U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: September 30, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number ______________________
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
---------------------------------------
(Exact name of small business issuer
as specified in its charter)
DELAWARE 80-0025175
------------------------------ --------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
91 HILL AVENUE NW,
FORT WALTON BEACH, FLORIDA 32548
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number (850) 796-0909
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 12, 2003 there were 18,851,000 shares of the registrant's common
stock, par value $0.0001, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
SEPTEMBER 30, 2003 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Special Note Regarding Forward Looking Statements
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2003 (unaudited) 4
Consolidated Statements of Operations for the three months
ended September 30, 2003 and 2002 (unaudited) 5
Consolidated Statements of Operations for the nine months
ended September 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis or Plan of Operations 15
Item 3. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Defaults in Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2003, discusses financial
projections, information or expectations about our products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. We are making these forward-looking statements in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These risks and uncertainties
are described, among other places in this Quarterly Report, in "Management's
Discussion and Analysis or Plan of Operations."
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.
3
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Balance Sheet
September 30, 2003
(Unaudited)
ASSETS
------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 211,782
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . 1,823,670
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 257,860
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 74,529
------------
Total current assets . . . . . . . . . . . . . . . . . . . 2,367,841
Property and equipment, net. . . . . . . . . . . . . . . . . . . 2,027,254
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 49,115
Cash surrender value of life insurance . . . . . . . . . . . . . 19,701
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 14,690
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 4,478,601
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 1,068,858
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 757,189
Contract deposits. . . . . . . . . . . . . . . . . . . . . . . 137,668
Bank lines of credit . . . . . . . . . . . . . . . . . . . . . 762,787
Current portion of long-term debt. . . . . . . . . . . . . . . 1,892,273
Due to related parties . . . . . . . . . . . . . . . . . . . . 805,021
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 91,825
------------
Total current liabilities. . . . . . . . . . . . . . . . . 5,515,621
Long-term liabilities:
Notes payable, net of current portion. . . . . . . . . . . . . 2,656
------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 5,518,277
Shareholders' deficit:
Common stock, $0.0001 par value; 80,000,000 shares authorized,
18,844,000 shares issued and outstanding . . . . . . . . . . 1,884
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (1,041,560)
------------
Total shareholders' deficit. . . . . . . . . . . . . . . . (1,039,676)
------------
Total liabilities and shareholders' deficit. . . . . . . . $ 4,478,601
============
4
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statements of Operations
For the three months ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Revenues earned. . . . . . . . . . . . . . . . . . . . . . $ 3,287,609 2,932,782
Cost of revenues earned. . . . . . . . . . . . . . . . . . 2,729,784 3,008,273
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . 557,825 (75,491)
Operating expenses . . . . . . . . . . . . . . . . . . . . 369,035 177,736
------------ ------------
Income (loss) from operations. . . . . . . . . . . . . 188,790 (253,227)
Other income and expense:
Interest income. . . . . . . . . . . . . . . . . . . . . 25 700
Building rent. . . . . . . . . . . . . . . . . . . . . . 45,351 45,430
Other income . . . . . . . . . . . . . . . . . . . . . . 1,078 (33,430)
Interest expense . . . . . . . . . . . . . . . . . . . . (61,665) (76,278)
Other expenses . . . . . . . . . . . . . . . . . . . . . (2,749) 3,097
------------ ------------
Total other income (expense) . . . . . . . . . . . . . (17,960) (60,481)
Net income (loss) from continuing operations . . . . . . . 170,830 (313,708)
Discontinued operations:
Loss on disposal of yacht manufacturing segment. . . . . - (79,325)
------------ ------------
Income (loss) before cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . 170,830 (393,033)
Cumulative effect of accounting change for
SFAS No. 142 . . . . . . . . . . . . . . . . . . . . . - -
------------ ------------
Net income (loss) before provision for income taxes. 170,830 (393,033)
Provision for income taxes . . . . . . . . . . . . . . . . 7,130 -
