Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ________
Commission File No. 0-24015
STEELCLOUD, INC
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1890464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1306 Squire Court, Dulles, VA 20166
(Address of principal executive offices) (Zip code)
(703) 450-0400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
-
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
-
As of September 1, 2004 there were 13,782,823 shares of the registrant's common
stock outstanding.
1
SteelCloud, Inc.
Form 10-Q Index
For the Quarterly period ended July 31, 2004
Description Page
Part I. Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of October 31, 2003 and
July 31, 2004 3
Consolidated Statements of Operations for the three and
nine month periods ended July 31, 2003 and 2004 4
Consolidated Statements of Cash Flows for the nine month
periods ended July 31, 2003 and 2004 5
Consolidated Statements of Stockholders' Equity for the nine
month periods ended July 31, 2003 and 2004 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 19
Item 4. Controls and Procedures 19
Part II. Other Information 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 20
Item 3. Defaults Upon Senior Securities 20
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 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEELCLOUD, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 31, JULY 31,
2003 2004
------------ ------------
ASSETS (UNAUDITED)
Current assets
Cash and cash equivalents $ 8,098,221 $ 6,363,433
Accounts receivable, net of allowance for doubtful accounts of
$293,000 and $13,428 as of October 31, 2003 and July 31, 2004,
respectively 5,332,549 4,229,654
Inventory, net 2,880,944 2,965,217
Prepaid expenses and other current assets 239,812 420,214
Deferred contract costs 7,053 209,487
------------ ------------
Total current assets 16,558,579 14,188,005
Property and equipment, net 477,111 371,421
Equipment on lease, net 335,935 393,331
Goodwill and other intangible assets, net 1,778,059 4,715,883
Deferred tax asset - long term 400,000 400,000
Other assets 211,155 216,755
------------ ------------
Total assets $ 19,760,839 $ 20,285,395
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,202,195 $ 2,781,409
Accrued expenses 1,369,145 1,438,543
Notes payable, current 96,133 70,711
Unearned revenue 293,363 552,539
------------ ------------
Total current liabilities 4,960,836 4,843,202
Note payable, long-term 59,952 138,625
Other liabilities 6,415 --
------------ ------------
Total long-term liabilities 66,367 138,625
Stockholders' equity
Common stock, $.001 par value: 50,000,000 shares authorized,
13,008,553 and 14,181,573 shares issued at October 31, 2003
and July 31, 2004, respectively 13,009 14,182
Additional paid in capital 47,307,036 50,874,750
Treasury stock, 400,000 shares at October 31, 2003 and
July 31, 2004, respectively (3,432,500) (3,432,500)
Accumulated deficit (29,153,909) (32,152,864)
------------ ------------
Total stockholders' equity 14,733,636 15,303,568
------------ ------------
Total liabilities and stockholders' equity $ 19,760,839 $ 20,285,395
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2004 2003 2004
------------ ------------ ------------ ------------
Revenues
Products $ 7,282,146 $ 5,566,452 $ 21,612,075 $ 13,498,126
Services 874,268 1,033,844 2,399,783 3,057,631
------------ ------------ ------------ ------------
Total revenues 8,156,414 6,600,296 24,011,858 16,555,757
------------ ------------ ------------ ------------
Cost of revenues
Products 5,889,206 4,844,877 17,143,705 10,985,035
Services 609,277 615,674 1,829,877 1,901,651
------------ ------------ ------------ ------------
Total cost of revenues 6,498,483 5,460,551 18,973,582 12,886,686
------------ ------------ ------------ ------------
Gross profit 1,657,931 1,139,745 5,038,276 3,669,071
Selling and marketing 292,626 646,786 927,575 1,631,601
Research and product development 186,140 161,694 296,735 437,111
General and administrative 1,139,723 1,367,304 3,515,543 4,570,071
Amortization of intangibles -- 51,933 -- 51,933
------------ ------------ ------------ ------------
Income (loss)from continuing operations 39,442 (1,087,972) 298,423 (3,021,645)
Interest (income) expense, net (937) (11,045) 12,802 (22,690)
------------ ------------ ------------ ------------
Net income (loss) from continuing operations (1,076,927) 40,379 285,621 (2,998,955)
Loss from discontinued operations (30,071) -- (86,526) --
------------ ------------ ------------ ------------
Net income (loss) $ 10,308 $ (1,076,927) $ 199,095 $ (2,998,955)
============ ============ ============ ============
Earnings (loss) per share (basic and diluted):
Earnings (loss) from continuing operations $ 0.01 $ (0.08) $ 0.03 $ (0.22)
Discontinued operations -- -- (0.01) --
------------ ------------ ------------ ------------
Net earnings (loss) per share $ 0.01 $ (0.08) $ 0.02 $ (0.22)
============ ============ ============ ============
Weighted-average shares outstanding, basic
10,164,928 13,646,284 10,078,815 13,447,135
Weighted-average shares outstanding, diluted
11,014,984 13,646,284 10,577,491 13,447,135
The accompanying notes are an integral part of these
consolidated financial statements.
