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 [FEE REQUIRED]
For the quarter ended April 30, 1995 Commission File Number 0-8193
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from -------- to --------
DAEDALUS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-1873250
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. Box 1869
Ann Arbor, Michigan 48106 (313) 769-5649
(Address of principal executive offices) (Registrant's telephone number)
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 ( )
Number of shares outstanding of common stock, $.01 par value, as
of June 13, 1995: 514,913 shares
PART I - FINANCIAL INFORMATION
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
Nine Months Ended Three Months Ended
April 30, April 30,
1995 1994 1995 1994
Revenue-Standard Products $ 225,840 $1,103,669 $85,042 $337,284
Revenue-Product Development 1,074,665 1,594,587 458,264 364,890
--------- --------- ------- -------
1,300,505 2,698,256 543,306 702,174
Other Income 8,333 6,069 1,931 1,477
--------- --------- ------- -------
1,308,838 2,704,325 545,237 703,651
Cost and Expenses
Cost of revenue - standard
products 154,533 413,121 67,493 107,112
Cost of revenue - product
development 650,382 1,459,636 267,436 393,575
Research and development 510,186 211,246 59,133 86,234
Selling and administrative 956,906 859,487 260,963 278,824
Interest 57,506 24,537 24,911 9,965
-------- --------- ------- -------
2,329,513 2,968,027 679,936 875,710
--------- --------- ------- -------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (1,020,675) (263,702) (134,699) (172,059)
Credit for Income Taxes -
Note F (347,000) (102,000) (46,000) (73,000)
----------- --------- -------- --------
LOSS BEFORE CUMULATIVE
CHANGE IN ACCOUNTING PRINCIPLE (673,675) (161,702) (88,699) (99,059)
Cumulative Change in
Accounting Principle Net of
Approximately $9,000 of Income
Taxes - Note B 0 22,187 0 0
---------- ---------- --------- --------
NET LOSS $(673,675) $(139,515) $(88,699) $(99,059)
========== ========== ========= =========
Loss Per Share Before Change
in Accounting Principle $(1.31) $(0.32) $(0.17) $(0.20)
Cumulative Effect of Change
in Accounting Principle -
Note B 0.00 0.04 0.00 0.00
-------- ------- ------- -------
NET LOSS PER SHARE $(1.31) $(0.28) $(0.17) $(0.20)
========= ======= ======= =======
DIVIDENDS DECLARED PER SHARE $0.08 $0.15 $0.00 $0.08
========= ======= ======= ======
Pro Forma Amounts Assuming the
Change in Accounting Principle
is Applied Retroactively
NET LOSS $(673,675) $(161,702) $(88,699) $(99,059)
========== ========== ========= =========
NET LOSS PER SHARE $(1.31) $(0.32) $(0.17) $(0.20)
========== ========== ========= =========
The accompanying notes are an integral part of these condensed financial
statements
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
April 30, July 31,
1995 1994
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 79,938 $ 163,158
Accounts receivable, less allowance
of $2,500 140,500 661,427
Unbilled accounts receivable - Note C 192,816 113,128
Inventories - Note D 1,373,510 1,111,637
Income tax receivable 0 223,946
Deferred tax asset 398,212 92,000
Other current assets 18,248 30,464
---------- ----------
TOTAL CURRENT ASSETS 2,203,224 2,395,760
Property and Equipment - Note E
Land 177,131 177,131
Building 1,432,661 1,432,661
Machinery and equipment 1,065,645 1,190,708
Special equipment 465,620 218,805
---------- ---------
3,141,057 3,019,305
Less accumulated depreciation (1,688,005) (1,573,470)
----------- -----------
1,453,052 1,445,835
Other Assets 130,867 199,639
----------- -----------
$ 3,787,143 $ 4,041,234
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank - Note G $ 882,000 $ 125,000
Accounts payable 145,590 75,943
Accrued contract costs 22,950 87,850
Compensation and related accounts 152,785 151,252
Customer deposits 0 156,099
Accrued commission 8,127 69,058
Reserve for product warranties 5,002 90,425
Other accrued liabilities 56,515 41,183
Current portion of long-term debt 290,661 36,857
--------- -------
TOTAL CURRENT LIABILITIES 1,563,630 833,667
Long-term Debt 0 278,422
Deferred Income Taxes 99,000 99,000
Stockholders' Equity
Common stock, $.01 par value
Authorized--2,000,000 shares
Issued and outstanding-- 514,913 shares
