UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number: 000-26227
SSP SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0757190
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17861 CARTWRIGHT ROAD, IRVINE, CALIFORNIA 92614
(Address of principal executive offices)
(949) 851-1085
(Issuer's telephone number, including area code)
NOT APPLICABLE.
(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 Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
The number of shares outstanding of the registrant's only class of common stock,
$.01 par value, was 27,836,733 on September 15, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PURPOSE OF AMENDMENT
The registrant hereby refiles its condensed consolidated financial statements
solely to delete the final paragraph of footnote 9 to those condensed
consolidated financial statements.
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 (unaudited)...............F-1
Condensed Consolidated Statements of Operations for the three month periods
ended March 31, 2002 and 2003 (unaudited) ............................................................F-2
Condensed Consolidated Statements of Cash Flows for the three month periods
ended March 31, 2002 and 2003 (unaudited).............................................................F-3
Notes to Condensed Consolidated Financial Statements (unaudited)...........................................F-5
'
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................................2
Signatures...........................................................................................................3
Exhibits Filed with this Report......................................................................................4
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SSP SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, March 31, 2003
2002 (Unaudited)
------------- --------------
ASSETS (note 5)
Current assets:
Cash and cash equivalents ............................................................. $ 553 $ 289
Investment in trading securities ...................................................... 76 60
Accounts receivable (net of allowance for doubtful accounts of
$187 as of December 31, 2002 and March 31, 2003) .................................... 1,584 2,119
Inventories ........................................................................... 238 285
Prepaid expenses ...................................................................... 315 151
Other current assets .................................................................. 173 165
------------- -------------
Total current assets ...................................................... 2,939 3,069
Property and equipment, net ........................................................... 90 73
Other assets .......................................................................... 600 550
Equity investment in affiliate ........................................................ 452 283
Goodwill .............................................................................. 25,930 25,930
------------- -------------
$ 30,011 $ 29,905
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 5) ........................................ $ 2,826 $ 3,935
Accounts payable ...................................................................... 4,413 4,405
Accrued liabilities ................................................................... 1,300 1,514
Deferred revenue ...................................................................... 349 116
------------- -------------
Total current liabilities .......................................................... 8,888 9,970
Commitments and contingencies (notes 1,4,5,6,and 7)
Subsequent events (note 10)
Shareholders' equity:
Preferred stock, $0.01 par value; Authorized 5,000,000 shares; no
shares issued or outstanding .......................................................... -- --
Common stock, $0.01 par value; Authorized 100,000,000 shares; issued or issuable
24,821,235 and 25,067,576 shares at December 31, 2002 and
March 31,2003, respectively .......................................................... 248 251
Additional paid-in capital ............................................................ 129,298 129,569
Note receivable from shareholder ...................................................... -- --
Deferred compensation ................................................................. (324) (167)
Accumulated deficit ................................................................... (108,099) (109,718)
------------- -------------
Total shareholders' equity ...................................................... 21,123 19,935
------------- -------------
$ 30,011 $ 29,905
============= =============
See accompanying notes to condensed consolidated financial statements
F-1
SSP SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
2002 2003
------------ ------------
Revenues:
Product ....................................................... $ 1,071 $ 1,030
Service ....................................................... 537 1,061
License ....................................................... 119 1,209
------------ ------------
Total revenues ............................................. 1,727 3,300
------------ ------------
Cost of Sales:
Product ....................................................... 503 297
Service ....................................................... 229 336
License ....................................................... 53 429
------------ ------------
Total cost of sales ........................................ 785 1,062
------------ ------------
Gross margin ..................................................... 942 2,238
Operating Expenses:
Selling, general and administrative ........................... 2,065 1,547
Research and development ...................................... 1,639 1,142
Research and development - Wave Systems Corp. ................. 833 --
Amortization of goodwill and other intangibles ................ 23 --
------------ ------------
Total operating expenses .................................. 4,560 2,689
------------ ------------
Operating (loss) ................................................. (3,618) (451)
------------ ------------
Non-operating Expenses (Income):
Unrealized loss on trading securities ......................... 1 15
Interest expense, net ......................................... 125 277
Non-cash interest and financing expense ....................... -- 500
Loss from equity investee ..................................... -- 269
Other (income) expense, net ................................... 14 --
------------ ------------
Total non-operating expenses (income) ...................... 140 1,061
------------ ------------
Operating loss before income taxes ............................ (3,758) (1,512)
Provision for income taxes ....................................... 3 --
------------ ------------
Loss from continuing operation ................................... (3,761) (1,512)
Loss from discontinued operations ................................ (266) (9)
Loss on disposal of discontinued operations (less no applicable taxes) -- (97)
Net Loss ......................................................... $ (4,027) $ (1,618)
============ ============
Loss per share of common stock, basic and diluted ................ $ (.19) $ (.06)
============ ============
Loss per share from discontinued operations, basic and diluted ... (.01) --
============ ============
Loss per share from continuing operations, basic and diluted ..... (.18) (.06)
============ ============
Shares used in per share computations--basic and diluted ......... 20,651 25,056
============ ============
See accompanying notes to condensed consolidated financial statements
F-2
SSP SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
2002 2003
------------ ------------
Cash flows from operating activities:
Net loss ............................................................... $ (4,027) $ (1,618)
Adjustments to reconcile net loss to net cash used in operating activities:
Operating activities:
Non-cash interest ................................................ -- 500
Loss from equity investee ........................................ -- 269
Common stock issued for rent expense ............................. -- 27
Common stock issued for interest expense ......................... -- 146
Provision for losses on receivables .............................. 12 --
Depreciation and amortization .................................... 108 20
Deferred compensation ............................................ 104 35
Unrealized loss on trading securities ............................ 1 15
Changes in assets and liabilities:
Accounts receivable .............................................. 2,907 (535)
Inventories ...................................................... 66 (47)
Prepaid expenses ................................................. 201 164
Other current assets ............................................. (55) 8
Other assets ..................................................... 17 --
Accounts payable ................................................. (1,715) (7)
Accrued liabilities .............................................. 410 214
Deferred revenue ................................................. (52) (233)
------------ ------------
Net cash (used in) continuing operating activities ............... (2,023) (1,042)
Net cash provided by discontinued operations ............ 238 --
Net cash (used in) operating activities ................. (1,785) (1,042)
------------ ------------
Cash flows used in investing activities:
Investment in equity investee .................................... -- (100)
Purchases of property and equipment .............................. (2) (3)
Proceeds from sale of trading securities ......................... 917 --
------------ ------------
Net cash provided by (used in) investing activities ..... 915 (103)
------------ ------------
Cash flows from financing activities:
Principal repayment .............................................. -- (42)
Stock options exercised .......................................... 60 --
Borrowings on revolving note payable ............................. 1,103 880
Repayment or insurance financing ................................. (173) --
Principal payments (increases) on revolving line of credit ....... (2,262) 43
Principal payments on note payable to related party .............. (392) --
------------ ------------
Net cash (used in) provided by in financing activities .. (1,664) 881
------------ ------------
Net (decrease) in cash ........................................... (2,534) (264)
Cash and cash equivalents and beginning of period ......................... 3,257 553
------------ ------------
Cash and cash equivalents at end of period ................................ $ 723 $ 289
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ................................................ $ 92 $ 25
Income taxes ............................................ 3 $ --
See accompanying notes to condensed consolidated financial statements
F-3
SSP SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
2002 2003
--------- ---------
Supplemental disclosure of non-cash financing activities information:
Deferred Compensation ............................................... $ 303 $ 35
Payment of rent in common stock ..................................... -- 27
Warrants issued to note holders ..................................... -- 222
Payment of interest in common stock ................................. -- 146
See accompanying notes to condensed consolidated financial statements.
F-4
SSP SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) GENERAL INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the management of SSP Solutions, Inc. (the
"Company"), the accompanying unaudited condensed consolidated financial
statements contain all adjustments (which are normal recurring accruals)
necessary to present fairly the financial position as of March 31, 2003; the
results of operations for the three months ended March 31, 2002 and 2003; and
the statements of cash flows for the three months ended March 31, 2002 and 2003.
Interim results for the three months ended March 31, 2003, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. The interim financial statements should be read in conjunction with the
Company's consolidated financial statements for the year ended December 31,
2002, included in the Company's Form 10-K/A, filed in April 2003.
These condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. The Company has incurred significant operating losses, has used
cash in operating activities, has an accumulated deficit, and deficit working
capital. The Company currently anticipates that existing resources will not be
sufficient to satisfy contemplated working capital requirements for the next
twelve months.
DETAILS OF THE DISPOSAL
Through December 31, 2002, the Company had operated in two business
segments: information security solutions and network solutions businesses.
During the three month period ended March 31, 2003 the Company discontinued its
network solution segment, which was conducted through Pulsar, as the Company
determined that this segment would not return to operating profits in a
reasonable time period. The total estimated cost to exit the segment at March
31, 2003 is $106 of which $9 has been incurred by March 31, 2003 and the
estimated remaining exit cost of $97 was accrued at March 31, 2003. The
network solution segment assets did not require an impairment write down as
there was no remaining book value of assets in existence at the date the
decision to exit the business was made. As a result, there is no gain or loss on
the discontinued operation relating to the network solution facility segment. In
addition, as a result of the discontinuance of the network solution segment, the
Company now only operates in one reporting segment.
REVENUE RECOGNITION
Revenue from some data security hardware products contains embedded
software. However, the embedded software is incidental to the hardware product
sale. Data security license revenue is recognized upon delivery if an executed
license exists, a delivery as defined under the license has occurred, the price
is fixed and determinable, and collection is probable. Prior to 2002,
post-contract customer support revenue was not separately identified and priced.
Therefore, sufficient vendor specific objective evidence could not be
established for the value or cost of such services. Furthermore, prior to 2002,
revenue for the entire license, including bundled post-contract customer support
was recognized ratably over the life of the license. Commencing in 2002,
software delivered under a license requires a separate annual maintenance
contract that governs the conditions of post-contract customer support.
Post-contract customer support services can be purchased under a separate
contract on the same terms and at the same pricing, whether purchased at the
time of sale or at a later date. Revenue from these separate maintenance support
contracts is recognized ratably over the maintenance period.
Revenue from cost-plus-award-fee support and development contracts is
recognized on the basis of hours incurred plus other reimbursable contract costs
incurred during the period. Prior to 2002, any award fee earned under a
cost-plus-award-fee contract was not recognized until the award fee notice was
received. Beginning in 2002, for a cost-plus-award-fee support contract, the
Company exercised the contract clause to bill and collect one-half of the award
F-5
fee ratably over the term of the contract. Revenue is recognized concurrently
with the billings based on the performance of the contract requirements and
reasonable assurance of collection. Based upon historical results, the Company
has received final awards in excess of one-half of the full award fees. A
post-contract period performance review conducted by the customer determines the
remaining amount of the award fee to be received, which amount is then
recognized as earned revenue together with interest paid on the unpaid balance.
Award fees under development contracts are recognized when confirmed by the
customer.
Revenue from network deployment products is recognized upon transfer of
title, generally upon verification of delivery to the customer, which represents
evidence delivery has occurred, under a sales order represented by a government
purchase order that contains a fixed purchase price. When the Company fulfills
the elements of the government purchase order, collection of the revenue
recorded is reasonably assured.
Service and license revenues from the Company's high assurance token
fixed-price contract were recognized in accordance with SOP 81-1, "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts." The
Company recognized this revenue on a percentage of completion method, based on
total cost incurred to total estimated cost (cost-to-cost percentage of
completion).
The Company's revenue recognition policies are in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement No.150, entitled "Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity." Statement No. 150 established
the accounting guidance related to how an "issuer" classifies/measures certain
financial instruments where those instruments have characteristics of both
liabilities and equity. The guidance in Statement No.150 requires
reclassification of certain financial instruments from the equity section of the
balance sheet to the liability section of the balance sheet. Specifically
Statement No.150 requires three classes of freestanding financial instruments to
be classified as liabilities: mandatorily - redeemable financial instruments,
obligations to repurchase equity shares by transferring assets, and certain
obligations to insure a variable number of shares. Statement No. 150 is
effective for financial instruments entered into after May 31, 2003 and
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003 (July 1, 2003 for SSP) and is to be implemented by reporting a
cumulative effect of a change in accounting principles for financial instruments
created before the May 15, 2003 issuance of Statement No.150. The Company
expects no material changes to its financial statements upon adoption of
Statement No.150.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had deficit working capital of $6,901,
and the Company had incurred a loss from operations for the three months then
ended. The Company expects to continue to incur substantial additional losses in
2003. Given the March 31, 2003 cash balance and the projected operating cash
requirements, the Company anticipates that existing capital resources will not
be adequate to satisfy cash flow requirements through December 31, 2003. The
Company will require additional funding. The Company's cash flow estimates are
based upon achieving certain levels of sales, reductions in operating expenses
and liquidity available under its accounts receivable financing, new debt and/or
equity financing. Should sales be less than forecast, expenses be higher than
forecast or the liquidity not be available through additional financings of debt
and/or equity, the Company will not have adequate resources to fund its
operations. During 2002, the Company incurred defaults, other than for the
payment of principal and interest, under both the Company's accounts receivable
financing and the Company's long-term convertible notes. The Company was not
able to obtain waivers for defaults on the long-term convertible notes and has
therefore classified such notes as short-term on the balance sheet as of
December 31, 2002 and March 31, 2003. The Company does not expect future fixed
obligations to be paid from operations and the Company intends to satisfy fixed
obligations from additional financings, use of the accounts receivable
financing, extending vendor payments and issuing stock as payment on
obligations.
The Company's current financial condition is the result of several
factors, including the fact that operating results were below expectations.
The Company currently has a need for a substantial amount of capital to
meet its liquidity requirements. The amount of capital that the Company will
need in the future will depend on many factors including, but not limited, to:
F-6
o the ability to extend terms received from vendors
o the market acceptance of products and services
o the levels of promotion and advertising that will be required to
launch new products and services and attain a competitive position
in the market place
o research and development plans
o levels of inventory and accounts receivable
o technological advances
o competitors' responses to our products and services
o relationships with partners, suppliers and customers
o projected capital expenditures
o reduction in the valuation of marketable investment securities
o downturn in economy
o defaults on financing which will impact the availability of
borrowings
In addition to the Company's current deficit working capital situation,
current operating plans show a shortfall of cash during 2003. The Company
intends to mitigate its position through one or more of the following:
o Additional equity capital -- The Company will seek additional
equity capital, if available. Equity capital will most likely be
issued at a discount to market, and require the issuance of
warrants causing a dilution to current shareholders. In addition,
providers of new equity capital may require additional concessions
in order for them to provide needed capital to the Company.
o Additional convertible debt -- Depending upon the market
conditions, the Company may issue an additional debt instrument.
The types of instruments available in the market would likely
contain a provision for the issuance of warrants and may also be
convertible into equity.
o Off balance sheet financing -- The Company's operations are not
relatively capital intensive. However, should the Company need to
add equipment or decide to expand the facilities, the Company may
use an operating lease transaction to acquire the use of capital
assets. An operating lease would not appear on the Company's
balance sheet and would be charged as an expense as payments
accrue. The Company plans to use third party financing for a
subsidiary whereby the subsidiary would become less than
wholly-owned.
o Receivables financing - Effective in October 2002, the Company
executed a new factoring agreement with Bay View Funding ("BVF")
for the financing of the Company's accounts receivable. The Company
also terminated its remaining agreement with Wells Fargo Business
Credit ("WFBC"). The Company plans to continue to generate cash by
financing receivables in conjunction with its BVF agreement.
o Sale of investments - The Company will sell its remaining
investments to generate cash. The market value of trading
securities was approximately $60 at March 31, 2003.
o Negotiate with vendors - The Company has successfully negotiated
extended payment terms with a number of vendors. The Company will
continue to negotiate term-out agreements with vendors to extend
the payment terms of existing accounts payable.