4
STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JULY 31,
2003 2004
--------------------------
OPERATING ACTIVITIES
Net income (loss) $ 199,095 $(2,998,955)
Loss from discontinued operations 86,526 --
--------------------------
Net income (loss) from continuing operations 285,621 (2,998,955)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 251,915 445,443
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable 2,165,213 1,102,895
Inventory 631,395 (84,273)
Prepaid expenses and other assets (51,833) (186,004)
Deferred contract costs 1,726,451 (202,434)
Accounts payable (1,051,371) (420,786)
Accrued expenses 164,437 75,809
Unearned revenue and other liabilities (3,887,197) 246,349
--------------------------
Net cash provided by(used in) operating activities 234,631 (2,021,956)
INVESTING ACTIVITIES
Purchase of property and equipment (99,421) (325,216)
Cash paid in acquisition -- (725,854)
--------------------------
Net cash used by investing activities (99,421) (1,051,070)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 56,166 718,714
Proceeds from exercise of common stock options 224,291 566,273
(Payments) proceeds on notes payable (477,950) 53,251
Net cash (used in) provided by financing activities (197,493) 1,338,238
Net decrease in cash and cash equivalents of continuing operations
(62,283) (1,734,788)
Net cash provided by operating activities of discontinued operations
357,512 --
Cash and cash equivalents at beginning of period 751,323 8,098,221
--------------------------
Cash and cash equivalents at end of period $ 1,046,552 $ 6,363,433
==========================
SUPPLEMENTAL CASH FLOW INFORMATION
Common stock issued in acquisition $ -- $ 2,283,900
Interest paid $ 19,647 $ 1,743
Income taxes paid $ -- $ --
The accompanying notes are an integral part of these
consolidated financial statements.
5
STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN TREASURY EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK (ACCUMULATED TOTAL
DEFICIT)
-------------------------------------------------------------------------------------------------------
BALANCE AT
OCTOBER 31, 2002 ....... -- -- 10,447,611 $ 10,448 $ 39,553,017 $(3,432,500) $(29,373,897) $ 6,757,068
-------------------------------------------------------------------------------------------------------
Issuance of common stock
in connection with
exercise of employee
incentive stock option
plan ................... -- -- 327,900 328 280,129 -- -- 280,457
Net Income ............. -- -- -- -- -- -- 199,095 199,095
-------------------------------------------------------------------------------------------------------
BALANCE AT
JULY 31, 2003 .......... 10,775,511 $ 10,776 $ 39,833,146 $(3,432,500) $(29,174,802) $ 7,236,620
=======================================================================================================
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
BALANCE AT
OCTOBER 31, 2003 ....... -- -- 13,008,553 $ 13,009 $ 47,307,036 $(3,432,500) $(29,153,909) $14,733,636
-------------------------------------------------------------------------------------------------------
Issuance of common stock
in connection with
exercise of employee
incentive stock option
plan ................... -- -- 325,649 326 492,030 -- -- 492,356
Issuance of common stock
in connection with
exercise of
warrants ............... -- -- 247,525 247 718,466 -- -- 718,713
Issuance of Common Stock
in connection with
employee stock purchase
plan ................... 24,846 25 73,893 -- -- 73,918
Issuance of common stock
in connection with
acquisition ............ -- -- 575,000 575 2,283,325 -- -- 2,283,900
Net loss ............... -- -- -- -- -- -- (2,998,955) (2,998,955)
-------------------------------------------------------------------------------------------------------
BALANCE AT
JULY 31, 2004 ........ -- -- 14,181,573 $ 14,182 $ 50,874,750 $(3,432,500) $(32,152,864) $15,303,568
=======================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
6
STEELCLOUD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Founded in 1987, SteelCloud, Inc, based in Dulles, Virginia, designs, develops
and manufactures customized computer servers and network appliances. The
Company's custom computer servers are designed to meet the precise needs of
volume customers to reduce the customer's investments in logistics, integration
capacity and support. SteelCloud's consulting services organization provides
clients with technical services, including network analysis, security, design,
troubleshooting and implementation. The Company is also a value-added reseller
for the software products of its strategic partners and certain other software
providers.
The consolidated financial statements for the three and nine month periods ended
July 31, 2004 and 2003 are unaudited and include all adjustments which, in the
opinion of management, are necessary to present fairly the results of operations
for the periods then ended. All such adjustments are of a normal and recurring
nature. These consolidated financial statements should be read in conjunction
with the Annual Report on Form 10-K of SteelCloud, Inc. (the "Company") which
includes consolidated financial statements and notes thereto for the years ended
October 31, 2003 and 2002.
2. EMPLOYEE STOCK OPTIONS
The Company accounts for employee stock option grants using the intrinsic method
in accordance with Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees" and accordingly associated compensation expense,
if any, is measured as the excess of the underlying stock price over the
exercise price on the date of grant. The Company complies with the disclosure
option of Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting
for Stock Based Compensation", and SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure" which requires pro-forma disclosure of
compensation expense associated with stock options under the fair value method.
The Company's pro forma information follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2004 2003 2004
---------- ------------- ---------- -----------
Net earnings (loss), as reported ........ $ 10,308 $ (1,076,927) $ 199,095 $(2,998,955)
Less: Total stock based employee
compensation expense determined under the 113,405 88,421 324,813 243,294
fair-value based method .................
---------- ------------- ---------- -----------
Pro-Forma net (loss) .................... $ (103,097) $ (1,165,348) $ (125,718) $(3,242,249)
========== ============= ========== ===========
Basic and diluted earnings per share:
========== ============= ========== ===========
Earnings (loss) per share as reported ... $ 0.00 $ (0.08) $ 0.02 $ (0.22)
========== ============= ========== ===========
Pro-forma net (loss) per share .......... $ (0.01) $ (0.09) $ (0.01) $ (0.25)
========== ============= ========== ===========
7
3. ACQUISITION
On February 17, 2004, the Company completed its acquisition of the assets of
Asgard Holding, LLC (Asgard), an internet security product and service company.
As a result of the acquisition, management believes SteelCloud is better
positioned to define and control proprietary product features and services from
its own intellectual property. The acquisition was accounted for as a purchase;
therefore, the accompanying financial statements include the results of
operations from the acquisition date forward.
