UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998 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 9, 1998, 1,736,621 shares of the Common Stock of the
registrant were outstanding.
<PAGE> HADRON, INC.
TABLE OF CONTENTS
Part I Financial Information: Page No.
Item 1. Financial Statements
Consolidated Balance Sheets at 3
September 30, 1998 and June 30, 1998
Consolidated Statements 5
of Operations for the Three Months Ended
September 30, 1998 and 1997
Consolidated Statements 6
of Cash Flows for the Three Months Ended
September 30, 1998 and 1997
Notes to Consolidated 7
Financial Statements
Item 2. Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
<TABLE>
<CAPTION>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND JUNE 30, 1998
SEPT. 30, JUNE 30,
ASSETS 1998 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53,800 $ 60,500
Accounts receivable, net 2,875,200 3,143,900
Note receivable 8,600
Prepaid expenses and other 40,600 32,500
---------- ----------
Total current assets 2,969,600 3,245,500
---------- ----------
Fixed assets 123,400 116,300
Assets held for resale 135,900 135,900
Other 12,600 9,300
---------- ----------
Total other assets 271,900 261,500
---------- ----------
Total assets $3,241,500 $3,507,000
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-3-
<PAGE>
<TABLE>
<CAPTION>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND JUNE 30, 1998
SEPT. 30, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1998
----------- ----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 748,700 $ 948,900
Note payable - line of credit 80,000
Notes payable - related party 120,000 120,000
Other current liabilities 2,176,800 2,282,700
----------- ----------
Total current liabilities 3,045,500 3,431,600
----------- ----------
Other 54,400 53,400
----------- ----------
Total long-term liabilities 54,400 53,400
----------- ----------
Total liabilities 3,099,900 3,485,000
----------- ----------
Shareholders' equity:
Common stock $.02 par; authorized
20,000,000 shares;
issued and outstanding -
September 30, 1998, 1,736,621 shares,
and June 30, 1998, 1,731,956 shares 34,800 34,700
Additional capital 9,377,600 9,374,100
Accumulated deficit (9,270,800) (9,386,800)
----------- ----------
Total shareholders' equity 141,600 22,000
----------- ----------
Total liabilities and shareholders' equity $3,241,500 $3,507,000
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-4-
<PAGE>
<TABLE>
<CAPTION>
HADRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Three Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 4,964,000 $ 4,895,000
----------- -----------
Operating costs and expenses:
Costs of revenue 4,378,000 4,188,600
Selling, general and administrative 451,300 492,200
----------- -----------
Total operating costs and expenses 4,829,300 4,680,800
----------- -----------
Operating income 134,700 214,200
----------- -----------
Other expense:
Interest expense (net) (5,300) (21,500)
Other expense (2,500) (2,800)
----------- -----------
Total other expense (7,800) (24,300)
----------- -----------
Income before income taxes 126,900 189,900
Provision for income taxes 10,900 17,200
----------- -----------
Net income $ 116,000 $ 172,700
=========== ===========
Per share data:
Net income per share
Basic $ .07 $ .10
=========== ===========
Diluted $ .04 $ .07
=========== ===========
Weighted average number of shares
Basic 1,736,621 1,686,684
=========== ===========
Diluted 3,099,434 2,664,952
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
- 5 -
<PAGE>
<TABLE>
<CAPTION>
HADRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Three Months Ended
September 30,
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 116,000 $ 172,700
----------- ------------
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation and amortization 10,100 9,000
Changes in operating assets and liabilities:
Accounts and notes receivable 277,200 172,100
Prepaid expenses and other (8,100) (7,800)
Other assets (3,200) 5,000
Accounts payable (200,200) (157,900)
Other current liabilities (105,800) (292,400)
Other long-term liabilities 1,000 1,000
----------- ------------
Total adjustments (29,000) (271,000)
----------- ------------
Net cash provided (used) by operating
activities 87,000 (98,300)
----------- ------------
Cash flows from investing activities:
Property additions (17,200) (6,200)
Investment in PEI (8,000)
----------- ------------
Net cash used by investing activities (17,200) (14,200)
----------- ------------
Cash flows from financing activities:
Proceeds of borrowings on bank
and other loans 120,000 779,400
Proceeds of stock options exercised 3,500
Payments on bank and other loans (200,000) (641,400)
----------- ------------
Net cash provided (used) by financing
activities (76,500) 138,000
----------- ------------
Net increase (decrease) in cash and
cash equivalent (6,700) 25,500
Cash and cash equivalents at beginning of period 60,500 24,700
----------- ------------
Cash and cash equivalents at end of period $ 53,800 $ 50,200
=========== ============
</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, 1998 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, 1998 ("1998 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.
As of July 1, 1998, the Company adopted Statement No. 130,
"Reporting Comprehensive Income", which establishes new rules for
the reporting and display of comprehensive income and its
components. Non-owner changes in shareholders' equity that have
not been included in net income are to be included in comprehensive
income. The Company had no such non-owner changes during the
periods reported. The adoption of the Statement had no impact on
the Company's net income or shareholders' equity.
For the fiscal year ending June 30, 1999, the Company will
adopt Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Company will make the
necessary changes to comply with the provisions of the Statement.
The Company does not expect the adoption of the Statement to have
a material impact on the Company's financial condition or results
of operations.
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 an $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 bear
interest at the prime rate plus two percent and are personally
guaranteed by Dr. Gilluly and his wife. There were no borrowings
under the facility at September 30, 1998.
<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 bear interest, payable quarterly,
at ten percent per annum.
4. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months ended
September 30,
1998 1997
---------- ---------
<S> <C> <C>
Numerator:
Net Income $ 116,000 $ 172,700
Effect of dilutive securities:
Convertible debt 3,000 3,000
---------- ---------
Numerator for diluted earnings
per share - income available
to common shareholders after
assumed conversion $ 119,000 $ 175,700
========== =========
Denominator:
Denominator for basic
earnings per share:
weighted average shares
outstanding 1,736,621 1,686,684
Effect of dilutive securities:
Warrants 888,557 751,048
Employee stock options 274,256 153,786
Convertible debt 200,000 73,434
---------- ---------
Denominator for diluted
earnings per share 3,099,434 2,664,952
========== =========
Basic earnings per share $ .07 $ .10
========== =========
Diluted earnings per share $ .04 $ .07
========== =========
</TABLE>
<PAGE>
5. Concentration of Business
The Company provides a broad range of information, management
and technical services to businesses and federal government
agencies. The Company specializes in the areas of trusted/secure
computer systems, computer systems support and intelligent weapons
systems.
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. In certain instances,
however, the Company acquires such service contracts because of
special professional competency or knowledge in specific subject
areas.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenues for the three months ended September 30, 1998 were
approximately $4,964,000, a 1% increase from the prior year
quarter. This slight increase reflects fewer contract requirements
at major government and commercial customers of both EISI and
SyCom, primarily due to certain government budgetary constraints.
Costs of revenue for the quarter ended September 30, 1998 were
approximately $4,378,000, an increase of approximately 5%. The
increase is due primarily to merit salary increases to the
professional technical staff. Costs of revenue as a percentage of
revenues were approximately 88% and 86% for the quarters ended
September 30, 1998 and 1997, respectively. This 2% increase is
primarily due to retaining technical professionals awaiting new
tasking by customers.
Selling, general and administrative expenses totaled
approximately $451,000 for the September 30, 1998 quarter, compared
with approximately $492,000 for the prior year period. The
decrease is primarily due to reduced profit-based employee
incentive program expenses.
The Company had an operating profit of $135,000 in the current
quarter, compared to an operating profit of $214,000 in the
corresponding prior period. This decrease is primarily
attributable to retaining technical personnel on overhead while
awaiting new customer tasking and funding.
For the quarters ended September 30, 1998 and 1997, net
interest expense decreased approximately $16,000 due to lower
outstanding borrowings.
Net income was $116,000, compared to net income of
approximately $173,000 in the prior year quarter. The decrease
resulted from the loss of billable positions and hiring freezes by
the Company's major customers, coupled with the costs of retaining
these technical professional personnel.
CAPITAL RESOURCES AND LIQUIDITY
The working capital deficit at September 30, 1998 decreased by
approximately $110,000 from June 30, 1998. Continuing
profitability in existing contracts within EISI and SyCom enabled
the Company to generate the retained profits to fund working
capital requirements
The Company has an $800,000 Line of Credit Agreement with
Century National Bank which expires November 30, 1998. The line of
credit provides additional working capital availability to fund the
Company's growth. The Company is currently investigating
increasing and extending the line of credit facility and expects to
execute a new agreement with a bank in the near future.
For the quarter ended September 30, 1998, the Company earned
net income of $116,000. The Company's ongoing operations are
expected to generate profits and cashflow which will be utilized to
improve working capital and increase shareholders' equity. 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. In addition, the Company's profitability is
highly dependent on increased position availability with major
government and commercial customers of both EISI and SyCom.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable
year, resulting in possible system failure or miscalculations
causing disruptions of operations.
The Company has completed an internal review and assessment of
the impact of the Year 2000 issue upon its operating, financial and
accounting systems. At this time, the Company believes that, with
respect to its internal systems, the Year 2000 issue will not pose
any significant operational problems or costs. The Company has
commenced a program to assess the impact of the Year 2000 issue
with respect to the Company's major vendors and customers (external
agents). Letters will be sent requesting detailed, written
information concerning existing or anticipated Year 2000 compliance
by their systems, insofar as the operating systems relate to the
Company's business activities with such parties. The Company
expects to receive replies by December 31, 1998, and will update
its assessment of any impact at that time.
The Company has no means of ensuring that its external agents
will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of non-compliance
by external agents in not determinable.
Management of the Company believes it has an effective program
in place to assess the Year 2000 issue. As noted above, the
Company has not yet completed all necessary phases of the Year 2000
program. Failure on the part of the external agents to comply and
disruptions in the economy generally resulting from Year 2000
issues could materially adversely affect the Company. The amount
of potential liability and lost revenues cannot be reasonably
estimated at this time.
<PAGE>
The Company currently has no contingency plans in place in the
event its external agents do not complete all phases of the Year
2000 resolution process. The Company plans to evaluate the status
of completion during the March 1999 quarter and determine whether
such a plan is necessary.
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
Items 1-5.
None.
Item 6. Exhibits and Reports.
(a) Exhibits
Exhibit No.
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 13, 1998 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 Office
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 3,079
<ALLOWANCES> 204
<INVENTORY> 0
<CURRENT-ASSETS> 2,970
<PP&E> 554
<DEPRECIATION> 431
<TOTAL-ASSETS> 3,242
<CURRENT-LIABILITIES> 3,046
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0
0
<COMMON> 35
<OTHER-SE> 107
<TOTAL-LIABILITY-AND-EQUITY> 3,242
<SALES> 4,964
<TOTAL-REVENUES> 4,964
<CGS> 4,378
<TOTAL-COSTS> 4,829
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</TABLE>
