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 January 31, 2003
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
(State or other jurisdiction of incorporation or organization)
54-1890464
(I.R.S. Employer 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 or former address, 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 March 1, 2003 there were 10,049,486 shares of the registrant's
common stock outstanding.
1
SteelCloud, Inc.
Form 10-Q Index
For the Quarterly period ended January 31, 2003
Description Page
----------- ----
Part I. Financial Information............................................................... 3
Item 1. Financial Statements................................................................
Consolidated Balance Sheets as of October 31, 2002 and January 31, 2003............. 3
Consolidated Statements of Operations for the three month periods ended January 31,
2002 and 2003 ....................................................... 4
Consolidated Statements of Cash Flows for the three month periods ended January 31,
2002 and 2003....................................................................... 5
Notes to the Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks......................... 12
Item 4. Controls and Procedures............................................................. 12
Part II. Other Information................................................................... 14
Item 1. Legal Proceedings................................................................... 14
Item 6. Exhibits and Reports on Form 8-K.................................................... 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEELCLOUD, INC.
CONSOLIDATED BALANCE SHEET
October 31, January 31,
2002 2003
------------ ------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 751,323 $ 892,887
Accounts receivable, net of allowance for doubtful accounts of
$293,000 as of October 31, 2002 and January 31, 2003
6,082,340 4,164,757
Inventory, net of reserves of $1,038,020 and $1,009,577 as of October
31, 2002 and January 31, 2003, respectively
4,180,812 3,508,704
Deferred tax asset 400,000 400,000
Income tax receivable 55,392 55,392
Prepaid expenses and other current assets 208,892 260,728
Deferred contract cost 2,039,339 1,949,323
Assets held for sale 953,320 572,282
------------ ------------
Total current assets 14,671,418 11,804,073
Property and equipment, net 304,081 352,055
Equipment on lease, net 574,272 458,248
Goodwill and other intangible assets, net 1,778,059 1,778,059
Other assets 304,922 290,509
------------ ------------
Total assets $ 17,632,752 $ 14,682,944
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,620,580 $ 2,367,296
Accrued expenses 1,542,277 1,554,958
Notes payable, current 503,823 381,781
Unearned revenue 4,507,859 2,955,268
Liabilities held for sale 641,145 522,864
------------ ------------
Total current liabilities 10,815,684 7,782,167
Note payable, long-term 60,000 62,651
Stockholders' equity
Common stock, $.001 par value: 50,000,000 shares authorized,
10,447,611 and 10,449,486 shares issued and outstanding at October
31, 2002 and January 31, 2003 10,448 10,450
Additional paid in capital 39,553,017 39,554,532
Treasury stock, 400,000 shares at October 31, 2002 and January 31,
2003, respectively (3,432,500) (3,432,500)
Accumulated deficit (29,373,897) (29,294,356)
------------ ------------
Total stockholders' equity 6,757,068 6,838,126
------------ ------------
Total liabilities and stockholders' equity $ 17,632,752 $ 14,682,944
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
January 31,
----------------------------
2002 2003
------------ ------------
Net revenues $ 9,354,066 $ 7,634,168
Cost of revenue 6,839,864 6,091,831
------------ ------------
Gross profit 2,514,202 1,542,337
Selling and marketing 313,821 298,724
General and administrative 1,300,949 1,128,728
Amortization of goodwill 98,554 --
------------ ------------
Income from continuing operations 800,878 114,885
Interest expense, net 49,859 5,840
Other (income) (4,155) --
------------ ------------
Income before income taxes 755,174 109,045
Provision for income taxes 1,200 --
------------ ------------
Net income from continuing operations 753,974 109,045
Loss from discontinued operations 267,468 29,501
------------ ------------
Net income $ 486,506 $ 79,544
============ ============
Earnings per share (basic and diluted):
Earnings from continuing operations $ 0.07 $ 0.01
Discontinued operations (0.02) --
------------ ------------
Net earnings per share $ 0.05 $ 0.01
============ ============
Weighted-average shares outstanding, basic 10,214,545 10,046,556
Weighted-average shares outstanding, diluted 10,704,386 10,412,839
The accompanying notes are an integral part of these consolidated statements.
