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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark
One)
x |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the year ended December 31, 2001
¨ |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition 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 incorporation or
organization) |
|
(I.R.S.Employer Identification Number) |
5904 Richmond Highway, Suite 300 Alexandria, Virginia 22303
(Address of principal executive offices)
Registrant’s telephone
number including area code
(703) 329-9400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.02 per share
(Title of Class)
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The registrant’s revenues for the twelve
months ended December 31, 2001 were $21,936,000.
As of March 13, 2002, the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant (based upon the average bid and asked prices of the common stock as reported by the National Association of Securities Dealers Inc. through its Electronic OTC Bulletin Board) was approximately
$7,384,300.
As of March 13, 2002, 14,394,340 shares of the common stock of the registrant were outstanding.
PART I
Item 1. Business
Introduction
Hadron, Inc. (“Hadron” or the “Company”) supports homeland security through the design, implementation and support of innovative
solutions that enhance the United States’ ability to detect, defend and respond to threats from hostile countries or terrorists. The Company specializes in three facets of homeland security: intelligence systems, bio-defense, and aerospace
programs. The Company was incorporated in New York in 1964, and can be found on the Internet at www.hadron.com.
Change in Fiscal Year
On February 14, 2001, the Board of Directors of the Company approved a change of the Company’s fiscal year from the
period of July 1 through June 30 to the period of January 1 through December 31, and declared the period of July 1, 2000 through December 31, 2000 the transition period.
Organizational Change
Prior to the acquisition of Analex Corporation on November 5, 2001
(see “Recent Developments”), the Company had four operating segments: Advanced Biosystems, Inc. (“ABS”), Avenue Technologies, Inc. (“ATI”), Engineering & Information Services, Inc. (“EISI”), and SyCom
Services, Inc. (“SyCom”).
After the acquisition of Analex, EISI and ATI were merged into Analex in December 2001.
ABS, Analex and SyCom continue to operate as wholly owned subsidiaries of the Company.
With the acquisition of Analex, the
Company reorganized its internal operating structure. Hadron now has three operating segments: ABS continues to operate in the bio-defense market; the Homeland Security Group supports the United States intelligence community and is comprised of the
businesses previously reported under the ATI, EISI, and SyCom operating segments; and the Aerospace Group supports NASA, Department of Defense (“DoD”), and other major aerospace contractors and is comprised on the business acquired as a
result of the acquisition of Analex Corporation in November 2001.
The following table may help in understanding the
organizational units for the relevant time periods discussed in this 10-K:
| Operating Units as reported for the period ended 12/31/00 and
prior fiscal years
|
|
Operating Units as reported for the fiscal year ended 12/31/01
|
| Advanced Biosystems, Inc. (“ABS”) |
|
ABS |
| Avenue Technologies, Inc. (“ATI”) |
|
Homeland Security Group |
| Engineering & Information Services, Inc. (“EISI”) |
|
Homeland Security Group |
| Sycom Services, Inc. (“SyCom”) |
|
Homeland Security Group |
| Analex Corporation (“Analex”) |
|
Aerospace Group |
2
Further, the consolidated financial statements for 2001 include two months of the Aerospace Group, formerly Analex Corporation. The
full-year pro-forma results for 2001 include twelve months of Aerospace Group operations, as if Analex had been acquired on January 1, 2001.
Operations
The Company has three operating units, the Homeland Security Group, Advanced Biosystems, Inc., and
the Aerospace Group, whose descriptions follow:
Homeland Security Group
Since 1964, the Company has provided hardware and software engineering, systems integration, information technology solutions and independent quality assurance to support intelligence
systems. The Company’s role in the support of the intelligence community brings specialized skills to a broad set of technical requirements. In the area of Intelligence, Reconnaissance and Surveillance (“ISR”), it provides solutions
that enable the simulation of a realistic operational environment so that satellites and related systems can be tested prior to deployment. The Company performs verification and validation of test results to ensure the reliability of the data and
also develops radar, modeling and simulation, and system software, all in support of testing, collecting, and analyzing data from various intelligence systems.
The Company is an independent expert in the design and testing of expendable launch vehicles (“ELV”) for the DoD and intelligence community. Its highly specialized expertise provides test analysis and
independent validation and verification (“IV&V”) support in areas such as Structural Dynamics, Trajectory and Performance, Thermal System Performance, and Range Safety.
The Company provides IV&V services to the United States Air Force and the National Reconnaissance Office (“NRO”) in support of launches of the Atlas and Titan ELV’s.
