<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 JUNE 30, 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 JUNE 30, 1998
---------------------------- ----------------------------
Common stock, $.10 par value 13,069,909
Page 1 of 14 pages
Exhibit Index appears on page 14
<PAGE> 2
MICRODYNE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Statements of Earnings
Three and Nine months ended June 30, 1998
and June 29, 1997 3
Balance Sheets
June 30, 1998 and September 28, 1997 4
Statements of Cash Flows
Nine months ended June 30, 1998
and June 29, 1997 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
<CAPTION>
PART II - OTHER INFORMATION
<S> <C> <C>
Item 5. Other Information 13
Item 6. Exhibits and Reports. 13
SIGNATURES 13
Exhibit Index 14
</TABLE>
2
<PAGE> 3
MICRODYNE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
June 29, June 30, June 29, June 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenue:
Microdyne Communication Technologies Incorporated $ 7,873 $ 7,688 $ 19,293 $ 22,355
Microdyne Outsourcing Incorporated 4,652 5,737 12,659 17,103
------------- ------------- ------------- -------------
Total revenue 12,525 13,425 31,952 39,458
Cost of products sold and service provided:
Microdyne Communication Technologies Incorporated 4,279 3,526 9,824 10,274
Microdyne Outsourcing Incorporated 3,356 4,609 9,115 13,157
------------- ------------- ------------- -------------
Total cost of products sold and service provided 7,635 8,135 18,939 23,431
------------- ------------- ------------- -------------
Gross profit 4,890 5,290 13,013 16,027
Operating expenses:
Selling, general and administrative expense 2,357 2,883 6,519 8,128
Research and development 409 599 1,151 1,576
------------- ------------- ------------- -------------
Total operating expenses 2,766 3,482 7,670 9,704
------------- ------------- ------------- -------------
Earnings from continuing operations 2,124 1,808 5,343 6,323
Other expense, net (197) (154) (835) (568)
------------- ------------- ------------- -------------
Earnings from continuing operations
before income taxes 1,927 1,654 4,508 5,755
Provision for income taxes: 732 - 1,716 -
------------- ------------- ------------- -------------
Net earnings from continuing operations 1,195 1,654 2,792 5,755
------------- ------------- ------------- -------------
Loss from discontinued operations, net of tax effect (5,169) - (33,334) -
------------- ------------- ------------- -------------
Net (loss) earnings $ (3,974) $ 1,654 $ (30,542) $ 5,755
============= ============= ============= =============
Basic earnings per share, continuing operations $ 0.09 $ 0.13 $ 0.22 $ 0.44
Basic loss per share, discontinued operations (0.40) - (2.59) -
------------- ------------- ------------- -------------
Basic (loss) earnings per share $ (0.31) $ 0.13 $ (2.37) $ 0.44
============= ============= ============= =============
Weighted average shares outstanding, basic 12,877 13,068 12,871 13,008
Diluted earnings per share, continuing operations $ 0.09 $ 0.13 $ 0.22 $ 0.44
Diluted loss per share, discontinued operations (0.40) - (2.58) -
------------- ------------- ------------- -------------
Diluted (loss) earnings per share $ (0.31) $ 0.13 $ (2.36) $ 0.44
============= ============= ============= =============
Weighted average shares outstanding, diluted 12,919 13,103 12,913 13,177
</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, June 30,
1997 1998
------------ -----------
(audited) (unaudited)
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,056 $ 676
Accounts receivable, net 17,327 13,418
Inventories 4,560 4,485
Income tax receivable 1,022 1,046
Prepaid expenses and deposits 391 1,099
Current assets of discontinued operations 2,442 270
Deferred income tax asset 4,056 4,056
------------ ----------
Total current assets 30,854 25,050
PROPERTY AND EQUIPMENT, net 3,225 5,322
DEFERRED INCOME TAX ASSET 123 123
NONCURRENT ASSETS
OF DISCONTINUED OPERATIONS 112 21
OTHER ASSETS 227 156
------------ ----------
Total assets $ 34,541 $ 30,672
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 2,040 $ 4,924
