UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarter ended April 30, 1996 Commission File
Number 0-8193
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----------- to ---------------
DAEDALUS ENTERPRISES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-1873250
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1869 (313) 769-5649
------------- --------------
Ann Arbor, Michigan 48106 (Registrant's telephone
(Address of principal executive number)
offices)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes(X) No( )
Number of shares outstanding of common stock, $.01 par value, as of June 12,
1996
532,824 shares
--------------
<PAGE>
PART I - FINANCIAL INFORMATION
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
Nine Months Ended Three Months Ended
April 30, April 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
Operating Revenue
Standard products $1,333,573 $ 225,840 $ 742,007 $ 85,042
Product development 203,391 1,074,665 127,659 458,264
--------- --------- ------- -------
1,536,964 1,300,505 869,666 543,306
Other Income 1,561 8,333 128 1,931
--------- --------- ------- -------
1,538,525 1,308,838 869,794 545,237
Cost and Expenses
Cost of revenue -
standard products 911,626 154,533 323,676 67,493
Cost of revenue -
product development 206,341 650,382 113,739 267,436
Research and development 408,959 510,186 144,006 59,133
Selling and administrative753,575 956,906 197,643 260,963
Interest 55,998 57,506 20,062 24,911
--------- --------- ------- -------
2,336,499 2,329,513 799,126 679,936
--------- --------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES (797,974) (1,020,675) 70,668 (134,699)
Credit for Income Taxes -
Note D (17,000) (347,000) 0 (46,000)
---------- ---------- ------- --------
NET INCOME (LOSS) $ (780,974) $ (673,675) $ 70,668 $ (88,699)
========== ========== ======= ========
NET EARNINGS (LOSS) PER
SHARE (Note F) $ (1.50) $ (1.31) $ 0.13 $ (0.17)
========== ========== ======= ========
DIVIDENDS DECLARED PER
SHARE $ 0.00 $ 0.08 $ 0.00 $ 0.00
The accompanying notes are an integral part of these condensed financial
statements
<PAGE>
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS - UNAUDITED
April 30, July 31,
1996 1995
--------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 63,966 $ 76,797
Accounts receivable, less allowance of $2,500 161,166 112,401
Unbilled accounts receivable - Note B 512,817 1,289,583
Inventories - Note C 646,768 635,541
Deferred tax asset 57,000 57,000
Deposits 3,523 131,000
Other current assets 14,071 39,496
-------- ---------
TOTAL CURRENT ASSETS 1,459,311 2,341,818
--------- ---------
Property and Equipment
Land 177,131 177,131
Building 1,433,898 1,433,898
Machinery and equipment 874,736 807,222
Special equipment 268,589 455,649
--------- ----------
2,754,354 2,873,900
Less accumulated depreciation (1,565,649) (1,464,358)
--------- ----------
1,188,705 1,409,542
Deferred Tax Asset 88,000 71,000
Other Assets 54,041 108,057
--------- ----------
$2,790,057 $ 3,930,417
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank - Note E $ 592,000 $ 642,000
Accounts payable 42,063 163,531
Accrued compensation and related accounts 125,550 150,401
Accrued commission 1,129 176,755
Reserve for product warranties 47,216 54,354
Other accrued liabilities 57,883 70,696
Current portion of long-term debt - Note E 265,730 282,608
--------- ----------
TOTAL CURRENT LIABILITIES 1,131,571 1,540,345
Stockholders' Equity
Common stock, $.01 par value
Authorized--2,000,000 shares
Issued and outstanding--532,824 shares
(July 31, 1995--514,913 shares) 5,328 5,149
Additional paid-in capital 1,162,340 1,113,131
Retained earnings 490,818 1,271,792
--------- ----------
$1,658,486 $ 2,390,072
--------- ----------
$2,790,057 $ 3,930,417
========= ==========
The accompanying notes are an integral part of these condensed financial
statements
<PAGE>
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
Nine Months Ended
April 30,
----------------------------
1996 1995
---- ----
Operating Activities
Net loss $ (780,974) $(673,675)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation 140,756 114,967
Amortization of software 51,211 64,317
Net book value of special equipment
transferred to inventory 152,450 0
Decrease in accounts receivable 728,001 441,239
Increase in inventory (11,227) (261,873)
Increase in deferred tax asset (17,000) (306,212)
Increase in income tax receivable 0 223,946
Decrease in other assets 155,707 16,671
Decrease in accounts payable and accrued
expenses (350,786) (124,742)
Increase (decrease) in customer deposits 8,890 (156,099)
--------- ---------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 77,028 (661,461)
--------- ---------
Investing Activities
Purchase of property and equipment (72,369) (122,184)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (72,369) (122,184)
--------- ---------
Financing Activities
Proceeds from revolving line of credit 1,597,749 2,087,000
Payments on revolving line of credit (1,647,749) (1,330,000)
Payments on long-term debt (16,878) (24,618)
Payments of dividends 0 (40,977)
Proceeds of stock issued pursuant to stock
option and stock purchase plan 49,388 9,020
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (17,490) 700,425
--------- ---------
Decrease in Cash (12,831) (83,220)
Cash and Cash Equivalents at Beginning of Year 76,797 163,158
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 63,966 $ 79,938
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 30, 1996
Note A - Basis of Presentation
The financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary for
a fair presentation of the results of operations, financial position and
cash flows for the periods presented. The accompanying unaudited financial
statements have been prepared in accordance with the instructions to Form
10-Q and, therefore, do not include all information necessary to be in
conformity with generally accepted accounting principles.