The Company’s contribution to the success of the program launches has earned two prestigious awards: the DoD’s David Packard Excellence in Acquisition Award, and the NRO’s Gold Medal Award.
The Company supports other intelligence agencies such as the National Security Agency and the Central Intelligence Agency by providing software
development, systems integration, configuration management and network administration services. In addition, the Company develops and conducts training designed to better enable military personnel in the conduct of Human Intelligence Source
Debriefings.
Advanced Biosystems, Inc.
3
The Company’s role in bio-defense began in 1999 when it established its Advanced
Biosystems (“ABS”) subsidiary. Since then, a elite group of biologists, immunologists and other researchers have been conducting studies to develop effective defenses and treatments for anthrax and other biological warfare
agents.
ABS scientists play a significant role in
advising Congress, members of the Bush administration, Defense officials and senior members of the medical community on strategies for bio-defense. ABS also provides training on the use of biological warfare agents, their effects, and defensive
strategies to improve preparedness. ABS has been awarded almost $7 million in contracts with the U.S. Defense Advanced Research Projects Agency (“DARPA”) for development of non-specific-immunity based defenses against biological threat
agents. ABS was awarded a grant from the National Institutes of Health (“NIH”) to study the role of certain cellular components in blocking the development of Anthrax.
Aerospace Group
The Aerospace Group, formerly Analex Corporation (“Analex”),
provides high quality services to NASA, the DoD and major aerospace contractors such as Lockheed Martin and Northrop Grumman. The Company provides aerospace systems engineering in the design, development, analysis, test and operation of both
hardware and software for aerospace systems. These systems include expendable launch vehicles, satellites, space-based experiments, and components and payloads associated with the International Space Station. The Company also supports a major
aerospace firm in development of sophisticated airborne electronic sensors and systems.
The Company provides a broad scope of
aerospace engineering services to support the programs of NASA Glenn Research Center (“GRC”), including development of next generation launch vehicles. Specific contributions include engineering design and development of aerospace systems,
engineering support to research and technology development, engineering support to operations of experimental systems, and management support.
The Company supports GRC on the Microgravity Research Development and Operations Contract (“MRDOC”) in providing an automated laboratory environment aboard the International Space Station to enable research
in the performance of fluids and combustion in the near-zero gravity of space. The Company participates in the design, development, manufacturing, test and delivery of the Fluids and Combustion Facility and associated payloads.
At the Kennedy Space Center, the Company supports the Payload and Ground Operations Contract (“PGOC”) by performing detailed
analyses of ELV’s and mission assurance surveillance at launch vehicle facilities in support of NASA ELV programs.
Recent Developments
4
The Company entered into an Agreement and Plan of Merger dated as of October 31, 2001 (the
“Plan”) with Analex Corporation and its equity holders pursuant to which Analex was merged with and into a wholly-owned subsidiary of the Company. Analex is a professional services and program management firm whose principal customers are
NASA and the U.S. intelligence community. The merger was closed as of November 5, 2001.
Under the terms of the Plan, the
shareholders representing all of the outstanding equity of Analex (the “Sellers”) exchanged their Analex equity on a pro rata basis for approximately $6,500,000 in a combination of cash and the satisfaction of certain liabilities of
Analex as well as 3,572,143 shares of the Company’s Common Stock, par value $0.02 per share (“Common Stock”). Of these shares, 857,143 shares are subject to a provision by which the Company guarantees for a five-year period to
reimburse the Sellers the difference between the price at which they sell such shares and a guaranteed sales price ranging from $1.60 to $2.20 per share, if such shares are sold within such period and if certain other conditions are satisfied.
Approximately 1,700,000 of the 3,572,143 shares of the Common Stock issued to the Sellers and $600,000 of the Sellers’ proceeds are subject to various escrow and indemnification agreements to ensure Sellers’ compliance with various
representation and warranties.
In addition, the Company issued promissory notes to certain Sellers totaling approximately
$773,000 with a five-year term and entered into non-competition agreements with these Sellers for total payments of $540,000. The Company offered at-will part-time employment agreements to four officers of Analex, three of which contain incentive
bonus provisions relating to the achievement of certain performance goals. Finally, while Analex must have at least a prescribed minimum tangible net worth at closing, the Company permitted Analex to have indebtedness at closing of approximately
$2,400,000.
