UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 5, 2001
Hadron, Inc.
(Exact name of registrant as specified in its charter)
New York 0-5404 11-2120726
- ------------------------------------------------- ------------------------------- ---------------------------------
(State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification No.)
5904 Richmond Highway, Suite 300, Alexandria, VA 22309
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(703) 329-9400
-------------------------------------
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
The undersigned Registrant hereby amends its Current Report on Form 8-K
dated November 5, 2001 by the addition of financial statements as set forth in
Item 7 below.
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired:
Analex Corporation
Financial Statements for the Years
Ended December 31, 2000, 1999 and 1998
Reports of Independent Auditors Balance Sheets at December 31,
2000 and 1999 Statements of Operations for the years ended
December 31,
2000, 1999 and 1998
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Financial Statements
Analex Corporation
Financial Statements for the Nine Months
Ended September 30, 2001 and 2000 (Unaudited)
Balance Sheet at September 30, 2001
Statements of Operations for the nine months ended September 30,
2001 and 2000
Statements of Cash Flows for the nine months ended September 30,
2001 and 2000
Notes to Financial Statements
(b) Pro Forma financial information:
Hadron, Inc. Pro Forma Financial Statements (Unaudited)
Pro Forma Combined Balance Sheets as of September 30, 2001
Pro Forma Combined Statements of
Operations for the Nine Months Ended September 30, 2001
Pro Forma Combined Statements of
Operations for the Twelve Months Ended December 31, 2000
Notes to Unaudited Pro Forma Combined
Financial Statements
INDEX TO FINANCIAL STATEMENTS
Item 7(a) Financial Statements of Business Acquired
Analex Corporation
Financial Statements for the Years
Ended December 31, 2000, 1999 and 1998 Page
----
Reports of Independent Auditors 1
Balance Sheets at December 31, 2000 and 1999 3
Statements of Operations for the years ended December 31, 2000,
1999 and 1998 5
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998 6
Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998 7
Notes to Financial Statements 8
Analex Corporation
Financial Statements for the Nine Months
Ended September 30, 2001 and 2000 (Unaudited)
Balance Sheet at September 30, 2001 17
Statements of Operations for the nine months ended September 30,
2001 and 2000 19
Statements of Cash Flows for the nine months ended September 30,
2001 and 2000 20
Notes to Financial Statements 21
Item 7 (b) Pro Forma Financial Information 22
Hadron, Inc. Pro Forma Financial Statements (Unaudited)
Pro Forma Combined Balance Sheets as of September 30, 2001 23
Pro Forma Combined Statements of Operations for the
Nine Months Ended September 30, 2001 25
Pro Forma Combined Statements of Operations for the
Twelve Months Ended December 31, 2000 26
Notes to Unaudited Pro Forma Combined Financial Statements 27
Item 7(a) Financial Statements of Business Acquired
Analex Corporation
Financial Statements
Years ended December 31, 2000, 1999 and 1998
with Reports of Independent Auditors
Analex Corporation
Financial Statements
Years ended December 31, 2000, 1999 and 1998
Contents
Reports of Independent Auditors.......................................................................... 1
Financial Statements
Balance Sheets........................................................................................... 3
Statements of Operations................................................................................. 5
Statements of Changes in Stockholders' Equity............................................................ 6
Statements of Cash Flows................................................................................. 7
Notes to Financial Statements............................................................................ 8-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Analex Corporation
Titusville, Florida
We have audited the balance sheet of Analex Corporation as of December 31, 2000,
and the related statements of operations, stockholders' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Analex
Corporation as of December 31, 1999 were audited by other auditors whose report
dated March 27, 2000 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Analex Corporation as of
December 31, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
February 6, 2001
Melbourne, Florida /s/ Berman Hopkins
Wright LaHam, CPAs, LLP
1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Analex Corporation (a Nevada Corporation)
We have audited the accompanying balance sheet of Analex Corporation (a Nevada
Corporation) as of December 31, 1999, and the related statements of income,
retained earnings (deficit) and cash flows for the years ended December 31, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Analex Corporation as of
December 31, 1999, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
March 27, 2000 /s/ Duvall & Associates, Inc.
Dayton, Ohio
2
ANALEX CORPORATION
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
--------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------- --------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 601,665 $ 543,218
Accounts receivable
United States government contracts
Billed 1,654,615 1,312,057
Unbilled 279,126 791,910
Commercial contracts
Billed 1,482,317 753,580
Unbilled - 303,456
Accounts receivable - other 37,552 51,218
Refundable income taxes 3,545 2,745
Deferred income taxes 396,000 369,553
------------- --------------
Total current assets 4,454,820 4,127,737
------------- --------------
Property and equipment, net 31,918 35,414
Other assets:
Deferred income taxes 1,082,000 1,541,318
Deposits 59,599 114,935
Other 2,860 2,860
------------- --------------
Total other assets 1,144,459 1,659,113
------------- --------------
Total assets $ 5,631,197 $ 5,822,264
============= ==============
See Notes to Financial Statements
-3-
ANALEX CORPORATION
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
--------------------------
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2000 1999
- ------------------------------------- ------------- -------------
Current liabilities:
Accounts payable $ 968,100 $ 1,168,217
Note payable to bank 970,365 1,224,695
Notes payable to shareholders 200,000 -
Current portion of long-term debt 218,627 202,114
Current portion of capital lease obligations - 6,248
Current portion of employee stock ownership plan settlement 253,348 534,155
Accrued income taxes 290,661 1,463,868
Accrual for disallowed contract costs 199,452 -
Accrued expenses 2,058,450 1,646,343
------------- -------------
Total current liabilities 5,159,003 6,245,640
------------- -------------
Long-term liabilities:
Long-term debt, less current portion 1,256,652 1,556,661
Long-term employee stock ownership plan settlement, less current portion - 464,495
Accrual for disallowed contract costs, less current portion 826,242 836,475
------------- -------------
Total long-term liabilities 2,082,894 2,857,631
------------- -------------
Total liabilities 7,241,897 9,103,271
------------- -------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock - Class A 1,428,525 1,428,525
Preferred stock - Class B 984,662 -
Common stock $.0001 par value, 130,000 shares
authorized, 108,258 and 100,000 shares issued and outstanding, respectively 11 10
Additional paid-in capital 85,468 990
Accumulated deficit (3,360,674) (3,789,163)
------------- -------------
(862,008) (2,359,638)
Less: treasury stock (748,692) (921,369)
------------- -------------
Total stockholders' deficit (1,610,700) (3,281,007)
------------- -------------
Total liabilities and stockholders' deficit $ 5,631,197 $ 5,822,264
============= =============
See Notes to Financial Statements
-4-
ANALEX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
----------------------------------------------------
2000 1999 1998
------------------ ----------------- ------------------
Revenues
United States government contracts $ 20,044,518 $ 22,279,146 $ 20,384,794