Accounts payable - trade 3,094 2,111
Accrued liabilities 6,135 5,021
Current liabilities of discontinued operations 5,172 409
------------ ----------
Total current liabilities 16,441 12,465
LONG-TERM OBLIGATIONS, net of current maturities 9,698 3,479
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 13,069,909
shares issued and outstanding at June 30, 1998 1,290 1,307
Additional paid-in capital 10,332 10,886
Retained (deficit) earnings (3,220) 2,535
------------ ----------
Total stockholders' equity 8,402 14,728
------------ ----------
Total liabilities and stockholders' equity $ 34,541 $ 30,672
============ ==========
</TABLE>
The notes on the following pages are an integral part of these statements
4
<PAGE> 5
MICRODYNE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 29, June 30,
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Increase (decrease) in Cash:
Cash flows from operating activities:
Net (loss) earnings $(30,542) $ 5,755
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 427 997
Loss on discontinued operations 33,334 -
Changes in assets and liabilities,
net of effect of discontinued operations
(Increase) decrease in accounts receivable (5,576) 4,226
(Increase) decrease in inventories (942) 75
Decrease (increase) in prepaid expenses 23 (708)
Decrease in other assets 89 71
Decrease (increase) in income tax receivable 405 (24)
(Increase) in deferred income tax asset (2,583) -
Increase (decrease) in accounts payable and other accruals 4,516 (2097)
-------- --------
Net cash (used in) provided by continuing operations (849) 8,295
Net cash provided by (used in) discontinued operations 13,704 (2,500)
-------- --------
12,855 5,795
Cash flows from investing activities:
Additions to property and equipment (228) (2,758)
-------- --------
Net cash used in investing activities (228) (2,758)
Cash flows from financing activities:
Payments on bank debt (11,825) (3,040)
Proceeds from issuance of long-term obligations - 1,227
Payments on notes payable (1,875) (1,858)
Issuance of common stock 299 254
-------- --------
Net cash used in financing activities (13,401) (3,417)
Net decrease in Cash (774) (380)
Cash at beginning of period 1,791 1,056
-------- --------
Cash at end of period $ 1,017 $ 676
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
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 nine
months of fiscal year 1998, the Company reduced its valuation allowance
against deferred tax assets, and its provision for income taxes, by
approximately $2,187,000 based upon a re-evaluation of its continuing
operations and the level of earnings for the nine months ended June 30,
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 nine month periods ended June 29, 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. The following is a
reconciliation of the earnings per share calculations:
<TABLE>
<CAPTION>
For the three months ended: For the nine months ended:
June 29, 1997 June 30,1998 June 29, 1997 June 30, 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Income:
Net earnings from continuing
operations $ 1,195 $ 1,654 $ 2,792 $ 5,755
Loss from discontinued
operations, net of tax effect (5,169) -- (33,334) --
-------------------------------------------------------------
Net (loss) earnings $ (3,974) $ 1,654 $(30,542) $ 5,755
=============================================================
Basic weighted average shares 12,877 13,068 12,871 13,008
Effect of dilutive shares:
Stock Options 42 35 42 169
-------------------------------------------------------------
Diluted weighted average shares 12,919 13,103 12,913 13,177
=============================================================
</TABLE>
6
<PAGE> 7
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 June 30, 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 June 30, 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 June 30, 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 nine months ended June 30, 1998.
5. During the first quarter of 1998, Microdyne amended the agreement governing
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.
