At the Annual Meeting of Shareholders held on February 17, 2004, SSI’s shareholders approved the adoption of a new stock option plan (the “Plan”). Eligible participants under the Plan include key employees, directors and advisors of the company and its subsidiaries. The options are not assignable or transferable and will expire ten years after the grant date. The purchase price of the common shares under the Plan must be equal to the fair market value of the company common stock at the time the option is granted or higher as may be determined by the Plan Committee or the Board of Directors at the time of grant. The maximum aggregate number of shares of common stock that may be issued and sold under the Plan is 10,000,000. The maximum aggregate number of shares issued under the Plan during any given year must not exceed 10% of the total outstanding shares of the company during such calendar year.

 

Description of Sun & Surf Inc.

 

SSI was incorporated as a New York corporation on November 30, 2000. SSI was a seller of sporting goods, apparel and accessories retail/wholesale and a consultant to retailers and wholesalers in the action sports industry. After the Stock Exchange, SSI discontinued its previous business and carried on the business of MSSI only. On August 27, 2003, SSI declared a dividend payable in shares of its wholly owned subsidiary, Surf Franchise Inc., on the basis of one share of common stock of the subsidiary in respect of each outstanding share of SSI, adjusted to give effect to the ten-for-one split. The record date for determining holders entitled to receive the dividend was September 8, 2003. As a result of this dividend, we no longer have any ownership interest in Surf Franchise Inc.

 

Description of Business of MSSI

 

MSSI was originally established in 1997, and presently provides information technology (“ IT ”) services and products, computer software and hardware sales, network operation and design, systems analysis and deployment, and business process consulting services to Federal, state and local governments, including military and civil agencies. Our corporate headquarters is located in Capitol Heights, Maryland.

 

We offer IT services in the following areas:

 

·	Enterprise Management Implementation and Sustainment services for Computer Associates (“ CA ”) Unicenter Suite of solutions

 

·	Customer Relationship Management (“CRM ”) and Call Center Management Services

 

·	Customized Training solutions that can incorporate new technologies such as web broadcasting, virtual class rooms and multi media

 

·	IT Management Services such as Business Process Re-Engineering (“ BPR ”), Requirements Analysis, Strategic Planning, and Independent Verification and Validation (“ IV&V ”) and other Pre-Implementation Services.

 

We are also an authorized dealer of several brand-name IT products. We provide our customers high-quality hardware and software, peripherals, office automation products, desktop and laptop systems, and computer accessories. Our long-established relationships with major IT equipment manufacturers and distributors allow us to provide our customers with IT products at competitive prices and expedited delivery times, often within 24 hours of the order.

 

Our suite of Enterprise Network solutions is comprised of a host of services, including design, implementation, and maintenance, networked facilities management, disaster recovery, security and helpdesk support. We analyze enterprise networks and offer meaningful, cost effective solutions.

 

We focus our business on providing necessary services and related equipment to Federal, state and local governments. We generate revenue by reselling IT products or providing services through consultative selling, which involves identifying agencies that have IT problems, developing a solution, and presenting the solution for customer approval. We use teams of specialists assembled from our current staff and subscribe to recruiting services over the Internet for additional personnel. Approximately 90% of our revenues were derived from sales to agencies of the Federal government and approximately 10% was derived from sales to agencies of state and local governments.

 

 

 

Employees

 

Currently, our total employment is 78, which includes six contractors. We have a total of 50 employees/contractors, who provide technical support and operational services at various contract sites principally in the Washington, D.C. area and in locations around the United States. The remaining 28 employees/contractors perform executive, business development and administrative functions. We are not a party to any collective bargaining agreement with a labor union, and we believe relations with our employees are good.

