##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal year ended: December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Commission File Number: 000-50373
 SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
  Delaware
    
    90-0182158(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)3130 Fairview Park Drive, Suite 400,
Falls Church, Virginia
    
    22042(Address of principal executive offices)
    
    (Zip Code)
 703-564-2967
 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
  SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
  o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE.




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##### 



TABLE OF CONTENTS
 Forward-Looking Statements
    
    
    1PART I  FINANCIAL INFORMATIONItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    5Item 1B.
    
    Unresolved Staff Comments
    
    
    7Item 2.
    
    Properties
    
    
    7Item 3.
    
    Legal Proceedings
    
    
    7Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    7Item 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchasersof Equity Securities
    
    
    7Item 6.
    
    Selected Financial Data
    
    
    9Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 8.
    
    Financial Statements and Supplementary Data
    
    
    18Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    44Item 9A.
    
    Controls and Procedures
    
    
    44Item 9B.
    
    Other Information
    
    
    45Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    45Item 11.
    
    Executive Compensation
    
    
    47Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    49Item 13.
    
    Certain Relationships and Related-Transactions
    
    
    50Item 14.
    
    Principal Accountant Fees and Services
    
    
    50Item 15.
    
    Exhibits and Financial Statements Schedules
    
    
    50




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##### 



FORWARD-LOOKING STATEMENTS
  Item 1. Business.
     Business Segments
  Security Solutions
  1




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##### 



Industrial and Offshore
     2




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##### 



Repair and Overhaul
   Procurement Services
    3




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##### 



Engineering Services
     Backlog
   2006
    
    
    2007
    
    
    2008+
    
    
    TotalSecurity Solutions
    
    $
    1,579
    
    
    $
    
    
    
    $
    
    
    
    $
    1,579Repair and Overhaul
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    141Engineering Services
    
    
    12,696
    
    
    
    3,992
    
    
    
    
    
    
    
    16,688Procurement Services
    
    
    16,335
    
    
    
    
    
    
    
    
    
    
    
    16,335Total Funded Backlog
    
    $
    30,751
    
    
    $
    3,992
    
    
    $
    
    
    
    $
    34,743
  4




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##### 



Environmental Matters
  Item 1A. Risk Factors.
  We may not receive the full amount of our contract awards.
  Increased raw material prices may adversely affect contract profitability.
  Loss of bonding may adversely impact our Canadian operations.
  Our quarterly operating results may fluctuate significantly as a result of factors outside of our
control, which could cause the market price of our common stock to decline.
  
    
    Fluctuations in revenue earned on contracts;
 5




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##### 




    
    Commencement, completion, or termination of contracts during any particular quarter;
    
    Variable purchasing patterns under GSA schedule contracts and agency-specific indefinite
delivery/indefinite quantity contracts;
    
    Provision of services under a share-in-savings or performance-based contract;
    
    Additions and departures of key personnel;
    
    Strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments, or changes in business strategy;
    
    Contract mix, the extent of use of subcontractors, and the level of third-party hardware
and software purchases for customers;
    
    Changes in presidential administrations and senior federal government officials that
affect the timing of procurements;
    
    Changes in policy or budgetary measures that adversely affect government contracts in general;
    
    The seasonality of our business; and
    
    Changes in the volume of material procurements we perform.
  Our business commitments require our employees to travel to potentially dangerous places, which may
result in injury to our employees.
  Unfavorable government audit results could force the Company to adjust previously reported
operating results and could subject us to a variety of penalties and sanctions.
    6




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##### 



Item 1B. Unresolved Staff Comments.
  Item 2. Properties.
  Segment
    
    Location
    
    Leased/Owned
    
    UsageSecurity Solutions
    
    Ft. Walton Beach, FL
    
    Owned
    
    ManufacturingFt. Walton Beach, FL
    
    LeasedIndustrial and Offshore
    
    St. Johns, Newfoundland
    
    Owned
    
    ManufacturingRepair and Overhaul
    
    Port Canaveral, FL
    
    Leased
    
    Fabrication
   Item 3. Legal Proceedings.
  Item 4. Submission of Matters to a Vote of Security Holders.
  PART II
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
 (a) Market Performance of Common Stock, Stockholders of Record and Dividends on Common Stock.
 7




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##### 



High
    
    Low2004First Quarter
    
    $
    2.81
    
    
    $
    1.60Second Quarter
    
    $
    4.02
    
    
    $
    0.70Third Quarter
    
    $
    1.55
    
    
    $
    0.58Fourth Quarter
    
    $
    1.69
    
    
    $
    1.142005First Quarter
    
    $
    2.60
    
    
    $
    1.45Second Quarter
    
    $
    2.36
    
    
    $
    1.00Third Quarter
    
    $
    1.63
    
    
    $
    0.91Fourth Quarter
    
    $
    1.17
    
    
    $
    0.57
   (b) Equity Compensation Plans.
 Number of
    
    
    
    
    
    Number of securitiessecurities to
    
    
    
    
    
    remaining available forbe issued upon
    
    
    
    
    
    future issuance underexercise
    
    Weighted-average
    
    equity compensationof outstanding
    
    exercise price of
    
    plans (excludingoptions,
    
    outstanding options,
    
    securitieswarrants and rights
    
    warrants and rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    0
    
    
    $
    0
    
    
    
    1,000,000
    (1)Equity compensation
plans not approved
by security holders
    
    
    5,837,800
    (2)
    
    $
    1.80
    
    
    
    3,041,000
    (3)Total
    
    
    5,837,800
    
    
    
    
    
    
    
    4,041,000
 
 (1)
    
    Represents stock options issuable pursuant to the Companys 2004 Non-Statutory Stock Option
Plan.(2)
    
    Represents shares of common stock issuable upon exercise of stock options issued pursuant to
the Companys Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan and the
Companys Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan.(3)
    
    Represents stock options issuable pursuant to the Companys Amended and Restated Number 1
2004 Non-Statutory Stock Option Plan and the Companys Amended and Restated Number 2 2004
Non-Statutory Stock Option Plan. 2004 Non-Statutory Stock Option Plan
  8




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##### 



Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan
  Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan
  Item 6. Selected Financial Data (Dollars shown in $000s except per share data).
 2005
    
    2004
    
    2003
    
    2002
    
    2001Revenue
    
    $
    53,698
    
    
    $
    11,134
    
    
    $
    13,330
    
    
    $
    12,261
    
    
    $
    11,877Income (loss) from Continuing Operations
    
    
    (4,492
    )
    
    
    (40,618
    )
    
    
    381
    
    
    
    (79
    )
    
    
    438Per share of Common Stock-basic &
diluted
    
    
    (0.11
    )
    
    
    (1.21
    )
    
    
    0.02
    
    
    
    (0.00
    )
    
    
    0.02Net Income (loss)
    
    
    (3,986
    )
    
    
    (40,307
    )
    
    
    206
    
    
    
    (611
    )
    
    
    232Per share of Common Stock-basic &
diluted
    
    
    (0.09
    )
    
    
    (1.20
    )
    
    
    0.01
    
    
    
    (0.03
    )
    
    
    0.01Total Assets
    
    
    49,404
    
    
    
    31,212
    
    
    
    4,634
    
    
    
    5,128
    
    
    
    6,123Long-term Debt
    
    
    2,814
    
    
    
    
    
    
    
    2,456
    
    
    
    2,006
    
    
    
    2,114Shareholder Equity
    
    
    35,097
    
    
    
    28,621
    
    
    
    (889
    )
    
    
    (1,176
    )
    
    
    (473
    )EBITDA
    
    
    (1,566
    )
    
    
    (38,878
    )
    
    
    732
    
    
    
    (158
    )
    
    
    757Adjusted EBITDA
    
    $
    (1,566
    )
    
    $
    (38,878
    )
    