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 nine month periods ended June 29, 1997 and
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Microdyne
Communication Microdyne
Technologies Outsourcing Corporate Consolidated
In Thousands of Dollars Incorporated Incorporated and Other Total
- ------------------------------------------------------- --------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers
- -----------------------------------
Third Quarter, Fiscal 1997 7,873 4,652 - 12,525
Third Quarter, Fiscal 1998 7,688 5,737 - 13,425
Pretax earnings from continuing operations
- ------------------------------------------
Third Quarter, Fiscal 1997 1,814 873 (760) 1,927
Third Quarter, Fiscal 1998 1,934 292 (572) 1,654
Net sales to unaffiliated customers
- -----------------------------------
Nine Month Period Ended June 29, 1997 19,293 12,659 - 31,952
Nine Month Period Ended June 30, 1998 22,355 17,103 - 39,458
Pretax earnings from continuing operations
- ------------------------------------------
Nine Month Period Ended June 29, 1997 4,709 2,507 (2,708) 4,508
Nine Month Period Ended June 30, 1998 5,948 1,626 (1,819) 5,755
Identifiable assets
- -------------------
As of September 28, 1997 21,028 4,258 6,701 31,987
As of June 30, 1998 15,749 6,876 7,756 30,381
</TABLE>
The consolidated total for identifiable assets above excludes assets of
the discontinued Networking Products Division. As of September 28, 1997 and
June 30, 1998 the discontinued operations of the Networking Products
Division had identifiable assets totaling approximately $2,554,000 and
$291,000 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"),
7
<PAGE> 8
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
$506,000 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 June 30, 1998.
Beginning March 1, 1998, Microdyne provided a bridge loan to an officer of
the company in the amount of $400,000 for the purchase of his principal
residence. A non interest bearing note receivable was established for that
amount. $250,000 of the note is due 60 days after the sale of his current
residence and the remainder of the note is due in 5 years. The note
receivable remains outstanding as of June 30, 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.
9. Previously the Company differentiated revenue and costs of products sold
and services provided by product and service. Beginning April 1, 1998, the
Company will present revenue and costs of product sold and services
provided by wholly owned subsidiary. Therefore, the Consolidated Statement
of Earnings for the three and nine month period ended June 29, 1997 has
been restated to conform to this presentation.
8
<PAGE> 9
PART 1. - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Microdyne Corporation ("the Company" or "Microdyne") is composed of two
businesses. Microdyne Communication Technologies Incorporated (MCTI)
manufactures telemetry products and provides systems integration services for
the aerospace industry. Microdyne Outsourcing Incorporated (MOI) provides
telephone technical support and repair services on an insourcing and outsourcing
basis for major electronics manufacturers. These two companies were previously
divisions of the company. On April 1, 1998 the two divisions were converted to
wholly owned subsidiaries of Microdyne. Consequently, Microdyne is presenting
Revenue and Cost of Sales data for each of these subsidiaries. Previously, the
Company presented such data on a product and service basis.
MCTI's revenues for the quarter just ended are essentially stable at $7.7
million during the third fiscal quarter of 1998, as compared to $7.9 million for
the quarter ended June 29, 1997. For the year to date, however, MCTI's revenues
are up by 16% at $22.3 million versus $19.3 million the previous year. The third
quarter of fiscal 1997 included $4.0 million in revenues from the sale of
telemetry and other products, and $3.9 million in revenues from the sale of
systems integration services. This unusually large amount of systems integration
revenue was primarily from our $11 million contract with the Italian Ministry of
Defense, which was awarded during the first fiscal quarter of 1997 and
substantially completed during the second fiscal quarter of 1998. The third
fiscal quarter of 1998 included $5.6 million in revenues from the sale of
telemetry and other products and $2.1 million from the sale of systems
integration services. Due to the product mix issues previously discussed, MCTI's
gross margins increased from 46% of revenues during the third quarter of 1997 to
54% of revenues during the third quarter of 1998.
MOI's revenues increased to $5.7 million during the third fiscal quarter of
1998, as compared to $4.6 million during the third fiscal quarter of 1997. The
higher revenue is primarily the result of increased activities at our
outsourcing facility located in Southern California. MOI's gross margin,
however, decreased by $0.2 million to 20% of revenue versus 28% in the year-ago
quarter. The lower gross margin is the result of higher costs associated with
the increased infrastructure required to operate a stand-alone outsourcing
facility. In addition, MOI's Cost of Sales includes the absorption of certain
training and other costs associated with an increase in call center staffing at
our Southern California outsourcing facility, in anticipation of higher call
volumes from a major customer that did not materialize. MOI adjusted its
staffing to the appropriate level during the quarter.