In exchange for the assets of Asgard, which included intellectual property and
patent-pending technology, the Company paid cash of $630,015, issued 575,000
shares of SteelCloud common stock valued at $2,283,900 and incurred
approximately $50,000 of direct costs associated with the transaction. The value
of SteelCloud common stock issued was determined in accordance with SFAS No. 141
by taking the average market price over the 2-day period before and after the
terms of the acquisition were agreed to and announced. In addition, the Company
assumed $170,138 of Asgard's debt.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition:
AT FEBRUARY 17,
2004
------------------
Current assets ........................................ $ 99,929
Intangible assets ..................................... 345,339
Goodwill .............................................. 2,664,417
Noncurrent assets ..................................... 69,368
-----------
Total assets acquired ................................. 3,179,053
-----------
Current liabilities ................................... (96,987)
Noncurrent liabilities ................................ (118,151)
-----------
Total liabilities assumed ............................. (215,138)
-----------
-----------
Net assets acquired ................................... $ 2,963,915
===========
Of the $345,339 assigned to acquire intangible assets, $238,207 was assigned to
SecureNet software technology developed by Asgard, and $107,132 was assigned to
customer relationships acquired in conjunction with the acquisition of the
assets of Asgard. Both the SecureNet software technology and the customer
relationships will be amortized over estimated useful lives of 3 years. The
$2,664,417 assigned to goodwill in conjunction with the acquisition will not be
amortized, but will be tested at least annually for impairment. As of July 31,
2004, intangible assets for SecureNet Software and Customer relationships were
$202,385 and $91,021, respectively.
4. DEBT
On February 17, 2004, the Company executed two three-year promissory notes in
conjunction with the purchase of the assets of Asgard Holding, LLC (Asgard) for
an aggregate amount of $170,138. The promissory notes bear interest at 4% and
mature in February 2007. The Company makes monthly aggregate payments of $4,726
plus accrued interest. The outstanding balance on the two notes at July 31, 2004
was $146,507.
8
On January 22, 2004, the Company amended its bank line of credit that allows the
Company to borrow an amount to the lesser of its collateralized cash on hand or
$3.5 million. The line of credit bears interest at the LIBOR Market Index rate
plus 1.25%. The line of credit is secured by all assets of the Company and
expires on March 31, 2005. There were no outstanding borrowings on the line of
credit at October 31, 2003 and July 31, 2004.
5. DEFERRED CONTRACT REVENUE
As of July 31, 2004, the Company had deferred contract revenue of approximately
$260,000 related to Lockheed Martin server appliance contracts, which were
awarded in February of 2003. The deferred revenue represents payments received
for milestones achieved prior to recognition of revenue. This revenue will be
recognized over the remaining life of the contracts as products are shipped
under the contracts, which are scheduled for completion in December of 2004.
Other deferred revenue consists of warranties, OEM releases and consulting
services.
6. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period and is calculated by dividing the net
earnings (loss) by the weighted average number of common shares outstanding.
Diluted earnings per share is based on the weighted average number of common
shares outstanding plus common stock equivalents associated with stock options
and warrants and is calculated by dividing net earnings (loss) by the weighted
average number of common shares outstanding used in the basic earnings per share
calculation plus the common stock equivalent of stock options and warrants. For
the three and nine months ended July 31, 2004, the Company's common stock
equivalent shares outstanding from stock options and warrants of 719,075 and
898,891, respectively, have been excluded from the diluted earnings per share
calculation as their effect is anti-dilutive.
7. SEGMENT REPORTING
FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is the Company's Chief Operating Officer. While the Chief
Operating Officer is apprised of a variety of financial metrics and information,
the Chief Operating Officer makes decisions regarding how to allocate resources
and assess performance based on a single operating unit.
8. SIGNIFICANT CUSTOMER
For the three and nine months ending July 31, 2004, the Company had one
significant third party customer, Lockheed Martin. Lockheed revenues were 31%
and 24% of total net revenues for the three and nine months ended July 31,
respectively. Accounts receivable balances at July 31, 2004 included amounts due
from Lockheed of approximately $1.4 million or 32% of total net accounts
recievable.
During fiscal year 2003, the Company's significant customers were Lockheed
Martin and General Services Administration, representing 36% and 31% of the
Company's net revenues for the three an nine mont periods ending July 31, 2003,
respectively. Accounts receivable balances as of October 31, 2003 included
amounts due from Lockheed Martin of 13% and General Services Administration of
1%.
9. RECLASSIFICATION
Certain prior year's amounts have been reclassified to conform to current year
presentation.
9
10. DISCONTINUED OPERATIONS
The Company continually evaluates its operating facilities with regard to its
long-term strategic goals established by management and the Board of Directors.
Operating facilities that are not expected to contribute to the Company's future
operations are either closed or sold. In fiscal 2002, management, with the
approval of the Board of Directors, adopted a plan to dispose of the Puerto Rico
Industrial Manufacturing Operation Acquisition, Corp ("PRIMOA"). The plan was
completed in fiscal 2003 whereby the remaining assets were sold and remaining
warranty liabilities and obligations were contracted to a local service
provider. The Company believes that there will be no additional costs incurred
related to this operation.
The loss associated with discontinued operations for the three months ended July
31, 2003 and 2004 was $30,071 and $0, respectively. Net revenues associated with
discontinued operations for the three months ended July 31, 2003 and 2004 was
$223,849 and $0, respectively. The loss associated with discontinued operations
for the nine months ended July 31, 2003 and 2004 was $86,526 and $0,
respectively. Net revenues associated with discontinued operations for the nine
months ending July 31, 2003 and 2004 was $228,355 and $0, respectively.
