1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended October 31, 1996 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
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DAEDALUS ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-1873250
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 1869
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ANN ARBOR, MICHIGAN 48106 (313) 769-5649
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(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, $.01 par value, as of December 2,
1996
533,224 shares
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Page 2 FORM 10-Q
PART I - FINANCIAL INFORMATION
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months Ended
October 31,
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1996 1995
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OPERATING REVENUE
Standard products .....................$ 586,746 $ 488,576
Product development ................... 256,331 64,692
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843,077 553,268
Other Income 2,740 325
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845,817 553,593
COST AND EXPENSES
Cost of revenue - standard products.... 307,455 346,815
Cost of revenue - product development.. 213,808 66,514
Research and development .............. 29,128 117,529
Selling and administrative 256,949 303,994
Interest 15,618 16,383
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822,958 851,235
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NET EARNINGS (LOSS) BEFORE INCOME TAXES $ 22,859 (297,642)
CREDIT FOR INCOME TAXES - NOTE C 0 (17,000)
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NET EARNINGS ( LOSS) $ 22,859 $ (280,642)
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NET EARNINGS (LOSS) PER SHARE $ 0.04 $ (0.54)
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The accompanying notes are an integral part of these condensed financial
statements.
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Page 3 FORM 10-Q
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
October 31, July 31,
1996 1996
(unaudited)
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ASSETS - Note D
CURRENT ASSETS
Cash and cash equivalents ........................ $ 59,428 $ 56,768
Accounts receivable, less allowance of $2,500..... 291,147 259,079
Unbilled accounts receivable...................... 332,803 546,024
Inventories - Note B.............................. 570,285 640,213
Other current assets.............................. 9,176 7,829
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TOTAL CURRENT ASSETS 1,262,839 1,509,913
PROPERTY AND EQUIPMENT
Land.............................................. 177,131 177,131
Building.......................................... 1,433,898 1,433,898
Machinery and equipment........................... 818,944 817,640
Special equipment................................. 367,780 397,951
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2,797,753 2,826,620
Less accumulated depreciation..................... (1,640,889) (1,606,526)
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1,156,864 1,220,094
OTHER ASSETS................................................ 24,852 39,446
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$ 2,444,555 $ 2,769,453
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank - Note D...................... $ 342,000 $ 689,000
Accounts payable................................... 108,323 184,524
Accrued compensation and related costs............. 102,697 97,936
Accrued commissions................................ 44,227 1,129
Reserve for product warranties..................... 30,500 30,500
Other accrued liabilities.......................... 63,688 32,228
Current portion of long-term debt - Note D......... 256,678 261,261
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TOTAL CURRENT LIABILITIES 948,113 1,296,578
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized--2,000,000 shares............... 5,332 5,329
Issued and outstanding--533,224 shares
(July 31, 1996--532,924 shares)
Additional paid-in capital......................... 1,163,044 1,162,339
Retained earnings.................................. 328,066 305,207
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1,496,442 1,472,875
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$ 2,444,555 $ 2,769,453
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The accompanying notes are an integral part of these condensed financial
statements.
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Page 4 FORM 10-Q
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
October 31,
1996 1995
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OPERATING ACTIVITIES
Net earnings (loss) ................................................... $ 22,859 $ (280,642)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation .................................................. 34,363 46,919
Amortization of software ...................................... 14,594 17,997
Net book value of special equipment sold ...................... 138,726 0
Increase in deferred tax asset ................................ 0 (17,000)
Decrease in accounts receivable ............................... 181,153 589,946
Decrease (increase) in inventory .............................. 69,928 (20,659)
Decrease (increase) in other assets ........................... (1,347) 132,626
Decrease (increase) in accounts payable and accrued expenses.. 3,118 (161,055)
Decrease in customer deposits ................................. 0 (9,652)
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CASH PROVIDED BY OPERATING ACTIVITIES 463,394 298,480
INVESTING ACTIVITIES
Purchase of property and equipment .................................... (109,859) (15,385)
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CASH USED IN INVESTING ACTIVITIES (109,859) (15,385)
FINANCING ACTIVITIES
Proceeds from revolving line of credit ................................ 332,000 610,000
Payments on revolving line of credit .................................. (679,000) (847,000)
Payments on long-term debt ............................................ (4,583) (8,385)
Proceeds of stock issued pursuant to stock option and
stock purchase plan ........................................... 708 2,001
- ------------------------------------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (350,875) (243,384)
INCREASE IN CASH ............................................................... 2,660 39,711
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 56,768 76,797
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CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 59,428 $ 116,508
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The accompanying notes are an integral part of these condensed financial
statements.