F-7
o Advance payments - Under current or future contracts the Company
may obtain cash deposits toward work to be performed or products to
be delivered. In addition, the Company may offer early payment
discounts to customers whose receivables are not financed under the
BVF agreements.
o Deferral of cash payments - The Company may defer cash payments
through suspension of development projects.
o Issuance of stock as payment for existing and future obligations -
The Company may pay some of its accrued liabilities or accounts
payable through the issuance of common stock. During the three
months ended March 31, 2003, the Company issued 34,600 shares of
its common stock for payments relating to its facility lease.
o Issuance of stock to pay interest - The Company may issue common
stock to pay interest on long-term debt. During the three months
ended March 31, 2003, the Company issued 211,700 shares of its
common stock in the payment of interest expense.
o Reductions in work force - The Company has reduced its workforce
and decreased the cash compensation paid to the remaining
workforce. The Company may be forced to make further reductions in
the future if sales plans are not achieved.
o If the Company does not receive adequate financing, the Company
could be forced to merge with another company or cease operations.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to successfully launch its new products, grow
revenue, attain operating efficiencies, sustain a profitable level of operations
and attract new sources of capital.
While the Company has a history of selling products in government
markets, new products that are just entering production after years of
development have no sales history. Additionally, the Company is entering
commercial markets with products and is still developing acceptance of Company
product offerings. Considerable uncertainty currently exists with respect to the
adequacy of current funds to support the Company's activities beyond March 31,
2003. This uncertainty will continue until a positive cash flow from operations
is achieved. Additionally, the Company is uncertain as to the availability of
financing from other sources to fund any cash deficiencies.
In order to reduce this uncertainty, the Company continues to evaluate
additional financing options and may therefore elect to raise capital, from time
to time, through equity or debt financings in order to capitalize on business
opportunities and market conditions and to insure the continued marketing of
current product offerings together with development of new technology, products
and services. There can be no assurance that the Company can raise additional
financing in the future.
Based upon forecasted sales and expense levels, the Company currently
anticipates that existing cash, cash equivalents, investments, term-out
arrangements with vendors and the current availability under our BVF factoring
agreement will not be sufficient to satisfy Company contemplated cash
requirements for the next twelve months. However, the Company's forecast is
based upon certain assumptions, which may differ from actual future outcomes.
The Company has incurred defaults under its financing agreements in the past.
The BVF agreement states among other things that a default occurs if the Company
is generally not paying debts as they become due or if the Company is left with
unreasonably small capital. The Company has notified BVF of its failure to make
certain payments on a timely basis and have requested a waiver of such default.
The Company therefore may not be able to draw funds in the future, which would
affect the Company's ability to fund its operations. Additionally, without a
substantial increase in sales or a reduction in expenses, the Company will
continue to incur operating losses.
STOCK-BASED COMPENSATION FOR EMPLOYEES AND NON-EMPLOYEES
The Company accounts for its employee stock option plans using the
intrinsic value method. When stock options are granted to employees with
exercise prices less than the fair value of the underlying common stock at the
date of grant, the difference is recognized as deferred compensation expense,
which is amortized over the vesting period of the options.
F-8
The Company accounts for stock options issued to non-employees using
the fair value method. The associated cost is recorded in the same manner as if
cash were paid.
At March 31, 2003, the Company had three stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. The following table illustrates the
effect on net loss and earnings per share if the Company had applied the fair
value recognition provisions of Statement No. 123:
THREE MONTHS ENDED
MARCH 31,
2002 2003
-------------- ------------
Net loss, as reported ....................................... $ 4,027 $ 1,618
Add: Stock compensation cost reported in accordance
with APB No. 25 ........................................ -- 35
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effect .............................. 373 379
-------------- ------------
Pro forma net loss .......................................... $ 4,400 $ 1,962
============== ============
Earnings per share
Net loss per share as reported -- basic and diluted .... $ (.19) $ (.06)
============== ============
Pro forma net loss per share -- basic and diluted ...... $ (.21) $ (.08)
============== ============
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions in
2002 and 2003: risk-free interest rate of 3.92%; dividend yield of 0.00%; and
volatility of 129% for both periods. The Black-Scholes model, as well as other
currently accepted option valuation models, was developed to estimate the fair
value of freely-tradable, fully-transferable options without vesting
restrictions, which significantly differ from the Company's stock option plans.
These models also require highly subjective assumptions, including future stock
price volatility and expected time until exercise, which greatly affect the
calculated fair value on the grant date.
A summary of the status of the Company's warrants as of March 31, 2003
and changes during the three months ending March 31, 2003 is presented below
(shares in thousands):
MARCH 31,
2003
----
.. WEIGHTED-
NUMBER OF AVERAGE
UNDERLYING EXERCISE
WARRANTS SHARES PRICE
-------- ------ -----
Outstanding at
beginning of year 4,081 $2.82
Granted 505 $1.02
Cancelled -- $ --
Exercised -- $ --
-------
Outstanding at end of 4,586 $2.63
year =======
Warrants exercisable 4,586
at year-end
Weighted-average fair $0.60
value of warrants
granted during the
year
F-9
The following table summarizes information about warrants outstanding
at March 31, 2003 (shares in thousands):
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------- --------------------
WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------ ------- ---------------- -------------- ------- --------------
$0.60 - $16.39 4,216 2.4 $ 1.26 4,216 $ 1.26
$16.40 - $18.15 370 1.2 $ 18.15 370 $18.15
------ --- -------- ------ -------
4,586 2.3 $ 2.63 4,586 $ 2.63
OPTIONS
A summary of the status of the Company's stock option plans as of March
31, 2003 and changes during the three months ending March 31, 2003 is presented
below (shares in thousands):
MARCH 31,
2003
----
.. WEIGHTED-
NUMBER OF AVERAGE
UNDERLYING EXERCISE
OPTIONS SHARES PRICE
------- ------ -----
Outstanding at 2,039 $2.40
beginning of year
Granted 515 $0.60
Cancelled (117) $2.75
Exercised -- --
Outstanding at end of 2,437 $2.00
year =======
Options exercisable at 1,110 $2.12
year-end
Weighted-average fair $0.93
value of options
granted during the
year
The following table summarizes information about stock options
outstanding at March 31, 2003 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES 3/31/03 CONTRACTUAL LIFE EXERCISE PRICE 3/31/03 EXERCISE PRICE
------ ------- ---------------- -------------- ------- --------------
$0.60 - $1.51 1,418 9.8 $1.02 537 $1.18
$1.52 - $2.43 446 7.9 $2.06 353 $2.09
$2.43 - $3.34 337 8.1 $3.02 101 $2.95
$3.35 - $4.26 71 7.9 $3.67 40 $3.70
$4.27 - $6.09 3 7.9 $4.81 1 $4.81
$6.10 - $7.00 115 9.4 $6.82 49 $6.80
$7.01 - $8.83 29 6.6 $8.75 18 $8.75
$8.84 - $9.75 18 6.7 $9.75 11 $9.75
------- --- ------ ------- ------
2,437 9.1 $2.00 1,110 $2.13
======= =======
The weighted average remaining contractual life of stock options outstanding at
March 31, 2003 was 9.1 years.
F-10
BIZ ACQUISITION
In accordance with Statement No. 142, the Company had up until June 30,
2002 to complete the initial test for impairment as of January 1, 2002, the
adoption date of Statement No. 142. In accordance with the transition provisions
of Statement No. 142, the Company conducted the first step of the impairment
tests. The Company assessed the fair value of its two reporting units by
considering their projected cash flows, using risk-adjusted discount rates.
Given consideration of relevant factors, the Company concluded that, as of
December 31, 2001, an impairment write-down of $36,299 was required related to
the BIZ acquisition. Subsequently, the Company reviewed the assumptions used in
the original analysis as of March 31, 2002, June 30, 2002, September 30, 2002
concluded that such analyses continued to be adequate and that no additional
write-down was required. In accordance with Statement No. 142, the Company
stopped amortizing goodwill in 2002. Accordingly, the Company does not
anticipate there to be any amortization expense for the next five years
related to intangible assets. The following table provides a reconciliation
of the reported net loss adjusted for amortization charges for each respective
three month period:
THREE MONTHS ENDED
MARCH 31
-------------------------------
2002 2003
------------ --------------
Reported net (loss) .............. $ (4,027) $ (1,618)
Add back goodwill amortization: (23) --
------------ --------------
Adjusted net loss ............. $ (4,004) $ (1,618)
============ ==============
Basic earnings per share:
Reported net (loss) ............. $ (.19) $ (.06)
Add back goodwill amortization: -- --
------------ --------------
Adjusted net loss ............. $ (.20) $ (.06)
============ ==============
The Company performed an assessment of the fair value of the goodwill
of its information security products and services reporting unit as of December
31, 2002 using a multi-period discounted cash flow method, a variation of the
income forecast approach. The process is used to determine the fair value of an
asset by estimating its future cash flows and then discounting the cash flows to
present day utilizing a discount rate that reflects the time value of money and
the risk inherent in the asset. The present value of the cash flows was
determined using a discount rate of 30%, which was found to be the weighted
average cost of capital for the Company. The results of the analysis indicated
that there was no impairment as of the valuation date of December 31, 2002.