4
STEELCLOUD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
January 31,
--------------------------
2002 2003
----------- -----------
Operating activities
Net income $ 486,506 $ 79,544
Loss from discontinued operations, net 267,468 29,501
----------- -----------
Net income from continuing operations 753,974 109,045
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment
231,992 93,986
Amortization of goodwill and other intangibles 98,554 --
Changes in operating assets and liabilities:
Accounts receivable 1,238,252 1,917,583
Income tax receivable (143,879) --
Inventory -- 708,574
Prepaid expenses and other assets (19,376) (37,422)
Deferred contract costs -- 90,016
Accounts payable 127,376 (1,253,284)
Accrued expenses (190,533) 12,681
Unearned revenue and other liabilities 498,023 (1,552,591)
----------- -----------
Net cash provided by operating activities 2,594,383 88,588
Investing activities
Purchase of property and equipment (46,244) (23,372)
Financing activities
Proceeds from exercise of common stock options -- 1,513
Payments on notes payable (106,943) (158,421)
Repayments on line of credit, net (2,270,317) --
----------- -----------
Net cash used in financing activities (2,377,260) (156,908)
Net increase (decrease) in cash and cash equivalents of continuing 170,879 (91,692)
operations
Net cash (used in) provided by operating activities of discontinued
operations (174,928) 233,256
Cash and cash equivalents at beginning of period 282,318 751,323
----------- -----------
Cash and cash equivalents at end of period $ 278,269 $ 892,887
=========== ===========
Supplemental cash flow information
Interest paid $ 52,383 $ 8,073
Income taxes paid $ 1,200 $-
The accompanying notes are an integral part of these consolidated financial
statements.
5
STEELCLOUD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements for the three month periods ended January
31, 2003 and 2002 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, 2002 and 2001.
2. 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, which are not expected to contribute to the Company's
future operations are either closed or sold. In October 2002, management, with
the approval of the Board of Directors, determined that its Puerto Rico
Industrial Manufacturing Operation ("PRIMO") would no longer contribute to
future operations and therefore adopted a plan to dispose that operation
effective on that date. The plan estimates that disposal will be complete in
early fiscal 2003. Accordingly, the Company has reflected PRIMO as discontinued
operations in the current financial statements. As a result, prior year amounts
have been reclassified to segregate the continuing operations from the
discontinued operations. The Company is pursuing a sale of the PRIMO business.
However, if a suitable buyer is not found in the foreseeable future, management
may chose to shut down the PRIMO operations. The loss associated with the
discontinued operation was approximately $29,500 for the period ended January
31, 2003. The Company believes that given the current environment of that
market, discontinuing the operation was the best alternative. Losses from the
PRIMO operation during the period prior to disposal are not expected to be
material.
A summary of the financial information for the discontinued operation is as
follows:
Three Months Ended
January 31,
----------------------
2002 2003
--------- ---------
Net revenues ................................. $ 332,159 $ 920
Gross profit ................................. 7,136 (33,381)
--------- ---------
Loss from discontinued operations ............ (267,468) (29,501)
========= =========
October 31, January 31,
2002 2003
----------- -----------
Accounts receivable, net ..................... $ 682,978 $ 267,471
Inventory, net ............................... 188,698 202,588
Other Assets ................................. 81,644 102,223
--------- ---------
Total assets ................................. 953,320 572,282
========= =========
Accrued expenses ............................. $ 590,526 $ 472,245
Accounts payable and other liabilities ....... 50,619 50,619
--------- ---------
Total liabilities ............................ 641,145 522,864
========= =========
6
3. Debt
On January 18, 2002, the Company amended its primary line of credit whereby the
maximum availability was increased from $5 million to $7.5 million. The note
bears interest at the lower of (a) the Lender's Prime Rate per annum or (b) the
LIBOR Market Index Rate plus 2.5%. The line of credit expires on March 31, 2003.
The Company anticipates that the line of credit will be renewed on or before
March 31, 2003. There was no outstanding balance on the line of credit at
October 31, 2002 and January 31, 2003.
On February 1, 2002, the Company executed a promissory note in conjunction with
their line of credit in the amount of $725,000. The note bears interest at the
lower of (a) the Lender's Prime Rate per annum or (b) the LIBOR Market Index
Rate plus 2.5% and matures on July 5, 2003. The Company's monthly principal
payments are approximately $43,000. The outstanding balance on the promissory
note at October 31, 2002 and January 31, 2003 was approximately $384,000 and
$256,000 respectively.
