<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER: 0-4384
MICRODYNE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-0856493
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3601 EISENHOWER AVENUE, ALEXANDRIA, VA 22304
(Address of principal executive office) (Zip Code)
(703) 329-3700
(Registrant's telephone number, including area code)
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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MARCH 31, 1998
- ----------------------------- -----------------------------
Common stock, $.10 par value 13,065,465
Page 1 of 12 pages
Exhibit Index appears on page 12
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MICRODYNE CORPORATION
INDEX
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Statements of Earnings
Three and Six months ended March 31, 1998
and March 30, 1997 3
Balance Sheets
March 31, 1998 and September 28, 1997 4
Statements of Cash Flows
Six months ended March 31, 1998
and March 30, 1997 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports. 12
SIGNATURES 12
2
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MICRODYNE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
March 30, March 31, March 30, March 31,
1997 1998 1997 1998
------------------- -------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenue:
Product $ 4,361 $ 5,545 $ 9,051 $11,252
Service 6,404 7,803 10,375 14,781
---------- --------- --------- -------
Total revenue 10,765 13,348 19,426 26,033
Cost of products sold and service provided:
Product 2,003 2,386 3,921 5,010
Service 4,534 5,303 7,383 10,286
---------- --------- --------- -------
Total cost of products sold and
service provided 6,537 7,689 11,304 15,296
---------- --------- --------- -------
Gross profit 4,228 5,659 8,122 10,737
Operating expenses:
Selling, general and
administrative expense 2,045 2,820 3,855 5,245
Research and development 384 580 743 977
---------- --------- -------- -------
Total operating expenses 2,429 3,400 4,598 6,222
---------- --------- -------- -------
Earnings from continuing
operations 1,799 2,259 3,524 4,515
Other expense, net (265) (186) (638) (414)
---------- --------- --------- -------
Earnings from continuing operations
before income taxes 1,534 2,073 2,886 4,101
Provision for income taxes: 583 - 1,097 -
---------- --------- --------- -------
Net earnings from continuing operations
951 2,073 1,789 4,101
---------- --------- --------- -------
Loss from discontinued
operations, net of tax effect (28,128) - (28,356) -
---------- --------- --------- -------
Net earnings
$ (27,177) $ 2,073 (26,567) $ 4,101
========== ========= ========= =======
Basic earnings per share, $ 0.07 $ 0.16 $ 0.14 $ 0.32
continuing operations
Basic loss per share,
discontinued operations (2.18) - (2.21) -
---------- --------- ========= =======
Basic earnings per share $ (2.11) $ 0.16 $ (2.07) $ 0.32
========== ========= ========= =======
Weighted average shares outstanding, basic 12,864 13,038 12,864 13,006
Diluted earnings per share,
continuing operations $ 0.07 $ 0.16 $ 0.14 $ 0.31
Diluted loss per share,
discontinued operations (2.15) - (2.17) -
---------- --------- --------- -------
Diluted earnings per share $ (2.08) $ 0.16 $ (2.03) $ 0.31
========== ========= ========= =======
Weighted average shares
outstanding, diluted 13,059 13,201 13,059 13,178
</TABLE>
The notes on the following pages are an integral part of these statements
3
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MICRODYNE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, March 31,
1997 1998
------------- -------------
(audited) (unaudited)
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,056 $ 827
Accounts receivable, net 17,327 11,548
Inventories 4,560 4,170
Income tax receivable 1,022 1,024
Prepaid expenses and deposits 391 845
Current assets of discontinued
operations 2,442 320
Deferred income tax asset 4,056 4,056
--------- ---------
Total current assets 30,854 22,790
PROPERTY AND EQUIPMENT, net 3,225 5,259
DEFERRED INCOME TAX ASSET 123 123
NONCURRENT ASSETS
OF DISCONTINUED OPERATIONS 112 21
OTHER ASSETS 227 115
--------- ---------
Total assets $ 34,541 $ 28,308
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term
obligations $ 2,040 $ 4,962
Accounts payable - trade 3,094 1,118
Accrued liabilities 6,135 4,600
Current liabilities of discontinued
operations 5,172 804
--------- ---------
Total current liabilities 16,441 11,484
LONG-TERM OBLIGATIONS, net of current
maturities 9,698 3,769
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value,
authorized 50,000,000,
shares 12,904,313 shares,
issued and outstanding at
September 28, 1997 and
13,065,465 shares issued and
outstanding at March 31, 1997 1,290 1,307
Additional paid-in capital 10,332 10,867
Retained (deficit) earnings (3,220) 881
--------- ---------
Total stockholders' equity 8,402 13,055
--------- ---------
Total liabilities and
Stockholders' equity $ 34,541 $ 28,308
