AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 2003
REGISTRATION NO.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12 (B) OR 12 (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
(Exact name of Registrant as specified in its charter)
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DELAWARE 8744 80-0025175
(State or other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or organization) Classification Code Number) I.D. No.)
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91 HILL AVENUE NW
FORT WALTON BEACH, FLORIDA 32548
(850) 796-0909
(850) 244-9560 (FACSIMILE)
(Address, including zip code, and telephone and facsimile numbers, including
area code, of
registrant's executive offices)
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THE COMPANY CORPORATION
2711 CENTERVILLE ROAD, SUITE 400
WILMINGTON, DELAWARE 19808
(800) 818-0204
(302) 636-5454 (FACSIMILE)
(Name, address, including zip code, and telephone and facsimile numbers,
including area code of agent for service)
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Securities to be registered under Section 12 (b) of the Act:
Title of each class Name of each exchange on which
to be registered each class is to be registered
None None
Securities to be registered under Section 12 (g) of the Act:
Common Stock, par value $.0001 per share
(Title of class)
Copies of Communications Sent to:
ADAM S. GOTTBETTER, ESQ.
KEVIN F. BARRETT, ESQ.
GOTTBETTER & PARTNERS, LLP
630 THIRD AVENUE
NEW YORK, NEW YORK 10017
TEL: (212) 983-6900 - FAX: (212) 983-9210
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS, INCLUDING RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS. . . . . . . . . . . . . . . . . . . 8
ITEM 3. DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . 16
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS . . . . . . . . . . . . . . . . . . 16
ITEM 6. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 8. DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 22
ITEM 2. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART III
ITEM 1. INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
PART I - ITEM 1. DESCRIPTION OF BUSINESS
Overview
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SUMMARY OF CORPORATE HISTORY
Spectrum Sciences & Software, Inc. a Florida corporation, was formed in
1982 for the purpose of providing engineering, science and technological support
services for the United States Department of Defense.
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. Silva Bay International, Inc.'s common stock has been traded on the
Electronic Pink Sheets as a non-reporting company under the symbol SIVY since
2000.
On April 2, 2003, Silva Bay International, Inc., a Delaware corporation
acquired all of the assets and assumed certain liabilities of Spectrum Sciences
& Software, Inc., a Florida corporation, in exchange for the issuance of
1,250,000 shares of its common stock. Spectrum Sciences & Software, Inc. is now
the wholly owned subsidiary of Silva Bay International, Inc. Donal R. Myrick had
been the sole shareholder, president and founder of Spectrum Sciences &
Software, Inc. Silva Bay International, Inc. retained the services of Mr. Donal
R. Myrick as president pursuant to a three year employment agreement. Mr. Myrick
is also the chairman of the board of directors.
On April 8, 2003, Silva Bay International, Inc. changed its name to
Spectrum Sciences & Software Holdings Corp. ("Spectrum" or the "Company"). On
April 9, 2003 the National Association of Securities Dealers issued the Company
a new trading symbol. The Company's trading symbol changed from "SIVY" to
"SPSC". All of the Company's operations are conducted through its wholly owned
subsidiary Spectrum Sciences & Software, Inc. On April 9, 2003, the Company
effectuated a two for one forward split of its common stock. The Company is
located at: 91 Hill Avenue NW, Fort Walton Beach, Florida 32548; the telephone
number is (850) 796-0909.
BUSINESS
The Company provides engineering, science and technological support
services for the United States Department of Defense.
The Company has three operating divisions:
1) Manufacturing Division. We manufacture aerospace ground support
equipment, missile, munitions and material handling equipment, specialized
shipping and storage containers; and a variety of precision parts for the
sustaining of military equipment.
2) Computuer Software. Computer Software provides technical services to
support range safety, hazard analysis and mitigation, mission planning, weapon
system simulations, weapons safety footprint development, and ballistic
analysis. Additionally, this division performs a wide variety of environmental
impact analysis to include: preparation of environmental impact statements,
aircraft noise analysis and noise impact assessments, airspace usage analysis,
airspace environmental impact assessments, and use compatibility studies.
3) Management Services. Management Services provides operations and
maintenance of United States Air Force air-to-ground bombing and gunnery
training ranges. We also provide for complete base operations services to
include: armed base security, fire department operations, grounds and road
maintenance, civil engineering, runway operations, airbase tower operations, and
base wide communications.
COMPETITION
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The market for our products is highly competitive. We face a variety of
domestic and foreign competitors including divisions of Ahntech, Arcata
Associates, Artic Slope Manufacturing Technology, Tybrin and Science
Applications International Corp. Many of our competitors are larger than we are
and have substantially greater financial and other resources.
We compete on the basis of product offerings, price, product and systems
quality, technology and ongoing customer service and support. Our ability to
compete for defense contracts depends on a variety of factors, including:
- Our corporate and key personnel backgrounds and qualifications;
- The effectiveness and innovation of our research and development
programs;
- Our proven past performance history;
- Our ability to offer better program performance than our competitors
at a lower cost; and
- The readiness of our facilities, equipment and personnel to undertake
the programs for which we compete.
In programs where we are the sole-source provider, other suppliers may
compete against us only if the customer chooses to reopen the particular program
to competition. Approximately 4% of our total contract revenue for the year
ended December 31, 2002 was derived from sole-source business.
Furthermore, our computer software division contains advanced technology
derived from internal research and development that creates high barriers to
entry. Since January 1, 1998, we have spent approximately $500,000 in research
and development, in large part, in support of advanced technology.
SUPPLIERS AND MATERIALS
Our in-house manufacturing primarily consists of assembly of purchased
parts. Accordingly, we do not use significant amounts of raw materials. We
purchase manufactured component parts for our assemblies from various
independent suppliers. These parts are normally not purchased under long-term
contracts unless a long-term sales contract with one of our customers requires
it. We are not dependent on any one supplier and maintain back-up suppliers for
all critical components. However, any delay in our suppliers' abilities to
obtain necessary parts may affect our ability to meet customer production needs.
REGULATORY MATTERS AND GOVERNMENT CONTRACTS
Substantially all of our contract revenue resulted from contracts with the
Department of Defense, prime contractors that identified the Department of
Defense as the ultimate purchaser or other United States Government agencies.
United States Government business is performed under fixed-price contracts.
Under U.S. Government regulations, certain costs, including certain
financing costs, portions of research and development costs, lobbying expenses,
certain types of legal expenses and certain marketing expenses related to the
preparation of bids and proposals, are not allowed for pricing purposes and
calculation of contract reimbursement rates under flexibly-priced contracts. The
U.S. Government also regulates the methods under which costs are allocated to
U.S. Government contracts. We are subject to a variety of audits performed by
U.S. Government agencies. The Defense Contract Audit Agency, or DCAA, performs
these audits on behalf of the U.S. Government.
U.S. Government contracts are, by their terms, subject to termination by
the U.S. Government for either its convenience or default by the contractor.
Fixed-price contracts provide for payment upon termination for items delivered
to and accepted by the U.S. Government and, if the termination is for
convenience, for payment of fair compensation of work performed plus the costs
of settling and paying claims by terminated subcontractors, other settlement
expenses and a reasonable profit on the costs incurred. If a contract
termination is for default, however,
- the contractor is paid an amount agreed upon for completed and
partially completed products and services accepted by the U.S.
Government;
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- the U.S. Government is not liable for the contractor's costs with
respect to unaccepted items, and is entitled to repayment of advance
payments and progress payments, if any, related to the terminated
portion of the contract; and
- the contractor may be liable for excess costs incurred by the U.S.
Government in procuring undelivered items from another source.
In addition to the right of the U.S. Government to terminate, U.S.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds for a given
program on a September 30 fiscal year basis, even though contract performance
may take many years. Consequently, at the outset of a major program, the
contract is usually partially funded and additional monies are normally
committed to the contract by the procuring agency only as appropriations are
made by Congress for future fiscal years.
INTELLECTUAL PROPERTY RIGHTS
We own several proprietary software and hardware products, these products
are not protected by any patents or copyrights.
ENVIRONMENTAL MATTERS
Our operations include the use, generation and disposal of hazardous
materials. We are subject to various U.S. federal, state and local laws and
regulations relating to the protection of the environment, including those
governing the discharge of pollutants into the air and water, the management and
disposal of hazardous substances and wastes, the cleanup of contaminated sites
and the maintenance of a safe workplace. We believe that we have been and are in
substantial compliance with environmental laws and regulations and that we have
no liabilities under environmental requirements that we would expect to have a
material adverse affect on our business, results of operations or financial
condition. In the past two years, we have not incurred material costs relating
to environmental compliance.
EMPLOYEES
As of June 3, 2003, we had approximately 135 employees. Approximately 15%
of our employees are engaged in manufacturing, 7% of our employees are engaged
in engineering, research and development and 73% of our employees are engaged in
range operations and maintenance, and 5% of our employees are engaged in sales,
marketing, product support and general administration. None of our employees are
represented by a union or are covered by a collective bargaining agreement. All
of our employees are based in the United States. We consider our employee
relations to be satisfactory.
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. All of the known material risks inherent in
this offering are addressed below. These risks and uncertainties are not the
only ones we face. Unknown additional risks and uncertainties, or ones that we
currently consider immaterial, may also impair our business operations.
If any of these risks or uncertainties actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this event you could lose all or part of your investment.
UNLESS WE RAISE ADDITIONAL CAPITAL WE WILL NOT BE ABLE TO FUND OUR OPERATIONS
AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES, THEREFORE YOUR INVESTMENT WOULD BE
A COMPLETE LOSS.
We will need additional working capital within the next twelve months to
continue our operations. We will attempt to obtain this capital through
borrowing or from selling our stock privately. Failure to maintain such funding
within the next twelve months would likely prohibit us from continuing our
operations. Therefore you may be unable to sell your shares and your investment
would be a complete loss.
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THE UNITED STATES INTERNAL REVENUE SERVICE HAS OBTAINED A LIEN IN THE AMOUNT OF
$173,041.01 AGAINST SPECTRUM FOR UNPAID PAYROLL TAXES.
On April 21, 2003, the IRS obtained a lien against any and all of our
assets in the amount $173,041.01. This lien is due to unpaid payroll taxes,
interest and penalties for 2000 payroll taxes. Spectrum has entered into a
payment arrangement acceptable to the IRS.
WE ARE IN DEFAULT OF LOAN AGREEEMNTS WITH SOUTHTRUST BANK IN THE AMOUNT OF
APPROXIMATLEY $3,200,000.
Our engineering, manufacturing, research and development and administrative
offices are in Fort Walton, Florida. We own the land and building. However,
the mortgage is with SouthTrust Bank. We are in default of our loan agreements
with SouthTrust Bank in the amount of approximately $3,200,000, which could
result in our land and building being sold, which would likely result in the
termination of our business.
WE ARE IN DEFAULT ON ADVANCES WITH A PRINCIPAL OF $540,144.
As of June 3, 2003, we are in default on advances with principal totaling
$540,144. The lender is Brannon Capital, Inc., the beneficial owner of which is
Dwain Brannon, one of our directors. This debt will have significant negative
impact on our ability to become profitable.
OUR LOAN AGREEMENTS MAY RESTRICT OUR ABILTY TO FINANCE OUR FUTURE OPERTIONS.
Our loan agreements with SouthTrust Bank limit our ability to seek
additional loans and to engage in other business arrangements such as mergers
and acquisitions.
OUR RECENT MERGER WITH SPECTRUM SCIENCES & SOFTWARE, INC. IS IN VIOLATION OF THE
TERMS OF OUR LOAN AGREEMENTS WITH SOUTHTRUST BANK, PLACING THE LOANS IN DEFAULT.
The merger of Spectrum Science & Software, Inc. with Silva Bay International,
Inc. in April of 2003 was in violation of the loan agreements with SouthTrust
Bank, which would have placed these loans in default had the loans not already
been in default.
OUR INDEPENDENT AUDITORS HAVE ISSUED A "GOING CONCERN" OPINION REGARDING THE
SUBSTANTIAL DOUBT ABOUT OUR ABILTY TO CONTINUE AS A GOING CONCERN.
The auditor's opinion on our financial statements indicates that it was
prepared under the assumption that we continue as a going concern.
Nevertheless, our independent auditor believes that there is "substantial doubt"
that we will be able to continue as a going concern. In part because we have
incurred recurring losses from operations and have a net capital deficiency.
Therefore, we might not achieve profitability, our business may fail and you may
loose all of your investment.
WE ARE DEPENDENT UPON DONAL R. MYRICK, OUR FOUNDER AND CEO, ANY REDUCTION OF HIS
ROLE IN SPECTRUM WOULD HAVE A MATERIAL ADVERSE EFFECT.
The success of Spectrum is dependent on the vision, knowledge, business
relationships and abilities of Spectrum's founder and Chief Executive Officer
and director Donal R. Myrick. Any reduction of Mr. Myrick's role in the
business would have a material adverse effect on Spectrum. Mr. Myrick has
signed a three year employment agreement to serve as president of Spectrum that
will take effect upon Spectrum becoming a publicly reporting company under the
1934 Act, as amended (which is 60 days after the date this registration
statement was first filed with the U.S. Securities and Exchange Commission) or
upon the first day of trading for Spectrum on the Over the Counter Bulletin
Board (the "OTCBB").
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WE DEPEND UPON THE UNITED STATES DEPARTMENT OF DEFENSE FOR ALMOST ALL OF OUR
SALES.
We depend upon the United States Department of Defense for 99% of our
sales. If we were to loose what is essentially our only customer our business
would likely fail. Further, any reduction in the U.S. defense budget may result
in a material adverse effect upon our business.
UNLESS AN ACTIVE PUBLIC MARKET DEVELOPS FOR OUR COMMON STOCK, YOU MAY NOT BE
ABLE TO SELL YOUR SHARES, AND THEREFORE YOUR INVESTMENT WOULD BE A COMPLETE
LOSS.
There has been no active public market for our common stock. An active
trading market may never develop or, if developed, it may not be maintained.
Failure to develop or maintain an active trading market could negatively affect
the price of our securities, and you may be unable to sell your shares, and
therefore your investment would be a complete loss.
A DEFAULT JUDGMENT IN THE AMOUNT OF $139,019.97, PLUS INTEREST AND ATTORNEY FEES
WAS ENTERED AGAINGST SPECTRUM IN JANUARY, 2003 BY THE TRIDENT COMPANY.
On or about January 13, 2003, The Trident Company secured a default
judgment in Oklahoma in the amount of $139,019.97, plus interest in the amount
of $1,780.88, and attorney fees in the amount of $2,500. The action The Trident
Company v. Spectrum Manufacturing, Inc. and Spectrum Sciences & Software, Inc.
is Case No. CJ-2002-07042 in the district Court of Tulsa County State of
Oklahoma. The default judgment arises from a debt owed by Spectrum to Trident.
The parties have negotiated a payment schedule.