The Company's consolidated balance sheet strengthened over the course of
the nine month period from September 28, 1997 to June 30, 1998. Accounts
receivable balances were reduced 23% to $13.4 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 28% from $11.7 million as of September 28, 1997 to $8.4 million
as of June 30, 1998 as well as reduce accounts payable-trade and accrued
liabilities
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 MOI and several large
customers at MCTI; 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 and original equipment manufacturers to continue to sell
networking products; fluctuations in the Company's quarterly results of
operations and the timing of orders from customers; the Company's relationships
with sources of external financing; the proposed acquisition; 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.
9
<PAGE> 10
RESULTS OF OPERATIONS
Quarter Ended June 30, 1998 Compared to Quarter Ended June 29, 1997
Consolidated revenue from continuing operations for the third quarter of
fiscal year 1998 increased to $13.4 million from $12.5 million in the third
quarter of fiscal year 1997, an increase of 7%.
Third quarter 1998 MCTI revenue decreased 2% to $7.7 million from $7.9
million in the third quarter of fiscal year 1997. MCTI's revenues continue to
reflect a changing mix of product and system integration sales in 1998 compared
to the prior period. Systems integration sales represented 28% of 1998 third
quarter sales compared to 50% during the same period in fiscal year 1997. In the
third fiscal quarter of 1998, system sales decreased to $2.1 million from $3.9
million during the same period in 1997, while third quarter 1998 MCTI product
and other sales increased 40% to $5.6 million from $4.0 million in 1997. As
stated previously, system integration sales were unusually high in the third
quarter of 1997, due to the recognition of revenue on our $11 million contract
with the Italian Ministry of Defense.
MOI revenue increased 23% to $5.7 million in the third quarter of 1998 from
$4.6 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 $1.7 million in revenue during the third quarter of 1998.
Although the current facility was not in operation during the third fiscal
quarter of 1997, a temporary facility generated $0.6 million in revenue during
that period.
For the third quarter of 1998, consolidated gross profit from continuing
operations increased 8% to $5.3 million in 1998 from $4.9 million in 1997. As a
percentage of continuing operations' revenue, gross profit remained the same at
39% for the third quarter of 1998 and 1997. MOI experienced a lower overall
gross profit as a percentage of revenue. The lower overall gross profits as a
percentage of revenue at MOI 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. The
Company was able to maintain the same gross profit as a percentage of revenue
for the third quarter of 1998, compared to the same period in 1997, due to a
higher gross profit as a percentage of revenue at MCTI. This higher gross profit
is due to increased product sales revenue in the third quarter of 1998, which
have a higher gross profit contribution, on average, than system integration
sales.
SG&A expense increased to $2.9 million in 1998 from $2.4 million in the
third quarter of 1997. The increase in SG&A is the result of higher
infrastructure as well as administrative costs at MOI resulting from its
expanded outsourcing activities. Research and Development expense was $0.6
million in the third quarter of 1998, compared to $0.4 million in the first
quarter of 1997, reflecting MCTI's continued efforts to improve and develop new
products and services.
Interest and other expenses were 22% lower in the third quarter of 1998
compared to the same period in 1997. The reduction to $0.1 million in 1998 from
$0.2 million in 1997 reflects the overall reduction in outstanding debt held by
Microdyne in the third quarter of fiscal year 1998 as compared to the same
period in 1997.
Microdyne's income tax expense during the third 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 $6.8 million as of
June 30, 1998 and $9.0 million as of September 28, 1997.
During the third quarter of 1998, Microdyne had $0.1 million in expenses,
net of income, which were offset against its reserve for discontinued
operations. Based on its current experience associated with the discontinued
operations, Microdyne believes that the $4.8 million reserve set up in June 1997
for the discontinuance of its Networking Products Division is adequate.
10
<PAGE> 11
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 29, 1997
Consolidated revenue from continuing operations for the first nine months
of fiscal year 1998 increased to $39.5 million from $32.0 million for the same
period in 1997, an increase of 23%. MOI increased its share of consolidated
revenues from continuing operations, which represented 40% of consolidated
revenues for the first nine months of fiscal year 1997, to 43% of consolidated
revenues in the first nine months of fiscal year 1998.
