SEC Info - Steelcloud Inc - ‘10-Q’ for 7/31/01

SEC Info℠

Home

Help

Please Sign In

Steelcloud Inc – ‘10-Q’ for 7/31/01

On: Friday, 9/14/01, at 3:48pm ET · For: 7/31/01 · Accession #: 1125282-1-501928 · File #s: 0-24015 (10-K), 0-24015, 333-48177 (10-K), 333-48177 · Correction: This Filing’s metadata (e.g., “Filed as of” Date) was Corrected by the SEC on 6/23/04. `®`

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/14/01  Steelcloud Inc                    10-Q®       7/31/01    1:37K                                    Bowne & C… Smartedgar/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      16     78K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Exhibits and Reports on Form 8-K Financial Statements Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Other Information Part I. Financial Information Part II. Other Information Submission of Matters to a Vote of Security Holders
1	1st Page - Filing Submission
3	Part I. Financial Information
"	Item 1. Financial Statements
10	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
13	Part II. Other Information
"	Item 1. Legal Proceedings
"	Item 4. Submission of Matters to a Vote of Security Holders
14	Item 5. Other Information
15	Item 6. Exhibits and Reports on Form 8-K

10-Q 1st Page of 16 TOC ↑Top Previous Next ↓Bottom Just 1st
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q

(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES          
EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2001

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, Sterling, VA. 20166
 (Address of principal executive offices) (zip code)

(703) 450-0400
(Registrant's telephone number, including area code)

 DUNN COMPUTER CORPORATION
D/B/A STEELCLOUD COMPANY
               (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______.                                           
As of September 1, 2001, there were 10,214,545 shares of the    
registrant's common stock outstanding.                          

                                                                               1

10-Q 2nd Page of 16 TOC 1st Previous Next ↓Bottom Just 2nd
 SteelCloud, Inc
 Form 10-Q Index
For the Quarterly period ended July 31, 2001

  Description                                                               Page

Part I.   Financial Information............................................   3 

Item 1.   Financial Statements.............................................     
Consolidated Balance Sheets as of July 31, 2001 and         
         October 31, 2000.................................................   3
Consolidated Statements of Operations for the three and     
         nine month periods ended July 31, 2001 and 2000..................   4
Consolidated Statements of Cash Flows for the nine month    
         periods ended July 31, 2001 and 2000.............................   5
         Notes to the Consolidated Financial Statements...................   6

Item 2.   Management's Discussion and Analysis of Financial Condition and       
         Results of Operations............................................  10

Part II.  Other Information................................................  13 

Item 1.   Legal Proceedings................................................  13 

Item 4.   Submission of Matters to a Vote of Security Holders..............  13 

Item 5.   Other Information ...............................................  14 

Item 6.   Exhibits and Reports on Form 8-K.................................  15 

                                                                               2

10-Q 3rd Page of 16 TOC 1st Previous Next ↓Bottom Just 3rd
PART I.  FINANCIAL INFORMATION                                                  

ITEM 1.  FINANCIAL STATEMENTS                                                   

STEELCLOUD, INC                                                                 
CONSOLIDATED BALANCE SHEETS                                                     

                                                        [Enlarge/Download Table]


                                                            October 31,     July 31,   
                                                               2000           2001     
                                                           -------------  -------------
                           ASSETS                                          (unaudited) 
                                                                                       
Current assets                                                                         
   Cash and cash equivalents                                   $363,958     $1,984,826 
   Accounts receivable, net                                  10,851,270      5,048,193 
   Inventory, net                                             4,318,936      3,939,404 
   Deferred tax asset                                         1,326,745        218,359 
   Income tax receivable                                        230,681      1,489,799 
   Prepaid expenses and other current assets                    191,897        195,568 
                                                           -------------  ------------ 
Total current assets                                         17,283,487     12,876,149 

   Property and equipment, net                                  819,798        429,811 
   Equipment on lease, net                                    1,443,704        669,845 
   Goodwill and other intangible assets, net                  3,164,789      2,869,127 
   Investments                                                  150,000        150,000 
   Other assets                                                 143,193        120,340 
                                                           -------------  ------------ 
Total assets                                                $23,004,971    $17,115,272 
                                                           =============  ============ 

            LIABILITIES AND STOCKHOLDERS' EQUITY                                       
Current liabilities                                                                    
    Accounts payable                                         $7,886,342     $1,543,893 
    Accrued expenses                                          2,753,361      3,377,643 
    Accrued litigation costs                                    343,087              - 
    Notes payable, current                                      431,597        221,888 
    Unearned revenue                                            135,690        290,287 
    Line of credit - short-term                                       -      2,109,483 
                                                           -------------  ------------ 
Total current liabilities                                    11,550,077      7,543,194 

