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 March 31, 1999 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 May 11, 1999, 1,849,339 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
March 31, 1999 and June 30, 1998
Consolidated Statements 5
of Operations for the Three and Nine
Months Ended March 31, 1999 and 1998
Consolidated Statements 6
of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998
Notes to Consolidated 7
Financial Statements
Item 2. Management's Discussion and Analysis 11
of Financial Condition and Results
of Operations
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 1999 1998
------ ----------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 67,400 $ 60,500
Accounts receivable, net 2,783,500 3,143,900
Note receivable 8,600
Prepaid expenses and other 184,100 32,500
---------- ----------
Total current assets 3,035,000 3,245,500
---------- ----------
Fixed assets 169,700 116,300
Assets held for resale 135,900 135,900
Other 33,900 9,300
---------- ----------
Total other assets 339,500 261,500
---------- ----------
Total assets $3,374,500 $3,507,000
========== ==========
See Notes to Consolidated Financial Statements
(Unaudited)
</TABLE> -3-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ---------- ----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 369,000 $ 948,900
Note payable - line of credit 80,000
Notes payable - related parties 330,900 120,000
Other current liabilities 2,174,900 2,282,700
---------- ----------
Total current liabilities 2,874,800 3,431,600
---------- ----------
Note payable - related party 100,000
Other 56,500 53,400
---------- ----------
Total long-term liabilities 156,500 53,400
---------- ----------
Total liabilities 3,031,300 3,485,000
---------- ----------
Shareholders' equity:
Common stock $.02 par; authorized
20,000,000 shares; issued and outstanding
- March 31, 1999, 1,849,432 shares
and June 30, 1998, 1,731,956 shares 37,000 34,700
Additional capital 9,502,600 9,374,100
Accumulated deficit (9,196,400) (9,386,800)
---------- ----------
Total shareholders' equity 343,200 22,000
---------- ----------
Total liabilities and shareholders' equity $3,374,500 $3,507,000
========== ==========
See Notes to Consolidated Financial Statements
(Unaudited)
</TABLE> -4-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 5,148,200 $ 5,411,600 $14,943,200 $15,476,700
----------- ----------- ----------- -----------
Operating costs and expenses:
Costs of revenue 4,509,500 4,587,400 13,203,100 13,298,900
Selling, general and administrative 582,700 573,200 1,498,100 1,580,300
----------- ----------- ----------- -----------
Total operating costs and expenses 5,092,200 5,160,600 14,701,200 14,879,200
----------- ----------- ----------- -----------
Operating income 56,000 251,000 242,000 597,500
----------- ----------- ----------- -----------
Other expense:
Interest expense (net) (3,200) (5,500) (23,800) (45,500)
Other expense (100) 1,900 (2,900) (1,900)
------------ ----------- ----------- -----------
Total other expense (3,300) (3,600) (26,700) (47,400)
------------ ----------- ----------- -----------
Income before income taxes 52,700 247,400 215,300 550,100
Provision for income taxes 5,500 15,000 24,900 43,500
------------ ----------- ----------- -----------
Net income $ 47,200 $ 232,400 $ 190,400 $ 506,600
============ ============ ============ ============
Per share data:
Net income per share
Basic $ .03 $ .14 $ .11 $ .30
============ ============ ============ ============
Diluted $ .01 $ .08 $ .06 $ .18
============ ============ ============ ============
Weighted average number of shares
Basic 1,849,432 1,686,684 1,774,225 1,686,684
============ ============ ============ ============
Diluted 3,133,088 2,988,143 3,109,660 2,885,567
============ ============ ============ ============
See Notes to Consolidated Financial Statements
(Unaudited)
</TABLE> - 5 -
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended
March 31,
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 190,400 $ 506,600
----------- ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 56,350 23,800
Provision for doubtful accounts, net
Changes in operating assets and liabilities:
Accounts and notes receivable 1,240,800 (502,200)
Prepaid expenses and other 150 1,100
Other assets (2,400) 5,200
Accounts payable (620,900) (547,300)
Other current liabilities (242,400) 578,800
Other long-term liabilities 3,100 3,100
----------- ------------
Total adjustments 434,700 (437,500)
----------- ------------
Net cash provided by operating activities 625,100 69,100
----------- ------------
Cash flows from investing activities:
Property additions (91,000) (28,500)
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 (504,900) (44,400)
----------- ------------
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 (994,100) (796,700)
----------- ------------
Net cash provided used by financing activities (113,300) (17,300)
----------- ------------
Net increase in cash and cash equivalents 6,900 7,400
Cash and cash equivalents at beginning of period 60,500 24,700
----------- ------------
Cash and cash equivalents at end of period $ 67,400 $ 32,100
=========== ============
See Notes to Consolidated Financial Statements
(Unaudited)
</TABLE> - 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.
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 $1,580,000.
Vail operates as a wholly-owned subsidiary of Hadron. The purchase
price was based upon the net worth of the Company as of December 18,
1998 plus $200,000. The purchase price was satisfied with a net
payment of $1,180,000 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 a 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 nine months ended March 31,
1999 and 1998, as if Vail had been acquired on July 1, 1997.
Nine months ended Nine months ended
March 31, 1999 March 31, 1998
Net revenues $16,103,000 $18,728,300
Net income $ 202,900 $ 580,000
Net income per share:
Basic $ .11 $ .34
Diluted $ .07 $ .20
3. Note Payable - Line of Credit
In December 1998, the Company entered into a Line of Credit
Agreement with Century National Bank which currently provides the
Company with a $850,000 line of credit facility through November 30,
1999. 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 March
31, 1999.