On April 1, 2002, the Company executed a two-year promissory note in conjunction
with a litigation settlement reached in March 2002 for approximately $240,000.
The promissory note bears interest at the prime rate and matures in May 2004.
The Company makes monthly payments of $10,000 plus accrued interest. The
outstanding balance on the note at October 31, 2002 and January 31, 2003 was
approximately $180,000 and $150,000 respectively.
4. Contract Revenue
For the three months ended January 31, 2003, the Company's deferred contract
revenue related to its server appliance contract awarded was approximately $2.5
million. The deferred revenue represents payments received for milestones
achieved. This revenue will be recognized over the remaining life of the
contract as units are shipped under the contract, which is scheduled for
completion in August 2003.
5. 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) available to common shareholders 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 is calculated by dividing net
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding used in the basic earnings per share calculation
plus stock options.
7
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.
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.
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, 2002 filed by the Company with the Securities and Exchange
Commission.
OVERVIEW
Founded in 1987, SteelCloud, Inc, based in Dulles, Virginia, designs, develops
and manufactures customized computer servers and network appliances. The
Company's primary business focus is to develop and manufacture products on an
OEM basis ("Original Equipment Manufacturer") for strategic software,
technology, and managed services partners. With its strategic partners,
SteelCloud creates and uniquely brands ready-to-use turnkey network server
appliance solutions combining both hardware and software. The Company integrates
its partner's, or other third-party software, into a custom designed server
platform. SteelCloud manufactures the resulting product under the partner's
brand name allowing the partner to deliver a complete turnkey solution.
SteelCloud's customer is its OEM partner rather than the end-user. The partner
is responsible for selling and distributing the OEM products developed by
SteelCloud. The Company enhances its product development and manufacturing
capability by providing custom supply chain and logistics support services to
its partners.
In addition to delivering computer products to the OEM market, SteelCloud
develops specialized servers and infrastructure products for large commercial
and government integrators, and certain governmental agencies. The Company is a
value-added reseller for the software products of its strategic partners and
certain other software providers. SteelCloud also provides Information
Technology (IT) support services to both the public sector and commercial
customers.
8
The following summarizes significant activity for the three-month period ended
January 31, 2003.
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, which are not expected to contribute to the Company's
future operations are either closed or sold. In October 2002, management, with
the approval of the Board of Directors, determined that its Puerto Rico
Industrial Manufacturing Operation ("PRIMO") would no longer contribute to
future operations and therefore adopted a plan to dispose that operation
effective on that date. The plan estimates that disposal will be complete in
early fiscal 2003. Accordingly, the Company has reflected PRIMO as discontinued
operations in the current financial statements. As a result, prior year amounts
have been reclassified to segregate the continuing operations from the
discontinued operations. The Company is pursuing a sale of the PRIMO business.
However, if a suitable buyer is not found in the foreseeable future, management
may chose to shut down the PRIMO operations. The loss associated with the
discontinued operation was approximately $29,500 for the period ended January
31, 2003. The Company believes that given the current environment of that
market, discontinuing the operation was the best alternative. Losses from the
PRIMO operation during the period prior to disposal are not expected to be
material.
Goodwill and Other Intangible Assets
Effective November 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". As a result, the Company no longer amortizes goodwill
and periodically tests goodwill for possible impairment. For the quarter ended
January 2003, reduction in goodwill amortization was approximately $98,500.
Summarized below are the effects on net income and net income per share if we
had not amortized goodwill pursuant to the provisions of SFAS No. 142 for all
periods presented.