------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . $ 163,700 (393,033)
============ ============
Weighted average common shares outstanding . . . . . . . . 18,844,000 16,244,000
============ ============
Basic and diluted earnings (loss) per share. . . . . . . . $ 0.01 $ (0.02)
============ ============
5
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statements of Operations, Continued
For the nine months ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Revenues earned. . . . . . . . . . . . . . . . . . . . . . $10,003,999 8,554,546
Cost of revenues earned. . . . . . . . . . . . . . . . . . 8,783,358 8,470,276
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . 1,220,641 84,270
Operating expenses . . . . . . . . . . . . . . . . . . . . 949,649 450,534
------------ ------------
Income (loss) from operations. . . . . . . . . . . . . 270,992 (366,264)
Other income and expense:
Interest income. . . . . . . . . . . . . . . . . . . . . 274 2,682
Building rent. . . . . . . . . . . . . . . . . . . . . . 136,053 136,132
Other income . . . . . . . . . . . . . . . . . . . . . . (9,250) (32,111)
Interest expense . . . . . . . . . . . . . . . . . . . . (211,059) (243,868)
Other expenses . . . . . . . . . . . . . . . . . . . . . (11,585) (17,865)
------------ ------------
Total other income (expense) . . . . . . . . . . . . . (95,567) (155,030)
Net income (loss) from continuing operations . . . . . . . 175,425 (521,294)
Discontinued operations:
Loss on disposal of yacht manufacturing segment. . . . . - (407,250)
------------ ------------
Income (loss) before cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . - (928,544)
Cumulative effect of accounting change for
SFAS No. 142 . . . . . . . . . . . . . . . . . . . . . - (91,022)
------------ ------------
Net income (loss) before provision for income taxes. 175,425 (1,019,566)
Provision for income taxes . . . . . . . . . . . . . . . . 42,710 -
------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . $ 132,715 (1,019,566)
============ ============
Weighted average common shares outstanding . . . . . . . . 18,844,000 16,244,000
============ ============
Basic and diluted earnings (loss) per share. . . . . . . . $ 0.01 $ (0.06)
============ ============
6
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2003 and 2002
(Unaudited)
2003 2002
---------- -----------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 132,715 (1,019,565)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 107,550 96,187
Restatement . . . . . . . . . . . . . . . . . . . . . . . . - (92,065)
Amortization. . . . . . . . . . . . . . . . . . . . . . . . 1,332 37,943
Cumulative effect of accounting change. . . . . . . . . . . - -
Gain on disposal of assets. . . . . . . . . . . . . . . . . (18,000) -
Impairment of goodwill. . . . . . . . . . . . . . . . . . . 145,974 -
Discontinued operations:
Provision for doubtful accounts . . . . . . . . . . . . . . - 407,250
(Increase) decrease in:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . 261,118 758,005
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 33,485 (148,965)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . (65,536) (12,185)
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . (49,115) -
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 1,000 (500)
Cash value of life insurance. . . . . . . . . . . . . . . . - -
Increase (decrease) in:
Accounts payable. . . . . . . . . . . . . . . . . . . . . (550,723) 134,238
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 6,450 6,440
Contract deposits . . . . . . . . . . . . . . . . . . . . (36,267) (2,649)
Corporate taxes payable . . . . . . . . . . . . . . . . . 91,825 -
---------- -----------
Net cash flows from operating activities. . . . . . . . 61,808 164,134
Cash flows from investing activities:
Proceeds from sale of assets. . . . . . . . . . . . . . . . . 18,000 -
Purchase of property and equipment. . . . . . . . . . . . . . (62,855) -
---------- -----------
Net cash used in from investing activities. . . . . . . (44,855) -
Cash flows from financing activities:
Principal payments on notes payable and lines of credit . . . (549,108) (175,996)
Proceeds from amount due to related party . . . . . . . . . . 171,735 -
Repayments on due to related party. . . . . . . . . . . . . . (70,585) -
---------- -----------
Net cash used in financing activities . . . . . . . . . (447,958) (175,996)
---------- -----------
Net decrease in cash. . . . . . . . . . . . . . . . . . (431,005) (11,862)
Cash at beginning of period. . . . . . . . . . . . . . . . . . 642,787 344,537
---------- -----------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . $ 211,782 332,675
========== ===========
7
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to Condensed Consolidated Financial Statements
For the nine months ended September 30, 2003 and 2002
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) ORGANIZATION AND NATURE OF BUSINESS
Silva Bay International, Inc., a Delaware corporation, was formed in 1998 for
the purpose of locating and recovering rare and valuable aircraft. Silva Bay
International, Inc. had no operations and no revenue from inception in 1998 to
the time of the acquisition of Spectrum Sciences & Software, Inc. in April,
2003.