Commercial contracts 11,257,494 6,014,156 5,360,455
------------------ ----------------- ------------------
31,302,012 28,293,302 25,745,249
Operating expenses:
Direct operating expenses 23,559,127 21,995,961 19,657,623
Other operating expenses 6,255,588 5,268,907 4,880,330
Unclaimed operating expenses 327,802 340,016 647,068
------------------ ----------------- ------------------
Total operating expenses 30,142,517 27,604,884 25,185,021
------------------ ----------------- ------------------
Income from operations 1,159,495 688,418 560,228
------------------ ----------------- ------------------
Other income (expense):
Interest expense (212,033) (436,405) (657,570)
Interest income 7,217 118 988
Bad debt expense - - (187,072)
Provision for disallowed contract costs (189,219) - -
Non-compete fees (142,800) (117,800) (114,300)
Employee stock ownership plan settlement 211,147 (998,650) -
Miscellaneous 21,162 (34,877) (100,376)
------------------ ----------------- ------------------
Total other expense (304,526) (1,587,614) (1,058,330)
------------------ ----------------- ------------------
Income (loss) before income taxes 854,969 (899,196) (498,102)
Income tax benefit (provision) (426,480) 87,222 (509,182)
------------------ --------------- ------------------
Net income (loss) $ 428,489 $ (811,974) $ (1,007,284)
================== =============== ==================
See Notes to Financial Statements
-5-
ANALEX CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
----------------------------------------------------
Preferred Stock - Class A Preferred Stock - Class B Common Stock Additional
Shares Amount Shares Amount Shares Amount Capital
------------------------------------------------------------------------------------------------
Balance - December 31, 1997 31,745 $ 1,428,525 - $ - 100,000 $ 10 $ 990
- - - - - - -
Purchase of preferred Class A - - - - - - -
shares by treasury from ESOP - - - - - - -
- - - - - - -
Net loss - - - - - - -
------------------------------------------------------------------------------------------------
Balance - December 31, 1998 31,745 1,428,525 - - 100,000 10 990
Purchase of preferred Class A
shares by treasury from ESOP - - - - - - -
Dividends - - - - - - -
Net loss - - - - - - -
------------------------------------------------------------------------------------------------
Balance - December 31, 1999 31,745 1,428,525 - - 100,000 10 990
Transfer of preferred Class A
shares held by treasury to ESOP - - - - - - -
Sale of preferred Class B shares - - 2 984,662 - - -
Sale of common shares - - - - 8,258 1 84,478
Reverse stock split (15,872) - - - - - -
Net income - - - - - - -
------------------------------------------------------------------------------------------------
Balance - December 31, 2000 15,873 $ 1,428,525 2 $ 984,662 108,258 $ 11 $ 85,468
================================================================================================
Accumulated Treasury
Deficit stock
---------------------------------------
Balance - December 31, 1997 $ (1,893,409) $ (819,565)
- -
Purchase of preferred Class A - -
shares by treasury from ESOP - (59,402)
- -
Net loss (1,007,284) -
---------------------------------------
Balance - December 31, 1998 (2,900,693) (878,967)
Purchase of preferred Class A
shares by treasury from ESOP - (42,402)
Dividends (76,496) -
Net loss (811,974) -
---------------------------------------
Balance - December 31, 1999 (3,789,163) (921,369)
Transfer of preferred Class A
shares held by treasury to ESOP - 172,677
Sale of preferred Class B shares - -
Sale of common shares - -
Reverse stock split - -
Net income 428,489 -
----------------------------------------
Balance - December 31, 2000 ($3,360,674) ($748,692)
========================================
See Notes to Financial Statements
-6-
ANALEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
----------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Cash flows from operating activities:
Net income (loss) $ 428,489 $ (811,974) $ (1,007,284)
------------------- -------------------- -------------------
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 22,162 41,405 72,458
Adjustment of government settlement - - 100,000
Loss on the disposal of property and equipment - 18,257 839
Changes in operating assets and liabilities:
Accounts receivable (241,389) (435,103) 626,061
Refundable income taxes (800) 64,034 -
Deposits 55,336 (71,999) (10,672)
Deferred income taxes 432,871 (182,845) (45,565)
Employee stock ownership plan settlement (745,302) 998,650 -
Accounts payable (200,119) (190,078) 398,326
Accrued expenses 584,783 270,890 199,789
Accrued income taxes (1,173,207) 344,480 566,276
Accrual for disallowed contract costs 189,219 - -
------------------- -------------------- -------------------
Total adjustments (1,076,446) 857,691 1,907,512
------------------- -------------------- -------------------
Net cash provided (used) by operating activities (647,957) 45,717 900,228
------------------- -------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (18,663) - (5,091)
Proceeds from disposal of property and equipment - 146,023 100
------------------- -------------------- -------------------
Net cash used by investing activities (18,663) 146,023 (4,991)
------------------- -------------------- -------------------
Cash flows from financing activities:
Proceeds (paydown) on note payable to bank (254,330) 641,698 (404,000)
Proceeds from notes payable to stockholders 200,000 - -
Payments on long-term debt (283,496) (311,149) (295,960)
Payments on capital lease obligations (6,248) (23,956) (20,775)
Proceeds from the sale of preferred Class B stock 984,662 - -
Proceeds from the sale of common stock 84,479 - -
Acquisition of treasury stock - (42,402) (59,402)
Dividends paid - (76,496) -
------------------- -------------------- -------------------
Net cash provided by financing activities 725,067 187,695 (780,137)
------------------- -------------------- -------------------
Net increase (decrease) in cash and cash equivalents 58,447 379,435 115,100
Cash and cash equivalents at beginning of year 543,218 163,783 48,683
------------------- -------------------- -------------------
Cash and cash equivalents at end of year $ 601,665 $ 543,218 $ 163,783
=================== ==================== ===================
Cash paid for interest $ 866,870 $ 185,416 $ 207,343
=================== ==================== ===================
Cash paid for income taxes $ 501,045 $ - $ -
=================== ==================== ===================
See Notes to Financial Statements
-7-
Analex Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of the business
----------------------
Analex Corporation (the "Company") was incorporated under the laws of the State
of Nevada in January 1990. The Company operates as an engineering service
provider for the design, development, analysis and testing of products and
systems for its government and commercial customers in the aerospace, medical,
telecommunications and information technology industries located throughout the
United States.
2. Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
3. Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
4. Accounts receivable
-------------------
As of December 31, 2000 and 1999, management considered its accounts receivable
to be fully collectible. Accordingly, no allowance for doubtful accounts is
reflected on the accompanying balance sheets.
The caption "unbilled receivables" represents estimated fees and costs incurred
on contracts for which billings have not yet been presented to the customer.
When billed, these amounts are included in "billed receivables."
5. Property and equipment
----------------------
Property and equipment is recorded at cost. Depreciation is provided using an
accelerated method over the estimated useful lives of the assets, generally five
to seven years. Expenditures for repairs and maintenance are charged to
operations as incurred.
6. Revenue recognition
-------------------
The Company primarily enters into cost plus fixed fee contracts that vary in
length from six months to five years. Revenues under these contracts are
recognized using the proportional performance method, which approximates the
percentage of completion method.
