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 March 31, 2002 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 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 April 30, 2002, 14,394,340 shares of the Common Stock of the registrant were outstanding. ================================================================================ HADRON, INC. TABLE OF CONTENTS
Page No. ---- Part I--FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2002 and December 31, 2001............................. 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001........ 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001........ 6 Notes to Consolidated Financial Statements...................................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 13 Item 3. Quantitative and Qualitative Disclosure About Market Risk...................................... 17 Part II--OTHER INFORMATION: Item 1. Legal Proceedings.............................................................................. 18 Item 4. Submission of Matters to a Vote of Security Holders............................................ 18 Item 6. Exhibits and Reports on Form 8-K............................................................... 18 Signatures.............................................................................................. 19
2 HADRON, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, December 31, 2002 2001 ----------- ------------ ASSETS ------ Current assets:.................... Cash and cash equivalents....... $ 362,700 $ 83,100 Accounts receivable, net........ 10,236,700 9,152,800 Prepaid expenses and other...... 488,700 223,300 ----------- ----------- Total current assets........ 11,088,100 9,459,200 ----------- ----------- Fixed assets, net.................. 266,900 260,600 Goodwill and other intangibles, net 16,428,600 16,488,600 Deferred finance costs............. 327,800 72,500 Other.............................. 124,400 119,400 ----------- ----------- Total other assets.......... 17,147,700 16,941,100 ----------- ----------- Total assets................ $28,235,800 $26,400,300 =========== ===========
See Notes to Consolidated Financial Statements 3 HADRON, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, December 31, 2002 2001 ----------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 1,798,900 $ 1,371,400 Note payable--line of credit............................. 2,852,800 1,696,500 Note payable--bank term note............................. 700,000 700,000 Notes payable--other..................................... 836,700 838,500 Other current liabilities................................ 4,720,700 4,779,400 ----------- ----------- Total current liabilities............................ 10,909,100 9,385,800 ----------- ----------- Note payable--bank term note................................ 2,566,700 2,741,600 Notes payable--other........................................ 2,060,600 2,262,600 Other....................................................... 775,200 835,200 ----------- ----------- Total long-term liabilities.......................... 5,402,500 5,839,400 ----------- ----------- Commitments and contingencies Total liabilities.................................... 16,311,600 15,225,200 ----------- ----------- Shareholders' equity: Common stock $.02 par; authorized 20,000,000 shares; issued and outstanding--March 31, 2002 14,394,645 shares and December 31, 2001, 14,375,975 shares................. 287,900 287,500 Additional capital....................................... 21,087,800 20,726,300 Deferred compensation.................................... (19,000) (22,300) Accumulated other comprehensive loss..................... (11,300) -- Accumulated deficit...................................... (9,421,200) (9,816,400) ----------- ----------- Total shareholders' equity........................... 11,924,200 11,175,100 ----------- ----------- Total liabilities and shareholders' equity........... $28,235,800 $26,400,300 =========== ===========
See Notes to Consolidated Financial Statements 4 HADRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
MARCH 31, 2002 2001 ----------- ---------- Revenues.......................................... $13,035,500 $4,229,900 Operating costs and expenses:..................... Costs of revenue............................... 11,028,900 3,505,600 Selling, general and administrative............ 1,252,600 556,600 Amortization of goodwill and other intangibles. 65,500 84,000 ----------- ---------- Total operating costs and expenses................ 12,347,000 4,146,200 ----------- ---------- Operating income.................................. 688,500 83,700 ----------- ---------- Other income (expense):........................... Interest income................................ 100 -- Interest expense............................... (268,500) (38,000) Other expense.................................. (15,400) (24,400) ----------- ---------- Total other expense............................... (283,800) (62,400) ----------- ---------- Income before income taxes........................ 404,700 21,300 Provision for income taxes........................ 9,500 -- ----------- ---------- Net income........................................ $ 395,200 $ 21,300 =========== ========== Net income per share:............................. Basic.......................................... $ 0.03 $ 0.003 =========== ========== Diluted........................................ $ 0.02 $ 0.003 =========== ========== Weighted average number of shares:................ Basic.......................................... 14,385,725 6,505,728 =========== ========== Diluted........................................ 16,796,764 7,731,937 =========== ==========