Three Months Ended
January 31,
------------------------
2002 2003
----------- ----------
Net income
As reported ..................................... $ 486,506 $ 79,544
Add goodwill amortization ....................... 98,554 --
----------- ----------
Adjusted net income ............................. $ 585,060 $ 79,544
Earnings per share (basic and diluted):
As reported ..................................... $ 0.05 $ 0.01
Add goodwill amortization ....................... 0.01 --
----------- ----------
Adjusted earnings per share (basic and diluted).. $ 0.06 $ 0.01
9
Significant Contract
In January 2002, the Company was awarded several contracts by a Government
Integrator valued at more than $10.5 million for customized servers. The Company
commenced work under the contracts in February 2002 and is expected to complete
the contracts by August 2003. During the three months ended January 31, 2003,
the Company recognized revenue of approximately $1.9 million (or approximately
25% of total net revenues) and has deferred contract revenue of approximately
$2.5 million that will be recognized over the life of the contracts as units are
shipped. Deferred contract costs associated with the contracts was approximately
$1.9 million as of January 31, 2003, which will be recognized over the life of
the contracts.
10
CRITICAL ACCOUNTING POLICIES
The Company believes the following represent its critical accounting policies:
Significant Customer
For the three months ended January 31, 2003, the Company had one customer,
Lockheed Martin, that accounted for approximately 24.5% of net revenues. 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. The
Company anticipates that concentration levels will decrease as their OEM
customer base expands in future periods. Future revenues and results of
operations could be adversely affected should these customers reduce their
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 SEC Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended by
SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred or services rendered; (3) the fee is fixed and
determinable: and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
Hardware products sold are generally covered by a warranty for periods ranging
from one to three years. The Company accrues a warranty reserve for estimated
costs to provide warranty services. The Company's estimate of costs to service
its warranty obligations is based on historical experience and expectation of
future conditions. To the extent the Company experiences increased warranty
claim activity or increased costs associated with servicing those claims, its
warranty accrual will increase resulting in decreased gross profit.
For technology support services under time and material contracts, the Company
recognizes revenue as services are provided based on contracted rates and
materials are delivered.
Net revenues for the three months ended January 31, 2003 increased to $7,634,168
from $5,786,842 for the three months ended October 31, 2002, a 32% increase. The
increase is the result of increased shipments for one of its OEM supply
agreements, Lockheed Martin. Under this contract, the Company recognized
approximately $1.9 million in revenue during the three months ended January 2003
compared to $350,000 for the three months ended October 31, 2002.
11
RESULTS OF OPERATIONS
For the three months ended January 31, 2003 compared to the three months ended
January 31, 2002
Net revenues for the three months ended January 31, 2003 were $7,634,168 as
compared to $9,354,066 for the three months ended January 31, 2002, a decrease
of approximately 18%. The decrease is primarily attributable to the Company's
OEM supply agreement with Network Associates (NAI), one of its significant
customers, which expired on December 31, 2002. For the three month periods ended
January 31, 2002 and 2003, revenues from this customer were approximately $7.6
million and $435,000, respectively, which represented approximately 81% and 6%
of net revenues for the three month periods then ended, respectively. Net
revenues, excluding those revenues under that agreement, increased approximately
323% to $7.2 million for the three month period ended January 31, 2003 from $1.7
million for the three month period ended January 31, 2002. This significant
increase is the result of the Company executing several new OEM supply
agreements, the Company's significant Government Integration contracts awarded
in January 2002 and increased revenues from its consulting services and
reselling activities. Growth from these revenue streams offset a majority of the
decline in revenues from a significant customer.
Gross margin, as a percentage of sales, decreased to 20.2% for the three months
ended January 31, 2003 from 26.88% for the three months ended January 31, 2002.
As previously discussed, the Company's revenue streams changed during the
quarter ended January 31, 2003. Accordingly, gross margin, as a percentage of
sales was impacted by the change in sales mix for that period. Given recent
contract awards and supply agreements executed, the Company believes that its
sales mix will improve in future periods, which will yield higher gross margins.
For the three months ended January 31, selling and marketing expenses decreased
to $298,724 in fiscal 2003 from $313,821 in fiscal 2002. The decrease is
primarily attributable to the decrease in sales commissions and incentives
earned as a result of the decrease in revenue.
General and administrative expenses decreased to $1,128,728 for the three months
ended January 31, 2003 from $1,300,949 for the same period in fiscal 2002. The
Company continues to manage its costs relative to its net revenues and gross
margins. As a result, the general and administrative costs decreased
proportionately with the change in revenue in the first quarter of fiscal 2003
compared to the same period in fiscal 2002. Cost savings included those realized
from reduction of consulting, accounting and legal fees. Effective November 1,
2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets".