July 31, 1994--511,533 shares) 5,149 5,115
Additional paid-in capital 1,113,131 1,104,145
Retained earnings 1,006,233 1,720,885
--------- ---------
2,124,513 2,830,145
--------- ---------
$ 3,787,143 $ 4,041,234
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Increase (Decrease) in Cash
Nine Months Ended
April 30,
1995 1994
Operating Activities
Net loss before cumulative effect of
change in accounting principal - Note B $ (673,675) $ (161,702)
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation 114,967 140,749
Amortization of software 64,317 74,489
Net book value of special equipment
transferred to inventory -Note E 0 124,466
Loss on disposal of property and equipment 0 129
Decrease (increase) in accounts receivable* 441,239 (287,691)
Increase in inventory* (261,873) (100,148)
Increase in deferred tax asset (306,212) 0
Decrease (increase) in income tax receivable 223,946 (78,133)
Decrease in other assets 16,671 13,871
Decrease in accounts payable and accrued
expenses* (124,742) (111,251)
Increase (decrease) in customer deposits* (156,099) 126,722
--------- ---------
CASH USED IN OPERATING ACTIVITIES (661,461) (258,499)
Investing Activities
Purchase of property and equipment (122,184) (171,271)
Investment in capitalized software 0 (44,692)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (122,184) (215,963)
Financing Activities
Proceeds from revolving line of credit 2,087,000 580,000
Payments on revolving line of credit (1,330,000) (580,000)
Payments on long-term debt (24,618) (28,165)
Payments of dividends (40,977) (76,189)
Proceeds of stock issued pursuant to
stock option and stock purchase plan 9,020 4,257
---------- ---------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 700,425 (100,097)
---------- ---------
Decrease in Cash (83,220) (574,559)
Cash and Cash Equivalents at Beginning of Year 163,158 918,019
---------- ---------
CASH AND CASH EQUIVALENTS AT END
OF QUARTER $ 79,938 $343,460
========== =========
*Excluding effect of accounting change in the nine months ended April 30,
1994.
The accompanying notes are an integral part of these condensed
financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 30, 1995
Note A - Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the results of operations, financial position and cash flows
for the periods presented. The accompanying unaudited financial statements
have been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information necessary to be in conformity with
generally accepted accounting principles.
Reference is made to the Notes to Consolidated Financial Statements in
the Annual Report to Stockholders for the year ended July 31, 1994.
The results of operations for the nine and three months ended April 30,
1995 are not necessarily indicative of the results to be expected for the full
year.
Note B - Revenue Recognition
Effective August 1, 1993, the Company changed from completed component
to cost incurred as a percentage of the total estimated cost as the method for
determining percentage completion for revenue recognition on standard product
contracts. The Company believes that, due to the increased complexity of its
standard product contracts,percentage-of-completion, based on cost incurred as
a percentage of total estimated cost, provides a better matching of revenue
and earnings with the related economic activity of the Company.
The cumulative effect of this accounting change at August 1, 1993
reduced the loss by $22,187 or $.04 per share for the nine months ended April
30, 1994.
Note C - Unbilled Accounts Receivable
Unbilled accounts receivable represent the revenue recognized pursuant
to standard system contracts and customer-funded product development contracts
using the percentage-of-completion method but which are not yet billable under
the terms of the contract. These amounts are billable based on contract terms
either upon shipment of the items, presentations of invoices, or completion of
the contract. The cost of such revenue is determined generally by separate
job cost accounts and involves no deferral of cost. If the estimated total
costs on any contract indicate a loss, the entire amount of the estimated loss
is recognized immediately (see Note B).