11. SUBSEQUENT EVENTS
On August 11, 2004, the Company signed a definitive merger agreement to acquire
all of the issued and outstanding capital stock of V-ONE Corporation, a network
security company based in Germantown, Maryland. The acquisition of V-ONE
Corporation would in management's opinion complement the Company's February 18,
2004 acquisition of Asgard Holding, LLC in that the intellectual property and
software acquired by the Company in such transactions would enhance its product
offerings.
To reflect recent business results posted by V-ONE, the terms of the transaction
have been modified from those in the May 19, 2004 letter of intent, which
contemplated that V-ONE common shareholders would receive one share of the
Company's common stock in exchange for approximately 8.5 shares of V-ONE common
stock. The definitive agreement calls for an all-stock transaction and
contemplates that V-ONE common shareholders would receive one share of the
Company's common stock plus one warrant to purchase the same in exchange for
approximately twenty-one (21) V-ONE common shares. Management and the respective
Boards of Directors of SteelCloud and V-ONE have approved this transaction
subject to approval of the shareholders of both companies and other customary
closing conditions. There can be no assurance that all closing conditions will
be met or waived on a timely basis, if at all.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words or phrases "would be," "will allow," "intends to," "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements".
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, risks associated with the integration of
businesses following an acquisition, competitors with broader product lines and
greater resources, emergence into new markets, the termination of any of the
Company's significant contracts, the Company's inability to maintain working
capital requirements to fund future operations, or the Company's inability to
attract and retain highly qualified management, technical and sales personnel.
Statements made herein are as of the date of the filing of this Form 10-Q with
the Securities and Exchange Commission and should not be relied upon as of any
subsequent date. Unless otherwise required by applicable law, the Company does
not undertake, and the Company specifically disclaims, any obligation to update
any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement.
10
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 1 in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
October 31, 2003 filed by the Company with the Securities and Exchange
Commission.
11
OVERVIEW
Founded in 1987, SteelCloud, Inc, based in Dulles, Virginia, designs, develops
and manufactures customized computer servers and network appliances. The
Company's custom computer servers are designed to meet the precise needs of
volume customers to reduce the customer's investments in logistics, integration
capacity and support. The Company's network security appliances are developed in
collaboration with premiere software companies. In addition, the Company
develops proprietary software to optimize the performance of its security
appliances. The Company's appliances are specially designed and optimized to
deliver a dedicated network service such as antivirus gateway protection,
intrusion detection and secure content management.
In fiscal 2003, SteelCloud began focusing its efforts on the network security
marketplace and on the creation of additional SteelCloud intellectual property.
The Company has created its own family of hardened (highly secured) appliances
to be delivered as co-branded appliances with its software partners. With these
strategic partners, SteelCloud creates and uniquely brands ready-to-use turnkey
network server appliance solutions combining both hardware and software. The
Company integrates its own, its partner's, or other third-party software, into a
custom designed server platform. The Company manufactures the resulting product
either under a co-branded name or its partner's brand name allowing the partner
to deliver a complete turnkey solution. The Company enhances its product
development and manufacturing capability by providing custom supply chain and
logistics support services to its partners.
To extend its network security offerings, the Company acquired the assets of
Asgard Holding, LLC in February 2004 through the payment of $630,015 in cash,
the issuance of 575,000 shares of common stock valued at $2,283,900 and
assumption of debt totaling $170,138. As a result of the acquisition, management
believes SteelCloud is better positioned to define and control proprietary
product features and services from its own intellectual property. With this
purchase, the Company has also acquired the technical knowledgebase and
resources to design and develop proprietary products.
In August 2004, the Company continued to exand its network security focus by
announcing its definitive purchase agreement of V-One Corporation, a network
security company based in Germantown, Maryland. Under the terms of the
definitive merger agreement announced by the Company on August 11, 2004,
SteelCloud would acquire V-ONE in an all-stock transaction valued at
approximately $8.5 million, inclusive of transaction expenses. The definitive
agreement calls for an all-stock transaction and contemplates that V-ONE common
shareholders would receive one SteelCloud common share plus one SteelCloud
warrant in exchange for approximately twenty-one (21) V-ONE common shares.
Management and the respective Boards of Directors of SteelCloud and V-ONE have
approved this transaction subject to approval of the shareholders of both
companies and other customary closing conditions. If the acquisition is
consummated, the Company will incur legal, accounting, printing and other
related transaction expenses. Through September 2004, the Company incurred
approximately $205,000 of transaction expenses and has classified these expenses
as prepaid transaction costs. These costs have been deferred and will be
recognized upon closing of the transaction. In addition, additional working
capital may be required if this acquisition is consummated in order to exploit
the benefits of this merger. The target date for closing under the merger
agreement is October 31, 2004. However, the Company cannot assure you that all
closing conditions will be met or waived on a timely basis, if at all.
SteelCloud's consulting services organization provides clients with a seamless
extension of their own IT organizations. Expert technical services include
network analysis, security, design, troubleshooting and implementation. The
Company provides Information Technology (IT) support services to the public
sector as well as commercial customers. The Company is also a value-added
reseller for the software products of its strategic partners and certain other
software providers.
