UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
---------------------
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997 or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period from __________ to ___________
Commission file number 0-5404
_____________________
HADRON, INC.
(Exact name of registrant as specified in its charter)
New York 11-2120726
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4900 Seminary Road, Suite 800
Alexandria, Virginia 22311
(Address of principal executive offices)
Registrant's Telephone number including area code
(703) 824-0400
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days:
Yes X No
___ ___
As of November 12, 1997, 1,686,684 shares of the Common Stock of
the registrant were outstanding.
<PAGE>
HADRON, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I Financial Information: Page No.
Item 1. Financial Statements
Consolidated Balance Sheets at 3
September 30, 1997 and June 30, 1997
Consolidated Statements 5
of Operations for the Three Months Ended
September 30, 1997 and 1996
Consolidated Statements 6
of Cash Flows for the Three Months Ended
September 30, 1997 and 1996
Notes to Consolidated 7
Financial Statements
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
Part II Other Information:
Item 1. Legal Proceedings 11
SIGNATURES 12
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
<CAPTION>
SEPT. 30, JUNE 30,
ASSETS 1997 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 50,200 $ 24,700
Accounts receivable, net 2,161,700 2,312,100
Note receivable 77,100 90,200
Prepaid expenses and other 28,400 20,600
- - - - - - - - - -
Total current assets 2,317,400 2,447,600
- - - - - - - - - -
Fixed assets 80,000 82,800
Note receivable 8,600
Investment in PEI and related notes
receivable, net of
deferred income of $2,000,000 166,400 158,400
Other 9,500 14,500
- - - - - - - - - -
Total other assets 255,900 264,300
- - - - - - - - - -
Total assets $ 2,573,300 $ 2,711,900
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-3-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
<CAPTION>
SEPT. 30, JUNE 30,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1997 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities
Accounts payable $ 1,244,400 $ 1,402,300
Note payable - line of credit 155,300 17,300
Other current liabilities 1,641,400 1,933,800
- - - - - - - - - - - - - -
Total current liabilities 3,041,100 3,353,400
- - - - - - - - - - - - - -
Notes payable - related party 120,000 120,000
Other 50,300 49,300
- - - - - - - - - - - - - -
Total long-term liabilities 170,300 169,300
- - - - - - - - - - - - - -
Commitments and contingencies
Total liabilities 3,211,400 3,522,700
- - - - - - - - - - - - - -
Shareholders' deficit:
Common stock $.02 par; authorized
20,000,000 shares;
issued and outstanding
- 1,686,685 shares 33,800 33,800
Additional capital 9,302,800 9,302,800
Accumulated deficit (9,974,700) (10,147,400)
- - - - - - - - - - - - - -
Total shareholders' deficit (638,100) (810,800)
- - - - - - - - - - - - - -
Total liabilities and shareholders' deficit $ 2,573,300 $ 2,711,900
============= ===============
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-4-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
Three Months Ended
September 30,
1997 1996
------------- --------------
<S> <C> <C>
Revenues $ 4,895,000 $ 3,774,500
- - - - - - - - - - - - - -
Operating costs and expenses:
Costs of revenue 4,188,600 3,232,400
Development costs of HeaTreaT 88,100
Selling, general and administrative 492,200 407,700
- - - - - - - - - - - - - -
Total operating costs and expenses 4,680,800 3,728,200
- - - - - - - - - - - - - -
Operating income 214,200 46,300
- - - - - - - - - - - - - -
Other expense:
Interest expense (net) (21,500) (10,200)
Other expense (2,800) (13,800)
- - - - - - - - - - - - - -
Total other expense (24,300) (24,000)
- - - - - - - - - - - - - -
Income before income taxes 189,900 22,300
Provision for income taxes 17,200 8,000
- - - - - - - - - - - - - -
Net income $ 172,700 $ 14,300
============= =============
Per share data:
Net income $ .07 $ .01
============= =============
Weighted average number of common shares and
common stock equivalents outstanding
during the period 2,684,848 1,503,685
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
- - 5 -
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION> Three Months Ended
September 30,
1997 1996
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 172,700 $ 14,300
- - - - - - - - - - - - -
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 9,000 23,000
Changes in operating assets and liabilities:
Accounts receivable 172,100 339,300
Prepaid expenses and other (7,800) (48,800)
Other assets 5,000
Restricted cash 10,000
Accounts payable (157,900) (187,900)
Other current liabilities (292,400) (76,600)
Other long-term liabilities 1,000 1,000
- - - - - - - - - - - - -
Total adjustments (271,000) 60,000
- - - - - - - - - - - - -
Net cash provided (used) by operating activities (98,300) 74,300
- - - - - - - - - - - - -
Cash flows from investing activities:
Property additions (6,200) (28,300)
Investment in PEI (8,000)
- - - - - - - - - - - - -
Net cash used by investing activities (14,200) (28,300)
- - - - - - - - - - - - -
Cash flows from financing activities:
Proceeds of borrowings on bank and other loans 779,400
Payments on bank and other loans (641,400) (25,000)
- - - - - - - - - - - - -
Net cash provided (used) by financing activities 138,000 (25,000)
- - - - - - - - - - - - -
Net increase in cash and cash equivalents 25,500 21,000
Cash and cash equivalents at beginning of period 24,700 33,900
- - - - - - - - - - - - -
Cash and cash equivalents at end of period $ 50,200 $ 54,900
============ =============
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
- - 6 -
<PAGE>
HADRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The interim consolidated financial statements for Hadron, Inc.