Note D - Inventories
Inventory includes work-in-process of approximately $770,000 and
$518,000 as of April 30, 1995 and July 31, 1994, respectively. The remaining
inventory consists of parts and subassemblies, both purchased and
manufactured, that could be used in the manufacturing process or sold as spare
parts.
Note E - Property and Equipment
Property and equipment is stated at cost. Property and equipment is
depreciated over the useful life by the straight-line method for financial
reporting purposes. Machinery and equipment includes construction-in-
progress, relating to a multispectral scanner, at July 31, 1994 in the
amount of approximately $143,000.
Special equipment consists of equipment manufactured by the Company and
includes direct manufacturing costs and overhead. Such equipment which is
used in manufacturing or research activities of the Company is normally
offered for sale by the Company. Therefore, revenue from the sale of such
equipment is included in sales and the depreciated cost is in cost of sales.
During the nine month period ended April 30, 1994, the Company transferred to
work-in-process one such system with a cost of approximately $124,000.
Note F - Income Taxes
The Company's provision for income taxes for the periods ended April 30,
1995 and 1994 was determined using the Company's estimated annual effective
rate. The difference in fiscal 1994 between the Company's effective rate and
the statutory rate of 34% is primarily due to the tax benefit of a foreign
sales corporation.
Note G - Revolving Credit
On April 30, 1995, the Company had a $3,000,000 line of credit with a
bank, bearing interest at one-half percent above the bank's prime rate. The
Company had an outstanding balance under this line of credit of approximately
$882,000 with an additional $79,420 of the line reserved to support an
existing standby letter of credit. The outstanding balance was $125,000 at
July 31, 1994.
On November 30, 1994, the Company and the bank amended the line of
credit agreement with availability on the $3,000,000 line subject to a
formula. The formula is $1,120,000 plus 75% of qualified accounts receivable
and 50% of qualified unbilled accounts receivable. As of April 30, 1995, the
total availability, pursuant to the formula, is approximately $1,332,000. The
line of credit includes certain covenants, some of which require the Company
to maintain certain tangible net worth amounts, which increase over the life
of the contract, and a certain liquid asset ratio. As of April 30, 1995, the
bank has waived the Company's noncompliance with the tangible net worth and
liquid asset to current liabilities covenants in the Company's line of credit
resulting from the loss in the third quarter of fiscal 1995. The Company's
next covenant measurement date is July 31, 1995.
Note H - Earnings Per Share
The computation of net earnings per share is based on the weighted
average number of shares of common stock outstanding during the nine and three
month periods ended April 30, 1995 and 1994. The weighted average number of
shares used in the computation was 512,739 and 505,602 for the nine months
ended as of April 30, 1995 and 1994, respectively, and 514,097 and 505,856 for
the three months ended as of April 30, 1995 and 1994, all of which were issued
and outstanding. No adjustments were made to either net loss or the number of
shares outstanding in calculating earnings per share as such adjustments would
have been antidilutive.
There was no material difference between primary and fully diluted
earnings per share for the periods ended April 30, 1995 and 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company manufactures products for, and performs development projects
in, the field broadly described as "remote sensing". The principal products
manufactured by the Company are airborne imaging systems which are installed
in aircraft for acquisition of data on environmental parameters. A principal
application of the Company's remote sensing products has been the measurement
of environmental parameters in support of pollution control programs and
environmental impact studies.
The Company is also engaged in customer-funded projects for the
development of advanced equipment in the remote sensing field. Some of these
projects may lead to the incorporation of newly developed technology into
existing or future product lines. These two portions of the business are
conducted by the same pool of personnel using the same equipment and operating
space and constitute a single industry segment.
The margins associated with these two portions of the business are
different, with standard products generally having higher margins than
customer-funded development projects. Standard product revenues are generally
of high dollar value, with each contract representing a substantial portion of
total sales each year. Therefore, the timing of the receipt of a standard
product sales contract as well as the related manufacturing endeavor can have
a material impact on a quarter-to-quarter or year-to-year comparison of the
Company's results of operations. Most standard product sales contracts and
some customer-funded product development contracts are also accompanied by a
significant deposit. Therefore, the timing of the contract receipt can have a
material impact on the Company's cash flow. The results for the remainder of
fiscal 1995 will be largely dependent upon the receipt and the timing of the
receipt of potential contracts currently under discussion. See "Business
Development - New Orders and Backlog".
