10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period from __________ to ___________ Commission file number 0-5404 _____________________ HADRON, INC. (Exact name of registrant as specified in its charter) New York 11-2120726 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5904 Richmond Highway Suite 300 Alexandria, Virginia 22303 (Address of principal executive offices) Registrant's Telephone number including area code (703) 329-9400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ---- ---- As of November 5, 2001, 14,329,930 shares of the Common Stock of the registrant were outstanding. HADRON, INC. TABLE OF CONTENTS Part I Financial Information: Page No. ------- Item 1. Financial Statements Consolidated Balance Sheets at 3 September 30, 2001 and December 31, 2000 Consolidated Statements 5 of Operations for the Three and Nine Months Ended September 30, 2001 and 2000 Consolidated Statements 6 of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 Notes to Consolidated Financial 7 Statements Item 2. Management's Discussion and Analysis 13 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative 17 Disclosure About Market Risk Part II Other Information: Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote 18 of Security Holders Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 HADRON, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 ----------------------------------------
SEPT. 30, 2001 DECEMBER 31, ASSETS (Unaudited) 2000 -------------- ----------- Current assets: Cash and cash equivalents $ 102,300 $ 234,900 Accounts receivable, net 2,881,000 3,237,300 Prepaid expenses and other 473,500 163,800 ----------- ---------- Total current assets 3,456,800 3,636,000 ----------- ---------- Fixed assets, net 256,900 284,800 Goodwill, net 1,557,100 1,809,600 Other 70,800 53,500 ----------- ---------- Total other assets 1,884,800 2,147,900 ----------- ---------- Total assets $ 5,341,600 $5,783,900 =========== ==========
See Notes to Consolidated Financial Statements (Unaudited) 3 HADRON, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 ----------------------------------------
SEPT. 30, 2001 DECEMBER 31, LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) 2000 -------------- ------------ Current liabilities: Accounts payable $ 434,700 $ 529,500 Note payable - line of credit 661,000 907,100 Note payable - current maturity of long-term debt 375,000 500,000 Note payable - related party 100,000 100,000 Convertible notes payable 101,700 - Other current liabilities 1,384,500 1,333,700 ---------- ------------ Total current liabilities 3,056,900 3,370,300 ---------- ------------ Notes payable - 351,700 Other 60,000 60,000 ---------- ------------ Total long-term liabilities 60,000 411,700 ---------- ------------ Commitments and contingencies Total liabilities 3,116,900 3,782,000 ---------- ------------ Shareholders' equity: Common stock $.02 par; authorized 20,000,000 shares; issued and outstanding - September 30, 2001, 6,539,144 shares, and December 31, 2000, 6,450,913 shares 130,800 129,000 Additional capital 1,965,300 11,885,300 Deferred compensation (6,800) - Accumulated deficit (9,864,600) (10,012,400) ---------- ------------ Total shareholders' equity 2,224,700 2,001,900 ---------- ------------ Total liabilities and shareholders' equity $5,341,600 $ 5,783,900 ========== ============
See Notes to Consolidated Financial Statements (Unaudited) 4 HADRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 ---------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues $4,137,300 $4,703,700 $12,724,800 $14,337,700 ---------- ---------- ----------- ----------- Operating costs and expenses: Costs of revenue 3,329,100 4,011,100 10,338,300 11,830,100 Selling, general and administrative 684,000 556,500 2,099,500 2,311,200 ---------- ---------- ---------- ----------- Total operating costs and expenses 4,013,100 4,567,600 12,437,800 14,141,300 ---------- ---------- ---------- ----------- Operating income 124,200 136,100 287,000 196,400 ---------- ---------- ---------- ----------- Other income (expense): Interest expense (net) (25,200) (68,100) (97,200) (226,100) Other income (expense) (44,900) (5,400) (42,000) (200) ---------- ---------- ---------- ----------- Total other expense (70,100) (73,500) (139,200) (226,300) ---------- ---------- ---------- ----------- Income (loss) before income taxes 54,100 62,600 147,800 (29,900) Provision for income taxes - - - 21,300 ---------- ---------- ---------- ----------- Net income (loss) $ 54,100 $ 62,600 $ 147,800 $ (51,200) ========== ========== ========== =========== Per share data: Net income (loss) per share Basic $ 0.01 $ 0.01 $ 0.02 $ (0.01) ========== ========== ========== =========== Diluted $ 0.01 $ 0.01 $ 0.02 $ (0.01) ========== ========== ========== =========== Weighted average number of shares Basic 6,536,276 5,916,209 6,520,040 4,608,111 ========== ========== ========== =========== Diluted 8,186,996 6,605,045 7,971,382 4,608,111 ========== ========== ========== ===========
See Notes to Consolidated Financial Statements (Unaudited) 5 HADRON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 -----------------------------------------------------
