65 per
option. The first exercise was on March 12, 2004 for 900,000 shares. Mr.
Genovese elected to convert debt in lieu of cash for approximately $1,485,000 as
payment for these options. This first exercise completely eliminated all past
26
non-investor relations debt to Mr. Genovese. The second Notice of Exercise was
on March 15, 2004 for 900,000 shares. The Company received $1,485,000 in cash
from Mr. Genovese for those shares. On March 19, 2004, Mr. Genovese presented
the company with a Notice of Exercise for 1,000,000 shares. This third exercise
of shares was paid for by a second debt conversion of $1,650,000 by Mr. Genovese
for his company Endeavor Capital. This $1,650,000 in debt to Endeavor Capital
Corp. is debt directly related to all invoices presented to Spectrum by Endeavor
Capital Corp. for its work performed in the area of investor relations and
publicity.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
By letter dated April 28, 2004, the Company was informed that the Staff of the
Securities and Exchange Commission's (SEC), Division of Enforcement is
conducting an informal inquiry into the Company. In conjunction with that
inquiry, the SEC's Staff has requested the Company to voluntarily provide
certain documents and information related to, among other things:
- the Company's relationship with Robert Genovese, Endeavor Capital Group
Ltd. and B.G. Capital Group Ltd., including transactions in the Company's
securities and options therefor;
- the Company's press releases, public announcements and other promotional
activities;
- the resignation of Donal Myrick in March 2004; and
- the listing of the Company's securities for trading on any foreign stock
exchanges.
The Company is cooperating fully with the SEC inquiry.
In light of this inquiry and pending further review, the Company's Board of
Directors elected to suspend the current consulting agreement between the
Company and Robert Genovese.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
10.1 Stock Option Agreement dated April 20, 2004 by and between Spectrum
Sciences & Software Holdings Corp. and Robert Genovese.
10.2 Stock Option Agreement dated April 20, 2004 by and between Spectrum
Sciences & Software Holdings Corp. and Robert Genovese.
b) Reports on Form 8-K:
(i) The Company filed a report on Form 8-K on January 21, 2004 with the United
States Securities and Exchange Commission. This report covered Items 5 & 7.
(ii) The Company filed a report on Form 8-K on January 26, 2004 with the United
States Securities and Exchange Commission. This report covered Items 5 & 7.
(iii) The Company filed a report on Form 8-K on February 11, 2004 with the
United States Securities and Exchange Commission. This report covered Items
5 & 7.
(iv) The Company filed a report on Form 8-K on March 12, 2004 with the United
States Securities and Exchange Commission. This report covered Items 5 & 7.
(v) The Company filed a report on Form 8-K on March 30, 2004 with the United
States Securities and Exchange Commission. This report covered Items 6 & 7.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 24th day of
May 2004.
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP
/s/ William H. Ham
By: -----------------------------------
William H. Ham, President and Chief
Executive Officer
The undersigned, the Chief Financial Officer of the Registrant, certifies that
this report complies with all of the requirements of section 13(a) and 15(d) of
the Exchange Act and the information contained in this report fairly presents,
in all material respects, the financial condition and results of operations of
the Registrant.
Date: May 24, 2004
/s/ Nancy C. Gontarek
-----------------------
Nancy C. Gontarek,
Chief Financial Officer
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