On April 2, 2003, Silva Bay International, Inc. acquired Spectrum Sciences &
Software, Inc., a Florida corporation, in exchange for the issuance of 2,500,000
shares of common stock (taking into account the forward two for one stock split
of April 9, 2003) (see Note 3). Spectrum Sciences & Software, Inc. is now the
wholly owned subsidiary of Silva Bay International, Inc. (now collectively
referred to as the "Company").
Spectrum Sciences & Software, Inc. was incorporated in the State of Florida on
October 8, 1982. Headquartered in Fort Walton Beach, Florida, the Company has
three reportable segments - management services, manufacturing, and engineering
and information technology services. Management services include providing
engineering, technical, and operational services in the area of defense range
management specializing in bombing and gunnery training range operation and
maintenance. Manufacturing operations includes the design and construction of
munitions ground support equipment and containers for the shipping and storage
of munitions and equipment. The Company's engineering and information technology
services segment consists of the sale of computer software developed to assist
in hazard management and weapons impact analysis.
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, 99% of
the Company's revenues were derived from contracts with the DOD.
On April 8, 2003, Silva Bay International, Inc. changed its name to Spectrum
Sciences & Software Holdings Corp. On April 9, 2003, the Company effectuated a
two for one forward split of its common stock.
(B) INCOME TAXES
The Company accounts for income taxes utilizing the asset and liability method.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enacted date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
(C) EARNINGS (LOSS) PER SHARE
The Company utilizes Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share." Statement No. 128 requires the presentation of basic and
diluted loss per share on the face of the statement of operations.
Basic earnings (loss) per share has been calculated using the weighted average
number of common shares outstanding during the period. In calculating diluted
earnings (loss) per share, the Company had no common stock equivalent shares as
of September 30, 2003 and 2002. However, if the Company had such common stock
equivalents, they would be considered anti-dilutive due to there being losses,
and therefore would not be included in the diluted loss per share calculations.
2. BASIS OF PRESENTATION AND GOING CONCERN:
The accompanying unaudited consolidated financial statements for the three and
nine months ended September 30, 2003 and 2002 have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission for Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring accruals, considered necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows for the
periods presented.
The results of operations for the interim periods ended September 30, 2003 and
2002 are not necessarily indicative of the results to be expected for the full
year. These interim consolidated financial statements should be read in
conjunction with the December 31, 2002 consolidated financial statements.
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 $1,041,560 as of September 30, 2003.
Additionally, the Company has negative working capital of $3,150,436 at
September 30, 2003. 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.
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.
9
3. ACQUISITION OF SPECTRUM SCIENCES & SOFTWARE, INC.:
On April 3, 2003, Spectrum Sciences & Software Holdings Corp. (formerly Silva
Bay International, Inc.) entered into an amended and restated agreement and plan
of merger with Spectrum Sciences & Software, Inc. pursuant to which Spectrum
Sciences & Software, Inc. became our wholly owned subsidiary and 2,500,000
shares of our common stock were issued to Donal Myrick. As a result of the
merger, Spectrum Sciences & Software, Inc. will have access to additional
capital markets as a registered reporting company with the SEC.