(the "Company") are unaudited, but in the opinion of management
reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of results for such
periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. The balance
sheet at June 30, 1997 has been derived from the audited financial
statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles
for complete financial statements. These consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1997 ("1997 Form
10-K") filed with the Securities and Exchange Commission.
Certain reclassifications have been made to prior year amounts
to conform to current year classifications.
Income per share is based on the weighted average number of
common shares outstanding during each quarter and common stock
equivalents, if dilutive.
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which is required to
be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of
Statement No. 128 on the calculation of primary earnings per share
and fully diluted earnings per share for the periods presented has
not yet been determined.
2. Note Payable - Line of Credit
In June 1997, the Company entered into a Line of Credit
Agreement with Century National Bank pursuant to which Century
National Bank provided the Company with a $800,000 line of credit
facility through November 30, 1998, replacing a $300,000 facility
set to expire in December 1997. Borrowings under the facility are
personally guaranteed by Dr. Gilluly and his wife. The outstanding
line of credit balance, bearing interest, payable monthly, at the
prime rate plus two percent, is $155,300 as of September 30, 1997.
<PAGE>
3. Notes Payable - Related Party
Certain members of the Company's management or Board of
Directors (the "Investors"), each agreed to invest $24,000 in the
Company in the form of five separate two-year promissory notes, the
principal of which is convertible at $.60 per share at each of his
or her respective option, into restricted shares of the Company's
common stock. Such notes also provide that upon prepayment by the
Company of principal outstanding under the notes, the Company shall
issue to the note holder a warrant to acquire Common Stock at $.60
per share. The number of shares each warrant shall entitle the
holder thereof to acquire shall equal the principal prepaid giving
rise to the warrant divided by $.60. The Company and each of the
Investors entered into an Investment Agreement dated June 20, 1997
setting forth the terms of his or her investment in the Company.
The notes payable - related party, bearing interest, payable
quarterly, at ten percent, remain at $120,000 as of September 30,
1997.
4. Note Receivable
In December 1996, the Company obtained a $148,606 note
receivable from a commercial customer to satisfy an outstanding
accounts receivable. Principal and interest at 10% is due in
monthly installments of $8,000 with a final payment of $8,664 due
July 15, 1998. At September 30, 1997, the Company has received its
required monthly installments.
5. Concentration of Business
The Company provides a broad range of information technology
management services to businesses and federal government agencies.
Revenues from services performed under direct and indirect long-
term contracts and subcontracts with government defense and
intelligence agencies comprise the majority of the Company's
business. The majority of the Company's technical and professional
service business with governmental departments and agencies is
obtained through competitive procurement and through "follow-up"
services related to existing contracts. The Company maintains a
primary commitment to its direct and indirect government clients
and is also pursuing its program of business development targeted
toward commercial operations.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Revenues for the three months ended September 30, 1997 were
approximately $4,895,000, a 30% increase from the prior year
quarter. The increase was primarily attributable to growth on
existing contracts with major government and commercial customers
of both EISI and SyCom.
Costs of revenue for the quarter ended September 30, 1997
were approximately $4,189,000, an increase of approximately 26%.
The increase is due to the growth in EISI and SyCom contracts
noted above, partially offset by the elimination of the HeaTreaT
product development expenses of $88,000. Costs of revenue as a
percentage of revenues were approximately 86% and 88% for the
quarters ending September 30, 1997 and 1996, respectively. This
2% decrease is due to the elimination of the HeaTreaT
expenditures.
Selling, general and administrative expenses totaled
approximately $492,000 for the September 30, 1997 quarter,
compared with approximately $408,000 for the prior year period.
The increase is primarily due to the Company's addition of key
administrative personnel, coupled with the implementation of a
profit-based employee incentive program, partially offset by the
absence of HeaTreaT marketing costs of $63,000.
The Company had an operating profit of $214,000 in the
current quarter, compared to an operating profit of $46,000 in
the corresponding prior period. This substantial increase is
primarily attributable to the growth in EISI and SyCom coupled
with the elimination of HeaTreaT expenses of $151,000.