The Company is required to perform reviews for impairment at least
annually that may result in future write-downs. Tests for impairment between
annual tests may be required if events occur or circumstances change that would
more likely than not reduce the fair value of the net carrying amount.
As the markets for the Company's products are characterized by rapidly
changing technology, evolving industry standards, and the frequent introduction
of new products and enhancements, it is reasonably possible in the near-term
that the estimates of the anticipated future gross revenues, the remaining
estimated economic life, or both will be reduced. Reasonably possible is defined
as more than remote but less than likely. As a result, the remaining goodwill of
$25,930 at December 31, 2002, may be reduced within the next year.
(2) INVESTMENTS
The Company has an investment that is classified as trading securities.
The securities are comprised of Class A Common Stock of Wave Systems Corp., par
value $0.01, received in the BIZ acquisition. As of March 31, 2003, the Company
had 57 shares with an aggregate value of $60. For the three months ended March
31, 2002 and 2003, the Company recorded realized loss on trading securities of
$1 and $0, respectively.
(3) INVENTORIES
A summary of inventories follows:
F-11
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
Raw materials .......... $ 23 $ 57
Work-in-process ........ 82 43
Finished goods ......... 133 185
------------ ------------
$ 238 $ 285
============ ============
(4) EQUITY INVESTMENT IN AFFILIATE
In January 2002, the Company formed a wholly-owned subsidiary, now
known as SSP Gaming, LLC, a Nevada limited liability company ("SSP Gaming"). The
entity was formed to conduct all business and any required financing activities
relative to the gaming industry. In June 2002, SSP Gaming and the Venetian
Casino Resort, LLC, a Nevada limited liability company based in Las Vegas,
Nevada, ("Venetian"), executed an operating agreement to form Venetian
Interactive, LLC, a Nevada limited liability company ("VI"). The purpose of VI
is to provide management services, consulting services, financial services,
intellectual property licensing services, and equipment to the online gaming
industry in venues where such activity complies with all regulatory
requirements, and to develop and operate Venetian branded casino sites.
To begin the process of developing online casino sites, engage vendors
to construct the sites and obtain the required licenses in the regulated venues
where such operations are authorized, VI began hiring employees in July 2002,
including one employee from the Company who was subsequently terminated by VI in
January 2003. The VI staff has forecast development and operational costs, which
are updated as new information becomes available. A VI related entity, V.I.
Ltd., was awarded both an Interactive Gaming License and an Electronic Betting
Center License by the Alderney Gambling Control Commission. The licenses permit
V.I. Ltd. to conduct Internet gaming activities under the name "Venetian
Interactive." The Venetian Casino site is currently under development and is
anticipated to go live before the end of the third quarter of 2003.
The current VI development budget estimates costs of $4,000 to bring
the Venetian Casino to live status, and an additional $2,200 to support startup
operations. Since beginning development in July 2002, VI has expensed all
operating costs and capitalized third party software development costs incurred
under a fixed price contract. As of March 31, 2003 development costs capitalized
totaled $955. The VI operating agreement calls for SSP Gaming to fund two-thirds
of the development costs and for Venetian to fund the remaining one-third of the
costs. As of March 31, 2003, SSP had invested $800 in SSP Gaming, with those
funds being invested in VI. In the three months ended March 31, 2003, SSP Gaming
recorded $269 as loss from equity investee, which represents its pro rata
portion of the VI net loss. This amount is included in non-operating expenses in
the condensed consolidated statement of operations for the three months ended
March 31, 2003, and as a reduction of the equity investment in affiliate.
The following represents summarized financial information for the VI:
BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
-----------
Current Assets $ -- Current Liabilities $ --
Site Development 955 Members' Equity 955
-------- --------
Total Members' Equity
Total Assets $ 955 & Liabilities $ 955
======== ========
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
-----------
Selling, general & admin $404
------
Net Loss ($404)
======
F-12
SSP Gaming's ownership interest decreases over time based upon the
distribution of cashflow from VI. The operating agreement provides for SSP
Gaming to receive two-thirds of the distributable cashflow until SSP Gaming
receives the return of the full amount of capital invested in VI. After
receiving the return of its invested capital, SSP Gaming is to receive the
following portions of distributable cashflow: 50% of the first $2,000, 40% of
the next $2,000 and 20% thereafter. Based upon forecasted operations, the
ownership and distribution percentage held by SSP Gaming should be reduced to
the 20% level within the first two full years of operation. Venetian and SSP
Gaming each are to appoint three managers to oversee general management of VI,
with an additional Manager appointed by mutual consent of the parties. Members
owning at least 75% of the percentage interests of VI must approve defined major
decisions. Based upon this forecasted scenario and the fact that Venetian will
have voting control upon achieving forecasted operations, the Company deems
control to be temporary, and therefore, the Company is accounting for SSP
Gaming's interest in VI using the equity method, and is not consolidating VI
operating results into the records of SSP Gaming. The operating agreement
commits SSP Gaming to fund up to $2,000. As of March 31, 2003, SSP Gaming had
funded $800.
SSP Gaming is currently in negotiations with financial sources to
provide interim and long-term funding to satisfy the VI investment requirements.
If the negotiations are successful, SSP Gaming would become a less than
wholly-owned subsidiary. If the negotiations are not successful, SSP Gaming's
percentage interest in the VI may be reduced and amounts invested by SSP in SSP
Gaming will be at risk.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No.51." Interpretation 46
addresses consolidation by business enterprises of variable interest entities
which have one or both of the following characteristics: (1) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional support from other parties, which is provided
through other interests that will absorb some or all of the expected losses of
the entity; (2) the equity investors lack one or more of the following essential
characteristics of a controlling financial interest: (a) the direct or indirect
ability to make decisions about the entity's activities through voting rights or
similar rights, (b) the obligation to absorb the expected losses of the entity
if they occur, which makes it possible for the entity to finance its activities,
or (c) the right to receive the expected residual returns of the entity, if they
occur, which is the compensation for the risk of absorbing expected losses.
Interpretation 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains and interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The Company is currently assessing the impact of Interpretation 46. The
Company has, however, identified VI as an entity that may be required to be
consolidated beginning in the third quarter of 2003. As of March 31, 2003,
relative to VI the Company recorded a net investment in affiliate carried with
other assets on its condensed consolidated balance sheet of approximately $283.
The Company currently adjusts the carrying value of the investment in affiliate
for any losses incurred by the entity through earnings. While this entity may be
considered a variable interest entity, the Company has not yet determined if it
will need to be consolidated.
F-13
(5) LONG-TERM DEBT
A summary of long-term debt follows:
DECEMBER 31, MARCH 31,
2002 2003
----------- -----------
Secured convertible promissory notes with an interest rate of 10% per annum,
interest payable quarterly, due December 31, 2005 ....................... $ 5,796 $ 5,796
Secured convertible promissory notes with an interest rate of 30% per annum,
interest payable quarterly, due November 14, 2003 ....................... 500 500
Secured promissory note with an interest rate of 15% per annum, interest
payable quarterly, due on or before December 31, 2005 ................... -- 500
Secured promissory notes at various interest rates from 15% to 60% per
annum, interest payable quarterly, due in July 2003 ..................... -- 380
Note payable related to restructuring of facilities leases due in
installments on or before September 19, 2003, without interest .......... 425 425
Promissory note due July 18, 2003 with interest at 6.75% per annum, interest
payable at maturity ..................................................... 429 429
Promissory note due July 18, 2003 without interest ......................... 27 27
Note payable secured by interest in SSP Gaming, payable in monthly
installments of $15,000, including interest at 6% per annum ............. 196 153
Bay View Funding accounts receivable financing, discount rate of 1.25% of
the receivables factored, interest payable upon payment of receivable ... 259 303
----------- -----------
7,632 8,513
----------- -----------
Less unamortized value of warrants related to debt issued .................. 4,806 4,578
----------- -----------
Long-term debt, net of debt discounts of $4,806 at December 31, 2002 and
$4,578 at March 31, 2003 ................................................ 2,826 3,935
Less current installments .................................................. 2,826 3,935
----------- -----------
Long-term debt, net of debt discounts of $4,806 at December 31, 2002 and
$4,578 at March 31, 2003 ................................................ $ -- $ --
============ ============
The Company is in default on notes relative to the timely payment of
obligations as they come due. The noteholders have not granted waivers of the
default. This means the noteholders have the right to declare the Company in
default and call all of their debt due and immediately payable. With the
potential of the notes being called for payment, the Company classified the
related debt as short-term debt in the condensed consolidated balance sheet as
of December 31, 2002 and March 31, 2003.