To finance the acquisition, the Company negotiated a new senior credit facility with Bank of America, N.A. in the
amount of $7,500,000 (the “Credit Agreement”), comprised of (i) a five-year $3,500,000 term loan (the “Term Loan”) and (ii) a $4,000,000 revolving credit facility through November 2, 2006 (the “Credit Facility”). The
principal amount of the Term Loan is amortized in sixty monthly installments of $58,333. Interest on each of the facilities is at the LIBOR rate plus an applicable margin as specified in the Credit Agreement. The Company has entered into an interest
rate swap agreement for $2,950,000 of this debt, and interest rate payments will be fixed beginning in January 2002. The Company is subject to certain financial covenants pursuant to the Credit Agreement, including debt to EBITDA ratio, fixed charge
coverage ratio, senior debt to EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company and its subsidiaries. In addition, Bank of America has required the
Company to obtain personal guarantees in the amount of $2,000,000, which the Company has procured from two individuals (one of whom is a director of the Company) in exchange for an annual fee and the issuance of warrants to purchase the
Company’s Common Stock at an exercise price of $0.02 per share with the number of warrants to be based on the duration of the guarantees and a formula related to valuing
5
the Company.
In addition, the Company
issued 3,961,060 shares of Common Stock for aggregate consideration of approximately $3,868,000 through a private placement pursuant to Regulation D under the Securities Act of 1933 consisting of (i) the Company’s Common Stock at a price of
$1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii) units consisting of Hadron Common Stock and warrants to purchase 0.2061 shares of Hadron Common Stock at an exercise price of $0.02 per share for each share
purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of the Company’s equity. Two of such purchasers are directors or affiliates of a director. All of these proceeds were directed to financing the acquisition of
Analex.
On November 2, 2001, to assist in financing the acquisition, Dr. C.W. Gilluly, one of the Company’s directors, and
J. Richard Knop, President of the Company’s investment banking firm, Windsor Group, exercised warrants and/or stock options to purchase an aggregate of 247,888 shares of Common Stock, resulting in proceeds of approximately $200,000.
General Information
The
Company provides engineering, information technology, medical research and technical services to federal government agencies or major defense contractors. In general, the industry in which the Company operates includes a large number of competitors
of varying sizes. Competition within the information technology and government contracting arenas is intense. Selection is based primarily on a combination of the price of services and evaluation of technical capability, as well as past performance,
quality of service and responsiveness to client requirements.
The Company maintains a primary commitment to its direct and
indirect government clients, while intensifying its business development efforts targeted towards additional government clients. The Company is continuing efforts to diversify its client base.
Direct and indirect contracts with government defense and intelligence agencies comprise the majority of the Company’s business base, and competition for government-funded
projects continues to exert pressure on profit margins. However, the Company’s management continues its program of cost containment, primarily in the areas of indirect labor costs, overhead and general and administrative expenses, and therefore
believes the Company is well positioned and competitive in its marketplace.
The revenues of the Homeland Security Group
accounted for 57%, 79%, 98%, 96%, and 97% of the total revenues for 2001, the six-month periods ended December 31, 2000 and 1999 and the fiscal years 2000 and 1999, respectively. On a full-year pro-forma basis, the Homeland Security Group accounted
for approximately 26% of the total 2001 revenues (see “Recent Developments”).
The revenues of ABS accounted for 22%,
21% and 3% of the total revenues for 2001, the six-month period ended December 31, 2000 and the fiscal year
6
2000. On a full-year pro-forma basis, ABS accounted for approximately 10% of the total 2001 revenues (see “Recent Developments”).
The revenues of the Aerospace Group, which became part of Hadron as a result of the Analex acquisition, accounted for 21% of the total
revenues for 2001, respectively. On a full-year pro-forma basis, the Aerospace Group accounted for approximately 64% of the total 2001 revenues (see “Recent Developments”).
The Company’s funded backlog of orders believed to be firm as of December 31, 2001 and realizable during 2002 approximated $32 million. As of December 31, 2000, before the
acquisition of Analex, the Company had approximately $15 million in firm backlog orders. Included in the firm backlog approximation are estimates of amounts the Company anticipates receiving under government contracts, some of which are indefinite
delivery, indefinite quantity contracts, under which services are provided as ordered by the government. Not included in the backlog approximation are amounts from future years of government contracts under which the government has the right to
exercise an option for the Company to perform services.
As of December 31, 2001, the Company (including its subsidiaries)
employed approximately 450 people. The Company’s employees are not members of any union, and employee relations are believed by management to be generally good.
Raw materials, patents, licenses, trademarks, franchises and concessions are not materially important to the conduct of the Company’s business and the Company’s business is not
seasonal.
Government Procurement
The principal customer for the Company’s services is the United States government. The Company’s sales to the U.S. government and its prime contractors represented approximately 99% of total net sales during the Company’s
twelve months ended December 31, 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, and are expected to continue to account for a substantial portion of the Company’s revenues for the foreseeable
future. On a full-year pro-forma basis, government revenues also accounted for 99% of the total 2001 revenues (see “Recent Developments”).