   Notes payable, long-term portion                             115,290              - 
   Line of credit - long-term                                 2,483,203              - 

Stockholders' equity                                                                   
    Preferred stock $.001 par value; 2,000,000 shares                 3              3 
       authorized, 3,000 shares issued, 2,850 and 2,620                                
       outstanding at October 31, 2000 and July 31, 2001,                              
       respectively; aggregate liquidation preference of                               
       $2,813,478                                                                      
    Common stock, $.001 par value: 50,000,000 shares              9,807         10,215 
       authorized, 9,806,962 and 10,214,545 shares issued                              
       and outstanding at October 31, 2000 and July 31,                                
       2001, respectively;                                                             
    Additional paid in capital                               41,584,844     41,594,471 
    Treasury stock, 400,000 shares;                         (3,432,500)    (3,432,500) 
    Accumulated deficit                                     29,305,753)   (28,600,111) 
                                                           ------------   ------------ 
Total stockholders' equity                                    8,856,401      9,572,078 
                                                           ------------   ------------ 
Total liabilities and stockholders' equity                  $23,004,971    $17,115,272 
                                                           ============   ============ 

The accompanying notes are an integral part of these consolidated financial     
statements.                                                                     

                                                                               3

10-Q 4th Page of 16 TOC 1st Previous Next ↓Bottom Just 4th
STEELCLOUD, INC                                                                 
CONSOLIDATED STATEMENTS OF OPERATIONS                                           
(unaudited)                                                                     

                                                        [Enlarge/Download Table]


                                              Three Months Ended               Nine Months Ended        
                                                   July 31,                         July 31,            
                                         ------------------------------  ------------     ------------- 
                                              2000             2001           2000             2001     
                                         --------------   -------------  --------------   ------------- 
                                                                                                        
Net revenues                               $10,328,950      $7,203,426     $28,059,561      $21,720,709 
Cost of revenue                              8,531,879       5,299,316      22,773,825       16,259,381 
                                         --------------   -------------  --------------   ------------- 
Gross profit                                 1,797,071       1,904,110       5,285,736        5,461,328 

Selling and marketing                          246,313         182,963         838,095          563,375 
General and administrative                   1,301,703       1,036,272       3,919,473        3,593,052 
Amortization of goodwill                        98,554          98,554         273,486          295,662 
                                         --------------   -------------  --------------   ------------- 
Income from operations                         150,501         586,321         254,682        1,009,239 

Interest expense, net                          150,659          36,791         448,587          159,001 
Other (income) expense                        (228,223)              -         (73,416)          26,396 
                                         --------------   -------------  --------------   ------------- 
Net income (loss) from operations before                                                                
income taxes and extraordinary item                                                                     
                                               228,065         549,530        (120,489)         823,842 
Provision for income taxes                           -           5,700               -            5,700 
                                         -------------    -------------  --------------   ------------- 
Net income (loss) before extraordinary                                                                  
item                                           228,065         543,830        (120,489)          818,142
Extraordinary gain - early extinguishment                                                               
of debt                                              -               -         750,000                - 
                                         -------------    -------------  --------------   ------------- 
Net income before dividends                    228,065         543,830         629,511          818,142 
Dividends to preferred stockholders             37,500          37,500         566,911          112,500 
                                         -------------    -------------  --------------   ------------- 
Net income attributable to common                                                                       
stockholders                                  $190,565        $506,330         $62,600         $705,642 

Basic earnings per share:                                                                               
      Earnings (loss) before                                                                            
      extraordinary gain                          0.02            0.05          (0.07)             0.07 
      Extraordinary gain                             -               -                                - 
                                                                                 0.08                   
                                         --------------   -------------  --------------   ------------- 
      Net earnings per share                     $0.02           $0.05           $0.01            $0.07 

Diluted earnings per share:                                                                             
      Earnings (loss) before                                                                            
      extraordinary gain                          0.02            0.04           (0.07)            0.06 
      Extraordinary gain                             -               -            0.08                - 
                                         --------------   -------------  --------------   ------------- 
      Net earnings per share                     $0.02           $0.04           $0.01            $0.06 


The accompanying notes are an integral part of these consolidated statements.   