Reference is made to the Notes to Consolidated Financial Statements
in the Annual Report to Stockholders for the year ended July 31, 1995.
The results of operations for the nine and three months ended April
30, 1996 are not necessarily indicative of the results to be expected for
the full year.
Note B - Unbilled Accounts Receivable
Unbilled accounts receivable represent the revenue recognized
pursuant to standard system contracts and customer-funded product
development contracts using the percentage-of-completion method but which
are not yet billable under the terms of the contract. These amounts are
billable based on contract terms either upon shipment of the items,
presentations of invoices, or completion of the contract. The cost of such
revenue is determined generally by separate job cost accounts and involves
no deferral of cost. If the estimated total costs on any contract indicate
a loss, the entire amount of the estimated loss is recognized immediately.
Note C - Inventory
Inventory includes work-in-process of approximately $135,000 and
$91,000 as of April 30, 1996 and July 31, 1995, respectively. The remaining
inventory consists of parts and subassemblies, both purchased and
manufactured, that could be used in the manufacturing process or sold as
spare parts.
Note D - Income Taxes
The Company estimates its provision for income taxes using the
Company's estimated annual effective rate. For the current fiscal year, the
Company has limited the recognition of income tax benefit of its current net
operating losses due to the cumulative losses realized in recent years. The
Company generated a valuation allowance of $237,000 in the nine month period
ended April 30, 1996.
Note E - Revolving Credit
On April 30, 1996, the Company had a $1,500,000 line of credit with
a bank, with availability subject to a formula, bearing interest at one and
one-half percent above the bank's prime rate. The formula is 75% of the
appraised value of the Company's building, $1,712,000, less the amount of
the mortgage plus 75% of qualified accounts receivable and 50% of qualified
unbilled accounts receivable. As of April 30, 1996, total availability was
approximately $1,394,000 pursuant to the formula. The Company had an
outstanding balance under this line of credit of approximately $592,000 and
$642,000 at April 30, 1996 and July 31, 1995, respectively.
The line of credit agreement includes certain covenants requiring
the Company to maintain a minimum tangible effective net worth and minimum
liquid asset to current liability and debt coverage ratios. As of April 30,
1996, the bank has waived the Company's third quarter noncompliance with the
tangible net worth and liquid asset to current liabilities covenants in the
Company's line of credit agreement resulting from the fiscal year-to-date
loss.
<PAGE>
On June 12, 1996, the Company entered into an amendment with the
bank reducing the borrowing limit under the line of credit. The amendment
provides a line of credit of $1,250,000, with the first $950,000 bearing
interest at one and one-half percent above the bank's prime rate and the
remaining $300,000 bearing interest at three percent above the bank's prime
rate. All covenants remain the same.
Note F - Earnings Per Share
The computation of net earnings per share is based on the weighted
average number of shares of common stock outstanding during the nine and
three month periods ended April 30, 1996 and 1995. The weighted average
number of shares used in the computation were 519,144 and 512,739 for the
nine months ended April 30, 1996 and 1995, respectively, and 514,097 for the
quarter ended April 30, 1995, all of which were issued and outstanding. No
adjustments were made to either net loss or the number of shares outstanding
in calculating earnings per share as such adjustments would have been
antidilutive.
The weighted average number of shares used in the computation of
earnings per share for the three months ended April 30, 1996 was 578,632 of
which 526,347 were issued and outstanding and 52,285 were stock equivalents
due to outstanding warrant and stock option agreements.
There was no material difference between primary and fully diluted
earnings per share for the periods ended April 30, 1996 and 1995.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
The Company manufactures products for, and performs development
projects in, the field broadly described as "remote sensing". The principal
products manufactured by the Company are airborne imaging systems which are
installed in aircraft for acquisition of data on environmental parameters.