The principal U.S. government customer is the DoD, which, directly or through its prime contractors, accounted for approximately 64%, 70%, 76%, 92% and 88% of the Company’s revenues in the twelve months ended
December 31, 2001, the six month periods ended December 31, 2000 and 1999, and the fiscal years 2000 and 1999, respectively. On a full-year pro-forma basis, DoD revenues accounted for 43% of the total 2001 revenues (see “Recent
Developments”).
The Company’s DoD government business from Northrop Grumman constituted approximately 26% of the
total 2001 revenues of the Company, but only 12% on the 2001 full-year pro-forma basis (see “Recent Developments”).
7
The Company’s contracts with the U.S. government are subject to the availability of funds
through annual appropriations, may be terminated by the government for its convenience at any time and generally do not require the purchase of fixed quantity of services or products. Reductions in U.S. government defense spending could adversely
affect the Company’s operating results. While the Company is not aware of present or anticipated reductions in U.S. government spending on specific programs or contracts, there can be no assurance that such reductions will not occur or that
decreases in U.S. government defense spending in general will not have an adverse effect on the Company’s revenues in the future. Contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency (“DCAA”).
The Company has been a contractor or subcontractor with the DoD continuously since 1973 with periodic renewals. During this
time, neither the Company nor its subsidiaries have experienced any material adjustment of profits under these contracts; however, no assurance can be given that the DoD will not seek and obtain an adjustment of profits in the future. All U.S.
government contracts contain clauses that allow for the termination of contracts at the convenience of the U.S. government.
The
preponderance of the Company’s technical and professional services business with the DoD and other governmental agencies is obtained through competitive procurement and through follow-on services related to existing business. In certain
instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas.
The Company derives no revenues from foreign operations.
Item
2. Properties
The Company owns no real estate. As of December 31, 2001, the
Company leased a total of 68,373 square feet of office space. These leases expire between February 2002 and September 2006. (See Note 11 of the Notes to Consolidated Financial Statements.)
Item 3. Legal Proceedings
No
material legal proceedings are currently pending.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
8
PART II
Item
5. Market for Registrant’s Common Equity and Related Stockholder Matters
Common Stock is traded on the National Association of Securities Dealers’ (“NASD”) Electronic OTC Bulletin Board, under the symbol HDRN. The Company has no other class of common stock.
The range of high and low bid quotations for the Common Stock, as reported by the National Quotation Bureau, for each quarterly period during 2001, the
six-month period ended December 31, 2000 and fiscal year 2000 is shown below:
| Year Ended December 31, 2001
|
|
High
|
|
Low
|
| First Quarter |
|
|
|
|
| (1/1 to 3/31/01) |
|
1.44 |
|
81 |
| Second Quarter |
|
|
|
|
| (4/1 to 06/30/01) |
|
1.40 |
|
1.00 |
| Third Quarter |
|
|
|
|
| (7/1 to 09/30/01) |
|
2.50 |
|
1.06 |
| Fourth Quarter |
|
|
|
|
| (10/1 to 12/31/01) |
|
4.55 |
|
1.40 |
| Period Ended December 31, 2000
|
|
High
|
|
Low
|
| First Quarter |
|
|
|
|
| (7/1 to 9/30/00) |
|
1.06 |
|
.63 |
| Second Quarter |
|
|
|
|
| (10/1 to 12/31/00) |
|
1.56 |
|
.75 |
| Fiscal Year Ended June 30, 2000
|
|
High
|
|
Low
|
| First Quarter |
|
|
|
|
| (7/1 to 9/30/99) |
|
1.28 |
|
.63 |
| Second Quarter |
|
|
|
|
| (10/1 to 12/31/99) |
|
.75 |
|
.50 |
| Third Quarter |
|
|
|
|
| (1/1 to 3/31/00) |
|
2.00 |
|
.47 |
| Fourth Quarter |
|
|
|
|
| (4/1 to 6/30/00) |
|
1.56 |
|
.75 |
As of March 13, 2002, there were approximately 2,101 shareholders of record of
the Company’s Common Stock. No cash dividends were paid during 2001 and past two fiscal years, and none are expected to be declared during 2002.