The acquisition was accounted for under the purchase method of accounting;
accordingly, the purchase price has been allocated to reflect the fair value of
assets and liabilities acquired at the date of acquisition. Due to the
composition of the majority of the governing body and senior management of the
Company being the same as Spectrum Sciences & Software, Inc. prior to the April
3, 2003 acquisition, Spectrum Sciences & Software, Inc. has been deemed to be
the accounting acquirer.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition:
AT APRIL 3, 2003
--------------------------------
Current assets . . . . . . $ 7,986
Goodwill . . . . . . . . . 145,974
----------
Total assets acquired . . 153,960
Current liabilities. . . . (153,960)
----------
Total liabilities assumed (153,960)
----------
Net . . . . . . . . . . . $ -
==========
The results of operations of the acquired business have been included in the
accompanying consolidated financial statements from the date of acquisition.
As of the date of the acquisition, management has determined that the goodwill
has no value; therefore, an impairment charge of $145,974 has been recorded
during the second quarter of 2003.
4. INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out method. The major components of inventories at
September 30, 2003 are summarized as follows:
Raw materials $ 137,870
Work in progress 48,990
Finished goods 71,000
----------
Total inventories $ 257,860
==========
10
4. INVENTORIES, CONTINUED:
Raw materials consists of sheet metal, various product spare parts, hardware and
other miscellaneous materials. Finished goods consist of substantially complete
products available for sale.
5. ACCRUED EXPENSES:
The major components of accrued expenses at September 30, 2003 are summarized as
follows:
Accrued salaries and related benefits $ 422,164
Payroll related taxes 135,779
Accrued vacation and sick 133,805
Accrued interest payable 15,085
Accrued property taxes 27,221
Accrued other 23,135
----------
Total accrued expenses $ 757,189
==========
A major components of the accrued salaries and related benefits is $200,000 owed
to Gila Bend employees for wage rates which were recalculated based on job
conformity required by the Department of Labor in 2002. These accrued salaries
will be paid out over a period of time beginning in early 2004 pending final
agreement with the DOL.
6. DEBT:
BANK LINES OF CREDIT
The following is a summary of the bank lines of credit:
AVAILABLE INTEREST CURRENT BALANCE AT
CREDIT TERMS RATE COLLATERAL DUE 9/30/2003
----------- ----------- -------- ----------- ------- -----------
1,000,000 Prime +2% 6% (1) 9/25/03 $ 267,361
1,000,000 Prime +2% 6% (1) 9/25/03 267,356
100,000 Prime +2% 6% (2) 9/25/03 99,549
145,000 Prime +2% 6% (3) 9/25/03 128,521
-----------
$ 762,787
===========
(1) Assignment of Government contracts and personal guarantee of Company
President.
(1) Personal guarantee of Company President.
(2) Cross-collateralized with real estate loan and personal guarantee of
Company President.
All of the bank lines of credit were due September 25, 2003. The Company is in
the process of negotiating a longer-term extension and modification of the lines
of credit.
11
6. DEBT, CONTINUED:
Debt consisted of the following:
SEPTEMBER 30, 2003
------------------
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.
$ 1,549,230
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. 190,159
Note payable to a bank, due in monthly installments of $4,347, including
interest at prime + .25% (4.25% at September 30, 2003). Final payment due
August 13, 2006, collateralized by equipment and inventory.