SECURED SUBORDINATED CONVERTIBLE NOTES
On April 16, 2002, the Company raised $5,000 in cash through the
issuance of $4,000 in 10% secured convertible promissory notes ("10% Convertible
Notes"), $653 in unsecured non-convertible promissory notes ("Non-convertible
Notes", $153 held by co-chairman Kris Shah and $500 held by co-chairman Marvin
Winkler) and the pre-payment of a $500 note receivable due to the Company from
Kris Shah, less a discount of $153 . In connection with the issuance of the 10%
Convertible Notes, the Company incurred approximately $626 of issuance costs,
which primarily consisted of amortization of warrant costs, investment banking
fees and legal and other professional fees. These notes mature December 31, 2005
and bear interest at a rate of 10% per annum to be paid quarterly in cash, or at
the Company's discretion, in common shares based upon the trailing 30-day
average prior to the interest due date. The $4,000 in 10% Convertible Notes are
convertible, in whole or in part, at the option of the holder into an aggregate
of 4,000,000 shares of the Company's common stock at any time prior to maturity,
at a conversion price of $1.00 per share, subject to adjustment under certain
conditions, and have detachable warrants exercisable for three years to purchase
up to an additional 2,400,000 shares at $1.30 per share, subject to adjustment
under certain conditions. In conjunction with the closing of the sale of the 10%
Convertible Notes, $1,750 of principal and $46 of accrued interest of the
Subordinated Notes were exchanged for the 10% Convertible Notes and detachable
warrants to purchase 1,077,667 shares at $1.30 per share.
F-14
The 10% Convertible Notes automatically convert prior to maturity if
the Company's common shares trade at or above $3.00 per share with average
volume of 100,000 shares per day for 20 consecutive trading days. The Company is
subject to restrictive covenants related to the Convertible Notes and
Non-convertible Notes that prevent the Company from pledging intellectual
property as collateral. In June 2002, Kris Shah and Marvin Winkler exchanged
their Non-convertible Notes, together with accrued interest, for 119,000 and
391,000 shares, respectively, of the Company's common stock based upon an
above-market exchange price of $1.30 per common share.
The 10% Convertible Notes contain a beneficial conversion feature. When
a convertible security contains a conversion price that is less than the quoted
trading price of a company's common stock at the date of commitment, then the
difference between the conversion price and the common stock price is called a
beneficial conversion feature. Emerging Issues Task Force ("EITF") Issue No.
00-27, which amends EITF Issue No. 98-5, requires both recordation of a discount
to recognize the intrinsic value of the conversion feature and amortization of
the amount recorded over the term of the security.
Of the aggregate $5,796 in 10% Convertible Notes issued, the Company
allocated approximately $2,644 to the value of the warrants and the remaining
$3,152 to the beneficial conversion feature of the debt instruments, which were
ascribed to these components on a pro rata basis of fair values calculated for
the warrants using a Black Scholes valuation model and the intrinsic value of
the beneficial conversion feature. These amounts have been recorded as discounts
from the face value of the debt, with an equal increase to additional paid-in
capital. Based on EITF No. 00-27, the governing accounting pronouncement, the
discounts are being amortized over the period from the date of issuance to the
maturity date of the notes. Amortization of the discounts totaled $1,107 for the
year ended December 31, 2002.
In connection with issuances of the 10% Convertible Notes and warrants,
the Company incurred approximately $741 of debt issuance costs comprised of
legal and professional fees, in addition to $182 in value calculated for the
110,000 warrants issued to the underwriter in the transaction. These costs,
which are included in other assets, are being amortized over the term of the 10%
Convertible Notes. Amortization of these costs totaled $142 for the year ended
December 31, 2002.
As of December 31, 2002, the Company was in violation of certain
provisions of the 10% Convertible Notes. These violations are related to the
Company's failure to pay debts and obligations as they become due. During the
first quarter of 2003, the Company requested waivers for each of the
aforementioned violations for past and for anticipated future events of default
through June 30, 2003, but has not been granted such waivers. While waivers have
been granted in the past, the holders of the 10% Convertible Notes have not
granted such waivers and may declare the principal and unpaid interest
immediately due and payable.
On April 16, 2002, with the exception of Mr. Winkler and Mr. Shah, the
holders of the Subordinated Notes converted their Subordinated Notes into 10%
Subordinated Notes . In June 2002, Mr. Winkler and Mr. Shah exchanged their
Non-convertible Notes and their Subordinated Notes, together with accrued but
unpaid interest, for shares of the Company's common stock at an above market per
shares price of $1.30.
SECURED PROMISSORY NOTES
On January 22, 2003, the Company issued to Richard P. Kiphart a $500
promissory note that bears interest at a rate of 15% per year, with a minimum
interest charge of $50. Accrued interest is payable quarterly in arrears
beginning March 31, 2003. Principal and accrued but unpaid interest are due upon
the earlier of December 31, 2005 and the Company's closing of a $5,000 or more
in equity or debt financing. Mr. Kiphart has the right to exchange the principal
and outstanding interest on the note for securities that the Company issues in
such an equity or debt financing. If the Company does not repay the note prior
to June 30, 2003, the Company will be required to issue to Mr. Kiphart a
three-year warrant to purchase up to 125,000 shares of common stock at an
exercise price of $1.30 per share and to register for resale the shares of
common stock underlying the warrant. The note is secured by all of the
unencumbered assets of SSP and its subsidiaries, including without limitation,
intellectual property assets and any and all receivables due to the Company from
SSP Gaming.
SECURED PROMISSORY NOTES
On March 18, 2003 and March 19, 2003, the Company issued to each of
Crestview Capital Fund II, L.P. and Richard P. Kiphart $100 promissory notes
that are secured by all of the Company's assets, including SSP Gaming and any
F-15
rights belonging to SSP Gaming. In addition, on March 28, 2003, Marvin Winkler
agreed to pledge 350,000 shares of common stock held by JAW Financial, L.P., an
entity controlled by Mr. Winkler, as security for the notes the Company issued
on March 18, March 19 and March 28, 2003. The notes bear interest in an amount
equal to the following percentage of the principal balance: 10%, if the notes
are repaid within 30 days; 12%, if the note are repaid within 60 days; 15%, if
the notes are repaid within 90 days; and 20%, if the notes are repaid at
maturity. Principal and interest under the notes are due upon the sooner of 120
days from the dates of the notes and the Company's raising of at least $3,500 in
equity or debt financing. Each note was accompanied by a five-year warrant to
purchase up to 50,000 shares of common stock at an exercise price of $0.60. The
Company will be required to issue to each holder warrants to purchase up to an
additional 50,000 shares of common stock upon repayment of the notes, depending
upon the date of repayment. The exercise price of the warrants and the number of
shares underlying the warrants are subject to anti-dilution adjustments in
connection with dividends or distributions of assets to holders of our common
stock and subdivisions or combinations of our common stock. The warrants contain
a cashless exercise provision. The shares of common stock underlying the
warrants bear registration rights.