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Page 5 FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
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, 1996.
The results of operations for the three months ended October 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
Certain reclassifications were made to the July 31, 1996 financial statements
to conform with the classification used in the October 31, 1996 financial
statements.
NOTE B - INVENTORY
Inventory includes work-in-process of approximately $63,000 and $104,000 as of
October 31, 1996 and July 31, 1996, respectively. The remaining inventory
consists of parts and subassemblies, both purchased and manufactured, that can
be used in the manufacturing process or sold as spare parts.
NOTE C - INCOME TAXES
The Company estimates its provision for income taxes using its estimated annual
effective rate. For the period ended October 31, 1996, the Company utilized
the income tax benefit of the net operating loss carryforwards to offset the
income tax provision for the first quarter earnings. The Company has limited
the recognition of income tax benefit for the remainder of its net operating
loss carryforwards due to cumulative losses realized in recent years. The
valuation allowance for deferred taxes at October 31, 1996 is $386,000.
NOTE D - REVOLVING CREDIT
On October 31, 1996, the Company had a $1,550,000 line of credit with a bank,
with availability subject to a formula, bearing interest at one and one-half
percent above the bank's prime rate. The formula is $950,000 based on the
value of the real estate, with the remaining available borrowings based on 50%
of the value of certain receivables specified in the line of credit agreement.
As of October 31, 1996, total availability was $1,018,000 pursuant to the
formula.
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The Company had an outstanding balance under this line of credit agreement of
approximately $342,000 at October 31, 1996, and a balance of $689,000 under the
prior line of credit agreement at July 31, 1996.
The Company has classified its total mortgage liability as a current liability
since the current line of credit is a secured master demand note. The line is
secured by substantially all of the Company's assets and does not include any
financial covenants.
NOTE F - 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 three month periods
ended October 31, 1996 and 1995. The weighted average number of shares used
in the computation was 533,124 and 515,404 for the three months ended October
31, 1996 and 1995, respectively, all of which were issued and outstanding. No
adjustments were made to either net earnings (loss) or the number of shares
outstanding in calculating earnings (loss) per share as such adjustments would
have been antidilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. The Company receives the majority of its
revenue from a small number of relatively large contracts. Standard product
contracts are generally of higher dollar value than customer-funded product
development contracts, with each contract representing a substantial portion of
total revenue 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
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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 Company was profitable in the first quarter of fiscal 1997 after incurring
significant losses in the last three fiscal years. The prior losses have
caused the Company to experience severe liquidity problems and its bank line
of credit is being utilized to maintain operations. However, the Company
received a substantial amount of new business in the last six months of fiscal
1996 and in the first quarter of 1997, which allowed it to be profitable for
that period of time (excluding the effect of a $149,000 valuation allowance
for deferred taxes recognized during the fourth quarter of fiscal 1996) and to
significantly reduce outstanding amounts borrowed under its line of credit.
The Company's short-term viability and operating results are dependent on its
ability to acquire additional equity capital or maintain the current levels of
new business and cash flow. See "Business Development - New Orders and
Backlog" and "Liquidity and Sources of Capital". The Company's long-term
viability is dependent upon its ability to successfully implement its Growth
Plan and attain consistent profitability. See "Business Development - Growth
Plan.
OPERATING REVENUE
Standard product revenue for the three month period ended October 31, 1996
increased from the comparable period of fiscal 1996 due to the Company's
recognition of revenue on a new standard product contract for $1,189,000
received in the first quarter of fiscal 1997. Product development revenue
increased in the first quarter of 1997 from the comparable period of 1996 due
to the Company's recognition of revenue on two product development contracts
received in late fiscal 1996.
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 contracts. Although
fluctuations are normal given the Company's reliance on a small number of high
value contracts for the majority of its revenue, the low level of standard
product orders received in the last three fiscal years is causing severe
liquidity problems. See "Business Development - New Orders and Backlog" and
"Liquidity and Sources of Capital".
DOMESTIC VS. INTERNATIONAL REVENUE
International revenue represented 65% and 83% of operating revenue during the
first three months of fiscal 1997 and 1996, respectively. International
revenue increased in absolute terms in the first quarter of fiscal 1997 from
the comparable period of fiscal 1996, primarily due to the Company's
recognition of revenue on a significant international contract received during
the first quarter of fiscal 1997. The international contracts received in
fiscal 1996 were received late in the year. The increase in domestic operating
revenue during the first quarter of fiscal 1997 from the same period in fiscal
1996 is due to the Company's recognition of revenue on two product development
contracts received in late fiscal 1996.