For the quarters ended September 30, 1997 and 1996, net
interest and other expense remained unchanged.
Net income was $173,000, compared to net income of
approximately $14,000 in the prior year quarter. The increase
resulted from the improved profitability of current operations,
coupled with the elimination of HeaTreaT product costs.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The working capital deficit at September 30, 1997 decreased
by approximately $182,000 from June 30, 1997. Substantial growth
in existing contracts with EISI and SyCom, coupled with the
elimination of the HeaTreaT expenditures, enabled the Company to
utilize the retained profits to reduce its accounts payable
obligations.
The Company has a Line of Credit Agreement with Century
National Bank which provides the Company with an $800,000 line of
credit facility through November 30, 1998. The line of credit
provides additional working capital availability to fund the
Company's growth.
For the quarter ended September 30, 1997, the Company earned
net income of $173,000. The Company's ongoing operations are
expected to generate profits and cashflow which will be utilized
to reduce the working capital and shareholders' deficits. The
Company does not anticipate substantial capital expenditures in
the current fiscal year.
The Company's operations are highly labor driven and
profitability levels are largely determined by billable hours,
which fluctuate from quarter to quarter. The first and fourth
fiscal quarters are generally more profitable, primarily since
there are fewer holidays, two and one, respectively. In
contrast, second quarter profitability is adversely affected by
four holidays and a client's five-day holiday shutdown in
December. The third quarter results are impacted by three
holidays and higher employment taxes.
Except for the historical information contained herein, the
matters discussed in this 10-Q include forward-looking statements
that involve a number of risks and uncertainties. There are
certain important factors and risks that could cause results to
differ materially from those anticipated by the statements
contained herein. Such factors and risks include business
conditions and growth in the information services, engineering
services, software development and government contracting arenas
and in the economy in general; competitive factors, such as the
pressures toward consolidation of small government contracts into
larger contracts awarded to major, multi-national corporations;
the Company's ability to continue to recruit and retain highly
skilled technical, managerial and sales/marketing personnel; and
such other risks detailed from time to time in the Company's SEC
reports.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
No material legal proceedings are currently pending.
Item 6. Exhibits and Reports.
(a) Exhibits
Exhibit No.
10.1 Employment Agreement with George E. Fowler dated October 1, 1997.
10.2 Employment Agreement with Donald Jewell dated October 1, 1997.
11 Earnings per share computation
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<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 there unto duly authorized.
Date: November 14, 1997 HADRON, INC.
(Registrant)
By:/S/ C.W. Gilluly By:/S/ Donald E. Ziegler
C. W. Gilluly Ed.D. Donald E. Ziegler
Chief Executive Officer Chief Financial Officer
and Chairman (Principal Financial
(Principal Executive Officer) Officer and Principal
Accounting Officer)
<PAGE>
Exhibit 10.1
October 1, 1997
Mr. George Fowler
5808 Beech Avenue
Bethesda, MD 20817
Dear George:
On behalf of HADRON I am pleased to renew the offer for you to
continue as the President and Chief Operating Officer of HADRON,
Inc., reporting to me. The annual salary for this position is
currently $135,000.00, paid bi-weekly.
The term of your employment is for one year, subject to renewal
annually, at the Company's discretion, for two additional one-year
terms; provided, however, that the Company shall have the right to
terminate your employment with no further obligation on the part of
the Company if you are convicted of a felony or a crime of moral
turpitude or if the Company determines that you have not
satisfactorily performed your duties. In the event that the
Company terminates your employment without cause, or if the Company
decides not to renew this agreement for any reason other than those
specified above, you shall receive six months' severance pay in
full and complete satisfaction of any claim you may have by virtue
of such termination of or election not to renew your agreement with
the Company.
In the event your employment agreement is renewed by October 1,
1998, you shall be entitled to an increase in annual salary which
is commensurate with the annual increase awarded to other executive
officers of the Company, as determined by the Board of Directors.
During the term of your employment, you shall be entitled to
participate, on the same terms and conditions as other executive
employees of the Company, in such major medical, dental, life
insurance, 401(k), and other employee benefits which the Company
now provides or in the future may provide to its executive
employees. You shall be entitled to three weeks of paid vacation
leave and two weeks of sick leave per year.
In addition, and as part of your compensation package, you shall
continue to receive a car allowance in the amount of $350 per
month. Furthermore, the Company will reimburse you for all
reasonable expenses incurred in the performance of your duties in
accordance with the Company's standard policy.
<PAGE>
Mr. George Fowler
October 1, 1997
Page 2
As previously discussed, you are a member of the Hadron Bonus Plan
for Fiscal Year 1998 as described to you in the letter dated July
28, 1997.
In addition to the above, you will be eligible to receive incentive
stock options as stipulated in the HADRON, Inc. 1994 Stock Option
Plan and approved by the Board of Directors.