CRITICAL ACCOUNTING POLICIES
The Company believes the following represent its critical accounting policies:
12
SIGNIFICANT CUSTOMER CONTRACT
In February 2003, the Company was awarded several contracts by Lockheed Martin
valued at more than $2.7 million for customized servers. The Company commenced
work under the contracts in February 2003, and is expected to complete the
contracts by December 2004. For the nine months ended July 31, 2004, the Company
recognized revenue of approximately $2.2 million (or approximately 14% of total
net revenues) from the contract awards and has deferred contract revenue and
deferred contract costs of approximately $260,000 and $206,000, respectively
that will be recognized over the life of the contracts as units are shipped.
Deferred contract revenue and costs associated with the contract do not
necessarily reflect final revenues and costs associated with specific units to
be shipped.
In May 2004, the Company was awarded a contract by Lockheed Martin valued at
more than $12 million for customized servers. The contract includes options for
the government integrator to purchase a substantial number of additional
appliances. Provided all contract options are exercised, the total contract
value may exceed $21 million. The Company began making shipments under the
initial contract during the three month period ending July 31, 2004. The Company
anticipates increased deliveries during the fourth quarter of fiscal year 2004
and the first quarter of fiscal year 2005, with an estimated completion date of
March 2005. If additional contract options are exercised, deliveries under those
options would begin after March 2005. For the three months ending July 31, 2004,
the Company recognized revenue of approximately $1.3 million. Given the nature
of the products manufactured by the Company as well as the delivery schedules
established by its partners, revenue and accounts receivable concentration by
any single customer will fluctuate from quarter to quarter. Future revenues and
results of operations could be adversely affected should this customer reduce
its purchases, eliminate product lines or choose not to continue to buy products
and services from SteelCloud.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting Bulletin No,
104, "Revenue Recognition in Financial Statements" (SAB104). SAB 104 requires
that four basic criteria be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have
been rendered; (3) the seller's price to the buyer is fixed or determinable; and
(4) collectibility is reasonably assured.
The Company derives its revenue from the following sources: Product revenue,
information technology support services, software license as a reseller and
maintenance support, software training and customization revenue associated with
software license reselling activity.
For product sales to commercial customers, the Company recognizes revenue at the
time of shipment (shipping FOB shipping point) when both title and risk of loss
transfers to the customer. For product sales to government customers, the
Company recognizes revenue when customer receipt of goods is confirmed (shipping
FOB destination) and risk of loss transfers to the customer. For technology
support services under time and material contracts, the Company recognizes
revenue as services are provided. Revenue from hardware leased to customers
under operating lease arrangements is recognized over the contract term. When
product and installation services that are not essential to the functionality of
the product are sold as part of a bundled agreement, the fair value of the
installation services, based on the price charged for the services when sold
separately, is deferred and recognized when the services are performed. The
products sold are generally covered by a warranty for periods ranging from one
to three years. The Company accrues an estimated warranty reserve in the period
of sale to provide for estimated costs for warranty services.
The Company is a value-added reseller for certain software products. When resold
software licenses, and related maintenance, customization and training services
are all provided together to an individual customer, the Company recognizes
revenue for the arrangement after the Company has delivered the software license
and the customer has approved all customization and training services provided.
In instances were the Company only resells the software license and maintenance
to the customer, the Company recognizes revenue after the customer has
acknowledged and accepted delivery of the software. The software manufacturer is
responsible for providing software maintenance. Accordingly, revenue from
maintenance contracts is recognized upon delivery or acceptance, as the Company
has no future obligation to provide the maintenance services and no right of
return exists.
The Company incurs shipping and handling costs, which are recorded in cost of
revenues.
13
DEFERRED TAX ASSETS
DEFERRED TAX ASSETS AND LIABILITIES ARE RECORDED TO REFLECT THE TAX CONSEQUENCES
ON FUTURE YEARS OF TEMPORARY DIFFERENCES OF REVENUE AND EXPENSE ITEMS FOR
FINANCIAL STATEMENT AND INCOME TAX PURPOSES. A VALUATION ALLOWANCE IS PROVIDED
TO REDUCE RELATED ASSETS TO AN AMOUNT THAT IS MORE LIKELY THAN NOT REALIZABLE.
THE COMPANY DETERMINES ITS VALUATION ALLOWANCE PURSUANT TO THE PROVISIONS OF
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NUMBER 109, ACCOUNTING FOR INCOME TAXES, WHICH REQUIRES THE COMPANY TO WEIGH ALL
POSITIVE AND NEGATIVE EVIDENCE INCLUDING PAST OPERATING RESULTS AND FORECASTS OF
FUTURE TAXABLE INCOME. IF FORECASTS OF TAXABLE INCOME CHANGE IN THE FUTURE, THE
COMPANY MAY BE REQUIRED TO ADJUST THE VALUATION ALLOWANCE AGAINST DEFERRED TAX
ASSETS, WHICH WOULD RESULT IN ADDITIONAL TAX EXPENSE OR BENEFIT.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2004 COMPARED TO THE THREE AND NINE
MONTHS ENDED JULY 31, 2003
Product revenues decreased to $5,566,452 for the three months ended July 31,
2004 from $7,282,146 for the same period in fiscal 2003, a decrease of
$1,715,694 or 23.6%. Product revenues decreased to $13,498,126 for the nine
months ended July 31, 2004 from $21,612,075 for the same period in fiscal 2003,
a decrease of $8,113,949 or 37.5%. The decreases are partially attributable to
the completion of a significant contract with Lockheed Martin during fiscal
2003. The contract completion, net of new Lockheed Martin contracts awarded to
the Company during the quarter ending July 31, 2004, resulted in a decrease in
revenues of approximately $900,000 and $3.7 million, respectively, for the three
and nine month periods ended July 31, 2004 as compared to the same periods in
fiscal 2003. Under the new contract, valued at approximately $12 million, the
Company began making shipments of approximately $1.3 million, during the three
months ending July 31, 2004. The Company anticipates increased deliveries during
the fourth quarter of fiscal year 2004 and the first quarter of fiscal year
2005, with an estimated completion date of March 2005. If additional contract
options are exercised, deliveries for that option period would commence in March
2005. The decrease is also the result of numerous contracts relating to the
Company's GSA schedule completed during fiscal 2003, which reduced revenues by
approximately $160,000 and $2.1 million, respectively, for the three and nine
month periods ended July 31, 2004 as compared to the same periods in fiscal
2003. In addition, certain organizational and restructuring changes within one
of the Company's reselling partners, Network Associates, during fiscal 2004
significantly impacted the Company's reselling activities. As a result,
reselling revenues decreased by approximately $513,000 and $1.0 million for the
three and nine month periods ended July 31, 2004 as compared to the same periods
in fiscal 2003. Revenue associated from the Company's security appliances were
significantly lower than expected due to delays in third party software
availability for both the three and nine month periods ending July 31, 2004.