A principal application of the Company's remote sensing products has been
the measurement of environmental parameters in support of pollution control
programs and environmental impact studies. The Company is also engaged in
customer-funded projects for the development of advanced equipment in the
remote sensing field. Some of these projects may lead to the incorporation
of newly developed technology into existing or future product lines.
The two portions of the business are conducted by the same pool of
personnel using the same equipment and operating space and constitute a
single industry segment. The margins associated with the two portions of
the business are different, with standard products generally having higher
margins than customer-funded development projects. The Company receives the
majority of its revenue from a small number of relatively large contracts.
Standard product contracts are generally of higher dollar value than
customer-funded product development contracts, with each contract
representing a substantial portion of total revenue each year. Therefore,
the timing of the receipt of a standard product sales contract as well as
the related manufacturing endeavor can have a material impact on a
quarter-to-quarter or year-to-year comparison of the Company's results of
operations. Most standard product sales contracts and some customer-funded
product development contracts are also accompanied by a significant deposit.
Therefore, the timing of the contract receipt can have a material impact on
the Company's cash flow.
The Company has incurred significant losses in the last two fiscal
years and in the first nine months of this fiscal year. These losses are
causing the Company to experience liquidity problems and its bank line of
credit is being utilized to maintain operations while its current level of
business is substantially below its break-even point. Although the Company
received a substantial amount of new business in the third quarter, there
can be no assurance that the Company will continue to receive new contracts
at a level sufficient to allow the Company to continue operations. See
"Business Development - New Orders and Backlog" and "Liquidity and Sources
of Capital."
<PAGE>
The Company has embarked on its Growth Plan and is in discussion
with several potential standard product customers regarding possible
contracts. The Company received two standard product orders in the third
quarter and is hopeful that it will receive more contracts in the fourth
quarter of 1996 and during fiscal 1997, although no assurances can be given.
See "Business Development".
The Company's short-term viability and operating results are
dependent on its ability to acquire additional equity capital or its ability
to generate increases in new business and cash flow to a level sufficient to
allow the Company to comply with the terms and covenants of its line of
credit agreement. See "Liquidity and Sources of Capital". The Company's
long-term viability is dependent upon the Company's ability to successfully
implement its Growth Plan and attain consistent profitability.
Operating Revenue
Operating revenue and standard product revenue for the nine and
three month periods ended April 30, 1996 increased from the comparable
periods of fiscal 1995 due to new standard product contracts obtained in the
third quarter of fiscal 1996, for which substantially all of the work was
completed and recognized as revenue during the quarter. In addition to the
new contracts received during the third quarter, the first quarter
completion of two standard product contracts received in late fiscal 1995
also contributed to the increase in operating revenue and standard product
revenue. Product development revenue for the nine and three month periods
ended April 30, 1996 decreased from the comparable periods of fiscal 1995
due to the fiscal 1995 completion of contracts received in fiscal 1994, and
the delay in receiving new contracts until the third quarter of fiscal
1996. See "New Orders and Backlog".
The level of the Company's revenues and profits has historically
fluctuated from quarter-to-quarter and from year-to-year as the majority of
its revenue is derived from a small number of high dollar value equipment
sales to a relatively small number of customers. Although fluctuations are
normal given the Company's reliance on a small number of high value
contracts for the majority of its revenue, the low level of standard product
orders received in the last two years is causing severe liquidity problems.
See "Business Development - New Orders and Backlog" and "Liquidity and
Capital Resources".
Domestic vs. International Sales and Revenue
International revenue generated 73% and 14% of operating revenue
during the first nine months of fiscal 1996 and 1995, respectively, and 70%
and 14% of operating revenue during the three months of fiscal 1996 and
1995, respectively. This increase in international revenue is attributable
to the standard product contracts received from two European customers in
late fiscal 1995 and the two new standard product contracts in the third
quarter of 1996.
Management expects most of its revenue to be generated from the
international market in the remainder of fiscal 1996 and future years. To
mitigate foreign currency transaction losses, international contracts are
denominated in US dollars and large standard product contracts are generally
secured by irrevocable letters of credit. The Company also receives
substantial deposits on many large contracts with international customers.
Other Income
Other income, for the periods presented, is comprised principally of
interest and rental income. The level of interest income is determined by
cash on hand and interest rates. The timing of contract receipt and level
of deposits received have a substantial impact on such income. The Company
does not expect significant interest or rental income for the current fiscal
year.
