UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Form 10-Q
---------------------
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 November 8, 1999, 2,707,217 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, 1999 and June 30, 1999
Consolidated Statements 5
of Operations for the Three Months Ended
September 30, 1999 and 1998
Consolidated Statements 6
of Cash Flows for the Three Months Ended
September 30, 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
SEPTEMBER 30, 1999 AND JUNE 30, 1999
<CAPTION>
SEPT. 30, JUNE 30,
ASSETS 1999 1999
------ ----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 237,800 $ 256,000
Accounts receivable, net 3,647,800 3,495,700
Prepaid expenses and other 231,500 255,400
----------- -----------
Total current assets 4,117,100 4,007,100
----------- -----------
Fixed assets 263,500 290,900
Goodwill 2,184,600 2,246,600
Other 60,400 145,100
----------- -----------
Total other assets 2,508,500 2,682,600
----------- -----------
Total assets $6,625,600 $6,689,700
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-3-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND JUNE 30, 1999
<CAPTION>
SEPT. 30, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1999
------------------------------------ ----------- -----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $1,254,700 $ 917,100
Note payable - line of credit 796,600 638,800
Note payable 1,375,000 500,000
Note payable - related party 75,000 150,000
Other current liabilities 1,925,400 1,867,800
----------- -----------
Total current liabilities 5,426,700 4,073,700
----------- -----------
Notes payable 292,700 1,292,700
Notes payable - related parties 805,100 805,100
Other 41,800 62,600
----------- -----------
Total long-term liabilities 1,139,600 2,160,400
----------- -----------
Total liabilities 6,566,300 6,234,100
----------- -----------
Shareholders' equity:
Common stock $.02 par; authorized 20,000,000
shares; issued and outstanding -
September 30, 1999, 2,707,517 shares,
and June 30, 1999, 2,487,518 shares 54,100 49,700
Additional capital 9,808,900 9,758,300
Accumulated deficit (9,803,700) (9,352,400)
----------- -----------
Total shareholders' equity 59,300 455,600
----------- -----------
Total liabilities and shareholders' equity $6,625,600 $6,689,700
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
-4-
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<CAPTION>
Three Months Ended
September 30,
1999 1998
----------- ------------
<S> <C> <C>
Revenues $ 5,306,600 $ 4,964,000
----------- ------------
Operating costs and expenses:
Costs of revenue 4,592,600 4,378,000
Selling, general and administrative 1,071,700 451,300
----------- ------------
Total operating costs and expenses 5,664,300 4,829,300
----------- ------------
Operating income (loss) (357,700) 134,700
----------- ------------
Other expense:
Interest expense (net) (78,900) (5,300)
Other expense (14,700) (2,500)
----------- ------------
Total other expense (93,600) (7,800)
----------- ------------
Income (loss) before income taxes (451,300) 126,900
Provision for income taxes - 10,900
----------- ------------
Net income (loss) $ (451,300) $ 116,000
=========== ============
Per share data:
Net income (loss) per share
Basic $ (.18) $ .07
=========== ============
Diluted $ (.18) $ .04
=========== ============
Weighted average number of shares
Basic 2,492,299 1,736,621
=========== ============
Diluted 2,492,299 3,099,434
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
(Unaudited)
- 5 -
<PAGE>
<TABLE>
HADRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<CAPTION>
Three Months
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (451,300) $ 116,000
------------ ------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 120,000 10,100
Changes in operating assets and liabilities:
Accounts receivable (152,100) 277,200
Prepaid expenses and other 23,900 (8,100)
Other assets 84,700 (3,200)
Accounts payable 337,600 (200,200)
Other current liabilities 57,600 (105,800)
Other long-term liabilities (44,800) 1,000
------------ ------------
Total adjustments 426,900 (29,000)
------------ ------------
Net cash provided (used) by operating activities (24,400) 87,000
------------ ------------
Cash flows from investing activities:
Property additions (6,600) (17,200)
------------ ------------
Net cash used by investing activities (6,600) (17,200)
------------ ------------
Cash flows from financing activities:
Proceeds of borrowings on bank and other loans 1,343,800 120,000
Proceeds of stock options and warrants exercised 55,000 3,500
Payments on bank and other loans (1,386,000) (200,000)
------------ ------------
Net cash provided (used) by financing activities 12,800 (76,500)
------------ ------------
Net decrease in cash and cash equivalents (18,200) (6,700)
Cash and cash equivalents at beginning of period 256,000 60,500
------------ ------------
Cash and cash equivalents at end of period $ 237,800 $ 53,800
============= ============
</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, 1999 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, 1999 ("1999 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. Debt
In connection with the December 1998 purchase of Vail
Research and Technology Corporation ("Vail"), the Company issued
two non-interest bearing promissory notes of $300,000 and
$100,000, respectively. The $300,000 non-interest bearing 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 September 30, 1999, $211,000 has been paid and
$14,000 offset due to post-closing adjustments, leaving an
outstanding note balance of $75,000. 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.