    $
    732
    
    
    $
    340
    
    
    $
    757
     9




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##### 



EBITDA Reconciliation
 2005
    
    2004
    
    2003
    
    2002
    
    2001Net Income (loss)
    
    $
    (3,986
    )
    
    $
    (40,307
    )
    
    $
    206
    
    
    $
    (611
    )
    
    $
    232Depreciation/Amortization
    
    
    715
    
    
    
    176
    
    
    
    139
    
    
    
    149
    
    
    
    183Interest expense (income)
    
    
    (20
    )
    
    
    (125
    )
    
    
    295
    
    
    
    304
    
    
    
    328Tax expense (benefit)
    
    
    325
    
    
    
    (21
    )
    
    
    92
    
    
    
    
    
    
    
    Options issued to employees/directors
    
    
    1,400
    
    
    
    1,399
    
    
    $
    
    
    
    
    
    
    
    
    EBITDA
    
    $
    (1,566
    )
    
    $
    (38,878
    )
    
    
    732
    
    
    $
    (158
    )
    
    $
    743Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407
    
    
    
    Adjusted EBITDA
    
    $
    (1,566
    )
    
    
    (38,878
    )
    
    $
    732
    
    
    $
    340
    
    
    $
    743
 Quarterly Financial Data
(Dollars shown in 000s except per share amounts)
 2005Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    $
    2,543
    
    
    $
    11,796
    
    
    $
    16,820
    
    
    $
    22,539Gross Profit
    
    
    394
    
    
    
    1,675
    
    
    
    2,084
    
    
    
    2,819Net Income (loss)
    
    
    (1,745
    )
    
    
    (1,058
    )
    
    
    (57
    )
    
    
    (1,126
    )Basic & diluted earnings per share
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.00
    )
    
    $
    (0.03
    )
 2004Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Revenue
    
    $
    3,597
    
    
    $
    3,419
    
    
    $
    3,009
    
    
    $
    1,109Gross Profit
    
    
    322
    
    
    
    364
    
    
    
    166
    
    
    
    (906
    )Net Income (loss)
    
    
    (13,581
    )
    
    
    (26,682
    )
    
    
    (690
    )
    
    
    646Basic & diluted earnings per share
    
    $
    (0.70
    )
    
    $
    (0.73
    )
    
    $
    (0.02
    )
    
    $
    0.02
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
   Executive-Level Overview
  10




---



##### 



11




---



##### 



Critical Accounting Estimates
   Revenue Recognition
    12




---



##### 



Net Operating Loss Carry-Forwards
  Goodwill
    Overall Results of Operations
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    
    2004
    
    
    2003Revenues
    
    $
    53,698
    
    
    
    100.0
    %
    
    $
    11,134
    
    
    
    100.0
    %
    
    $
    13,330
    
    
    
    100.0
    %Cost of Revenue
    
    
    46,726
    
    
    
    87.0
    %
    
    
    11,188
    
    
    
    100.5
    %
    
    
    11,681
    
    
    
    87.6
    %Gross Profit
    
    $
    6,972
    
    
    
    13.0
    %
    
    $
    (54
    )
    
    
    -0.5
    %
    
    $
    1,649
    
    
    
    12.4
    %
  13




---



##### 



Security Solutions
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    
    2004
    
    
    2003Revenues
    
    $
    5,624
    
    
    
    100.0
    %
    
    $
    11,134
    
    
    
    100.0
    %
    
    $
    13,330
    
    
    
    100.0
    %Cost of Revenue
    
    
    6,236
    
    
    
    110.9
    %
    
    
    11,188
    
    
    
    100.5
    %
    
    
    11,681
    
    
    
    87.6
    %Gross Profit
    
    $
    (612
    )
    
    
    -10.9
    %
    
    $
    (54
    )
    
    
    -0.5
    %
    
    $
    1,649
    
    
    
    12.4
    %
      14




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##### 



Industrial and Offshore
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    
    2004
    
    
    2003Revenues
    
    $
    20,542
    
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %Cost of Revenue
    
    
    17,253
    
    
    
    84.0
    %
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %Gross Profit
    
    $
    3,289
    
    
    
    16.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    Repair and Overhaul
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    
    2004
    
    
    2003Revenues
    
    $
    1,921
    
    
    
    100.0
    %
    
    $
    
    
    
    
    100.0
    %
    
    $
    
    
    
    
    100.0
    %Cost of Revenue
    
    
    1,186
    
    
    
    61.7
    %
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %Gross Profit
    
    $
    735
    
    
    
    38.3
    %
    
    $
    
    
    
    
    0.0
    %
    
    $
    
    
    
    
    0.0
    %
   15




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##### 



Engineering Services
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    
    2004
    
    
    2003Revenues
    
    $
    9,324
    
    
    
    100.0
    %
    
    $
    
    
    
    
    100.0
    %
    
    $
    
    
    
    
    100.0
    %Cost of Revenue
    
    
    7,196
    
    
    
    77.2
    %
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %Gross Profit
    
    $
    2,128
    
    
    
    22.8
    %
    
    $
    
    
    
    
    0.0
    %
    
    $
    
    
    
    
    0.0
    %
   Procurement Services
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    
    2004
    
    
    2003Revenues
    
    $
    16,287
    
    
    
    100.0
    %
    
    $
    
    
    
    
    100.0
    %
    
    $
    
    
    
    
    100.0
    %Cost of Revenue
    
    
    14,855
    
    
    
    91.2
    %
    
    
    
    
    
    
    100.0
    %
    
    
    
    
    
    
    100.0
    %Gross Profit
    
    $
    1,432
    
    
    
    8.8
    %
    
    $
    
    
    
    
    0.0
    %
    
    $
    
    
    
    
    0.0
    %
   Operating Expenses
 For the Year ended December 31,(Dollars shown in 000s)2005
    
    2004
    

2003Selling, General & Administrative
    
    $
    11,464
    
    
    $
    40,564
    
    
    $
    1,268
  16




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##### 



Backlog by Segment
  Backlog
 (Dollars shown in 000s)2006
    
    
    2007
    
    
    2008+
    
    
    TotalSecurity Solutions
    
    $
    1,579
    
    
    $
    
    
    
    $
    
    
    
    $
    1,579Repair and Overhaul
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    141Engineering Services
    
    
    12,696
    
    
    
    3,992
    
    
    
    
    
    
    
    16,688Procurement Services
    
    
    16,335
    
    
    
    
    
    
    
    
    
    
    
    16,335Total Funded Backlog
    
    $
    30,751
    
    
    $
    3,992
    
    
    $
    
    
    
    $
    34,743
   Liquidity and Capital Resources
     17




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##### 



Contractual Obligations
  (Dollars shown in 000s)Total
    
    Current
    

1  3 Years
    

3  5 Years
    

5+ YearsOperating Leases
    
    $
    1,396
    
    
    $
    894
    
    
    $
    455
    
    
    $
    47
    
    
    $
    Capital Leases
    
    
    674
    
    
    
    211
    
    
    
    340
    
    
    
    99
    
    
    
    24Debt Service
    
    
    2,140
    
    
    
    117
    
    
    
    237
    
    
    
    126
    
    
    
    1,660Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Commitments
    
    $
    4,210
    
    
    $
    1,222
    
    
    $
    1,032
    
    
    $
    272
    
    
    $
    1,684
 Off-Balance Sheet Arrangements
  Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
    Foreign Exchange Risk
   Item 8. Financial Statements and Supplementary Data.
  Financial Statements
 Report of Independent Registered Certified Public Accounting Firm
    
    
    [19]Consolidated Balance Sheets: December 31, 2005 and 2004
    
    
    [20]Consolidated Statements of Operations and Comprehensive Income
(Loss): Years ended December 31, 2005, 2004 and 2003
    