Operating Revenue
Both standard product and product development revenue for the nine
months ended April 30, 1995 were substantially less than that for the
comparable period of fiscal 1994 due to reduced backlog at the beginning of
fiscal 1995 and delays in booking new standard product contracts.
Customer-funded product development revenue decreased in the nine months ended
April 30, 1995 as compared to the same period of fiscal 1994 for the same
reasons. Customer-funded product development revenue increased in the quarter
ended April 30, 1995 as compared to the same quarter of fiscal 1994 due
primarily to the low level of standard product workload allowing the Company
to focus additional resources on customer-funded product development revenue
in the three months ended April 30, 1995.
Approximately $795,000 and $264,000 of the standard product revenue
earned in the nine months and quarter ended April 1994 was related to a
contract on which the Italian customer eventually defaulted in late fiscal
1994 (the "Defaulted Contract"). As was the case in the first nine months of
fiscal 1994, the majority of the revenue earned in the first nine months of
fiscal 1995 was attributable to contracts received prior to the beginning of
the fiscal year. See "Business Development - New Orders and Backlog".
The level of the Company's revenues and profits has historically
fluctuated from quarter-to-quarter and from year-to-year as the majority of
its revenue is derived from a small number of high dollar value equipment
sales to a relatively small number of customers. Such fluctuations are normal
given the Company's reliance on a small number of high value contracts for the
majority of its revenue. See "Business Development - Growth Plan", but
current levels of revenue are not adequate to sustain the Company, see
"Business Development - New Orders and Backlog" and "Liquidity and Sources of
Capital".
Standard Product vs. Customer-Funded Product Development Revenue and Margins
Standard product revenue declined substantially in the three and nine
month periods ended April 30, 1995 as compared to the same periods of fiscal
1994 due to the low level of standard product orders in the Company's backlog
at the beginning of fiscal 1995 and the low level of standard product orders
received in the first nine months of fiscal 1995. Standard product margins
decreased significantly due to the lack of any major standard product
contracts in fiscal 1995. Approximately $795,000 of standard product revenue
and $233,000 of standard product cost of revenue during the first nine months
of fiscal 1994 were related to the Defaulted Contract. See "Business
Development - New Orders and Backlog" for a further discussion of this
contract. Standard product contracts generally have a much higher margin than
product development contracts. Therefore, it is a goal of Management to
increase the percentage of revenue derived from standard product contracts.
Another goal of management is to develop new products that will reduce the
fluctuations in standard product revenue between periods while increasing the
Company's profits. See "Business Development - Growth Plan".
Customer-funded product development revenue generated 83% and 84% of
operating revenue during the nine and three month periods ended April 30,
1995, respectively, as compared to 59% and 52% of operating revenue during the
comparable periods of fiscal 1994, respectively, but declined overall by 33%
in the first nine months of fiscal 1995 due to the low level of backlog at the
beginning of the fiscal year and the low level of product development orders
received in the first nine months of fiscal 1995. Customer-funded product
development revenue increased by 26% in the third quarter of fiscal 1995 as
compared to the comparable period of fiscal 1994 as the low level of standard
product workload allowed the Company to focus additional resources on
customer-funded product development contracts. Margins during such periods in
fiscal 1995 improved over the comparable periods in fiscal 1994 due to cost
overruns on the development of MIVIS and its related image processing system
in fiscal 1994. The customer-funded product development contract for the
development of MIVIS accounted for approximately 19% and 3% of operating
revenue for the nine and three month periods ended April 30, 1994,
respectively. This contract was completed in fiscal 1994 and therefore did
not generate any revenue in fiscal 1995.