IN DECEMBER 2002, THREE SPECTRUM EMPLOYEES EACH FILED COMPLAINTS FOR VIOLATION
OF CIVIL RIGHTS, DISCRIMINATION, HARASSMENT, HOSTILE WORK ENVIRONMENT AND
RETALIATION AGAINST SPECTRUM IN THE UNITED STATES DISTRICT COURT, DISTRICT OF
ARIZONA.
In December, 2002, three Spectrum 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. Spectrum filed answers to all three complaints.
In January, 2003, Spectrum filed answers to all three complaints, denying all
allegations of wrongdoing. Spectrum does not know what the outcome of this
litigation will be.
WE MAY NOT QUALIFY FOR OVER-THE-COUNTER ELECTRONIC BULLETIN BOARD INCLUSION, AND
THEREFORE YOU MAY BE UNABLE TO SELL YOUR SHARES.
Upon the effectiveness of this registration statement, we will attempt to
have our common stock eligible for quotation on the Over-the-Counter Electronic
Bulletin Board ("OTCBB" or "Bulletin Board"). OTCBB eligible securities includes
securities not listed on NASDAQ or a registered national securities exchange in
the U.S. and that are also required to file reports pursuant to Section 13 or
15(d) of the Securities Act of 1933, and the company is current in its periodic
securities reporting obligations. For more information on the OTCBB see its
website at www.otcbb.com. If for any reason, however, any of our securities are
not eligible for continued quotation on the Bulletin Board or a public trading
market does not develop, purchasers of the shares may have difficulty selling
their securities should they desire to do so. If we are unable to satisfy the
requirements for quotation on the Bulletin Board, any trading in our common
stock may continue to be conducted in the over-the-counter market in what are
commonly referred to as the "pink sheets". As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the securities offered hereby. The above-described rules may materially
adversely affect the liquidity of the market for our securities.
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THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY AND YOU COULD LOOSE
ALL OR PART OF YOUR INVESTMENT.
Our common stock is currently traded on the "Over the Counter Pink Sheets.
The price of our common stock may fluctuate significantly. You may loose all or
part of your investment.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain financial information and statements
regarding our operations and financial prospects of a forward-looking nature.
Although these statements accurately reflect management's current understanding
and beliefs, we caution you that certain important factors may affect our actual
results and could cause such results to differ materially from any
forward-looking statements which may be deemed to be made in this prospectus.
For this purpose, any statements contained in this prospectus which are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as, "may",
"intend", "expect", "believe", "anticipate", "could", "estimate", "plan" or
"continue" or the negative variations of those words or comparable terminology
are intended to identify forward-looking statements. There can be no assurance
of any kind that such forward-looking information and statements will be
reflective in any way of our actual future operations and/or financial results,
and any of such information and statements should not be relied upon either in
whole or in part in connection with any decision to invest in the shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements, including the related notes, appearing
elsewhere in this prospectus. The following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from those discussed in the forward-looking
statements as a result of the various factors set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
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Spectrum Sciences & Software Holdings Corp. provides engineering, science
and technological support services for the United States Department of Defense.
We earn our revenue on fixed-price contracts with the United States
Department of Defense. In a fixed-price contract, the price is not subject to
adjustment based on cost incurred to perform the required work under the
contract. Under fixed-price contracts we agree to perform for a predetermined
contract price. Although fixed-price contracts generally permit the Company to
keep profits if costs are less than projected, the Company bears the risk that
increased or unexpected costs may reduce profit or cause the Company to sustain
losses on the contracts.
We use the percentage-of-completion method of accounting for fixed-price
contracts and, therefore, matches revenue with the cost incurred on each unit
produced at the time the Company recognized its sale based on the estimate of
gross profit margin the Company expects to receive over the life of the
contract. The Company currently evaluates its estimates of gross margin on a
monthly basis. In addition, the Company uses the cumulative catch-up method to
recognize its changes in estimates of sales and gross margins during the period
in which those changes are determined. The Company charges any anticipated
losses on a contract to operations as soon as those losses are determined. The
principal components of the Company's contract cost of revenue are materials,
subcontractor costs, labor and overhead. The Company charges all of these costs
to the respective contracts as incurred.
We expense operating costs such as selling, general and administrative,
internal research and development costs and bid and proposal costs in the period
incurred. The major components of these costs are compensation and overhead.
Capitalized debt issuance costs are amortized over their useful lives. Since
January 1, 2002, the Company has been subject to a new accounting standard
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under which it no longer amortizes goodwill, although it must test its goodwill
periodically for impairment.
The Company's results of operations, particularly its revenue and gross
profits, and its cash flows may vary significantly from period to period
depending upon the timing of delivery of finished products and the terms of
contracts. As a result, period-to-period comparisons may show substantial
changes disproportionate to the Company's underlying business activity.
Accordingly, the Company does not believe that its quarterly results of
operations are necessarily indicative of results for future periods.
SUMMARY OF SPECTRUM SCIENCES & SOFTWARE, INC. ACQUISITION
Our president, Donal R. Myrick, owned and operated Spectrum Sciences &
Software, Inc., a Florida S-Corporation since its formation in 1982. Silva Bay
International, Inc. acquired the business of Spectrum Sciences & Software, Inc.
in April 2003. Through our wholly owned subsidiary, SSS Acquisition Corp., we
acquired substantially all of the assets and assumed certain liabilities of
Spectrum Sciences & Software, Inc. in exchange for the issuance of 1,250,000
shares of common stock to Mr. Myrick. We have continued to operate the business
of Spectrum Sciences & Software, Inc. since our acquisition of its business
under the name "Spectrum Sciences & Software Holdings, Inc." The business the
Company acquired, Spectrum Sciences & Software, Inc., has been in operation for
21 years prior to our acquisition, whereas prior to this acquisition the Company
(previously named Silva Bay International, Inc.) had no operations and no
revenues.
The acquisition of Spectrum Sciences & Software, Inc. was accounted for in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 141
"Business Combinations" ("SFAS 141"), which requires all business combinations
initiated after June 30, 2001 to be accounted for under the purchase method.
SFAS No. 141 also sets forth guidelines for applying the purchase method of
accounting in the determination of intangible assets, including goodwill
acquired in a business combination, and expands financial disclosures concerning
business combinations. The assets acquired and liabilities assumed were recorded
at estimated fair values as determined by our management, based on information
available and on assumptions as to future operations.
PLAN OF OPERATION
Silva Bay International, Inc. acquired the business of Spectrum Sciences &
Software, Inc. in April 2003. In April 2003 we changed our name to Spectrum
Sciences & Software Holdings Corp. We provide engineering, science and
technological support services for the United States government. Our revenues
are earned primarily from contracts with the Department of Defense of the United
States Government. Our goal is to grow our current business through
acquisitions of other small, private defense contractors in exchange for our
common stock. Our plan of operations has two major components: financing our
current operations, and launching our acquisition strategy.
MINIMUM 12 MONTH REQUIREMENTS. Although our pro forma cash balances were
$236,581 at March 31, 2003, we are essentially out of working capital to pursue
our business and acquisition plans. Based on an analysis of our liabilities, we
are dependent on the cooperation of our creditors to permit us to continue to
operate. An analysis of our accounts payable and accrued and other liabilities
indicates that our largest payables are: SouthTrust Bank (approximately
$3,032,000) Environmental Management, Inc. (approximately $245,000), Washington
Group, International (approximately $353,000), Internal Revenue Service
(approximately $175,000) and The Trident Company (approximately $139,000). These
creditors are specifically aware of our weak financial position and search for
financing. The continued cooperation of these creditors is not assured. However,
we have been successful in obtaining agreements with all creditors. The terms of
the debt with SouthTrust Bank are as follows: unsecured $1,038,000 at a floating
interest rate currently at 6.25%, maturing June 30, 2003; $1,567,000 at 8.5%,
maturing in October 1, 2004; $145,000 at 4.5% interest rate, maturing on August
13, 2006; and $191,000 at 8.75% interest rate, maturing on December 27, 2004;
the Washington Group, International: interest payments of approximately $1,811
per month until July 2003, and then principal payments of $20,000 until the
balance is paid. The IRS has accepted the company proposal of a lump sum payment
of $25,000 (paid April 24, 2003) and monthly payments of $5,000 per month until
September 2003, when the amount increases to $10,000 per month until balance is
paid. The Trident Company has accepted the company proposal of a lump sum
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payment of $25,000 (paid May 2, 2003) and monthly payments of approximately
$8,880 until balance is paid.
We presently have no commitments for the additional financing necessary to
continue our operations. If we are unsuccessful in obtaining sufficient
financing, we may be forced to curtail all of our activities. Our plan of
operations and capital requirements are also dependent upon a number of factors
such as those described elsewhere in this registration statement.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our financial statements, which have been prepared in
accordance with accounting principals generally accepted in the United States.
The preparation of these 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 financial statements with respect to the approximately $235,000 net
operating loss carryforward for federal income tax purposes as of March 31,
2003. 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 2002 or otherwise, we may be liable
for back taxes, interest and, possibly, penalties prospectively.
10
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 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.
RESULTS OF OPERATIONS
The following tables set forth selected financial data from continuing
operations on a consolidated and segment basis for the three months ended March
31, 2003 and 2002 and for the years ended December 31, 2002 and 2001. The
segment tables, shown below, exclude certain charges, which are shown
separately. The following numbers are presented as if Silva Bay International,
Inc. would have acquired Spectrum Sciences & Software, Inc. on January 1, 2001.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
CONSOLIDATED OVERVIEW
FOR THE 3 MONTHS ENDED MARCH 31,
2003 2002
------------------- -------------------
Sales $ 3,273,000 100.0% $ 2,806,000 100.0%
Cost of Sales 3,091,000 94.4% 2,671,000 95.2%
------------------- -------------------
Gross Margin $ 182,000 5.6% $ 135,000 4.8%
Overall sales from continuing operations for the three months ended March
31, 2003 increased compared to the same period in 2002 due to increased segment
sales activity.
MANAGEMENT SERVICES
FOR THE 3 MONTHS ENDED MARCH 31,
2003 2002
------------------- -------------------
Sales $ 2,293,000 100.0% $ 2,143,000 100.0%
Cost of Sales 2,230,000 97.3% 2,080,000 97.1%
------------------- -------------------
Gross Margin $ 63,000 2.7% $ 63,000 2.9%
Sales in the Management Services segment increased approximately 7% for the
three-month period ended March 31, 2003 compared to 2002. The increases in
revenue are primarily due to the scheduled increases in reimbursable labor cost
under the Service Contract Act and increased contract modifications requesting
additional range services.
Gross margin as a percent of sales for the three-month period ended March
31, 2003 remained constant.
11
COMPUTER SOFTWARE SEGMENT
FOR THE 3 MONTHS ENDED MARCH 31,
2003 2002
------------------- -------------------
Sales $ 329,000 100.0% $ 238,000 100.0%
Cost of Sales 248,000 75.4% 147,000 61.8%
------------------- -------------------
Gross Margin $ 81,000 24.6% $ 91,000 38.2%
Sales in the Computer Software segment increased approximately 38% for the
period ended March 31, 2003 as compared to the same period in 2002. Increased
sales were a result of scheduled completion of backlog software development
tasks for the Safe-Range program
Gross margin, as a percent of sales, decreased due to increased direct
labor costs. This increase in labor costs was a result of hiring additional
employees in this division.
MANUFACTURING SEGMENT
FOR THE 3 MONTHS ENDED MARCH 31,
2003 2002
------------------- -------------------
Sales $ 651,000 100.0% $ 420,000 100.0%
Cost of Sales 613,000 94.2% 366,000 87.1%
------------------- -------------------
Gross Margin $ 38,000 5.8% $ 54,000 12.9%
Sales in the Manufacturing segment increased 55% for the three-month period
ended March 31, 2003 as compared to 2002. The increase in revenue is due to the
expansion the customer base for the Spectrum manufactured products.
Gross margin as a percent of sales decreased by 7% in 2003 compared to 2002
due to the increased overhead costs to include, the cost to provide health care
for our employees and the increased cost of general liability insurance for the
company.
OPERATING EXPENSES
FOR THE 3 MONTHS ENDED MARCH 31,
2003 2002
------------------- -------------------
Selling, general
and administrative $ 127,900 100.0% $ 162,600 100.0%
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were $127,900 in the first quarter of 2003
compared to $162,600 in 2002, a net decrease of $34,700.
OTHER INCOME AND EXPENSES
Interest income and expense, net. Net interest expense was $66,553 in
the quarter ended March 31, 2003, compared to net interest expense of $89,173 in
2002. The decline in interest expense is a result of lower prevailing interest
rates and lower average loan balances.
Other income and expense, net. Net other income in the quarter ended March
31, 2003 was $43,904 compared to other income of $44,080 in 2001. Our other
income consists primarily of rental income received from L3 Communications,
(formerly Raytheon).
12
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
CONSOLIDATED OVERVIEW
YEARS ENDED DECEMBER 31,
2002 2001
------------------- -------------------
Sales $ 12,262,000 100.0% $ 11,874,000 100.0%
Cost of Sales 11,876,000 94.5% 11,033,000 92.9%
------------------- -------------------
Gross Margin $ 386,000 5.5% $ 840,000 7.1%
Overall sales from continuing operations for the year ended December 31,
2002 increased compared to 2001. As indicated below, the Range Operations and
Maintenance saw modest growth over the prior year while depressed markets have
impacted the Manufacturing segment.
MANAGEMENT SERVICES
YEARS ENDED DECEMBER 31,
2002 2001
------------------- -------------------
Sales $ 8,761,000 100.0 % $ 8,239,000 100.0%
Cost of Sales 8,681,000 99.1 % 7,822,000 94.9%
------------------- -------------------
Gross Margin $ 80,000 0.9 % $ 417,000 5.1%
Sales in the Management Services segment increased 6.3% for the year ended
December 31, 2002 compared to 2001. The increases in revenue are primarily due
to the increases in range patrolling and range maintenance work as added to the
contract.
Gross margin as a percent of sales for the year ended December 31, 2002
decreased compared to the prior year. Operational improvements, including
improved quality, material procurement and facility management, have contributed
to improved margins compared to 2001. In fiscal 2002, the decrease in gross
margin was a direct result of increased labor rates. Labor rates are specified
by the Department of Labor in accordance with the Service Contract Act.
COMPUTER SOFTWARE
YEARS ENDED DECEMBER 31,
2002 2001
------------------- -------------------
Sales $ 1,095,000 100.0% $ 1,017,000 100.0%
Cost of Sales 570,000 52.1% 526,000 51.7%
------------------- -------------------
Gross Margin $ 525,000 47.9% $ 491,000 48.3%
Sales in the Computer Software segment increased approximately 7.7% for the
year ended December 31, 2002 as compared to 2001. Increased sales were a result
of increased delivery orders on the General Services Administration contract.
This contract was signed in December 14, 1999 and expires in December 13, 2004.
Each delivery order under that contract has a separate performance schedule.
Gross margin, as a percent of sales, remained consistent compared to the
prior year.