 

Business and Industry Overview

 

According to an initial analysis of President Bush’s Administration’s 2006 Budget to Congress performed by FSI, a Washington, DC-area management consulting group, President Bush’s proposed fiscal year 2006 Information Technology IT Budget of $65.2 billion represents more than a 7% growth rate relative to the prior fiscal year. A four year view shows that the Federal IT budget has experienced a compound annual growth rate (“CAGR”) of 5.5% over four years (from FY2003 through FY2006). “This is not unexpected, and represents healthy growth for IT for the Federal Government, considering that the top line budgets of many agencies are dropping or funded below requested,” said Karen Wilson, vice president, consulting for FSI. “The IT portions of this budget are growing, which is good news for the industry.”

 

According to INPUT, a provider of high quality and in-depth government market insight and analysis based in Reston, Virginia, states in its recent “Federal IT Market Forecast, FY 2004-FY 2009” report, that the Federal market demand for vendor-furnished information systems and services will increase from $58.6 billion in FY 2004 to $80.7 billion in FY 2009 at a CAGR of 6.6%. INPUT’s Federal Market Forecast, FY 2004-FY 2009 is a comprehensive analysis of the Federal IT market for information technology. Produced by INPUT as a part of its Federal Market Program, this report provides vendors and other interested parties with a detailed view of Federal spending and market forecasts for the next five years.

 

Competition

 

The General Accounting Office in its report of February 2003, titled Contracting for Information Technology Services , reported that the distribution of Federal spending for IT services in fiscal year 2001 was to 2,167 small businesses, 635 medium companies, and 281 large companies. We are considered a small business.

 

There are approximately 14,000 IT companies in the United States with 50 or more employees. The number of firms with less than 50 employees is estimated to be even larger.

 

Many IT firms are competing for government contracts. We believe that other IT companies doing business with the government are positioning themselves for growing opportunities in outsourcing, information assurance, modernization efforts, and large systems integration projects.

 

The larger IT firms doing business with the government have extensive resources to pursue and obtain contracts. There are a large number of contracts, however, being awarded by the Federal government. We believe that we have demonstrated our ability to effectively bid and be awarded government awarded contracts.

 

We believe that government contractors tend to focus on bids with specific agencies and become comfortable dealing within those agencies. We believe this tendency means we will consistently encounter certain competitors at a given agency. For these reasons, we do not expend much effort devising strategies against our competitors.

 

 

 

 

Government Regulation

 

We are subject to numerous Federal, state and local regulations. The most significant source of regulations is the Federal Acquisition Regulation (“ FAR ”) which defines the laws and regulations that we must observe applicable to the formation, administration and performance of Federal government contracts. Any company selling to the Federal government must comply with the FAR or may face penalties or disbarment from doing business with the Federal government.

 

 

 

Service Contracts

 

Our contracts are primarily negotiated on either a fixed-price basis or a time-and-materials basis. For our time-and-materials contracts we charge our customers a fixed hourly rate for each hour of service provided. The skills and rates used are similar to those established in our GSA Schedule Contract No. GS-35F-5347H (the “ GSA Contract ”) held with the GSA. The GSA Schedule is a Federal government contract managed by GSA. Any agency or department of the Federal government may purchase goods and services by using this contract. Any vendor can apply for a GSA schedule, which when awarded would allow publication of the vendor’s products and services targeted for sale to agencies of Federal, state and local governments. Many Federal agencies use this contract to purchase goods and services.

 

When awarded a contract, we often recruit and hire additional employees. The term of employment of these additional employees is usually for the duration of the contract or task order received.

 

 

 

 

Products Orders

 

We provide products to our customers. We respond to requests for quotes initiated by prospective customers. Our quoted prices include all estimated costs to deliver the products, plus an overhead and profit amount. None of those amounts include penalties to either party for early termination.

 

We purchase the products we resell only after a valid order is received from an ordering customer. We maintain no inventory.