9
Item 6. Selected Financial Data
| |
|
Year Ended 12/31/01
|
|
Six Months Ended 12/31/00
|
|
Unaudited Six Months Ended 12/31/99
|
|
|
Fiscal Year 6/30/00
|
|
|
Fiscal Year 6/30/99
|
|
|
Fiscal Year 6/30/98
|
|
|
Fiscal Year 6/30/97
|
|
| |
|
(In thousands of dollars, except per share amounts) |
|
| Total Revenues (1) |
|
$ |
21,936 |
|
$ |
8,943 |
|
$ |
10,267 |
|
|
$ |
19,901 |
|
|
$ |
20,333 |
|
|
$ |
21,134 |
|
|
$ |
16,988 |
|
| Operating Income (Loss) |
|
|
454 |
|
|
190 |
|
|
(481 |
) |
|
|
(421 |
) |
|
|
63 |
|
|
|
888 |
|
|
|
128 |
|
| Interest Expense, net of Interest income |
|
|
217 |
|
|
112 |
|
|
167 |
|
|
|
324 |
|
|
|
78 |
|
|
|
56 |
|
|
|
84 |
|
| Income (Loss) Before income taxes |
|
|
216 |
|
|
85 |
|
|
(631 |
) |
|
|
(724 |
) |
|
|
48 |
|
|
|
819 |
|
|
|
57 |
|
| Net Income (Loss) (1) |
|
|
196 |
|
|
85 |
|
|
(631 |
) |
|
|
(745 |
) |
|
|
34 |
|
|
|
761 |
|
|
|
13 |
|
| Income (Loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
.03 |
|
|
.01 |
|
|
(.24 |
) |
|
|
(.23 |
) |
|
|
.02 |
|
|
|
.45 |
|
|
|
.01 |
|
| Diluted |
|
|
.02 |
|
|
.01 |
|
|
(.24 |
) |
|
|
(.23 |
) |
|
|
.01 |
|
|
|
.26 |
|
|
|
.01 |
|
| At Period End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Assets |
|
|
26,400 |
|
|
5,784 |
|
|
6,127 |
|
|
|
5,951 |
|
|
|
6,690 |
|
|
|
3,507 |
|
|
|
2,712 |
|
| Long-term Liabilities |
|
|
5,839 |
|
|
412 |
|
|
1,040 |
|
|
|
702 |
|
|
|
2,160 |
|
|
|
53 |
|
|
|
169 |
|
| Working Capital (Deficit) |
|
|
73 |
|
|
266 |
|
|
(1,454 |
) |
|
|
(13 |
) |
|
|
(67 |
) |
|
|
(186 |
) |
|
|
(906 |
) |
| Shareholders’ Equity (Deficit) |
|
|
11,175 |
|
|
2,002 |
|
|
(80 |
) |
|
|
1,535 |
|
|
|
456 |
|
|
|
22 |
|
|
|
(811 |
) |
(1) |
|
See Item 7 “Management’s Discussion and Analysis” for an explanation of events that materially affect
comparability. |
10
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, including without limitation, statements about the Company’s expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on
information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The forward-looking statements contained herein involve risks and uncertainties. The Company’s actual
results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this report.
Critical Accounting Policies
The consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes the following critical accounting policies affect
significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue
The Company uses the percentage of completion
method to recognize revenues and costs on all contracts. Under this method of accounting, the Company expenses all contract costs as they are incurred and simultaneously recognizes an estimate of the revenues related to those costs. Contract costs
include direct labor, direct materials, subcontract costs, as well as an allocated share of overhead and general and administrative costs. The Company uses different techniques for estimating and recording revenues depending on the type of contract.
Revenues may differ from recorded estimates due to various factors, including favorable or unfavorable performance in comparison to estimated contract costs, unanticipated conditions, the resolution of contract claims or disputes and audits by
government audit agencies. Revisions to costs and revenues recorded are recognized in the period in which the revisions occur. Revenues on cost-plus contracts are recorded as the sum of allowable costs incurred to date plus estimated earned fees,
which are recognized based on the percentage that costs incurred bears to total estimated costs. Some of the fees on cost-plus contracts may be awarded or adjusted in accordance with performance incentive provisions. These incentive-fee awards or
adjustments are included in revenues at the time they can be reasonably estimated. Revenues on fixed-price contracts are recorded based on the percentage of costs incurred to date compared to total estimated costs. Revenues on time and materials
contracts are recorded based upon the agreed prices per direct labor hour
11
expended plus the cost of direct materials and subcontract costs incurred. In the normal course of business, the Company may be party to claims and disputes
resulting from modifications and change orders and other contract matters. Claims for additional contract compensation are recognized when realization is probable and estimable.
Long-Lived Assets
In
assessing the recoverability of long-lived assets, including goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these
estimates or the Company’s related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.