Pursuant to the guidance offered in Accounting Research Bulletin No. 43 ("ARB
43"), revenues are recognized in relation to costs incurred, which are
proportionate to the estimated total cost of the contract. Furthermore, pursuant
to ARB 43, the Company's revenues include the fixed fee and reimbursable cost
components.
Costs directly related to the services performed are classified as direct
operating expenses on the accompanying statements of operations. Costs that are
not directly related to the services performed, yet
8
are includable in the pool of reimbursable costs, are classified as other
operating expenses. Operating costs that are not allowable for reimbursement
under the terms of the applicable contract are classified as unclaimed operating
expenses. All costs are charged to operations as incurred.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2000 1999
---------------- ----------------
Computer equipment and software $ 333,233 $ 385,799
Facilities and leasehold
Improvements 158,683 158,683
Office furniture and equipment 100,849 57,293
------------- --------------
Total fixed assets 592,765 601,775
Less accumulated depreciation
And amortization (560,847) (566,361)
------------- --------------
$ 31,918 $ 35,414
============= ==============
For the years ended December 31, 2000, 1999, and 1998, the Company recognized
depreciation expense in the amount of $22,162, $41,405, and $72,458,
respectively.
NOTE C - NOTE PAYABLE TO BANK
The Company is a party to a revolving line of credit agreement with a bank. The
agreement allows for the borrowing of up to the lesser of $1.5 million or 80% of
qualified accounts receivable. The note is payable on demand, bears interest at
the bank's prime rate (8.5% at December 31, 2000) plus 2.0%, and is secured by
substantially all the assets of the Company. As of December 31, 2000 and 1999,
the outstanding balances on the note payable to bank was $970,365 and
$1,224,695, respectively. During the years ended December 31, 2000, 1999 and
1998, interest incurred on the note payable to bank was $82,554, $52,072 and
$39,489, respectively.
NOTE D - NOTES PAYABLE TO SHAREHOLDERS
In March 2000, the Company entered into a $90,000 note payable agreement with
its Chief Executive Officer and a $110,000 note payable agreement with the
Secretary of its Board of Directors. Both of the notes provide for interest to
accrue at 9.0%, are due on demand and are uncollateralized.
NOTE E - LONG-TERM DEBT
Long-term debt consists of an extended payout settlement on disallowed contract
costs (see Note N-2). The agreement provides for quarterly payments of $80,000
consisting of principal and interest at 7.0% through February 2006, with a final
payment due in May 2006 and is collateralized by substantially all the assets of
the Company. As of December 31, 2000, the outstanding principal balance was
$1,475,279, with $218,627 scheduled to mature during 2001.
The Company is also contingently obligated to make an additional annual payment
based on 1% of "non-pass through" revenues in excess of $22.5 million, as
defined. During the years ended December 31, 2000 and 1999 and 1998, the Company
was not subject to this contingent payment. In addition, the Company is
obligated to make a supplemental principal payment in the amount of 70% of any
proceeds received on the
9
disposal of property and equipment. During the year ended December 31, 2000, a
supplemental payment in the amount of $80,338 was made as a result of a disposal
during 1999.
The scheduled maturities of the long-term debt agreement for each of the years
ending December 31 are as follows:
2001 $ 218,627
2002 234,064
2003 250,592
2004 268,287
2005 287,232
Thereafter 216,477
---------------
$ 1,475,279
===============
NOTE F - EMPLOYEE STOCK OWNERSHIP PLAN SETTLEMENT
In March 2000, the Company negotiated a settlement with the Internal Revenue
Service (the "IRS") regarding the Analex Employee Stock Ownership Plan (the
"ESOP") (see Note L). The IRS had issued two Revenue Agent's Reports that
proposed to disqualify the ESOP retroactively to its commencement and proposed
to assert excise taxes against the Company for allegedly engaging in prohibited
transactions in connection with the sale of the Company's preferred stock to the
ESOP.
In order to resolve the matter with the IRS, the Company agreed to the following
terms: (1) to make a settlement payment of $231,000 to the United States
Government, (2) to transfer 12,896 shares of Class A preferred stock back to the
ESOP, (3) to refund the ESOP $109,715 of interest previously paid to the
Company, (4) to pay $134,955 of Federal excise tax, for each of the periods
ending December 31, 1992 and 1993 and (5) interest on the excise taxes in the
amount of $194,585.
As a result of the settlement, the IRS rescinded the proposed adverse
determination letter related to the ESOP.
During the year ended December 31, 2000, the Company (1) paid the $231,000
settlement to the IRS, (2) refunded the $109,715 interest to the ESOP, and (3)
consummated the transfer of the 12,896 shares of its preferred Class A stock
from the treasury back to the ESOP. In addition, the Company successfully
renegotiated with the IRS to reduce the remaining settlement obligation from
$464,495 to $253,348.
As a result of the renegotiation, the accompanying statement of operations for
the year ended December 31, 2000 reflects a component of other income in the
amount of $211,147 to reflect the reduction of the obligation, and the
accompanying December 31, 2000 balance sheet reflects a current liability in the
amount of $253,348, as the remaining balance is expected to be paid in 2001.
NOTE G - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
------------------------ -----------------------
2000 1999
------------------------ -----------------------
Accrued payroll and related expenses $ 1,193,940 $ 928,126
Accrued vacation 673,544 568,225
Accrued profit sharing 152,116 130,383
Accrued interest 30,599 10,602
Accrued other 8,251 9,007
---------------- ----------------
$ 2,058,450 $ 1,646,343
================ ================
10
NOTE H - ACCRUED INCOME TAXES
In May 2000, the Company entered into a settlement agreement with the IRS to
increase its federal income tax liability for the tax years 1991 through 1993.
In addition to the income taxes, the Company also agreed to pay accuracy-related
penalties and interest. Due to these adjustments, additional state and local
income taxes and interest for the same years examined were accrued.
During the year ended December 31, 2000, the Company paid the additional federal
income taxes, interest and penalties for the 1991 through 1993 assessment. There
were no current income tax accruals as of December 31, 2000 or 1999. The accrued
income tax balance reflected on the accompanying balance sheets is comprised of
the following:
Balance at December 31, 1998 $ -
Federal income taxes for 1991 through 1993 506,636
Interest on additional federal income taxes 565,119
Penalties on federal income taxes 101,302
Additional state and local income taxes 133,465
Interest on additional state and local income taxes 80,879
Accrual for foregone AMT tax credits 76,467
---------------
Balance at December 31, 1999 1,463,868
Payment of 1991 through 1993 federal taxes (506,636)
Payment of 1991 through 1993 interest on federal taxes (565,119)
Payment of 1991 through 1993 penalties on federal taxes (101,452)
--------
Balance at December 31, 2000 $ 290,661
===============
The remaining balance of the income tax accrual is expected to be paid during
the year ended December 31, 2001.
NOTE I - ACCRUAL FOR DISALLOWED CONTRACT COSTS
As a government contractor, the Company is subject to audits by the federal
government with respect to costs claimed under its cost plus fixed fee
contracts.
