UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X)[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the quarter ended April 30,October 31, 1995 Commission File Number 0-8193
OR
( )[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from -------------- to --------------
DAEDALUS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-1873250
(State or other jurisdiction of (I.R.S. Employer
of
incorporation or organization) Identification No.)
P.O. Box 1869
Ann Arbor, Michigan 48106 (313) 769-5649
(Address of principal executive offices) (Registrant's telephone number)no.)
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)[X] No ( )[ ]
Number of shares outstanding of common stock, $.01 par value, as of
June 13,December 8, 1995: 514,913515,654 shares
PART I - FINANCIAL INFORMATION
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
Nine Months Ended Three Months Ended
April 30, April 30,October 31,
------------------
1995 1994
1995 1994
Revenue-Standard Products ------ ------
Operating Revenue
Standard products.............................$ 225,840 $1,103,669 $85,042 $337,284
Revenue-Product Development 1,074,665 1,594,587 458,264 364,890
--------- ---------488,576 $30,901
Product development........................... 64,692 376,488
-------- -------
553,268 407,389
Other Income..................................... 325 2,148
-------- -------
1,300,505 2,698,256 543,306 702,174
Other Income 8,333 6,069 1,931 1,477
--------- --------- ------- -------
1,308,838 2,704,325 545,237 703,651553,593 409,537
Cost and Expenses
Cost of revenue - standard products 154,533 413,121 67,493 107,112products........... 346,815 8,818
Cost of revenue - product development 650,382 1,459,636 267,436 393,575development......... 66,514 208,878
Research and development 510,186 211,246 59,133 86,234development...................... 117,529 267,719
Selling and administrative 956,906 859,487 260,963 278,824
Interest 57,506 24,537 24,911 9,965administrative.................... 303,994 360,447
Interest...................................... 16,383 11,314
-------- --------- -------
-------
2,329,513 2,968,027 679,936 875,710
--------- ---------851,235 857,176
------- -------
LOSS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (1,020,675) (263,702) (134,699) (172,059)(297,642) (447,639)
Credit for Income Taxes - Note F (347,000) (102,000) (46,000) (73,000)
----------- --------- -------- --------
LOSS BEFORE CUMULATIVE
CHANGE IN ACCOUNTING PRINCIPLE (673,675) (161,702) (88,699) (99,059)
Cumulative Change in
Accounting Principle Net of
Approximately $9,000 of Income
Taxes - Note B 0 22,187 0 0
---------- ---------- --------- --------
NET LOSS $(673,675) $(139,515) $(88,699) $(99,059)
========== ========== ========= =========
Loss Per Share Before Change
in Accounting Principle $(1.31) $(0.32) $(0.17) $(0.20)
Cumulative Effect of Change
in Accounting Principle -
Note B 0.00 0.04 0.00 0.00
-------- -------D................. (17,000) (151,000)
------- -------
NET LOSS $(280,642) $(296,639)
======= =======
NET LOSS PER SHARE $(1.31) $(0.28) $(0.17) $(0.20)
========= ======= ======= =======- Note F $ (0.54) $ (0.58)
==== ====
DIVIDENDS DECLARED PER SHARE $0.08 $0.15 $0.00 $0.08
========= ======= ======= ======
Pro Forma Amounts Assuming the
Change in Accounting Principle
is Applied Retroactively
NET LOSS $(673,675) $(161,702) $(88,699) $(99,059)
========== ========== ========= =========
NET LOSS PER SHARE $(1.31) $(0.32) $(0.17) $(0.20)
========== ========== ========= =========$ 0.00 $ 0.08
==== ====
The accompanying notes are an integral part of these condensed financial
statements
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
April 30,October 31, July 31,
1995 1994
(Unaudited)1995
--------- ---------
(unaudited)
ASSETS
Current AssetsAssets:
Cash and cash equivalentsequivalents..................... $ 79,938116,508 $ 163,15876,797
Accounts receivable, less allowance of $2,500 140,500 661,427$2,500. 198,090 112,401
Unbilled accounts receivable - Note C 192,816 113,128C......... 613,948 1,289,583
Inventories - Note D 1,373,510 1,111,637
Income tax receivable 0 223,946C......................... 656,200 635,541
Deferred tax asset 398,212 92,000asset............................ 57,000 57,000