<PAGE>
Business Development
Growth Plan
One challenge facing the Company is to develop additional products
that will allow future growth in revenues and profits. Early in fiscal
1995, Management developed a three-pronged growth plan to add revenue and
profits to the Company's current core business. Since that time, Management
has concentrated its efforts into the two areas of the plan with the most
near-term potential.
The first growth area involves the use and sale of airborne digital
cameras ("ADC") developed by the Company for the mapping of infrastructure
within narrow corridors. Examples of the types of infrastructure that would
be mapped with such a system include gas pipelines, electrical distribution
systems, railroads and highways. The Company is currently developing an
enhanced version of the ADC and is investigating various image processing
systems that may be bundled with the ADC for delivery to its customers and
for use by the Company in performing services for customers. The Company
has completed one contract for which it has utilized the ADC and has
received two additional contracts for ADC services. The Company believes
that there is a sizable market for data that can be produced with its
current ADC and believes that the completion of the enhanced ADC will give
the Company added capabilities, increasing the size of the potential market.
The Company is pursuing various alternatives to obtain the additional
funding and marketing capabilities necessary to bring these services to
market. However, there can be no assurance that such funding and
capabilities will be obtained. See "Liquidity and Sources of Capital".
The other growth area involves performing domestic environmental
remote sensing programs. In order to exploit this market, the Company must
perform specific applications and show the results to be reliable and
cost-effective. To date, the Company has received two contracts in this
area and continues to pursue other demonstration projects.
Although implementation of the growth plan began in fiscal 1995,
revenue is not expected to be affected materially until fiscal 1997 at the
earliest. If successful, these strategies are expected to reduce
fluctuations in the Company's revenue and earnings and enhance the Company's
profitability and shareholder value. However, the Company's implementation
of these growth initiatives has been slowed by the small size of the
Company's staff, by its current financial position and by the lack of solid
market information caused by the Company's limited resources. The Company
is seeking partners and additional financing, and possibly marketing
expertise, to help bring these services into the market more quickly. See
"Liquidity and Sources of Capital".
New Orders and Backlog
In the nine months ended April 30, 1996, the Company received orders
in the amount of approximately $2,410,000 as compared to approximately
$604,000 in the first nine months of fiscal 1995. The Company's backlog at
April 30, 1996 was approximately $1,452,000 as compared to approximately
$1,150,000, including $928,000 relating to a contract in which the European
customer defaulted in fiscal 1994, one year earlier. Approximately $324,000
of the April 30, 1996 backlog is for standard products with the balance
being product development. As the Company expects to consume approximately
$500,000 of its April 30, 1996 backlog in the fourth quarter of fiscal 1996,
the Company's ability to retain its line of credit and continue operations
depends upon receiving significant orders during the fourth quarter. The
rate at which orders were received during the first nine months of fiscal
1996 was below the level required for the Company to be profitable. See
"Liquidity and Sources of Capital." Of the $2,410,000 bookings received by
the Company in the first nine months of fiscal 1996, approximately
$1,259,000 was in customer-funded product development, with the remainder
for standard products.
<PAGE>
The Company is engaged in negotiations for several standard product
orders, some of which the Company hopes to receive in the current fiscal
year. However, such negotiations have not been finalized and there can be
no assurance that such orders will be received. The Company has begun
production for some of the anticipated standard product orders and has
costly subcomponents for one of the potential orders in stock. Two Phase II
Small Business Innovative Research (product development) contracts for
approximately $600,000 each, awarded during the first quarter, were finally
executed in the third quarter and accounted for $86,000 of the product
development sales. The Company was also notified in late February that it
been awarded a large international standard product order. The Company
expects negotiations for the final contract to be completed before the end
of fiscal 1996 although there can be no assurance to that effect.
The results of operations for future periods are dependent upon the
receipt and timing of future orders and the success of Management's growth
strategy. The Company's continued viability depends upon receiving orders
at a level similar to that experienced in the third quarter of fiscal 1996,
which was substantially higher than the first half of fiscal 1996. In an
effort to conserve the Company's cash resources, the Company has reduced
its workforce by an additional 25% in the third quarter. The remaining
employees are considered sufficient to satisfy the current contracts as well
as the majority of the contracts currently being negotiated. If additional
orders are received which require an increase in staffing, the Company
believes that such staff increases can be made without jeopardizing contract
completion.