The Company entered into a Loan and Security Agreement dated
June 29, 1999 (the "Loan Agreement") with United Bank. The Loan
Agreement provides the Company with a one-year $1.5 million line
of credit facility (the "Credit Facility") and a three-year $1.5
million term loan (the "Term Loan"). Interest on each of the
facilities is at the prime rate plus 150 basic points. Dr.
Gilluly and his wife have personally guaranteed the Term Loan.
<PAGE>
The Company is subject to certain financial covenants
pursuant to the Loan Agreement, including debt to net worth
ratio, debt to EBITDA ratio, and working capital and net worth
requirements. The Company has been unable to comply with certain
of these original financial covenants at September 30, 1999 due
to operating losses incurred. The Company is working with its
bank to modify the covenants. Because the covenants have not yet
been modified, the long-term portion of the debt totaling
$875,000 is technically in default and has been classified as
current.
The Credit Facility replaces the Company's previous line of
credit with Century National Bank. At September 30, 1999, the
Company had outstanding borrowings of $797,000 under this
facility. Proceeds from the Term Loan were used to repay the
Company's $1.5 million in short-term notes that were issued in
connection with the Company's May 1999 acquisition of Avenue
Technologies, Inc. ("ATI"). The Term Loan provides for monthly
principal payments of approximately $42,000, plus interest. As
of September 30, 1999, principal payments of $125,000 have been
made, leaving an outstanding balance of $1,375,000.
The Term Loan and the Credit Facility are secured by the
accounts receivable and other assets of the Company. In
addition, the 3-year $998,000 convertible notes, interest payable
at 6%, issued by the Company to the former shareholders of ATI in
connection with the Company's acquisition of ATI were
subordinated to the Company's obligations under the Term Note and
the Credit Facility. The notes are convertible into 444,000
shares of Company's Common Stock at $2.25 per share.
<PAGE>
<TABLE>
3. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<CAPTION>
Three Months ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Net Income (loss) $(451,300) $ 116,000
Effect of dilutive securities:
Convertible debt - 3,000
---------- ----------
Numerator for diluted earnings
per share - income available
to common shareholders after
assumed conversion $(451,300) $ 119,000
========== ==========
Denominator:
Denominator for basic
earnings per share:
weighted average shares
outstanding 2,492,299 1,736,621
Effect of dilutive securities:
Warrants - 888,557
Employee stock options - 274,256
Convertible debt - 200,000
---------- ----------
Denominator for diluted
earnings per share 2,492,299 3,099,434
========== ==========
Basic earnings per share $ (.18) $ .07
========== ==========
Diluted earnings per share $ (.18) $ .04
========== ==========
</TABLE>
Shares issuable upon the exercise of stock options or
warrants or upon conversion of debt have been excluded from the
computation to the extent that their inclusion would be anti-
dilutive.
<PAGE>
4. 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 developing
innovative technical solutions for the intelligence community,
analyzing and supporting defense systems (including intelligent
weapons systems and biological warfare defense), and supporting
computer 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 proprietary
knowledge in specific subject areas.
5. Business segments and major customers
The Company has four reportable segments comprising its
individual operating subsidiaries - Avenue Technologies, Inc.
("ATI"), Engineering & Information Services, Inc. ("EISI"), SyCom
Services, Inc. ("SyCom"), and Vail Research and Technology
Corporation ("Vail"). Each of the operating subsidiaries
performs within the Company's one industry segment, providing
engineering, computer support services and other professional
technical services. The reportable segments are distinguished by
their individual clients, prior experience and technical skills
within the industry segment.
Each of the reportable segments has a president who is
responsible for the operating results. Operating results are
measured at the net income level for each segment. The
accounting policies of the reportable segments are the same as
those described in the summary of significant accounting
policies. Interest on debt incurred in connection with an
acquisition and applicable associated goodwill amortization is
charged to the reportable segment. The Company's corporate
amounts consist primarily of certain activities and assets not
attributable to the reportable segments.
<PAGE>
<TABLE>
HADRON, INC.
REPORTABLE SEGMENTS - FASB STATEMENT 131
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
- -------------------------------------------
<CAPTION>
DESCRIPTON: 1999 1998
- ------------------------------------------ ----------- -----------
<S> <C> <C>
Trade revenues:
ATI $ 1,381,100 $ -
EISI 2,519,700 2,766,700
Sycom 1,335,300 2,188,800
Vail 66,800 -
Corporate 3,700 8,500
----------- -----------
Total trade revenues $ 5,306,600 $ 4,964,000
=========== ===========
Net income/(loss):
ATI $ (219,100) $ -
EISI (2,300) 108,200
Sycom (115,000) (8,100)
Vail (62,500) -
Corporate (52,400) 15,900
----------- -----------
Total net income/(loss) $ (451,300) $ 116,000
=========== ===========
Assets:
ATI $3,709,700 $ -
EISI 1,221,300 1,820,100
Sycom 595,400 881,700
Vail 778,400 -
Corporate 320,800 539,700
----------- -----------
Total assets $6,625,600 $3,241,500
=========== ===========
</TABLE>
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues for the three months ended September 30, 1999 were
approximately $5,307,000, a 7% increase from the prior year
quarter. This increase reflects revenues from newly acquired
companies ATI and Vail, partially offset by 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, 1999
were approximately $4,593,000, an increase of approximately 5%.