13
MANUFACTURING SEGMENT
YEARS ENDED DECEMBER 31,
2002 2001
------------------- -------------------
Sales $ 2,406,000 100.0% $ 2,618,000 100.0%
Cost of Sales 2,625,000 (109.1)% 2,607,000 99.6%
------------------- -------------------
Gross Margin $ (219,000) (9.1)% $ 11,000 0.4%
Sales in the Manufacturing segment declined 8.1% for the year ended
December 31, 2002 as compared to 2001. The decline in revenue is driven
primarily by the overall weakness in the U.S. economy and reduction in sales due
to September 11, 2001. In 2002, conditions were very weak in the Department of
Defense markets for our line of products including aircraft and munitions
handling equipment.
Gross margin as a percent of sales decreased by 166% in 2002 compared to
2001, primarily due to the operating holding loss on inventory of $289,000. The
holding loss on inventory was a result of obsolete equipment previously
purchased. The anticipation was to sell the equipment to the Federal Government,
however, due to the decline in the government's requirements as a result of the
terrorist attacks of September 11, 2001 and no adequate storage facility, the
equipment deteriorated beyond economic repair. Normal direct and indirect costs
decreased by 9.1%, while revenues decreased only 8.1% for the year. Adjusting
for the inventory reserve adjustments in 2002, gross margin percentages would
have remained consistent with prior year despite decreased revenues, as we
adjusted our operations to the depressed market conditions by lowering overhead
and reducing spending.
OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
2002 2001
------------------- -------------------
Selling, general
and administrative 595,000 100.0% 490,000 100.0%
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were $595,000 in 2002 compared to $490,000 in
2001, a net increase of $105,000. The increase is primarily a result of the
additional staff hired for the purpose of assisting with refinancing the
Company.
OTHER INCOME AND EXPENSES
Interest income and expense, net. Net interest expense was $303,297 in
the year ended December 31, 2002, compared to net interest expense of $328,314
in 2001. The decline in interest expense is a result of lower prevailing
interest rates and lower average investment balances.
Other income and expense, net. Net other income in 2002 was $269,743
compared to other income of $149,127 in 2001. Our other income consists
primarily of rental income received from L3 Communications, (formerly Raytheon).
The additional increase from the prior year is due to a one-time legal
settlement payment of $175,000.
Discontinued operations. During the second quarter of 2002, we decided to
divest our Yacht Manufacturing division. We completed the disposal of the
division in the fourth quarter of 2002. During 2002, we recorded a special
charge of $407,000, which included the impairment of assets and closing related
expenses. These costs are discussed in more detail in Note 11 to the Financial
Statements for Spectrum Sciences & Software, Inc.
LIQUIDITY AND CAPITAL RESOURCES
14
We had cash balances totaling approximately $236,500 at March 31, 2003.
During the past fiscal year, our principal sources of funds have been cash
generated from loans, financing activities, and from continuing operations.
We believe that we will require approximately $4,000,000 to fund our
currently anticipated requirements for ongoing operations and budgeted capital
expenditures for our existing business for the twelve-month period following
this registration statement. The majority of the funds that we require are a
direct result of the current loan agreements that we have with SouthTrust Bank
and our need to seek alternative sources to finance that debt.
We currently intend to satisfy our long-term liquidity requirements from
cash flow from operations and with the proceeds from future debt and equity
offerings. However, we have no specific plan for future debt or equity
offerings nor have we identified any source from which such funding could be
obtained. Further, our long-term liquidity requirements will depend on many
factors, including but not limited to, various risks associated with our
business that affect our sales levels and pricing, our ability to recover all of
our up-front costs related to future acquisitions, capital expenditures and
operating expense requirements and there can be no assurance that we will not
need to raise additional funds to satisfy them.
PART I - ITEM 3. DESCRIPTION OF PROPERTY
PROPERTY
Our engineering, manufacturing and research and development activities and
administrative offices are located in Fort Walton Beach, Florida.
The following table presents certain information on our leased and owned
operating properties as of June 3, 2003:
SQ.
LOCATION FEET USE LEASED OR OWNED LEASE EXPIRATION DATE
--------------------------------- ---------- ----------------------------- --------------- ---------------------
91 Hill Avenue, . . . . . . . . . 47,200 Engineering, manufacturing Owned N/A
Fort Walton Beach, Florida 32549 and research and
development, and
administrative office
321 Bream Avenue, Unit 604
Fort Walton Beach, Florida 32548. 1,089 Condominium Owned N/A
15
SQ.
LOCATION FEET USE LEASED OR OWNED LEASE EXPIRATION DATE
--------------------------------- ---------- ----------------------------- --------------- ---------------------
755 Lovejoy Road. . . . . . . . . 10,000 Precision machine shop Leased Leased, month to month
Fort Walton Beach, Florida 32548. metal fabrication for $1,802 per month.
PART I - ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information known to us, as of the date of
this prospectus relating to the beneficial ownership of common stock by:
- each person who is known by us to be the beneficial holder of more
than 5% of our outstanding common stock;
- each of our named executive officers and directors; and
- our directors and executive officers as a group.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares beneficially owned by them, except
as noted. Unless otherwise indicated, the address of each stockholder listed in
the table is care of Spectrum Sciences & Software Holdings Corporation, 91 Hill
Avenue NW, Fort Walton Beach, Florida 32548.
Percentage ownership in the following table is based on 18,844,000 shares
of common stock outstanding as of the date of this prospectus. A person is
deemed to be the beneficial owner of securities that can be acquired by that
person within 60 days from the date of this prospectus upon the exercise of
options, warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by dividing the number of shares beneficially owned by
that person by the base number of outstanding shares, increased to reflect the
shares underlying options, warrants or other convertible securities included in
that person's holdings, but not those underlying shares held by any other
person.
PERCENTAGE OF
NUMBER OF SHARES
SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
------------------------ ------------------ -------------
Donal R. Myrick 2,500,000 13%
All directors and officers 2,500,000 13%
Crystal Overseas Trading, Inc. 1,200,000 6.5%
(1)
Shirley House-50 Shirley
Street, PO Box N-7755,
Nassau, Bahamas
Private Investment Company 1,250,000 6.7%
Ltd., (2)
Gretton House-Duke Street
PO Box 65
Grand Turk, Turk & Caicos
Islands, British West Indies
Seloz Gestion & Finance SA (3) 1,250,000 6.7%
1 Rue Hugo-de-Senger
1211 Geneva 4
Switzerland
(1) the beneficial owner and control person of Crystal Overseas Trading, Inc.
is Daniele Cimmino.
(2) the beneficial owner and control person of Private Investment Company Ltd.
Is the estate of Martin Christen.
(3) the beneficial owner and control person of Seloz Gestion & Finance SA Is
Rene Belser.
PART I - ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names of our executive officers and directors, their ages as of June 3,
2003, and the positions currently held by each are as follows:
NAME AGE POSITION
---- --- --------
Donal R. Myrick 64 Chief Executive Officer, Chairman of the
Board of Directors
Donald L. Garrison 56 Vice President, Chief Operating Officer
William H. Ham, Jr. 54 Vice President
Nancy Chadderdon Gontarek 47 Chief Financial Officer
16
Harold Dwain Brannon 42 Director
Dyron M. Watford 27 Director
BIOS OF EXECUTIVE OFFICERS
DONAL R. MYRICK. Mr. Myrick, our CEO and Chairman of the Board of
Directors, founded Spectrum Sciences & Software, Inc. in 1982, Mr. Myrick has
been the chief executive officer of Spectrum since 1982. Mr. Myrick has over
30 years of relevant technical and managerial experience in military operations
research, hazard analysis, range planning, range safety, weapon systems
analysis, weapon performance and analysis, threat definition, engagement
analysis, and the development and application of large scale computer
simulations. In his professional career, Mr. Myrick has participated in a broad
range of major programs ranging from the XB-70 Project (while a research
engineer at North American Aviation from 1963 to 1965), the Saturn, Apollo and
Skylab and Lunar Landing projects (while a research engineer at Teledyne-Brown
Engineering Company from 1965 to 1974), and to the design and operation of major
national training ranges, to numerous weapon systems design, development and
test programs. In the past few years, Mr. Myrick led a team of analysts and
programmers in a successful multi-year program to develop hazard assessment
methodologies and supporting data bases which have become the core of the Air
Force Range Planning Program. Mr. Myrick is also the sole shareholder of the
following three inactive non publicly reporting companies: Spectrum
Manufacturing, Inc; Spectrum Equipment and Transport Company; and Apogee
Financial, Inc. Mr. Myrick earned a B.S. degree in Mathematics in 1960 and a
M.S. degree in Mathematics in 1962, both from Texas Technological College. Mr.
Myrick also taught mathematics at Texas Technological College (from 1960 to
1963), has published many technical articles, and has presented papers at both
national and international forums. Mr. Myrick has signed a three year
employment agreement to serve as president of Spectrum that will take effect
upon Spectrum becoming a publicly reporting company under the 1934 Act, as
amended (which is 60 days after the date this registration statement was first
filed with the U.S. Securities and Exchange Commission) or upon the first day of
trading for Spectrum on the Over the Counter Bulletin Board (the "OTCBB").
DONALD L. GARRISON. Mr. Garrison has been the Chief Operating Officer of
Spectrum Sciences & Software, Inc. since November 2002. From 1986 to 2002 Mr.
Garrison was the Vice President of Spectrum Sciences & Software, Inc. Mr.
Garrison earned a B.S. degree in Electrical Engineering from the United States
Air Force Academy in 1969, and he earned a M.S. degree in Electrical Engineering
from Oklahoma State University in 1976.
WILLIAM H. HAM, JR. Mr. Ham has been the Vice President in charge of Range
Systems Operations and Maintenance for Spectrum Sciences & Software, Inc. since
August, 1999. Mr. Ham is responsible for all contracts including personnel,
budgeting, performance contracts, sub contracts and proposals. From 1991 to
1999 Mr. Ham was a senior scientist with Spectrum Sciences & Software, Inc. Mr.
Ham earned a B.S. degree in Electrical Engineering from the United States Air
Force Academy in 1970. He earned a Certificate in Airspace Planning from the
Federal Aviation Administration in 1978.
NANCY CHADDERDON GONTAREK. Ms. Gontarek has been the Chief Financial
Officer of Spectrum Sciences & Software, Inc. since November, 2002. From
November, 2000 to November 2002, Ms. Gontarek was the controller of Spectrum
Sciences & Software, Inc. From 1995 to 2000, Ms. Gontarek was the controller
for Nugget Oil, Inc. located in Crestview, Florida. Ms. Gontarek earned a B.A.
degree from State University of New York at Fredonia, New York, and she earned
an M.B.A. from George Washington University in Washington, DC in 1982.
HAROLD DWAIN BRANNON. Mr. Brannon has been a director since July, 2002.
From 1998 to the present Mr. Brannon has been the president and owner of Brannon
Capital, a consulting firm. From 2000 to the present Mr. Brannon has been
president of LiquidGolf, an online golf equipment retailer. From 1996 to 1998
Mr. Brannon was a salesman for MarketShare, Inc., an advertising company. Mr.
Brannon earned an A.A. degree in Marketing and Merchandising from Spartanburg
Methodist College in 1981.
DYRON M. WATFORD. Mr. Watford has been a director since July 2002. Since
January 2002, Mr. Watford has been the founder and a director and principal
accounting officer of Universal Tanning Ventures, Inc. Universal Tanning owns
and operates a single indoor tanning salon business. Universal Tanning is a
publicly reporting company. Since May 2001, Mr. Watford has been the sole
17
officer and director of Frontier Educational Systems, Inc., of which he is the
founder and sole stockholder. Frontier Educational Systems is a development
stage company that intends to provide online tutoring services to the secondary
educational market. Since August 2000, Mr. Watford has served as the president,
sole stockholder and director of Sirus Capital Corp, Inc., a consulting company
providing financial services to existing and emerging private and public
companies. From December 1998 to August 2000, Mr. Watford was an auditor for
Arthur Andersen, LLP. From 1997 to 1998, Mr. Watford worked at the Certified
Public Accounting firm of DeArrigoitia & Company as a staff accountant. Mr.
Watford earned a B.S. degree in Accounting from Florida Southern College in 1997
and an M.B.A. from the University of Central Florida in December 1998. Mr.
Watford is a certified public accountant.
DIRECTORS' COMPENSATION
Currently there is no compensation package for our board. We expect to
create a compensation package for our board members during the next 12 months.
We currently do not have any employee stock option or other incentive
plans.
BOARD OF DIRECTORS AND COMMITTEES
The directors are elected to one-year terms. Each director holds office
until the expiration of the director's term, until the director's successor has
been duly elected and qualified or until the earlier of such director's
resignation, removal or death. Our board of directors does not have an audit or
any other committee.
18
PART I - ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid or
incurred on our behalf to our chief executive officer and each of the four other
most highly compensated employee executive officers, or the named executive
officers, that earned more than $50,000 during the last three fiscal years:
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Fiscal Other Annual
Name and Principal Position Year Salary ($) Compensation ($)
---- ---------- ----------------
Donal R. Myrick, CEO, Chairman
of the Board of Directors * . 2002 99,996 0
2001 91,998 0
2000 36,005 0
Donald L. Garrison, COO. . . . 2002 82,014 0
2001 82,014 0
2000 82,014 0
William H. Ham, Jr., VP. . . . 2002 60,984 0
2001 71,701 0
2000 72,080 0
Nancy Chadderdon Gontarek, CFO 2002 65,000 0
2001 65,000 0
2000 4,865 0
* Mr. Myrick has signed a three year employment agreement to serve as president
of Spectrum that will take effect upon Spectrum becoming a publicly reporting
company under the 1934 Act, as amended (which is 60 days after the date this
registration statement was first filed with the U.S. Securities and Exchange
Commission) or upon the first day of trading for Spectrum on the Over the
Counter Bulletin Board (the "OTCBB"). Mr. Myrick's compensation pursuant to
this employment agreement will be $10,000 per month.
STOCK OPTION GRANTS
There were no individual grants of stock options to any Executive Officers
during the fiscal years ended December 31, 2002, 2001 or 2000.
19
PART I - ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DIRECTORS / MERGER/ EQUITY CONVERSION
Donal R. Myrick is the sole shareholder of two corporations that are
without operations, Spectrum Manufacturing, Inc. and Spectrum Equipment &
Transport Co.
On December 28, 2001, the Company entered into a consulting agreement with
Harold Dwain Brannon, one of the Company's directors. Mr. Brannon agreed to
provide corporate counseling services for an initial term of one year and for an
initial fee of $25,000, plus expenses.
On June 20, 2002, the Company was advanced $500,000 from Brannon Capital,
Inc. The repayment of this advance was due December 20, 2002. The Company has
now agreed to repay this loan including costs, for a total payment of $540,144.
The beneficial owner of Brannon Capital, Inc. is Harold Dwain Brannon, a
director of the Company.