During the year ended December 31, 1997, the Defense Contract Audit Agency (the
"DCAA") issued preliminary audit reports challenging the Company's costs claimed
on government contracts during the years 1990 through 1995. As a result of the
issuance of these reports, the Company recorded an accrual for disallowed
contract costs at December 31, 1997 in the amount of $736,475.
During 1998, the Company recorded an accrual for disallowed contract costs for
costs claimed in the calendar years 1996 and 1997 in the amount of $50,000 for
each year in anticipation of receiving a preliminary audit adjustment for these
years. As a result, the December 31, 1999 balance reflects an accrual for
disallowed contract costs in the amount of $836,475.
During the year ended December 31, 2000, the DCAA and the Company reached a
settlement for disallowed costs claimed during the years 1990 through 1995. As a
result of this settlement, the Company agreed to reimburse costs claimed in
those years in the amount of $831,588. Of this amount, $199,452 of costs is
expected to be remitted in 2001.
Also during 2000, the Company received preliminary audit reports from the DCAA
for costs claimed during the calendar years 1996 and 1997. These audit reports
challenge costs of approximately $1.4 million claimed during those years. It is
management's belief that substantially all the costs claimed by the Company are
allowable and the original accrual for $50,000 for each years is still
appropriate. The Company intends to defend itself rigorously during the
negotiation process expected to take place in 2001.
11
In addition, during 2000, the Company recorded an accrual for disallowed
contract costs for costs claimed in the calendar years 1998 and 1999, in
the amount of $47,053 for each year, in anticipation of receiving a
preliminary audit adjustment for these years.
As a result of the afore-mentioned events, the December 31, 2000 balance
sheet reflects an accrual for disallowed contract costs in the amount of
$1,025,694, of which $199,452 is considered currently due. The accompanying
statement of operations for the year ended December 31, 2000 contains a
provision for disallowed contract costs in the amount of $189,219, the net
result of the settlement of the 1990 through 1995 audits and the accrual
for the 1998 and 1999 estimates.
The ultimate amount of disallowed costs for the years 1996 through 1999 is
unknown at this time. However, it is management's belief that the
accompanying balance sheet reflects the appropriate settlement accrual
balance.
NOTE J - INCOME TAXES
The Company accounts for deferred income taxes using the liability method
pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between the financial
reporting and income tax bases of assets and liabilities. Measurement of
deferred income tax is based on enacted tax rates and laws that will be in
effect when the differences are expected to reverse, with the measurement
of deferred income tax assets being reduced by available tax benefits not
expected to be realized.
The components of the Company's income tax provision (benefit) for the
years ended December 31 are as follows:
------------------------ ----------------------- -----------------------
2000 1999 1998
------------------------ ----------------------- -----------------------
Current:
Federal $ (6,391) $ 12,146 $ (54,918)
State - 700 (635)
Local - - (24)
-------- -------- ----------
(6,391) 12,846 (55,577)
-------- -------- ----------
Deferred:
Federal 367,940 (147,704) (39,562)
State 43,287 (30,477) (22,540)
Local 21,644 (4,664) 16,537
-------- -------- ----------
432,871 (182,845) (45,565)
-------- -------- ----------
Accrual for IRS audit adjustments:
Federal - 66,557 493,079
State - 13,701 96,707
Local - 2,519 20,538
-------- -------- ----------
- 82,777 610,324
-------- -------- ----------
$426,480 $(87,222) $ 509,182
======== ======== ==========
The components of the Company's deferred tax assets as of December 31 are
as follows:
------------------------ -----------------------
2000 1999
------------------------ -----------------------
Current deferred tax asset:
Accrued vacation $ 269,000 $ 240,413
Accrual for disallowed contract
costs 80,000 -
12
Accrued interest to shareholders 5,000 -
Accrued interest on excise taxes 42,000 82,580
Accrued interest due to the ESOP - 46,560
---------- ----------
396,000 369,553
Non-current deferred tax asset:
Accrual for government settlement 594,000 746,367
Accrual for disallowed contract costs 330,000 354,973
Net operating loss carryforward 93,000 129,372
Accrued interest on IRS audit 42,000 284,009
Accumulated depreciation 23,000 26,597
---------- ----------
1,082,000 1,541,318
---------- ----------
$1,478,000 $1,910,871
========== ==========
As of December 31, 2000, the Company's entire net operating loss
carryforward is scheduled to expire in 2018.
The Company's effective income tax rate for the year ended December 31,
2000 is more than would be expected if the federal, state and local
statutory rates were applied to income, primarily because of a reduction in
tax rates to calculate the deferred tax components. The Company's effective
income tax rate for the year ended December 31, 1999 is less than what
would be expected if the federal, state and local statutory rates were
applied to income primarily because of the effect of non-deductible
payments accrued on the IRS audit (see Note H) and the ESOP (see Note F)
settlement. The Company's effective income tax rate for the year ended
December 31, 1998 is more than would be expected if the federal, state and
local statutory rates were applied to income, primarily because of expenses
deductible for book purposes but not for income tax purposes.
NOTE K - PROFIT SHARING PLAN
The Company sponsors the Analex Corporation Retirement Plan (the "Plan"),
pursuant to Internal Revenue Code 401(k), which covers substantially all
employees. Contributions to the Plan are based on a percentage of employee
compensation and are accrued and funded on a current basis. Contributions
to the Plan were $427,742, $367,257 and $327,674 for the years ended
December 31, 2000, 1999 and 1998, respectively.
NOTE L - EMPLOYEE STOCK OWNERSHIP PLAN
On January 1, 1991, the Company adopted the Analex Corporation Employee
Stock Ownership Plan (the "ESOP"), which was designed as a leveraged ESOP
plan to comply with Internal Revenue Code section 4975(e)(7). The ESOP
allowed for the participation of substantially all employees and funded a
purchase of the Company's Class A preferred stock through the issuance of a
note payable. As the ESOP made each note payment, an appropriate percentage
of stock was allocated to the eligible employees' accounts based upon the
ratio that each participant's compensation bore to the total compensation
of all eligible participants. All shares fully vest upon allocation.
During 1994, the note was paid in full and the Company ceased making
further contributions to the ESOP. As of December 31, 2000, the ESOP was
holding 14,415 shares of the Company's preferred Class A stock (after the
reverse stock split), all of which have been released.
NOTE M - STOCKHOLDERS' DEFICIT
1. Class A preferred stock
-----------------------
On January 1, 1991, the Company designated and issued 59,980 shares of no
par value Series A non-voting, cumulative, convertible preferred stock. The
Class A shares are entitled to a cumulative,
13
preferential dividend at a rate of $4.05 per share and are convertible at a
rate of four shares of Company common stock for every three shares of
preferred stock. In addition, the Company may redeem the Class A preferred
shares at any time at $45 per share. Upon liquidation, the holders of the
Class A shares are entitled to receive $45 per share. In January 1991, the
Company sold 59,980 shares of its Class A preferred stock to the ESOP at
$45 per share. The Class A shares have preferential rights to dividends and
liquidation proceeds over any of the Company's other equity classes.