 

Material Contracts Awarded to MSSI

 

Army Medical Command - Walter Reed Army Medical Center - Directorate of Information Management (“DOIM”) - Our projects under this work order include database administration, Internet/intranet application development for Army medical support program requiring the utilization of the Integrated Clinical Data Base (“ICDB”) and the Composite Health Care System (“CHCS”) resources. Our on-site system development team provides project research, data mining, data filtering, and the conversion of legacy applications, which includes project management of task assignments issued to the Directorate of Information Management (“DOIM”). The core environment is Oracle WEB, Oracle DB, SQL-Server and Active Server Page (“ASP”).

 

The initial period of performance for this contract was from October 2002 to September 2004, with a total contract value of $2,914,114.43. This contract was modified and extended to reflect a period of performance of October 2004 to June 2005 with a value of $1,281,866.00. The total value of this contract is $4,195,980.43.

 

The U.S. Department of Housing and Urban Development (“HUD”) - We designed, developed, and implemented a call center to provide a service desk solution for HUD’s Office of Public and Indian Housing Authority (PIH). The call center identifies, tracks and resolves issues associated with the Public and Indian Housing Information Center (PIC) system. Our call center staff provides support to a national user base. In addition to providing call center implementation and management services, we provide project management consulting, legislative compliance maintenance, and end-user training services to HUD’s PIH personnel.

 

This contract called for a one-year base period running from July 2002 to June 2003, with a series of two one-year extension options. HUD exercised each option, and intends to re-compete the contract prior to the June 2005 completion. As the incumbent contractor, we are confident of our prospects for retaining this business.

 

Anteon Corporation (“Anteon”) - We provide hardware, operating systems and feature set licensing, telecommunications infrastructure, engineering services, operations services, planning services and management of delivery of application hosting, management and deployment services to build out and operate one or more classified Data Centers. The services we provide Anteon on this contract are in direct support of the implementation of Data Centers for the United States Army Reserves. The contract was awarded on September 1, 2003, included two option years and the initial one-year period of performance was valued at $841,000. The second option year was exercised in fiscal 2004. The total contract value, including the two option years, is valued at $2,523,000.

 

The U.S. Department of Justice - Drug Enforcement Administration (“DEA”) - We are providing a staff of 15 employees around DEA offices nationwide to provide state-of-the-art inventory data control services. The DEA inventory support tasks include analyzing and reconciling property records, editing data, making corrections, keying into DEA’s Fixed Asset Subsystem (FAS), assisting with inventory, and performing similar duties as assigned. This contract is valued at $1,036,000 for a period of performance from January 2005 - December 2005. MSSI was selected based on its considerable experience in staffing and managing on-site functions at various Federal agencies across the United States.

 

Material Contract Terminations

 

Sergeant at Arms of the United States Senate (“SAA”) - On June 1, 2004, we were awarded a fixed-price contract by the SAA to design and build a new software application referred to as Print Management and Accounting System (“PMAS”). The SAA is responsible for providing a number of administrative support services to the offices of the U.S. Senate. Many of these services are regulated by statute and include the preparation of franked mail, printing and graphic services and the storage and distribution of documents for official U.S. Senate use. The period of performance was to be October 2004 to September 2005 with a contract value of $975,200.

 

On February 10, 2005, the SAA exercised its option to terminate the contract. The basis for their termination was that we did not make a satisfactory performance of the initial deliverable as specified in the PMAS Preliminary Design and Requirements Validation. We have ceased all work under the contract, and we are in discussions with the SAA to be paid for the value of our services provided which amounted to $75,612.80.

 

Substantial Customers

 

During the period November 1, 2003 through October 31, 2004, we derived a substantial proportion of our sales from three agencies of the Federal government. Those sales were generated through multiple contracts with each agency. Individually these contracts do not represent significant business, but collectively they make our relationship with each agency material. The chart below illustrates the distribution.

 

 

Future Commitments

 

Our contract backlog consists of contracts valuing approximately $5.5 million, which is based on amounts actually obligated by a client for payment of goods and services, and unfunded backlog, which is based upon management’s estimate of the future potential of our existing contracts and task orders, including options, to generate revenue. Our backlog may not result in actual revenue in any particular period or at all.