========= =========
</TABLE>
The notes on the following pages are an integral part of these statements
4
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MICRODYNE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 30, 1997 March 31, 1998
------------------- ------------------
(In thousands)
<S> <C> <C>
Increase (decrease) in Cash:
Cash flows from operating activities:
Net earnings $ (26,567) $ 4,101
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 291 610
Loss on discontinued operations 28,356 -
Changes in assets and liabilities,
net of effect of discontinued operations
(Increase) decrease in accounts receivable (3,546) 6,096
(Increase) decrease in inventories (402) 390
Increase in prepaid expenses (17) (454)
(Increase) decrease in other assets (32) 112
Increase in income tax receivable (252) (2)
(Increase) in deferred income tax asset (1,915) -
Increase (decrease) in accounts payable and other accruals 2,155 (3,511)
------------------- -------------------
Net cash (used in) provided by continuing operations (1,929) 7,342
Net cash provided by (used in) discontinued operations 11,824 (2,155)
------------------- -------------------
9,895 5,187
Cash flows from investing activities:
Additions to property and equipment (71) (2,308)
------------------- -------------------
Net cash used in investing activities (71) (2,308)
Cash flows from financing activities:
Payments on bank debt (9,390) (3,128)
Proceeds from issuance of long-term obligations - 1,227
Payments on notes payable (1,238) (1,442)
Issuance of common stock 183 235
------------------- -------------------
Net cash used in financing activities (10,445) (3,108)
Net decrease in Cash (621) (229)
Cash at beginning of period 1,791 1,056
------------------- -------------------
Cash at end of period $ 1,170 $ 827
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial information is unaudited. In the opinion of management,
financial statements included in this report reflect all normal recurring
adjustments which Microdyne Corporation (the "Company" or "Microdyne")
considers necessary for a fair presentation of the results of operations for
the interim periods covered and of the financial position of the Company at
the date of the interim balance sheet. The results for interim periods are
not necessarily indicative of the results for the entire year. In addition,
preparation of financial statements in conformance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q, and therefore certain
footnote disclosures normally accompanying financial statements have been
substantially omitted. These condensed financial statements should be read
in conjunction with complete disclosures accompanying the financial
statements contained in the Company's most recent Annual Report on Form
10-K.
2. The provision for income taxes presented in the Statements of Operations is
based upon the estimated effective tax rate at fiscal year-end, and is
largely determined by management's estimate as of the interim date of
projected taxable income for the entire fiscal year. In the first six months
of fiscal 1998, the Company reduced its valuation allowance against deferred
tax assets, and its provision for income taxes, by approximately $1,558,000
based upon a re-evaluation of its continuing operations and the level of
earnings for the six months ended March 31, 1998.
3. During the first quarter of 1998, Microdyne adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," which is
effective for periods ending after December 15, 1997. This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per Share," and makes
them comparable to international EPS standards. It replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. This Statement requires restatement of all
prior-period EPS data presented.
The company has disclosed basic and diluted earnings per share on the income
statement. The quarterly earnings per share for both the three month and the
six month periods ended March 30, 1997 on the face of the financial
statements have been restated to reflect the requirements of SFAS 128. The
adoption of SFAS 128 had no effect on the assets, liabilities, stockholder's
equity or income of the Company.
4. During the Company's first quarter of fiscal year 1998, Microdyne entered
into an agreement with Mellon U.S. Leasing ("Mellon") whereby Microdyne sold
and then leased back from Mellon certain fixed assets of the Company's
outsourcing Support Services Division. The value of the assets sold and
subsequently leased back was approximately $1.2 million. No profit or loss
was realized on the sale. The leased assets have been included with other
property, plant and equipment on the March 31, 1998 Balance Sheet. The lease
obligation has been accounted for as a capital lease and is included with
current maturities and non-current maturities of long term obligations on the
March 31, 1998 Balance Sheet.