                                                                               4

10-Q 5th Page of 16 TOC 1st Previous Next ↓Bottom Just 5th
STEELCLOUD, INC                                                                 
CONSOLIDATED STATEMENTS OF CASH FLOWS                                           
(unaudited)                                                                     

                                                        [Enlarge/Download Table]


                                                                 Nine Months Ended      
                                                                      July 31,          
                                                                2000            2001    
                                                            ----------------------------
                                                                                        
Operating activities                                                                    
Net income                                                    $592,011         $818,142 
Adjustments to reconcile net income to net cash provided                                
  by operating activities:                                                              
Depreciation and amortization of property and equipment                                 
                                                             2,097,410        1,106,539 
Amortization of goodwill and other intangibles                 284,574          295,662 
Gain on sale of leases                                        (272,710)               - 
Extraordinary debt extinguishment gain                        (750,000)               - 
   Changes in operating assets and liabilities:                                         
  Accounts receivable                                           302,239       5,803,077 
  Income tax receivable                                         181,362      (1,259,118)
  Inventory                                                  (1,630,821)        898,715 
  Prepaid expenses and other assets                             (99,139)         19,182 
  Accounts payable                                              361,600      (6,342,449)
  Accrued expenses                                             (182,875)        178,731 
  Deferred tax credit                                           (47,568)      1,108,386 
  Unearned revenue and other liabilities                        (43,221)        154,597 
                                                           -----------------------------
Net cash provided by operating activities                      792,862        2,781,464 

Investing activities                                                                    
 Sale (purchase) of property and equipment                      454,595        (461,876)

Financing activities                                                                    
Proceeds from issuance of preferred stock                     2,725,578               - 
Proceeds from exercise of common stock options                   15,308               - 
Payments on notes payable                                      (242,878)       (325,000)
Repayments on line of credit, net                            (3,966,120)       (373,720)
                                                          ------------------------------
Net cash used in financing activities                        (1,468,112)       (698,720)

Net (decrease) increase in cash and cash equivalents           (220,655)      1,620,868 
Cash and cash equivalents at beginning of period                655,450         363,958 
                                                          ------------------------------
Cash and cash equivalents at end of period                     $434,795      $1,984,826 

Supplemental cash flow information                                                      
Interest paid                                                  $448,587         $52,750 

Income taxes paid                                              $      -          $5,700 


The accompanying notes are an integral part of these consolidated financial     
statements.                                                                     

                                                                               5

10-Q 6th Page of 16 TOC 1st Previous Next ↓Bottom Just 6th
STEELCLOUD, INC                                                                 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

1.  Basis of Presentation                                                       

The consolidated financial statements for the three and nine month periods ended
July 31, 2001 and 2000 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; formerly Dunn Computer  
Corporation (the "Company"), which includes consolidated financial statements   
and notes thereto for the years ended October 31, 2000 and 1999.                

Certain prior year amounts have been reclassified to conform to current year    
presentation.                                                                   

2.  Early Extinguishment of Debt                                                

In conjunction with the purchase of IDP, the Company assumed a credit facility  
of $25,000,000 secured by inventory and accounts receivable of IDP.             

On November 8, 1999, the Company executed an agreement with the financial       
institution to terminate this facility. Under the terms of the agreement, the   
Company repaid approximately $3.0 million of the outstanding principal balance  
prior to December 31, 1999. In conjunction with the agreement, approximately    
$750,000 ($.08 per share) was forgiven by the financial institution and the     
remaining principal balance of approximately $832,000 was converted into a      
two-year note maturing in January 2002 bearing interest at the prime rate. The  
Company has properly reflected the $750,000 as an extraordinary gain for the    
three months ended January 31, 2000, which resulted in income of approximately  
$.08 per share. The outstanding balance on the note at October 31, 2000 and July
31, 2001 was approximately $519,000 and $207,000 respectively.                  

3.  Amended Line of Credit                                                      

On July 26, 2001, the Company made a second amendment to its bank modification  
agreement whereby the maximum availability under the line of credit increased   
from $3.5 million to $5.0 million. Under the terms of the amendment, the Company
may make advances against their eligible inventory and receivables. The interest
rate remained unchanged at the prime rate plus 1% and the line of credit expires
on November 30, 2001. The outstanding balance on the line of credit at October  
31, 2000 and July 31, 2001 was approximately $2,483,000 and $2,109,000,         
respectively.                                                                   

                                                                               6

10-Q 7th Page of 16 TOC 1st Previous Next ↓Bottom Just 7th
4.  Private Placement                                                           

On March 13, 2000, the Company sold 3,000 shares of its Series A Convertible    
Preferred Stock in a private placement, which is exempt from registration       
provided by Regulation D Rule 506 promulgated by the Securities and Exchange    
Commission under the Securities Act of 1933, as amended. The Company received   
net proceeds of approximately $2.7 million, which was used to fund current and  
future operations.                                                              

In addition, the Company issued warrants to the preferred investor and broker of
the transaction in the amount of 247,525 and 75,000 to purchase shares of the   
Company's common stock at $3.64 and $4.57 per share, respectively.              

The holders of the preferred shares are entitled to cumulative dividends of 5%  
of the liquidation preference of $1,000 per share plus accrued but unpaid       
dividends whether or not declared. As of July 31, 2001, 380 shares of preferred 
stock plus accrued dividends were converted into common stock. As of July 31,   
2001, there was approximately $193,500 in accrued and unpaid dividends. Each    
holder of preferred shares is entitled to voting rights equal to the number of  
shares of common stock into which such preferred shares are convertible.        