Contingencies
From time
to time, the Company is subject to proceedings, lawsuits and other claims related to labor and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these contingencies as well as potential ranges of
probable losses and establish reserves accordingly. The amount of reserves required, if any, may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy.
Results of Operations
Comparison of Year Ended December 31, 2001 to the Unaudited Twelve Months Ended December 31, 2000
Revenues for the twelve months ended December 31, 2001 were approximately $21,936,000, an 18% increase from the twelve-month period ended December 31, 2000. This increase is
primarily due to the addition of two months of revenues, totaling $4,658,000, generated by the Aerospace Group, formerly Analex Corporation, acquired in November 2001 (see “Recent Developments”), coupled with the increased revenues of ABS,
partially offset by decreased revenues of the Homeland Security Group.
Costs of revenue for the twelve months ended December
31, 2001 were approximately $18,158,000, an increase of approximately 18% from the same period of the prior year. The increase is primarily due to the costs of revenue of the Aerospace Group, coupled with increased ABS costs, partially offset by
decreased costs of the Homeland Security Group. Costs of revenue as a percentage of revenues were approximately 83% for the twelve months ended December 31, 2001 and 2000.
Selling, general and administrative expenses totaled approximately $3,324,000 for the twelve months ended December 31, 2001, compared with approximately $2,908,000 for the twelve
months ended December 31, 2000. The $416,000, or 14% increase is primarily due to the addition of the Aerospace Group’s costs and the costs associated with the acquisition.
12
The Company had operating income of approximately $454,000 for the twelve months ended December 31, 2001, compared to operating income
of approximately $250,000 for the twelve month period ended December 31, 2000. This $204,000 increase is primarily attributable to the profitability of the Aerospace Group partially offset by the Company’s acquisition costs.
Net income was approximately $196,000 for the twelve months ended December 31, 2001, compared to a net loss of approximately
$29,000 for the twelve months ended December 31, 2000. The $225,000 increase resulted primarily from the $350,000 net income produced by the Aerospace Group, coupled with the $186,000 net income of ABS, partially offset by the $10,000 net loss of
the Homeland Security Group and increased costs associated with the Analex acquisition.
Results of Operations
Comparison of Six Month Period Ended December 31, 2000 to the Unaudited Six Month Period Ended December 31, 1999
Revenues for the six months ended December 31, 2000 were approximately $8,943,000, a 13% decrease from the period ended
December 31, 1999. This decrease is primarily due to the loss of billable personnel resulting from the hiring of certain of the Company’s technical employees by the Homeland Security Group’s major client, Johns Hopkins University’s
Applied Physics Laboratory (“APL”), partially offset by additional revenue produced by ABS. The Company’s billable staff dedicated to the APL contracts decreased 83% between December 31, 1999 and December 31, 2000.
Costs of revenue for the six months ended December 31, 2000 were approximately $7,601,000, a decrease of approximately 13% from the same
period of the prior year. The decrease is primarily due to the lowered personnel costs of the Homeland Security Group partially offset by costs associated with the increased ABS revenues. Costs of revenue as a percentage of revenues were
approximately 85% for the six-month periods ended December 31, 2000 and 1999, respectively.
Selling, general and administrative
expenses totaled approximately $1,153,000 for the six months ended December 31, 2000, compared with approximately $1,995,000 for the same period of the prior year. The $842,000, or 42%, decrease is primarily due to the Company’s aggressive cost
reduction and containment program.
The Company had operating income of $190,000 for the six months ended December 31, 2000,
compared to an operating loss of $481,000 for the period ended December 31, 1999. This $671,000 increase is primarily attributable to the Company’s aggressive cost reductions coupled with increases in the productivity of the Company’s
billable staff.
Net income was $85,000 for the six months ended December 31, 2000, compared to a net loss of approximately
$631,000 for the same period of the prior year. The $716,000 increase resulted from the same factors mentioned above.
13
Results of Operations
Comparison of Fiscal Year 2000 to Fiscal Year 1999
Revenues for the fiscal year ended
June 30, 2000 were approximately $19,901,000, a 2% decrease from the prior fiscal year. This decrease is due to the loss of billable personnel resulting from the hiring of certain of the Company’s technical employees by the Homeland Security
Group’s major client, APL, and the difficulties retaining and recruiting new technical employees at another Homeland Security Group’s major client, Northrop Grumman, partially offset by additional revenue produced by ABS.