The increase is primarily due to the costs associated with the
increased revenues from ATI and Vail. Costs of revenue as a
percentage of revenues were approximately 87% and 88% for the
quarters ended September 30, 1999 and 1998, respectively. This
1% decrease is primarily due to incorporating the cost mixes of
the newly acquired companies ATI and Vail, partially offset by
the retaining of technical personnel on overhead while awaiting
new customer tasking and funding.
Selling, general and administrative expenses totaled
approximately $1,072,000 for the September 30, 1999 quarter,
compared with approximately $451,000 for the prior year period.
The increase is primarily due to the addition of key
administrative personnel of ATI and Vail, coupled with the
Company's aggressive business development efforts targeting the
biological weapons defense and counter terrorism arenas.
The Company had an operating loss of $358,000 in the current
quarter, compared to an operating profit of $135,000 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, along
with the increase in corporate personnel hired to develop the
Company's initiatives in the areas of biological weapons defense
and counter terrorism.
For the quarters ended September 30, 1999 and 1998, net
interest expense increased approximately $74,000 due to higher
outstanding borrowings and increases in debt associated with the
recent acquisitions.
Net loss was $451,000, compared to net income of
approximately $116,000 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 key technical professional personnel and diversifying
business development efforts.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The working capital deficit at September 30, 1999 increased
by approximately $1,243,000 from June 30, 1999 primarily due to
trickle-down effect resulting from the downturn experienced by
the Company's two largest customers, the Company's costs associated
with its business development endeavors, and the
consequence of the Company's inability to meet the financial
covenants of its bank credit facility.
Effective June 29, 1999, the Company entered into a Line of
Credit Agreement with United Bank, which provides the Company
with a $1,500,000 line of credit facility. The line of credit
provides additional working capital availability to fund the
Company's growth. Borrowings outstanding under the line of
credit totaled $797,000 at September 30, 1999.
The Company has been unable to comply with certain of the
original financial covenants of its bank credit facility at
September 30, 1999 due to operating losses incurred. The Company
is working with its bank to modify the covenants. Because the
covenants have not yet been modified, the long-term portion of
the debt totaling $875,000 is technically in default and has been
classified as current. The Company believes it has good
relationships with its bank and the bank will continue to work
with the Company as it seeks to improve its financial condition.
The Company anticipates that it will be able to work with its
bank such that the debt is not called. However, the inability of
the Company to modify the covenants could have a material adverse
affect on the Company's liquidity, financial condition and
results of operations.
The Company is exposed to market risks related to
fluctuations in interest rates on its debt. Increases in
prevailing interest rates could increase the Company's interest
payment obligations relating to variable rate debt. For example,
a 100 basis points increase in interest rates would increase
annual interest expense by $21,000.
For the three months ended June 30, 1999, the Company
received new capital of $55,000, resulting from the exercise of
warrants.
The Company is pursuing a previously announced acquisition
program as part of its growth strategy. No assurances can be
made as to the success of the program. Previous acquisitions
have been funded through internal and external sources.
Continuing profitability and availability of external financing
are necessary for successful implementation of the growth
strategy. The Company may require infusion of equity capital in
pursuit of its strategy.
<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 has received and reviewed the
replies and its assessment is that the Company's major vendors
and customers appear to be Year 2000 ready.
Management of the Company believes it has an effective
program in place to assess the Year 2000 issue. As noted above,
the Company is still completing 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 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.
27Financial 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 15, 1999 HADRON, INC.
(Registrant)
By:/S/ C.W. Gilluly By:/S/ C.W. Gilluly
C. W. Gilluly Ed.D. C.W. Gilluly Ed.D.
Chief Executive Officer Acting Chief Financial Officer
and Chairman (Principal Financial Officer
(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 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 238
<SECURITIES> 0
<RECEIVABLES> 3902
<ALLOWANCES> 254
<INVENTORY> 0
<CURRENT-ASSETS> 4,117
<PP&E> 775
<DEPRECIATION> 511
<TOTAL-ASSETS> 6,626
<CURRENT-LIABILITIES> 5,427
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,626
<SALES> 5,307
<TOTAL-REVENUES> 5,307
<CGS> 4,593
<TOTAL-COSTS> 5,664
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (451)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