For the first nine months of 1998, MCTI revenue increased 16% to $22.3
million from $19.3 million for the same period in fiscal year 1997. For the
first nine months of 1998, product sales grew 31% while system integration sales
fell 16% due to the completion of the contract with the Italian Ministry of
Defense discussed above. For the same period in 1998, system integration sales
were $5.3 million compared to $6.3 million in 1997 while product and other
revenues were $17.0 million compared to $13.0 million in 1997.
MOI revenue increased 35% to $17.1 million during the first nine months of
1998 compared to $12.7 million for the comparable period in the prior fiscal
year. The portion of the revenue earned at Microdyne's own facilities
("outsourced revenue"), was $4.4 million for the first nine months of 1998,
while the portion of the revenue earned at the customer's facilities
("in-sourced revenue") represented $12.7 million of year to date revenue. The
year to date revenue for 1997 is comprised of $12.0 million of in-sourced
revenue and $0.7 million of outsourced revenue. Therefore, outsourced revenue
represented 100% of total revenue growth for MOI during the first nine months of
fiscal year 1998.
For the first nine months of 1998, consolidated gross profit from
continuing operations' revenue increased 23% to $16.0 million in 1998 from $13.0
million in 1997. As a percentage of revenue, gross profit remained the same at
41%. MCTI's gross profit increased $2.6 million (54% of revenue) for fiscal year
1998 from $9.5 million (49% of revenue) in fiscal year 1997 due to higher margin
product sales. MOI's gross margin increased $0.4 million (24% of revenue) for
fiscal year 1998 from $3.5 million (28% of revenue) in fiscal year 1997. MOI's
gross profit as a percentage of revenue declined due to the Company's investment
in infrastructure for the new outsourcing facility in California.
SG&A expense increased to $8.1 million for the nine months of 1998 from
$6.5 million for the comparable period in 1997. As a percentage of revenue, SG&A
remained at 20% for 1998 and 1997 fiscal year to date. Despite the higher
revenue, the Company was able to control its SG&A costs and will continue its
efforts to reduce SG&A expenses as a percentage of revenue. In dollar terms,
SG&A's increase is the result of higher administrative and infrastructure
charges at MOI.
Research and Development ("R&D")expense was $1.6 million in the first nine
months of fiscal year 1998, compared to $1.2 million in the first nine months of
1997. As a percentage of revenue, R&D remained at 4% of year to date revenue.
Interest and other expenses were 32% lower in the first nine months of 1998
compared to the same period in 1997. The $0.3 million reduction from $0.8
million 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 nine 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 $6.8 million as
of June 30, 1998, and $9.0 million as of September 28, 1997. There was no such
valuation in the first nine months of fiscal year 1997.
During the first nine months of 1998, Microdyne had $2.3 million in
expenses, net of income, which were offset against its reserve for discontinued
operations. Based on its current experience associated with the discontinued
operations, 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 June 30, 1998, Microdyne had $3.4 million of bank debt under a revolving line
of credit facility. On June 30, 1998, Microdyne had $0.7 million in cash and
$4.5 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
11
<PAGE> 12
$12 million to $9 million. On August 11, 1998, the Company obtained a new line
of credit facility from another commercial bank for $10 million payable on
October 31, 2000. The Company repaid its current borrowings under the previous
line of credit from the amount available under this new line of credit.
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 June 30, 1998, notes payable due Novell totaled $3.6 million, of which
$1.2 million has been classified as a short-term obligation and $2.4 million as
a long-term obligation on the June 30, 1998 Balance Sheet.
During the first nine months of 1998, net cash provided by operations was
$5.8 million. Cash provided by continuing operations was $8.3 million, while
cash used in discontinued operations was $2.5 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 $2.8 million, which primarily relates to additional
equipment for the MOI facility in California. Microdyne has no material
commitments for future capital expenditures. Cash used in financing activities
was $3.4 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
operations, suppliers and customers. Nothing has come to the attention of the
Company that would materially impact the results of operations of the Company.