Cost of Revenue
In the nine months ended April 30, 1996, cost of revenue increased
as a percentage of revenue due primarily to the Company operating
significantly below its capacity during the fiscal year causing overhead
rates to increase substantially. For the third quarter of fiscal 1996, cost
of revenue as a percentage of revenue improved due to the better utilization
of capacity following receipt of the new contracts and due to the workforce
reductions in the current quarter. Contributing to the high cost of revenue
for the first half of fiscal 1996 were increases in the Company's provision
for obsolete and excess inventory caused by the reappraisal of excess
inventory due to the recent low level of contracts received for standard
products. This provision has been maintained as of the end of the third
quarter.
The cost of revenue percentage for the remainder of fiscal 1996 will
be dependent upon the timing and mix of future contracts, some of which are
currently under discussion. See "Business Development - New Orders and
Backlog".
Research and Development
The majority of the Company's investment into research and
development in the third quarter and for the nine months of fiscal 1996 was
related to enhancements of the Airborne Digital Camera developed in fiscal
1995. Research and development expense decreased by approximately 20% in
the nine month period ended April 30, 1996, as compared to the same period
one year earlier. This decrease is attributable to the completion of the
first generation ADC in fiscal 1995 with the enhancements developed in
fiscal 1996 requiring fewer Company resources. The increase in research and
development expenses in the third quarter of fiscal 1996 from the prior year
was mainly due to the completion of the first generation ADC prior to the
third quarter of fiscal 1995.
Selling and Administrative Expense
Selling and administrative expense decreased by 21% and 24% in the
first nine months and third quarter of fiscal 1996, respectively, as
compared to the same periods one year earlier, primarily due to
non-recurring marketing expenses which were incurred in fiscal 1995. The
Company's third quarter staffing reductions are expected to result in
additional decreases in selling and administrative expense in the remainder
of fiscal 1996. See "Business Development - New Orders and Backlog".
<PAGE>
Interest
Interest expense decreased for the first nine months of fiscal 1996
as compared to fiscal 1995 due principally to the Company's decreased use of
its line of credit in the third quarter of fiscal 1996. Interest expense
for the remainder of fiscal 1996 will be dependent upon future interest
rates and the extent of the Company's utilization of its line of credit
during this fiscal year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's primary sources of liquidity were funds from
operations and borrowings under a secured line of credit. The Company's
line of credit agreement contains tangible net worth and liquid asset to
current liabilities covenants that are measured quarterly and a debt
coverage covenant that is measured at the end of each second quarter and
fiscal year. Although the Company was not in compliance with two of these
three covenants at the end of its third quarter of fiscal 1996, the bank
lender has waived the Company's lack of compliance for the April 30, 1996
measurement date. In the event the bank believes that the prospect of
payment of the Company's indebtedness under the line of credit is impaired,
the bank is permitted under certain of the agreements governing the line of
credit to declare such indebtedness due and payable. The bank has indicated
that it may limit the amount which the Company is permitted to borrow under
the line of credit and that it may not grant a waiver of future financial
covenant violations in the absence of continued improvement in the Company's
business prospects or progress toward the acquisition of a significant
amount of equity capital. If the Company is unable to borrow amounts
necessary to fund its operations or is required by the bank to repay the
line of credit, its financial position would be materially and adversely
affected and the Company may have no choice but to cease operations.
Moreover, if the Company is unable to continue generating a sufficient
amount of backlog during the fourth quarter to sustain its operations in the
short term, it may not be able to continue operations.
As of April 30, 1996, borrowings under the line of credit formula
were limited to approximately $1,394,000 pursuant to the availability
formula. At that date, the Company had an outstanding balance of $592,000
under the line of credit and approximately $79,000 of the line reserved to
cover a standby letter of credit. On June 12, 1996, the Company entered into
an amendment with the bank reducing the borrowing limit under the line of
credit. The amendment provides a line of credit of $1,250,000, with the
first $950,000 bearing interest at one and one-half percent above the bank's
prime rate and the remaining $300,000 bearing interest at three percent
above the bank's prime rate. All covenants remain the same.
In order to provide additional working capital and retire current
debt, the Company is attempting to sell its building and lease back a
portion of the facility from the new owner. There can be no assurance that
the building can be sold at a price acceptable to the Company or that an
acceptable lease-back agreement can be negotiated. If the Company must
relocate, Management is confident that a suitable facility can be found and
that the Company's business will not be materially disrupted. The sale of
the building is expected to result in the repayment of all currently
outstanding indebtedness to the Company's bank lender and the termination of
the existing line of credit. Management believes that a new line of credit
supported by receivables and other assets of the Company can be negotiated
with the current bank lender or a substitute bank which will be adequate to
support the Company's working capital needs provided that the Company's
backlog increases significantly over the current level. However, any new
line of credit is likely to permit substantially less borrowing than the
current line of credit. There can be no assurance that the Company will be
able to acquire a replacement line of credit at all or that the level of
borrowing permitted under any replacement line of credit will be adequate
for the Company's working capital needs.