Kay Dean Ham, the wife of our vice president William H. Ham, has made two
short term unsecured loans to Spectrum Sciences & Software, Inc. A loan of
$75,000 was made on March 12, 2002. This loan was repaid with interest paid of
$750. A Loan of $65,000 was made on July 19, 2002. This loan was repaid with
interest paid of $925.
Donal R. Myrick, our president and CEO loaned Spectrum Sciences & Software,
Inc. $20,000 in October, 2002. This advance was made as convertible promissory
note due on June 30, 2003, bearing 6% interest per year. This loan can be
converted into common stock at a price of $1.00.
On March 3, 2003, we issued 50,000 shares of our common stock to Jackson
Steinem, Inc. for consulting services related to the filing of our registration
statement. The beneficial owner of Jackson Steinem, Inc. is Adam S. Gottbetter
of Gottbetter & Partners, LLP, our legal counsel. This stock issuance was valued
at $5,000 or $.10 per share.
PART I - ITEM 8. DESCRIPTION OF SECURITIES
DESCRIPTION OF SECURITIES
Our authorized capital stock currently consists of 80,000,000 shares of
Common Stock, par value $0.0001 per share, and 20,000,000 shares of preferred
stock, par value $0.0001 per share, the rights and preferences of which may be
established from time to time by our Board of Directors. There are 18,844,000
shares of our common stock issued and outstanding, and no other securities,
including without limitation any preferred stock, convertible securities,
options, warrants, promissory notes or debentures outstanding.
The description of our securities contained herein is a summary only and
may be exclusive of certain information that may be important to you. For more
complete information, you should read our Certificate of Incorporation and its
restatements, together with our corporate bylaws.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of our common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any shares of preferred stock outstanding at the time, holders of our common
stock are entitled to receive dividends ratably, if any, as may be declared from
time to time by our board of directors out of funds legally available therefor.
Upon our liquidation, dissolution or winding up, the holders of our common
stock are entitled to receive ratably, our net assets available after the
payment of:
20
a. all secured liabilities, including any then outstanding secured debt
securities which we may have issued as of such time;
b. all unsecured liabilities, including any then unsecured outstanding
secured debt securities which we may have issued as of such time; and
c. all liquidation preferences on any then outstanding preferred stock.
Holders of our common stock have no preemptive, subscription, redemption or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the common stock. The rights, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
designate and issue in the future.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to 20,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions of these shares,
including dividend rights, conversion rights, voting rights, terms of redemption
and liquidation preferences, and to fix the number of shares constituting any
series and the designations of these series. These shares may have rights
senior to our common stock. The issuance of preferred stock may have the effect
of delaying or preventing a change in control of us. The issuance of preferred
stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of the holders of our common stock. At
present, we have no plans to issue any shares of our preferred stock.
DELAWARE ANTI-TAKEOVER LAW
If we close an initial public offering of our securities, and become listed
on a national stock exchange or the NASDAQ Stock Market or have a class of
voting stock held by more than 2000 record holders, we will be governed by the
provisions of Section 203 of the General Corporation Law of Delaware. In
general, such law prohibits a Delaware public corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner.
As a result of Section 203 of the General Corporation Law of Delaware,
potential acquirers may be discouraged from attempting to effect acquisition
transactions with us, thereby possibly depriving holders of our securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
DIVIDENDS
We have not declared any dividends since inception, and have no present
intention of paying any cash dividends on our shares in the foreseeable future.
The payment of dividends, if any, in the future, rests within the discretion of
our board of directors and will depend, among other things, upon our earnings,
our capital requirements and our financial condition, as well as other relevant
facts.
TRANSFER AGENT AND REGISTRAR
The transfer agent for our common stock is Signature Stock Transfer, Inc.,
14675 Midway Road, Suite 121 Addison, TX 75001 and its telephone number is
(972) 788-4193.
21
PART II - ITEM 1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Electronic Pink Sheets as a
non-reporting company since 2000 under the symbol SIVY, until April 2003 when
the symbol was changed to SPSC. Trading volume has historically been
negligible. The high and low bid prices at the close of each fiscal quarter for
the past 13 quarters are as follows:
BID
---
HIGH LOW
----- ----
March 31, 2000 . . . . . . . . . . . . . . . . . . .50 .10
June 30, 2000. . . . . . . . . . . . . . . . . . . .50 .25
September 30, 2000 . . . . . . . . . . . . . . . . .375 .375
December 31, 2000. . . . . . . . . . . . . . . . . 4.75 .375
March 31, 2001 . . . . . . . . . . . . . . . . . . 1.125 .55
June 30, 2001. . . . . . . . . . . . . . . . . . . 3.00 .375
September 30, 2001 . . . . . . . . . . . . . . . . .51 .25
December 31, 2001. . . . . . . . . . . . . . . . . .25 .15
March 31, 2002 . . . . . . . . . . . . . . . . . . .15 .15
June 30, 2002. . . . . . . . . . . . . . . . . . . .15 .15
September 30, 2002 . . . . . . . . . . . . . . . . 1.50 .15
December 31, 2002. . . . . . . . . . . . . . . . . 2.00 1.30
March 31, 2003 . . . . . . . . . . . . . . . . . . 2.10 1.30
Source: Pink Sheets, LLC
These quotations represent prices between dealers and do not include retail
markup, markdown, or commission. They do not represent actual transactions and
have not been adjusted for stock dividends or splits. Further these trading
records are for Silva Bay International, Inc. and predate Silva Bay
International, Inc. acquiring Spectrum Sciences & Software, Inc.
As of June 3, 2003, there were approximately 36 shareholders of record of
the Company's common stock. On April 9, 2003, the Company effectuated a two for
one forward split of its common stock.
The Company has not paid any cash dividends for the past three fiscal years
or during the interim period presented and has no intention to pay a dividend.
PART II - ITEM 2. LEGAL PROCEEDINGS
On January 13, 2003, The Trident Company obtained a default judgment in the
District Court of Tulsa County, State of Oklahoma, Case No. CJ-2003-1787,
against Spectrum Sciences & Software, Inc. and Spectrum Manufacturing, Inc. in
the amount of approximately $143,229.86.
On April 21, 2003, the United States Internal Revenue Service obtained a
lien against any and all of Spectrum's assets in the amount $173,041.01.
Spectrum has entered into a payment arrangement with the IRS.
We currently have a debt to Washington Group, International of
approximately $353,000. We are attempting resolve this debt.
22
In December, 2002, three Spectrum 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. Spectrum does not know
what the outcome of this litigation will be.
Spectrum is not aware of any other pending or threatened litigation.
PART II - ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The auditor for the Company prior to the April 2, 2003 acquisition of
Spectrum Sciences & Software, Inc. was Richard M. Prinzi, Jr., CPA. The auditor
of the acquired company, Spectrum Sciences & Software, Inc., is Tedder, James,
Worden & Associates, P.A. Going forward after the merger of April 3, 2003, the
Company's auditor will be Tedder, James, Worden & Associates, P.A.
PART II - ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On June 20, 2002, the Company borrowed $500,000 from Brannon Capital, Inc.
The repayment of this advance was due December 20, 2002. The Company has now
agreed to repay this loan including costs, for a total payment of $540,144. The
beneficial owner of Brannon Capital, Inc. is Harold Dwain Brannon, a director of
the Company.
Kay Dean Ham, the wife of our CCO William H. Ham, has made two short term
unsecured loans to Spectrum Sciences & Software, Inc. A loan of $75,000 was
made on March 12, 2002. This loan was repaid with interest paid of $750. A
Loan of $65,000 was made on July 19, 2002. This loan was repaid with interest
paid of $925.
Donal R. Myrick, our president and CEO loaned Spectrum Sciences & Software,
Inc. $20,000 in October, 2002. This advance was made as convertible promissory
note due on June 30, 2003, bearing 6% interest per year. This loan can be
converted into common stock at a price of $1.00.
On March 3, 2003, the Company issued 50,000 shares of common stock to Adam
S. Gottbetter of Gottbetter & Partners, LLP, our legal counsel. This stock
issuance was in exchange for legal advice for the Company, valued at $5,000 or
$.10 per share. The sales were a private transaction without registration in
reliance on the exemption provided by Rule 701 of the Securities Act of 1933, as
amended.
On April 2, 2003, the Company issued 1,250,000 shares of common stock to
Donal R. Myrick in exchange for Mr. Myrick's 600 shares of Spectrum Sciences &
Software, Inc., which were all of the issued and outstanding shares of Spectrum
Sciences & Software, Inc. This transaction was part of the merger in which the
Company acquired all of the assets of Spectrum Sciences & Software, Inc.
Note, on April 9, 2003, the Company effectuated a two for one forward split
of its common stock.
PART II - ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated certificate of incorporation provides that none of
our directors shall be liable to us or our stockholders for monetary damages for
any breach of fiduciary duty as a director, except to the extent otherwise
required by the Delaware General Corporation Law, or the DGCL. The effect of
this provision is to eliminate our rights, and our stockholders' rights, to
recover monetary damages against a director for breach of a fiduciary duty of
care as a director. This provision does not limit or eliminate our right, or the
right of any stockholder, to seek non-monetary relief, such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
our amended and restated certificate of incorporation provides that, if the DGCL
is amended to authorize the further elimination or limitation of the liability
23
of a director, then the liability of the directors shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended. These
provisions will not alter the liability of directors under federal or state
securities laws. Our amended and restated certificate of incorporation also
includes provisions for the indemnification of our directors and officers to the
fullest extent permitted by Section 145 of the DGCL. We have entered into an
indemnification agreement with each of our directors which requires us, among
other things, to indemnify them against certain liabilities which may arise by
reason of his status or service as a director (other than liabilities arising
from willful misconduct of a culpable nature). We also intend to maintain
director and officer liability insurance, if available on reasonable terms.
24
INDEX TO FINANCIAL STATEMENTS
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP. UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements . . . . . . . . . . . . . . . . . F-1
Unaudited Pro Forma Balance Sheet as of December 31, 2002 . . . . . . . . . . . . . . . . . . . . . F-2
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 2002 . . . . . F-3
Unaudited Pro Forma Balance Sheet as of March 31, 2003. . . . . . . . . . . . . . . . . . . . . . . F-5
Unaudited Pro Forma Combined Statement of Operations for the three months ended March 31, 2003. . . F-6
SILVA BAY INTERNATIONAL, INC.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Balance Sheet as of December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Statement of Operations for the year ended December 31, 2002. . . . . . . . . . . . . . . . . . . . F-10
Statement of Stockholders' Deficit for the year ended December 31, 2002 . . . . . . . . . . . . . . F-11
Statement of Cash Flows for the year ended December 31, 2002. . . . . . . . . . . . . . . . . . . . F-12
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
SPECTRUM SCIENCES & SOFTWARE, INC.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
Balance Sheets as of December 31, 2002 and March 31, 2003 (unaudited) . . . . . . . . . . . . . . . F-18
Statement of Operations for the year ended December 31, 2002 and the three months ended March 31,
2003 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
Statement of Shareholders' Deficit for the year ended December 31, 2002 and the three months ended
March 31, 2003 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-20
Statement of Cash Flows for the year ended December 31, 2002 and the three months ended March 31,
2003 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
25
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
-----------------------------------------------------------------
The following Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 2002 for Silva Bay International, Inc. and Subsidiary and the
year ended December 31, 2002 for Spectrum Sciences & Software, Inc. The
Unaudited Pro Forma Balance Sheet presents the consolidated financial position
of Silva Bay International, Inc. and Subsidiary as of December 31, 2002 assuming
that the merger had occurred as of January 1, 2002. Such pro forma information
is based upon the historical balance sheet data of Silva Bay International, Inc.
and Subsidiary as of that date. The Unaudited Pro Forma Statement of Operations
gives effect to the combined operations for the year ended December 31, 2002 for
Silva Bay International, Inc. and Subsidiary, which includes the results of
Spectrum Sciences & Software, Inc. for the year ended December 31, 2002.
The Unaudited Pro Forma Financial Information has been prepared by the Company
based on the historical consolidated financial statements of Silva Bay
International, Inc. and Subsidiary which are included elsewhere in this
registration statement. The Unaudited Pro Forma Financial Information is
presented for illustrative purposes only and does not purport to indicate the
results that would have been obtained if the transactions had occurred on the
dates indicated or to project those that will be realized in the future. These
Unaudited Pro Forma Financial Statements should be read in conjunction with the
historical consolidated financial statements of Silva Bay International, Inc.
and the financial statements of Spectrum Sciences & Software, Inc. included
elsewhere in this registration statement.
F-1
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
HISTORICAL PRO FORMA
--------------------------------- ----------------
SILVA BAY SPECTRUM
INTERNATIONAL, SCIENCES &
INC. SOFTWARE, INC.
ASSETS (SUCCESSOR) (PREDECESSOR) ADJUSTMENTS AS ADJUSTED
-------- ---------------- ------------------------------- ----------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . $ 8,877 $ 633,909 $ - $ 642,786
Receivables . . . . . . . . . . . . . . . . . - 2,084,789 - 2,084,789
Inventories . . . . . . . . . . . . . . . . . - 291,344 - 291,344
Prepaid expenses and other current assets . . - 8,993 - 8,993
Total current assets. . . . . . . . . . . . 8,777 3,019,035 - 3,027,912
Property, plant, and equipment, net . . . . . - 2,071,948 - 2,071,948
Cash surrender value of life insurance. . . . - 19,701 - 19,701
Other assets. . . . . . . . . . . . . . . . . - 17,024 - 17,024
---------------- ------------------------------- ----------------
Total assets. . . . . . . . . . . . . . . . $ 8,777 $ 5,127,708 $ - $ 5,136,585
================ =============================== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
---------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ - $ 1,413,229 $ - $ 1,413,229
Accrued expenses. . . . . . . . . . . . . . . 16,686 940,406 - 957,092
Contract deposits . . . . . . . . . . . . . . - 173,936 - 173,936
Bank lines of credit. . . . . . . . . . . . . - 1,201,111 - 1,201,111
Current portion of long-term debt . . . . . . - 1,975,591 - 1,975,591
Due to related parties. . . . . . . . . . . . - 568,870 - 568,870
---------------- ------------------------------- ----------------
Total current liabilities . . . . . . . . . - 6,273,143 - 6,289,829
Long-term debt, less current portion. . . . . 135,000 30,122 - 165,122
---------------- ------------------------------- ----------------
Total liabilities . . . . . . . . . . . . . - 6,303,265 - 6,454,951
Stockholders' equity
Common stock. . . . . . . . . . . . . . . . . 812 600 - (a) 1,412
Additional paid in capital. . . . . . . . . . 88,638 - - 88,638
Accumulated deficit . . . . . . . . . . . . . (232,259) (1,176,157) - (1,408,416)
---------------- ------------------------------- ----------------
Total stockholders' deficit . . . . . . . . 8,877 (1,175,557) - (1,318,366)
---------------- ------------------------------- ----------------
Total liabilities and stockholders' deficit $ 8,877 $ 5,127,708 $ - $ 5,136,585
================ =============================== ================
See accompanying notes to unaudited pro forma consolidated financial statements.