During the Company's second quarter, the company entered into a leasing
agreement with two vendors whereby the Company acquired fixed assets with a
value of approximately $336,000. The leased assets have been included with
other property, plant and equipment in the March 31, 1998 Balance Sheet.
There were no cash proceeds from these transactions and as a result, the
effects of this transaction are not reflected in the Statement of Cash Flows
for the six months ended March 31, 1998.
5. During the first quarter of 1998, Microdyne amended the agreement which
governs the terms of the Company's Line of Credit with Crestar Bank ("the
Line of Credit"). This agreement was disclosed in footnote G to the financial
statements filed with the Company's Fiscal 1997 Annual Report on Form 10K.
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The new amendment extends the applicable date of certain of the terms of the
Line of Credit. Under the terms stipulated under the Line of Credit, as
amended, the amount available on the Line of Credit is calculated as the
lesser of: the Borrowing Base or $12.0 million as of September 15, 1997 and
until March 31, 1998, and $9.0 million thereafter until October 30, 1998.
6. The Company operates in two business segments: aerospace telemetry and
outsourced services. Information about the Company's operations in the
segments for the three month and six month periods ended March 30, 1997 and
March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Aerospace Telemetry Outsourced Support Corporate Consolidated
In Thousands of Dollars Division Services and Other Total
- ----------------------------------------------- ---------------------- ---------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers
Second Quarter, Fiscal 1997 6,633 4,132 - 10,765
Second Quarter, Fiscal 1998 7,396 5,952 - 13,348
Pretax earnings from continuing operations
Second Quarter, Fiscal 1997 1,586 787 (839) 1,534
Second Quarter, Fiscal 1998 2,066 610 (603) 2,073
Net sales to unaffiliated customers
Six Month Period Ended March 30, 1997 11,419 8,007 - 19,426
Six Month Period Ended March 31, 1998 14,667 11,366 - 26,033
Pretax earnings from continuing operations
Six Month Period Ended March 30, 1997 2,895 1,633 (1,642) 2,886
Six Month Period Ended March 31, 1998 4,014 1,334 (1,247) 4,101
Identifiable assets
As of September 28, 1997 21,028 4,258 6,701 31,987
As of March 31, 1998 13,443 7,304 7,220 27,967
</TABLE>
The consolidated total for identifiable assets above excludes assets of the
discontinued Networking Products Division. As of September 28, 1997 and March
31, 1998 the discontinued operations of the Networking Products Division had
identifiable assets totaling approximately $2,554,000 and $341,000
respectively.
Effective April 1, 1998, the Company transferred substantially all of the
assets and liabilities of its Aerospace Telemetry and outsourcing Support
Services divisions to two newly formed wholly owned subsidiaries, Microdyne
Communication Technologies Incorporated ("MCTI") and Microdyne Outsourcing
Incorporated ("MOI"), respectively. Effective on and after such date, the
Company intends to conduct its operations through the holding company
structure established by the aforementioned transfer.
7. As of October 1, 1997, Microdyne entered into an agreement with an officer of
the company. Under the terms of the agreement, the officer exchanged a
$317,000 note receivable for 116,702 shares of the Company's stock. The
shares were available to the officer pursuant to the exercise of stock
options granted under the Company's stock option plans. The note receivable
bears interest at the rate of 6% annually and is to be paid in full no later
than October 1, 2000. The note and accrued interest remain outstanding as of
March 31, 1998.
8. On December 29, 1997, Microdyne changed its fiscal year from a 52/53 week
fiscal year ending on the Sunday closest to September 30 to a 365-day fiscal
year ending on September 30. As a result, the Company's 1998 fiscal year will
now end on September 30, 1998, rather than on September 27, 1998.
7
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PART 1. - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Sales from continuing operations increased in the second quarter of fiscal
1998 by $2.6 million, or 24% from the second quarter of fiscal 1997. Net
earnings from continuing operations increased $1.1 million, or 118% during the
same period. The increase in revenue is a result of both the Aerospace Telemetry
and outsourcing Support Services operations increasing their sales volume from
existing businesses as well as from new services and products. The increase in
earnings reflects the overall growth in the company's revenues over the second
quarter of the prior fiscal year, higher gross profit as a percentage of revenue
and lower interest expense resulting from lower outstanding debt during the
period.
