<PAGE>
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 December 31, 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.)
7611 Little River Turnpike, Suite 404 West
Annandale, Virginia 22003
(Address of principal executive offices)
Registrant's Telephone number including area code
(703) 642-9404
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 February 10, 1999, 1,849,340 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
December 31, 1998 and June 30, 1998
Consolidated Statements 5
of Operations for the Three and Six
Months Ended December 31, 1998 and 1997
Consolidated Statements 6
of Cash Flows for the Six Months Ended
December 31, 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 14
SIGNATURES 15
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1998
<CAPTION>
DEC. 31, JUNE 30,
ASSETS 1998 1998
------ ------------ ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 156,100 $ 60,500
Accounts receivable, net 2,886,100 3,143,900
Note receivable 8,600
Prepaid expenses and other 120,100 32,500
---------- ----------
Total current assets 3,162,300 3,245,500
---------- ----------
Fixed assets 152,300 116,300
Assets held for resale 135,900 135,900
Other 34,800 9,300
---------- ----------
Total other assets 323,000 261,500
---------- ----------
Total assets $3,485,300 $3,507,000
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-3-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1998
<CAPTION>
DEC. 31, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1998
------------------------------------ ------------ -----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 632,000 $ 948,900
Note payable - line of credit 80,000
Notes payable - related party 420,000 120,000
Other current liabilities 2,056,800 2,282,700
---------- ----------
Total current liabilities 3,108,800 3,431,600
---------- ----------
Note payable - related party 100,000
Other 55,500 53,400
---------- ----------
Total long-term liabilities 155,500 53,400
---------- ----------
Total liabilities 3,264,300 3,485,000
---------- ----------
Shareholders' equity:
Common stock $.02 par; authorized 20,000,000 shares;
issued and outstanding -
December 31, 1998, 1,774,432 shares,
and June 30, 1998, 1,731,956 shares 35,500 34,700
Additional capital 9,429,100 9,374,100
Accumulated deficit (9,243,600) (9,386,800)
---------- ----------
Total shareholders' equity 221,000 22,000
---------- ----------
Total liabilities and shareholders' equity $3,485,300 $3,507,000
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-4-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,831,000 $ 5,170,100 $ 9,795,000 $10,065,100
----------- ----------- ----------- -----------
Operating costs and expenses:
Costs of revenue 4,315,600 4,522,900 8,693,600 8,711,500
Selling, general and administrative 464,100 514,900 915,400 1,007,100
----------- ----------- ----------- -----------
Total operating costs and expenses 4,779,700 5,037,800 9,609,000 9,718,600
----------- ----------- ----------- -----------
Operating income 51,300 132,300 186,000 346,500
----------- ----------- ----------- -----------
Other expense:
Interest expense (net) (15,300) (18,500) (20,600) (40,000)
Other expense (300) (1,000) (2,800) (3,800)
----------- ----------- ----------- -----------
Total other expense (15,600) (19,500) (23,400) (43,800)
----------- ----------- ----------- -----------
Income before income taxes 35,700 112,800 162,600 302,700
Provision for income taxes 8,500 11,300 19,400 28,500
----------- ----------- ----------- -----------
Net income $ 27,200 $ 101,500 $ 143,200 $ 274,200
=========== =========== =========== ===========
Per share data:
Net income per share
Basic $ .01 $ .06 $ .08 $ .16
=========== =========== =========== ===========
Diluted $ .01 $ .03 $ .05 $ .10
=========== =========== =========== ===========
Weighted average number of shares
Basic 1,737,032 1,686,684 1,736,826 1,686,684
=========== =========== =========== ===========
Diluted 3,086,673 3,003,413 3,093,459 2,834,278
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
- 5 -
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
Six Months
December 31
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 143,200 $ 274,200
----------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 21,100 19,000
Provision for doubtful accounts, net 3,700
Changes in operating assets and liabilities:
Accounts and notes receivable 1,138,200 (59,800)
Prepaid expenses and other 7,900 (3,400)
Other assets (3,300) 5,200
Accounts payable (357,900) (232,500)
Other current liabilities (360,500) 64,900
Other long-term liabilities 2,100 2,100
----------- ------------
Total adjustments 447,600 (200,800)
----------- ------------
Net cash provided by operating activities 590,800 73,400
----------- ------------
Cash flows from investing activities:
Property additions (57,100) (23,500)
Purchase of Vail (1,193,600)
Cash acquired in connection
with Vail purchase 779,700
Investment in PEI (15,900)
----------- ------------
Net cash used by investing activities (471,000) (39,400)
----------- ------------
Cash flows from financing activities:
Proceeds of borrowings on bank and other loans 825,000 779,400
Proceeds of stock options exercised 3,500
Proceeds of employee stock purchases 52,300
Payments on bank and other loans (905,000) (796,700)
----------- ------------
Net cash provided (used) by financing activities (24,200) (17,300)
----------- ------------
Net increase in cash and cash equivalents 95,600 16,700
Cash and cash equivalents at beginning of period 60,500 24,700
----------- ------------
Cash and cash equivalents at end of period $ 156,100 $ 41,400
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
- 6 -
<PAGE>
HADRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1998 and 1997
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.