The Series A Convertible Preferred Stock are convertible at the shareholders    
option into common stock at the price equal to the lesser of 85% of the average 
of the three lowest closing bid prices of the common stock for the 25 days prior
to the conversion date or $3.64. In fiscal year 2000, the Company recorded a    
non-cash deemed dividend of $529,411 for the beneficial conversion feature. The 
transaction was reported as "Dividend to Preferred Stockholders" on the         
Company's 2000 Consolidated Statement of Operations.                            

On July 26, 2001, the Company entered into an agreement with its Preferred      
Shareholders to redeem all of its outstanding Series A Convertible Preferred    
stock for $2,500,000 in cash. Under the redemption agreement, the Preferred     
Shareholders would retain approximately 247,000 warrants previously issued.     

On August 2, 2001, the Company completed the transaction by delivering $2.5     
million to its Preferred Shareholders in exchange for 2,620 shares of its Series
A Convertible Preferred Stock. As a result of this redemption, the Company has  
no outstanding preferred shares. The Company will reflect the redemption        
transaction in its fourth quarter ending October 31, 2001.                      

                                                                               7

10-Q 8th Page of 16 TOC 1st Previous Next ↓Bottom Just 8th
5.  Recently Issued Accounting Pronouncements                                   

In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue  
Recognition in Financial Statements." This bulletin, as amended by Staff        
Accounting Bulletin Nos. 101A and 101B, establishes more clearly defined revenue
recognition criteria than previously existing accounting pronouncements and is  
effective for the Company for the quarter ending October 31, 2001. The Company  
does not anticipate that it will have a material effect on its financial        
position, results of operations and cash flows.                                 

In June 2001, the FASB issued SFAS No. 141, Business Combinations, which        
requires the purchase method of accounting for business combinations initiated  
after June 30, 2001 and eliminates the pooling-of-interests method. Currently,  
the Company does not believe the adoption of SFAS No. 141 will have any impact  
on its financial statements                                                     

Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible  
Assets, effective for fiscal years beginning after December 15, 2001. Under the 
new rules, goodwill and intangible assets deemed to have indefinite lives will  
no longer be amortized but will be subject to annual impairment tests. In       
addition, the statement includes provisions for the reclassification of certain 
existing recognized intangibles to goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of 
previously reported goodwill and the identification of reporting units for      
purposes of assessing potential future impairments of goodwill. Goodwill and    
other intangibles, acquired prior to July 1, 2001, may be amortized until the   
adoption of the statement. The Company will apply the new rules on accounting   
for goodwill and other intangible assets beginning in the first quarter of the  
fiscal year ending October 31, 2003. The Company is currently assessing, but has
not yet determined, the impact of SFAS No. 142 on its financial position and    
results of operations.                                                          

6.  Contingencies                                                               

Professional Services Malpractice Claim                                         

In August of 2000, the Company's former legal counsel filed a claim against the 
Company for approximately $343,087 plus accrued interest for legal fees and     
costs. In response to the claim, the Company filed a counter claim for          
professional malpractice and breach of fiduciary duty in the amount of          
$1,568,000.                                                                     

In June 2001, the Company reached a settlement agreement with its former legal  
counsel whereby both parties agreed to relinquish all claims against the other, 
release each other from liability and waive the payment of all outstanding      
claims. The Company has reversed the liability that had been previously recorded
for this claim, which reduced general and administrative expenses.              

                                                                               8

10-Q 9th Page of 16 TOC 1st Previous Next ↓Bottom Just 9th
Microsoft Licensing Agreement                                                   

In November 1998, IDP entered into a Government Integrator Agreement, as        
amended, with Microsoft Corporation (Microsoft) for the licensing of certain    
Microsoft software. During 1999, Microsoft asserted that IDP owed approximately 
$800,000 under this due primarily to amended billing by Microsoft concerning    
sales by IDP to the U.S. Air Force in conjunction with the Desktop V contract.  
On October 31, 2000, Microsoft filed suit against the Company, and its          
subsidiary IDP, for breach of contract. In conjunction with the filing of the   
claim, Microsoft further amended the original billings, which resulted in a     
claim against the Company of approximately $1.3 million. Subsequent to October  
31, 2000, the Company submitted a motion to dismiss the case and filed a        
counterclaim of fraud on behalf of IDP in the amount of $500,000. The Company   
believes that it has meritorious defenses to the claim and intends to vigorously
defend itself. The Company cannot estimate at this time the amount of the       
liability to be incurred, if any. In the event the Company is not successful in 
its defense and a judgment is entered on behalf of Microsoft for the full amount
sought, the payment would have a material adverse effect upon the Company's     
financial position and results of operations. The Company has accrued for       
amounts due Microsoft based on the original billing terms. On February 20, 2001,
the Court ruled in favor of SteelCloud thereby dismissing that entity from the  
claim. The Company will continue to vigorously defend its subsidiary, IDP, for  
which it believes to have meritorious defenses.                                 