The Company believes demand for its Aerospace Telemetry products is strong
and that such demand should continue. Aerospace Telemetry revenues increased 12%
over the same quarter of the prior fiscal year. Aerospace Telemetry saw its
product sales increase by $1.2 million or 28%, over the second quarter of fiscal
1997. Telemetry's gross profit improved 35% when compared to the second quarter
of fiscal 1997 as both products and systems generated improved gross profits in
dollar terms and as a percentage of revenue. During the second quarter of fiscal
1998, the Aerospace Telemetry Division substantially completed the requirements
of the Company's contract with Italian Ministry of Defense, valued at $11.0
million. As a result of increased sales and higher gross profits as percentage
of sales in its systems integration business, Aerospace Telemetry experienced
higher pretax earnings from operations for the second quarter when compared to
the same period in fiscal 1997.
Outsourcing Support Services revenue continues to meet the Company's
revenue expectations. Compared to the second quarter of fiscal year 1997, the
outsourcing Support Services Division experienced a $1.8 million or 44% increase
in sales, $1.5 million of which was generated by the new outsourcing facility in
Southern California. The new outsourcing facility, which provides telephone
technical support and warranty repair work from one location in Southern
California, was opened in September 1997. Microdyne also signed a contract with
a new customer to provide telephone technical support and warranty work from
this facility beginning in October 1997. Also during the second quarter, the
division continued its investment in infrastructure. These investments have, as
expected, resulted in pretax earnings from operations for the quarter that are
less than those of the year ago quarter. Once the facility reaches full
capacity, pretax earnings from operations are expected to improve.
The Company's consolidated balance sheet improved over the course of the six
month period from September 28, 1997 to March 31, 1998. Accounts receivable
balances were reduced 33% to $11.5 million, despite higher revenues, due to the
collection of Italian Ministry of Defense accounts receivable and an improved
collection effort throughout the Company. As a result of the improved collection
of accounts receivable, the Company was able to reduce its long term obligations
by 26% from $11.7 million as of September 28, 1997 to $8.7 million as of March
31, 1998. This reduction is net of a $1.5 million increase in capital lease
obligations during the period.
RISK FACTORS
The information included in this Management's Discussion and Analysis, and
elsewhere in the Form 10Q, contains forward-looking statements that involve
risks and uncertainties. Important factors that could cause actual results to
differ materially include: rapid changes in products and technology that may
displace products sold by Microdyne; the competitive industries within which
Microdyne operates; the Company's success in identifying, acquiring and
incorporating commercially successful technology, products or businesses, and in
identifying and taking advantage of growth opportunities; the effect on cash
flow and liquidity of differences between the expected and the actual timing of
collection of accounts receivable; uncertainty associated with certain future
events outside of Microdyne's control which could affect the adequacy of the
amount of the loss estimated for the disposal of the Networking Products
Division; dependence upon a limited customer base at outsourcing Support
Services Division and several large customers at Aerospace Telemetry;
fluctuations in call volume at the Company's outsourced telephone technical
support facility; limited product lines and service offerings relative to other
suppliers; contractual agreements between Microdyne and other companies; the
discontinued Networking Products Division's reliance upon distributors to
continue to sell networking products; fluctuations in the Company's quarterly
results of operations and the timing of orders from customers; and the Company's
relationships with sources
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of external financing; and the risk factors listed from time to time in the
Company's SEC filings, including but not limited to the Annual Report on Form
10-K for the year ended September 28, 1997. In addition, any shortfall in
revenue or earnings from the levels expected by securities analysts could have
an immediate and significant effect on the trading price of Microdyne's common
stock in any given period.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1998 Compared to Quarter Ended March 30, 1997
Consolidated revenue from continuing operations for the second quarter of
fiscal year 1998 increased to $13.3 million from $10.8 million in the second
quarter of fiscal year 1997, an increase of 24%. Both the Aerospace Telemetry
Division and the outsourcing Support Services Division had overall increases in
revenue.