On March 28, 2003, the Company issued to Richard P. Kiphart, Crestview
Capital Fund II, L.P., Kris Shah and Marvin Winkler promissory notes in the
aggregate principal amount of $440, of which $180 was funded prior to March 31,
2003. The notes are secured by all of the Company's assets and the assets of SSP
Gaming. In addition, Mr. Winkler agreed to pledge 350,000 shares of common stock
held of record by JAW Financial, L.P. as security for the notes the Company
issued on March 18, March 19 and March 28, 2003. The notes bear interest at the
rate of 18% per year, with interest payable in cash monthly in arrears. The
Company is required to use the proceeds of the notes only for payment of
operating expenses. Principal and accrued but unpaid interest under the notes
are due upon the sooner of July 26, 2003 and the Company's raising of $3,500 in
equity or debt financing. The notes were accompanied by five-year warrants to
purchase up to an aggregate of 230,000 shares of common stock. The exercise
price of the warrants has not yet been fixed. The exercise price will be equal
to the greater of $0.70 per share or the conversion price of securities the
Company may issue in a proposed financing, not to exceed $1.30 per share. The
exercise price of the warrants and the number of shares underlying the warrants
will be subject to anti-dilution adjustments in connection with dividends or
distributions of assets to holders of the Company's common stock and
subdivisions or combinations of the Company's common stock. The warrants contain
a cashless exercise provision.
NOTE PAYABLE FOR RESTRUCTURING FACILITY LEASE
In restructuring existing facility lease agreements, the Company agreed
to pay $500 in installments without interest. The first payment of $75 was made
as scheduled in December 2002, with additional payments scheduled of $100 due in
March 2003, $150 due in June 2003 and a final payment of $175 due in September
2003. The Company has not made the $100 payment that was due in March 2003.
(Note 10).
NOTE TO REPURCHASE INTEREST IN SSP GAMING
In October 2002, the Company entered into a mutual settlement and
release regarding the default by a party that had contracted to finance the
investment of SSP Gaming, a then wholly-owned subsidiary. The party defaulted
under the financing agreement. To preserve the underlying business
relationships, the Company and the other party executed an agreement whereby the
Company repurchased the party's interest by issuing a note for $250, the amount
invested by the party, and agreed to repay such amount by making an initial $40
payment and additional monthly payments of $15 per month, including interest at
6%, until paid in full. The note is secured by the Company's interest in SSP
Gaming, and includes an acceleration clause whereby the then principal balance
will be paid upon separate SSP Gaming financing of $2,000 or more.
SECURED CONVERTIBLE NOTE
In November 2002, the Company issued three one-year notes totaling
$500, bearing interest at 30% per annum ("Secured Convertible Notes"), which
have detachable warrants exercisable for five years to purchase up to an
additional 500,000 shares (depending upon the date of repayment) at $1.30 per
share subject to adjustment under certain conditions. SSP Gaming used the
proceeds for investment into the joint venture with Venetian. After they have
been outstanding for more than six months, the Secured Convertible Notes may be
converted into the Company's common stock at a conversion price of $1.30 per
share. The Secured Convertible Notes are due upon a Company financing of $3,500
or more, and are secured behind the Secured Subordinated Convertible Notes
described above.
The fair value of the detachable warrants associated with the Secured
Convertible Notes were estimated at $154 using the Black Scholes valuation
model, based on the following assumptions: risk-free interest rate of 4.85%;
F-16
dividend yield of 0.00%; and volatility of 119%. The amounts have been recorded
as discounts from the face value of the debt with an equal increase to
additional paid-in capital. The relative fair value of the warrants have been
allocated as a debt discount and is being amortized over the period from the
date of issuance to the maturity date of the Secured Convertible Notes.
Amortization of the discounts totaled $38 for the year ended December 31, 2002.
PROMISSORY NOTES
In April 2002, the Company issued two promissory notes due in July 2003
as payment for goods sold by Pulsar's network solutions business. The note, with
an original balance of $679, bears interest at 6.75% per annum, with interest
payable at maturity. The note in the amount of $27 does not bear interest.
In March 2003, the Company executed documents to settle the action
brought against the Company by Integral Systems, Inc. As part of the settlement,
the Company entered into a Forbearance Agreement dated March 12, 2003 with
Integral Systems that would allow Integral Systems to enter a judgment against
the Company should the Company default in the $20 per month payments due under
the agreement. The Company also issued to Integral Systems a warrant exercisable
for three years to purchase 150,000 at an exercise price of $1.30 per common
share. Additionally, if the Company does not payoff the agreed to obligation, at
a discount, by June 30, 2003, we agreed to place 400,000 of our common stock in
a third party escrow as additional security for our performance under the
Forbearance Agreement.
ACCOUNTS RECEIVABLE FINANCING
During November 2001, both the Company and its wholly-owned subsidiary,
Pulsar, entered into separate financing agreements with Wells Fargo Business
Credit, Inc. ("WFBC"), which provided for the factoring of accounts receivable.
The agreements contained no limit on the dollar volume of receivable financing,
but provided for WFBC's approval of credit limits for non-government customers.
The agreements contained a discount rate of 1.25% of the gross receivable
factored, which would be increased by .0625% per day for accounts that extended
beyond the 30-day period from the date the account was purchased. At the time of
purchase, terms called for WFBC to advance 85% of the gross receivable, with the
balance remitted after collection of the invoice less the discount and any other
charges. The combined agreements contained minimum quarterly fees and discounts
totaling $63. In July 2002, the Company signed amendments to the financing
agreements, which increased the discount rate charged to 1.95% of the gross
receivable and revised the daily rate to .063% for accounts extending beyond 30
days. The minimum quarterly fees and discounts were also reduced to $15. All
other terms and conditions remained. During the third quarter of 2002, the
Company terminated the WFBC agreement related to Pulsar.
In October 2002, the Company terminated its remaining financing
arrangement with WFBC and entered into a new financing arrangement with Bay View
Funding ("BVF"). The new factoring agreement contains a maximum advance of $750,
and was for an initial term of three months, which at the Company's option, is
renewable for additional three-month periods, which has been renewed by the
Company. The agreement contains a factoring fee, which is based on 1.25% of the
gross face value of the purchased receivable for every thirty day period from
the date of purchase by BVF until the invoice is paid in full. For invoices
outstanding more than the thirty day period, a finance fee will be charged at
the rate of .063% of the gross face value of the purchased receivable for every
one day period beyond the 30th day from the original date of purchase. At the
time of purchase, terms call for BVF to advance 85% of the gross receivable,
with the balance remitted after collection of the invoice less the factoring and
finance fee, if applicable. The agreement contains certain representations,
warranties and covenants and requires a monthly minimum fee, including the
factoring and financing fees, of .25% of the maximum advance of $750, or
approximately $2 per month. The BVF states among other things that a default
occurs if we do not pay debts as they become due or if maintain unreasonably
small capital. We have notified BVF of our failure to make certain payments on a
timely basis and have therefore recently requested a waiver of such default.
Gross receivables transferred to WFBC and WFBC/BVF amounted to $2,105
and $2,873 in 2001 and 2002, respectively. The Company is obligated to
repurchase certain accounts receivable under the program and, therefore, the
transaction does not qualify as a sale.
Factored receivables included in the accounts receivable balance as of
December 31, 2002 and March 31, 2003 were $314 and $371, respectively
F-17
(6) RELATED PARTY TRANSACTIONS
KRDS REAL PROPERTY LEASE
In 1999, the primary shareholders of Litronic, Inc. formed KRDS, Inc.,
(KRDS) for the sole purpose of purchasing real estate property. KRDS's
operations primarily consisted of a mortgage obligation, interest, depreciation
and rental income from the Company related to the real estate property.
In February 2000, KRDS leased a building to the Company for its
corporate headquarters. The lease expires in February 2007. The facility has an
annual rent of approximately $429. In April 2002, the Company and KRDS entered
into an agreement whereby upon 60 days' notice, either party may cancel the
remaining balance of the facility lease with no future liability. Neither party
has exercised the exit clause.
NOTE RECEIVABLE FROM SHAREHOLDER
The note receivable from shareholder consists of a note acquired as
part of the BIZ acquisition. The $500 note was received by BIZ from the
Company's co-chairman, Kris Shah, in conjunction with the issuance of BIZ common
shares prior to the BIZ acquisition, and therefore was shown as a reduction of
shareholders' equity until paid. The note had a stated interest rate of 5% per
annum and was due on July 24, 2005. On April 12, 2002, in a transaction approved
the Company's board of directors, Mr. Shah prepaid the note by paying to the
Company $347, and the Company recorded a discount of $153 which was charged
against income in the second quarter of 2002. The discount was computed based
upon a present value calculation using a discount rate of 20%.