In December 1993, the ESOP returned 28,235 Class A shares to the Company in
exchange for the cancellation of the remaining balance on the note payable,
effectively reducing the outstanding value of preferred stock by
$1,270,575, or $45 per share. The Company then canceled the returned
shares.
During the period from January 1994 through December 1999, the Company
repurchased 15,812 Class A shares from the ESOP for a total of $350,614, or
the fair market value of the shares at each transaction date. These shares
were transferred to the Company's treasury.
In June 2000, the Company returned 12,896 shares of the Class A preferred
stock from the treasury to the ESOP pursuant to the IRS settlement
agreement (see Note F). The fair market value of these shares was $172,677,
or $13.39 per share.
In December 2000, the Company's stockholders effected a reverse stock split
on the Series A preferred stock. As a result, the number of outstanding
shares was reduced to 15,873. The post-stock split Class A shares are
entitled to cumulative, preferential dividends at a rate of $8.10 per share
and are convertible at a rate of three shares of Company common stock for
every two shares of preferred stock. In addition, the Company may redeem
the Class A preferred shares at any time at $90 per share. Upon
liquidation, the holders of the Class A shares are entitled to receive $90
per share. In addition, by written consent of the stockholders, the number
of authorized Class A shares was decreased to 49,800.
As of December 31, 2000, the amount of dividends in arrears on the
cumulative Class A preferred stock was $181,286.
2. Class B preferred stock
-----------------------
In May 2000, the Company designated 200 shares of no par value Series B
non-voting, non-cumulative preferred stock. The Class B shares are entitled
to a non-cumulative annual dividend at a rate of $49,233 per share, at the
discretion of the Company's Board of Directors, and liquidation rights of
$492,331 per share. The Class B dividend and liquidation rights are
subordinate to the Class A shares and senior to the rights of the Company's
common stock.
In June 2000, the Company sold 1.046 shares and .954 share of its Class B
preferred stock to the Company's Secretary of the Board of Directors and
Chief Executive Officer, respectively. Proceeds received on the sale of the
shares were $984,662.
3. Common Stock
------------
In May 2000, the Company sold 1,000 and 7,258 shares of its common stock to
the Company's Secretary of the Board of Directors and Chief Executive
Officer, respectively. Proceeds received on the sale of the shares were
$84,479.
4. Treasury stock
--------------
Treasury stock is shown at cost and consists of 23,809 shares of common
stock, with a value of $570,728 and 1,458 shares of the Class A preferred
stock (after accounting for the reverse stock split), with a value of
$177,964.
14
NOTE N - COMMITMENTS AND CONTINGENCIES
1. Operating leases
----------------
The Company leases office space and equipment under operating leases that
expire at various dates through January 2005. The future minimum lease
payments under the non-cancelable leases for the following years ending
December 31 are as follows:
2001 $392,736
2002 339,585
2003 161,893
2004 4,761
2005 52
--------
$899,027
========
Rent expense incurred under these leases for the years ended December 31,
2000, 1999 and 1998 was approximately $400,000, $1,700,000 and $1,700,000,
respectively.
2. Government settlement
---------------------
In June 1994, the Company entered into a settlement agreement (see Note E)
with the United States Government for costs that were billed by the Company
during the fiscal years 1982 through 1990, which the Government claimed
were unallowable under Federal Acquisition Regulations in a cost
reimbursable contract.
The agreement provided for the reimbursement of not less that $6 million
and not more than $15.5 million, less $896,000 previously deposited by the
Company. The total reimbursement will remain at $6 million as long as the
Company is not in default of the payment terms as described below. In the
event there is a default under the payment terms and it remains uncured for
30 days after the due date for such payment, the entire maximum unpaid
balance due, $15.5 million less any payments paid under the agreement, will
become due and payable.
During 1999, the Company renegotiated the payment terms of the government
settlement. On August 31, 1999, the Company began making twenty-eight
quarterly payments of $80,000 principal and interest, plus certain
contingent principal payments as defined in the agreement. As of the date
of these financial statements, the Company is in compliance with the
payment plan.
3. Non-compete agreements
----------------------
The Company is a party to six non-compete agreements that expire at various
dates through December 2007. Pursuant to these agreements, the Company is
obligated to make monthly payments to the parties in amounts ranging from
$600 to $4,750. During the years ended December 31, 2000, 1999 and 1998,
the Company paid $142,800, $117,800 and $114,300, respectively, under the
non-compete agreements. The future non-compete payments under the
agreements for the following years ending December 31 are payable as
follows:
2001 $ 137,400
2002 129,000
2003 129,000
2004 129,000
2005 100,500
Thereafter 274,000
-----------
$ 898,900
===========
15
NOTE O - CONCENTRATIONS
1. Customers
---------
A substantial portion of the Company's services are provided in connection
with United States government contracts. If these contracts were
terminated, the Company would be reimbursed for costs incurred through the
termination date and for certain costs arising from the termination.
Government contracts represented approximately 64%, 79% and 79% of total
revenue for the years ended December 31, 2000, 1999 and 1998, respectively.
2. Cash deposits
-------------
The Company maintains cash balances at various banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation for up
to $100,000. The amount in excess of the insured limit was $723,000 at
December 31, 2000.
NOTE P - SUBSEQUENT EVENTS
In January 2001, the Company sold 17,196 shares of its common stock to a
new officer of the Company. Proceeds received on the sale of the stock
amounted to $175,761. In addition, in January 2001, the Company repurchased
1,000 shares of its common stock formally held by an officer of the
Company. The cost of the shares, which were transferred to the Company's
treasury, amounted to $10,230.