After review of the terms and conditions expressed above, sign the
agreement in the space provided and return a copy to me. I look
forward to the opportunity to continue to work with you here at
HADRON. I believe you will continue to find the position
challenging and worthy of your talents.
Very truly yours,
/S/ C.W. GILLULY
C. W. Gilluly
Chairman of the Board and
Chief Executive Officer
Accepted:
/S/ GEORGE FOWLER 10/01/97
George Fowler Date
<PAGE>
Exhibit 10.2
October 1, 1997
Mr. Donald Jewell
9368 Duff Court
Ellicott City, MD 21043
Dear Don:
On behalf of HADRON I am pleased to offer you the position of Vice
President of HADRON, as approved by the Compensation committee of
the HADRON Board of Directors. The annual salary for this position
is currently $5,000.00, paid bi-weekly. In addition, I am pleased
to renew the offer for you to continue as the President of HADRON's
subsidiary, Engineering & Information Services, Inc., (EISI)
reporting to George Fowler, President of HADRON. The annual salary
accompanying this position is $85,000 per annum paid bi-weekly.
The term of your employment is for one year, subject to renewal
annually, at the Company's discretion, for two additional one-year
terms; provided, however, that the Company shall have the right to
terminate your employment with no further obligation on the part of
the Company if you are convicted of a felony or a crime of moral
turpitude or if the Company determines that you have not
satisfactorily performed your duties. In the event that the
Company terminates your employment without cause, or if the Company
decides not to renew this agreement for any reason other than those
specified above, you shall receive six months' severance pay in
full and complete satisfaction of any claim you may have by virtue
of such termination of or election not to renew your agreement with
the Company.
In the event your employment agreement is renewed by October 1,
1998, you shall be entitled to an increase in annual salary which
is commensurate with the annual increase awarded to other executive
officers of the Company, as determined by the Board of Directors.
During the term of your employment, you shall be entitled to
participate, on the same terms and conditions as other executive
employees of the Company, in such major medical, dental, life
insurance, 401(k), and other employee benefits which the Company
now provides or in the future may provide to its executive
employees. You shall be entitled to four weeks of paid vacation
leave and two weeks of sick leave per year.
<PAGE>
Mr. Donald Jewell
October 1, 1997
Page 2
In addition, and as part of your compensation package, you shall
continue to receive a car allowance in the amount of $350 per
month. Furthermore, the Company will reimburse you for all
reasonable expenses incurred in the performance of your duties in
accordance with the Company's standard policy.
As previously discussed, you are a member of the Hadron Bonus Plan
for Fiscal Year 1998, as described to you in the letter dated July
28, 1997.
In addition to the above, you will be eligible to receive incentive
stock options as stipulated in the HADRON, Inc. 1994 Stock Option
Plan, As Amended and approved by the Board of Directors.
After review of the terms and conditions expressed above, sign the
agreement in the space provided and return a copy to me. George
Fowler and I look forward to the opportunity to continue to work
with you here at HADRON and EISI. I believe you will continue to
find the position challenging and worthy of your talents.
Very truly yours,
/S/ C.W. GILLULY
C. W. Gilluly
Chairman of the Board and
Chief Executive Officer
Accepted:
/S/ DONALD JEWELL 10/01/97
Donald Jewell Date
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 10-Q AND IS QUALFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 50
<SECURITIES> 0
<RECEIVABLES> 2,347
<ALLOWANCES> 185
<INVENTORY> 0
<CURRENT-ASSETS> 2,317
<PP&E> 475
<DEPRECIATION> 395
<TOTAL-ASSETS> 2,573
<CURRENT-LIABILITIES> 3,041
<BONDS> 0
<COMMON> 34
0
0
<OTHER-SE> (672)
<TOTAL-LIABILITY-AND-EQUITY> 2,573
<SALES> 4,895
<TOTAL-REVENUES> 4,895
<CGS> 4,189
<TOTAL-COSTS> 4,681
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 190
<INCOME-TAX> 17
<INCOME-CONTINUING> 173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
Exhibit 11
<TABLE>
Hadron, Inc.
Earnings per Share Computation
<CAPTION>
Three Months Ended
September 30,
1997 1996
--------- ----------
<S> <C> <C>
Net income $172,700 $14,300
Add:
Interest expense savings
assuming repayment of
debt from excess proceeds
of exercise of stock options
under treasury stock method
assuming 20% of outstanding
shares limitation 2,300
--------- -----------
$175,000 $14,300
--------- -----------
Weighted average shares:
Shares outstanding 1,686,685 1,503,685
Common stock equivalents 998,163
--------- -----------
2,684,848 1,503,685
Earnings per share $175,000 = $ .07 $14,300 = $ .01
--------- ===== ----------- =====
2,684,848 1,503,685
</TABLE>
<PAGE>