2. Acquisition of Vail Research and Technology Corporation
Effective December 18, 1998, the Company acquired Vail Research
and Technology Corporation ("Vail"), a privately-held information
technology firm based in Annandale, VA, for approximately $1,594,000.
Vail will operate as a wholly-owned subsidiary of Hadron. The
purchase price was based upon the net worth of the Company as of
September 30, 1998 plus $200,000, subject to post-Closing adjustments
for earnings from September 30, 1998 through the Closing Date. The
purchase price was satisfied with a payment of $1,194,000 and the
issuance of two non-interest bearing promissory notes in the amounts
of $300,000 and $100,000 payable to Jeannine Mantz (See Note 4).
Ms. Mantz, the sole stockholder of Vail, remains President of Vail in
addition to holding a corporate vice-president position at Hadron.
The fair value of the assets and liabilities acquired approximated
their book value of $1,833,000 and $121,000, respectively. The Company
incurred financial, legal and accounting costs associated with the Vail
purchase of approximately $55,000. Included in these fees was a $25,000
payment made to Hadron director, John D. Sanders, for advisory services
in connection with the purchase.
<PAGE>
The following table sets forth proforma unaudited results of
operations of the Company for the six months ended December 31, 1998
and 1997, as if Vail had been acquired on July 1, 1996.
Six months ended Six months ended
December 31, 1998 December 31, 1997
----------------- -----------------
Net revenues $10,954,800 $12,332,300
Net income $ 155,700 $ 325,600
Net income per share:
Basic $ .09 $ .19
Diluted $ .05 $ .11
3. Note Payable - Line of Credit
In December 1998, the Company entered into a Line of Credit
Agreement with Century National Bank pursuant to which Century National
Bank provided the Company with a $1,050,000 line of credit facility
through November 30, 1999, replacing an $800,000 facility which expired
November 30, 1998. Borrowings under the facility bear interest at the
prime rate plus one percent and are personally guaranteed by Dr.
Gilluly and his wife. There were no outstanding borrowings under the
facility at December 31, 1998.
4. Notes Payable - Related Party
The Company and certain members of the Company's management or
Board of Directors (the "Investors") entered into an Investment
Agreement dated June 20, 1997, pursuant to which 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 notes payable
- - related party bear interest, payable quarterly, at ten percent per
annum.
As part of the purchase of Vail, Ms. Mantz holds two non-interest
bearing promissory notes of $300,000 and $100,000, respectively. The
$300,000 non-interest bearing promissory note, which is based upon the
collection of Vail's accounts receivable shall be payable each month
in the amount of $25,000 for twelve months. The $100,000 non-interest
promissory note is due and payable on the two-year anniversary of the
Closing Date, less permitted deductions taken for contingent
liabilities and uncollected accounts receivable.