    
    [21]Consolidated Statements of Stockholders Equity: Years ended
December 31, 2005, 2004, 2003
    
    
    [22]Consolidated Statements of Cash Flows: Years ended December 31,
2005, 2004 and 2003
    
    
    [23]Notes to Consolidated Financial Statements
    
    
    [24]
 18




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##### 



Report of Independent Registered Certified Public Accounting Firm
 TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
Spectrum Sciences & Software Holdings Corp.:
     
 19




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##### 



December
    
    
    December31, 2005
    
    
    31, 2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,652
    
    
    $
    5,667Short-term investments
    
    
    
    
    
    
    18,795Receivables
    
    
    16,959
    
    
    
    2,760Due from Stockholder
    
    
    
    
    
    
    705Inventories
    
    
    557
    
    
    
    79Prepaid expenses & other current assets
    
    
    513
    
    
    
    882Total current assets
    
    
    25,681
    
    
    
    28,888Property and equipment, net
    
    
    7,597
    
    
    
    2,281Goodwill
    
    
    15,222
    
    
    
    Investments in joint ventures
    
    
    746
    
    
    
    Deferred tax asset
    
    
    77
    
    
    
    Other assets
    
    
    81
    
    
    
    43TOTAL ASSETS
    
    $
    49,404
    
    
    $
    31,212LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,426
    
    
    $
    1,026Accrued expenses
    
    
    2,006
    
    
    
    483Due to related party
    
    
    
    
    
    
    705Deferred revenues
    
    
    376
    
    
    
    229Provision for contract losses
    
    
    
    
    
    
    148Income taxes payable
    
    
    156
    
    
    
    Deferred income taxes
    
    
    426
    
    
    
    Current portion of long-term debt
    
    
    332
    
    
    
    Total current liabilities
    
    
    11,722
    
    
    
    2,591Long term debt, less current portion
    
    
    2,482
    
    
    
    TOTAL LIABILITIES
    
    
    14,204
    
    
    
    2,591Commitments and contingencies (Note 17)Minority interest
    
    
    103
    
    
    
    Stockholders equity:Preferred stock, $0.0001 par value; 20,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 80,000,000 shares authorized,
44,072,200 and 38,969,300 issued and outstanding
    
    
    4
    
    
    
    3Additional paid-in capital
    
    
    79,866
    
    
    
    69,895Accumulated deficit
    
    
    (45,264
    )
    
    
    (41,278
    )Accumulated other comprehensive income
    
    
    491
    
    
    
    1Total stockholders equity
    
    
    35,097
    
    
    
    28,621TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    49,404
    
    
    $
    31,212
  20




---



##### 



12 months endedDecember 31,2005
    
    
    2004
    
    
    2003Revenues
    
    $
    53,698
    
    
    $
    11,134
    
    
    $
    13,330Cost of revenues
    
    
    46,726
    
    
    
    11,188
    
    
    
    11,681Gross profit
    
    
    6,972
    
    
    
    (54
    )
    
    
    1,649Operating expenses
    
    
    11,464
    
    
    
    40,564
    
    
    
    1,268Income (Loss) from operations
    
    
    (4,492
    )
    
    
    (40,618
    )
    
    
    381Total non-operating income (expense), net
    
    
    930
    
    
    
    290
    
    
    
    (83
    )Loss before provision for income taxes
    
    
    (3,562
    )
    
    
    (40,328
    )
    
    
    298Income tax benefit (expense)
    
    
    (325
    )
    
    
    21
    
    
    
    (92
    )Loss before minority interest
    
    
    (3,887
    )
    
    
    (40,307
    )
    
    
    206Minority interest (income) expense
    
    
    99
    
    
    
    0
    
    
    
    0Net (Loss) Income
    
    
    (3,986
    )
    
    
    (40,307
    )
    
    
    206Weighted average common shares outstanding:Basic and diluted
    
    
    42,250,363
    
    
    
    33,616,188
    
    
    
    18,845,112(Loss) income per share:Basic and diluted
    
    $
    (0.09
    )
    
    $
    (1.20
    )
    
    $
    0.01Net (Loss) Income
    
    
    (3,986
    )
    
    
    (40,307
    )
    
    
    206Foreign currency translation adjustments
    
    
    491
    
    
    
    0
    
    
    
    0Unrealized gain on available for sale securities
    
    
    (1
    )
    
    
    1
    
    
    
    0Total comprehensive (loss) income
    
    $
    (3,496
    )
    
    $
    (40,306
    )
    
    $
    206
  21




---



##### 



AccumulatedOtherComprehensiveCommon Stock
    
    
    
    
    
    
    Accumulated
    
    
    IncomeShares
    
    
    Amount
    
    
    APIC
    
    
    Deficit
    
    
    (Loss)
    
    
    TotalBalance at December 31, 2002
    
    
    600
    
    
    
    1
    
    
    
    
    
    
    
    (1,177
    )
    
    
    
    
    
    
    (1,176
    )Recapitalization of Silva Bay International, Inc.
    
    
    16,344,000
    
    
    
    1
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    70Issuance of share to effectuate recapitalization
    
    
    2,500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dissolution
of Spectrum Sciences & Software, Inc.
    
    
    (600
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Issuance of shares to legal counsel
    
    
    7,000
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206
    
    
    
    
    
    
    
    206Balance at December 31, 2003
    
    
    18,851,000
    
    
    
    1
    
    
    
    79
    
    
    
    (971
    )
    
    
    
    
    
    
    (891
    )Stock options issued for consulting services
    
    
    
    
    
    
    
    
    
    
    32,945
    
    
    
    
    
    
    
    
    
    
    
    32,945Exercise of stock options
    
    
    20,078,300
    
    
    
    2
    
    
    
    35,281
    
    
    
    
    
    
    
    
    
    
    
    35,283Stock options issued to employees
    
    
    
    
    
    
    
    
    
    
    1,399
    
    
    
    
    
    
    
    
    
    
    
    1,399Stock options issued for consulting services
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Exercise of stock options
    
    
    40,000
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,307
    )
    
    
    
    
    
    
    (40,307
    )Balance at December 31, 2004
    
    
    38,969,300
    
    
    
    3
    
    
    
    69,895
    
    
    
    (41,278
    )
    
    
    1
    
    
    $
    28,621Stock options issued to employees and directors
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    
    
    
    
    1,400Exercise of stock options
    
    
    2,900
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Issuance of common stock
for acquisition of Horne Engineering
Services, Inc.
    
    
    5,100,000
    
    
    
    1
    
    
    
    8,567
    
    
    
    
    
    
    
    
    
    
    
    8,568Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491
    
    
    
    491Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,986
    )
    
    
    
    
    
    
    (3,986
    )Balance as of December 31, 2005
    
    
    44,072,200
    
    
    $
    4
    
    
    $
    79,866
    
    
    $
    (45,264
    )
    
    $
    491
    
    
    $
    35,097Disclosure of reclassification amount:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005Reclassification adjustment for
losses included in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1
  22




---



##### 



2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet income (loss)
    
    $
    (3,986
    )
    
    $
    (40,307
    )
    
    $
    206Adjustments to reconcile net loss to net
cash used in operating activities
issuance of stock options to related party for
consulting services
    
    
    
    
    
    
    32,945
    
    
    
    Investor relations expenses paid by a related party
    
    
    
    
    
    
    2,763
    
    
    
    Stock options issued to employees and directors
    
    
    1,400
    
    
    
    1,399
    
    
    
    Stock options issued to service providers
    
    
    
    
    
    
    125
    
    
    
    10Write-down of obsolete inventory
    
    
    
    
    
    
    
    
    
    
    45Depreciation
    
    
    715
    
    
    
    176
    
    
    
    139Deferred income taxes
    
    
    440
    
    
    
    11
    
    
    
    46Earnings in joint ventures
    
    
    460
    
    
    