Trademark Infringement                                                          

On October 19, 2000, the Company received a cease and desist letter from        
LoudCloud, Inc. alleging that the use of the "SteelCloud" mark and name would   
constitute an infringement of LoudCloud's rights to its "LoudCloud" mark and    
name and family of "Cloud" marks, that use of "SteelCloud" would dilute the     
distinctiveness and fame of the LoudCloud mark and name and, that such acts by  
the Company violated federal and state law regarding unfair competition. In     
response, the Company filed a declaratory judgment action in the U.S. District  
Court for the Eastern District of Virginia, seeking a judicial determination    
that its use of the "SteelCloud" mark and name would not violate the proprietary
rights of LoudCloud nor dilute the alleged fame and distinctiveness of the      
"LoudCloud" mark and name. In this action, the Company also alleged a new claim 
that LoudCloud, Inc. has violated federal law through its misuse of the         
trademark provisions under the Lanham Act as amended in 1988. A hearing has been
held on the LoudCloud motion to dismiss and the court has taken the matter under
advisement. On January 10, 2001, the US District Court for the Eastern District 
of Virginia dismissed the case. SteelCloud has appealed such decision. The      
Company cannot estimate at this time the amount of the liability to be incurred,
if any, but does not believe that this matter will have a material adverse      
effect upon the Company's financial position or results of operations.          

Contract Termination                                                            

On July 31, 1998 the Company received notice from the SBA that it was denying   
the request of the U.S. Air Force to waive the requirement to terminate IDP's   
Desktop V contract for the convenience of the Government upon the change in     
control of IDP to the Company. The Company appealed the denial by the SBA to the
SBA's Office of Hearings and Appeals. On August 31, 1999, the SBA denied the    
appeal and ruled that the U.S. Air Force must terminate-for-convenience the     
Desktop V contract. Under a termination-for-convenience, the Government shall   
reimburse the Company for all costs incurred in the performance of the contract.
The Company expects to recover from the Government a portion or all of its      
unreimbursed costs. The Company is currently in negotiations with the Government
regarding this matter.                                                          

                                                                               9

10-Q 10th Page of 16 TOC 1st Previous Next ↓Bottom Just 10th
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND         
RESULTS OF OPERATIONS                                                           

Founded in 1987, SteelCloud, Inc, based in Dulles, Virginia, designs, develops  
and manufactures customized computers and turnkey server appliances for software
companies and organizations that develop, implement, and support e-business     
infrastructure solutions. Over the past 14 years, the company has delivered over
200,000 total systems, including 20,000 server appliances to major corporate and
public sector enterprises, including some of the world's largest software and   
information technology ("IT") companies. SteelCloud's facilities include a      
manufacturing and engineering operation at its headquarters in Dulles, Virginia 
and an ISO 9002 manufacturing plant in Guayama, Puerto Rico. In addition, the   
Company provides IT consulting support for some of the hardware and networking  
solutions offered.                                                              

The following discussion should be read in conjunction with the consolidated    
financial statements. 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 Company undertakes no obligation to publicly 
re-issue these forward-looking statements to reflect events or circumstances    
that arise after the date hereof.                                               

RESULTS OF OPERATIONS                                                           

For the three and nine months ended July 31, 2001 compared to the three and nine
months ended July 31, 2000                                                      

Net revenues for the three months ended July 31, 2001 were $7,203,426 as        
compared to $10,328,950 for the three months ended July 31, 2000, a decrease of 
approximately 30%. Net revenues for the nine month periods ended July 31, 2001  
and 2000 were $21,720,709 and $28,059,561, respectively. The decrease in net    
revenues is attributable to the completion of a significant contract with the   
Puerto Rican Government in January 2001. At the end of the prior fiscal year,   
the Company modified its business plan to focus on providing network solutions  
through the development, engineering and deployment of new servers and          
appliances. As a result of the business plan modification, the Company has      
yielded higher margins through the bundling of its product offerings with their 
consulting services. These higher margins have significantly offset the decline 
in sales volume. The Company will continue to develop new markets, new product  
lines and product mix in order to promote future revenue growth that yield      
higher than average margins.                                                    

The Company experienced a growth in gross margins, as a percentage of sales, as 
a result of the execution of its new business strategy. For the three months    
ended July 31, 2001, gross margin, as a percentage of sales, increased to 26%   
from 17% for the three months ended July 31, 2000. For the nine months ended    
July 31, gross margin was approximately 25% in fiscal 2001 compared to 19% in   
fiscal 2000.                                                                    

                                                                              10

10-Q 11th Page of 16 TOC 1st Previous Next ↓Bottom Just 11th
For the three months ended July 31, selling and marketing expenses decreased to 
$182,963 in fiscal 2001 from $246,313 in fiscal 2000, a decrease of             
approximately 26%. For the nine months ended July 31, selling and marketing     
expenses decreased to $563,375 in fiscal 2001 from $838,095 in fiscal 2000. The 
decrease is attributable to the elimination of expensive marketing programs as  
well as the utilization of co-operative marketing arrangements with certain     
vendors, which reduced the overall marketing costs.                             