<PAGE>
5. Earnings Per Share
<TABLE>
The following table sets forth the computation of basic and
diluted earnings per share:
<CAPTION>
Three Months ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator: Net Income $ 27,200 $ 101,500 $ 143,200 $ 274,200
Effect of dilutive securities:
Convertible debt 3,000 3,000 6,000 6,000
-------- --------- --------- ---------
Numerator for diluted earnings
per share - income available
to common shareholders after
assumed conversion 30,200 $104,500 $149,200 $280,200
======== ========= ========= =========
Denominator:
Denominator for basic
earnings per share:
weighted average shares
outstanding 1,737,032 1,686,684 1,736,826 1,686,684
Effect of dilutive securities:
Warrants 881,413 892,872 885,079 821,960
Employee stock options 268,228 283,707 271,554 218,842
Convertible debt 200,000 140,150 200,000 106,792
-------- --------- --------- ---------
Denominator for diluted
earnings per share 3,086,673 3,003,413 3,093,459 2,834,278
======== ========= ========= =========
Basic earnings per share $ .01 $ .06 $ .08 $ .16
======== ========= ========= =========
Diluted earnings per share $ .01 $ .03 $ .05 $ .10
======== ========= ========= =========
</TABLE>
<PAGE>
6. 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 DECEMBER 31, 1998
TO THE THREE MONTHS ENDED DECEMBER 31, 1997
Revenues for the three months ended December 31, 1998 were
approximately $4,831,000, a 7% decrease from the prior year quarter.
This decrease reflects fewer contract requirements at major government
and commercial customers of both EISI and SyCom, primarily due to
certain government budgetary constraints. Vail's contribution to
revenues for the period of December 18, 1998 through December 31, 1998
was $51,000.
Costs of revenue for the quarter ended December 31, 1998 were
approximately $4,316,000, a decrease of approximately 5%. The decrease
is due primarily to a decrease in billable positions with major
government and commercial customers of both EISI and SyCom. Costs of
revenue as a percentage of revenues were approximately 89% and 87% for
the quarters ended December 31, 1998 and 1997, respectively. This 2%
increase is primarily due to retaining technical professionals awaiting
new tasking by customers. Vail's costs of revenue for the period of
December 18, 1998 through December 31, 1998 was $38,000.
Selling, general and administrative expenses totaled approximately
$464,000 for the December 31, 1998 quarter, compared with approximately
$515,000 for the prior year period. The decrease is primarily due to
reduced profit-based employee incentive program expenses as well as
infrastructure cost-savings. Vail's inclusion from December 18, 1998
through December 31, 1998 in these costs was $10,000.
The Company had an operating profit of $51,000 in the current
quarter, compared to an operating profit of $132,000 in the
corresponding prior period. This decrease is primarily attributable
to the loss of billable employees due to customer cutbacks coupled with
the retaining of technical personnel on overhead while awaiting new
customer tasking and funding. Vail contributed $3,000 to the operating
profit in the current period.
For the quarters ended December 31, 1998 and 1997, net interest
expense decreased approximately $3,000 due to lower outstanding
borrowings during the period.
Net income was $27,000, compared to net income of approximately
$101,000 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. Vail recorded income of $3,000 for its
activity from the purchase date to the period end.
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998
TO THE SIX MONTHS ENDED DECEMBER 31, 1997
Revenues for the six months ended December 31, 1998 were
approximately $9,795,000, a 3% decrease from the prior year period. The
decrease reflects fewer contract requirements at major government and
commercial customers of both EISI and SyCom, primarily due to certain
government budgetary constraints. Vail contributed revenues of $51,000
in the current period.
Costs of revenue for the six months ended December 31, 1998 were
approximately $8,694,000, less than a 1% decrease from the prior year
period. This small decrease is due primarily to the loss of billable
positions with major government and commercial customers of both EISI
and SyCom, coupled with merit salary increases to the professional
technical staff. Costs of revenue as a percentage of revenues were
approximately 89% and 87% for the periods ended December 31, 1998 and
1997, respectively. This 2% increase is due primarily to retaining
technical professionals awaiting new tasking by customers. Vail's
costs of revenue for the current period was $38,000.
Selling, general and administrative expenses totaled approximately
$915,000 for the December 31, 1998 period, compared with approximately
$1,007,000 for the prior year period. This decrease is primarily due
to reduced profit-based employee incentive program expenses coupled
with infrastructure cost savings. Vail incurred $10,000 of general and
administrative expenses in the current period.