Deposits...................................... 0 131,000
Other current assets 18,248 30,464
---------- ----------assets.......................... 39,356 39,496
--------- -----------
TOTAL CURRENT ASSETS 2,203,224 2,395,7601,681,102 2,341,818
Property and Equipment - Note E
LandEquipment:
Land.......................................... 177,131 177,131
Building 1,432,661 1,432,661Building...................................... 1,433,898 1,433,898
Machinery and equipment 1,065,645 1,190,708equipment....................... 819,105 807,222
Special equipment 465,620 218,805equipment............................. 459,151 455,649
---------- ---------
3,141,057 3,019,305-----------
2,889,285 2,873,900
Less accumulated depreciation (1,688,005) (1,573,470)depreciation................. (1,511,277) (1,464,358)
---------- -----------
1,378,008 1,409,542
Deferred Tax Asset.............................. 88,000 71,000
Other Assets.................................... 88,574 108,057
---------- -----------
1,453,052 1,445,835
Other Assets 130,867 199,639
----------- -----------$3,235,684 $ 3,787,143 $ 4,041,2343,930,417
========== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current LiabilitiesLiabilities:
Note payable to bank - Note GE................. $ 882,000 $ 125,000405,000 $642,000
Accounts payable 145,590 75,943payable.............................. 65,566 163,531
Accrued contract costscosts........................ 22,950 87,85022,950
Compensation and related accounts 152,785 151,252accounts............. 133,033 150,401
Accrued commissions........................... 115,874 176,755
Customer depositsdeposits............................. 0 156,099
Accrued commission 8,127 69,0589,652
Reserve for product warranties 5,002 90,425warranties................ 49,523 54,354
Other accrued liabilities 56,515 41,183liabilities..................... 58,084 38,094
Current portion of long-term debt 290,661 36,857
--------- -------- Note E.... 32,588 282,608
-------- --------
TOTAL CURRENT LIABILITIES 1,563,630 833,667882,618 1,540,345
Long-term Debt - Note E......................... 241,635 0
278,422
Deferred Income Taxes 99,000 99,000
Stockholders' EquityEquity:
Common stock, $.01 par value
Authorized--2,000,000 shares
Issued and outstanding-- 514,913outstanding--515,654 shares
July(July 31, 1994--511,5331995--514,913 shares)...... 5,157 5,149 5,115
Additional paid-in capitalcapital.................... 1,115,124 1,113,131
1,104,145
Retained earnings 1,006,233 1,720,885earnings............................. 991,150 1,271,792
--------- ---------
2,124,513 2,830,1452,111,431 2,390,072
--------- ---------
$ 3,787,143 $ 4,041,234
=========== ===========$3,235,684 $3,930,417
========= =========
The accompanying notes are an integral part of these condensed financial
statements
DAEDALUS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
Increase (Decrease) in Cash
NineThree Months Ended
April 30,October 31,
1995 1994
------------- ------------
Operating Activities
Net loss before cumulative effect of
change in accounting principal - Note Bloss................................ $ (673,675)(280,642) $ (161,702)(296,639)
Adjustments to reconcile net income to
net cash used in operatingopearting activities
Depreciation 114,967 140,749Depreciation........................ 46,919 38,364
Amortization of software 64,317 74,489
Net book value of special equipment
transferred to inventory -Note E 0 124,466
Loss on disposal of property and equipment 0 129
Decrease (increase) in accounts receivable* 441,239 (287,691)
Increase in inventory* (261,873) (100,148)software............ 17,997 24,198
Increase in deferred tax asset (306,212) 0asset...... (17,000) (151,000)
Decrease in accounts receivable..... 589,946 194,605
Increase in inventory............... (20,659) (38,546)
Decrease (increase) in income tax receivable 223,946 (78,133)
Decrease in other assets 16,671 13,871assets. 132,626 (1,206)
Decrease in accounts payable and
accrued expenses* (124,742) (111,251)
Increase (decrease)expenses.................. (161,055) (56,253)
Decrease in customer deposits* (156,099) 126,722deposits....... (9,652) (108,842)
--------- ---------
CASH USED INPROVIDED BY (USED IN) OPERATING ACTIVITIES (661,461) (258,499)298,480 (395,319)