Domestic vs. International Sales and Revenue
International revenue accounted for 14% and 54% of operating revenue
during the first nine months fiscal 1995 and 1994, respectively, while
generating 20% and 43% of operating revenue during the third quarters of
fiscal 1995 and 1994, respectively. Had the Company not recognized revenue on
the Defaulted Contract in the nine and three month periods ended April 30,
1994, international customers would have accounted for approximately 35% and
8% of operating revenue in the nine and three month periods ended April 30,
1994, respectively. Historically, the majority of the product development
projects received by the Company have been received from domestic customers,
and the majority of major standard product contracts have been received from
international customers. For this reason, the level of international sales
tends to mirror the level of standard product revenue. Management is hopeful
that the international market will be a major source of revenue in the
remainder of fiscal 1995 and future years. See "Business Development - New
Orders and Backlog".
To insure against foreign currency transaction losses, international
contracts are denominated in U.S. dollars and large standard product contracts
are generally secured by irrevocable letters of credit. The Company also
receives substantial deposits on many large contracts with international
customers. Many such deposits are backed up by standby letters of credit
issued by the Company.
Other Revenue
Other income, for the periods presented, is comprised principally of
interest and rental income. The level of interest income is determined by
cash on hand and interest rates. The timing of contract receipt and level of
deposits received have a substantial impact on such income. The Company does
not expect significant interest or rental income for the remainder of the
current fiscal year.
Major Customers
The customers to whom the Company sells change from year to year. No
single customer has generated a majority of the Company's revenue during any
consecutive years. The U.S. government accounted for a majority of the
Company's operating revenue in both fiscal 1994 and the first nine months of
fiscal 1995. It is too early to determine what impact, if any, the attempts
to balance the federal budget may have on the Company's revenue in the short
or long term.
Although Italian customers have been an important source of revenue for
the Company in recent years, generating 49% and 42% of operating revenue for
the nine and three month periods ended April 30, 1994, respectively, such
customers generated only 5% and 11% of operating revenue during the comparable
periods of fiscal 1995. Had the Company not recognized revenue on the
Defaulted Contract in fiscal 1994, Italian customers would have accounted for
28% and 6% of operating revenue during the nine and three month periods ended
April 30, 1994, respectively. Sales to Italian customers are expected to
generate a significant percentage of revenue in the remainder of fiscal 1995
as the Company expects to substantially complete the Defaulted Contract prior
to fiscal year-end. See "Business Development - New Orders and Backlog".
Business Development
Growth Plan
One challenge facing the Company is to develop additional markets that
will allow future growth in revenues and profits. Management has developed a
three-pronged growth plan to add revenue and profits to the Company's current
core business.
In furtherance of the growth plan, the Company successfully tested the
Airborne Digital Camera during fiscal 1995 and delivered its first production
version in March 1995. The Company is studying various methods of
capitalizing on this new product, including selling it and using it to
establish a service segment. The Company is researching various image
processing and Geographic Information System packages that may be bundled with
the camera developed by the Company.
The Company is exploring various avenues of establishing a domestic
and/or international remote sensing service program, including the formation
of partnerships and joint ventures. The Company has also hired a consultant
to help the Company in developing strategies for the exploitation of the
domestic and international airborne remote sensing markets. The Company has
built an Airborne Multispectral System (AMS) that it intends to use in
performing domestic and international remote sensing service programs.
If successful, these strategies are expected to reduce fluctuations in
the Company's revenue and earnings and enhance the Company's profitability and
shareholder value. Although the Company has received one contract for a
domestic environmental monitoring project and hopes to receive additional
contracts for domestic pilot projects in fiscal 1995, revenues are not
expected to be affected materially until at least late fiscal 1996.
New Orders and Backlog
In the nine months ended April 30, 1995, the Company received orders in
the amount of approximately $604,000 as compared to approximately $2,426,000
in the first nine months of fiscal 1994. Included in the orders received in
the first nine months of fiscal 1994 was the Defaulted Contract for
approximately $1,031,000. The Company's backlog at April 30, 1995 was
approximately $222,000 as compared to approximately $1,622,000 one year
earlier. Included in the backlog amount at April 30, 1994 was $236,000
relating to the Defaulted Contract. Subsequent to April 30, 1995, the Italian
customer of the Defaulted Contract expressed its intent to reaffirm its order.