Nine Months Ended September 30, 2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 147,800 $ (51,200) ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 352,500 364,000 Stock compensation expense 4,000 - Changes in operating assets and liabilities: Accounts receivable 356,300 (892,200) Prepaid expenses and other (309,700) 20,500 Other assets (17,300) (31,600) Accounts payable (94,800) 448,300 Other current liabilities 50,800 (369,000) Other long-term liabilities - 58,200 ----------- ----------- Total adjustments 341,800 (401,800) ----------- ----------- Net cash provided by (used in) operating activities 489,600 (453,000) ----------- ----------- Cash flows from investing activities: Fixed asset purchases (72,100) (166,400) ----------- ----------- Net cash used in investing activities (72,100) (166,400) ----------- ----------- Cash flows from financing activities: Proceeds from borrowings on bank and other loans 1,347,300 1,926,600 Proceeds from stock options and warrants exercised 3,000 359,200 Proceeds from employee stock purchases 17,900 13,800 Proceeds from sale of stock 50,000 891,300 Payments on bank and other loans (1,968,300) (2,641,100) ----------- ----------- Net cash provided by (used in) financing activities (550,100) 549,800 ----------- ----------- Net decrease in cash and cash equivalents (132,600) (69,600) Cash and cash equivalents at beginning of period 234,900 193,200 ----------- ----------- Cash and cash equivalents at end of period $ 102,300 $ 123,600 =========== ===========
See Notes to Consolidated Financial Statements (Unaudited) 6 HADRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation --------------------- The interim consolidated financial statements for Hadron, Inc. (the "Company") are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the transition period ended December 31, 2000 ("2000 Form 10-K") filed with the Securities and Exchange Commission on May 11, 2001. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statement is expected to result in an increase in net income. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not determined what the effect of these tests will be on the earnings and financial position of the Company. 2. Debt ---- The Company entered into a Loan and Security Agreement dated June 29, 1999 (the "Loan Agreement") with United Bank. The Loan Agreement provided the Company with a $1.5 million line of credit facility (the "Credit Facility") through November 30, 2001, and a three-year $1.5 million term loan (the "Term Loan"). As of September 30, 2001, the outstanding balances of the Credit Facility and Term Loan were $661,000 and $375,000, respectively. On November 7 2, 2001, the Credit Facility and Term Loan with United Bank were paid in full (see "Subsequent Event" footnote). In May 1999, the Company issued three-year $998,000 convertible notes, interest payable at 6%, to the former shareholders of ATI in connection with the Company's acquisition of ATI. The notes are convertible into 444,000 restricted shares of the Company's Common Stock at $2.25 per share. These notes are subordinated to the Company's obligations under the Term Note and the Credit Facility. In May 2000, the Board of Directors adopted resolutions providing for the conversion of the convertible notes on the basis of one share of Common Stock for $1.25 per share if tendered to the Company for conversion before the close of business on June 30, 2000. At June 30, 2000, $846,000 of the convertible notes were converted into 677,000 restricted shares of the Company's Common Stock at the $1.25 per share. As of September 30, 2001, two convertible notes totaling $102,000 remain. In connection with the December 1998 purchase of Vail Research and Technology Corporation ("Vail"), the Company issued two non-interest bearing promissory notes of $300,000 and $100,000, respectively. The $300,000 non- interest bearing note was payable each month in the amount of $25,000 for twelve months and was paid in full in December 1999. The $100,000 non-interest bearing promissory note was due and payable on the two-year anniversary of the closing date, less permitted deductions taken for contingent liabilities and uncollected accounts receivable. The Company is currently reviewing the permitted deductions and the status of the note payable. 3. Earnings Per Share ------------------ The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Numerator: Net Income (Loss) $ 54,100 $ 62,600 $ 147,800 $ (51,200) Denominator: Denominator for basic earnings per share: weighted average shares outstanding 6,536,276 5,916,209 6,520,040 4,608,111 Effect of dilutive securities: Warrants 1,379,396 607,052 1,268,187 Employee stock options 271,324 81,784 183,155 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share 8,186,996 6,605,045 7,971,382 4,608,111 ========== ========== ========== ========== Basic earnings per share $ .01 $ .01 $ .02 $ (.01) ========== ========== ========== ========= Diluted earnings per share $ .01 $ .01 $ .02 $ (.01) ========== ========== ========== ==========