--------- ---------
Investing Activities
Purchase of property and equipment (122,184) (171,271)
Investment in capitalized software 0 (44,692)equipment....... (15,385) (52,482)
--------- ---------
CASH USED IN(USED IN) INVESTING ACTIVITIES (122,184) (215,963)(15,385) (52,482)
--------- ---------
Financing Activities
Proceeds from revolving line of credit 2,087,000 580,000credit.... 610,000 631,000
Payments on revolving line of credit (1,330,000) (580,000)credit...... (847,000) (255,000)
Payments on long-term debt (24,618) (28,165)
Payments of dividends (40,977) (76,189)debt................ (8,385) (8,474)
Proceeds of stock issued pursuant to
stock option and stock purchase plan 9,020 4,257
----------plan.... 2,001 1,714
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 700,425 (100,097)
----------(243,384) 369,240
--------- Decrease---------
Increase (Decrease) in Cash (83,220) (574,559)Cash................. 39,711 (78,561)
Cash and Cash Equivalents at Beginning
of YearYear................................... 76,797 163,158
918,019
---------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $116,508 $ 79,938 $343,460
==========84,597
========= *Excluding effect of accounting change in the nine months ended April 30,
1994.========
The accompanying notes are an integral part of these condensed financial
statements.statements
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 30,October 31, 1995
Note A - Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the results of operations,operation, financial position
and cash flows for the periods presented. The accompanying unaudited
financial statements have been prepared in accordance with the
instructions to Form 10-Q and, therefore, do not include all information
necessary to be in conformity with generally accepted accounting
principles.
Reference is made to the Notes to Consolidated Financial Statements in
the Annual Report to Stockholders for the year ended July 31, 1994.1995.
The results of operations for the nine and three months ended April 30,October 31, 1995 are
not necessarily indicative of the results to be expected for the full
year.
Note B - Revenue Recognition
Effective August 1, 1993, the Company changed from completed component
to cost incurred as a percentage of the total estimated cost as the method for
determining percentage completion for revenue recognition on standard product
contracts. The Company believes that, due to the increased complexity of its
standard product contracts,percentage-of-completion, based on cost incurred as
a percentage of total estimated cost, provides a better matching of revenue
and earnings with the related economic activity of the Company.
The cumulative effect of this accounting change at August 1, 1993
reduced the loss by $22,187 or $.04 per share for the nine months ended April
30, 1994.
Note C - Unbilled Accounts Receivable
Unbilled accounts receivable represent the revenue recognized pursuant to
standard system contracts and customer-funded product development
contracts using the percentage-of-completion method but which are not yet
billable under the terms of the contract. These amounts are billable
based on contract terms either upon shipment of the items, presentations
of invoices, or completion of the contract. The cost of such revenue is
determined generally by separate job cost accounts and involves no
deferral of cost. If the estimated total costs on any contract indicate
a loss, the entire amount of the estimated loss is recognized
immediately (seeimmediately.
Note B).
Note DC - InventoriesInventory
Inventory includes work-in-process of approximately $770,000$111,000 and $518,000$91,000
as of April 30,October 31, 1995 and July 31, 1994,1995, respectively. The remaining
inventory consists of parts and subassemblies, both purchased and
manufactured, that could be used in the manufacturing process or sold as
spare parts.
Note E - Property and Equipment
Property and equipment is stated at cost. Property and equipment is
depreciated over the useful life by the straight-line method for financial
reporting purposes. Machinery and equipment includes construction-in-
progress, relating to a multispectral scanner, at July 31, 1994 in the
amount of approximately $143,000.