 

In each case, the customer may at any time modify these contracts to increase or decrease the contract dollar value or terminate the contract.

 

Proprietary Products and Intellectual Property

 

We own no proprietary products. Any proprietary products that are developed are owned by the customer and not us.

 

 

Our Growth Strategy

 

Our goal is to continue to grow as a provider of excellent IT services and quality products. Our strategy to reach this goal concentrates on:

 

·

Maintaining and growing our core business. We will achieve this through (i) continuing to build a sales and service organization; (ii) developing service offerings that have broad application across government agencies; (iii) establishing direct relationships with manufacturers to maintain pricing competitiveness; and (iv) improving our Human Resource recruiting processes and compensation plans, which will enhance our ability to compete.

 

·	Seeking growth opportunities in new business verticals. This strategy will include the private sector as well as other government sectors which management believes represents a forward growth opportunity that is currently not being addressed.

 

·

Strategic growth opportunities. This may include strategic partnerships, alliances and strategic acquisitions which would leverage our current relationships, and expand our offering with various government agencies. Currently, due to limited access to the capital markets, management has not yet executed a strategic acquisition.

 

Intent to Acquire Voyage Data Corporation .

 

In June, 2004, the company’s Board of Directors approved the issuance of a definitive letter of intent (“LOI”) to acquire Voyage Data Corporation ("Voyage Data"), a Florida based systems integrator which specializes in wireless security, management, and application development with a focus on healthcare. The company would acquire all of the outstanding shares of Voyage Data for a value of $2,000,000, which consideration shall be a combination of 2,175,000 of the company's common stock and a $1,000,000 promissory note secured by the assets of Voyage Data. The note would be payable in 20 quarterly installments of $50,000.The LOI was issued June 1, 2004, and the closing date for the transaction was anticipated to take place on or before September 30, 2004. Upon completion of the transaction, Voyage Data would become a wholly-owned subsidiary of the company. The company would use the acquisition to expand its current systems management and application development practice to include the fast growing wireless sector and to expand into the commercial healthcare marketplace to complement the company's Federal systems integration activities. As part of the purchase, the company will acquire Intellectual Property, Client Reference Account, Exclusivity, and Strategic Alliances from Voyage Data.

 

On October 18, 2004, the company’s Board of Directors approved a resolution calling for a delay in making a decision as to proceed or not to proceed with the transaction to allow more time to complete its due diligence process and to seek terms and conditions in the deal that would be more favorable to the company. The company would resume consideration of the transaction after March 31, 2005.

 

The costs related to the acquisition that were incurred during the twelve-month period ended October 31, 2004 totaled $107,000, and were comprised of a good faith deposit of $50,000, legal fees of $40,000 and miscellaneous expenses of $17,000.

 

Other Material Agreements

 

We have a $2.0 million financing facility with Action Capital Corporation of Atlanta, Georgia. Under the terms of this facility we can sell accounts receivable up to 85% of their value in advance of payment from the customer. Interest on this facility is calculated at prime rate plus one percent on the daily average balance of unpaid accounts sold plus a 0.95% monthly fee on said balance. The facility is secured by liens on MSSI’s accounts receivable and by personal guarantees of its principals.

 

We issued a promissory note to a corporation controlled by a minority shareholder for receipt of $250,000. The loan proceeds were used for general corporate purposes and the loan was restructured such that all remaining accrued and unpaid interest and principal was to be paid in full on June 22, 2004. The interest rate is 15% per annum, compounded annually. We were unable to fully repay the loan on the due date, and the outstanding principal balance on the note was $100,800 as of October 31, 2004. We are in discussions with the lender to restructure an extension of the maturity date.