See Notes to Consolidated Financial Statements 5 HADRON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
MARCH 31, ---------------------- 2002 2001 ----------- --------- Cash flows from operating activities: Net income...................................... $ 395,200 $ 21,300 ----------- --------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation.................................... 29,800 33,500 Amortization of goodwill and other intangibles.. 65,500 84,000 Finance costs................................... 86,400 -- Stock compensation expense...................... 3,300 1,300 Changes in operating assets and liabilities: Accounts receivable......................... (1,083,900) (276,400) Prepaid expenses and other.................. (265,400) (28,500) Other assets................................ (5,000) (200) Accounts payable............................ 427,500 (81,200) Other current liabilities................... (75,400) 101,300 Other long-term liabilities................. (60,000) -- ----------- --------- Total adjustments........................... (877,200) (166,200) ----------- --------- Net cash used in operating activities.............. (482,000) (144,900) ----------- --------- Cash flows from investing activities: Property additions.............................. (36,100) (35,100) ----------- --------- Net cash used in investing activities.............. (36,100) (35,100) ----------- --------- Cash flows from financing activities: Proceeds from borrowings on line of credit, net. 1,156,300 275,200 Proceeds from stock options exercised........... 16,400 -- Proceeds from sale of common stock.............. -- 50,000 Payments on bank loans.......................... (174,900) (125,000) Payments on other loans......................... (200,100) -- ----------- --------- Net cash provided by financing activities.......... 797,700 200,200 ----------- --------- Net increase in cash and cash equivalents.......... 279,600 20,200 Cash and cash equivalents at beginning of period... 83,100 234,900 ----------- --------- Cash and cash equivalents at end of period......... $ 362,700 $ 255,100 =========== =========
See Notes to Consolidated Financial Statements 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, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 ("2001 Form 10-K") filed with the Securities and Exchange Commission on March 26, 2002. 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. Goodwill is no longer being amortized, effective January 1, 2002. If SFAS No. 142 had been adopted at the beginning of 2001, the absence of goodwill amortization would have increased net income by $84,000 for the three months ended March 31, 2001, resulting in pro forma 2001 net income of $105,000 and basic and diluted earnings per share of $.02 and $.01, respectively. 2. Organizational Change The Company entered into an Agreement and Plan of Merger dated October 31, 2001 with Analex Corporation ("Analex") 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 on November 5, 2001. Prior to the acquisition of Analex in November 2001, the Company had four operating segments: Advanced Biosystems, Inc. ("ABS"), Avenue Technologies, Inc. ("ATI"), Engineering & 7 Information Services, Inc. ("EISI"), and SyCom Services, Inc. ("SyCom"). In December 2001, EISI and ATI were merged into Analex. 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. Further, the consolidated financial statements for the three months ended March 31, 2002 include three months of the Aerospace Group, formerly Analex Corporation. The pro-forma results for the three months ended March 31, 2001 include three months of Aerospace Group operations, as if Analex had been acquired on January 1, 2001. 3. Debt On November 2, 2001, to finance the acquisition of Analex, the Company entered into a Credit Agreement ("Agreement") with Bank of America, N.A. The Agreement provides the Company with a $4,000,000 revolving credit facility (the "Credit Facility") through November 2, 2006 and a five-year $3,500,000 term loan ("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. As of March 31, 2002, the Credit Facility and Term Loan balances were $2,853,000 and $3,267,000, respectively. The interest rate at March 31, 2002 was 4.63% for the Credit Facility and 5.12% for the Term Loan. 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's $3.5 million Term Loan facility from Bank of America carries interest comprised of two components: floating-rate LIBOR plus a credit performance margin. The Company has entered into an interest-rate swap agreement with Bank of America whereby its obligation to pay floating-rate LIBOR on debt totaling $2,950,000 is swapped into a fixed rate obligation at 4.25% beginning in January 2002. The Company continues to have the obligation to pay the credit performance margin in addition 8 to its swapped 4.25% payment obligation. The total effective interest rate on the swapped portion of the Term Loan amounted to 7.5% at March 31, 2002. The Company's comprehensive income for the three months ended March 31, 2002 was $384,000, which includes net income of $395,000 and other comprehensive loss of $11,000 arising from the interest rate swap. On November 2, 2001, the Company issued promissory notes to certain Analex sellers totaling $772,600 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. 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. The DOJ note payable balance was $1,092,000 as of March 31, 2002. 