The Company had an operating profit of $186,000 in the current
period, compared to an operating profit of $347,000 in the
corresponding prior period. This decrease is primarily attributable
to retaining technical personnel on overhead while awaiting new
customer tasking and funding. Vail contributed $3,000 to operating
profit for the period ended December 31, 1998.
For the six months ended December 31, 1998, net interest expense
decreased approximately $19,000 from the prior year period due to lower
outstanding borrowings during the period.
Net income was $143,000, compared to net income of approximately
$274,000 in the prior year period. 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. Vail recorded net income of $3,000 from its
acquisition date of December 18, 1998 to the current period ended
December 31, 1998.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The working capital at December 31, 1998 was $54,000, an increase
of $240,000 since 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 a $1,050,000 Line of Credit Agreement with Century
National Bank, which expires November 30, 1999. The line of credit
provides additional working capital availability to fund the Company's
growth.
For the six months ended December 31, 1998, the Company earned net
income of $143,000. The Company's ongoing operations are expected to
generate profits and cash flow, 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.
To help counter the effects of the loss of billable positions at
major government and commercial customers of both EISI and SyCom, the
Company has accelerated its merger and acquisition program to enhance
the growth of the Company. As an integral component of this program,
Hadron has engaged the firm of Boles Knop & Company, L.L.C. ("Boles
Knop") to provide investment banking services. In connection with the
engagement, the Company issued 75,000 shares of its common stock to
Boles Knop.
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.
<PAGE>
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
have been 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 is in the process of receiving replies
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 external agents' inability to complete their
Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external agents
is 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.
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; the Company's ability to successfully
identify, complete and integrate acquisitions; 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.
10.1 $1,050,000 Change in Terms Agreement in favor
of Century National Bank dated December 17, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On January 4, 1999, the Company filed a report on Form
8-K disclosing that on December 18, 1998, the Company
acquired from Jeannine Mantz all of the outstanding
capital stock of the Vail Research and Technology
Corporation ("Vail Research"), a privately held
information technology firm based in Northern Virginia,
for approximately $1.6 million, consisting of $1.2
million in cash and two non-interest bearing promissory
notes totaling $400,000, payments which are subject to
the satisfaction of certain future conditions relating
to the accounts receivable and liabilities of Vail
Research. The acquisition was effected pursuant to the
terms of a Stock Purchase Agreement dated December 18,
1998 between the Company, Vail Research and Ms. Mantz,
a copy of which was filed as Exhibit 2.2 and
incorporated herein by reference. The Company intends
to conduct the operations of Vail Research as a wholly-
owned subsidiary of the Company.
<PAGE>
In conjunction with the acquisition, the Company
employed Ms. Mantz as President of Vail Research and as
Vice President of the Company pursuant to the terms of
an Employment Agreement dated as of December 18, 1998,
a copy of which was filed as Exhibit 10.1 hereto and
incorporated herein by reference. Financing for the
acquisition was provided from internal funds and
through the Company's line of credit facility with
Century National Bank, the balance of which was
increased to $1.05 million as of December 17, 1998 (the
"Line of Credit"). Funds provided through the Line of
Credit for the acquisition have been repaid as of the
date hereof through internally generated funds and with
cash on hand at Vail Research.
On January 28, 1999, the Company filed a report on Form 8-K
disclosing that on January 28, 1999, the Company
announced that it had engaged the firm of Boles Knop &
Company, L.L.C. ("Boles Knop") in connection with an
acceleration of the Company's merger and acquisition
program to enhance the growth of the Company. The
Company engaged Boles Knop pursuant to an Investment
Banking Agreement between the Company and Boles Knop
dated January 7, 1999, a copy of which was filed as
Exhibit 99.1 hereto and incorporated herein by reference.
A copy of the Company's press release containing the
announcement, dated January 28, 1999, was filed as
Exhibit 99.2 hereto and incorporated herein by reference.