Second quarter 1998 Aerospace Telemetry revenue increased 12% to $7.4
million from $6.6 million in the second quarter of fiscal 1997. The division's
revenues continue to reflect a changing mix of product and system integration
sales in 1998 compared to the year-earlier period. Systems integration sales
represented 25% of 1998 second quarter sales compared to 34% during the same
period in fiscal year 1997. In the second fiscal quarter of 1998, system sales
decreased to $1.9 million from $2.3 million during the same period in 1997.
Second quarter 1998 Aerospace Telemetry product sales increased 29% to $5.5
million from $4.3 million in 1997.
Outsourcing Support Services revenue increased 44% to $6.0 million in the
second quarter of 1998 from $4.1 million in 1997. The increase in revenues
reflect continued demand for established support services as well as demand for
the services provided under the new contract for outsourced technical support
and warranty work at the Company's outsourcing facility in Southern California.
The new outsourcing facility generated $1.6 million in revenue during the second
quarter of 1998. Although the facility was not in operation during the second
fiscal quarter of 1997, a temporary facility generated $100,000 in revenue for
the second quarter of 1997.
For the second quarter of 1998, consolidated gross profit from continuing
operations increased 34% to $5.7 million in 1998 from $4.2 million in 1997. As a
percentage of continuing operations' sales, gross profit increased to 42% in
1998 from 39% in 1997. The dollar increase in gross profit was the result of
higher sales at both Aerospace Telemetry and Outsourcing Support Services. The
increase in gross profit as percentage of revenues is the result of improved
profits at Aerospace Telemetry. The higher gross profits at that division are
the result of higher than anticipated gross profits, in dollar terms and as a
percentage of sales, on the $11 million systems integration contract with the
Italian Ministry of Defense. This contract was substantially completed by the
end of the quarter. The higher gross profit as a percentage of sales associated
with the division's systems integration activities is expected to be temporary,
and should not continue in the future. The improved gross profits as a
percentage of sales at Aerospace Telemetry were partially offset by a lower
overall gross profits as a percentage of sales at outsourcing Support Services.
The lower overall gross profits as a percentage of sales at outsourcing Support
Services are the result of higher costs at its new telephone technical support
facility due to the Company's substantial investment in infrastructure. Once the
facility reaches full capacity, overall gross profits, in dollar terms and as a
percentage of sales are expected to improve.
SG&A expense increased to $2.8 million in 1998 from $2.0 million in the
second quarter of 1997. The increase in SG&A is the result of: higher sales
commissions at Aerospace Telemetry as a result of increased sales, and higher
infrastructure as well as administrative costs at the outsourcing Support
Services Division resulting from its expanded activities. Research and
Development expense was $580,000 in the second quarter of 1998, compared to
$384,000 in the first quarter of 1997, reflecting Aerospace Telemetry's
continued efforts to improve and develop new products and services.
Interest and other expenses were 30% lower in 1998's second quarter than in
1997. The reduction to $186,000 in 1998 from $265,000 in 1997 reflects the
overall reduction in outstanding debt held by Microdyne in the second quarter of
fiscal year 1998 as compared to the same period in 1997.
Microdyne's income tax expense during the second fiscal quarter of 1998 was
offset by an adjustment to the Company's deferred tax asset valuation account,
resulting in no tax provision for the quarter. The deferred tax assets, as shown
on the Balance Sheets, are net of valuation adjustments of $7.5 million as of
March 31, 1998, and $9.0 million as of September 28, 1997.
During the second quarter of 1998, Microdyne had $0.4 million in expenses,
net of income, which were offset against its reserve for discontinued
operations. Based on its current experience, Microdyne believes that the $4.8
million reserve set up in June 1997 for the discontinuance of its Networking
Products Division is adequate.
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Six Months Ended March 31, 1998 Compared to Six Months Ended March 30, 1997
Consolidated revenue from continuing operations for the first six months of
fiscal year 1997 increased to $26.0 million from $19.4 million for the same
period in 1997, an increase of 34%. The outsourcing Support Services Division
increased its share of consolidated revenues from continuing operations, which
represented 41% of consolidated revenues for the first six months of fiscal
1997, to 44% of consolidated revenues in the first six months of fiscal 1998.