F-2
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
SPECTRUM
SILVA BAY SCIENCES &
INTERNATIONAL, SOFTWARE, INC. PRO FORMA
INC. YEAR ENDED COMBINED
(SUC CESSOR) (PREDECESSOR) AS ADJUSTED
------------- -------------- -------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 12,261,630 $ 12,261,630
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (11,875,499) (11,875,499)
------------- -------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 386,131 386,131
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (129,720) (464,987) (594,707)
------------- -------------- -------------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (129,720) (78,856) (208,576)
------------- -------------- -------------
Non-operating income (expense), net. . . . . . . . . . . . . . . . . . . . . . . - (33,554) (33,554)
Loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . . (129,720) (112,410) (242,130)
Discontinued operations:
Loss on disposal of yacht manufacturing segment. . . . . . . . . . . . . . . . - (407,250) (407,250)
------------- -------------- -------------
Income (loss) before cumulative effect of accounting change. . . . . . . . . (129,720) (519,660) (649,380)
Cumulative effect of accounting change for SFAS No. 142. . . . . . . . . . . . - (91,022) (91,022)
------------- -------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (129,720) $ (610,682) $ (740,402)
============= ============== =============
Weighted average common shares outstanding
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,122,000 600 9,372,000
============= ============== =============
Earnings per share:
Basic and diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.02) $ (1017.80) $ (0.08)
============= ============== =============
See accompanying notes to unaudited pro forma consolidated financial statements.
F-3
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2002
Offering Adjustments
Statement of operations adjustments:
(a) Reflects the issuance of 1,250,000 shares of common stock to Donal
Myrick for the purchase of Spectrum Sciences & Software, Inc., a Florida S
Corporation.
F-4
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
HISTORICAL PRO FORMA
--------------------------------- ----------------
SILVA BAY SPECTRUM
INTERNATIONAL, SCIENCES &
INC. SOFTWARE, INC.
ASSETS (SUCCESSOR) (PREDECESSOR) ADJUSTMENTS AS ADJUSTED
-------- ---------------- ------------------------------- ----------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . $ 7,986 $ 228,595 $ - $ 236,581
Receivables . . . . . . . . . . . . . . . . . - 2,161,793 - 2,161,793
Inventories . . . . . . . . . . . . . . . . . - 225,035 - 225,035
Prepaid expenses and other current assets . . - 84,351 - 84,351
---------------- ------------------------------- ----------------
Total current assets. . . . . . . . . . . . 7,986 2,669,774 - 2,707,760
Property, plant, and equipment, net . . . . . - 2,064,070 - 2,064,070
Cash surrender value of life insurance. . . . - 19,701 - 19,701
Other assets. . . . . . . . . . . . . . . . . - 15,579 - 15,579
---------------- ------------------------------- ----------------
Total assets. . . . . . . . . . . . . . . . $ 7,986 $ 4,799,124 $ - $ 4,807,110
================ =============================== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
---------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ - $ 1,351,127 $ - $ 1,351,127
Accrued expenses. . . . . . . . . . . . . . . 18,711 828,612 - 847,323
Contract deposits . . . . . . . . . . . . . . - 171,859 - 171,859
Current portion of long-term debt . . . . . . - 3,032,376 - 3,032,376
Due to related parties. . . . . . . . . . . . - 532,201 - 532,201
---------------- ------------------------------- ----------------
Total current liabilities . . . . . . . . . - 5,916,175 - 5,934,886
Long-term debt, less current portion. . . . . 135,000 23,857 - 158,857
---------------- ------------------------------- ----------------
Total liabilities . . . . . . . . . . . . . - 5,940,032 - 5,940,032
Stockholders' equity
Common stock. . . . . . . . . . . . . . . . . 812 600 - (a) 1,412
Additional paid in capital. . . . . . . . . . 88,638 - - 88,638
Accumulated deficit . . . . . . . . . . . . . (235,175) (1,141,508) - (1,357,972)
---------------- ------------------------------- ----------------
Total stockholders' deficit . . . . . . . . 7,986 (1,140,908) - (1,132,922)
---------------- ------------------------------- ----------------
Total liabilities and stockholders' deficit $ 7,986 $ 4,799,124 $ - $ 4,807,110
================ =============================== ================
See accompanying notes to unaudited pro forma consolidated financial statements.
F-5
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
HISTORICAL PRO FORMA
--------------------------------- ----------------
SPECTRUM
SILVA BAY SCIENCES &
INTERNATIONAL, SOFTWARE, INC. PRO FORMA
INC. YEAR ENDED COMBINED
(SUCCESSOR) (PREDECESSOR) AS ADJUSTED
---------------- ---------------- -------------
Revenues . . . . . . . . . . . . . . . . . $ - $ 3,273,029 $ 3,273,029
Cost of revenues . . . . . . . . . . . . . - (3,090,799) (3,090,799)
---------------- ---------------- -------------
Gross profit . . . . . . . . . . . . . - 182,230 182,230
Operating expenses . . . . . . . . . . . . (2,916) (124,932) (127,848)
---------------- ---------------- -------------
Income (Loss) from operations. . . . . (2,916) 57,298 54,382
---------------- ---------------- -------------
Non-operating income (expense), net. . . . - (22,649) (22,649)
---------------- ---------------- -------------
Net loss . . . . . . . . . . . . . . . $ (2,916) $ 34,649 $ 31,733
================ ================ =============
Weighted average common shares outstanding
Basic and diluted. . . . . . . . . . . . . 8,122,000 600 9,372,000
================ ================ =============
Earnings per share:
Basic and diluted. . . . . . . . . . . . $ 0.00 $ 57.75 $ 0.00
================ ================ =============
See accompanying notes to unaudited pro forma consolidated financial statements.
F-6
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2003
Offering Adjustments
Statement of operations adjustments:
(a) Reflects the issuance of 1,250,000 shares of common stock to Donal
Myrick for the purchase of Spectrum Sciences & Software, Inc., a Florida S
Corporation.
F-7
RICHARD M. PRINZI, JR.
Certified Public Accountant
8403 7th Avenue
Brooklyn, NY 11228
Phone (718) 748-2300
INDEPENDENT ACCOUNTANT'S AUDIT REPORT
----------------------------------------
To the Board of directors of Silva Bay International, Inc.
I have audited the accompanying Balance Sheets of Silva Bay International, Inc.
(A Development Stage Company) as of December 31, 2002 & 2001, and the related
Statements of Operations, Change in Stockholders' Equity and Cash Flows for the
years then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that I plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Silva Bay International, Inc. (A
Development Stage Company) as of December 31, 2002 & 2001, and the results of
its operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in note #3 to the financial
statements, the Company has no operations and has no established source of
revenue. Also, the Company has incurred recurring losses from operations and has
a net capital deficiency. These factors, and the need for additional financing
in order for the Company to meet its business plans, raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters are also described in note #3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Brooklyn, NY
May 30, 2003
F-8
SILVA BAY INTERNATIONAL, INC
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
---------- ----------
ASSETS
------
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . $ 8,877 $ 30,012
Cash Held in Escrow. . . . . . . . . . . . . - 100,000
Organization Costs . . . . . . . . . . . . . 350 350
Accumulated Amortization-Organization Costs. (350) (350)
---------- ----------
Total Current Assets . . . . . . . . . . . 8,877 130,012
---------- ----------
Total Assets . . . . . . . . . . . . . . . $ 8,877 $ 130,012
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Long Term Liabilities:
Due to Shareholder . . . . . . . . . . . . . $ 135,000 $ 135,000
Accrued Interest . . . . . . . . . . . . . . 16,686 8,100
---------- ----------
Total Long Term Liabilities. . . . . . . . 151,686 143,100
---------- ----------
Stockholders' Equity
Common Stock, $.0001 Par Value; 80,000,000
Shares Authorized, 8,122,000 Shares Issued
And Outstanding . . . . . . . . . . . . . . 812 812
Additional Paid-In Capital . . . . . . . . . . . 88,638 88,638
Deficit Accumulated During The Development Stage (232,259) (102,538)
---------- ----------
Total Stockholders' Equity . . . . . . . . (142,809) (13,088)
---------- ----------
Total Liabilities And Stockholders' Equity $ 8,877 $ 130,012
========== ==========
See accountants' audit report and notes to financial statements.
F-9
SILVA BAY INTERNATIONAL, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED AUGUST 26, 1998
DECEMBER 31, DECEMBER 31, (DATE OF INCEPTION)
2002 2001 TO DECEMBER 31, 2002
-------------- -------------- ----------------------
Income:
Interest Income. . . . . . . . . $ - $ - $ 925
-------------- -------------- ----------------------
Expenses:
Legal & Professional . . . . . . 119,909 51,388 204,932
Interest Expense . . . . . . . . 8,586 8,100 16,686
Stock Transfer Fees. . . . . . . 908 357 2,616
Office . . . . . . . . . . . . . 192 230 7,471
Amortization . . . . . . . . . . - 245 350
Bank Charges . . . . . . . . . . 125 155 360
Taxes. . . . . . . . . . . . . . - 770 770
-------------- -------------- ----------------------
Total Expenses. . . . . . . . 129,720 61,245 233,184
-------------- -------------- ----------------------
Net Deficit. . . . . . . . . . . . $ (129,720) $ (61,245) $ (232,259)
============== ============== ======================
Net Deficit Per Common Share -
Basic And Diluted. . . . . . . . $ (0.0160) $ (0.0075) $ (0.0307)
============== ============== ======================
Weighted Average Common Shares
Outstanding - Basic And Dilutive 8,122,000 8,122,000 7,576,500
============== ============== ======================
See accountants' audit report and notes to financial statements.
F-10
SILVA BAY INTERNATIONAL, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
COMMON STOCK
------------- ADDITIONAL PAID RETAINED
SHARES AMOUNT -IN CAPITAL EARNINGS TOTAL
------------- ----------------- ------------ ---------- ----------
Balance, January 1, 2001. . . . . . 8,122,000 $ 812 $ 88,638 $ (41,293) $ 48,157
Net Deficit For The Year Ended 2001 (61,245) (61,245)
------------- ----------------- ------------ ---------- ----------
Balance, December 31, 2001. . . . . 8,122,000 812 88,638 (102,538) (13,088)
Net Deficit For The Year Ended 2002 (129,720) (129,720)
------------- ----------------- ------------ ---------- ----------
Balances, December 31, 2002 . . . . 8,122,000 $ 812 $ 88,638 $(232,259) $(142,809)
============= ================= ============ ========== ==========
See accountants' audit report and notes to financial statements.
F-11
SILVA BAY INTERNATIONAL, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED AUGUST 26, 1998
DECEMBER 31, DECEMBER 31, (DATE OF INCEPTION)
2002 2001 TO DECEMBER 31, 2002
-------------- -------------- ----------------------
Cash Flows Provided By (Used In)
Operating Activities:
Net Deficit. . . . . . . . . . . . . . $ (129,720) $ (61,245) $ (232,259)
Amortization . . . . . . . . . . . . . - 245 350
Adjustment To Reconcile Net Loss To Net
Cash Used In Operating Activities:
Accrued Interest . . . . . . . . . . . 8,586 8,100 16,686
Organization Costs . . . . . . . . . . - - (350)
-------------- -------------- ----------------------
Net Cash Provided By (Used In)
Operating Activities . . . . . . . . . . (121,135) (52,900) (215,573)
-------------- -------------- ----------------------
Cash Flows Provided By (Used In):
Investing Activities:. . . . . . . . . . - - -
-------------- -------------- ----------------------
Cash Flows Provided By (Used In):
Financing Activities:
Issuance of Common Stock . . . . . . . - - 89,450
Proceeds from a stockholder loan . . . - 135,000 135,000
-------------- -------------- ----------------------
Cash Flows Provided By (Used In):
Financing Activities:. . . . . . . . . . - 135,000 224,450
-------------- -------------- ----------------------
Net Increase (Decrease) In Cash. . . . . . (121,135) 82,100 8,877
Cash, Beginning Of Period. . . . . . . . . 130,012 47,912 -
-------------- -------------- ----------------------
Cash, End Of Period. . . . . . . . . . . . $ 8,877 $ 130,012 $ 8,877
============== ============== ======================
See accountants' audit report and notes to financial statements.
F-12
SILVA BAY INTERNATIONAL, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 HISTORY AND ORGANIZATION OF THE COMPANY
-------
Silva Bay International, Inc. (A Development Stage Company) ("The Company") was
incorporated on August 26, 1998, under the laws of the State of Delaware. The
Company has no operations and in accordance with SFAS #7 is considered to be in
the development stage.
The Company had adopted a fiscal year end of July 31 at inception, however in
March 2000 the Company changed its year end to December 31.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------
CASH & CASH EQUIVALENTS
--------------------------
For the purpose of the statement of cash flows, cash equivalents include all
highly liquid investments, with a maturity of three months or less.
BASIS OF FINANCIAL STATEMENTS
--------------------------------
These financial statements are prepared on the accrual basis of accounting in
conformity with generally accepted accounting principles.
INCOME TAXES
-------------
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No.109, for Income Taxes Under this method, deferred income
taxes are determined based on differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year end, and are
measured based on enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
No provision for income taxes is included in the statement due to its immaterial
amount, net of the allowance account, based on the likelihood of the Company to
utilize the loss carry-forward.
UTILIZATION OF ESTIMATES
--------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-13
SILVA BAY INTERNATIONAL, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------
NET INCOME PER COMMON SHARE
-------------------------------
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding and common stock equivalents, if not
anti-dilutive. The Company has not issued any potentially dilutive common
shares.
REVENUE AND COST RECOGNITION
-------------------------------
The Company has no current source of revenue, therefore, the Company has not yet
adopted any policy regarding the recognition of revenue or cost.
NOTE 3 GOING CONCERN
-------
The Company's financial statements are prepared using the generally accepted
accounting principles acceptable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. However, the Company has no current source of revenue. Without
realization of additional capital, it would be unlikely for the Company to
continue as a going concern. It is management's plan to seek additional capital
through a merger with an existing company.
The Company's activities to date have been supported by equity financing. As
indicated in the accompanying balance sheet, at December 31, 2002, the Company
had $8,877 in cash and $151,686 in liabilities. For the years ended December 31,
2002 and December 31, 2001, the Company had losses from operations of $129,720
and $61,245, respectively. The Company is in need of immediate additional
financing or a strategic arrangement in order to continue its planned activities
for the remainder of the current fiscal year. These factors, among others,
indicate that the Company may be unable to continue operations as a going
concern.
The Company's plans to deal with these uncertainties by reducing expenditures
and raising additional capital or entering into a strategic arrangement with a
third party. There can be no assurance that management's plans to reduce
expenditures, raise capital or enter into a strategic arrangement can be
realized. No adjustment has been made in the accompanying financial statements
to the amounts and classification of assets and liabilities which could result
should the Company be unable to continue as a going concern.