<PAGE>
Working capital declined between July 31, 1995 and April 30, 1996,
due largely to the loss for the nine month period. Current assets declined
by approximately $883,000 due primarily to the loss for the period and
payments on the line of credit from funds generated by the collection of a
large portion of the July 31, 1995 unbilled accounts receivable.
Contributing to the decline in current assets was the $56,500 increase in
the Company's reserve for obsolete and excess inventory. See "Cost of
Revenue."
Current liabilities decreased in the nine months ended April 30,
1996 largely due to the payment of July 31, 1995 accrued commission amounts
and a reduction in accounts payable.
The Company expects to invest an additional $100,000 for capital
expenditures, primarily for equipment and software relating to the Company's
growth plan, during fiscal 1996. The Company also expects internal research
and development costs to be substantially below the fiscal 1995 level in the
current fiscal year. Due to its current financial position, the Company
expects to keep marketing and other administrative costs to a minimum until
its financial condition improves significantly.
PART II - OTHER INFORMATION
All items omitted are not applicable or the answers thereto are negative.
Item 6(a): Exhibits
Exhibit No. Description
4.56 Sixth Amendment to Revolving Credit,
Overline Credit and Term Loan Agreement,
between the Company and Comerica Bank,
dated June 12 , 1996.
27 Financial Data Schedule
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAEDALUS ENTERPRISES, INC.
Date: June 13, 1996 by: /S/ Thomas R. Ory
-------------------------------------
Thomas R. Ory, President and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit No. Description
4.56 Sixth Amendment to Revolving Credit,
Overline Credit and Term Loan Agreement,
between the Company and Comerica Bank,
dated June 12, 1996.
27 Financial Data Schedule
SIXTH AMENDMENT
TO REVOLVING CREDIT, OVERLINE AND TERM LOAN AGREEMENT
THIS SIXTH AMENDMENT ("Amendment") to Revolving Credit, Overline
Credit and Term Loan Agreement is made and delivered as of the ____ day of
June, 1996 by and between DAEDALUS ENTERPRISES, INC. (the "Company") and
COMERICA BANK ("Bank").
W I T N E S S E T H:
WHEREAS, the Company and the Bank did execute and deliver a certain
Revolving Credit, Overline Credit and Term Loan Agreement ("Loan Agreement")
which Loan Agreement has been amended by five (5) amendments prior to the
date hereof (as so amended the "Original Agreement"); and
WHEREAS, the Company and the Bank desire to further amend the
Original Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the terms
and conditions herein contained, the Bank and the Company agree as follows:
1. All capitalized terms unless otherwise defined herein or
unless the context clearly requires otherwise are as defined in the Original
Agreement.
2. The Bank hereby waives compliance by the Company with
Section 6.3 and Section 6.4 during the time period commencing on, and
including, February 1, 1996 and ending on, and including April 30, 1996; but
does not waive compliance by the Company with both said Sections at any
other time.
The aforesaid waivers contained in this Section 2 do not act as a
waiver of any other section of the Original Agreement or any related or
unrelated document, nor does it constitute a consent to any transaction,
occurrence or omission, whether related or unrelated to the matters waived
herein. The foregoing waivers do not extend to or affect any obligation,
covenant, event of default or default not expressly waived by the foregoing
or otherwise impair any of the rights of the Bank consequent therefrom.
3. The definition of Commitment Amount contained in Section 2.1
of the Original Agreement is hereby deleted in its entirety and is hereby
replaced with the following:
"Commitment Amount" shall mean $1,250,000.