For the first six months of 1998, Aerospace Telemetry revenue increased 28%
to $14.7 million from $11.4 million for the same period in fiscal 1997. For the
first six months of 1998, systems integration sales growth of 44% outpaced the
product sales growth of 24%. For the same period in 1998, system integration
sales were $3.4 million compared to $2.4 million in 1997 while product and
other revenues were $11.3 million compared to $9.0 million in 1997.
Outsourcing Support Services revenue increased 42% to $11.4 million during
the first six months of 1998 compared to $8.0 million for the comparable period
in the prior fiscal year. The portion of the revenue earned at the Microdyne's
own facilities ("outsourced revenue"), was $2.8 million for the first six months
of 1998, while the portion of the revenue earned at the customer's facilities
("in-sourced revenue") represented $8.6 million of year to date revenue. The
year to date revenue for 1997 is comprised of $7.9 million of in-sourced revenue
and $100,000 of outsourced revenue. Therefore, outsourced revenue represented
79% of total revenue growth for the outsourcing Support Services Division during
the first six months of fiscal 1998.
For the six months of 1998, consolidated gross profit from continuing
operations increased 32% to $10.7 million in 1998 from $8.1 million in 1997. As
a percentage of continuing operations' sales, gross profit decreased to 41% in
1998 from 42% in 1997. The reduction in the gross profit as a percentage of
sales for the first six months reflects the offsetting trends noted above for
the second quarter of 1998: while Aerospace Telemetry experienced higher margins
as a result of improvements in the gross profit as a percentage of sales in its
system integration business, outsourcing Support Services saw a decline in its
gross profit as a percentage of sales principally as a result of its investment
in infrastructure for the new outsourcing facility in Southern California.
SG&A expense increased to $5.2 million in 1998 from $3.9 million in the
second quarter of 1997. As a percentage of sales, SG&A remained at 20% for 1998
and 1997 fiscal year to date. In dollar terms, SG&A's increase is the result of
higher sales commissions, as well as new administrative and infrastructure
charges at outsourcing Support Services.
Research and Development ("R&D")expense was $977,000 in the first six
months of fiscal 1998, compared to $743,000 in the first six months of 1997. As
a percentage of sales, R&D remained at 4% of year to date sales.
Interest and other expenses were 35% lower in 1998's first six months than
in 1997. The $225,000 reduction from $638,000 in 1997 reflects the effects of
the overall reduction in Microdyne's outstanding debt as compared to the same
period in fiscal 1997.
Microdyne's income tax expense during the first six months of 1998 was
offset by an adjustment to the Company's deferred tax asset valuation account,
resulting in no tax provision for the year to date. The deferred tax assets, as
shown on the Balance Sheets, are net of valuation adjustments of $7.5 million
as of March 31, 1998, and $9.0 million as of September 28, 1997. There was no
such valuation in the first six months of fiscal 1997.
During the first six months of 1998, Microdyne had $2.2 million in expenses,
net of income, which were offset against its reserve for discontinued
operations. Based on its current experience, Microdyne believes that the $4.8
million reserve set up in June 1997 for the discontinuance of its Networking
Products Division is adequate.
LIQUIDITY AND CAPITAL RESOURCES
During the past three years, Microdyne has financed its continuing
operations principally through internally generated funds. However, Microdyne
has secured external financing in connection with acquisitions and repurchases
of common stock.
External financing has been primarily provided through bank borrowings. As
of March 31, 1998, Microdyne had $3.3 million of bank debt under a revolving
line of credit facility. On March 31, 1998, Microdyne had $0.8 million in cash
and $7.6 million available for borrowing under its revolving credit facility. On
April 1, the maximum borrowing amount under the credit facility, in accordance
with the terms of a credit agreement, was reduced from $12 million to $9
million. Microdyne is required to repay its bank borrowings by October 30, 1998,
unless such agreements are renewed. Microdyne believes that based on its
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current forecast of cash generation, it will meet that schedule. In addition,
Microdyne plans for the previously mentioned borrowing agreements to be renewed
or replaced within the current fiscal year.
In April 1996, Microdyne utilized cash and notes to purchase from Novell,
Inc. ("Novell") the exclusive, royalty-free perpetual right to market certain
hardware and related technology which were previously sold by Microdyne under
license from Novell, and to convert certain accounts payable into notes payable.