    
    
    
    
    Minority interest
    
    
    99
    
    
    
    
    
    
    
    (Gain) Loss on disposal of equipment
    
    
    (5
    )
    
    
    45
    
    
    
    (22
    )Realized (gain) loss on the sale of bonds
    
    
    (1
    )
    
    
    12
    
    
    
    Change in balance sheet itemsReceivables
    
    
    (6,492
    )
    
    
    (1,032
    )
    
    
    357Inventory
    
    
    (58
    )
    
    
    43
    
    
    
    124Prepaid Expenses
    
    
    580
    
    
    
    (831
    )
    
    
    (10
    )Accounts Payable
    
    
    5,272
    
    
    
    (246
    )
    
    
    (143
    )Accrued Expenses
    
    
    (220
    )
    
    
    (51
    )
    
    
    (74
    )Deferred Revenue
    
    
    (201
    )
    
    
    192
    
    
    
    37Provision for contract losses
    
    
    (148
    )
    
    
    148
    
    
    
    Other balance sheet changes
    
    
    (137
    )
    
    
    (87
    )
    
    
    11Net cash (used in) provided by continuing
operations
    
    
    (2,282
    )
    
    
    (4,695
    )
    
    
    726Net cash (used in) discontinued operations
    
    
    0
    
    
    
    0
    
    
    
    (15
    )Net cash (used in) provided by operations
    
    
    (2,282
    )
    
    
    (4,695
    )
    
    
    711Cash flows from investing activitiesPurchases of available for sale investments, net
    
    
    
    
    
    
    (22,807
    )
    
    
    Maturities of available for sale investments, net
    
    
    18,795
    
    
    
    4,000
    
    
    
    Business acquisitions, net of cash received
    
    
    (12,276
    )
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    (763
    )
    
    
    (497
    )
    
    
    (71
    )Proceeds from the sale of equipment
    
    
    75
    
    
    
    
    
    
    
    22Investments in joint ventures,net
    
    
    701
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    6,532
    
    
    
    (19,304
    )
    
    
    (49
    )Cash flows from financing activitiesRepayment of debt
    
    
    (481
    )
    
    
    (2,782
    )
    
    
    (184
    )Net (repayments) borrowings on lines of credit
    
    
    (1,828
    )
    
    
    
    
    
    
    (551
    )Advances and accrued interest from related parties, net
    
    
    (278
    )
    
    
    (68
    )
    
    
    136Proceeds for the exercise of stock options
    
    
    4
    
    
    
    31,819
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (2,583
    )
    
    
    28,969
    
    
    
    (599
    )Currency impact on cash and cash equivalents
    
    
    318
    
    
    
    0
    
    
    
    0Net increase in cash and cash equivalents
    
    
    1,985
    
    
    
    4,970
    
    
    
    63Cash and cash equivalents at beginning of period
    
    
    5,667
    
    
    
    697
    
    
    
    634Cash and cash equivalents at end of period
    
    $
    7,652
    
    
    $
    5,667
    
    
    $
    697
  23




---



##### 



1. ORGANIZATION AND NATURE OF BUSINESS
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Financial Statement Presentation
  Revenue Recognition
     24




---



##### 



Use of Estimates
  Cash Equivalents
  Fair Value of Financial Instruments
  Significant Customers and Credit Risks
  Year Ended December 31,2005
    
    2004
    
    2003Customer A
    
    
    23.7
    %
    
    
    
    *
    
    
    
    *Customer B
    
    
    27.1
    %
    
    
    
    *
    
    
    
    *Customer C
    
    
    
    *
    
    
    60.1
    %
    
    
    67.8
    %
 
 *
    
    Less than 10% of consolidated revenue as of the end of each period.  Concentration of Credit Risk
  25




---



##### 



Year Ended December 31,2005
    
    2004
    
    2003Customer A
    
    
    15.4
    %
    
    
    
    *
    
    
    
    *Customer B
    
    
    31.0
    %
    
    
    
    *
    
    
    
    *Customer C
    
    
    
    *
    
    
    60.0
    %
    
    
    61.8
    %
 
 *
    
    Less than 10% of consolidated accounts receivable and unbilled services as of the end of each period.  Inventories
  Property & Equipment
  Goodwill
  Impairment of Long-Lived Assets
  Income Taxes
  26




---



##### 



Research and Development Costs
  Earnings (Loss) Per Share
   Financial Instruments and Short-Term Investments
   Foreign Currency Translation
  Stock Based Compensation
 .
 27




---



##### 



3. ACQUISITIONS
 M&M Engineering, Ltd.
  Coast Engine and Equipment Company, Inc.
  Horne Engineering Services, Inc.
  28




---



##### 



Pro Forma Results (Unaudited)
  Twelve months endedDecember 31,(Dollars shown in 000s except per share amounts)2005
    
    2004Revenue
    
    $
    76,813
    
    
    $
    49,637Net loss
    
    
    (3,552
    )
    
    
    (38,830
    )Loss per share  Basic & Diluted
    
    $
    (0.08
    )
    
    $
    (1.16
    )
  29




---



##### 



Purchase Price Allocation
  (Dollars shown in 000s)M&M
    
    
    CEECO
    
    
    HorneAssets AcquiredCash
    
    $
    188
    
    
    $
    40
    
    
    $
    Accounts Receivable
    
    
    3,197
    
    
    
    117
    
    
    
    4,081Inventory
    
    
    374
    
    
    
    29
    
    
    
    Property and Equipment
    
    
    2,508
    
    
    
    65
    
    
    
    372Investments in joint ventures
    
    
    1,569
    
    
    
    
    
    
    
    311Other
    
    
    387
    
    
    
    28
    
    
    
    198$
    8,223
    
    
    $
    279
    
    
    $
    4,962Liabilities AssumedDebt
    
    
    (1,102
    )
    
    
    (27
    )
    
    
    (1,835
    )Accounts payable and accruals
    
    
    (1,258
    )
    
    
    (28
    )
    
    
    (2,641
    )Deferred Taxes
    
    
    (417
    )
    
    
    
    
    
    
    (221
    )(2,777
    )
    
    
    (55
    )
    
    
    (4,697
    )Goodwill
    
    
    1,675
    
    
    
    262
    
    
    
    13,285Total consideration
    
    $
    7,121
    
    
    $
    486
    
    
    $
    13,550
  4. SHORT-TERM INVESTMENTS (000s)
 Unrealized
    
    
    Unrealized
    
    
    RecordedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    BasisDecember 31, 2004Short-term investments:Certificate of Deposit
    
    $
    879
    
    
    $
    
    
    
    $
    
    
    
    $
    879US government and
Agency securities
    
    
    17,915
    
    
    
    17
    
    
    
    (16
    )
    
    
    17,916Total short-term investments
    
    $
    18,794
    
    
    $
    17
    
    
    $
    (16
    )
    
    $
    18,795
  5. RECEIVABLES (000s)
  30




---



##### 



December
    
    
    December31, 2005
    
    
    31, 2004ReceivablesBilled receivables
    
    $
    14,465
    
    
    $
    1,467Unbilled receivables
    
    
    2,268
    
    
    
    1,166Holdbacks
    
    
    184
    
    
    
    Other
    
    
    42
    
    
    
    127Total Receivables
    
    $
    16,959
    
    
    $
    2,760
  6. INVENTORIES (000s)
  December
    
    
    December31, 2005
    
    
    31, 2004InventoriesRaw materials
    
    $
    330
    
    
    $
    20Work in process
    
    
    217
    
    
    
    59Finished goods
    
    
    10
    
    
    
    Total Inventories
    
    $
    557
    
    
    $
    79
 7. PROPERTY AND EQUIPMENT (000s)
 Range of
    
    December
    
    
    DecemberLives (Years)
    