General and administrative expenses decreased to $1,036,272 for the three months
ended July 31, 2001 from $1,301,703 for the three months ended July 31, 2000, a 
decrease of approximately 20%. For the nine month period ended July 31, general 
and administrative expenses decreased to $3,593,052 in fiscal 2001 from         
$3,919,473 in fiscal 2000, a decrease of approximately 8%. The decrease is      
attributable to the settlement of certain liabilities for amounts less than     
accrued, whereby the discounts received in those settlements reduced operating  
costs and expenses incurred in defending and resolving those liabilities. In    
addition, the decrease can be attributed to the Company's efforts to manage     
general and administrative expenses relative to its net revenue and gross       
margin.                                                                         

Interest expense, net of interest income, decreased to $36,791 for the three    
months ended July 31, 2001 from $150,659 for the three months ended July 31,    
2000. For the nine months ended July 31, interest expense, net of interest      
income, decreased to $159,001 in fiscal 2001 from $448,587 in fiscal 2000. This 
decrease is the result of the Company's reduction in its outstanding debt during
fiscal 2001 as well as an overall decline in the short-term interest rate.      

The Company recorded a provision for income taxes for the three months ended    
July 31, 2001 of $5,700 related to the alternative minimum tax. The Company's   
current tax expense for the three and nine month periods ended July 31, 2001 was
offset by the deferred tax benefit of operating loss carryforwards.             

The Company reported net income before extraordinary items, taxes and dividends 
of $549,530 for the three months ended July 31, 2001 as compared to $228,065 for
the same period in the prior year. For the nine months ended July 31, the       
Company reported net income before extraordinary items, taxes and dividends of  
$823,842 for fiscal 2001 as compared to a net loss of $120,489 for the          
comparable period during fiscal 2000. These increases are the result of the     
Company's efforts to manage costs relative to its net revenue as well as its    
efforts to increase profit margins for their products sold and services         
provided.                                                                       

                                                                              11

10-Q 12th Page of 16 TOC 1st Previous Next ↓Bottom Just 12th
LIQUIDITY AND CAPITAL RESOURCES                                                 

For the nine months ended July 31, 2001, the Company generated approximately    
$2,781,464 in cash flow from its operating activities. The Company generated net
income before preferred dividends of $818,142. The Company generated cash from  
the reduction of inventories of approximately $898,715, collected approximately 
$5,803,077 in receivables and $154,597 of cash receipts from unearned products  
and services. The cash generated was used to purchase goods and services of     
approximately $6,342,449 net of payments.                                       

Funds used in investing activities consisted of the purchase of property,       
equipment and leased assets of $461,876. Net cash used for financing activities 
consisted of net repayments on the line of credit of $373,720 and payments on   
notes payable of $325,000.                                                      

On July 26, 2001, the Company executed a second amendment to its bank           
modification agreement whereby the maximum availability under the line of credit
increased from $3.5 to $5.0 million. Under the terms of the amendment, the      
Company may make advances against its eligible inventory and receivables. The   
interest rate remained unchanged at the prime rate plus 1% and the line of      
credit expires on November 30, 2001. As of July 31, 2001, the Company had an    
outstanding balance on the line of credit of approximately $2.1 million and     
available borrowing capacity of approximately $2.7 million.                     

In fiscal 2000, the Company executed an agreement terminating the borrowing     
arrangement with a financial institution whereby $3.0 million was repaid to     
financial institution prior to December 31, 1999. The remaining outstanding     
balance of approximately $832,000 was converted to a 24-month note accruing     
interest at the prime rate and $750,000 was forgiven by the financial           
institution. The Company recorded the $750,000 as an extraordinary gain on the  
early extinguishment of debt. As of July 31, 2001, the Company had an           
outstanding balance on the note payable of approximately $207,000.              

As of July 31, 2001, the Company had working capital of approximately $5.3      
million as compared to approximately $5.7 million for the year ended October 31,
2000. The decrease is due to the re-classification of the line of credit from   
long-term at October 31, 2000 to short-term at July 31, 2001 based on its       
maturity date. As a result, the $2.5 million line of credit balance at October  
31, 2000 was not included in the working capital computation. The Company       
believes the bank facility, together with cash on hand, projected cash generated
from operations, and income tax refunds due will provide sufficient financial   
resources to finance the current operations of the Company for the next twelve  
months.                                                                         

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.                            