As a result, the Company no longer amortizes goodwill and periodically tests
goodwill for possible impairment. For the quarter ended January 2003, reduction
in goodwill amortization was approximately $98,500.
Interest expense, net of interest income, decreased to $5,840 for the three
months ended January 31, 2002 from $49,859 for the three months ended January
31, 2002. The decrease is the direct result of the Company's reduction in its
outstanding debt during fiscal 2003.
The Company reported net income before discontinued operations of $109,045 for
the three months ended January 31, 2003, as compared to net income before
discontinued operations of $753,974 for the same period in the prior year. This
decrease is primarily the result of the Company's change in sales mix and gross
margins during the three-month period ended January 31, 2003, compared to the
three-month period ended January 31, 2002.
12
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended January 31, 2003, the Company generated approximately
$88,588 in cash flow from continuing operations. The Company generated cash from
the collection of its accounts receivables of approximately $1,917,583 and the
reduction of inventories of approximately $708,574. The cash generated was used
to reduce accounts payable by approximately $1,253,284 and recognized revenue
for cash collected in prior periods of approximately $1,552,591.
Funds used for investing activities consisted of the purchase of property and
equipment of $23,372. Net cash used for financing activities consisted of
payments on notes payable of $158,421.
On January 18, 2002, the Company amended its existing line of credit from $5
million to $7.5 million, with an expiration date of March 31, 2003, bearing
interest at the lower of (a) prime rate or (b) the LIBOR Market Index Rate plus
2.5%. As of January 31, 2003, the Company had an outstanding balance on the line
of credit of approximately $0 and available borrowing capacity of $3.1 million.
The Company anticipates that its line of credit will be renewed on or before the
expiration date of the existing agreement.
As of January 31, 2003, the Company had working capital of approximately $4.0
million. The Company believes the bank facility, together with cash on hand and
projected cash generated from operations will provide sufficient financial
resources to finance the current operations of the Company through fiscal 2003.
From time to time, the Company may pursue strategic acquisitions or mergers,
which may require significant additional capital, and additional capital may be
required to satisfy unusual or infrequent expenses. In such event, the Company
may seek additional financing of debt and/or equity.
13
Contractual Obligations and Commercial Commitments:
The Company's significant contractual obligations as of January 31, 2003 are for
debt and operating leases. Debt by year of maturity, the Company's line of
credit and future rental payments under operating lease agreements are presented
below. The Company does not have any purchase obligations as of January 31,
2003. 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 After 5
Total year 1-3 years 4-5 years years
- ----------------------------------- --------------- -------------- -------------- ----------- ----------
Notes Payable - Current $ 381,781 $ 381,781 -- -- --
- ----------------------------------- --------------- -------------- -------------- ----------- ----------
Long Term Debt $ 62,651 -- $ 49,164 $ 13,487 --
- ----------------------------------- --------------- -------------- -------------- ----------- ----------
Operating Lease $ 871,966 $ 505,751 $ 366,215 -- --
- ----------------------------------- --------------- -------------- -------------- ----------- ----------
The Company will receive $218,631 in aggregate sublease income through fiscal
2003.
Management believes that these commitments will be satisfied with current
operating cash flow.
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
$38,000.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
14
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1: Statement of computation of earnings per share.
(b) Reports on Form 8-K
On January 23, 2003, the Company filed a report on Form 8-K pursuant to Item 5
"Other Events" and Item 7 "Financial Statements, Pro Forma Financial Information
and Exhibits".
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.
March 13, 2003 STEELCLOUD, INC.
By: /s/ Thomas P. Dunne
-------------------------------
Name: Thomas P. Dunne
Title: Chief Executive Officer
By: /s/ Kevin Murphy
-------------------------------
Name: Kevin Murphy
Title: Vice President Finance
15
CERTIFICATIONS
I, Thomas P. Dunne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SteelCloud, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Thomas P. Dunne
-----------------------------------
Thomas P. Dunne
Chief Executive Officer
16
I, Edward Spear, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SteelCloud, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Edward Spear
-----------------------------------
Edward Spear
President
17
I, Kevin Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SteelCloud, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ Kevin Murphy
-----------------------------------
Kevin Murphy
Vice President Finance
18