8 Shares issuable upon the exercise of stock options or warrants or upon conversion of debt have been excluded from the computation to the extent that their inclusion would be anti-dilutive. 4. Income Taxes ------------ The provision for income taxes is limited to the liability for alternative minimum tax as the majority of income for federal and state tax purposes has been offset by carrying forward net operating losses. 5. Concentration of Business ------------------------- The Company supports the national security organizations of the United States Government, by providing engineering, information technology, medical research and technical services to these agencies. The Company specializes in developing innovative technical solutions for the intelligence community, analyzing and supporting defense systems, developing medical defenses for biological warfare agents and supporting computer systems. Revenues from services performed under direct and indirect long-term contracts and subcontracts with government defense and intelligence agencies comprise the majority of the Company's business. The majority of the Company's technical and professional services business with governmental departments and agencies is obtained through competitive procurement and through follow-on services related to existing contracts. In certain instances, however, the Company acquires such service contracts because of special professional competency or proprietary knowledge in specific subject areas. 6. Equity Capital -------------- On January 16, 2001 Sterling E. Phillips, Jr. was appointed to the positions of President and Chief Executive Officer of the Company. Mr. Phillips was also elected to serve as a member of the Company's Board of Directors. In connection with his appointment, Mr. Phillips purchased 66,667 shares of the Company's restricted common stock, par value $0.02, for $0.75 per 9 share. As a result of this transaction, the Company recorded deferred compensation of $10,800, $4,000 of which was amortized during the nine months ended September 30, 2001. In addition, Mr. Phillips was awarded a five-year, non-qualified stock option to purchase 875,725 shares of the Company's common stock, par value $0.02, at the exercise price equal to 100% of the fair market value of the common stock on the grant date, exercisable in one-third increments over a two-year period. For shares issued pursuant to the November 2, 2001 acquisition of Analex Corporation ("Analex"), see "Subsequent Event" footnote. 7. Business segments ------------------ The Company has four active reportable segments comprising its individual operating subsidiaries - Advanced Biosystems, Inc. ("ABS"), Avenue Technologies, Inc. ("ATI"), Engineering & Information Services, Inc. ("EISI"), and SyCom Services, Inc. ("SyCom"). Each of the operating segments provides engineering, information technology, medical research or technical services to federal government agencies or major defense contractors. The reportable segments are distinguished by their individual clients, prior experience and technical skills. Operating results are measured at the net income (loss) level for each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Interest on debt incurred in connection with an acquisition and applicable associated goodwill amortization is charged to the reportable segment. The Company's corporate amounts consist primarily of certain activities and assets not attributable to the reportable segments.
HADRON, INC. REPORTABLE SEGMENTS FOR THE THREE AND NINE MONTHS ENDED FASB STATEMENT 131 SEPTEMBER 30, 2001 AND 2000 THREE MONTHS THREE MONTHS ENDED ENDED NINE MONTHS ENDED NINE MONTHS ENDED DESCRIPTON: SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000 ------------------------ -------------- -------------- -------------- -------------- Trade revenues: ABS $ 1,305,300 $ 1,001,600 $ 3,178,600 $ 1,524,400 ATI 757,300 1,263,300 2,800,100 3,840,300 EISI 767,600 1,260,200 2,554,000 5,312,600 SyCom 1,307,100 1,178,600 4,192,100 3,647,700 Corporate 12,700 ----------- ----------- ------------ ----------- Total trade revenues $ 4,137,300 $ 4,703,700 $ 12,724,800 $14,337,700 =========== =========== ============ =========== Net income/(loss): ABS $ 143,400 $ 5,800 $ 256,800 $ (152,400) ATI (42,200) 123,900 (30,200) 105,900 EISI (13,800) 13,000 (2,000) 87,900 SyCom 3,000 (39,100) (21,300) (28,300) Corporate (36,300) (41,000) (98,100) (64,300) ----------- ----------- ------------ ----------- Total net income (loss) $ 54,100 $ 62,600 $ 147,800 $ (51,200) =========== =========== ============ =========== Assets: ABS $ 842,600 $ 1,123,700 $ 842,600 $ 1,123,700 ATI 2,937,000 3,669,400 2,937,000 3,669,400 EISI 531,100 647,500 531,100 647,500 SyCom 626,100 528,900 626,100 528,900 Corporate 404,800 839,100 404,800 839,100 ----------- ----------- ------------ ----------- Total assets $ 5,341,600 $ 6,808,600 $ 5,341,600 $ 6,808,600 =========== =========== ============ ===========
10 8. Subsequent Event ---------------- The Company announced on November 1, 2001 that it had entered into an Agreement and Plan of Merger dated as of October 31, 2001 (the "Plan") with Analex and its equity holders pursuant to which Analex will be merged with and into a wholly-owned subsidiary of the Company. Analex is a privately held engineering 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 shall be subject to a provision by which the Company will guarantee 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 net worth tests, representation and warranties. In addition, the Company issued promissory notes to certain Sellers totaling approximately $773,000 with a five-year term and 11 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 shall be 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 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 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, the Company's director, and J. Richard Knop, President of the Company's investment banking firm, Windsor Group, exercised warrants and/or stock options to purchase an 12 aggregate of 247,888 shares of common stock, resulting in an equity investment of approximately $200,000. Item 2. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations ------------------------- COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenues for the three months ended September 30, 2001 were approximately $4,137,000, a 12% decrease from the period ending September 30, 2000. This decrease is primarily due to the loss of billable technical employees hired by EISI's major client, APL, coupled with revenue decreases at ATI due to customers' budget reductions, partially offset by additional revenue produced by ABS. Costs of revenue for the quarter ended September 30, 2001 were approximately $3,329,000, a decrease of approximately 17% from the same period of the prior year. The decrease is largely due to the lowered personnel costs of EISI partially offset by costs associated with the ABS revenues. Costs of revenue as a percentage of revenues were approximately 80% and 85% for the quarters ended September 30, 2001 and 2000, respectively. Selling, general and administrative expenses totaled approximately $684,000 for the September 30, 2001 quarter, compared with approximately $557,000 for the same period of the prior year. The $127,000 or 23% increase is primarily due to the investments in new business initiatives, including the addition of key business development and marketing executives and internal expenses associated with merger and acquisition activities. Operating profit for the three months ended September 30, 2001 was approximately $124,000, compared to an operating profit of approximately $136,000 for the period ended September 30, 2000. This $12,000 decrease is primarily attributable to the loss of billable technical employees hired by a major client, certain customers' budget reductions, and increased expenses associated with new business initiatives, partially offset by increased profitability produced by ABS. Interest expense totaled approximately $25,000 for the September 30, 2001 quarter, compared with approximately $68,000 for the same period of the prior year. The $43,000, or 63%, decrease is due to the Company's lowered debt obligations. Other expense totaled approximately $45,000 for the September 30, 2001 quarter, compared with approximately $5,000 13 for the same period of the prior year. This increase is primarily due to one-time write-offs. Net income was approximately $54,000 for the quarter ended September 30, 2001, compared to net income of approximately $63,000 for the same period of the prior year. The $9,000 decrease resulted primarily from the loss of billable technical employees hired by a major client, certain customers' budget reductions, and increased expenses associated with new business initiatives, partially offset by increased profitability produced by ABS. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Revenues for the nine months ended September 30, 2001 were approximately $12,725,000, an 11% decrease from the period ending September 30, 2000. This decrease is primarily due to the loss of billable technical employees hired by EISI's major client, APL, coupled with certain customers' budget reductions at ATI, partially offset by additional revenue produced by ABS. Costs of revenue for the nine months ended September 30, 2001 were approximately $10,338,000, a decrease of approximately 13% from the same period of the prior year. The decrease is largely due to the lowered personnel costs of EISI partially offset by costs associated with the ABS revenues. Costs of revenue as a percentage of revenues were approximately 81% and 83% for the nine- month periods ending September 30, 2001 and 2000, respectively. Selling, general and administrative expenses totaled approximately $2,100,000 for the nine months ended September 30, 2001, compared with approximately $2,311,000 for the same period of the prior year. The $211,000, or 9%, decrease is primarily due to the Company's company-wide cost reduction and containment program, partially offset by increased investment in new business initiatives. Operating profit for the nine months ended September 30, 2001 was approximately $287,000, compared to an operating profit of approximately $196,000 for the period ended September 30, 2000. This $91,000 increase is primarily attributable to the Company's indirect cost reductions coupled with increases in the profitability of ABS, partially offset by the loss of billable technical employees hired by a major client, certain customers' budget reductions, and increased expenses associated with new business initiatives. Interest expense totaled approximately $97,000 for the nine months ended September 30, 2001, compared with approximately $226,000 for the same period of the prior year. The $129,000, or $57%, decrease is due to the Company's lowered debt obligations. 14 Other expense totaled approximately $42,000 for the nine months ended September 30, 2001, compared with approximately $200 for the same period of the prior year. This increase is due to one-time write-offs. Net income was approximately $148,000 for the nine months ended September 30, 2001, compared to a net loss of approximately $51,000 for the same period of the prior year. The $199,000 increase resulted from the Company's indirect cost reductions coupled with increases in the profitability of ABS, partially offset by the loss of billable technical employees hired by a major client, certain customers' budget reductions, and increased expenses associated with new business initiatives. CAPITAL RESOURCES AND LIQUIDITY ------------------------------- The working capital at September 30, 2001 increased by approximately $134,000 from December 31, 2000, primarily due to the Company's positive cash flow resulting from its profitability, partially offset by debt pay down and ABS' laboratory equipment purchases. In the three months ended September 30, 2001, the Company recorded a profit of approximately $54,000 and EBITDA, as defined below, of $195,000, after add- backs for interest of $25,000, depreciation of $32,000 and goodwill amortization of $84,000. In the nine months ended September 30, 2001, the Company recorded a profit of approximately $148,000 and EBITDA, as defined below, of $598,000, after add- backs for interest of $97,000, depreciation of $101,000 and goodwill amortization of $252,000. 