                                                                              12

10-Q 13th Page of 16 TOC 1st Previous Next ↓Bottom Just 13th
PART II. OTHER INFORMATION                                                      

ITEM 1. LEGAL PROCEEDINGS                                                       

Professional Services Malpractice Claim                                         

In August of 2000, the Company's former legal counsel filed a claim against the 
Company for approximately $343,087 plus accrued interest for legal fees and     
costs. In response to the claim, the Company filed a counter claim for          
professional malpractice and breach of fiduciary duty in the amount of          
$1,568,000.                                                                     

In June 2001, the Company executed a settlement agreement with its former legal 
counsel whereby both parties agreed to relinquish all claims against the other, 
release each other from liability and waive the payment of all outstanding      
claims. The Company has reversed the liability that had been previously recorded
for this claim, which reduced general and administrative expenses.              

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 above, we are not a party in any other material legal            
proceedings.                                                                    

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

On May 15, 2001, the Company held its 2000 Annual Meeting of Shareholders. At   
the annual meeting, the Company's shareholders were asked to vote upon: (i) the 
election of three Class III Directors to serve for the following three years,   
one Class I Director for the following year and one Class II Director for the   
following two years and until their successors are duly elected and qualified,  
(ii) the appointment of Ernst & Young LLP as independent accountants of the     
Company for the fiscal year ending October 31, 2001, (iii) the ratification of  
an amendment to the Company's Articles of Incorporation to change the Company's 
name to SteelCloud.                                                             

The following persons were elected as directors of the Company for the ensuing  
year by votes next to such persons name:                                        

For           Against      Withheld 

Jay M. Kaplowitz      8,498,772     178,081          0                          
James Bruno           8,494,922     181,931          0                          
Thomas P. Dunne       8,467,652     209,201          0                          
Edward Spear          8,499,422     177,431          0                          
Benjamin Krieger      8,494,022     182,831          0                          

Jay Kaplowitz was duly elected as a Class I Director, James Bruno was duly      
elected as a Class II Director and Thomas P. Dunne, Edward Spear and Benjamin   
Krieger were duly elected as Class III Directors, and each shall serve until    
their respective successors have been duly elected and qualified.               

                                                                              13

10-Q 14th Page of 16 TOC 1st Previous Next ↓Bottom Just 14th
Ernst & Young, LLP was approved to act as the Company's independent certified   
public accountants for the ensuing year by the following vote:                  

For           Against      Abstain  

8,646,990     25,160        4,503   

The approval of an amendment to the Corporation's articles of incorporation to  
change the corporate name to SteelCloud was approved by the following by the    
following vote:                                                                 

For           Against      Abstain  

8,548,537     125,150       3,166   

ITEM 5.  OTHER INFORMATION                                                      

NASDAQ                                                                          

On July 3, 2001, the Company received a NASDAQ Staff Determination that the     
Company's common stock fails to comply with the $1.00 minimum bid price         
requirement for continued listing on The NASDAQ National Market as set forth in 
marketplace Rule 4450(a)(5), and that its common stock is, therefore, subject to
delisting from The NASDAQ National Market.                                      

The Company has requested an oral hearing with the NASDAQ Listing Qualifications
Panel to review the Staff Determination. The delisting of the Company's common  
stock will be stayed pending the outcome of the hearing.                        

On August 23, 2001, the Company attended its hearing with NASDAQ. The Company   
is currently awaiting the outcome of that meeting.                              

There can be no assurance that the Company's actions will prevent the delisting 
of its common stock from The NASDAQ National Market. In the event that the      
Company is unsuccessful in maintaining its NASDAQ listing, the Company's common 
stock will be listed on the NASD OTC Bulletin Board.                            

Preferred Stock Redemption                                                      

On July 26, 2001, the Company entered into an agreement with its Preferred      
Shareholders to redeem all of its outstanding Series A Convertible Preferred    
stock for $2,500,000 in cash. Under the redemption agreement, the Preferred     
Shareholders would retain approximately 247,000 warrants previously issued.     

On August 2, 2001, the Company completed the transaction by delivering $2.5     
million to its Preferred Shareholders in exchange for 2,620 shares of its Series
A Convertible Preferred Stock. As a result of this redemption, the Company has  
no outstanding preferred shares. The Company will reflect the redemption        
transaction in its fourth quarter ending October 31, 2001.                      

                                                                              14

10-Q 15th Page of 16 TOC 1st Previous Next ↓Bottom Just 15th
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 June 28, 2001, the Company filed a report on Form 8-K, which included        
information, reported pursuant to Item 5 - Other Events. The report documented  
the settlement agreement with the Company's former legal counsel.               