16
Analex Corporation
Financial Statements (Unaudited)
Nine months ended September 30, 2001 and 2000
ANALEX CORPORATION
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2001
------------------
SEPTEMBER 30,
ASSETS 2001
- ------ ---------------
Current assets:
Cash and cash equivalents $ 72,843
Accounts and notes receivable, net 5,327,739
Refundable income taxes 2,285
Deferred income taxes 396,000
---------------
Total current assets 5,798,867
---------------
Property and equipment, net 36,446
Deferred income taxes 1,082,000
Deposits and other 54,617
---------------
Total other assets 1,173,063
---------------
Total assets $ 6,971,930
===============
See Notes to Financial Statements
(Unaudited)
-17-
ANALEX CORPORATION
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2001
------------------
SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2001
- ------------------------------------- --------------
Current liabilities:
Accounts payable $ 572,010
Note payable to bank 660,715
Notes payable to shareholders 728,000
Current portion of long-term debt 216,695
Current portion of capital lease obligations 2,579
Deferred income 200,000
Accrued income taxes 246,362
Accrual for disallowed contract costs 199,452
Accrued expenses 3,360,940
--------------
Total current liabilities 6,186,753
--------------
Long-term liabilities:
Long-term debt, less current portion 1,091,070
Long-term capital lease obligations, less current portion 14,607
Accrual for disallowed contract costs, less current portion 826,242
--------------
Total long-term liabilities 1,931,919
--------------
Total liabilities 8,118,672
--------------
Stockholders' deficit:
Preferred stock - Class A 1,428,525
Preferred stock - Class B 984,662
Common stock $.0001 par value, 130,000 shares
authorized, 127,200 and 108,258 shares issued and outstanding, respectively 13
Additional paid-in capital 261,217
Accumulated deficit (3,062,237)
--------------
(387,820)
Less: treasury stock (758,922)
--------------
Total stockholders' deficit (1,146,742)
--------------
Total liabilities and stockholders' deficit $ 6,971,930
==============
See Notes to Financial Statements
(Unaudited)
-18-
ANALEX CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
-----------------------------------------------------
2001 2000
---------------- --------------
Revenues $ 24,010,668 $ 23,888,699
Operating expenses:
Direct operating expenses 17,038,734 17,557,684
Other operating expenses 5,884,400 5,327,218
Unclaimed operating expenses 232,278 279,139
------------- --------------
Total operating expenses 23,155,412 23,164,041
------------- --------------
Income from operations 855,256 724,658
------------- --------------
Other expense:
Interest expense, net (277,496) (135,139)
Non-compete fees (107,809) (111,601)
------------- --------------
Total other expense (385,305) (246,740)
------------- --------------
Income before income taxes 469,951 477,918
Income tax benefit (provision) (171,514) 6,559
------------- --------------
Net income $ 298,437 $ 484,477
============= ==============
See Notes to Financial Statements
(Unaudited)
-19-
ANALEX CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
-----------------------------------------------------
2001 2000
--------------- --------------
Cash flows from operating activities:
Net income $ 298,437 $ 484,477
-------------- --------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 18,042 16,776
Changes in operating assets and liabilities:
Accounts and notes receivable (1,874,129) (971,728)
Prepaid income taxes 1,260 2,745
Deposits 7,842 33,075
Employee stock ownership plan settlement (253,348) (998,650)
Accounts payable (396,090) 359,423
Deferred income 200,000 -
Accrued expenses 1,302,490 2,084,954
Accrued income taxes (44,299) (1,073,004)
-------------- --------------
Total adjustments (1,038,232) (546,409)
-------------- --------------
Net cash used by operating activities (739,795) (61,932)
-------------- --------------
Cash flows from investing activities:
Property additions (22,570) (18,666)
-------------- --------------
Net cash used by investing activities (22,570) (18,666)
-------------- --------------
Cash flows from financing activities:
Proceeds on note payable to bank (309,650) (1,104,419)
Proceeds from notes payable to stockholders 528,000 -
Payments on long-term debt (167,514) (220,083)
Payments on capital lease obligations 17,186 (6,248)
Proceeds from the sale of preferred Class B stock - 984,662
Proceeds from the sale of common stock 175,751 84,479
Acquisition of treasury stock (10,230) -
-------------- --------------
Net cash provided (used) by financing activities 233,543 (261,609)
-------------- --------------
Net decrease in cash and cash equivalents (528,822) (342,207)
Cash and cash equivalents at beginning of period 601,665 543,218
-------------- --------------
Cash and cash equivalents at end of period $ 72,843 $ 201,011
============== ==============
See Notes to Financial Statements
(Unaudited)
-20-
Analex Corporation
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001 and 2000
NOTE A - BASIS OF PRESENTATION
The interim financial statements for Analex Corporation (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. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the financial statements for the year ended December 31, 2000.
21
Item 7 (b) Pro Forma Financial Information
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma combined financial statements are based upon the
historical consolidated financial statements of Hadron, Inc. (the "Company")
adjusted to give effect to the acquisition of Analex Corporation ("Analex") by
the Company under the purchase method of accounting.
The unaudited pro forma combined balance sheets at September 30, 2001 are
presented as if the above transactions were consummated on September 30, 2001.
The unaudited pro forma combined statements of operations for the nine months
ended September 30, 2001 and the twelve months ended December 31, 2000 are
presented as if the above transactions were consummated on January 1, 2000.
This information should be read in conjunction with the notes and the
consolidated financial statements of the Company and the financial statements of
Analex included herein. The unaudited pro forma combined financial data do not
purport to represent what the Company's results of operations actually would
have been had such transactions and events occurred on the dates specified, or
to project the Company's results of operations for any future period or date. In
the opinion of management of the Company, all adjustments and reclassifications
have been made that are necessary to present the pro forma combined data.
A preliminary allocation of the purchase price has been made to the assets
and liabilities based on available information. The actual allocation of
purchase price and the resulting effect on income from operations may differ
significantly from the pro forma amounts included herein. These pro forma
adjustments represent the Company's preliminary determination of purchase
accounting adjustments and are based upon available information and certain
assumptions that the Company believes to be reasonable. Consequently, the
amounts reflected in the pro forma financial statements are subject to change,
and the final amounts may differ substantially.
22
HADRON, INC.
PROFORMA COMBINED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2001
------------------------
Historical Historical Pro Forma
ASSETS HADRON ANALEX Adjustments Combined
- ------ ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 102,300 $ 72,843 $ (6,510,000)(A) $ 679,198
4,067,740 (D)
4,735,627 (E)
(1,696,715)(F)
(92,597)(I)
Accounts receivable, net 2,881,000 5,327,739 451,441 (N) 8,660,180
Prepaid expenses and other 473,500 2,285 (172,100)(G) 303,685
Deferred income taxes - 396,000 (396,000)(I) -
------------ ------------ ------------ ------------
Total current assets 3,456,800 5,798,867 387,396 9,643,063
------------ ------------ ------------ ------------
Fixed assets, net 256,900 36,446 - 293,346
Goodwill ATI, net 1,557,100 - - 1,557,100
Goodwill Analex, net - - 13,529,638 (H) 13,529,638
Other 70,800 54,617 - 125,417
Deferred finance costs - - 109,980 (E) 109,980
Deferred income taxes - 1,082,000 (1,082,000)(I) -
------------ ------------ ------------ ------------
Total other assets 1,884,800 1,173,063 12,557,618 15,615,481
------------ ------------ ------------ ------------
Total assets $ 5,341,600 $ 6,971,930 $ 12,945,014 $ 25,258,544
============ ============ ============ ============
See Notes to Pro Forma Combined Financial Statements
(Unaudited)
-23-
HADRON, INC.