122,455
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. 33,085
------------------
1,894,929
Less current portion (1,892,273)
------------------
Total long-term debt $ 2,656
==================
12
7. DUE TO RELATED PARTIES:
Related Party Payables
Related party payables consist of the following:
September 30,
2003
(Unaudited)
Cash advances made to the Company
by a shareholder, non-interest
bearing, payable upon demand . . . . . $ 698,064
Management consulting fees to a
shareholder of the Company, non-
interest bearing, payable upon demand. 106,957
-------------
$ 805,021
=============
8. SEGMENT INFORMATION:
Segment information has been presented on a basis consistent with how business
activities are reported internally to management. Management solely evaluates
operating profit by segment by direct costs of its products and services with an
allocation of indirect costs. The Company has three operating segments -
management services, manufacturing, and engineering and information technology.
Management services include providing engineering, technical, and operational
services in the area of defense range management specializing in bombing and
gunnery training range operation and maintenance. Manufacturing operations
include the design and construction of munitions ground support equipment and
containers for the shipping and storage of munitions and equipment. The
Company's engineering and information technology segment consists of the sale of
computer software developed to assist in hazard management and weapons impact
analysis.
13
8. SEGMENT INFORMATION, CONTINUED
The following is a summary of certain financial information related to the three
segments during the three and nine months ended September 30, 2003 and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------- ----------- ------------ ------------
TOTAL REVENUES BY SEGMENT
Management Services . . . . . . . . . . . . . $2,304,494 $2,162,548 $ 6,941,884 $ 6,474,548
Engineering and Information Technology. . . . 599,711 194,796 1,363,711 645,796
Manufacturing . . . . . . . . . . . . . . . . 383,404 575,202 1,698,404 1,434,202
----------- ----------- ------------ ------------
TOTAL REVENUES BY SEGMENT . . . . . . . . . 3,287,609 $2,932,782 $10,003,999 $ 8,554,546
=========== =========== ============ ============
OPERATING PROFIT (LOSS) BY SEGMENT
Management Services . . . . . . . . . . . . . $ 239,467 $ (56,813) $ 412,283 $ (60,813)
Engineering and Information Technology. . . . 325,325 59,063 640,325 255,064
Manufacturing . . . . . . . . . . . . . . . . (6,967) (77,980) 168,033 (109,980)
Operating Expenses. . . . . . . . . . . . . . (369,035) (177736) (803,675) (450,534)
Impairment Loss . . . . . . . . . . . . . . . (145,974)
Interest income (expense)net. . . . . . . . . (61,640) (75,578) (210,785) (241,186)
Other income (expense), net . . . . . . . . . 43,680 27,033 115,218 86,156
Discontinued operations . . . . . . . . . . . (407,250)
Cumulative effect of SFAS No. 142 . . . . . . (91,022) (91,022)
----------- ----------- ------------ ------------
Net Income before Provision for income taxes. $ 170,830 $ (393,033) $ 175,425 $(1,019,565)
Provision for income taxes. . . . . . . . . . (7,130) (42,710)
----------- ----------- ------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . $ 163,700 $ (393,033) $ 132,715 $(1,019,565)
=========== =========== ============ ============
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
unaudited financial statements (and notes thereto) and other financial
information of our company appearing elsewhere in this report.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
CONSOLIDATED OVERVIEW:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 3,287,609 100.0% $ 2,932,782 100.0%
Cost of sales 2,729,784 83.0% 3,008,276 102.6%
----------- ------ ------------- --------
Gross margin. $ 557,825 17.0% $ ( 75,730) ( 2.6)%
=========== ====== ============= ========
Overall sales for the three-months ended September 30, 2003 increased by 12%
compared to the same period in 2002. This increase was due to increased
marketing activity during 2003. Gross margin as a percentage of sales improved
by 758% due to cost controls put in place in during the last quarter of 2002.
MANAGEMENT SERVICES
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 2,304.068 100.0% $ 2,162,548 100.0%
Cost of sales 2,065.027 89.6% 2,219,361 102.6%
----------- ------ ------------- --------
Gross margin. $ 239,042 10.4% $ (56,813) (2.6)%
=========== ====== ============= ========
Sales in the Management Services segment increased approximately 7% for the
three-month period ended September 30, 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 for the three-month period ended September 30, 2003 improved by
$295,855 due to improved labor cost efficiencies that were implemented in
2003.