4. The following language shall be added to the Original Agreement
and shall be placed immediately after the definition of Commitment Amount:
"Borrowing Base" shall mean (a) $950,000, plus (b) during
such times as the Existing Conditions shall exist, an amount equal
to the lesser of (i) 50% of the Company's Eligible Unbilled Account
Receivables owed to the Company by Asia Air Survey Co., Ltd ("Asia
Air") pursuant to a Purchase Agreement dated April 30, 1996, and
(ii) $300,000. "Existing Conditions" shall mean all of the
following: (a) Company shall have a valid, binding and enforceable
contract with Asia Air ("Asia Air Contract") which Asia Air Contract
shall be in form and substance completely satisfactory to the Bank,
(b) neither Asia Air nor the Company shall be in default under the
Asia Air Contract, nor shall any event of default exist thereunder,
(c) a letter of credit ("Letter of Credit") in form and substance
satisfactory to the Bank shall have been issued by a bank acceptable
to the Bank for the benefit of the Company pursuant to which Letter
of Credit the Company may draw the full amount of all payments which
Asia Air is required to make pursuant to the Asia Air Contract
(assuming compliance with the Asia Air Contract by the Company) and
such Letter of Credit shall be in full force and effect, (d) the
Bank shall have a first perfected security interest in, and pledge
of, the Letter of Credit, the proceeds thereof, and all rights of
the Company thereto, (e) the Company shall have entered into a
contract ("Thailand Contract") with Royal Thai Air Force
("Thailand") which contract shall be in form and substance
satisfactory to the Bank, (f) neither the Company nor Thailand shall
be in default under the Thailand Contract nor shall any event of
default exist thereunder, (g) if required by the Bank, a letter of
credit ("Thailand Letter of Credit"), in form and substance
satisfactory to the Bank, shall have been issued, and be in
existence, for the benefit of the Company pursuant to which Thailand
Letter of Credit the Company may draw all or a portion (as
acceptable to the Bank) of the payments which Thailand is required
to make pursuant to the Thailand Contract (assuming compliance with
the Thailand Contract by the Company), and (h) if required by the
Bank, the Bank shall have a first perfected security interest in,
and pledge of, the Thailand Letter of Credit, the proceeds thereof,
and all rights of the Company thereto.
5. Section 2.7 of the Original Agreement is hereby deleted and
shall be and hereby is replaced with the following:
"2.7 Bank shall not be obligated to make an advance or
issue a Standby Letter of Credit under the Revolving Credit Note if
at the time of such request for advance or issuance the loans
outstanding under this Section 2 plus the amount which could be
drawn under operative Letters of Credit (assuming compliance with
the terms and conditions thereof) plus the amount of the requested
advance or the amount which could be drawn under the requested
Letter of Credit if issued (assuming compliance with the terms and
conditions thereof) would exceed the Borrowing Base."
6. Section 2.2 of the Original Agreement is hereby deleted and
shall be and hereby is replaced with the following:
"2.2 The principal indebtedness represented by the
Revolving Credit Note and all interest thereon shall be due and
payable on November 1, 1996 (unless it shall become due and payable
prior thereto by acceleration or otherwise). The Company agrees to
pay interest on the unpaid principal balance of the Revolving Credit
Note as follows: (a) during such times as said unpaid principal
balance is less than or equal to $950,000, at a per annum rate equal
to one and one half percent (1 1/2%) above the Bank's Prime Rate and
(b) during such times as said unpaid principal balance is greater
than $950,000, (i) on $950,000 of said unpaid principal balance at a
per annum rate equal to one and one half percent (1 1/2%) above the
Bank's Prime Rate and (ii) on the amount by which said unpaid
principal balance exceeds $950,000 at a per annum rate equal to
three percent (3%) above the Bank's Prime Rate. Upon the occurrence
of any default or event of default hereunder, interest shall accrue
on the unpaid principal balance represented by the Revolving Credit
Note at the rates set forth above plus three percent (3%).
7. The first sentence of Section 2.4 of the Original Agreement is
hereby deleted and shall be and hereby is replaced by the following:
"Standby letters of credit ("Letters of Credit") may be
issued by Bank on behalf of Company from time to time not to exceed
the Commitment Amount in aggregate face amount at any time
outstanding."
8. Exhibit B to the Original Agreement is hereby replaced in its
entirety by Exhibit B to this Amendment.
9. Upon demand for the payment thereof, the Company agrees that
it shall pay to the Bank the amount of attorney's fees and disbursements
incurred by the Bank to Miller, Canfield, Paddock and Stone, P.L.C. in
connection herewith and in connection with the closing of the transactions
contemplated thereby, which fees and disbursements through June 11, 1996 are
in the amount of $2,580.00, (fees in the amount of $2,500.00 and
disbursements in the amount of $80.00) which amount shall be paid
simultaneously with the execution herewith by the Company.
10. The Company represents and warrants to the Bank that:
(a) The execution, delivery and performance of this
Amendment, the Amended and Restated Note (as hereinafter defined) and the
other documents contemplated hereby to be executed by the Company have been
duly authorized and are not in contravention with any law, rule or
regulation, of its Articles of Incorporation, or its Bylaws, or of any
contract, agreement, note, indenture, or other undertaking to which it is a
party or by which it or any of its assets are bound, and that the Company is
not required to obtain the consent or approval of any person or entity in
order to enter into this Amendment and perform in accordance herewith.