 

 

 

 

On December 15, 2003, we signed a $250,000 Convertible Promissory Note payable to a minority shareholder. The loan proceeds were to be delivered in installments, the first of which was received on the same day for $25,000. On April 30, 2004 we received a second installment in the amount of $65,000. On June 22, 2004, we received a third installment in the amount of $20,000. The total outstanding loan balance as of October 31, 2004 was $110,000. The loan is payable on demand anytime after December 30, 2005 (“demand date”). The interest rate is 6 percent per annum, compounded annually. The conversion of the unpaid principal and interest balance into our common stock shares is exercisable at our option at any time during the period commencing 30 days prior to the demand date and based on the closing price of the common stock on the date of conversion.

 

On April 30, 2004, we signed a $100,000 Convertible Promissory Note payable to a minority shareholder. The loan proceeds were to be delivered in installments, the first of which was received on the same day for $90,000. The loan is payable on demand anytime after December 30, 2005 (“demand date”). The interest rate is 6 percent per annum, compounded annually. The conversion of the unpaid principal and interest balance into our common stock shares is exercisable at our option at any time during the period commencing 30 days prior to the demand date and based on the closing price of the common stock on the date of conversion.

 

 

RISK FACTORS

 

The Company operates in a competitive environment. Our business encounters, among others, the following primary risk factors:

 

Business Risks

 

We depend on contracts with the Federal government for a substantial majority of our revenue, and our business could be seriously harmed if the Federal government ceased doing business with us.

 

The Federal sector accounts for 90% of our income. Our Federal government contracts may be terminated by the government at any time. We could be barred from doing business with the Federal government or Federal government agencies could exercise their right to terminate our contracts for budgetary reasons, convenience of the government, or any other reason. In either case, we expect that our revenues would decrease significantly. Should our largest Federal government customer terminate its contract with us, our revenues could decrease by as much as 20% per month.

 

If we fail to establish and maintain important relationships with government entities and agencies, our ability to successfully bid for new business may be adversely affected.

 

To facilitate our ability to prepare bids for new business, we rely in part on establishing and maintaining relationships with officials of various government entities and agencies. These relationships enable us to provide informal input and advice to government entities and agencies prior to the development of a formal bid. We may be unable to successfully maintain our relationships with government entities and agencies, and any failure to do so may adversely affect our ability to bid successfully for new business.

 

We derive significant revenue from contracts and task orders awarded through a competitive bidding process. If we are unable to consistently win new awards over any extended period, our business and prospects will be adversely affected.

 

Substantially all of our contracts and task orders with the Federal government are awarded through a competitive bidding process. We expect that much of the business that we will seek in the foreseeable future will continue to be awarded through competitive bidding. However, there are no assurances that our bids will be accepted, even if competitive, and as such if we are unable to gain new contracts for any extended period, our business and prospects will be adversely affected.

 

 

 

 

Insufficient positive cash flow could adversely impact our operating results.

 

We depend on the collection of our receivables to generate cash flow, provide working capital, pay debt and continue our business operations. If the Federal government or any of our other customers fails to pay or delays the payment of their outstanding invoices for any reason, our business and financial condition may be materially adversely affected. The government may fail to pay outstanding invoices for a number of reasons, including lack of appropriated funds or lack of an approved budget.

 

Competition in the markets in which we compete may adversely affect our business.

 

Our markets are highly competitive, and many of the companies we compete against have substantially greater resources.

 

Our failure to attract and retain qualified employees, including our senior management team, may adversely affect our business.

 

Our continued success depends to a substantial degree on our ability to recruit and retain the technically skilled personnel we need to serve our clients effectively. Our business involves the development of tailored solutions for our clients, a process that relies heavily upon the expertise and services of our employees. Accordingly, our employees are our most valuable resource. Competition for skilled personnel in the IT services industry is intense, and technology service companies often experience high attrition among their skilled employees. There is a shortage of people capable of filling these positions and they are likely to remain a limited resource for the foreseeable future. Recruiting and training these personnel require substantial resources. Our failure to attract and retain technical personnel could adversely affect our business by increasing our costs of performing our contractual obligations, reducing our ability to efficiently satisfy our clients’ needs, limiting our ability to win new business and constraining our future growth.