In addition, the Company and its customer preliminarily agreed to a price
increase of approximately $46,000, and the Company has removed the $928,000
relating to the Defaulted Contract from its April 30, 1995 backlog. The
Company expects to receive an acceptable letter of credit from this customer
that will allow the Company to ship the two systems ordered, which are
nearly complete, prior to July 31, 1995, although no assurances can be given
that this contract will be favorably settled. Management will not ship these
systems to their original customer without assurance of payment.
On June 12, 1995, the Company received the long-delayed standard
product order for approximately $1,600,000 and the Company expects to soon
receive a substantial downpayment thereon. As the Company has already
completed most of this system, the Company expects to be able to recognize
a large portion of this contract in fiscal 1995.
The Company continues to be engaged in substantive discussions for an
additional substantial standard product order, which would rank among the
largest orders ever received by the Company. The Company has begun production
for the anticipated standard product order, therefore, the Company will be
able to recognize revenue immediately upon signing it to the extent completed
at that time. However, Management does not anticipate receiving this
anticipated standard product contract in fiscal 1995, or that it will
contribute significantly to fiscal 1995 revenue even if received before the
end of the fiscal year. As is normally the case, the Company is engaged in
discussions with other potential standard product customers and hopes that
these discussions may result in one or more standard product contracts
in the near future. There can be no assurance that the above orders will be
received.
During the first nine months of fiscal 1995, backlog was consumed faster
than orders were received. The rate at which orders were received during the
first nine months of fiscal 1995 was below the level required for the Company
to be profitable. The Company expects to consume all of its April 30, 1995
backlog, and it expects to substantially complete the long-delayed contract
and the Defaulted Contract in fiscal 1995. Approximately $185,000 of the
April 30, 1995 backlog consists of lower margin customer-funded development
contracts. Of the $604,000 bookings received by the Company in the first nine
months of fiscal 1995, approximately $365,000 was in customer-funded product
development, with the remainder for standard products.
As the Company expects to consume its April 30, 1995 backlog and to
substantially complete the Defaulted Contract and the long-delayed contract in
fiscal 1995, the Company will begin the next fiscal year with a very small
backlog unless it receives another substantial order before fiscal year end.
The Company's continued viability depends upon receiving significant orders in
the next few months. Management is hopeful that such orders will be received
and that the Company will remain a going concern, although no assurances can
be given.
The results of operations for future periods are dependent upon the
receipt of future orders, their timing, and securing payment for the Defaulted
Contract. The Company's long term success is also dependent on the success of
Management's growth strategy.
Research and Development
The majority of the Company's investment into research and development
in the first nine months of fiscal 1995 was related to the development of the
Airborne Digital Camera while the majority of the research and development
expenditures in the third quarter related to the improvement of one of the
Company's standard airborne remote sensing systems. Research and development
expense increased by over 140% in the nine month period ended April 30, 1995
as compared to the same period one year earlier while decreasing by 31% in the
quarter then ended as compared to the same quarter of fiscal 1994. The
substantial increase in research and development expense in the nine month
period ended April 30, 1995 over the comparable period of fiscal 1994 would
not have been possible if the Company had a significantly higher level of
customer orders and backlog during the period. The Company expects research
and development costs to remain relatively high in fiscal 1995 as the Company
works toward accomplishing its growth plan. See "Business Development -
Growth Plan".
Selling and Administrative Expense
Selling and administrative expense increased by 11% in the nine months
ended April 30, 1995 but decreased by 6% in the quarter then ended as compared
to the same periods one year earlier. The increase for the nine month period
was primarily due to increased expenditures on marketing partially offset by
a decline in commission expense resulting from a decline in international sales
and revenue. The decline in the three month period was primarily due to a
decline in commission expense partially offset by increases in other marketing
costs. The level of commission expense and the total of selling and
administrative expense for the remainder of fiscal 1995 will be highly
dependent upon the favorable settlement of the Defaulted Contract and are
likely to be higher than that experienced in the previous quarters of fiscal
1995. Selling and administrative expense is likely to remain above the fiscal
1994 level if the Defaulted Contract is favorably settled in fiscal 1995,
or if the Company receives standard product contracts as hoped. Included in
selling and administrative expense for the nine and three month periods
ended April 30, 1994 was commission expense relating to the Defaulted
Contract of approximately $119,000 and $40,000, respectively. See "Business
Development - New Orders and Backlog".