Special equipment consists of equipment manufactured by the Company and
includes direct manufacturing costs and overhead. Such equipment which is
used in manufacturing or research activities of the Company is normally
offered for sale by the Company. Therefore, revenue from the sale of such
equipment is included in sales and the depreciated cost is in cost of sales.
During the nine month period ended April 30, 1994, the Company transferred to
work-in-process one such system with a cost of approximately $124,000.
Note FD - Income Taxes
The Company's provision for income taxes for the periodsperiod ended April 30,
1995 andOctober 31,
1994 was determined using the Company's estimated annual effective rate.
The difference in fiscal 1994 between the Company's effective rate and the statutory
rate of 34%35% is primarily due to surtax exemptions.
For the tax benefitperiod ended October 31, 1995, the Company has limited the
recognition of credit for income taxes due to the cumulative losses
realized in recent years. The Company generated a foreign
sales corporation.valuation allowance of
$84,000 in the quarter ended October 31, 1995. The valuation allowance
relates to net operating loss generated in the current fiscal year.
Note G -E- Revolving Credit
On April 30,October 31, 1995, the Company had a $3,000,000$1,700,000 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 Company had an outstanding balance under this line of credit of approximately
$882,000 with an additional $79,420formula is the
appraised value of the line reserved to support an
existing standby letterCompany's building, $1,712,000, less the amount of
credit. The outstanding balance was $125,000 at
July 31, 1994.
On November 30, 1994, the Company and the bank amended the line of
credit agreement with availability on the $3,000,000 line subject to a
formula. The formula is $1,120,000mortgage plus 75% of qualified accounts receivable and 50% of
qualified unbilled accounts receivable. As of April 30,October 31, 1995, the total
availability was approximately $1,476,000 pursuant to this availability
formula. The Company had an outstanding balance under this line of
credit of approximately $405,000 and $642,000 at October 31 and July 31,
1995 with an additional $1,029,420 of the formula, is approximately $1,332,000.line reserved to support
existing standby letters of credit at October 31 and July 31, 1995.
The line of credit agreement includes certain covenants some of which requirerequiring the
Company to maintain certaina minimum tangible effective net worth amounts, which increase over the life
of the contract, and a certain liquid asset ratio. As of April 30, 1995, the
bank has waived the Company's noncompliance with the tangible net worth andminimum
liquid asset to current liabilitiesliability and debt coverage ratios. The Company
was in compliance with these covenants at October 31, 1995. Continued
compliance is dependent upon the Company receiving a substantial amount
of new business in the Company's line of credit
resulting from the loss in the thirdsecond quarter of fiscal 1995. The Company's
next covenant measurement date is July 31, 1995.1996.
Note HF - Earnings Per Share
The computation of net earnings per share is based on the weighted
average number of shares of common stock outstanding during the nine and three
month periods ended April 30,October 31, 1995 and 1994. The weighted average
number of shares used in the computation was 512,739515,404 and 505,602 for the nine months
ended as of April 30, 1995 and 1994, respectively, and 514,097 and 505,856511,907 for the
three months ended as of April 30,October 31, 1995 and 1994, respectively, all of which
were issued and outstanding. No adjustments were made to either net loss
or the number of shares outstanding for common stock equivalents in
calculating earnings per share as such adjustments would have been
antidilutive.
There was no material difference between primary and fully diluted
earnings per share for the periods ended April 30,October 31, 1995 and 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONSManagement'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 revenuescontracts are generally of highhigher dollar value than
customer-funded product development contracts, with each contract
representing a substantial portion of total salesrevenue each year.
Therefore, the timing of the receipt of a standard product sales contract
as well as the related manufacturing endeavor can have a material impact
on a quarter-to-quarter or year-to-year comparison of the Company's
results of operations. Most standard product sales contracts and some
customer-funded product development contracts are also accompanied by a
significant deposit. Therefore, the timing of the contract receipt can
have a material impact on the Company's cash flow.