 

Risks Related to Our Common Stock

 

The liquidity of our common stock is affected by its limited trading ability.

 

Shares of our common stock are traded on the OTC Bulletin Board under the symbol “IJJP.” There is currently no broadly followed established trading market for our common stock. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. The absence of an active trading market reduces the liquidity of our shares. The trading volume of our common stock historically has been limited and sporadic. As a result of this trading inactivity and the exchange, the quoted price for our common stock on the OTC Bulletin Board is not necessarily a reliable indicator of its fair market value. Further, if we cease to be quoted, holders would find it more difficult to dispose of, or obtain accurate quotations as to the market value of our common stock, and the market value of our common stock would likely decline.

 

Our common stock may be subject to regulations prescribed by the Securities and Exchange Commission relating to “penny stock.”

 

The Securities and Exchange Commission has adopted regulations that generally define a “penny stock” to be any equity security that has a market price (as defined in such regulations) of less than $5.00 per share, subject to certain exceptions. Our common stock is currently subject to these regulations, which impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, which generally include institutions with assets in excess of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with their spouse).

 

Our common stock will likely be subject to substantial price and volume fluctuations.

 

The market price of our common stock has been volatile and could fluctuate widely in response to several factors, some of which are beyond our control, including:

 

 

 

 

·	our quarterly operating results;

 

·	additions or departures of key personnel;

 

·	changes in the business, earnings estimates or market perceptions of our competitors;

 

·	our introduction of new facilities;

 

·	future sales of our common stock by us or selling stockholders;

 

·	changes in general market or economic conditions;

 

·	announcements of legislative or regulatory change; and

 

·	potentially significant downward selling pressure on the stock price during the coming years as certain current and new stockholders seek to liquidate a portion or all of their holdings for various reasons subject to certain lock-up provisions where applicable.

 

The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in our industry. The changes often appear to occur without regard to specific operating performance. In addition, there has been a limited public market for our common stock. We cannot predict the extent to which investor interest in us will be maintained. Such interest is necessary for an active, liquid trading market for our common stock. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. The price and trading volumes of our common stock may fluctuate widely due to the limited public market for our stock.

 

A significant number of our shares are eligible for sale and their sale could depress the market price of our stock.

 

Sales of a significant number of shares of our common stock in the public market following the merger and related transactions could harm the market price of our common stock. Moreover, as additional shares of our common stock become available for resale in the public market pursuant to the registration of the sale of the shares, and otherwise, the supply of our common stock will increase, which could decrease its price. Some or all of the shares of our common stock may be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for shares of our common stock. In general, a person who has held restricted shares for a period of one year may, upon filing with the SEC a notification on Form 144, sell into the market our common stock in an amount equal to the greater of one percent of the outstanding shares or the average weekly number of shares sold in the last four weeks prior to such sale. Such sales may be repeated once each three months. Any of the restricted shares may be sold by a non-affiliate after such shares have been held two years.

 

After giving effect to the Stock Exchange, certain of our principal stockholders will continue to have significant voting power and may take actions that may not be in the best interest of other stockholders.

 

Certain of our officers, directors and principal stockholders control and will continue for the foreseeable future to control a significant percentage of our outstanding common stock. If these stockholders act together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all of our stockholders.

 

We do not anticipate paying dividends in the foreseeable future, and the lack of dividends may have a negative effect on the stock price.

 

We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay dividends, our stock price may be negatively affected.

 

 

 

 

We are subject to critical accounting policies and actual results may vary from our estimates.

 

We follow generally accepted accounting principles for the United States in preparing our financial statements. As part of this work, we must make many estimates and judgments about future events. These affect the value of the assets and liabilities, contingent assets and liabilities, and revenue and expenses that we report in our financial statements. We believe these estimates and judgments are reasonable, and we make them in accordance with our accounting policies based on information available at the time. However, actual results could differ from our estimates, requiring us to record adjustments to expenses or revenues that could be material to our financial position and results of operations in future periods.