<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: February 16, 1999 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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q IN ITS ENTIRELY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 156
<SECURITIES> 0
<RECEIVABLES> 3154
<ALLOWANCES> 268
<INVENTORY> 0
<CURRENT-ASSETS> 3162
<PP&E> 661
<DEPRECIATION> 509
<TOTAL-ASSETS> 3485
<CURRENT-LIABILITIES> 3109
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 185
<TOTAL-LIABILITY-AND-EQUITY> 3485
<SALES> 9795
<TOTAL-REVENUES> 9795
<CGS> 8694
<TOTAL-COSTS> 9609
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 163
<INCOME-TAX> 20
<INCOME-CONTINUING> 143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143
<EPS-PRIMARY> .08
<EPS-DILUTED> .05
</TABLE>
CHANGES IN TERMS AGREEMENT
PRINCIPAL LOAN DATE MATURITY LOAN NO
$1,050,000.00 12-17-1998 11-31-1999 12348
CALL COLLATERAL ACCOUNT OFFICER INITIALS
510 07 13505 12 RH
Borrower: Hadron, Inc.; ET.AL. Lender: Century National Bank
4900 Seminary Road, Tysons Corner
Suite 800 8251 Greensboro Drive
Alexandria, VA 22311 McLean, VA 22102
IMPORTANT NOTICE
THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH
CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR
AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT
ANY FURTHER NOTICE.
Principal Amount: $1,050,000.00
Date of Agreement: December 17, 1998
DESCRIPTION OF EXISTING INDEBTEDNESS. All of the indebtedness evidenced by
that certain PROMISSORY NOTE dated June 25, 1997 from HADRON, INC. and
SYCOM SERVICES, INC. and ENGINEERING & INFORMATION SERVICES, INC. to
lender, together with all modifications of and renewals, replacements
and substitutions for the note of credit agreement.
DESCRIPTION OF COLLATERAL. All of the right, title and interest granted
to Lender, including but not limited to those granted under the following:
(a) that certain COMMERCIAL SECURITY AGREEMENT dated June 25, 1997 from
ENGINEERING & INFORMATION SERVICES, INC. to lender; (b) that certain
COMMERCIAL SECURITY AGREEMENT dated June 25, 1997 from SYCOM SERVICES, INC.
to lender together with a Financing Statement recorded July 1, 1997 with the
Delaware Department of State, Division of Corporations bearing file #9722223
and a Financing Statement recorded with the Clerk of the Court of the City
of Alexandria, Virginia bering file #47738; (c) that certain COMMERCIAL
SECURITY AGREEMENT dated December 31, 1996 from HADRON, INC. to lender,
together with a Financing Statement recorded January 29, 1997 with the
Recorder of Deeds of the District of Columbia bearing file #970001513
and a Financing Statement recorded Janaury 15, 1997 with the Clerk of the
Court of the City of Alexandria, Virginia bearing file #47097 and a
Financing Statement recorded January 13, 1997 with the Virginia State
Corporation Commission bearing file #9701137825 and a Financing
Statement recorded Janaury 7, 1997 with the Maryland State Department
of Assessments and Taxation in Liber 3887 at Folio 1167 and bearing ID
#170107380; (e) that certain COMMERICIAL SECURITY AGREEMENT Dated
June 25, 1997 from HADRON, INC. to Lender; (f) that certain COMMERICAL
SECURITY AGREEMENT dated June 25, 1997 from HADRON, INC. to Lender; (g) that
certain ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL dated November
13, 1991 from Martha A. Gilluly to Lender covering Policy #003009191, as
acknowledged by Chubb Life Insurance Company of America on July 9, 1992; (h)
that certain ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL dated
November 13, 1992; (i) that certain ASSIGNMENT OF LIFE INSURANCE POLICY
AS COLLATERAL dated December 18, 1991 from Christopher W. Gilluly to Lender
covering Policy #6001582, as acknowledged by Chubb Security Corporation
on September 12, 1992; and (j) that certain ASSIGNMENT OF LIFE
INSURANCE POLICY AS COLLATERAL dated December 18, 1991 from Martha A. Gilluly
to Lender covering Policy #6001581, as acknowledged by Chubb
Securities Corporation on September 12, 1992.
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DESCRIPTION OF CHANGE IN TERMS.