ENGINEERING AND INFORMATION TECHNOLOGY SERVICES
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 599,711 100.0% $ 194,796 100.0%
Cost of sales 274,386 45.8% 135,733 69.7%
----------- ------ ------------- --------
Gross margin. $ 325,325 54.2% $ 59,063 30.3%
=========== ====== ============= ========
15
Sales in the Engineering and Information Technology Services segment increased
approximately 208% for the period ended September 30, 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, increased by more than 79% due to
significant revenue increases in the 3rd quarter 2003.
MANUFACTURING SEGMENT
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 383,404 100.0% $ 575,202 100.0%
Cost of sales 390,371 101.8% 653,182 113.6%
----------- ------ ------------- --------
Gross margin. $ ( 6,967) (1.8)% $ (77,980) (13.6)%
=========== ====== ============= ========
Sales in the Manufacturing segment decreased 33% for the three-month period
ended September 30, 2003 as compared to 2002. The decrease in revenue is due to
the delay of the federal Department of Defense budget being approved by
Congress. Demand by the Spectrum customer base remains strong
While still at a minimal loss, the gross margin improved by 87% due to improved
labor efficiencies.
OPERATING EXPENSES
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2003 2002
------------------- ----------------------
Selling, general and administrative $ 369,035 100.0% $ 177,736 100.0%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("SG&A") expenses were $369,035 and $177,736 in the three-month
period ended September 30, 2003 and 2002, respectively. This increase of
$191,299 is due to increased legal and accounting costs associated with the
filing of a registration statement with the Securities and Exchange Commission.
OTHER INCOME AND EXPENSES
INTEREST INCOME AND EXPENSE, NET - Net interest expense was $61,640 and $75,578
for the three-month period ended September 30, 2003 and 2002, respectively.
OTHER INCOME AND EXPENSE, NET - Net other income was $43,680 and $15,097 for the
three-month period ended September 30, 2003 and 2002, respectively. The
increase of $28,583 or 189% was primarily due to a reduction of the penalties we
incurred during 2002 for late payment of payroll taxes and other late fees.
16
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $10,003,999 100.0% $ 8,554,546 100.0%
Cost of sales 8,783,358 87.8% 8,470,276 99.0%
----------- ------ ------------- --------
Gross margin. $ 1,220,641 12.2% $ 84,270 1.0%
=========== ====== ============= ========
Overall sales for the nine-months ended September 30, 2003 increased by
approximately 17% compared to the same period in 2002. This increase can be
attributed to increased marketing activity of our services. Gross margin as a
percentage of sales improved by 1139% due to cost controls that we implemented
in December 2002.
MANAGEMENT SERVICES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 6,941,884 100.0% $ 6,474,548 100.0%
Cost of sales 6,529,601 94.1% 6,535,361 100.9%
----------- ------ ------------- --------
Gross margin. $ 412,283 5.9% $ (60,813) (0.9)%
=========== ====== ============= ========
Sales in the Management Services segment increased approximately 7% for the
nine-month period ended September 30, 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 for the nine-month period ended September 30, 2003 improved by
approximately $473,096. This increase was due to improved labor cost
efficiencies.
ENGINEERING AND INFORMATION TECHNOLOGY SERVICES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 1,363,711 100.0% $ 645,796 100.0%
Cost of sales 723,386 53.0% 390,733 60.5%
----------- ------ ------------- --------
Gross margin. $ 640,325 47.0% $ 255,063 39.5%
=========== ====== ============= ========
17
Sales in the Engineering and Information Technology Services segment increased
approximately 111% for the period ended September 30, 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, increased by approximately 19% due to
increased labor costs as a result of hiring additional employees in this
division.