    31, 2005
    
    
    31, 2004Property and EquipmentLand
    
    
    
    $
    860
    
    
    $
    175Buildings and Improvements
    
    3-39
    
    
    4,786
    
    
    
    1,699Furniture & fixtures
    
    3-7
    
    
    51
    
    
    
    39Manufacturing Equipment
    
    3-7
    
    
    2,094
    
    
    
    1,013Tools & Equipment
    
    3-7
    
    
    383
    
    
    
    Office Equipment
    
    3-7
    
    
    633
    
    
    
    245Vehicles
    
    3-7
    
    
    311
    
    
    
    55Investment Property
    
    39
    
    
    221
    
    
    
    221Total
    
    
    
    $
    9,339
    
    
    $
    3,447Accumulated Depreciation
    
    
    
    
    (1,742
    )
    
    
    (1,166
    )Property and Equipment, net
    
    
    
    $
    7,597
    
    
    $
    2,281
 31




---



##### 



8. ACCRUED EXPENSES (000s)
 December
    
    
    December31, 2005
    
    
    31, 2004Actual ExpensesSalaries & payroll related items
    
    $
    740
    
    
    $
    126Accrued leave
    
    
    365
    
    
    
    66Property & sales tax
    
    
    65
    
    
    
    15Professional Fees
    
    
    492
    
    
    
    Deferred Rent
    
    
    120
    
    
    
    38Other
    
    
    224
    
    
    
    238Total Accrued Liabilities
    
    $
    2,006
    
    
    $
    483
 9. BORROWINGS AND LINES OF CREDIT
   CIBC Facility
   Bank of America Facility
  Magna Credit Facility
  32




---



##### 



Capital Leases
    
    
    Mortgages2006
    
    $
    224
    
    
    $
    1172007
    
    
    218
    
    
    
    1212008
    
    
    143
    
    
    
    1162009
    
    
    57
    
    
    
    612010
    
    
    48
    
    
    
    652011
    
    
    26
    
    
    
    1,660716
    
    
    
    2,140Less Interest on Capital Leases included above
    
    
    42
    
    
    
    Total Debt Commitments
    
    $
    674
    
    
    $
    2,140
 10. RELATED PARTY TRANSACTIONS
 Transactions related to BG Capital Group Limited, Endeavor Group, LLC and Related Stockholders
      33




---



##### 



Transactions with the President of the Company
  Transactions
related to the spouse of the former President of the Company
  Transactions related to Coast Engine and Equipment Company
    Transactions with Directors of the Company
  34




---



##### 



11. EMPLOYEE BENEFIT PLAN
  12. STOCK OPTION PLAN
      35




---



##### 



36




---



##### 



WeightedNumber of shares
    
    Option Price
    
    Average PriceOptions Outstanding 12/31/2003
    
    
    Granted
    
    
    24,243,250
    
    
    
    1.40-1.95
    
    
    
    1.76Exercised
    
    
    (20,118,300
    )
    
    
    1.65-1.95
    
    
    
    1.74Cancelled
    
    
    Outstanding 12/31/2004
    
    
    4,124,950
    
    
    
    1.40-1.95
    
    
    
    1.83Granted
    
    
    4,215,750
    
    
    
    1.28-2.50
    
    
    
    2.19Exercised
    
    
    (2,900
    )
    
    
    1.40
    
    
    
    1.40Cancelled
    
    
    (2,500,000
    )
    
    
    2.50
    
    
    
    2.50Outstanding 12/31/2005
    
    
    5,837,800
    
    
    
    1.28-1.95
    
    
    
    1.80
  Options Exercisable & OutstandingWeighted AverageExercise Price
    
    Shares Outstanding
    
    Remaining Life (yrs)1.28
    
    
    
    13,750
    
    
    
    2.51.40
    
    
    
    588,850
    
    
    
    1.41.65
    
    
    
    1,811,500
    
    
    
    2.81.95
    
    
    
    3,423,700
    
    
    
    0.85,837,800
 13. INCOME TAXES
  Year Ended December 312005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    
    
    
    $
    (33
    )
    
    $
    33State
    
    
    64
    
    
    
    
    
    
    
    13Foreign
    
    
    58
    
    
    
    
    
    
    
    Total Current
    
    
    122
    
    
    
    (33
    )
    
    
    46DeferredFederal
    
    
    
    
    
    
    12
    
    
    
    46Foreign
    
    
    203
    
    
    
    
    
    
    
    Total Deferred
    
    
    203
    
    
    
    12
    
    
    
    46Total tax provision
    
    $
    325
    
    
    $
    (21
    )
    
    $
    92
 37




---



##### 



2005
    
    2004
    
    2003Statutory Federal income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State taxes, net of federal benefits
    
    
    -1.7
    %
    
    
    3.6
    %
    
    
    2.8
    %Foreign tax rate difference
    
    
    -0.6
    %
    
    
    
    
    
    
    Deferred taxes from acquisition
    
    
    3.8
    %
    
    
    
    
    
    
    Change in tax rates
    
    
    0.5
    %
    
    
    
    
    
    
    Loss taxed under Subchapter S
    
    
    
    
    
    
    
    
    
    
    -5.9
    %Permanent difference
    
    
    -0.1
    %
    
    
    -30.8
    %
    
    
    Valuation allowance
    
    
    -46.7
    %
    
    
    -6.7
    %
    
    
    Other
    
    
    1.7
    %
    
    
    -0.1
    %
    
    
    Effective tax rate
    
    
    -9.1
    %
    
    
    0.0
    %
    
    
    30.9
    %
  2005
    
    
    2004Accrued expenses
    
    $
    211
    
    
    $
    55Depreciation
    
    
    (95
    )
    
    
    (98
    )Allowance for doubtful accounts
    
    
    222
    
    
    
    Stock compensation
    
    
    531Work in process (foreign)
    
    
    (809
    )NOL carry-forwards
    
    
    4,886
    
    
    
    2,725Other, net
    
    
    (269
    )
    
    
    17Valuation allowance
    
    
    (5,026
    )
    
    
    (2,699
    )Net deferred tax asset (liability)
    
    $
    (349
    )

    
    $
    
   38




---



##### 



14. NON-OPERATING INCOME (EXPENSE) (000s)
 2005
    
    
    2004
    
    
    2003IncomeBuilding Rent
    
    $
    228
    
    
    $
    206
    
    
    $
    186Interest
    
    
    198
    
    
    
    290
    
    
    
    Equity Investments
    
    
    830
    
    
    
    
    
    
    
    26ExpenseInterest
    
    
    (277
    )
    
    
    (165
    )
    
    
    (295
    )Other
    
    
    (49
    )
    
    
    (41
    )
    
    
    Total non-operating income (expense)
    
    $
    930
    
    
    $
    290
    
    
    $
    (83
    )
 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (000S)
 2005
    
    2004
    
    2003Cash paid for interest
    
    $
    300
    
    
    $
    181
    
    
    $
    309Cash paid for taxes
    
    $
    229
    
    
    $
    
    
    
    $
    Supplemental schedule of non-cash financing and investing:Issuance of debt for fixed asset acquisitions
    
    $
    2,393
    
    
    $
    
    
    
    $
    Reduction in due to related-party in lieu of cash
payment for exercise of stock options
    
    $
    
    
    
    $
    3,530
    
    
    $
    Unrealized (loss)gain on available for sale securities
    
    $
    (1
    )
    
    $
    1
    
    
    $
    Conversion of bank line of credit to priority note payable
    
    $
    
    
    
    $
    
    
    
    $
    649Conversion of accrued expenses to short-term debt
    
    $
    
    
    
    $
    
    
    
    $
    325Recapitalization of Silva Bay
    
    $
    
    
    
    $
    
    
    