1. The prinicipal amount is hereby increased from $800,000.00 to
$1,050,000.00.
2. The interest rate to be applied the unpaid balance of this
agreement will be at a rate of 1.00 percentage point over the index.
3. The maturity date is hereby extended to November 30, 1999.
PROMISE TO PAY. Hadron, Inc., promises to pay to Century National
Bank ("Lender"), or order, In lawful money of the United States of
America, the principal amount of One Million Fifty Thousand & 00/100
Dollars ($1,050,000.00) or so much as may be outstanding, together
with Interest on the unpaid outstanding principal balance of each
advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or If no demand Is
made, In one payment of all outstanding principal plus all accrued
unpaid Interest on November 30, 1999. In addition, Borrower will
pay regular monthly payments of accrued unpaid Interest beginning
July 31, 1997, and all subsequent Interest payments are due on the
last day of each month after that. Interest on this Note is
computed on a 365/360 simple interest basis; that is, by applying
the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate In writing. Unless otherwise
agreed or required by applicable law, payments will be applied
first to accrued unpaid interest, then to principal, and any
remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject
to change from time to time based on changes in an Index which is
the Wall Street Journal Prime Rate (the "Index). As used herein
"Prime Rate" refers to on index listed from time to time in the
WALL STREET JOURNAL listing of Money Rates a.-id shall be the
higher of all such rates in effect at any one time. Lender will
tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other
rates as wall. The interest rate change will not occur more often
than each day. The Index currently is 7.750% per annum. The
Interest rate to be applied to the unpaid principal balance of this
Note will be at a rate of 1.000 percentage point over the Index,
resulting in an initial rate of 8.750% per annum. NOTICE: Under
no circumstances will the interest rate on this Note be more than
the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid
finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary
or as a result of default), except as otherwise required by law.
Except for the foregoing, Borrower may pay without penalty all or
a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of
accrued unpaid interest. Rather, they will reduce the principal
balance due.
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LATE CHARGE. If a payment is 10 days or more late, Borrower will
be charged 5.000% of the regularly scheduled payment or $5.00,
whichever is greater.
DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or
Borrower fails to comply with or to perform when due any other
term, obligation, covenant, or condition contained In this Note or
any agreement related to this Note, or in any other agreement or
loan Borrower has with Lender. (c) Borrower defaults under any
loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property or
Borrower's ability to repay this Note or perform Borrower's
obligations under this Note or any of the Related Documents. (d)
Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished. (e)
Borrower becomes insolvent, a receiver is appointed for any part of
Borrower's property, Borrower makes an assignment for the benefit
of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any
creditor tries to take any of Borrower's property on or in which
Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (g) Any
guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition,
or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (i) Lender in good faith deems itself
insecure.
<PAGE>
If any default, other than a default in payment, is curable and if
Borrower has not been given a notice of a breach of the same
provision of this Note within the preceding twelve (12) months, it
may be cured (and no event of default will have occurred) if
Borrower, after receiving written notice from Lender demanding cure
of such default: (a) cures the default within fifteen (15) days; or
(b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire
unpaid principal balance on this Note and all accrued unpaid
interest, together with all other applicable fees, costs and
charges, if any, immediately due and payable, without notice, and
then Borrower will pay that amount. Furthermore, subject to any
limits under applicable law, upon default, Borrower also agrees to
pay Lender's reasonable attorneys' fees equal to 15.000% of the
principal balance due on the Note, and all of Lender's other
collection expenses, whether or not there is a lawsuit and
including without limitation legal expenses for bankruptcy
proceedings. This Note shall be governed by, construed and
enforced in accordance with the laws of the District of Columbia.
Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either party against
the other.