MANUFACTURING SEGMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2003 2002
------------------- -----------------------
Sales . . . . $ 1,698,404 100.0% $ 1,434,202 100.0%
Cost of sales 1,530,371 90.1% 1,544,182 107.7%
----------- ------ ------------- --------
Gross margin. $ 168,033 9.9% $ (109,980) (7.7)%
=========== ====== ============= ========
Sales in the Manufacturing segment increased 18% for the nine-month period ended
September 30, 2003 as compared to 2002. The increase in revenue is due to the
expansion the customer base for the Spectrum manufactured products.
Gross margin increased by $278,013 due to the labor cost efficiencies
implemented in 2003.
OPERATING EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2003 2002
------------------- ----------------------
Selling, general and administrative $ 949,649 100.0% $ 450,534 100.0%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("SG&A") expenses were $949,649 and $450,534 for the nine month
period ending September 30, 2003 and 2002, respectively. This increase of
approximately $499,115 or 1.10% was due to increased legal and accounting fees
associated with filing a registration statement with the Securities and Exchange
Commission and the impairment loss taken for $145,974 in relation to the
acquisition.
18
IMPAIRMENT LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2003 2002
------------------- ----------------------
Impairment Loss $ 146,000 100.0% $ -0- 100.0%
IMPAIRMENT LOSS - On April 3, 2003, Spectrum Sciences & Software Holdings Corp.
(formerly Silva Bay International, Inc.) entered into an asset purchase
agreement to purchase all of the assets and assume all of the liabilities of
Spectrum Sciences & Software, Inc. in exchange for the issuance of 2,500,000
shares of our common stock. As a result of the acquisition, Spectrum Sciences &
Software, Inc. will have access to additional capital markets. The acquisition
was accounted for under the purchase method of accounting; accordingly, the
purchase price was allocated to reflect the fair value of assets and liabilities
acquired at the date of acquisition. Based on an evaluation of all of the facts
and circumstances of this transaction, we determined that Spectrum Sciences &
Software, Inc. is the accounting acquirer. As of the date of the acquisition,
management has determined that the goodwill has no value; therefore, an
impairment charge of approximately $146,000 was recorded during the six month
period ending June 30, 2003.
OTHER INCOME AND EXPENSES
INTEREST INCOME AND EXPENSE, NET - Net interest expense totaled $210,785 and
$241,186 for the nine month periods ended September 30, 2003 and 2002,
respectively. The decrease of $30,401 or 13% was a result of lower prevailing
interest rates and lower average loan balances.
OTHER INCOME AND EXPENSE, NET - Net other income in the nine months ended
September 30, 2003 was $115,218 compared to other income of $86,156 in 2002.
Our other income consists primarily of rental income received from L3
Communications, (formerly Raytheon).
ITEM 3. CONTROLS AND PROCEDURES
Our principal executive and financial officer evaluated the effectiveness of our
disclosure controls and procedures as of a date within 90 days prior to the
filing of this report. Based on this evaluation, our principal executive and
financial officer concluded that our controls and procedures are effective in
providing reasonable assurance that the information required to be disclosed in
this report is accurate and complete and has been recorded, processed,
summarized and reported within the time period required for the filing of this
report. Subsequent to the date of this evaluation, there have not been any
significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect our internal controls.
19
Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
listing the non-audit services approved by our Board of Directors to be
performed by Tedder, James, Worden & Associates, P.A. our external auditor.
Non-audit services are defined as services other than those provided in
connection with an audit or a review of our financial statements. Our Board of
Directors currently has not approved the engagement of Tedder, James, Worden &
Associates, P.A. to perform any non-audit services in 2003, except for income
tax preparation.
PART II - OTHER INFORMATION
ITEM 1. 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 $143,000. The current balance is $52,380 as of
December 2, 2003.
On April 21, 2003, the United States Internal Revenue Service obtained a lien
against any and all of Spectrum's assets in the amount of $173,041.
Spectrum has entered into an installment payment plan with the IRS, which
specifies that Spectrum will pay to the IRS $7,500 a month for 4 months. The
December 2, 2003 current IRS balance is $33,425.