    $
    71
  16. SEGMENT INFORMATION
   39




---



##### 



Year Ended December 31 (000s)2005
    
    
    2004
    
    
    2003Security SolutionsTotal revenue
    
    $
    5,624
    
    
    $
    11,134
    
    
    $
    13,330Operating (loss) income
    
    
    (1,934
    )
    
    
    (54
    )
    
    
    1,649Industrial and OffshoreTotal revenue
    
    
    20,542
    
    
    
    
    
    
    
    Operating income
    
    
    735
    
    
    
    
    
    
    
    Repair and OverhaulTotal revenue
    
    
    1,921
    
    
    
    
    
    
    
    Operating income
    
    
    345
    
    
    
    
    
    
    
    Engineering ConsultingTotal revenue
    
    
    9,324
    
    
    
    
    
    
    
    Operating income
    
    
    340
    
    
    
    
    
    
    
    Procurement ServicesTotal revenue
    
    
    16,287
    
    
    
    
    
    
    
    Operating income
    
    
    992
    
    
    
    
    
    
    
    HeadquartersTotal revenue
    
    
    
    
    
    
    
    
    
    
    Operating (loss)
    
    
    (4,970
    )
    
    
    (40,564
    )
    
    
    (1,268
    )TotalTotal revenue
    
    $
    53,698
    
    
    $
    11,134
    
    
    $
    13,330Operating (loss) income
    
    $
    (4,492
    )
    
    $
    (40,618
    )
    
    $
    381Non-Operating income(expense)
    
    
    930
    
    
    
    290
    
    
    
    (83
    )Net income (loss) before tax
    
    $
    (3,562
    )
    
    $
    (40,328
    )
    
    $
    298
 Identifiable Assets
    
    Fixed Asset Additions
    
    Depreciation ExpenseDecember 31,
    
    12 months ended
    
    12 months ended(Dollars
shown in 000s)
    
    2005
    
    2004
    
    2005
    
    2004
    
    2003
    
    2005
    
    2004
    
    2003Security Solutions
    
    $
    6,624
    
    
    $
    3,071
    
    
    $
    2,676
    
    
    $
    497
    
    
    $
    71
    
    
    $
    313
    
    
    $
    176
    
    
    $
    139Industrial and Offshore
    
    
    8,356
    
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    Repair and Overhaul
    
    
    773
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    Engineering Consulting
    
    
    2,924
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    Procurement Services
    
    
    6,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate Assets
    
    
    24,080
    
    
    
    28,142
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Total
    
    $
    49,404
    
    
    $
    31,213
    
    
    $
    3,156
    
    
    $
    497
    
    
    $
    71
    
    
    $
    715
    
    
    $
    176
    
    
    $
    139
  17. COMMITMENTS AND CONTINGENCIES
 Operating Leases
  40




---



##### 



Minimum CommitmentsType
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Facilities/Office space
    
    $
    727,136
    
    
    $
    263,818
    
    
    $
    11,238
    
    
    $
    
    
    
    $
    Office equipment
    
    
    104,739
    
    
    
    79,547
    
    
    
    38,483
    
    
    
    31,429
    
    
    
    7,126Vehicles
    
    
    61,818
    
    
    
    44,594
    
    
    
    17,216
    
    
    
    8,814
    
    
    
    Operating Leases
    
    $
    893,693
    
    
    $
    387,959
    
    
    $
    66,937
    
    
    $
    40,243
    
    
    $
    7,126
 Lessor
   2006
    
    $
    228,9672007
    
    $
    228,9672008
    
    $
    171,726$
    629,660
 Legal Matters
 Title VII Lawsuit
  Section 16(b) claim
   41




---



##### 



Claim by the former President of the Company
  Munitions Assembly Conveyor (MAC) Lawsuit
   Garrison Lawsuit
  42




---



##### 



Plum Island Claim
  SEC Investigation
  18. INVESTMENTS IN JOINT VENTURES
 M&M Engineering Limited
    43




---



##### 



Horne Engineering Services, LLC
  19. SUBSEQUENT EVENTS
 Option Issuances
  Bank of America Loan
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  Item 9A. Controls and Procedures.
 (a) Evaluation of Disclosure Controls and Procedures
 44




---



##### 



(b) Changes in Internal Control Over Financial Reporting.
 Item 9B. Other Information
  PART III
 Item 10. Directors and Executive Officers of the Registrant.
  Name
    
    Age
    
    PositionDarryl K. Horne
    
    
    45
    
    
    President, Chief Executive Officer and ChairmanMichael M. Megless
    
    
    59
    
    
    Vice President, Chief Financial Officer,
Secretary and DirectorFrancis X. Ryan
    
    
    54
    
    
    DirectorKelvin D. Armstrong
    
    
    64
    
    
    DirectorKarl H. Heer
    
    
    56
    
    
    Director
 BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
 Darryl Horne
 Michael
M. Megless
 45




---



##### 



Francis X. Ryan
 Kelvin D. Armstrong
 Karl H. Heer
 CODE OF ETHICS
 http://www.spectrumholdingscorp.com/governance/codeofethics.pdf
 COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
  46




---



##### 



AUDIT COMMITTEE AND FINANCIAL EXPERT
  Item 11. Executive Compensation.
 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
     47




---



##### 



COMPENSATION COMMITTEE
  Long-TermCompensation AwardsAnnual Compensation
    
    Restricted
    
    SecuritiesOther Annual
    
    Stock
    
    UnderlyingName and Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Compensation
    
    Award(s)
    
    Options (#)Darryl K. Horne
    
    
    2005
    
    
    $
    333,474
    
    
    $
    
    
    
    $
    20,975
    (a)
    
    $
    
    
    
    
    President and Chief Executive OfficerMichael M. Megless
    
    
    2005
    
    
    $
    213,358
    
    
    $
    
    
    
    $
    15,732
    (b)
    
    $
    
    
    
    
    Vice President and Chief Financial OfficerWilliam H. Ham
    
    
    2005
    
    
    $
    81,670
    
    
    $
    
    
    
    $
    63,800
    (c)
    
    $
    
    
    
    
    300,000Chief Executive Officer (former)
    
    
    2004
    
    
    $
    87,498
    
    
    $
    
    
    
    $
    6,000
    (d)
    
    $
    
    
    
    
    220,0002003
    
    
    $
    64,104
    
    
    $
    
    
    
    $
    
    
    
    $
    Nancy C. Gontarek
    
    
    2005
    
    
    $
    118,578
    
    
    $
    15,000
    
    
    $
    67,888
    (e)
    
    $
    
    
    
    
    300,000Chief Financial Officer (former)
    
    
    2004
    
    
    $
    107,750
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    220,0002003
    
    
    $
    76,375
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
 
 (a)
    
    Includes $9,942 car allowance, $4,033 country club dues and $7,000 Board of Directors
fees.(b)
    
    Includes $8,732 car allowance and $7,000 Board of Directors fees.(c)
    
    Includes $50,000 severance, $1,800 car allowance and $12,000 Board of Directors fees.(d)
    
    Includes $6,000 Board of Directors fees.(e)
    
    Includes $60,000 severance, $1,800 car allowance and $6,188 consulting fees. Board Compensation
   48




---



##### 



Stock Options
  Option Grants in Fiscal Year 2005
 Potential RealizableValue at AssumedNumber of
    
    Percent of
    
    
    
    
    
    
    
    
    
    Annual RatesSecurities
    
    Total Options
    
    Exercise
    
    
    
    
    
    of Stock PriceUnderlying
    
    Granted to
    
    or Base
    
    
    
    
    
    AppreciationOptions
    
    Employees in
    
    Price
    
    Expiration
    
    For Option Term (2)Name
    
    Granted (#) (1)
    
    Fiscal Year (1)
    
    ($/share)
    
    Date
    
    5% ($)
    