CONFESSION OF JUDGMENT. Upon a default in payment of the
Indebtedness at maturity, whether by acceleration or otherwise,
Borrower hereby irrevocably authorizes and empowers Arthur F.Lafionatis
as Borrower's attorney-in-fact to appear in the Fairfax County
clerk's officer and to confess judgment against Borrower for the
unpaid amount of this Note as evidenced by an affidavit signed by
an officer of Lender setting forth the amount then due, plus
attorney's fees as provided in this Note, plus costs of suit, and
to release all errors, and waive all rights of appeal. If a copy
of this Note, verified by an affidavit, shall have been filed in
the proceeding, it will not be necessary to file the original as a
warrant of attorney. Borrower waives the right to any stay of
execution and the benefit of all exemption laws now or hereafter in
effect. No single exercise of the foregoing warrant and power to
confess judgment will be deemed to exhaust the power, whether or
not any such exercise shall be held by any court to be invalid,
voidable, or void; but the power will continue undiminished and may
be exercised from time to time as Lender may elect until all
amounts owing on this Note have been paid in full.
<PAGE>
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $12.00
if Borrower makes a payment on Borrower's loan and the check or
preauthorized charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual
possessory security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's right,
title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and
all accounts Borrower may open in the future, excluding however all
IRA and Keogh accounts, and all trust accounts for which the grant
of a security interest would be prohibited by law. Borrower
authorizes Lender, to the extent permitted by applicable law, to
charge or setoff all sums owing on this Note against any and all
such accounts, and at Lender's option, to administratively freeze
all such accounts to allow Lender to protect Lender's charge and
setoff rights provided on this paragraph.
LINE OF CREDIT. This Note evidences a revolving line of credit.
Advances under this Note may be requested orally by Borrower or as
provided in this paragraph. All oral requests shall be confirmed
in writing on the day of the request. All communications,
instructions, or directions by telephone or otherwise to Lender are
to be directed to Lender's office shown above. The following party
or parties are authorized as provided in this paragraph to request
advances under the line of credit until Lender receives from
Borrower at Lender's address shown above written notice of
revocation of their authority: Christopher W. Gilluly, Chairman and
Chief Executive Officer. Advance requests on the line of credit
must be in a minimum amount of $5,000.00. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on
this Note or by Lender's internal records, including daily computer
print-outs. Lender will have no obligation to advance funds under
this Note if: (a) Borrower or any guarantor is in default under the
terms of this Note or any agreement that Borrower or any guarantor
has with Lender, including any agreement made in connection with
the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; or (d)
Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in
good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
<PAGE>
CONTINUING VALIDITY. Except as expressly changed by this Agreement,
the terms of the original obligation of obligations, including all
agreement evidenced or secruing the obligation(s), remain unchanged
and in ful force and effect. Consent by Lender to this Agreement
does not waive Lender's right to strict performance of the obligation(s).
It is the intention of Lender to retain as liable parties all makers
and endorsers of the orginial obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing.
Any maker or endorser, including accommodation makers, signing
below acknowledge that this Agreement is given conditionally, based
on the represenation to Lender that the non-signing party consents
to the changes and provisions of this Agreement or otherwise will not
be released by it. This waiver applies not only to any initial
extension, modification or release, but also to all such subsequent
actions.
LINE OF CREDIT REST PROVISION. Borrower hereby agrees to maintain
the line of credit balance at a $0 (Zero dollars) principal balance
for a period of 30 consecutive days at any time between December 18,
1998 and November 30, 1999.
MISCELLANEOUS PROVISIONS. This Agreement is payable on demand. The
inclusion of specific default provisions or rights of Lender shall not
preclude Lender's right to declare payment of this Agreement on its
demand. Lender may delay or forgo enforcing any of its rights or
remedies under this Agreement without losing them. Borrower and
any other person who signs, guarantees or endorses this Agreement,
to the extent allowed by law, waives presentment, demand
for payment, protest and notice of dishonor. Upon any change in
the terms of the Agreement, and unless otherwise expressly
stated in writing, no party who signs this Agreement, whether
as maker, guarantor, accommodation maker or endorser, shall
be released from libility. All such parties agree that
Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and toake any other action
deemed necessary by Lender without the consent of or notice to
anyone. All such parties also agree that Lender may modify this
loan without the consent of or notice to anyone other than the
party with whom thie modification is made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.
BORROWER:
HADRON, INC.
By: /S/ CHRISTOPHER W. GILLULY -(SEAL)
Christopher W. Gilluly,
Chairman and Chief Executive Officer
<PAGE>