We currently have a debt to Washington Group International, Inc. of
approximately $73,900, and this debt may be reduced pursuant to a confession of
judgment. We are attempting to resolve this debt. The current balance is
$52,778.
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. All three plaintiffs are
claiming "undue stress and anxiety" from Spectrum's actions. There were no
damage amounts specified in any of the actions. The plaintiffs are requesting
the following:
a) Compensatory damages, plus special in
incidental damages in such a sum as may be proven at trial;
b) For punitive damages in such a sum as may be proven at trial;
c) For cost for the suit;
d) For attorney's fees; and
e) For other such relief as the Court deems just and proper.
20
ITEM 1. LEGAL PROCEEDINGS, CONTINUED
Spectrum does not know what the outcome of this litigation will be.
On or about May 28, 2003, Business & Commercial Brokerage, Inc. filed a
complaint against Spectrum Sciences & Software, Inc. (a Florida Corporation) and
Donal R. Myrick (Case No. 2003 CA 001093) in the Circuit Court in and for
Escambia County, Florida. The complaint is based upon an alleged breach of
contract related to the sale of any and all assets of Spectrum Sciences &
Software, Inc. The plaintiff Business & Commercial Brokerage, Inc. is seeking
damages in the form of a sales commission, additional unspecified damages,
interests, court costs and attorney fees. Spectrum has answered the complaint
with an affirmative defense that Business & Commercial Brokerage, Inc. is not
owed any commission or any other damages.
On November 12, 2003, Spectrum filed a Second Motion to Amend Answer of
Defendant, Spectrum Sciences & Software, Inc. and Motion to file Counterclaims.
The motion states the Spectrum recently discovered additional facts which are
fundamental for its affirmative defense to liability and which create a cause of
action for reformation against Plaintiff. Spectrum recently discovered that the
Agreement sued on by the Plaintiff is not the Agreement entered into by the
parties. Spectrum does not know what the outcome of this litigation will be.
Spectrum is not aware of any other pending or threatened litigation.
On November 24, 2003, Spectrum received a waiver for the reduction of penalty
and interest charges from the Internal Revenue Service in the amount of $38,070.
This was related to September 2000.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In accordance with the Delaware General Corporation Law Section 228(a), as of
September 26, 2003, and the holders of approximately 59% of the issued and
outstanding shares of common stock (or 10,880,000 shares), $.0001 par value, of
the Company, in person or by proxy, by their consent in writing, authorized,
approved and adopted a resolution respecting the removal of Harold Dwain Brannon
and Dyron M. Watford as members of the Board of Directors without cause, and
elected Brent Lokash and Kelly Armstrong to fill the vacancies created by such
the removals. Pursuant thereto, the Shareholder Consent was delivered to the
Company on October 16, 2003. Subsequently, it was learned by the Company that
Brent Lokash did not desire to participate as a member of the Company's Board.
On October 20, 2003, the Board of Directors elected Karl Heer as a member of the
Board of Directors to serve until the next annual meeting of Stockholders or
until his successor is duly elected and qualified, or until his earlier death,
resignation or removal.
The Company's current board members include Kelly Armstrong, Karl Heer and Donal
Myrick.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive
Officer
31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial
Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
b) Reports on Form 8-K:
None
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 3rd day of
December 2003.
SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP
By: /s/ Donal R. Myrick
--------------------------------
Donal R. Myrick, Chief Executive
Officer, President, and Chairman
of the Board
The undersigned, the Chief Financial Officer of the Registrant, certifies that
this report complies with all of the requirements of section 13(a) and 15(d) of
the Exchange Act and the information contained in this report fairly presents,
in all material respects, the financial condition and results of operations of
the Registrant.
Date: December 3, 2003
/s/ Nancy Gontarek
--------------------------------
Nancy Gontarek,
Chief Financial Officer
22