Management expects a significant portion of the Company's revenue to be
generated from the international market in fiscal 1997 and future years. To
mitigate foreign currency transaction losses, international contracts are
denominated in U.S. dollars and large standard product
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contracts are generally secured by irrevocable letters of credit. The Company
also receives substantial deposits on many large contracts with international
customers.
BUSINESS DEVELOPMENT
Growth Plan
One challenge facing the Company is to develop additional markets that will
allow future growth in revenues and profits. In early fiscal 1995, management
developed a three-pronged growth plan to add revenue and profits to the
Company's current core business. Since that time, management has concentrated
its efforts on the two areas of the plan with the most near-term potential.
The first growth area involves the use and sale of airborne digital cameras
(ADC) developed by the Company for the mapping of infrastructure within narrow
corridors. Examples of the types of infrastructure that would be mapped with
such a system include gas pipelines, electrical distribution systems, railroads
and highways. The Company is currently developing an enhanced version of the
ADC and is investigating various image processing systems that may be bundled
with the ADC for delivery to its customers and for use by the Company in
performing services for customers. The Company completed three contracts in
fiscal 1996 for which it utilized the ADC. The Company believes that there is
a sizable market for data that can be produced with its current ADC and
believes that the completion of the enhanced ADC will give the Company added
capabilities, increasing the size of the potential market. In the fourth
quarter of fiscal 1996, the Company entered into a Marketing Alliance with a
major company which provides infrastructure maintenance services to electric
and gas utilities and railroads in the United States and Canada. The Company is
also continuing to pursue various alternatives to obtain the additional funding
necessary to bring these services to market. However, there can be no
assurance that such funding will be obtained. See "Liquidity and Sources of
Capital".
The other growth area involves performing domestic environmental
surveys to provide a better applications market for its airborne multispectral
scanners. In order to exploit this market, the Company must perform specific
applications and show the results to be reliable and cost-effective. To date,
the Company has completed several contracts in this area and continues to
pursue other demonstration projects.
Although implementation of the growth plan began in fiscal 1995,
material revenue impact is not expected until late fiscal 1997 at the earliest.
These strategies are intended to reduce fluctuations in the Company's revenue
and earnings and enhance the Company's profitability and stockholder value.
However, the Company's implementation of these growth initiatives has been
slowed by the small size of the Company's staff, by its current financial
position and by the lack of solid market information caused by the Company's
limited resources. The Company is seeking partners and additional financing to
help bring these services into the market more quickly. See "Liquidity and
Sources of Capital".
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New Orders and Backlog
In the three months ended October 31, 1996, the Company received orders in the
amount of approximately $1,259,000 as compared to approximately $192,000 in the
comparable period of fiscal 1996. Approximately $1,189,000 of the bookings
received by the Company in the first quarter of fiscal 1997 were for standard
products, with the remainder for customer funded service orders. The Company
has also been awarded two new contracts totaling $789,000 in the second quarter
of fiscal 1997. The Company's backlog at the end of the first quarter was
approximately $1,430,000, compared to approximately $213,000 at the end of the
comparable period in fiscal 1996. Approximately $725,000 of the first quarter
fiscal 1997 backlog is for standard products, with the majority of the balance
being related to the two Phase II Small Business Innovation Research (product
development) contracts awarded during the first quarter of fiscal 1996 and
executed in the third quarter.
The Company is engaged in negotiations for several standard product
orders. The negotiations for these orders have not been finalized and there
can be no assurance that these orders will be received. The Company has begun
production for some of these standard product orders and has costly
subcomponents for one of the potential orders in stock.
The Company's ability to retain its line of credit and continue operations
depends upon the receipt of additional significant orders during fiscal 1997 in
addition to approximately $2,000,000 of orders already received in fiscal 1997.
Management is hopeful that such orders will be received although no assurances
can be given. See "Liquidity and Sources of Capital". The results of
operations for future periods are dependent upon the receipt and timing of
future orders and the success of Management's growth strategy.
COST OF REVENUE
In the first quarter of fiscal 1997, cost of revenue decreased as a percentage
of revenue compared to the same period in fiscal 1996 due primarily to higher
standard product profitability. Contributing to the higher cost of revenue
percentage in fiscal 1996 were higher overhead rates due to the Company
operating significantly below capacity.
The cost of revenue percentage for the remainder of fiscal 1997 will be
dependent upon the timing and mix of future contracts. See "Business
Development - New Orders and Backlog".
RESEARCH AND DEVELOPMENT
Research and development expense declined in the first quarter of fiscal 1997
as compared to the same period one year earlier primarily due to a significant
portion of the ADC enhancements being completed in the first quarter of fiscal
1996. The higher research and development expense in the first quarter of
fiscal 1996 was also due to the higher than normal overhead rates.