4. Notes Payable - Related Parties
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
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. As of March 31, 1999,
$75,000 has been paid and $14,000 offset due to post-Closing
adjustments, leaving an outstanding note balance of $211,000. 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
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
March 31, March 31,
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Numerator: Net Income $ 47,200 $ 232,400 $ 190,400 $ 506,600
--------- ---------- --------- ----------
Effect of dilutive securities:
Convertible debt 3,000 3,000 9,000 9,000
--------- ---------- --------- ----------
Numerator for diluted earnings
per share - income available
to common shareholders after
assumed conversion $ 50,200 $ 235,400 $ 199,400 $ 515,600
========= ========= ========= =========
Denominator:
Denominator for basic
earnings per share:
weighted average shares
outstanding 1,849,432 1,686,684 1,774,225 1,686,684
Effect of dilutive securities:
Warrants 846,743 886,492 874,286 843,453
Employee stock options 236,913 277,794 261,149 238,511
Convertible debt 200,000 137,173 200,000 116,919
--------- ---------- --------- ----------
Denominator for diluted
earnings per share 3,133,088 2,988,143 3,109,660 2,885,567
========= ========= ========= =========
Basic earnings per share $ .03 $ .14 $ .11 $ .30
========= ========= ========= =========
Diluted earnings per share $ .01 $ .08 $ .06 $ .18
========= ========= ========= =========
</TABLE>
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,
weapons systems analysis and support (including intelligent weapons
systems and biowarfare defense), and computer systems support.
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>
7. Subsequent Event
On May 12, 1999, the Company acquired Avenue Technologies, Inc.
("ATI"), a privately-held defense analysis firm based in Alexandria,
VA, for approximately $2.5 million consisting of the payment of
$26,000 and the issuance of 90-day notes for approximately $1,477,000,
interest payable at the prime rate, and 3-year $997,000 convertible
notes, interest payable at 6%. The 3-year notes are convertible
into 444,000 shares of the Company's Common Stock at $2.25 per share.
In conjunction with the acquisition, Dr. Howard C. Whetzel,
Chairman of ATI, has joined the Company's Board of Directors.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999
TO THE THREE MONTHS ENDED MARCH 31, 1998
Revenues for the three months ended March 31, 1999 were
approximately $5,148,000, a 5% 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.
Costs of revenue for the quarter ended March 31, 1999 were
approximately $4,509,000, a decrease of approximately 2%. 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 88% and 85% for
the quarters ended March 31, 1999 and 1998, respectively. This 3%
increase is primarily due to retaining technical professionals awaiting
new tasking by customers.
Selling, general and administrative expenses totaled approximately
$583,000 for the March 31, 1999 quarter, compared with approximately
$573,000 for the prior year period. The increase is primarily due to
Vail's inclusion of expenses, coupled with a reduction in profit-based
employee incentive program expenses.
The Company had an operating profit of $56,000 in the current
quarter, compared to an operating profit of $251,000 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.
For the quarter ended March 31, 1999, net interest expense
decreased approximately $2,000 due to lower outstanding borrowings
during the period.
Net income was $47,000, compared to net income of approximately
$232,000 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, as discussed above.
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1999
TO THE NINE MONTHS ENDED MARCH 31, 1998
Revenues for the nine months ended March 31, 1999 were
approximately $14,943,000, 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.
Costs of revenue for the nine months ended March 31, 1999 were
approximately $13,203,000, 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 88% and 86% for the periods ended March 31, 1999 and
1998, respectively. This 2% increase is due primarily to retaining
technical professionals awaiting new tasking by customers.
Selling, general and administrative expenses totaled approximately
$1,498,000 for the March 31, 1999 period, compared with approximately
$1,580,000 for the prior year period. This decrease is primarily due
to reduced profit-based employee incentive program expenses coupled
with infrastructure cost savings.
The Company had an operating profit of $242,000 in the current
period, compared to an operating profit of $598,000 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 nine months ended March 31, 1999, net interest expense
decreased approximately $22,000 from the prior year period due to lower
outstanding borrowings during the period.
Net income was $190,000, compared to net income of approximately
$507,000 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, as discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The working capital at March 31, 1999 was $160,000, an increase
of $346,000 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 $850,000 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.
<PAGE>
For the nine months ended March 31, 1999, the Company earned net
income of $190,000. 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.
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.
<PAGE>
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 is presently evaluating the status of
completion and is determining 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 include 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 the Company's ability to successfully identify, complete
and integrate acquisitions. Other risks may be 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
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").
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.
On March 2, 1999, the Company filed a report on Form 8-K/A
amending its Current Report on Form 8-K dated December 18,
1998 by the addition of required financial statements.
<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: May 14, 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 ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 67
<SECURITIES> 0
<RECEIVABLES> 3,088
<ALLOWANCES> 304
<INVENTORY> 0
<CURRENT-ASSETS> 3,035
<PP&E> 696
<DEPRECIATION> 526
<TOTAL-ASSETS> 3,375
<CURRENT-LIABILITIES> 2,875
<BONDS> 0
37
0
<COMMON> 0
<OTHER-SE> 306
<TOTAL-LIABILITY-AND-EQUITY> 3,375
<SALES> 14,943
<TOTAL-REVENUES> 14,943
<CGS> 13,203
<TOTAL-COSTS> 14,701
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 215
<INCOME-TAX> 25
<INCOME-CONTINUING> 190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> .11
<EPS-DILUTED> .06
</TABLE>