FACILITIES RELATED PARTY LEASING
During 2001, the Company arranged for the lease of two buildings
approximating 63 square feet that were under construction and were subsequently
completed. In October 2002, the Company restructured its lease obligations with
landlord, Research Venture, LLC, for the two buildings located in the Spectrum
area of Irvine, California. This restructuring and settlement provided the basis
for revising the estimate of costs relative to resolving the liability incurred
under the original leases. In 2001 the Company recorded an estimated liability
of $2,171, which was net of then anticipated offsetting sublease income. As a
result of the restructuring and settlement, the Company increased stockholders'
equity by $1,650 through the issuance of common stock valued for financial
reporting purposes at $956 and recorded a gain of $700 for the year ended
December 31, 2002. The settlement required the Company to issue 959,323 shares
of common stock, pay $500 in cash over a one-year period, cancel the lease on
one building approximating 23 square feet, and take occupancy of the other
building under a seven-year operating lease for the facility with approximately
40 square feet for an initial monthly rental rate of $55, plus common area costs
beginning in December 2002. The monthly rental rate on the seven-year lease is
scheduled to increase to $73, plus common area costs, at the beginning of the
third year. The Company records rent expense on a straight-line basis. At the
Company's option, a portion of the rental rate may be paid either in stock or in
cash during the first two years of the lease under certain circumstances through
conversion of a $360 subordinated convertible promissory note that the Company
issued as prepaid rent. In August 2002, Mr. Shah surrendered his 25% ownership
interest in the entity that owns the two buildings. At the time of surrendering
his interest, the buildings were encumbered by one or more construction loans
for which the lender required personal guarantees for renewal of the financing.
As there was little, if any, equity in the project and Mr. Shah was unwilling to
personally guarantee the loans, Mr. Shah chose to surrender his membership
interest.
(7) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to
concentration of credit risk are trade receivables. Credit risk on trade
receivables is limited as a result of the Company's customer base and their
dispersion across different industries and geographic regions. As of December
31, 2002 and March 31, 2003, accounts receivable included $133 and $895,
respectively, due from the U.S. government and related agencies. Sales to the
U.S. government and related agencies accounted for 19% and 50% of total revenues
for the three months ended March 31, 2002 and 2003, respectively.
F-18
The Company had sales that represented 25%, 12%, and 10% of the total
revenues for the three months ended March 31, 2002. The Company had sales that
represented 41%, 11%, and 10% of total revenues for the three months ended March
31, 2003. No other customers accounted for more than 10% of total Revenues
during the three months ended March 31, 2002 and March 31, 2003. Trade accounts
receivable totaled $165 and $1,148 from these major customers as of December 31,
2002 and March 31, 2003, respectively.
Some key components used in the manufacture of the Company's products
can only be obtained from single sources.
(8) LOSS PER SHARE
The calculation of diluted net loss per share excludes potential common
shares if the effect is anti-dilutive. Potential common shares are composed of
incremental shares of common stock issuable upon the exercise of stock options
and warrants. The following table sets forth potential common shares that were
excluded from the diluted net loss per share calculation for the three months
ended March 31, 2002 and 2003 because they are anti-dilutive for the periods
indicated (shares in thousands):
2002 2003
---- ----
Warrants........................................... 394 4,586
Stock options...................................... 1,535 2,437
------- -------
1,929 7,023
======= =======
(9) CONTINGENT LIABILITIES
Because the Company provides engineering and other services to various
government agencies, it is subject to retrospective audits, which may result in
adjustments to amounts recognized as revenues, and the Company may be subject to
investigation by governmental entities. Failure to comply with the terms of any
governmental contracts could result in civil and criminal fines and penalties,
as well as suspension from future government contracts. The Company is not aware
of any adjustments, fines or penalties, which could have a material adverse
effect on its financial position or results of operations.
The Company has cost reimbursable type contracts with the federal
government. Consequently, the Company is reimbursed based upon the direct
expenses attributable to the contract, plus a percentage based upon overhead,
material handling, and general administrative expenses. The overhead, material
handling, and general administrative rates are estimates. Accordingly, if the
actual rates as determined by the Defense Contract Audit Agency are below the
Company's estimates, a refund for the difference would be due to the federal
government. It is management's opinion that no material liability will result
from any contract audits.
The Company is involved from time to time in various litigation matters
that arise in the ordinary course of business. The Company is unable to estimate
a potential loss or potential range of loss associated with any of the pending
claims described herein.
In November 2000, the Company executed an Alliance Agreement with
Electronic Data Systems Corporation ("EDS") for the marketing of Company
products to EDS customers ("Alliance"). The Alliance calls for a joint working
relationship between the two companies, which is non-exclusive and has a term of
ten (10) years. In February 2001, the Company and EDS executed an engagement
letter for EDS to provide certain information technology and consulting services
for both the Company's organizational structure and for a specific customer
project.
On August 27, 2001, EDS and the Company executed a letter of intent and
temporary working agreement whereby EDS supplied software and hardware for
re-sale to Pulsar customers ("Pulsar Agreement"). Under the Pulsar Agreement, as
of December 31, 2002, $1,049 remained outstanding and unpaid to EDS for
purchases of hardware and software and is recorded in accounts payable in the
consolidated balance sheet. The Company stopped doing business with EDS and as a
result, we are subject to a monthly charge of $44. This amount will be charged
against operations as incurred.
The Company and EDS executed a Master Services Agreement ("MSA") dated
as of November 14, 2001, whereby beginning December 1, 2001 and ending December
31, 2006, the Company and EDS established a strategic teaming relationship to
implement, sell and deliver a set of secure transaction processing offerings
based upon a Trust Assurance Network ("TAN"). The MSA task order ("Task Order")
F-19
requires that the Company to pay a monthly fee of $44 for account, test and lab
management services beginning January 1, 2002. The obligations for these
services could have terminated beginning January 1, 2003 by giving ninety (90)
days prior written notice and payment of $400, or beginning January 1, 2004 by
giving ninety (90) days prior written notice and payment of $200. Further, the
Task Order provides for EDS to provide TAN hosting and implementation in
exchange for an implementation fee of $45 payable October 1, 2002. Once
installation of the production environment TAN is complete, EDS agrees to host
the TAN in exchange for a monthly service fee of $59 for thirty-six (36) months
and $60 per month for the remaining months of the MSA. The Company could have
but did not delay implementation of the TAN by paying a fee of $200 prior to
January 31, 2003. The Company may terminate the Task Order without cause by
paying $400 after January 1, 2004 and providing ninety (90) days prior written
notice. In the event the Company is unable to obtain intellectual property
rights or licensing consents that may be required, if any, prior to January 1,
2003, and the parties determine there are no software alternatives, then after
giving ninety (90) days prior written notice the Company may terminate the Task
Order by paying $450. As of March 31, 2003, $353 remained outstanding and
unpaid to EDS relative to the Task Order. The Company has not made any payments
since December 31, 2002 relative to the balance outstanding as of that date.
The Company is currently in discussions with EDS regarding the
restructuring of its relationship with EDS relative to the MSA and Task Order.
EDS has not provided services as outlined in the agreements and there is no
prospect of such services being required in the near future. However, the
Company cannot predict the outcome of these discussions as they pertain to the
fees associated with early termination of the contract, and portions of the
charges may be incurred.
On January 16, 1998, G2 Resources Inc. ("G2") filed a complaint against
Pulsar Data Systems, Inc. ("Pulsar") in the Fifteenth Judicial Circuit in Palm
Beach County, Florida. G2 claimed that Pulsar breached a contract under which G2
agreed to provide services related to the monitoring of government contracts
available for bid and the preparation and submission of bids on behalf of
Pulsar. The contract provided that Pulsar pay G2 $500 in 30 monthly installments
of $16 and an additional fee of 2% of the gross dollar amount generated by
awards. In its complaint, G2 alleged that Pulsar failed to make payments under
the contract and claimed damages in excess of $525 plus interest, costs and
attorneys fees. In the course of discovery G2 asserted that its losses/costs
arising out of its claim amounted to approximately $10,300. Pulsar asserted that
G2 failed to perform the services required under the contract and Pulsar filed a
claim for compensatory damages, interest and attorneys fees against G2.