The Company will expense all costs as incurred in accordance with Emerging
Issues Task Force Opinion No. 96-4, "Accounting for the Costs Associated With
Modifying Computer Software for the Year 2000".
ACQUISITION
Effective August 11, 1998 the Company acquired four affiliated,
privately-held companies for cash. A subsidiary of MCTI acquired all of the
outstanding stock of two companies and the assets and certain liabilities of the
other two companies. Operations of the companies will be run in conjunction of
those of MCTI located in Ocala, Florida. The acquisition will be accounted for
as a purchase. The Company obtained financing from a commercial bank for the
cost of the acquisition.
PROPOSED ACQUISITION
On August 6, 1998 the Company entered into a letter of intent to acquire
for cash all of the assets of Veda Systems, a provider of a wide range of
software and digital products supporting data acquisition and telemetry
processing. The acquisition is subject to the signing of a definitive agreement,
completion of due diligence, and approval of the Board of Directors for both
companies. The acquisition is expected to close by September 30, 1998. The
Company is currently in negotiations to obtain financing from commercial banks
for the acquisition. There can be no assurances that the conditions to the
closing of the acquisition will be met.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has a Line of Credit agreement with a commercial bank for a
total of $9 million. As of June 30, 1998 the amount outstanding under the line
of credit was $3.4 million. Interest is payable monthly and is variable based on
the London Inter-bank Offer Rate (LIBOR) plus a premium. The Line of Credit
exposure to market rate fluctuations is limited due to the interest rate paid on
a monthly basis being variable and based on current market conditions. The
Company does not engage in hedging or derivative transactions with respect to
the interest paid on the line of credit agreement or other obligations.
12
<PAGE> 13
PART II. - OTHER INFORMATION
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) See exhibit index
(b) No Form 8-K was filed during the quarter ended June 30, 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: August 12, 1998 /s/ Michael E. Jalbert
-------------------------- ----------------------
Michael E. Jalbert
Chief Executive Officer
[Duly Authorized Officer]
Date: August 12, 1998 /s/ Massoud Safavi
-------------------------- ----------------------
Massoud Safavi
Chief Financial Officer
[Principal Financial Officer]
13
<PAGE> 14
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
Exhibit Number Exhibit Description
<S> <C>
3.2 Articles of Amendment and Restatement of Articles of Incorporation of
the Registrant(1)
3.3 Bylaws of Registrant(2)
4.1 Specimen Common Stock Certificate(3)
27 Financial Data Schedule
</TABLE>
<TABLE>
<S> <C>
1 Incorporated by reference to Exhibit 4 (A) (1) to the Registrant's 1989 Form S-2
Registration Statement.
2 Incorporated by reference to Exhibit 4 (B) (1) to the Registrant's 1990 Form S-3
Registrant Statement.
3 Incorporated by reference to Exhibit 49 (A) to the Registrant's 1979 Registration
Statement (File No. 2-634130).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q AS OF JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REVERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> SEP-29-1997 SEP-29-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 676 676
<SECURITIES> 0 0
<RECEIVABLES> 13,418 13,418
<ALLOWANCES> 0 0
<INVENTORY> 4,485 4,485
<CURRENT-ASSETS> 25,050 25,050
<PP&E> 10,237 10,237
<DEPRECIATION> 4,915 4,915
<TOTAL-ASSETS> 30,672 30,672
<CURRENT-LIABILITIES> 12,465 12,465
<BONDS> 0 0
0 0
0 0
<COMMON> 1,307 1,307
<OTHER-SE> 10,886 10,886
<TOTAL-LIABILITY-AND-EQUITY> 30,672 30,672
<SALES> 5,636 17,043
<TOTAL-REVENUES> 13,425 39,458
<CGS> 2,320 7,319
<TOTAL-COSTS> 8,135 23,431
<OTHER-EXPENSES> 3,482 9,704
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 154 568
<INCOME-PRETAX> 1,654 5,755
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,654 5,755
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,654 5,755
<EPS-PRIMARY> 0.13 0.44
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