PROFORMA COMBINED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2001
------------------------
Historical Historical Pro Forma
LIABILITIES AND SHAREHOLDERS' EQUITY HADRON ANALEX Adjustments Combined
------------------------------------ ------------ ------------ ------------- --------------
Current liabilities:
Accounts payable $ 434,700 $ 572,010 $ - $ 1,006,710
Note payable - line of credit 661,000 660,715 1,310,627 (E) 1,310,627
(1,321,715)(F)
Notes payable - related party 100,000 728,000 (728,000)(I) 100,000
Note payable - current maturity of long-term debt 375,000 216,695 700,000 (E) 1,333,126
(375,000)(F)
416,431 (C)
Notes payable - other 101,700 - - 101,700
Current portion of capital lease obligations - 2,579 - 2,579
Deferred income - 200,000 - 200,000
Accrued income taxes - 246,362 - 246,362
Accrual for disallowed contract costs - 199,452 (199,452)(I) -
Other current liabilities 1,384,500 3,360,940 398,174 (G) 4,934,017
(209,597)(I)
------------- ------------- ------------- --------------
Total current liabilities 3,056,900 6,186,753 (8,532) 9,235,121
------------- ------------- ------------- --------------
Long-term debt, less current portion - 1,091,070 - 1,091,070
Long-term capital lease obligations, less current portion - 14,607 - 14,607
Notes payable - long term portion 1,248,389 (C) 4,048,389
2,800,000 (E)
Accrual for disallowed contract costs, less current portion - 826,242 (416,548)(I) 409,694
Other 60,000 - - 60,000
------------- ------------- ------------- --------------
Total long-term liabilities 60,000 1,931,919 3,631,841 5,623,760
------------- ------------- ------------- --------------
Commitments and contingencies
Total liabilities 3,116,900 8,118,672 3,623,309 14,858,881
------------- ------------- ------------- --------------
Shareholders' equity:
Common stock $.02 par, authorized 20,000,000 shares; 130,800 13 71,443 (B) 286,422
issued and outstanding 6,539,144 shares 84,179 (D)
(13)(I)
Preferred stock - 2,413,187 (2,413,187)(I) -
Treasury stock - (758,922) 758,922 (I) -
Additional capital 11,965,300 261,217 4,000,800 (B) 19,984,641
3,983,561 (D)
34,980 (E)
(261,217)(I)
Deferred compensation (6,800) - - (6,800)
Accumulated deficit (9,864,600) (3,062,237) 3,062,237 (I) (9,864,600)
------------- ------------- ------------- --------------
Total shareholders' equity 2,224,700 (1,146,742) 9,321,705 10,399,663
------------- ------------- ------------- --------------
Total liabilities and shareholders' equity $ 5,341,600 $ 6,971,930 $ 12,945,014 $ 25,258,544
============= ============= ============= ==============
See Notes to Pro Forma Combined Financial Statements
(Unaudited)
-24-
HADRON, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------------
Historical Historical Pro Forma
Hadron Analex Adjustments Combined
------------------ ------------------ ------------------ -----------------
Revenues $ 12,724,800 $ 24,010,668 $ - $ 36,735,468
------------------ ------------------ ------------------ -----------------
Operating costs and expenses:
Costs of revenue 10,338,300 21,850,086 - 32,188,386
Selling, general and administrative 2,099,500 1,305,326 196,431 (L) 3,601,257
------------------ ------------------ ------------------ -----------------
Total operating costs and expenses 12,437,800 23,155,412 196,431 35,789,643
------------------ ------------------ ------------------ -----------------
Operating income 287,000 855,256 (196,431) 945,825
------------------ ------------------ ------------------ -----------------
Other expense:
Interest expense (net) 97,200 277,496 491,346 (J) 704,457
(161,585)(K)
Non-compete fees - 107,809 (107,809)(M) -
Other expense 42,000 - - 42,000
------------------ ------------------ ------------------ -----------------
Total other expense 139,200 385,305 221,952 746,457
------------------ ------------------ ------------------ -----------------
Income before income taxes 147,800 469,951 (418,383) 199,368
Provision for income taxes - 171,514 - 171,514
------------------ ------------------ ------------------ -----------------
Net income $ 147,800 $ 298,437 $ (418,383) $ 27,854
================== ================== ================== =================
Per share data:
Net income per share:
Basic $ 0.02 $ 0.002
================== =================
Diluted $ 0.02 $ 0.002
================== =================
Weighted average number of shares:
Basic 6,520,040 7,781,091 (O) 14,301,131
================== ================== =================
Diluted 7,971,382 7,744,571 (O) 15,715,953
================== ================== =================
See Notes to Pro Forma Combined Financial Statements
(Unaudited)
-25-
HADRON, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
Historical Historical Pro Forma
Hadron Analex Adjustments Combined
------------ ------------ ---------------- ------------
Revenues $ 18,577,400 $ 31,302,012 $ - $ 49,879,412
Operating costs and expenses:
Costs of revenue 15,419,700 28,832,483 - 44,252,183
Selling, general and administrative 2,907,700 1,310,034 261,907 (L) 4,479,641
------------ ------------ ------------ ------------
Total operating costs and expenses 18,327,400 30,142,517 261,907 48,731,824
------------ ------------ ------------ ------------
Operating income 250,000 1,159,495 (261,907) 1,147,588
------------ ------------ ------------ ------------
Other expense (income):
Interest income (7,500) (7,217) - (14,717)
Interest expense 277,500 212,033 655,130 (J) 842,492
(302,171)(K)
Provision for disallowed contract costs - 189,219 - 189,219
Non-compete fees - 142,800 (142,800)(M) -
Employee stock ownership plan settlement - (211,147) - (211,147)
Other income (12,300) (21,162) - (33,462)
------------ ------------ ------------ ------------
Total other expense 257,700 304,526 210,159 772,385
------------ ------------ ------------ ------------
Income (loss) before income taxes (7,700) 854,969 (472,066) 375,203
Provision for income taxes 21,300 426,480 - 447,780
------------ ------------ ------------ ------------
Net income (loss) $ (29,000) $ 428,489 $ (472,066) $ (72,577)
============ ============ ============ ============
Per share data:
Net loss per share:
Basic $ (0.01) $ (0.01)
============ ============
Diluted $ (0.01) $ (0.01)
============ ============
Weighted average number of shares:
Basic 5,055,197 7,781,091 (O) 12,836,288
============ ============ ============
Diluted 6,139,538 7,763,622 (O) 13,903,160
============ ============ ============
See Notes to Consolidated Financial Statements
(Unaudited)
-26-
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2001 AND 2000, AND DECEMBER 31, 2000
1. Acquisition of Analex Corporation
---------------------------------
Effective November 2, 2001, the Company acquired Analex Corporation
("Analex"), a privately held engineering and program management firm whose
principal customers are NASA and the U.S. intelligence community. Analex will
operate as a wholly owned subsidiary.
Under the terms of the Agreement and Plan of Merger dated as of October
31, 2001 (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 $6.5 million in a combination of cash and the
satisfaction of certain liabilities of Analex as well as approximately 3.6
million shares of the Company's Common Stock, par value $0.02 per share ("Common
Stock"). Of the approximately 3.6 million of Common Stock issued to the holders
of Analex equity, 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 ("Guaranteed Shares"), if such
shares are sold within such period and if certain other conditions are
satisfied.
In addition, the Company issued promissory notes to certain Sellers
totaling $772,625 with a five-year term and entered into non-competition
agreements with these Sellers for total payments of $540,000. In the event the
Company is awarded the Expendable Launch Vehicle Integrated Services ("ELVIS")
contract by NASA pursuant to the current procurement, the Company will be
required to make additional payments to certain Sellers, pursuant to the
Agreement
To finance the Merger, the Company negotiated a new senior credit
facility with Bank of America, N.A. in the amount of $7.5 million, comprised of
(i) a term loan note in the amount of $3.5 million and (ii) a revolving line of
credit at $4 million. Bank of America has required the Company to obtain
personal guarantees in the amount of $2 million, which the Company 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 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 shares of common stock for aggregate consideration of
approximately $4 million through a private placement consisting of (i) 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 Common Stock and warrants to
purchase 0.2061 shares of 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.