Classical Financial Services, LLC intervened in the case. Classical claimed that
G2 assigned its accounts receivable to Classical under a financing program and
that Pulsar breached its obligations to Classical by failing to make payments
under the contract with G2. Pulsar asserted defenses to Classical's claim. On
April 20, 2001, a court hearing was held and G2's complaint against Pulsar was
dismissed without prejudice on the basis of no prosecution activity for more
than 12 months. On May 22, 2001, G2 filed a new complaint against Pulsar. In
August 2002 the case was moved from Division AF to Division AH of the Fifteenth
Judicial Circuit in Palm Beach County Court, Civil Division. The Company
believes that the claims made by G2 and Classical against Pulsar are without
merit and intends to vigorously defend against these claims.
In May 2002, Contemporary Services Corporation filed an action against
the Company alleging breach of contract, fraud, negligent misrepresentation and
violation of California Corporations Code section 25400. The action relates to a
term sheet agreement that the Company entered into with the plaintiff in October
2001 in connection with a potential strategic relationship between the plaintiff
and the Company. The Company filed an answer and cross-complaint. While the
Company continued to believe we would prevail at trial, in February 2003, we
reached an agreement to settle the case for less than $50,000, which will be
jointly paid by the Company's insurance carrier and the Company. The Company's
estimated portion of the settlement has been accrued in the results of the year
ended December 31, 2002.
In July 2002, Synnex Technology ("Synnex") filed a lawsuit against the
Company in the Superior Court of Orange County, alleging that the Company failed
to pay $120,986 for products purchased by us for resale. The Company and Synnex
agreed to settle the matter by payment of ten equal installments of $12,099,
pursuant to a stipulation for entry of judgment that is to be held by counsel
for Synnex and not filed with the court absent breach by the Company. The last
payment is due on or before June 9, 2003, at which time the action will be
dismissed.
In restructuring existing facility lease agreements, the Company agreed
to pay $500 in installments without interest. The first payment of $75 was made
as scheduled in December 2002, with additional payments scheduled of $100 due in
March 2003, $150 due in June 2003 and a final payment of $175 due in September
2003. The Company has not made the full $100 payment that was due in March 2003,
F-20
which means the Company is currently in default under the settlement facilities
settlement agreement and the landlord could enter a stipulated judgment. Also,
if we are delisted from The Nasdaq National Market, Research Venture, LLC would
be entitled to entry of a stipulated judgment against the Company in the maximum
aggregate amount of $3,100, less consideration the Company pays prior to any
entry of the judgment.
During the second quarter of 2001 Microsoft notified the Company
regarding the alleged sales of unlicensed copies of Microsoft Office. The
software in question was purchased from a major computer hardware manufacturer
and was resold to one of the Company's customers in a package that included both
hardware and software. The Company is currently investigating the matter, and
does not anticipate that the outcome will have a material impact on its results
of operations, financial condition or liquidity.
The Company currently holds multiple contracts with the federal
government for the resale of network deployment products. In particular, three
of these contracts permit the Company to provide goods and services to various
federal government agencies. An administrative agency recently informed the
Company that one of the contracts would not be renewed unless purchase activity
was conducted under the contract. The Company is negotiating with a party for
the sale of the contract. It is possible the other contracts may not be renewed
or may be cancelled by the federal government due to the Company's inability to
perform as required under the contracts.
The Company is currently in negotiations with the various government
agencies that it contracts with to initiate and implement the corrective
measures necessary to insure the uninterrupted continuity of the contracts.
Although there is no assurance that the contracts will be renewed or that they
will not be cancelled, the Company has reason to believe they will be renewed.
However, if the contracts are not renewed or if they are cancelled, then a
significant portion of the Company's revenues will be lost which would have a
significant impact on the Company's financial condition, results of operations
and liquidity.
As of March 31, 2003, accounts payable totaled $4,405. Of that amount,
$2,987 is aged at least 90 days. Unless payment is made or satisfactory payment
plans agreed to, it is likely that the vendors will eventually initiate legal
actions to collect the amounts owed to them. Currently, the Company has the
intent to satisfy its vendor obligations through a combination of payment
negotiations, which include extending the terms over time, partial payments of
the obligations due as payment in full and converting obligations to long term
notes payable.
(10) SUBSEQUENT EVENTS
On April 1, 2003, the Company issued to Richard P. Kiphart a $240,000
promissory note that bears interest at a rate of 18% per annum. Principal and
accrued but unpaid interest are due upon the earliest of July 31, 2003 or the
Company obtaining $3.5 million in equity or debt financing. The note also
contains a provision to issue a warrant to purchase 120,000 shares of common
stock at an exercise price equal to the greater of $.70 or the conversion
price of a proposed financing, not to exceed $1.30 per share.
F-21
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
Number Description
------ -----------
10.1 Waiver and Acknowledgment dated January 28, 2003 among
Crestview Capital Fund, L.P., Crestview Capital Fund II, L.P.,
Crestview Offshore Fund, Inc., Robert Geras, Richard P.
Kiphart and Nefilim Associates, LLC, LLC Wave Systems Corp.
(1)
10.2 Second Amended and Restated Operating Agreement of SSP Gaming,
LLC dated April 7, 2003 by SSP Solutions, Inc., the sole
member of SSP Gaming, LLC (1)
10.3 Forbearance Agreement dated March 12, 2003 between SSP
Solutions, Inc. and Integral Systems, Inc., effective
September 1, 2002 (1)
10.4 Employment Agreement dated March 6, 2003 between SSP
Solutions, Inc. and Kris Shah (1) (#)
10.5 Employment Agreement dated March 6, 2003 between SSP
Solutions, Inc. and Marvin J. Winkler (1) (#)
10.6 Promissory Note dated January 22, 2003 in the principal amount
of $500,000 made by SSP Solutions, Inc. in favor of Richard P.
Kiphart (1)
10.7 Form of Promissory Notes dated March 18, 2003 and March 19,
2003, respectively, made by SSP Solutions, Inc. in favor of
Crestview Capital Fund, L.P. and Richard P. Kiphart,
respectively, each in the principal amount of $100,000 (1)
10.8 Form of Warrants to Purchase Common Stock dated March 18, 2003
and March 19, 2003, respectively, issued by SSP Solutions,
Inc. in favor of Crestview Capital Fund L.P. and Richard P.
Kiphart, respectively, each in the amount of 100,000 shares
(1)
10.9 Form of Promissory Notes dated March 28, 2003 made by SSP
Solutions, Inc. in favor of Richard P. Kiphart, Crestview
Capital Fund II, L.P., Marvin J. Winkler and the Kris and
Geraldine Shah Family Trust, respectively, in the principal
amounts of $240,000, $160,000, $10,000 and $30,000,
respectively (1)
10.10 Form of Warrants to Purchase Common Stock dated March 28, 2003
issued by SSP Solutions, Inc. in favor of Crestview Capital
Fund L.P., Richard P. Kiphart, Marvin J. Winkler and the Kris
and Geraldine Shah Family Trust, respectively, in the amounts
of 120,000, 80,000, 5,000 and 15,000 shares, respectively (1)
10.11 Warrant to Purchase Common Stock dated March 12, 2003 by SSP
Solutions, Inc. to Integral Systems, Inc. (1)
31.1 Certifications required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officers and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
_________________
(#) Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit.
(1) Filed as an exhibit to the initial filing of our Form 10-K for the year
ended December 31, 2002 (file no. 000-26227) and incorporated herein by
reference.
2
(b) Reports on Form 8-K.
--------------------
On January 30, 2003, we filed a Form 8-K for January 27, 2003 to report
the appointment of Gregory J. Clark and Ron R. Goldie to our board of directors.
The Form 8-K contained Item 5 - Other Events, and Item 7 - Financial Statements
and Exhibits. The exhibits to the Form 8-K consisted of two press releases
relating to the director appointments.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 15, 2003 SSP SOLUTIONS, INC.
By: /s/ MARVIN J. WINKLER
---------------------
Marvin J. Winkler
CO-CHAIRMAN OF THE BOARD OF DIRECTORS,
DIRECTOR AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ THOMAS E. SCHIFF
--------------------
Thomas E. Schiff
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
3
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number Description
------ -----------
31.1 Certifications required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
4