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SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expense decreased in the first quarter of fiscal
1997 compared to the same period in fiscal 1996, primarily due to the Company's
fiscal 1996 third quarter staffing reductions.
INTEREST
Interest expense decreased in the first quarter of fiscal 1997 compared to the
same period in fiscal 1996 due principally to the Company's reduced borrowings.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's primary sources of liquidity were funds from operations and
borrowings under a secured line of credit. The Company's line of credit
provides for borrowings of up to $1,550,000, with an availability formula
allowing borrowings of up to $950,000 based on the value of the real estate,
with the remaining available borrowings based on 50% of the value of certain
receivables specified in the line of credit agreement. The line of credit is a
demand note which is secured by substantially all of the Company's assets and
contains no financial covenants. The interest rate on both the line of credit
and the mortgage is at one and one-half percent above the bank's prime rate.
As of October 31, 1996, borrowings under the line of credit formula were
limited to approximately $1,018,000 pursuant to the availability formula. At
that date, the Company had an outstanding balance of $342,000 under the line
of credit and an additional $238,000 of the line reserved for a standby letter
of credit. The mortgage continues to require the Company to make monthly
payments of $3,583 for both principal and interest and to make a balloon
payment on November 1, 2000.
The bank is permitted under the line of credit agreement to declare such
indebtedness due and payable at any time and is not obligated to make further
advances at any time. If the Company is unable to borrow amounts necessary to
fund its operations or is required by the bank to repay the line of credit, its
financial position would be materially and adversely affected and the Company
may have no choice but to cease operations. Moreover, the Company must
continue to significantly increase its backlog during fiscal 1997 in order to
generate sufficient cash flow to sustain its operations.
In order to provide additional working capital and retire current debt, the
Company is attempting to sell its building and lease back a portion of the
facility from the new owner. There can be no assurance that the building can
be sold at a price acceptable to the Company or that an acceptable lease-back
agreement can be negotiated. If the Company must relocate, management is
confident that a suitable facility can be found and that the Company's business
will not be materially disrupted. The sale of the building is expected to
result in the repayment of all currently outstanding indebtedness to the
Company's bank lender and the termination of the existing line of credit.
Management believes that a new line of credit supported by receivables and
other assets of
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the Company can be negotiated with the current bank lender, or a substitute
bank, which will be adequate to support the Company's working capital needs
provided that the Company's backlog increases significantly over the current
level. The Company might also negotiate a line of credit secured by the
irrevocable letters of credit received on large orders from international
customers. However, any new line of credit is likely to permit substantially
less borrowing than the current line of credit. There can be no assurance that
the Company will be able to acquire a replacement line of credit at all or that
the level of borrowing permitted under any replacement line of credit will be
adequate for the Company's working capital needs. The Company is also actively
pursuing additional equity financing through discussions with potential
investors possessing related technological and/or marketing capabilities that
can help the Company develop new markets for its facility management
information technology. However, there can be no assurance that such financing
can be obtained.
Working capital increased to $315,000 at October 31, 1996 from $213,000 at
July 31, 1996, due primarily to the increased revenue and earnings for the
first quarter. Current assets declined by approximately $247,000 due primarily
to the utilization of inventory parts for orders received in the first quarter
and by the collection of a large portion of the July 31, 1996 unbilled accounts
receivable. Funds from these collections were used for payments on the line of
credit and to reduce accounts payable.
Cash flow from operating activities was $463,000 during the first quarter of
fiscal 1997 due primarily to the $181,000 reduction in accounts receivable, the
$139,000 sale of special equipment and the $70,000 reduction of inventory as
compared to $298,000 in the first quarter of fiscal 1996.
The Company expects to invest approximately $100,000 during the remainder of
fiscal 1997 for capital expenditures, primarily for equipment and software
relating to the Company's growth plan. Due to its current financial position,
the Company intends to reduce internal research and development expenses and to
keep marketing and other administrative costs to a minimum until its financial
condition improves significantly.
PART II - OTHER INFORMATION
Item 6(a): Exhibits
Exhibit No. Description
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10.613 Form of Incentive Stock Option Agreement Under Long-Term
Incentive Plan
27 Financial Data Schedule
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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: December 6, 1996 by: /s/ Thomas R. Ory
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Thomas R. Ory, President & CEO
(Duly Authorized Officer)
Date: December 6, 1996 by: /s/ Jane E. Barrett
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Jane E. Barrett, Treasurer
(Principal Financial & Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.613 Form of Incentive Stock Option Agreement Under Long-Term
Incentive Plan
27 Financial Data Schedule