The Company has embarked on its growth plan and is in discussion with
several potential standard product customers regarding possible
contracts. The Company is hopeful that it will receive these contracts
in fiscal 1996, although no assurances can be given. See "Business
Development". The Company's future liquidity, financial position and
results forof operations and its ability to successfully execute its growth
plan are dependent upon its ability to generate increases in new business
and cash flow to a level sufficient to allow the remainderCompany to maintain its
compliance with the terms and covenants of its new line of credit
agreement. The Company's long-term financial prospects are dependent
upon the Company's ability to successfully implement its growth plan and
attain consistent profitability. The results of fiscal 19951996 will be
largely dependent upon the receipt and the timing of the receipt of
potential contracts currently under discussion. See "Business
Development - New OrdersDevelopment" and Backlog""Liquidity and Sources of Capital".
Operating Revenue
BothOperating revenue was significantly higher in the first quarter of fiscal
1996 than in the first quarter of fiscal 1995, but was not adequate to
produce a profit for the quarter. The vast majority of the increase in
standard product andrevenue is attributable to the two standard product
contracts received in the fourth quarter of fiscal 1995, one of which was
completed in the first quarter of fiscal 1996; the other was completed in
November, 1995. Product development revenue fordeclined in the nine
months ended April 30, 1995 were substantially less than that for the
comparable periodfirst
quarter of fiscal 19941996 as compared to the same period one year earlier
due to reducedthe low level of product development backlog at the beginning of
fiscal 19951996 and delays in booking new standard product contracts.
Customer-funded product development revenue decreased in the nine months ended
April 30, 1995 as compared to the same period of fiscal 1994 for the same
reasons. Customer-funded product development revenue increased in the quarter
ended April 30, 1995 as compared to the same quarter of fiscal 1994 due
primarily to the low level of standard product workload allowing the Company
to focus additional resources on customer-funded product development revenueproduct-development contracts received
in the three months ended April 30, 1995.
Approximately $795,000 and $264,000 of the standard product revenue
earned in the nine months and quarter ended April 1994 was related to a
contract on which the Italian customer eventually defaulted in late fiscal
1994 (the "Defaulted Contract"). As was the case in the first nine months of
fiscal 1994, the majority of the revenue earned in the first nine months of
fiscal 1995 was attributable to contracts received prior to the beginning of
the fiscal year. See "Business Development - New Orders and Backlog".quarter.
The level of the Company's revenuesrevenue and profits has historically
fluctuated from quarter-to-quarter and from year-to-year as the majority
of its revenue is derived from a small number of high dollar value
equipment sales to a relatively small number of customers. Such
fluctuations are normal given the Company's reliance on a small number of
high value contracts for the majority of its revenue. See "Business
Development - Growth Plan", but
current levels.
Domestic vs. International Revenue
International revenue generated approximately 83% of operating revenue are not adequate to sustain the Company, see
"Business Development - New Orders and Backlog" and "Liquidity and Sources of
Capital".
Standard Product vs. Customer-Funded Product Development Revenue and Margins
Standard product revenue declined substantially in the three and nine
month periods ended April 30, 1995 as compared to the same periods of fiscal
1994 due to the low level of standard product orders in the Company's backlog
at the beginning of fiscal 1995 and the low level of standard product orders
received in
the first nine months of fiscal 1995. Standard product margins
decreased significantly due to the lack of any major standard product
contracts in fiscal 1995. Approximately $795,000 of standard product revenue
and $233,000 of standard product cost of revenue during the first nine months
of fiscal 1994 were related to the Defaulted Contract. See "Business
Development - New Orders and Backlog" for a further discussion of this
contract. Standard product contracts generally have a much higher margin than
product development contracts. Therefore, it is a goal of Management to
increase the percentage of revenue derived from standard product contracts.
Another goal of management is to develop new products that will reduce the
fluctuations in standard product revenue between periods while increasing the
Company's profits. See "Business Development - Growth Plan".