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 generally accepted accounting principles. EBITDA excludes components that are significant in understanding and assessing the Company's results of operations and cash flows. In addition, EBITDA is considered relevant and useful information, which is often reported and widely used by analysts, investors and other interested parties. Accordingly, the Company is disclosing this information to permit a more comprehensive analysis of the 15 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 provided by operating activities during the nine months ended September 30, 2001 was approximately $490,000, as compared with net cash used of approximately $453,000 during the same period in 2000. Net cash provided by operating activities in the nine months ended September 30, 2001 was primarily the result of operating income and changes in working capital. Net cash used for operating activities in the same period of the prior year was primarily the result of operating losses coupled with changes in working capital. Net cash used for investing activities during the nine months ended September 30, 2001 and 2000 was approximately $72,000 and $166,000, respectively. Net cash used for investing activities in each of these periods was for fixed asset purchases. In the nine months ended September 30, 2001, the Company paid $375,000 to United Bank to pay down its Term Loan, and $72,000 to purchase fixed assets in support of ABS' growth. To provide funding for these obligations, the Company primarily utilized its $223,000 increase in shareholders' equity, resulting from equity transactions of $71,000 and profits of $148,000. The Company entered into a Loan and Security Agreement dated June 29, 1999 (the "Loan Agreement") with United Bank. The Loan Agreement, as amended, provided the Company with a $1.5 million line of credit facility (the "Credit Facility") through November 30, 2001, and a three-year $1.5 million term loan (the "Term Loan"). As of September 30, 2001, the outstanding balances of the Credit Facility and Term Loan were $661,000 and $375,000, respectively. On November 2, 2001, the Company entered into a new credit facility with Bank of America, and the Credit Facility and Term Loan were paid in full (See "Subsequent Event" footnote). In October 2001, ABS was awarded a three-year $800,000 grant by the National Institute of Health to research the medical defenses against Anthrax. For the remainder of 2001, the Company plans to integrate its operations with recently acquired Analex, maintain control over costs, pursue new business opportunities within core competencies and clients, and perform its contracts efficiently. The Company believes its enhanced presence in the intelligence community combined with its bioterrorism defense capabilities will strengthen its position in the homeland security market. 16 Except for the historical information contained herein, the matters discussed in this 10-Q include forward-looking statements that involve a number of risks and uncertainties. There are certain important factors and risks that could cause results to differ materially from those anticipated by the statements contained herein. Such factors and risks include business conditions and growth in the information services, engineering services, software development and government contracting arenas and in the economy in general. Competitive factors include the pressures toward consolidation of small government contracts into larger contracts awarded to major, multi-national corporations; the Company's ability to continue to recruit and retain highly skilled technical, managerial and sales/marketing personnel; and the Company's ability to successfully identify, complete and integrate acquisitions. Other risks may be detailed from time to time in the Company's SEC reports. Item 3. Quantitative and Qualitative Disclosure about Market Risk --------------------------------------------------------- The Company is exposed to market risks related to fluctuations in interest rates on its debt. Increases in prevailing interest rates could increase the Company's interest payment obligations relating to variable rate debt. For example, a 100 basis points increase in interest rates would increase annual interest expense by $10,000. 17 Part II. Other Information Item 1. Legal Proceedings ----------------- No material legal proceedings are currently pending. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits None. (b) Reports on Form 8-K None. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. Date: November 14, 2001 Hadron, Inc. (Registrant) By: /S/ Sterling E. Phillips, Jr. By: /S/ Ronald B. Alexander ----------------------------- ------------------------------- Sterling E. Phillips, Jr. Ronald B. Alexander President and Chief Executive Chief Financial Officer Officer (Principal Financial (Principal Executive Officer) Officer and Principal Accounting Officer) 19