The Merger is subject to various customary terms, conditions,
covenants, indemnities and events.
(A) Represents cash payments of $6,510,000 to the Sellers.
(B) Represents 3,572,143 shares of the Company's restricted common stock
distributed to the Sellers, recorded at the valuation price of $1.14
per share.
(C) Represents the issuance of promissory notes to certain Sellers totaling
$772,625, and the recording of liabilities related to non-competition
agreements of $892,195.
(D) Represents the issuance of 4,208,948 shares of restricted common stock
through a private placement, aggregating $4,067,740.
(E) Represents the $3,500,000 million term note and $1,310,627 of the $4
million revolving line of credit with Bank of America, used to finance
acquisition. A $75,000 fee was paid to Bank of
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America, which will be amortized over 60 months. In addition, total
warrants of 30,956 were issued to the two guarantors of the Bank of
America loans, resulting in deferred finance costs of $34,980.
(F) Represents the payment of the $375,000 United Bank term note, $661,000
United Bank line of credit, and the $660,715 Analex line of credit.
(G) Represents legal, financial and other obligations of $570,274
associated with the acquisition, of which $172,100 was prepaid and the
remaining was accrued.
(H) Represents goodwill of approximately $13,529,638 associated with the
purchase, representing the total cost of acquisition of $14,676,380 in
excess of the fair value of assets acquired of $6,971,930 and
liabilities assumed of $8,118,672.
(I) Represents elimination of $1,146,742 of Analex' stockholders' deficit
and $1,478,000 of deferred tax assets, and a $92,597 reclassification
between cash and other current liabilities in connection with purchase
accounting. Represents payment of Analex liabilities pursuant to, and
in connection with, the acquisition, of $728,000 of Shareholder notes,
$616,000 of disallowed contract costs, and $117,000 of accrued state
and local tax obligations.
(J) Represents the recording of the following interest expense:
1) At the rate of 6% per annum, related to the $727,625 promissory
notes issued in connection with the acquisition, of approximately
$34,768 and $46,358 for the nine months ended September 30, 2001 and
the twelve months ended December 31, 2000, respectively.
2) In connection with the discounted non-competition agreements, of
approximately $17,319 and $23,093 for the nine months ended September
30, 2001 and the twelve months ended December 31, 2000, respectively.
3) At the negotiated fixed rate of 7.5%, related to the Bank of America
$3.5 million term note of approximately $196,875 and $262,500 for the
nine months ended September 30, 2001 and the twelve months ended
December 31, 2000, respectively.
4) At the negotiated fixed rate of 7.5%, related to the Bank of America
$4.0 million revolving line of credit, assuming principal outstanding
of $1,310,627, of approximately $73,723 and $98,297 for the nine months
ended September 30, 2001 and the twelve months ended December 31, 2000
respectively.
5) Related to the Bank of America $75,000 fee, of approximately $11,250
and $15,000 for the nine months ended September 30, 2001 and the twelve
months ended December 31, 2000, respectively.
6) Related to the issuance of 30,956 warrants to guarantors of Bank of
America debt, of approximately $157,411 and $209,882 for the nine
months ended September 30, 2001 and the twelve months ended
December 31, 2000, respectively.
(K) Represents the elimination of the following interest expense:
1) Related to the United Bank term note, of $40,717 and $114,521 for
the nine months ended September 30, 2001 and the twelve months ended
December 31, 2000, respectively.
2) Related to the United Bank and Analex line of credits, of $120,868
and $187,650 for the nine months ended September 30, 2001 and the
twelve months ended December 31, 2000, respectively.
28
(L) Represents amortization of non-competition agreements, of $196,431 and
$261,907 for the nine months ended September 30, 2001 and the twelve months
ended December 31, 2000, respectively.
(M) Represents elimination of Analex' non-compete fees of $107,809 and $142,800
for the nine months ended September 30, 2001 and the twelve months ended
December 31, 2000, respectively.
(N) Represents the deficiency in the tangible net worth of Analex at
post-closing, of $451,441 below the required $80,000 which, pursuant to the
Agreement, will be repaid by Analex.
(O) Represents the impact of the acquisition on the Company's basic and diluted
earnings per share computations, as reflected below:
2. Pro Forma Earnings per Share
----------------------------
The following table sets forth the computation of pro forma basic and
diluted earnings per share for the nine months ended September 30, 2001 and the
twelve months ended December 31, 2000:
September 2001 December 2000
-------------- -------------
Numerator for diluted earnings per share:
Net income (loss) $ 27,854 $(72,577)
============== =============
Denominator:
Denominator for basic
earnings per share:
weighted average shares
outstanding 14,301,131 12,836,288
Effect of dilutive securities:
Warrants 1,235,163 978,446
Employee stock options 179,659 88,426
Convertible debt - -
-------------- -------------
Denominator for diluted
earnings per share 15,715,953 13,903,160
============== =============
Basic earnings (loss) per share $ .002 $ (.01)
============== =============
Diluted earnings (loss) per share $ .002 $ (.01)
============== =============
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.
29
3. Adjusted Pro Forma Earnings per Share
-------------------------------------
The Company has net operating loss (NOL) carryforwards for federal and
state purposes available to offset future taxable income in excess of
$5,000,000. The provisions for Analex' income taxes of $171,514 and $426,480 for
the pro forma nine months ended September 30, 2001 and the twelve months ended
December 31, 2000, respectively, would have been eliminated if the Company had
been combined at those dates.
The Company anticipates cost savings associated with its integration with
Analex, mainly in the areas of indirect staff and facilities' reductions, of
approximately $547,500 and $730,000 for the pro forma nine months ended
September 30, 2001 and the twelve months ended December 31, 2000, respectively.
With these adjustments, the Company's basic and diluted pro forma earnings
per share for the nine months ended September 30, 2001 and the twelve months
ended December 31, 2000 would be as follows:
September 2001 December 2000
-------------- -------------
Numerator for diluted earnings per share:
Net income $ 746,868 $ 1,083,903
============== =============
Denominator:
Denominator for basic
earnings per share:
weighted average shares
outstanding 14,301,131 12,836,288
Effect of dilutive securities:
Warrants 1,235,163 978,446
Employee stock options 179,659 88,426
Convertible debt - -
-------------- -------------
Denominator for diluted
earnings per share 15,715,953 13,903,160
============== =============
Basic earnings per share $ .05 $ .08
============== =============
Diluted earnings per share $ .05 $ .08
============== =============
30
SIGNATURE
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.
Hadron, Inc.
/s/ STERLING E. PHILLIPS, JR.
Date: January 4, 2002 By:__________________________________
Sterling E. Phillips, Jr.
President and Chief Executive
Officer
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