Customer-funded product development revenue generated 83% and 84% of
operating revenue during the nine and three month periods ended April 30,
1995, respectively, as compared to 59% and 52% of operating revenue during the
comparable periods of fiscal 1994, respectively, but declined overall by 33%
in the first nine months of fiscal 1995 due to the low level of backlog at the
beginning of the fiscal year and the low level of product development orders
received in the first nine months of fiscal 1995. Customer-funded product
development revenue increased by 26% in the third quarter of fiscal 19951996 as compared to the comparable period of fiscal 1994 as the low level of standard
product workload allowed the Company to focus additional resources on
customer-funded product development contracts. Margins during such periods in
fiscal 1995 improved over the comparable periods in fiscal 1994 due to cost
overruns on the development of MIVIS and its related image processing system
in fiscal 1994. The customer-funded product development contract for the
development of MIVIS accounted for approximately 19% and 3% of operating
revenue for the nine and three month periods ended April 30, 1994,
respectively. This contract was completed in fiscal 1994 and therefore did
not generate any revenue in fiscal 1995.
Domestic vs. International Sales and Revenue
International revenue accounted for 14% and 54% of operating revenue
during the first nine months fiscal 1995 and 1994, respectively, while
generating 20% and 43% of operating revenue during the third quarters of
fiscal 1995 and 1994, respectively. Had the Company not recognized revenue on
the Defaulted Contract in the nine and three month periods ended April 30,
1994, international customers would have accounted for approximately 35% and 8% of operating revenue
in the ninefirst quarter of fiscal 1995. The increase in international
revenue, both in absolute terms and three month periods ended April 30,
1994, respectively. Historically, the majorityas a percentage of theoperating revenue,
is attributable to two standard product development
projectscontracts received by the Company
have been received from domesticEuropean customers andin the majorityfourth quarter of major standard product contracts have been received from
international customers. For this reason, the level of international sales
tends to mirror the level of standard product revenue.fiscal 1995.
Management is hopeful
thatexpects the international market willto continue to be a major
source of revenue in the
remainder of fiscal 19951996 and future years. See "Business Development - New
Orders and Backlog". To insure against
foreign currency transaction losses, international contractsrevenues are
denominatedcontracted in U.S. dollars and large standard product contracts
are generally secured by irrevocable letters of credit.US dollars. The Company also receives substantial deposits on
many large contracts with international customers. Many such depositscontracts
are backed upsecured by standbyirrevocable letters of credit
issued by the Company.
credit.
Other RevenueIncome
Other income, for the periods presented, is comprised principally of
interest and rental income. The level of interestsuch income is determined by cash on hand
and interest rates. The timing of contract receipt and level of deposits
received have a substantial impact on such income.
The Company does
not expect significant interest or rental income for the remainder of the
current fiscal year.
Major Customers
The customers to whom the Company sells change from year to year. No
single customer has generated a majority of the Company's revenue during any
consecutive years. The U.S. government accounted for a majority of the
Company's operating revenue in both fiscal 1994 and the first nine months of
fiscal 1995. It is too early to determine what impact, if any, the attempts
to balance the federal budget may have on the Company's revenue in the short
or long term.
Although Italian customers have been an important source of revenue for
the Company in recent years, generating 49% and 42% of operating revenue for
the nine and three month periods ended April 30, 1994, respectively, such
customers generated only 5% and 11% of operating revenue during the comparable
periods of fiscal 1995. Had the Company not recognized revenue on the
Defaulted Contract in fiscal 1994, Italian customers would have accounted for
28% and 6% of operating revenue during the nine and three month periods ended
April 30, 1994, respectively. Sales to Italian customers are expected to
generate a significant percentage of revenue in the remainder of fiscal 1995
as the Company expects to substantially complete the Defaulted Contract prior
to fiscal year-end. See "Business Development - New Orders and Backlog".
Business Development
Growth Plan
One challenge facing the Company is to develop additional markets that
will allow future growth in revenuesrevenue and profits. In early fiscal 1995,
Management has developed a three-pronged growth plan to add revenue and
profits to the Company's current core business.