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.                                          

       SteelCloud, Inc
    (Registrant)

Date:   September 14, 2001          By:  /s/ Thomas P. Dunne                    

                            ------------------------------------
       Thomas P. Dunne
               Chief Executive Officer

Date:   September 14, 2001          By:  /s/ Kevin M. Murphy                    

                            ------------------------------------
       Kevin M. Murphy
               Vice President, Finance

                                                                              15

10-Q Last Page of 16 TOC 1st Previous Next ↓Bottom Just 16th
Exhibit 11.1                                                                    

COMPUTATION OF EARNINGS PER SHARE                                               

                                                        [Enlarge/Download Table]


                                             Three Months Ended           Nine Months Ended    
                                                  July 31,                    July 31,         
                                              2000         2001           2000        2001     
                                          -----------------------------------------------------
                                                                                               
Numerator:                                                                                     
Net income (loss) before extraordinary        $228,065     $543,830       $629,511    $818,142 
  gain                                                                                         
Preferred stock dividends                      (37,500)     (37,500)      (566,911)   (112,500)
                                          -----------------------------------------------------
Net (loss) income available to common                                                          
  shareholders before extraordinary gain                                                       
                                               190,565      506,330         62,600     705,642 

Denominator:                                                                                   
Denominator for basic earnings per                                                             
  share- weighted-average shares             9,649,409   10,214,545      9,548,440  10,076,592 
Effect of dilutive securities:                                                                 
Employee stock options                         316,563            -              -      12,821 
Convertible preferred stock                          -    5,137,255              -   3,084,316 
                                          ---------------------------------------------------- 
Dilutive potential common shares               316,563    5,137,255              -   3,097,137 

Denominator for diluted earnings per                                                           
  share adjusted weighted-average shares                                                       
  and assumed conversions                    9,965,972   15,351,800      9,548,440  13,173,729 

Basic earnings per share                         $0.02        $0.05          $0.01       $0.07 

Diluted earnings per share                       $0.02        $0.04          $0.01       $0.06 


                                                                              16

10-Q	1st Page of 16	TOC	↑Top	Previous	Next	↓Bottom	Just 1st

10-Q	2nd Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 2nd

10-Q	3rd Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 3rd

10-Q	4th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 4th

10-Q	5th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 5th

10-Q	6th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 6th

10-Q	7th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 7th

10-Q	8th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 8th

10-Q	9th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 9th

10-Q	10th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 10th

10-Q	11th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 11th

10-Q	12th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 12th

10-Q	13th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 13th

10-Q	14th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 14th

10-Q	15th Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 15th

10-Q	Last Page of 16	TOC	1st	Previous	Next	↓Bottom	Just 16th

Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

Changed as of / Corrected on:	6/23/04
	10/31/03	8		10-K, 4
	12/15/01	8
	11/30/01	6	12
	10/31/01	7	14	10-K
Filed on:	9/14/01	15
	9/1/01	1
	8/23/01	14
	8/2/01	7	14
For Period End:	7/31/01	1	12
	7/26/01	6	14	8-K
	7/3/01	14
	7/1/01	8
	6/30/01	8
	6/28/01	15		8-K
	5/15/01	13		DEF 14A, PRE 14A
	2/20/01	9
	1/10/01	9
	10/31/00	2	12	10-K405
	10/19/00	9
	7/31/00	2	11	10-Q
	3/13/00	7
	1/31/00	6		10-Q
	12/31/99	6	12
	11/8/99	6
	10/31/99	6		10-K, 10-K/A, NT 10-K
	8/31/99	9
	7/31/98	9		10-Q
				List all Filings

↑Top

Filing Submission 0001125282-01-501928 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Steelcloud Inc – ‘10-Q’ for 7/31/01

On: Friday, 9/14/01, at 3:48pm ET · For: 7/31/01 · Accession #: 1125282-1-501928 · File #s: 0-24015 (10-K), 0-24015, 333-48177 (10-K), 333-48177 · Correction: This Filing’s metadata (e.g., “Filed as of” Date) was Corrected by the SEC on 6/23/04. ®

Previous ‘10-K’: ‘10-K/A’ on 4/5/00 for 10/31/99 · Next: ‘10-K’ on 1/29/02 for 10/31/01 · Latest: ‘10-K/A’ on 3/16/10 for 10/31/09

Quarterly Report — Form 10-QFiling Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

On: Friday, 9/14/01, at 3:48pm ET · For: 7/31/01 · Accession #: 1125282-1-501928 · File #s: 0-24015 (10-K), 0-24015, 333-48177 (10-K), 333-48177 · Correction: This Filing’s metadata (e.g., “Filed as of” Date) was Corrected by the SEC on 6/23/04. `®`

Quarterly Report — Form 10-Q
Filing Table of Contents