(b) This Amendment is, and the Amended and Restated
Note, and the other documents contemplated hereby to be executed by the
Company will be, when delivered, the legal, valid, and binding obligations
of the Company enforceable against it in accordance with the respective
terms hereof and thereof.
(c) After giving effect to this Amendment, the
representations and warranties (other than that set forth in Section 5.6 of
the Original Agreement) contained in the Original Agreement as amended
hereby are true and accurate on and as of the date hereof with the same
force and effect as if made on and as of the date hereof and the
representations and warranties set forth in Section 5.6 of the Original
Agreement are true and correct as of the date hereof with respect to the
most recent financial statements furnished to the Bank by the Company in
accordance with Section 6.1 of the Original Agreement.
11. This Amendment shall be effective only upon the receipt by
the Bank of the following items, each to be in form and substance
satisfactory to the Bank and its counsel:
(a) Certified Resolutions of the Company authorizing
execution and delivery of this Amendment and the documents contemplated
hereby.
(b) Certificates of Incumbency as to all officers of
the Company or any documents contemplated hereby.
(c) The Amended and Restated Revolving Credit Note
("Amended and Restated Note") in the form and substance of Exhibit B
attached hereto.
The Bank may waive in the exercise of its unfettered discretion any
of the conditions set forth in this Section to the effectiveness hereof, but
such waiver shall be enforceable against the Bank only if done in writing
which is signed by a duly authorized officer of the Bank.
12. The Company hereby certifies that its Articles of Incorporation
and its By-laws, last submitted to the Bank in connection with the Original
Agreement have not been amended or modified in any manner and remain in full
force and effect in the form as so submitted.
13. This Amendment shall be construed in accordance with the
laws of the State of Michigan.
14. Except as expressly amended hereby, the Company affirms and
ratifies the Original Agreement and all documents executed and delivered by
it in connection therewith ("Related Documents"), and restates all
representations and warranties contained therein as of the date hereof
except those set forth in Section 5.6 in the Original Agreement. The
Company furthermore agrees that the Original Agreement as amended hereby and
the Related Documents (in the case of the Revolving Credit Note, as amended
and restated as contemplated hereby) remain in full force and effect and
that it has no set off, counterclaim or defense with respect to any of the
foregoing.
15. The Company represents and warrants to the Bank that no
Default or Event of Default existed immediately prior to the execution
hereof except to the extent such Default is expressly waived herein in
paragraph 2 hereof. By execution and delivery hereof, the Bank does not
waive any Default or Event of Default in existence, whether known or unknown
to the Bank except to the extent waived in paragraph 2 hereof.
16. Company hereby waives, discharged, and forever releases
Bank, Bank's employees, officers, directors, attorneys, stockholders and
successors and assigns, from and of any and all claims, causes of action,
allegations or assertions that Company has or may have had at any time up
through and including the date of this Amendment, against any or all of the
foregoing, regardless of whether any such claims, causes of action,
allegations or assertions are known to Company or whether any such claims,
causes of actions, allegations or assertions arose as a result of Bank's
actions or omissions in connection with the Original Agreement, or any
amendments, extensions or modifications thereto, or Bank's administration of
debt evidenced by the Original Agreement or otherwise.
17. COMPANY AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THE ORIGINAL AGREEMENT, THIS
AMENDMENT, THE RELATED DOCUMENTS OR ANY INDEBTEDNESS OWNING TO THE BANK.
IN WITNESS WHEREOF, the undersigned Company and the Bank have caused
this Amendment to be executed by their respective duly authorized officers
as of the date first hereinabove stated.
DAEDALUS ENTERPRISES, INC.
By:
------------------------------
Its:
------------------------------
COMERICA BANK
By:
------------------------------
Its:
-----------------------------
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<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> APR-30-1996
<CASH> 63,966
<SECURITIES> 0
<RECEIVABLES> 676,483
<ALLOWANCES> 2,500
<INVENTORY> 646,768
<CURRENT-ASSETS> 1,459,311
<PP&E> 2,754,354
<DEPRECIATION> 1,565,649
<TOTAL-ASSETS> 2,790,057
<CURRENT-LIABILITIES> 1,131,571
<BONDS> 0
<COMMON> 5,328
0
0
<OTHER-SE> 1,653,158
<TOTAL-LIABILITY-AND-EQUITY> 2,790,057
<SALES> 1,536,964
<TOTAL-REVENUES> 1,538,525
<CGS> 1,117,967
<TOTAL-COSTS> 1,117,967
<OTHER-EXPENSES> 1,162,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,998
<INCOME-PRETAX> (797,974)
<INCOME-TAX> (17,000)
<INCOME-CONTINUING> (780,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (780,974)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
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