F-14
SILVA BAY INTERNATIONAL, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 4 RELATED PARTY TRANSACTIONS
-------
The Company neither owns or leases any real or personal property. Office
services are provided without charge by a director. Such costs are immaterial to
the financial statements and, accordingly, have not been reflected therein. The
officers and directors of the Company are involved in other business
opportunities. If a specific business opportunity becomes available, such
persons may face a conflict in selecting between the Company and their other
business interests. The Company has not formulated a policy for the resolution
of such conflicts.
The Company was provided management consulting services by one of the
shareholders during 2002. Expenses of $24,000 are reported in the accompanying
financial statements as legal & professional fees.
In February of 2001 a cash advance totaling $135,000 was provided to the Company
by one of its shareholders for operating purposes. The loan's repayment terms
including interest of 6% per year is to be determined solely by the Company
based on its ability to make payments. The Company, at this time, has no ability
or plan to repay the loan and interest, Therefore, the entire loan and Interest
amounts have been classified as long term. For the years ended December 31, 2002
and December 31, 2001, interest of $8,586 and $8,100 was accrued, respectively.
NOTE 5 WARRANTS AND OPTIONS
-------
There are no warrants or options outstanding to acquire additional shares of
common or preferred stock.
NOTE 6 STOCKHOLDERS' EQUITY
-------
On August 26, 1998, the Company issued 1,000,000 shares of its $.0001 par value
common stock for cash of $2,250 to a director of the Company.
On December 10, 1998, the Company completed a private offering that was offered
without registration under the Securities Act of 1933, as amended ("The Act"),
in reliance upon the exemption from registration afforded by sections 4(2) and
3(b) of the Securities Act and regulation D promulgated thereunder. The Company
sold 122,000 shares of common stock at a price of $.10 per share for a total
amount raised of $12,200.
On July 31, 2000, the Company completed a private offering that was offered
without registration under the Securities Act of 1933, as amended ("The Act"),
in reliance upon the exemption from registration afforded by sections 4(2) and
3(b) of the Securities Act and regulation D promulgated thereunder. The Company
sold 7,000,000 shares of common stock at a price of $.03 per share for a total
amount raised of $210,000. After expenses of $135,000, the Company received a
net amount of $75,000.
F-15
NOTES TO FINANCIAL STATEMENTS
NOTE 7 SUBSEQUENT EVENTS:
-------
In April 2003, the Company acquired substantially all of the assets of Spectrum
Sciences & Software, Inc. ("Spectrum"), a company whose assets were being used
to operate as a defense contractor, and assumed certain liabilities in exchange
for the issuance of 1,250,000 share of our common stock. Spectrum expects to
expand on these initial operations by acquiring industry related entities in an
effort to be a profitable, technology driven defense contractor, but also
expects to reduce costs through economies of scales. Operating results with the
asset acquisition have been included since that date. The acquisition of ATI was
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141 "Business Combinations" ("SFAS 141"), which requires all
business combinations initiated after June 30, 2001 to be accounted for under
the purchase method. The assets acquired and liabilities assumed were recorded
at estimated fair values as determined by our management, based on information
available and on assumptions as to future operations.
F-16
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of
Spectrum Sciences & Software, Inc.
We have audited the accompanying balance sheet of Spectrum Sciences & Software,
Inc. (the "Company") as of December 31, 2002, and the related statements of
operations, shareholder's deficit, and cash flows for the years ended December
31, 2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spectrum Sciences & Software,
Inc. as of December 31, 2002, and the results of its operations and its cash
flows for the years ended December 31, 2002 and 2001 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred recurring losses from operations
and has a net capital deficiency. These factors, and the need for additional
financing in order for the Company to meet its business plans, raise substantial
doubt about its ability to repay outstanding notes payable and continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 1 (h) to the financial statements, the Company changed its
method of accounting for goodwill of January 1, 2002 as required by the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.
Orlando, Florida
May 9, 2003
F-17
SPECTRUM SCIENCES & SOFTWARE, INC.
BALANCE SHEET
DECEMBER 31, MARCH 31,
ASSETS 2002 2003
------ -------------- -----------
(UNAUDITED)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 633,909 228,595
Receivables . . . . . . . . . . . . . . . . . . . . . 2,084,789 2,161,793
Inventories . . . . . . . . . . . . . . . . . . . . . 291,344 225,035
Prepaid expenses. . . . . . . . . . . . . . . . . . . 8,993 84,351
-------------- -----------
Total current assets. . . . . . . . . . . . . . . . 3,019,035 2,699,774
Property, plant, and equipment, net . . . . . . . . . 2,071,948 2,064,070
Cash surrender value of life insurance. . . . . . . . 19,701 19,701
Other assets. . . . . . . . . . . . . . . . . . . . . 17,024 15,579
-------------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . $ 5,127,708 4,799,124
============== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
-------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . $ 1,413,229 1,351,127
Accrued expenses. . . . . . . . . . . . . . . . . . . 940,406 828,612
Contract deposits . . . . . . . . . . . . . . . . . . 173,936 171,859
Bank lines of credit. . . . . . . . . . . . . . . . . 1,201,111 1,092,516
Current portion of long-term debt . . . . . . . . . . 1,975,591 1,939,860
Due to related parties (Note 9) . . . . . . . . . . . 568,870 532,201
-------------- -----------
Total current liabilities . . . . . . . . . . . . . 6,273,143 5,916,175
Long-term debt, less current portion. . . . . . . . . 30,122 23,857
-------------- -----------
Total liabilities . . . . . . . . . . . . . . . . . 6,303,265 5,940,032
Commitments and contingencies (Note 16)
Shareholder's deficit:
Common stock, $1 par value; 1,000 shares authorized;
600 shares issued and outstanding . . . . . . . . . 600 600
Accumulated deficit . . . . . . . . . . . . . . . . . (1,176,157) (1,141,508)
-------------- -----------
Total shareholder's deficit . . . . . . . . . . . . (1,175,557) (1,140,908)
-------------- -----------
Total liabilities and shareholder's deficit . . . . $ 5,127,708 4,799,124
============== ===========
See the accompanying notes to the financial statements
F-18
SPECTRUM SCIENCES & SOFTWARE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
2002 2001 2003 2002
------------- ------------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues . . . . . . . . . . . . . . . . . . . . . $ 12,261,630 11,873,525 3,273,029 2,805,698
Cost of revenues . . . . . . . . . . . . . . . . . (11,875,499) (11,033,382) (3,090,799) (2,671,303)
------------- ------------- ------------ -----------
Gross profit . . . . . . . . . . . . . . . . . 386,131 840,143 182,230 134,395
Operating expenses . . . . . . . . . . . . . . . . (464,987) (428,541) (124,932) (123,709)
-------------- ------------- ------------ -----------
Income (loss) from operations. . . . . . . . . (78,856) 411,602 57,298 10,686
Non-operating expense, net . . . . . . . . . . . . (33,554) (179,187) (22,649) (45,093)
-------------- ------------- ------------ -----------
Income (loss) from continuing operations . . . (112,410) 232,415 34,649 (34,407)
Discontinued operations:
Loss on disposal of yacht manufacturing segment. (407,250) - - -
------------- ------------ ------------ -----------
Income (loss) before cumulative effect of
accounting change. . . . . . . . . . . . . . (519,660) 232,415 34,649 (34,407)
Cumulative effect of accounting change for
SFAS No. 142 . . . . . . . . . . . . . . . . . (91,022) - - (91,022)
------------- ------------ ------------ -----------
Net income (loss). . . . . . . . . . . . . . . $ (610,682) 232,415 34,649 (125,429)
============= ============ ============ ===========
Weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . 600 600 600 600
============= ============ ============ ===========
Earnings (loss) per share:
Basic and diluted. . . . . . . . . . . . . . . . $ (1,017.80) 387.36 57.75 (209.05)
============= ============ ============ ===========
See the accompanying notes to the financial statements
F-19
SPECTRUM SCIENCES & SOFTWARE, INC.
STATEMENTS OF SHAREHOLDER'S DEFICIT
For the years ended December 31, 2002 and 2002 and
Three months ended March 31, 2003
(Three months ended March 31, 2003 unaudited)
COMMON STOCK
-------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------ ------------ ----------- -----------
Balances at December 31, 2000, as previously reported. 600 $ 600 (705,825) (705,225)
Restatement (Note 12). . . . . . . . . . . . . . . . . - - (92,065) (92,065)
------------ ------------ ----------- -----------
Balances at December 31, 2000, as restated . . . . . . 600 600 (797,890) (797,290)
Net income . . . . . . . . . . . . . . . . . . . . . . - - 232,415 232,415
------------ ------------ ----------- -----------
Balances at December 31, 2001. . . . . . . . . . . . . 600 600 (565,475) (564,875)
Net loss . . . . . . . . . . . . . . . . . . . . . . . - - (610,682) (610,682)
------------ ------------ ----------- -----------
Balances at December 31, 2002. . . . . . . . . . . . . 600 600 (1,176,157) (1,175,557)
Net income (unaudited) . . . . . . . . . . . . . . . . - - 34,649 34,649
------------ ------------ ----------- -----------
Balances at March 31, 2003 (unaudited) . . . . . . . . 600 $ 600 (1,141,508) (1,140,908)
============ ============ =========== ===========
See the accompanying notes to the financial statements
F-20
SPECTRUM SCIENCES & SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
2002 2001 2003 2002
------------ --------- --------- ----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . $ (610,682) 232,415 34,649 $(125,429)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on discontinued operations . . . . . . . . . . . 407,250 - - -
Write-down of obsolete inventory. . . . . . . . . . . 289,652 - - -
Depreciation. . . . . . . . . . . . . . . . . . . . . 148,899 182,764 38,082 42,015
Restatement (Note 12) . . . . . . . . . . . . . . . . 92,065 - - -
Cumulative effect of accounting change. . . . . . . . 91,022 - - 91,022
Decrease in cash surrender value of life insurance. . 5,059 376 - -
Amortization. . . . . . . . . . . . . . . . . . . . . - 14,340 445 444
Loss on disposal of equipment . . . . . . . . . . . . - 11,271 - 2,598
(Increase) decrease in assets:
Receivables . . . . . . . . . . . . . . . . . . . . 27,579 419,048 (77,004) 609,124
Inventories . . . . . . . . . . . . . . . . . . . . 472,989 (454,526) 66,309 (12,218)
Prepaid expenses. . . . . . . . . . . . . . . . . . (8,993) - (75,358) (36,555)
Other assets. . . . . . . . . . . . . . . . . . . . (723) 5,620 1,000 (1,000)
Increase (decrease) in liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . 204,999 301,489 (62,103) (9,076)
Accrued expenses. . . . . . . . . . . . . . . . . . 250,290 (100,669) (111,792) (57,317)
Contract deposits . . . . . . . . . . . . . . . . . (114,349) 288,285 (2,077) (119,705)
Due to the Department of Defense. . . . . . . . . . - (640,392) - -
------------ --------- --------- ----------
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . 1,255,057 260,021 (187,849) 383,903
Cash flows from investing activities:
Purchase of property and equipment. . . . . . . . . . . (13,570) (106,036) (30,204) -
Increase in notes receivable (employees). . . . . . . . - - - (4,274)
------------ --------- --------- ----------
Net cash used in investing activities . . . . . . (13,570) (106,036) (30,204) (4,274)
Cash flows from financing activities:
Net repayments on bank lines of credit. . . . . . . . . (1,069,437) (162,377) (108,596) -
Proceeds from line of credit. . . . . . . . . . . . . . - - - 66,738
Proceeds from notes payable . . . . . . . . . . . . . . 75,000 13,343 - 73,755
Payments on notes payable . . . . . . . . . . . . . . . (146,962) (295,239) (41,996) (72,963)
Advances from related parties . . . . . . . . . . . . . 641,370 250,903 163,392 -
Repayments of advances from related parties . . . . . . (322,073) (1,330) (200,061) (1,297)
------------ --------- --------- ----------
Net cash used in financing activities . . . . . . (822,102) (194,700) (187,261) 66,233
------------ --------- --------- ----------
Net increase (decrease) in cash
and cash equivalents. . . . . . . . . . . . . . 419,385 (40,715) (405,314) 445,862
Cash and cash equivalents - beginning of year . . . . . . 214,524 255,239 633,909 214,524
------------ --------- --------- ----------
Cash and cash equivalents - end of year . . . . . . . . . $ 633,909 214,524 228,595 660,386
============ ========= ========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 300,693 350,391 73,512 94,148
============ ========= ========= ==========
See the accompanying notes to the financial statements
F-21
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2002 and 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND NATURE OF BUSINESS
Spectrum Sciences & Software, Inc. (the "Company") 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 computer software. 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 includes the design and construction of
munitions ground support equipment and containers for the shipping and storage
of munitions and equipment. The Company's computer software segment consists of
the sale of computer software developed to assist in hazard management and
weapons impact analysis.
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 years ended December 31, 2002 and 2001
and three months ended March 31, 2003 and 2002 (unaudited), 99% of the Company's
revenues were derived from contracts with the DOD.
(B) REVENUE AND COST RECOGNITION
The principal source of revenue for the Company is derived from contracts
with the DOD and other governmental contractors. Revenue on firm fixed price
contracts is recognized currently as the work is performed for all segments.
Costs of revenues earned include all direct costs (labor, travel,
relocations, materials, subcontracts, and other) and those indirect costs
allocable to a contract. Allocations of indirect costs are based on the
relative amounts of direct labor.
(C) CASH AND CASH EQUIVALENTS
The Company considers cash on hand, deposits in banks, and money market
accounts to be cash and cash equivalents.
F-22
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(D) ALLOWANCES
The Company provides appropriate provisions for uncollectible
accounts and credit for returns based upon factors surrounding the credit risk
and activity of specific customers. 99% of the Company's revenue and related
accounts receivable are derived from contracts with the DOD which minimizes the
risk of uncollectibility. In the opinion of management, no provisions are
deemed necessary for uncollectible accounts or returns for credits at December
31, 2002 and March 31, 2003 (unaudited). If a customer account becomes
considered uncollectible, it will be written off at that time.
Certain commercial accounts receivable were written off during the fiscal
years ended December 31, 2002 related to the acquisition of Ver-Val Enterprises
(see Note 1(h)). Bad debt expense of approximately $3,900, $43,600, $0 and
$21,460 was recognized as an operating expense in the accompanying financial
statements during the years ended December 31, 2002 and 2001 and the three
months ended March 31, 2003 and 2002 (unaudited), respectively. In 2002,
the long-term receivables were written off and an additional $34,978 was charged
to the loss from discontinued operations, which is described further in Note 11
to the financial statements.
(E) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Accordingly, results could differ
materially from those estimates.
(F) INVENTORIES
Inventories are stated at the lower of cost or market, determined by the
average cost method. Inventories are reviewed periodically and items considered
to be slow-moving, excess and/or obsolete are written down to their estimated
net realizable value. During 2002, inventories were reduced by approximately
$289,700 due to obsolescence.