Service revenues increased to $1,033,844 for the three months ended July 31,
2004 from $874,268 for the same period in fiscal 2003, an increase of $159,576
or 18.3%. Service revenues increased to $3,057,631 for the nine months ended
July 31, 2004 from $2,399,783 for the same period in fiscal 2003, an increase of
$657,848 or 27.4%. The increase in service revenues for the three and nine
months ended July 31, 2004 as compared to the same periods in fiscal 2003 is
primarily the result of continuing efforts to leverage existing customer
relationships through sales of additional products and complementary services.
14
Gross margin, as a percentage of net revenues, decreased to 17.3% for the three
months ended July 31, 2004 from 20.3% for the same period in fiscal 2003. Gross
margin, as a percentage of net revenues, increased to 22.2% for the nine months
ended July 31, 2004 from 21.0% for the same period in fiscal 2003. The decrease
in gross margin for the three months ended July 31, 2004 as compared to the same
period in fiscal 2003 is partially due to the lower margins associated with
start up costs incurred in connection with the Company's new firm fixed
contract. The Company anticipates that gross margins will increase over the
length of the contract. In addition, the Company's revenue and gross margins
were adversely affected by overall decrease within the industry for enterprise
software during the quarter ended July 31, 2004. The increase in gross margin
for the nine months ended July 31, 2004 as compared to the same period in fiscal
2003 is the result of an increase in sales revenue from the Company's
higher-margin revenue sources: security appliances and consulting and network
services. The increase in gross margin from consulting services is principally
the result of improved utilization of the Company's consulting service
resources, and the integration and utilization of the technical knowledgebase
acquired from Asgard. In addition, the Company incurred minimal start up costs
for the three and nine month periods in fiscal 2003. While the Company expects
gross margin as a percentage of net revenues to increase as it continues to grow
its higher-margin revenue sources, gross margin is expected to fluctuate from
quarter to quarter.
15
Sales and marketing expenses increased to $646,786 for the three months ended
July 31, 2004 from $292,626 for the same period in fiscal 2003, an increase of
$354,160 or 121.0%. The increase is primarily attributable to increased trade
show costs of approximately $160,000 and personnel costs and sale incentives of
approximately $160,000. Currently, attendance at trade shows is an essential
part in promoting the Company's new security appliances. Sales and marketing
expenses increased to $1,631,601 for the nine months ended July 31, 2004 from
$927,575 for the same period in fiscal 2003, an increase of $704,026 or 75.9%.
The increase is primarily attributable to an increase in sales and marketing
efforts for the Company's new security appliances as well as its services. The
increase can be attributable to increased personnel costs and sales incentives
of approximately $450,000 and trade show expenses of $160,000.
Research and product development expenses decreased to $161,694 for the three
months ended July 31, 2004 from $186,140 for the same period in fiscal 2003, a
decrease of $24,446 or 13.1%. The decrease is primarily attributable to software
delays associated with certain appliance products required to develop its
intellectual property, which decreased labor associated with the Company's
research and development efforts. Research and product development expenses
increased to $437,111 for the nine months ended July 31, 2004 from $296,735 for
the same period in fiscal 2003, an increase of $140,376 or 47.3%. The large
increase is primarily the result of the Company commencing its research and
product development efforts during the second quarter of fiscal 2003, since
research and product development efforts did not commence until the second
quarter of fiscal 2003. The Company expects to continue to incur additional
research and product development costs in future quarters as new products are
brought to market.
General and administrative expenses increased to $1,367,304 for the three months
ended July 31, 2004 from $1,139,723 for the same period in fiscal 2003, an
increase of $227,581 or 20%. As a percentage of revenue, general and
administrative expenses increased to 21% from 14% for the same period in fiscal
2003. The increase is largely attributable to increased personnel costs of
approximately $185,000 and depreciation of approximately $30,000. For the nine
month period ended July 31, 2004 general and administrative expenses increased
to $4,570,071 from $3,515,543 for the same period in fiscal 2003, an increase of
$1,054,528 or 30%. As a percentage of revenue, general and administrative
expenses increased to 27% from 15% for the same period in fiscal 2003. The
increase is largely attributable to increased personnel costs of approximately
$310,000, and increased professional services, depreciation, and insurance costs
of approximately $390,000. In addition, the Company incurred approximately
$85,000 in non-recurring professional services related to analysis associated
with amending the Company's Net Operating Loss carryforward during fiscal year
2004. The increases associated with general and administrative expenses for the
three and nine months ended July 31, 2004 is primarily the result of growing
administrative requirements necessary to transform the Company into a network
security solutions provider. In addition, expenses have increased due to the
Company incurring additional expenses associated with workforce and facility
leases acquired from Asgard. Although the Company continues to manage its costs
relative to its revenues and gross margins, additional resources will be
required in order to support its new product lines and successfully transition
the Company into a network security company.