As of March 31, 1998, notes payable due Novell totaled $4.0 million, of which
$1.3 million has been classified as a short-term obligation and $2.7 million as
a long-term obligation on the March 31, 1998 Balance Sheet.
During the first six months of 1998, net cash provided by operations was
$5.2 million. Cash provided by continuing operations was $7.3 million, while
cash used in discontinued operations was $2.1 million. Cash provided by
continuing operations was primarily the result of improved collections of
accounts receivable, the collection of a substantial portion of the previously
unbilled accounts receivable related to the company's contract with the Italian
Ministry of Defense, and decreases in inventory and other assets. The cash
provided by continuing operations was partially offset by decreases in accounts
payable and other accruals, and an increase in prepaid expenses. Cash used in
investing activities was $2.3 million, which primarily relates to additional
equipment for the outsourcing Support Services Division's facility in
California. Microdyne has no material commitments for future capital
expenditures. Cash used in financing activities was $3.1 million, representing
the principal payments on bank borrowings and long term debt obligations offset
by cash proceeds from the sale lease-back transaction and the issuance of common
stock.
Microdyne believes its available cash, funds generated from operations, and
funds available under its credit facility should be sufficient to finance its
continuing operations in fiscal 1998. In addition, Microdyne may from time to
time consider the acquisition of businesses, products, or technologies that may
require additional funds.
YEAR 2000
The company is currently evaluating the impact of the year 2000 on operation,
suppliers and customers. Nothing has come to the attention of the Company that
would materially impact the results of operations of the Company.
11
<PAGE> 12
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Registrant was held March 23,
1998. Results of the voting for directors was as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstained or Unvoted
<S> <C> <C> <C>
Philip T. Cunningham 12,195,169 43,782 -
Christopher M. Maginniss 12,197,816 41,135 -
Curtis M. Coward 12,197,816 41,135 -
Gregory W. Fazakerley 12,197,816 41,135 -
H. Brian Thompson 12,197,816 41,135 -
Michael E. Jalbert 12,197,816 41,135 -
</TABLE>
Item 5. Other Information
Effective April 1, 1998, the Company transferred substantially all of the
assets and liabilities of its Aerospace Telemetry and outsourcing Support
Services divisions to two newly formed wholly owned subsidiaries, Microdyne
Communication Technologies Incorporated ("MCTI") and Microdyne Outsourcing
Incorporated ("MOI"), respectively. Effective on and after such date, the
Company intends to conduct its operations through the holding company structure
established by the aforementioned transfer.
Item 6. Exhibits and Reports.
(a)One Form 8-K was filed during the quarter ended March 31, 1998. The form 8-K
related to the change of the Company's fiscal year from a 52/53 week fiscal
year ending on the Sunday closest to September 30 to a 365-day fiscal year
ending on September 30. As a result, the Company's 1998 fiscal year will now
end on September 30, 1998, rather than on September 27, 1998.
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 thereunto duly authorized.
MICRODYNE CORPORATION
----------------------
Registrant
Date: May 11, 1998 /s/ MICHAEL E. JALBERT
------------------------ ----------------------
Michael E. Jalbert
Chief Executive Officer
[Duly Authorized Officer]
Date: May 11, 1998 /s/ MASSOUD SAFAVI
------------------------ ------------------
Massoud Safavi
Chief Financial Officer
[Principal Financial Officer]
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> MAR-31-1998
<CASH> 827
<SECURITIES> 0
<RECEIVABLES> 11,548
<ALLOWANCES> 0
<INVENTORY> 4,170
<CURRENT-ASSETS> 22,790
<PP&E> 9,787
<DEPRECIATION> 4,528
<TOTAL-ASSETS> 28,308
<CURRENT-LIABILITIES> 11,484
<BONDS> 0
0
0
<COMMON> 1,307
<OTHER-SE> 10,867
<TOTAL-LIABILITY-AND-EQUITY> 28,308
<SALES> 13,348
<TOTAL-REVENUES> 13,348
<CGS> 2,386
<TOTAL-COSTS> 7,689
<OTHER-EXPENSES> 3,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186
<INCOME-PRETAX> 2,073
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,073
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