Costs of revenue for the fiscal year ended June 30, 2000 were approximately $16,572,000, a decrease of approximately 7% from the prior fiscal
year. The decrease is due primarily to the lowered personnel costs of the Homeland Security Group. Costs of revenue as a percentage of revenues were approximately 83% and 87% for the fiscal years ended June 30, 2000 and 1999, respectively. This 4%
decrease is primarily due to increases in direct personnel of ABS, coupled with decreased company-wide indirect personnel.
Selling, general and administrative expenses totaled approximately $3,750,000 for the fiscal year ended June 30, 2000, compared with approximately $2,535,000 for the prior fiscal year. The increase is primarily due to the Company’s
addition of key administrative personnel of ABS and the Homeland Security Group, totaling $362,000 and $364,000, respectively, along with the amortization of goodwill of approximately $344,000 associated with the purchase of Avenue Technologies,
Inc. (“ATI”). The Company embarked on an aggressive cost reduction and containment program in the second half of fiscal year 2000 evidenced by a 26% decrease in general and administrative expenses between the first and fourth quarters of
fiscal year 2000.
The Company had an operating loss of $421,000 in the fiscal year ended June 30, 2000, compared to operating
income of $63,000 in the prior fiscal year. This $484,000 decrease is primarily due to the loss of billable personnel resulting from the hiring of certain of the Company’s technical employees by the Homeland Security Group’s major client,
APL, and the difficulties retaining and recruiting new technical employees at Homeland Security Group’s client, Northrop Grumman, coupled with the addition of key administrative personnel hired to develop the Company’s initiatives in the
areas of biological weapons defense and counterterrorism. In addition, the Company amortized the goodwill associated with the purchase of ATI. The Company’s net billable headcount at APL and Northrop Grumman decreased by 30 and 36, or 59% and
42%, respectively, during the fiscal year ended June 30, 2000 as compared with the prior year. The loss of billable personnel at APL is expected to continue as a result of the removal of hiring ceilings at APL.
Net interest expense increased approximately $246,000 between the fiscal year ended June 30, 1999 and the fiscal year ended June 30, 2000 due to higher
outstanding borrowings during the year and increased debt associated with the acquisition of ATI.
14
The net loss for the fiscal year ended June 30, 2000 was approximately $745,000, compared to
net income of approximately $34,000 in the prior year. The net loss resulted primarily from the loss of billable positions, as discussed above, coupled with the costs of retaining key technical professional personnel and diversifying business
development efforts.
Capital Resources and Liquidity
The working capital at December 31, 2001 decreased by approximately $192,000 from December 31, 2000, primarily due to the Company’s purchase of
Analex (see “Recent Developments”). While the Company paid off its previous bank obligations with United Bank, it added increased line of credit and term note facilities at Bank of America, issued promissory notes and non-competition
agreements and inherited an extended payout settlement, as further discussed below.
These increases in debt were partially
offset by Analex’ two month net income of approximately $350,000. On an adjusted full-year pro-forma basis, the net income of Analex was approximately $1,458,000 for 2001, which would have resulted in a company-wide increase to working capital
of over $1,266,000.
In the three months ended December
31, 2001, the Company recorded net income of $48,000 and EBITDA, as defined below, of $359,000, after add-backs for interest of $120,000, taxes of $20,000, depreciation of $45,000 and goodwill amortization of $126,000.
In the twelve months ended December 31, 2001, the Company recorded net income of $196,000 and EBITDA of $957,000, after add-backs for interest of
$217,000, taxes of $20,000, depreciation of $146,000 and goodwill amortization of $378,000.
On an adjusted full-year pro-forma
basis for 2001, the Company recorded net income of $910,000 and EBITDA of $2,346,000, after add-backs for interest of $823,000, depreciation of $235,000 and goodwill amortization of $378,000.
The Company believes that with anticipated increased earnings in the upcoming years, it will be able to sufficiently pay down its debt obligations.
EBITDA consists of earnings before interest expense, interest and other income, income taxes, deferred compensation, and depreciation and amortization.
EBITDA does not represent funds available for the Company’s discretionary use and is not intended to represent cash flow from operations. EBITDA should also not be construed as a substitute for operating income or a better measure of liquidity
than cash flow from operating activities, which are determined in accordance with accounting principles generally accepted in the U.S. EBITDA excludes components that are significant in understanding and assessing the Company’s results of
operations and cash flows. In addition, EBITDA is considered to be relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties.
15
Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of the Company’s operating performance, as an additional
meaningful measure of performance and liquidity, and to provide additional information with respect to the Company’s ability to meet future debt service, capital expenditure and working capital requirements.
Net cash used in operating activities was $435,000 during the twelve months ended December 31, 2001. Net cash used in operating activities in the
twelve months ended December 31, 2001 was primarily the result of changes in working capital, partially offset by operating income.