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 Hadron 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 March 31, 2002, 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. 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. On April 15, 2002, the Company satisfied its obligations with a payment of $30,000. 9 4. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31, ---------------------- 2002 2001 ----------- ---------- Numerator: Net Income..................... $ 395,200 $ 21,300 Denominator: Denominator for basic earnings per share: weighted average shares outstanding..... 14,385,725 6,505,728 Effect of dilutive securities: Warrants................................ 1,766,658 1,115,190 Employee stock options.................. 644,381 111,019 ----------- ---------- Denominator for diluted earnings per share 16,796,764 7,731,937 =========== ========== Basic earnings per share.................. $ .03 $ .003 =========== ========== Diluted earnings per share................ $ .02 $ .003 =========== ==========
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. 5. Income Taxes The provision for income taxes is limited to state taxes and 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. 6. Concentration of Business 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. 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 10 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. 7. Equity Capital Pursuant to the November 2, 2001 acquisition of Analex, the Company issued 3,572,143 shares of the Company's Common Stock to the shareholders representing all of the outstanding equity of Analex (the "Sellers"). Of the 3,572,143 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 ("Guaranteed Shares"), if such shares are sold within such period and if certain other conditions are satisfied. 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 president of the Company's investment banker, J. Richard Knop. The compensation during the period of guaranty is in the form of cash and warrants. In January 2002, 198,522 total warrants were issued pursuant to the guaranty. The Company recorded interest expense of $86,000 in the three months ended March 31, 2002 related to the issuance of warrants. 8. Business segments The Company has four active reportable segments, comprising its individual operating units - ABS, the Homeland Security Group, the Aerospace Group and the Corporate Pool. 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. 11 HADRON, INC. REPORTABLE SEGMENTS FASB STATEMENT 131
THREE THREE MONTHS MONTHS ENDED ENDED MARCH 31, MARCH 31, 2002 2001 ----------- ---------- DESCRIPTON: Trade revenues: ABS.................... $ 1,570,200 $ 711,600 Homeland Security Group 3,133,800 3,518,300 Aerospace Group........ 8,331,500 Corporate.............. ----------- ---------- Total trade revenues... $13,035,500 $4,229,900 =========== ========== Net income/(loss): ABS.................... $ 62,300 $ (28,700) Homeland Security Group 199,700 76,200 Aerospace Group........ 429,800 Corporate.............. (296,600) (26,200) ----------- ---------- Total net income....... $ 395,200 $ 21,300 =========== ========== Assets: ABS.................... $ 1,034,700 $ 517,300 Homeland Security Group 3,874,000 5,091,200 Aerospace Group........ 21,332,700 Corporate.............. 1,994,400 418,300 ----------- ---------- Total assets........... $28,235,800 $6,026,800 =========== ==========
9. Acquisitions Effective November 2001, the Company acquired Analex, a professional services and program management firm whose principal customers are NASA and the U.S. intelligence community, for approximately $12,898,000. The purchase price was satisfied with cash payments of $6,510,000, 3,572,143 shares of Common Stock valued at $4,723,000, the issuance of promissory notes of $773,000, non-compete arrangements of $892,000, and the satisfaction of other certain liabilities of Analex. The purchase price is subject to additional contingent consideration related to certain contract rights. The acquisition of Analex should increase the Company's presence in the intelligence community and provide an additional earnings base from which the Company can grow. 12 The fair value of the assets acquired and liabilities assumed approximated their book value of $5,058,000 and $6,647,000, respectively. The Company incurred financial, legal and accounting costs associated with the Analex purchase of approximately $570,000. Resulting from the acquisition of Analex, the Company recorded goodwill and other intangibles of approximately $15,057,000. The purchase price has not yet been finalized due to certain contingencies associated with contract rights and other potential adjustments. Accordingly, the final purchase price allocation has not been completed. Goodwill related to the acquisition of Analex in November 2001 is subject to SFAS 142, and accordingly has not been amortized. Other intangible assets identified in connection with the acquisition, including non-compete arrangements and contractual relationships, are amortized on a straight-line basis over their estimated lives ranging from three to ten years. The following table sets forth pro forma results of operations of the Company for the three months ended March 31, 2001, as if Analex had been acquired on January 1, 2001:
Quarter ended March 31, 2001 -------------- Revenue.............. $12,934,300 Operating income..... 347,000 Net income........... 23,900 Net income per share: Basic................ .002 Diluted.............. .002