F-23
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(G) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using accelerated methods over the
estimated useful lives of the related assets. Routine maintenance and repairs
are charged to expense as incurred. Major replacements and improvements are
capitalized. When assets are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and gains or losses from dispositions
are credited or charged to income.
(H) GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired. During the fourth quarter of 1999, the Company
purchased certain assets and assumed certain liabilities of Ver-Val Enterprises,
Inc. ("Ver-Val"). The Company allocated $113,777 to goodwill. Amortization was
computed on a straight-line basis over the estimated useful life of 10 years.
Amortization expense was $11,377 in 2001 and accumulated amortization was
$22,755 at December 31, 2001.
Effective January 1, 2002, the Company adopted the provisions of FASB
Statement No. 142, Goodwill and Other Intangibles ("SFAS No. 142"). The
adoption of SFAS No. 142 required an initial impairment assessment involving a
comparison of the fair value of goodwill to its current carrying value. Upon
adoption, the Company recorded a loss as a cumulative effect of an accounting
change of $91,022 related to goodwill in the manufacturing segment. Prior
periods have not been restated for the adoption of SFAS No. 142.
(I) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company's long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows (undiscounted and without interest charges)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
F-24
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(J) INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under these provisions, the shareholder reports
his proportionate share of the Company's income or loss on his individual income
tax return. Therefore, no provision or liability for federal or state income
taxes has been included in the accompanying financial statements.
(K) CONTRACT DEPOSITS
The Company has received advance deposits for contracts to be performed in
2003. These advance deposits are recorded as current liabilities at December
31, 2002 and three months ended March 31, 2003 (unaudited) in the accompanying
balance sheet until such time as the required work is performed and then these
amounts are recorded as revenue.
(L) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is calculated by dividing net
income by the weighted-average number of common shares outstanding during the
reporting period. Diluted EPS is computed in a manner consistent with that of
basic EPS while giving effect to the potential dilution that could occur if
options and/or warrants to issue common stock were exercised.
(M) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs incurred during 2002 and 2001 and for the three months ended
March 31, 2003 and 2002 (unaudited) totaled approximately $22,300, $45,000,
$11,371 and $9,584, respectively, and are included in operating expenses in the
accompanying statements of operations.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, receivables, accounts payable, and accrued
expenses approximates fair value because of the short maturity of those
instruments. The fair value of the bank lines of credit and notes payable are
assumed to approximate the recorded value because there have not been any
significant changes in specific circumstances since the notes and lines were
originally recorded.
F-25
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(O) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and receivables. The
Company places its cash with high credit quality financial institutions. At
various times throughout 2002 and the three months ended March 31, 2003
(unaudited) and at December 31, 2002 and the three months ended March 31, 2003
(unaudited), cash balances held at some financial institutions were in excess of
federally insured limits.
Receivables are from the DOD and/or through DOD prime contractors, which
minimizes the Company's credit risk. The Company generally does not require
collateral or other security to support customer receivables.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to (a)
all entities and (b) legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of long-lived assets, except for certain obligations
of lessees. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not believe the
adoption of SFAS No. 143 will have a material impact on it's financial position
or results of operations.
Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which established one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS No. 144 also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation of a subsidiary for
which control is likely to be temporary. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early application encouraged. Upon adoption of SFAS No.
144, the Company recorded a loss on disposal of its yacht manufacturing segment
of $407,250 in the accompanying statements of operations.
F-26
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(P) RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds SFAS No. 44, "Accounting for Intangible Assets for Motor
Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The Company does not expect the adoption of SFAS No. 145 will
have a material impact on its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
requires that costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is effective for all exit or disposal activities
initiated after December 31, 2002. The Company has implemented SFAS No. 146 in
connection with its discontinued operations (see Note 11).
(2) BASIS OF PRESENTATION AND GOING CONCERN
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The Company has experienced losses from
operations and has an accumulated deficit of $1,176,157 and $1,140,908 as of
December 31, 2002 and three months ended March 31, 2003 (unaudited),
respectively. Additionally, the Company has negative working capital of
$3,254,108 and $3,216,401 at December 31, 2002 and March 31, 2003 (unaudited),
respectively. These deficits and the dependence of the Company to find
alternative financing arrangements to repay its debt owed to its lender are
conditions which could affect the Company's ability to continue as a going
concern.
F-27
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(2) BASIS OF PRESENTATION AND GOING CONCERN, CONTINUED
The Company's plans to deal with this uncertainty include reducing
expenditures, continuing to request forbearance from creditors and raising
additional capital or entering into a strategic arrangement with a third party.
There can be no assurance that management's plans to reduce expenditures, gain
cooperation from creditors, raise capital or enter into a strategic arrangement
can be realized. No adjustment has been made in the accompanying financial
statements to the amounts and classification of assets and liabilities which
could result should the Company be unable to continue as a going concern.
(3) RECEIVABLES
Receivables are, primarily comprised of amounts due to the Company for
work performed on contracts directly related to the DOD and through DOD prime
contractors, consisted of the following:
DECEMBER 31, MARCH 31,
2002 2003
------------ -----------
(UNAUDITED)
Contracts - billed $ 1,546,705 1,956,821
Contracts - unbilled 537,630 202,096
------------ -----------
Net trade receivables 2,084,335 2,158,917
Employee advances and notes receivable 454 2,876
------------ -----------
Total $ 2,084,789 2,161,793
============= ===========
Unbilled receivables represent recoverable costs and estimated earnings and
consist principally of contract revenue which has been recognized for accounting
purposes but is not yet billable to the customer. Substantially all of these
amounts will be billed in the following year.
Substantially all of the receivables at December 31, 2002 and March 31,
2003 (unaudited) are due from the DOD or through DOD prime contractors.
F-28
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(4) INVENTORIES
Inventories of the Company consists of the following components:
DECEMBER 31, MARCH 31,
2002 2003
------------ -----------
(UNAUDITED)
Raw materials $ 170,344 154,035
Finished goods 121,000 71,000
------------ -----------
$ 291,344 225,035
============ ===========
RAW MATERIALS
Raw materials consists of sheet metal, various product spare parts,
hardware and other miscellaneous materials.
FINISHED GOODS
Finished goods consist of substantially complete products available for
sale. The composition is as follows:
QUANTITY 2003
NUMBER OF 2002 (UNAUDITED)
ITEM ITEMS COST COST
--------------------------- ---------- -------- -----------
Munitions trailers 7 $ 1,000 1,000
B5A maintenance stands 137 20,000 20,000
Munitions assembly conveyor 2 100,000 50,000
------- ------
$121,000 71,000
======== ======
During 2002, the Company determined that the munitions trailers and B5A
maintenance stands with a carrying value of $182,452 were impaired and wrote
them down by $161,452 to their estimated fair value. Management determined
impairment had occurred due to anticipated significant costs to make the
finished goods marketable.
F-29
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(5) PROPERTY, PLANT, AND EQUIPMENT
A summary of property and equipment is as follows:
LIVES IN DECEMBER 31, MARCH 31,
YEARS 2002 2003
----------------------------------- ----------- ----------- ----------
(UNAUDITED)
Land. . . . . . . . . . . . . . . . - $ 175,000 $ 175,000
Buildings and improvements. . . . . 15 - 39 1,565,301 1,565,301
Manufacturing and other equipment . 3 - 7 775,016 775,016
Investment property . . . . . . . . 39 220,900 220,900
Computer equipment. . . . . . . . . 3 102,507 115,770
Software. . . . . . . . . . . . . . 3 - 5 54,616 54,616
Vehicles. . . . . . . . . . . . . . 5 - 7 48,288 65,229
Furniture and fixtures. . . . . . . 5 - 7 24,206 24,206
Construction in progress. . . . . . - 38,714 38,714
----------- ----------
Total . . . . . . . . . . 3,004,548 3,034,752
Less accumulated depreciation . . . (932,600) (970,682)
----------- ----------
Net property, plant, and equipment. $2,071,948 $2,064,070
=========== ==========
Depreciation expense totaled $148,899, $182,764, $38,082 and $42,015 during
the years ended December 31, 2002 and 2001 and three months ended March 31, 2003
and 2002 (unaudited), respectively.
(6) ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 31, MARCH 31, 2003
2002 2003
(UNAUDITED)
------------ --------------
Accrued payroll and related benefits $ 454,249 457,812
Payroll related taxes 302,289 204,130
Accrued vacation and sick 128,775 138,790
Accrued interest payable 29,120 18,806
Accrued property taxes 25,973 9,074
------------ --------------
Total accrued expenses $ 940,406 828,612
============ ==============
F-30
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(7) BANK LINES OF CREDIT
The following is a summary of the bank lines of credit:
AVAILABLE INTEREST CURRENT BALANCE AT BALANCE AT
CREDIT TERMS RATE COLLATERAL DUE 12/31/2002 3/31/2003
----------- --------- -------- ---------- ---------- ----------- -----------
(UNAUDITED)
1,000,000 Prime + 2% 6.25% (1) 09/28/01 $ 529,555 432,163
1,000,000 Prime + 2% 6.25% (1) 09/28/01 443,486 432,283
100,000 Prime + 2% 6.25% (2) 03/08/02 99,549 99,549
145,000 Prime + 2% 6.25% (3) 02/08/01 128,521 128,521
----------- -----------
$1,201,111 1,092,516
=========== ===========
(1) Assignment of Government contracts and personal guarantee of Company
President.
(2) Personal guarantee of Company President.
(3) Cross collateralized with real estate loan and personal guarantee of
Company President.
At December 31, 2002, all of the bank lines of credit were due and had
been extended to January 15, 2003. The Company has negotiated an additional
extension and modification of the loans as further described in Note 16 and 17
to the financial statements.
F-31
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(8) LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, MARCH 31,
2002 2003
------------ -----------
(UNAUDITED)
Note payable to a bank, due in monthly
installments of $14,870, including interest at
8.50%. Final balloon payment of $1,501,039
due October 1, 2004, collateralized by real
estate and a personal guarantee of the
Company President. . . . . . . . . . . . . . . . $ 1,581,419 1,570,367
Note payable to a bank, due in monthly
installments of $1,588, including interest at
8.75%. Final balloon payment of $188,822
due December 27, 2004, collateralized by a
condominium and a personal guarantee of the
Company President. . . . . . . . . . . . . . . . 193,473 191,283
Note payable to a bank, due in monthly
installments of $4,347, including interest at
prime + .25% (4.50% at December 31, 2002).
Final payment due August 13, 2006,
collateralized by equipment and inventory. . . . 163,356 148,367
Note payable to a financial corporation, due
in monthly installments of $2,655, including
interest at 22%. Final payment due January
10, 2005, collateralized by certain equipment
of the Company and a personal guarantee of
the Company President. . . . . . . . . . . . . . 52,465 46,200
Note payable to an individual, principal and
interest due in monthly installments of
1,000, including interest at 8.0%
commencing on February 1, 2001. In April
2003 the Company reached an agreement
with the debtor allowing them to settle the
outstanding debt on this note with a $15,000
lump sum payment.. . . . . . . . . . . . . . . . 15,000 7,500
------------ -----------
2,005,713 1,963,717
Less current portion . . . . . . . . . . . . . . (1,975,591) (1,939,860)
------------ -----------
Total long-term debt . . . . . . . . . . . . . . $ 30,122 23,857
============ ===========
F-32
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(8) LONG-TERM DEBT, CONTINUED
The original maturities of the debt are due as follows:
YEAR ENDING DECEMBER 31,
----------------------------
2003 $ 166,732
2004 1,739,873
2005 73,940
2006 10,361
2007 11,221
Thereafter 3,586
-----------
$ 2,005,713
===========
On June 13, 2002, the Company was considered in default on all debt with
its primary lender (the "lender") due to cross collateralization of all loans
and lines of credit. As such, the outstanding balance of all long-term debt due
to that lender at December 31, 2002, has been included in current liabilities.
The revised maturities of the debt based on the event of default are as follows:
YEAR ENDING DECEMBER 31,
----------------------------
2003 $ 1,975,591
2004 27,515
2005 2,607
-----------
$ 2,005,713
===========
F-33
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(9) RELATED PARTY PAYABLES AND TRANSACTIONS
Related party payables consist of the following:
DECEMBER 31, 2002 MARCH 31, 2003
------------------- --------------
(UNAUDITED)
Cash advances made to the Company
non-interest bearing, payable upon
demand. . . . . . . . . . . . . . . . . $ 544,329 489,453
Legal fees paid by a shareholder of the
Company, non-interest bearing, payable
upon demand . . . . . . . . . . . . . . 12,947 12,947
Management consulting fees to a
shareholder of the Company, non-
interest bearing, payable upon demand . 11,594 29,801
------------------- --------------
$ 568,870 532,201
=================== ==============
During 2002, cash advances totaling $616,829 were provided to the Company
for operating purposes by individuals who were either officers, directors,
and/or material participants in the transaction described in Note 17. The
Company repaid $72,500 of the cash advances in the fourth quarter of 2002 and
$54,876 in the three months ended March 31, 2003 (unaudited). No interest was
paid on the cash advances.
The Company was provided management consulting services by one of the
shareholders during 2002. Expenses of $11,594 and $18,207 are reported in the
accompanying financial statements for the year ended December 31, 2002 and the
three months ended March 31, 2003 (unaudited), respectively.
In November of 2001, the Company's shareholder personally entered into a
20-year mortgage agreement with a financial institution. The financial
institution loaned the shareholder $250,903. The shareholder then loaned the
entire proceeds to the Company. The Company was directly making the monthly note
payments of $2,097, including interest at 7.99%. The final payment was due
November 16, 2021. The mortgage was secured by the 43-foot fishing vessel, which
was titled in the Company's name. In the second quarter of 2002, the Company
decided to exit the yacht construction segment of its business because it felt
it could not be competitive in this specialized market. In the fourth quarter of
2002, the fishing vessel was sold and the amount due to the shareholder was paid
in full.
F-34
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(10) NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) consisted of the following:
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
2002 2001 2003 2002
(UNAUDITED)(UNAUDITED)
----------- ---------- ---------- ----------
Income:
Building rent (Note 16) . . . . . $ 181,556 181,771 45,351 45,351
Legal settlement (Note 14). . . . 175,000 - - -
Interest. . . . . . . . . . . . . 3,285 11,125 199 2,088
Other . . . . . . . . . . . . . . 6,034 7,070 4,802 1,545
----------- --------- ---------- ----------
Total income. . . . . . . . . . . 365,875 199,966 50,352 48,984
----------- --------- ---------- ----------
Expense:
Interest. . . . . . . . . . . . . (306,582) (339,439) (66,752) (91,261)
Penalties (Note 16(b)). . . . . . (78,086) (9,166) (6,249) (2,816)
Other . . . . . . . . . . . . . . (14,761) (30,548) - -
----------- --------- ---------- ----------
Total expense . . . . . . . . . . (399,429) (379,153) (73,001) (94,077)
----------- --------- ---------- ----------
Total non-operating expense, net. $ (33,554) (179,187) (22,649) (45,093)
=========== ========== ========== ==========
(11) LOSS ON DISCONTINUED OPERATIONS
In connection with the acquisition of Ver-Val during 1999, the Company
decided to enter the yacht construction industry. A 43-foot Express fishing
vessel was purchased in 2000 and completed in 2001, and consisted of a molded
fiberglass sport fisherman with a tuna tower and twin diesel engine propulsion.