    10% ($)William H. Ham
    
    
    300,000
    
    
    
    17.5
    %
    
    $
    1.65
    
    
    
    1/11/08
    
    
    
    0
    
    
    
    0Nancy C. Gontarek
    
    
    300,000
    
    
    
    17.5
    %
    
    $
    1.65
    
    
    
    1/11/08
    
    
    
    0
    
    
    
    0
 
 (1)
    
    The figures representing options granted and percentages of total options are based on a
total, net of options granted, forfeited or cancelled within 2005, including an additional
515,750 common shares underlying stock options granted to our employees during 2005.(2)
    
    Stock value of $0.71, December 30, 2005 closing price, was used in this calculation.  Item 12. Security Ownership of Certain Beneficial Owners and Management.
  Number of Shares
    
    PercentName and Address of Beneficial Owner(1)
    
    Beneficially Owned (2)
    
    of ClassDarryl K. Horne, CEO and President
    
    
    4,877,007
    
    
    
    11.1
    %Michael M. Megless, CFO
    
    
    336,846
    (a)
    
    
    
    *%William H. Ham, Jr., former CEO and President
    
    
    520,000
    (b)
    
    
    1.2
    %Francis X. Ryan, Director
    
    
    
    
    
    
    
    *%Kelvin D. Armstrong, Director
    
    
    464,000
    (c)
    
    
    1.0
    %Karl H. Heer, Director
    
    
    460,000
    (c)
    
    
    1.0
    %Directors and Officers as a Group
    
    
    6,657,853
    
    
    
    15.1
    %
 
 *
    
    Less than 1% of the outstanding common stock.(1)
    
    Except as otherwise noted, the address for each person listed in this table is c/o Spectrum
Sciences & Software Holdings Corp., 3130 Fairview Park Drive, Suite 400, Falls Church,
Virginia 22042.(2)
    
    Beneficial ownership of shares is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes any shares over which a person exercises sole
or shared voting or investment power. The number of shares beneficially owned by a person
includes shares of common stock that the person had the right to acquire pursuant to options
exercisable within 60 days of March 15, 2006. Shares issuable pursuant to options are deemed
outstanding for calculating the percentage ownership of the person holding the options but are
not deemed outstanding for the purposes of calculating the percentage ownership of any other
person.(a)
    
    Includes 326,353 shares of common stock issuable pursuant to options.(b)
    
    Includes 520,000 shares of common stock issuable pursuant to options.(c)
    
    Includes 450,000 shares of common stock issuable pursuant to options. 49




---



##### 



Item 13. Certain Relationships and Related-Transactions.
  Item 14. Principal Accountant Fees and Services.
 Fees Paid to the Independent Auditors
  2004
    
    
    2005Audit Fees (a)
    
    $
    109,210
    
    
    $
    265,000Audit-Related Fees
    
    $
    2,500
    
    
    $
    Tax Fees
    
    $
    
    
    
    $
    6,000All Other Fees
    
    $
    
    
    
    $
    Total
    
    $
    111,710
    
    
    $
    271,000
 
 (a)
    
    Billed or expected to be billed in conjunction with that years audit.    Item 15. Exhibits and Financial Statements Schedules.
 (a)
    (1)
    
    The financial statements included in Item 8 hereof are incorporated herein by reference and
filed as part of this report.(2)
    
    All financial statement schedules are omitted because they are either not applicable, or
because the required information is shown in the consolidated financial statements or notes
thereto.(3)
    
    Exhibits: The response to this section of Item 15 is included in the Exhibit Index of
this report and is incorporated herein by reference.
 50




---



##### 



SIGNATURES
  SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.Date:  March 29, 2006
    By:
    /s/ Darryl K. HorneName:
    Darryl K. HorneTitle:
    Chief Executive Officer and President POWER OF ATTORNEY
   SIGNATURE
    
    TITLE
    
    DATE/s/ Darryl K. Horne
    
    Chief Executive Officer, President and Director
    
    March 29, 2006/s/ Michael M. Megless
    
    Chief Financial Officer and Director
    
    March 29, 2006/s/ Francis X. Ryan
    
    Director
    
    March 29, 2006/s/ Kelvin D. Armstrong
    
    Director
    
    March 29, 2006/s/ Karl H. Heer
    
    Director
    
    March 29, 2006
 51




---



##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger among Silva Bay International, Inc., SSS
Acquisition Company and Spectrum Sciences & Software, Inc., dated April 2, 2003
(previously filed in registration statement on Form 10-SB File No. 1-31710,
filed with the Securities and Exchange Commission on August 11, 2003).2.2
    
    Stock Purchase and Sale Agreement, dated as of January 28, 2005, by and among
Spectrum Sciences & Software Holdings Corp., Coast Engine and Equipment Co.,
Inc., Louis T. Rogers and Marilyn G. Rogers (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on March 3, 2005).2.3
    
    Share Purchase Agreement, dated as of February 1, 2005, by and among Spectrum
Sciences & Software Holdings Corp., EnerNorth Industries Inc. and M&M
Engineering Limited (previously filed on Form 8-K, filed with the Securities
and Exchange Commission on February 7, 2005).2.4
    
    Letter Agreement, dated as of February 2, 2005, by and between Spectrum
Sciences & Software Holdings Corp. and EnerNorth Industries Inc. (previously
filed on Form 8-K, filed with the Securities and Exchange Commission on
February 7, 2005).2.5
    
    Agreement and Plan of Merger, dated as of April 14, 2005, by and among Spectrum
Sciences & Software Holdings Corp., Horne Acquisition LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne and Michael M. Megless
(previously filed on Form 8-K, filed with the Securities and Exchange
Commission on March 17, 2005).2.6
    
    Amendment and Waiver Agreement, dated as of May 11, 2005, by and among Spectrum
Sciences & Software Holdings Corp., Horne Acquisition LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne and Michael M. Megless
(previously filed on Form 8-K, filed with the Securities and Exchange
Commission on March 17, 2005).3.1
    
    Certificate of Incorporation, filed August 28, 1998 (previously filed in
registration statement on Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003).3.2
    
    Certificate of Renewal and Revival, filed March 24, 2003 (previously filed in
registration statement on Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003).3.3
    
    Certificate of Amendment of Certificate of Incorporation, filed April 8, 2003
(previously filed in registration statement on Form 10-SB File No. 1-31710,
filed with the Securities and Exchange Commission on June 10, 2003).3.4
    
    Certificate of Merger filed with the Delaware Secretary of State (previously
filed in registration statement on Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003).3.5
    
    Articles of Merger filed with the Florida Secretary of State (previously filed
in registration statement on Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003).3.6
    
    Amended and Restated Bylaws of Spectrum Sciences & Software Holdings Corp., as
amended (previously filed on Form 10-Q, filed with the Securities and Exchange
Commission on November 14, 2005).4.1
    
    Specimen Certificate of Common Stock (previously filed in registration
statement on Form 10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003).4.2
    
    Registration Rights Agreement, dated as of May 11, 2005, by and among Spectrum
Sciences & Software Holdings Corp., Darryl K. Horne, Charlene M. Horne and
Michael M. Megless (previously filed on Form 8-K, filed with the Securities and
Exchange Commission on March 17, 2005).4.3
    
    First Amendment to Promissory Note, dated May 25, 2005, by and between Horne Engineering
Services LLC and Darryl K. Horne (previously filed on Form 8-K, filed with the Securities and
Exchange Commission on May 27, 2005).4.4
    
    Revolving Note, dated March 2, 2006, by and among Spectrum Sciences & Software
Holdings
 52




---



##### 



ExhibitNumber
    
    DescriptionCorp., Horne Engineering Services, LLC and Bank of America, N.A.
(filed herewith).10.1
    