Interest income, net increased to $11,045 for the three months ended July 31,
2004 from $937 for the same period in fiscal 2003, an increase of $10,108 or
1,078.7%. The company recorded net interest income of $22,690 for the nine
months ended July 31, 2004 compared to net interest expense of $12,802 for the
same period in fiscal 2003, an income increase of $35,492 or 277.2%. The
increase in interest income is the direct result of the Company's reduction in
its outstanding debt and an increase in income realized from cash investments
during the three and nine months ended July 31, 2004 as compared to the same
periods in fiscal 2003.
The Company reported a net loss of $(1,076,927) from continuing operations for
the three months ended July 31, 2004, as compared to net income of $40,379 from
continuing operations for the same period in fiscal 2003. The Company reported a
net loss of $(2,998,955) for the nine months ended July 31, 2004, as compared to
net income of $285,621 for the same period in fiscal 2003. The decrease in net
income for the three and nine months ended July 31, 2004 as compared to the same
periods in fiscal 2003 is primarily attributable to the Company's increased
costs associated with its efforts to acquire and develop intellectual property
and to produce, manufacture, and market its network security products.
Additionally, the Company experienced significantly slower than expected
16
increases in revenues associated with the Company's network security products.
While the Company is experiencing a slower than expected increase in revenues
associated with its network security products, the Company is beginning to
realize higher gross margins resulting from sales of its security appliances. In
addition, the Company continued to experience increases in consulting service
revenue as a result of continuing efforts to leverage existing customer
relationships through sales of additional products and complementary services.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended July 31, 2004, the Company used $2,021,956 in cash
flow from continuing operations. The Company generated cash from the collection
of its accounts receivables of $1,102,895, and experienced an increase in
unearned revenue and other liabilities of $246,349. The cash generated was
primarily used to pay accounts payable of $420,786 and purchase inventory of
$84,273. In addition, the Company experienced an increase in deferred contract
costs of $202,434.
For the nine months ended July 31, 2004, the Company invested $325,216 in
property and equipment. In addition, the Company invested $725,854, which
consists of cash paid, net of current assets and liabilities assumed to purchase
the assets of Asgard Holding, LLC (Asgard).
For the nine months ended July 31, 2004, the Company generated $1,338,238 from
financing activities. Cash provided by the Company's financing activities
resulted primarily from proceeds received in connection with the exercise of
warrants and options to purchase the Company's common stock of $1,284,987. The
Company did not rely on its bank line of credit for the nine months ended July
31, 2004.
As of July 31, 2004, the Company had working capital of $9,344,803. The Company
believes cash on hand together with cash generated from operations will provide
sufficient financial resources to finance current operations of the Company
through fiscal 2004.
On February 17, 2004, the Company completed its acquisition of the assets of
Asgard Holding, LLC (Asgard), an internet security product and service company.
In exchange for the assets of Asgard, which included intellectual property and
patent-pending technology, the Company paid cash of $630,015 and issued 575,000
shares of SteelCloud common stock valued at $2,283,900. The value of SteelCloud
common stock issued was determined in accordance with SFAS No. 141. In addition,
the Company assumed $170,138 of Asgard's debt by executing two three-year
promissory notes. The promissory notes bear interest at 4% and mature in
February 2007. The Company makes monthly aggregate payments of $4,726 plus
accrued interest. The outstanding balance on the two notes at July 31, 2004 was
approximately $146,507.
On January 22, 2004, the Company modified its bank line of credit that allows
the Company to borrow an amount to the lesser of its collateralized cash on hand
or $3.5 million. The line of credit bears interest at the LIBOR Market Index
rate plus 1.25%. The line of credit is secured by all assets of the Company. As
of July 31, 2004, there were no outstanding borrowings on the line of credit.
The line of credit expires on March 31, 2005.
In August 2004, the Company continued exanding its network security focus by
announcing its definitive purchase agreement of V-One. Under the terms of the
definitive merger agreement announced by the Company on August 11, 2004,
SteelCloud would acquire V-ONE in an all-stock transaction valued at
approximately $8.5 million, inclusive of transaction expenses. The definitive
agreement calls for an all-stock transaction and contemplates that V-ONE common
shareholders would receive one SteelCloud common share plus one SteelCloud
warrant in exchange for approximately twenty-one (21) V-ONE common shares. The
management and respective Boards of Directors of SteelCloud and V-ONE have
approved this transaction subject to approval of the shareholders of both
companies and other customary closing conditions. If the acquisition is
consummated, the Company will incur legal, accounting, printing and other
related transaction expenses. Through September 2004, the Company incurred
approximately $205,000 of transaction expenses and has classified these expenses
as prepaid transaction costs. These costs have been deferred and will be
recognized upon closing of the transaction. In addition, additional working
capital may be required if this acquisition is consummated in order to exploit
the benefits of this merger. The target date for closing under the merger
agreement is October 31, 2004. However, the Company cannot assure you that all
closing conditions will be met or waived on a timely basis, if at all.
17
From time to time, the Company may pursue strategic acquisitions or mergers,
which may require significant additional capital to satisfy unusual or
infrequent expenses. In such event, the Company may seek additional financing of
debt and/or equity.