13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 TO THE THREE MONTHS ENDED MARCH 31, 2001 Revenues for the three months ended March 31, 2002 were approximately $13,036,000, an increase of approximately $8,806,000 from the period ended March 31, 2001. This increase is primarily due to revenues of $8,332,000 generated by the Aerospace Group, formerly Analex Corporation, acquired in November 2001, coupled with the increased revenues of ABS, partially offset by decreased revenues of the Homeland Security Group. Revenues increased $101,000, or 1%, in the quarter ended March 31, 2002 as compared to the pro-forma revenues for the same period in 2001. Costs of revenue for the quarter ended March 31, 2002 were approximately $11,029,000, an increase of approximately $7,523,000 from the same period of the prior year. The increase is largely 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 85% and 83% for the quarters ended March 31, 2002 and 2001, respectively. Selling, general and administrative expenses, including amortization of goodwill and other intangibles, totaled approximately $1,318,000 for the March 31, 2002 quarter, compared with approximately $641,000 for the same period of the prior year.The $677,000 increase is primarily due to the addition of the Aerospace Group's costs and costs related to key finance, business development and marketing positions filled. Operating income for the three months ended March 31, 2002 was approximately $689,000, compared to operating income of approximately $84,000 for the period ended March 31, 2001. This $605,000 increase is primarily attributable to the profitability of the Aerospace Group, coupled with increased profitability of ABS and the Homeland Security Group. Operating income increased $342,000, or 99%, in the quarter ended March 31, 2002 as compared to the pro-forma revenues for the same period in 2001. Interest expense totaled approximately $268,000 for the March 31, 2002 quarter, compared with approximately $38,000 for the same period of the prior year. The $230,000 increase is due to the Company's increased debt obligations and financing commitments associated with the acquisition of Analex. Net income was approximately $395,000 for the quarter ended March 31, 2002, compared to net income of approximately $21,000 14 for the same period of the prior year. The $374,000 increase resulted primarily from the net income of $430,000, $62,000, and $200,000 produced by the Aerospace Group, ABS and Homeland Security Group, respectively, partially offset by the increased interest and finance costs associated with the Analex acquisition. Net income increased $371,000 in the three months ended March 31, 2002 as compared to the pro-forma net income for the same period in 2001. CAPITAL RESOURCES AND LIQUIDITY The working capital at March 31, 2002 increased by approximately $106,000 from December 31, 2001, primarily due to the Company's net income, partially offset by debt pay down of $375,000. In the three months ended March 31, 2002, the Company recorded net income of approximately $395,000 and EBITDA, as defined below, of $784,000, after add-backs for interest of $268,000, depreciation of $30,000, amortization of $66,000, income taxes of $10,000, and other expenses of $15,000. 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 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 during the three months ended March 31, 2002 was approximately $482,000, as compared with net cash used of approximately $145,000 during the same period in 2001. Net cash used in investing activities during the three months ended March 31, 2002 and 2001 was approximately $36,000 15 and $35,000, respectively. Net cash used in investing activities in each of these periods was for fixed asset purchases. 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. For the remainder of 2002, the Company plans to finalize the integration of its operations with Analex, maintain control over costs, pursue new business opportunities within core competencies and clients, and perform its contracts efficiently. The Company, through its acquisition of Analex, expects to concentrate in the aerospace niche of homeland security. 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. 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. The Company limits these risks by following established risk management policies and procedures including the use of an interest rate swap on $2,950,000 of its $3,500,000 Term Loan to manage, or hedge, interest rate risk. The Company does not enter into derivative 16 instruments for speculative purposes. The Company requires that the hedging derivative instruments are effective in reducing the interest rate risk exposure. The effectiveness is essential for qualifying for hedge accounting. Changes in the hedging instruments fair value related to the effective portion of the risk being hedged are included in accumulated other comprehensive income (loss). In conjunction with the Company's policy to reduce interest rate risk, the Company entered into an interest rate swap in conjunction with its Term Loan to hedge the variability of monthly cash outflows attributable to changes in LIBOR. The swap effectively locks LIBOR at 4.25% plus the credit performance margin. Increases in prevailing interest rates on other debt could increase the Company's interest payment obligations relating to variable debt. For example, a 100 basis point increase in interest rates would increase annual interest expense by $32,000. 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: May 7, 2002 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 Officer and (Principal Executive Officer) Principal Accounting Officer) 19