    First Amendment to Revolving Line of Credit Loan Agreement, Contract Line of
Credit Loan Agreement and Security Agreement, effective June 30, 2005, made by
Horne Engineering Services, LLC, Darryl K. Horne and Charlene M. Horne, and
Bank of America, N.A. (previously filed on Form 8-K, filed with the Securities
and Exchange Commission on July 12, 2005).10.2
    
    Subordination Agreement, effective June 30, 2005, made by Spectrum Sciences &
Software Holdings Corp. in favor of Bank of America, N.A. (previously filed on
Form 8-K, filed with the Securities and Exchange Commission on July 12, 2005).10.3
    
    Revolving Line of Credit Loan Agreement and Security Agreement, dated March 2,
2006, by and among Spectrum Sciences & Software Holdings Corp., Horne
Engineering Services, LLC and Bank of America, N.A. (filed herewith).10.6
    
    Employment Agreement with William H. Ham, Jr., dated August 9, 2004 and as
amended on December 14, 2005 (previously filed on Form 10-KSB, filed with the
Securities Exchange Commission on April 13, 2005).10.7
    
    Assignment and Assumption Agreement, dated as of May 11, 2005, by and between
Spectrum Sciences & Software Holdings Corp. and Spectrum Sciences & Software,
Inc., with respect to the Employment Agreement of William H. Ham, Jr., as
amended (previously filed on Form 8-K, filed with the Securities and Exchange
Commission on March 17, 2005).10.8
    
    First Amendment to Assignment and Assumption Agreement, dated as of May 23,
2005, by and between Spectrum Sciences & Software Holdings Corp. and Spectrum
Sciences & Software, Inc., with respect to the Employment Agreement of William
H. Ham, Jr., as amended. (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on May 27, 2005).10.9
    
    Employment Agreement with Nancy C. Gontarek, dated August 9, 2004 and as
amended on December 14, 2005 (previously filed on Form 10-KSB, filed with the
Securities Exchange Commission on April 13, 2005).10.10
    
    Assignment and Assumption Agreement, dated as of May 11, 2005, by and between
Spectrum Sciences & Software Holdings Corp. and Spectrum Sciences & Software,
Inc., with respect to the Employment Agreement of Nancy C. Gontarek, as amended
(previously filed on Form 8-K, filed with the Securities and Exchange
Commission on March 17, 2005).10.11
    
    First Amendment to Assignment and Assumption Agreement, dated as of May 23,
2005, by and between Spectrum Sciences & Software Holdings Corp. and Spectrum
Sciences & Software, Inc., with respect to the Employment Agreement of Nancy C.
Gontarek, as amended (previously filed on Form 8-K, filed with the Securities
and Exchange Commission on May 27, 2005).10.12
    
    Employment Agreement, dated as of May 11, 2005, by and between Spectrum
Sciences & Software Holdings Corp. and Darryl K. Horne (previously filed on
Form 8-K, filed with the Securities and Exchange Commission on March 17, 2005).10.13
    
    First Amendment to Employment Agreement, dated as of May 23, 2005, by and
between Spectrum Sciences & Software Holdings Corp. and Darryl K. Horne
(previously filed on Form 8-K, filed with the Securities and Exchange
Commission on May 27, 2005).10.14
    
    Employment Agreement, dated as of May 11, 2005, by and between Spectrum
Sciences & Software Holdings Corp. and Michael M. Megless (previously filed on
Form 8-K, filed with the Securities and Exchange Commission on March 17, 2005).10.15
    
    First Amendment to Employment Agreement, dated as of May 23, 2005, by and
between Spectrum Sciences & Software Holdings Corp. and Michael M. Megless
(previously filed on Form 8-K, filed with the Securities and Exchange
Commission on May 27, 2005).10.16
    
    2004 Non-Statutory Stock Option Plan, dated March 11, 2004 (previously filed on
Form 8-K, filed with the Securities and Exchange Commission on March 12, 2004).10.17
    
    Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan, dated April
16, 2004 (previously filed on Form S-8, filed with the Securities and Exchange
Commission on April 21, 2004).10.18
    
    Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan, dated
November 15, 2004 (previously filed on Form 8-K, filed with the Securities and
Exchange Commission on November 19, 2004).10.19
    
    Stock Option Agreement between Robert Genovese and Spectrum Sciences & Software
Holdings Corp., dated April 20, 2004 (previously filed on Form 10-QSB, filed
with the Securities and
 53




---



##### 



ExhibitNumber
    
    DescriptionExchange Commission on May 24, 2004).10.20
    
    Stock Option Agreement between Robert Genovese and Spectrum Sciences & Software
Holdings Corp., dated April 20, 2004 (previously filed on Form 10-QSB, filed
with the Securities and Exchange Commission on May 24, 2004).10.21
    
    Form of Stock Option Agreement between Spectrum Sciences & Software Holdings
Corp. and each of Kelvin D. Armstrong, Karl H. Heer, William H. Ham, Jr. and Nancy
C. Gontarek, dated November 15, 2004 (previously filed on Form 8-K, filed with
the Securities and Exchange Commission on November 19, 2004).10.22
    
    Form of Stock Option Agreement between Spectrum Sciences & Software Holdings
Corp.and each of Kelvin D. Armstrong, Karl H. Heer, William H. Ham, Jr. and Nancy
C. Gontarek, dated January 12, 2005 (previously filed on Form 8-K, filed with
the Securities and Exchange Commission on January 19, 2005).10.23
    
    Form of Stock Option Agreement between Spectrum Sciences & Software Holdings
Corp. and each of Kelvin D. Armstrong, Karl H. Heer and William H. Ham, Jr., dated
February 14, 2005 (previously filed on Form 8-K, filed with the Securities and
Exchange Commission on February 18, 2005).10.24
    
    Stock Option Agreement between Spectrum Sciences & Software Holdings Corp. and
Darryl K. Horne, dated May 11, 2005 (previously filed on Form 8-K, filed with
the Securities and Exchange Commission on May 17, 2005).10.25
    
    Form of Stock Option Agreement between Spectrum Sciences & Software Holdings
Corp. and each of Darryl K. Horne and Michael M. Megless, dated June 8, 2005
(previously filed on Form 8-K, filed with the Securities and Exchange
Commission on June 13, 2005).10.26
    
    Stock Option Agreement between Spectrum Sciences & Software Holdings Corp. and
Michael M. Megless, dated January 23, 2006 (previously filed on Form 8-K, filed
with the Securities and Exchange Commission on January 27, 2006).10.27
    
    Amended and Restated Consulting Agreement between Robert Genovese and
Spectrum Sciences & Software Holdings Corp., dated April 16, 2004 (previously
filed on Form 8-K, filed with the Securities and Exchange Commission on April
21, 2004).10.28
    
    Consulting Agreement between Robert Genovese, Endeavor Capital Group LLC, BG
Capital Group Ltd. and Spectrum Sciences & Software Holdings Corp., dated
October 1, 2004 (previously filed on Amendment No. 1 to Schedule 13D, filed
with the Securities and Exchange Commission on October 4, 2004).10.29
    
    Stipulation and Agreement of Compromise, Settlement and Release, dated November
17, 2005, by and among Todd Augenbaum, Robert Genovese, BG Capital Group Ltd.
and Spectrum Sciences & Software Holdings Corp. (filed herewith).10.30
    
    Settlement and Standstill Agreement, dated November 17, 2005, by and among
Robert Genovese, BG Capital Group Ltd. and Spectrum Sciences & Software
Holdings Corp. (filed herewith).14
    
    Code of Ethics (previously filed on Form 10-KSB, filed with the Securities and
Exchange Commission on April 13, 2004).21
    
    List of Subsidiaries (filed herewith).23
    
    Accountants Consent, Tedder, James, Worden & Associates, P.A. (filed herewith).24
    
    Powers of Authority (see signature page hereto).31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
 54