Contractual Obligations and Commercial Commitments:
The Company's significant contractual obligations as of July 31, 2004 are for
debt and operating leases. Debt by year of maturity and future rental payments
under operating lease agreements are presented below. The Company does not have
any purchase obligations, capital lease obligations or any material commitments
for capital expenditures as of July 31, 2004. The Company has not engaged in
off-balance sheet financing, commodity contract trading or significant related
party transactions.
- ----------------------------------- ----------------------------------------------------------------------
Contractual Obligations Payments Due by Period
- ----------------------------------- ----------------------------------------------------------------------
Less than 1 More than
Total year 1-3 years 3-5 years 5 years
- ----------------------------------- --------------- -------------- -------------- ----------- ------------
Notes Payable - Current $ 70,711 $ 70,711 - - -
- ----------------------------------- --------------- -------------- -------------- ----------- ------------
Long Term Debt $ 138,625 - $ 135,606 $ 3,019 -
- ----------------------------------- --------------- -------------- -------------- ----------- ------------
Operating Lease $ 488,904 $ 234,006 $ 127,449 $127,449 -
- ----------------------------------- --------------- -------------- -------------- ----------- ------------
Management believes that these commitments will be satisfied with current
operating cash flow.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to fluctuations in interest rates
on its debt. Increase in prevailing interest rates could increase the Company's
interest payment obligations relating to variable rate debt. For example, a 100
basis point increase in interest rates would increase annual interest expense by
$35,000 if the Company fully utilized its existing line of credit.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of SteelCloud's Disclosure Controls and Internal Controls
SteelCloud evaluated the effectiveness of the design and operation of its
disclosure controls and procedures, or "Disclosure Controls," as of the end of
the period covered by this quarterly report on Form 10-Q. This evaluation, or
"Controls Evaluation", was performed under the supervision, and with the
participation, of management, including our Chairman of the Board, Chief
Executive Officer and Director ("CEO"), our Chief Operating Officer ("COO"), and
our Chief Financial Officer ("CFO").
CEO, COO and CFO Certifications
The certifications of the CEO, COO, and the CFO required by Rule 13a-15(e) of
the Securities Exchange Act of 1934, as amended, or the "Rule 13a-15(e)
Certifications" are filed as Exhibit 31 of this quarterly report on Form 10-Q.
This Controls and Procedures section of the quarterly report includes the
information concerning the Controls Evaluation referred to in the Rule 13a-15(e)
Certifications and it should be read in conjunction with the Rule 13a-15(e)
Certifications for a more complete understanding of the topics presented.
Disclosure Controls and Internal Control over Financial Reporting
Disclosure Controls are controls and other procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this quarterly report, is recorded, processed, summarized and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms. Disclosure Controls include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to our management, including our CEO, COO, and CFO, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our
assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and
directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Limitations on the Effectiveness of Controls
Our management, including our CEO, COO, and CFO, does not expect that our
Disclosure Controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
19
control issues and instances of fraud, if any, within SteelCloud have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with associated
policies or procedures. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
Conclusions
Based upon the Controls Evaluation, our CEO, COO, and CFO have concluded that,
subject to the limitations noted above, our Disclosure Controls are effective to
ensure that material information relating to SteelCloud is made known to
management, including the CEO, COO, and CFO, particularly during the period when
our periodic reports are being prepared.
During the period covered by this quarterly report on Form 10-Q, there were no
changes in our internal control over financial reporting that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are routine legal claims pending against the Company that occur in the
ordinary course of business, but in the opinion of management, liabilities, if
any, arising from such claims will not have a material adverse effect on the
financial condition and results of operation of the Company.
Other than the items previously disclosed, we are not a party in any other
material legal proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 2004, the Company held its 2003 Annual Meeting of Shareholders. At
the annual meeting, the Company's shareholders were asked to vote upon: (i) the
election of two Class III directors, (ii) the approval of an amendment to the
Company's 2002 Stock Option Plan, and (ii) the ratification of the appointment
of an independent accounting firm for the ensuing year.
The following persons were elected as directors of the company for the ensuing
year by the votes next to such persons name:
FOR WITHHELD
Thomas P. Dunne 10,317,099 762,536
Benjamin Krieger 10,668,195 411,440
Thomas P. Dunne and Benjamin Krieger were each elected as Class III Directors
and shall serve until their respective successors have been duly elected and
qualified.
The approval of an amendment to the Company's 2002 Stock Option Plan was
approved by the following vote:
FOR AGAINST ABSTAIN
3,693,347 817,427 17,317
Grant Thornton LLP was approved to act as the Company's independent certified
public accountants for the ensuing year by the following vote:
FOR AGAINST ABSTAIN
11,011,496 62,677 5,462
ITEM 5. OTHER INFORMATION
Not applicable
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 Statement of computation of earnings per share.
Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications.
Exhibit 32.1 Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.*
Exhibit 32.2 Certification by the Chief Operating Officer Relating to a
Periodic Report Containing Financial Statements.*
Exhibit 32.3 Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.*
- ------
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
(b) Reports on Form 8-K
On May 21, 2004, the Company filed a report on Form 8-K pursuant to Item 5
"Other Events and Required FD Disclosure" and Item 7 "Financial Statements, Pro
Forma Financial Information and Exhibits".
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
September 14, 2004 STEELCLOUD, INC.
By: /S/ THOMAS P. DUNNE
-----------------------
Name: Thomas P. Dunne
Title: Chief Executive Officer
By: /S/ BRIAN HAJOST
--------------------
Name: Brian Hajost
Title: Chief Operating Officer
By: /S/ KEVIN MURPHY
--------------------
Name: Kevin Murphy
Title: Chief Financial Officer
23