Net cash used for investing activities during the twelve months ended December 31, 2001 was $6,254,000. Net cash used for investing activities in this period was for fixed asset purchases of $86,000 and the cash portion of the Analex
acquisition of $6,168,000.
On November 2, 2001, to finance the acquisition of Analex, the Company entered into the Credit
Agreement which provides the Company with a $4,000,000 Credit Facility through November 2, 2006 and a five-year $3,500,000 Term Loan. The principal amount of the Term Loan is amortized in sixty equal monthly payments of $58,333. Interest on each of
the facilities is at the LIBOR Rate plus an applicable margin as specified in a pricing grid. The Company is subject to certain financial covenants pursuant to the Agreement, including debt to EBITDA ratio, fixed charge coverage ratio, senior debt
to EBITDA ratio, and net worth requirements. The Credit Facility and Term Loan are secured by the accounts receivable and other assets of the Company. The Company was required by Bank of America to obtain personal guarantees in the amount of
$2,000,000, which the Company procured from two individuals, the Company’s Board member Gerald R. McNichols and the Company’s Investment Banker J. Richard Knop. The compensation during the period of guaranty is in the form of cash and
warrants.
In addition, the Company issued 3,961,060 shares of Common Stock for aggregate consideration of approximately
$3,868,000 through a private placement pursuant to Regulation D under the Securities Act of 1933 consisting of (i) the Company’s Common Stock at a price of $1.14 per share to purchasers who purchased less than $500,000 worth thereof or (ii)
units consisting of Hadron Common Stock and warrants to purchase 0.2061 shares of Hadron Common Stock at an exercise price of $0.02 per share for each share purchased at a price of $1.14 per unit for purchasers who purchased $500,000 or more of the
Company’s equity. Two of such purchasers are directors or affiliates of a director. All of these proceeds were directed to financing the acquisition of Analex.
On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $773,000 with a five-year term, bearing interest at 6%. The Company also entered into
non-competition agreements with these Sellers for total payments of $540,000 over a three-year period. In addition, the Company entered into non-competition agreements with former employees totaling $352,000, on a discounted basis, payable over
various periods.
16
With its purchase of Analex, the Company assumed a note payable to the Department of Justice
(“DOJ”). The agreement provides for quarterly payments of $80,000 consisting of principal and interest at 7% through February 2006, with a final payment due in May 2006.
On November 2, 2001, to assist in financing the acquisition, Dr. C.W. Gilluly, one of the Company’s directors, and J. Richard Knop, President of the Company’s investment
banking firm, Windsor Group, exercised warrants and/or stock options to purchase an aggregate of 247,888 shares of common stock, resulting in proceeds of approximately $200,000.
Contractual Obligations
The
Company has contractual obligations to pay long-term debt, leases and other non-cancelable obligations. The following table aggregates the amounts of these obligations as of December 31, 2001:
| Year
|
|
Long-term debt(1)
|
|
Operating Leases
|
|
Non-compete Agreements
|
|
Total
|
| 2002 |
|
$ |
1,276,600 |
|
$ |
1,022,600 |
|
$ |
261,900 |
|
$ |
2,561,100 |
| 2003 |
|
|
1,107,500 |
|
|
614,500 |
|
|
261,900 |
|
|
1,983,900 |
| 2004 |
|
|
1,122,800 |
|
|
590,700 |
|
|
261,900 |
|
|
1,975,400 |
| 2005 |
|
|
1,141,800 |
|
|
408,300 |
|
|
81,900 |
|
|
1,632,000 |
| 2006 |
|
|
1,015,500 |
|
|
48,300 |
|
|
10,900 |
|
|
1,074,700 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total contractual obligations |
|
$ |
5,664,200 |
|
$ |
2,684,400 |
|
$ |
878,500 |
|
$ |
9,227,100 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include line of credit. |
Payments for long-term debt do not include interest payments. Lease commitments could require higher payments than shown in the table due to escalation provisions that are tied to various measures of inflation. The lease commitments reflect
only existing commitments and do not include future requirements necessary to replace existing leases. In addition to the contractual obligations included above, the Company also has routine purchase order commitments for materials and supplies that
are entered into in the normal course of business and are not in excess of current requirements. Also, pursuant to the purchase of Analex, the Company has guaranteed a minimum sales price ranging from $1.60 to $2.20 per share for 857,143 shares
issued to the sellers, for various periods through 2006.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or
SFAS, No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” Under the new rules, goodwill will no longer be amortized starting in 2002 but will
17
be subject to annual impairment tests. Other intangible asset