Interest
Interest expense increased in fiscal 1995 as compared to fiscal 1994 due
principally to the Company's use of its line of credit. Interest expense for
the remainder of fiscal 1995 will be dependent upon future interest rates and
the extent of the Company's utilization of its line of credit during this
fiscal year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's primary sources of liquidity are funds from operations and
a $3,000,000 secured line of credit with availability subject to a formula.
The line of credit expires on November 30, 1995, and borrowings thereunder
bear interest at one-half percent over the bank's prime rate (9.5% at April
30, 1995). When necessary, the Company has used short-term borrowings to
finance cash shortfalls. At April 30, 1995, the Company had $882,000
outstanding under the line of credit and $79,000 reserved to back up a standby
letter of credit. The Company had approximately $370,000 of availability
remaining on its line of credit at such date. As of April 30, 1995, the bank
has waived the Company's noncompliance with the tangible net worth and liquid
asset to current liabilities covenants in the Company's line of credit
resulting from the loss in the first nine months of fiscal 1995. The Company
may be obliged to request a further waiver, from its principal lender, of the
covenant defaults described above at fiscal year-end even if it receives
adequate assurance of payment on the Defaulted Contract before such time.
The Company's ability to extend its line of credit prior to its expiration in
November 1995 and the Company's ability to obtain the necessary waivers of
covenants and availability formula on its line of credit will depend largely
on the results of operations for the last quarter of fiscal 1995 and early
fiscal 1996 and its business prospects at such times. Failure to obtain
sufficient new business, the required waiver, or new financing could cause the
Company to cease operations.
Management is actively pursuing various means of improving the Company's
liquidity position to allow the Company to continue operations and more
aggressively pursue its growth plan.
The Company's mortgage has a balloon payment due on March 1, 1996.
Management and the Company's bank are working on refinancing the mortgage and
Management expects to refinance the mortgage prior to the end of fiscal 1995
under acceptable terms, although there can be no assurance that the Company
will be able to do so.
Cash and working capital declined in the nine months ended April 30,
1995 as a result of the loss for the period. Accounts receivable and unbilled
accounts receivable decreased during the first nine months of fiscal 1995 as a
result of the normal course of business. The increase in inventory is
attributable, in part, to work performed in anticipation of the long-delayed
standard product order that the Company received on June 12, 1995. See
"Business Development - New Orders and Backlog". Machinery and equipment
increased primarily as a result of the Company building an AMS system for its
use in testing components and possible use in its domestic and international
remote sensing operations. See "Business Development - Growth Plan".
Short-term liabilities increased in the nine months ended April 30, 1995
primarily as a result of borrowings against the Company's line of credit.
The Company expects to invest approximately $150,000 for capital
expenditures, primarily for equipment, during fiscal 1995. The Company also
expects fiscal 1995 internal research and development costs to remain above
fiscal 1994 levels as additional products are developed and introduced. See
"Business Development - Growth Plan". These expenditures are vital to the
future growth of the Company, and are expected to be funded by working capital
and the Company's line of credit.
PART II - OTHER INFORMATION
All items omitted are not applicable or the answers thereto are negative.
Item 6(a): Exhibits
Exhibit No. Description
11.01 Computation of earnings per share
27 Financial Data Schedule (EDGAR filing only)
Item 6(b): No reports on Form 8-K were filed during the period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAEDALUS ENTERPRISES, INC.
Date: June 13, 1995 By: /S/ Thomas R. Ory
Thomas R. Ory, President
(Duly Authorized Officer)
Date: June 13, 1995 By: /S/ Vincent J. Killewald
Vincent J. Killewald, VP-Finance
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Description
11.01 Computation of earnings per share
27 Financial Data Schedule (EDGAR filing only)