F-35
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(11) LOSS ON DISCONTINUED OPERATIONS, CONTINUED
In the second quarter of 2002, the Company decided to exit the yacht
construction segment of its business because it felt it could not be competitive
in this specialized market. In the fourth quarter of 2002, the Company sold the
43-foot fishing vessel held in inventory for $400,000. The loss on disposal of
the yacht construction segment consists of the following components:
Loss on disposal of fishing vessel including sales commission $ (367,926)
Carrying costs including rent, interest, utilities, and bad debts (76,050)
Gain on extinguishment of debt 36,726
-------------
Total loss on discontinued operations $ (407,250)
=============
(12) PRIOR PERIOD ADJUSTMENT
The accompanying financial statements for 2001 have been restated to
reflect an adjustment to equity as of January 1, 2001 for a correction of an
error made on the calculation of the Company's payroll tax liability for the
third quarter of 2000. Due to the error payroll tax expense and the related
liability were understated in the amount of $92,065.
(13) EMPLOYEE BENEFIT PLANS
The Company has established a defined contribution profit sharing plan
(401k) available to all employees of the Company who have completed six months
of service and are age twenty (20) or older. Eligible employees may defer a
portion of their annual salary based on yearly Internal Revenue Service (IRS)
guidelines.
The Company has the option to contribute to the profit sharing plan on an
annual basis. No contributions were made to the profit sharing plan for the
years ended December 31, 2002 and 2001 and the three months ended March 31, 2003
and 2002 (unaudited).
F-36
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(14) NON-RECURRING ITEMS
As a result of the Ver-Val acquisition, the Company established an
allowance for doubtful accounts and recognized bad debt expense of $30,000
during 2001 relating to long-term notes receivable from two employees of the
Company. The Company wrote off the balance of the notes receivable in 2002 and
the bad debt expense is included in the loss from discontinued operations as
discussed in Note 11 to the financial statements.
The Company received $175,000 in 2002 from an out of court legal settlement
related to an employee theft which occurred prior to January 1, 2001. The amount
is included in non-operating income in the accompanying financial statements
(see Note 10).
(15) 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 manufacturing its
products with an allocation of indirect costs. The Company has three operating
segments - management services, manufacturing, and computer software. 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 computer
software segment consists of the sale of computer software developed to assist
in hazard management and weapons impact analysis. The "Other" category includes
revenues and expenses related to the Company's discontinued yacht construction
segment during 2001 and for the three months ended March 31, 2002 (see Note 11).
The significant accounting policies of the operating segments are the same as
those described in Note 1.
The following is a summary of certain financial information related to the
Company's operating segments:
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
2002 2001 2003 2002
------------- ----------- --------- ----------
(UNAUDITED) (UNAUDITED)
Total revenues by segment
Management Services . . . . $ 8,761,280 8,238,647 2,293,100 2,148,364
Manufacturing . . . . . . . 2,405,517 2,617,917 650,576 419,756
Computer Software . . . . . 1,094,833 1,016,961 329,353 237,578
------------- ----------- --------- ----------
Total revenues by segment. $ 12,261,630 11,873,525 3,273,029 2,805,698
============= =========== ========= ==========
F-37
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(15) SEGMENT INFORMATION, CONTINUED
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
2002 2001 2003 2002
-------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Operating profit (loss) by segment
Management Services . . . . . . . . $ 79,684 416,610 63,391 63,482
Manufacturing . . . . . . . . . . . (219,143) 10,819 38,307 54,019
Computer Software . . . . . . . . . 525,590 490,990 80,532 91,294
Other . . . . . . . . . . . . . . . - (78,276) - (74,400)
Operating expenses. . . . . . . . . (464,987) (428,541) (124,932) (123,709)
Interest income (expense), net. . . (303,297) (328,314) (66,553) (89,173)
Other income (expense), net . . . . 269,743 149,127 43,904 44,080
Discontinued operations . . . . . . (407,250) - - -
Cumulative effect of SFAS No. 142 . (91,022) - - (91,022)
-------------- ------------- ----------- -----------
Net income (loss). . . . . . . . . $ (610,682) 232,415 34,649 (125,429)
============== ============= =========== ===========
Identifiable assets
Management Services . . . . . . . . $ 1,066,693 1,558,330 882,019 913,470
Manufacturing . . . . . . . . . . . 1,168,048 2,146,792 1,246,691 2,170,101
Computer Software . . . . . . . . . 386,099 131,441 304,116 149,868
-------------- ------------- ----------- -----------
Total identifiable assets. . . . . 2,620,840 3,836,563 2,432,826 3,233,439
Corporate and other assets. . . . . 2,506,868 2,286,578 2,366,298 2,644,407
-------------- ------------- ----------- -----------
Total assets . . . . . . . . . . . $ 5,127,708 6,123,141 4,799,124 5,877,846
============== ============= =========== ===========
Depreciation by segment
Management Services . . . . . . . . $ 2,262 1,389 2 15
Manufacturing . . . . . . . . . . . 97,487 132,147 22,668 12,750
Computer Software . . . . . . . . . 2,684 - 1,793 -
Other . . . . . . . . . . . . . . . 46,466 49,228 13,619 29,250
-------------- ------------- ----------- -----------
Total depreciation . . . . . . . . $ 148,899 182,764 38,082 42,015
============== ============= =========== ===========
Capital expenditures by segment
Manufacturing . . . . . . . . . . . $ - 79,368 - -
Computer Software . . . . . . . . . 11,070 4,376 13,263 -
Other . . . . . . . . . . . . . . . 2,500 22,292 16,941 -
-------------- ------------- ----------- -----------
Total capital expenditures . . . . $ 13,570 106,036 30,204 -
============== ============= =========== ===========
F-38
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(15) SEGMENT INFORMATION, CONTINUED
As of December 31, 2002 and 2001 and three months ended March 31, 2003 and
2002 (unaudited), all of the Company's revenues have been generated in the
United States of America. As of December 31, 2002 and March 31, 2003
(unaudited), all of the Company's long-lived assets are located in the United
States of America.
(16) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
(i) Lessee
-------
The Company leases a facility for manufacturing under a
month-to-month operating lease. Total rent expense incurred under this
operating lease during the years ended December 31, 2002 and 2001 and
the three months ended March 31, 2003 and 2002 (unaudited) totaled
$20,400, $25,643, $5,100 and $5,100, respectively.
The Company also leased a facility for use by the yacht
construction segment. Total rent expense incurred under this lease
during the years ended December 31, 2002 and 2001 was approximately
$55,000 and for the three months ended March 31, 2003 and 2002
(unaudited) totaled $-0- and $18,450, respectively.
(ii) Lessor
-------
During the years ended December 31, 2002 and 2001 and the three
months ended March 31, 2003 and 2002 (unaudited), the Company was the
lessor in an operating lease of office space. The lessee is a
governmental contractor who rented space in the Company's office
building. The operating lease expires in September 2003. Rental income
during the years ended December 31, 2002 and 2001 and the three months
ended March 31, 2003 and 2002 (unaudited) totaled $181,556, $181,771,
$45,351 and $45,351, respectively.
Minimum lease payments to be received for the next year are as
follows:
2003 $ 136,050
==========
F-39
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(16) COMMITMENTS AND CONTINGENCIES, CONTINUED
(B) IRS TAX LIEN
At December 31, 2002, the Company had outstanding payroll tax liabilities
(including penalties and interest) relating to the third quarter of 2000
totaling $162,680 included in accrued expenses in the accompanying financial
statements. Subsequent to December 31, 2002, a lien was filed by the Internal
Revenue Service (IRS) with respect to the amount owed as described in Note 17 to
the financial statements.
(C) FORBEARANCE AGREEMENTS
On February 28, 2002, the Company entered into a Forbearance Agreement
with its primary lender (the "lender"). The Company at this date was in default
under terms and conditions relating to the bank lines of credit with the lender.
The lender agreed to forbear taking certain actions as to these outstanding
loans and obligations owed by the Company to the lender from that date until May
16, 2002. The forbearance was to allow the Company to refinance the debt owed
to the lender with another institution. As part of the Forbearance Agreement,
the lender and the Company expressly agreed that all outstanding debt due to the
lender by the Company is cross-defaulted with one another.
On June 13, 2002, the Company entered a second Forbearance Agreement with
the lender. The lender at that date, considered the Company in default of all
debt under the terms of the First Forbearance Agreement and under the terms of
the loans and loan documents. The lender agreed to forbear taking certain
action as to all outstanding loans and obligations owned by the Company to the
lender until September 30, 2002. The Company agreed to make periodic payments
to the lender totaling $500,000 in installments through September 25, 2002. The
Company also agreed to make arrangements to close a factoring transaction with a
substitute lender no earlier than September 25 and no later than September 30,
2002. From that closing, the Company will make an additional payment to the
lender of $2,000,000. The Company also agreed by September 30, 2002, to repay
all obligations including all interest, attorney's fees and cost of collection
to the lender.
On October 31, 2002, the Company entered into an extension of the Second
Forbearance Agreement with the lender. The Company agreed to pay $87,000 on
December 31, 2002 and January 2, 2003, on the outstanding priority loans (lines
of credit) and to pay all other debt according to the payment schedule. The new
maturity date for the priority loans was extended to January 15, 2003.
F-40
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(16) COMMITMENTS AND CONTINGENCIES, CONTINUED
(D) LEGAL MATTERS
On or about December 9, 2002, the Trident Company ("Trident") brought a
lawsuit against the Company in the State Court in Tulsa County, Oklahoma for the
nonpayment of metals purchased by the Company. Trident secured a default
judgment against the Company in the amount of $139,020, plus interest in the
amount of $1,780, and attorneys' fees in the amount of $2,500 for a total of
$143,300. On or about February 19, 2003, Trident commenced to domesticate the
Oklahoma Judgment in the State Court in Escambia County, Florida. On or about
March 18, 2003, Trident filed a Petition to Vacate Default Judgment and
Supporting Brief in the District Court in and for Tulsa County, State of
Oklahoma. On or about March 20, 2003 the Company filed a Petition Contesting
Validity of Foreign Judgment and Motion for Stay in the Domestication Action. On
or about April 9, 2003, Trident served a Notice of Taking Deposition in the
Oklahoma Petition to Vacate proceedings.
The Parties desire to resolve this matter and these pending cases amicably
under the following terms and conditions: the Company has paid Trident $25,804
on May 2, 2003. The Company agrees to pay Trident $23,709 on or before June 15,
which includes accumulated legal fees and interest. From July 15, 2003 through
May 15, 2004, the Company agrees to pay Trident $8,883. This will completely
settle this debt. Final settlement documents have not been executed.
(17) SUBSEQUENT EVENTS (UNAUDITED)
On January 20, 2003, the IRS placed a lien in favor of the United States of
America on all property and rights to the property for unpaid payroll taxes from
the third quarter of 2000. On April 21, 2003, the IRS filed a Notice of Levy to
collect the unpaid amount of $173,041. On April 24, 2003, the Company remitted
$25,000 to the IRS and a Release of Levy/Release of Property from Levy was filed
by the IRS. In addition, the Company submitted a proposal to the IRS to satisfy
the remainder of the unpaid payroll tax liability. The proposal is as follows:
Beginning in May 2003, and carrying on through August 2003, the Company proposed
a payment to the IRS of $5,000 per month to be made no later than the 10th of
each month for a total of an additional $20,000. Starting in September 2003 and
continuing until the final debt is settled, the Company proposed a payment of
$10,000 per month to be paid no later than the 10th of each month.
F-41
SPECTRUM SCIENCES & SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(17) SUBSEQUENT EVENTS (UNAUDITED), CONTINUED
On January 31, 2003, the Company signed an extension and modification of
the loan agreement. The Company was in default under all of the priority loans
(lines of credit) at this date. The maturity date of each of the priority loans
was extended to July 25, 2003. The Company agreed to make lump sum payments of
$60,000 on February 25, 2003 through July 25, 2003 ($300,000) on the priority
loans. During the period of the agreement the Company also agreed to make
regularly scheduled payments on all other loans to the lender. The Company
agreed they shall not, without consent of the lender, merge the Company or cause
any change in control of more than 25% of the common stock of the Company.
On April 1, 2003, the Company negotiated a debt restructuring agreement
related to a note payable for a facility it previously leased in connection with
its yacht construction segment. The agreement calls for total payments of
$15,000 to the individual of which, $7,500 was paid on the date of the
agreement. The remaining $7,500 is due on or before April 30, 2003. The note
balance at December 31, 2002 was $51,726, which resulted in a gain on
extinguishment of debt of $36,726 which is reported in discontinued operations.
In April 2003, Silva Bay International, Inc. acquired all of the assets of
the Company and assumed certain liabilities in exchange for the issuance of
1,250,000 shares of it's common stock. For accounting purposes the transaction
will be accounted for as a recapitalization if the Company expects to expand on
these initial operations by acquiring industry related entities in an effort to
be a profitable, technology driven defense contractor, but also expects to
reduce costs through economies of scales. The assets acquired and liabilities
assumed will be recorded at carryover basis.
F-42
PART III - ITEM 1. INDEX TO EXHIBITS
SPECTRUM SCIENCES & SOFTWARE HOLDINGS, INC.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation, filed August 28, 1998
3.2 Certificate of Amendment of Certificate of Incorporation, filed
April 8, 2003
3.3 Certificate of Renewal and Revival, filed March 24, 2003
3.4 By-Laws
3.5 Certificate of Merger filed with the Delaware Secretary of State
3.6 Articles of Merger filed with the Florida Secretary of State
3.7 Bylaws of Silva Bay International, Inc., dated August 26, 1998
3.8 Amended And Restated Bylaws of Silva Bay International, Inc.,
dated March 24, 2003
4.1 Specimen Certificate of Common Stock
10.1 Stock Option Plan of 2002
10.2 Employment Agreement with Donal R. Myrick
10.3 Consulting Agreement with Dwain Brannon, dated December 28,
2001
21.1 List of Subsidiaries
23.1 Accountant's Consent, Tedder, James, Worden & Associates, P.A.
23.2 Accountant's Consent, Richard M. Prinzi, Jr., Certified Public
Accountant
SIGNATURES
In accordance with Section 12 of the Exchange Act of 1934, the registrant
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized this 3rd day of June, 2003.
Spectrum Sciences & Software Holdings Corp.
By: /s/ Donal R. Myrick
--------------------------
Donal R. Myrick
President
26