In furtheranceThe 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 growth plan, the Company successfully tested the
Airborne Digital Camera during fiscal 1995types of
infrastructure that would be mapped with such a system include gas
pipelines, electrical distribution systems, railroads and delivered its first production
version in March 1995.highways. The
Company is studying various methodscurrently developing an enhanced version of capitalizing on this new product, including selling itthe ADC and using it to
establish a service segment. The Company is
researchinginvestigating various image processing and Geographic Information System packagessystems that may be bundled with
the camera developedADC for delivery to its customers and for use by the Company.Company in
performing services for customers. The Company has recently received a
contract for which it will utilize the ADC and has partially completed
the contract. The Company has also performed two demonstration projects
with its ADC and is exploring various avenueshoping to use the data gathered as a result of establishingthese
projects to obtain a domestic
and/or international remote sensing servicepilot program
including
for its services from each of two potential customers. 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.
The second prong of the Company's growth plan involves the formation of
partnerships to obtain and joint ventures. The Company has also hired a consultant
to help the Company in developing strategies for the exploitation of the
domestic and international airborne remote sensing markets. The Company has
built an Airborne Multispectral System (AMS) that it intends to use in
performing domestic andperform international remote sensing service programs.
To this end, the Company entered into three teaming agreements in fiscal
1995 with the intent to sell the combined capabilities to large
consulting engineering companies that are typically the prime contractors
for such international programs. The Company, through a sales
representative, is currently pursuing international remote sensing
programs. To date, the Company has not received any contracts in this
area of business.
The third growth area involves performing domestic environmental remote
sensing programs. In order to exploit this market, the Company must
perform specific applications and show the results to be reliable and
cost-effective. To that end, the Company has pursued and obtained a
small remote sensing program and is pursuing other demonstration
projects. The Company plans to enter into additional business agreements
aimed at developing a corporate domestic environmental assessment
capability.
Although implementation of the growth plan began in fiscal 1995, revenue
is not expected to be affected materially until late in fiscal 1996 at
the earliest. If successful, these strategies are expected to reduce
fluctuations in the Company's revenue and earnings and enhance the
Company's profitability and shareholder value. AlthoughHowever, the Company's
implementation of these growth initiatives has been slowed by the small
size of the Company's staff and by its current financial position. Also
contributing to the delay in implementing the growth plan is the
Company's lack of solid market information caused by the Company's
limited resources. The Company has received one contract for a
domestic environmental monitoring projectis seeking partners and hopesadditional
financing to receive additional
contracts for domestic pilot projects in fiscal 1995, revenues are not
expected to be affected materially until at least late fiscal 1996.
help bring these services into the market more quickly. See
Liquidity and Sources of Capital.
New Orders and Backlog
In the nine months ended April 30, 1995,first quarter of fiscal 1996, the Company received orders in
the amount of
approximately $604,000$192,000 as compared to orders of approximately $2,426,000$155,000 in
the first nine monthsquarter of the preceding year. Approximately $130,000 of the
fiscal 1994. Included1996 orders, including approximately $46,000 of service projects
relating to the growth plan, were for standard products. The Company
received approximately $25,000 in thestandard product orders received in the first
nine monthsquarter of fiscal 1994 was1995, none of which are related to the Defaulted Contract for
approximately $1,031,000.growth plan.
The Company's backlog at April 30,October 31, 1995 was approximately $222,000 as$213,000
compared to approximately $1,622,000$663,000 one year earlier. Included in theThe October 31,
1995 backlog amount at April 30, 1994 was $236,000includes approximately $147,000 of standard product backlog,
including $15,000 of service projects relating to the Defaulted Contract. Subsequent to April 30, 1995, the Italian
customer of the Defaulted Contract expressed its intent to reaffirm its order.
In addition, the Company and its customer preliminarily agreed to a price
increase of approximately $46,000, and the Company has removed the $928,000
relating to the Defaulted Contract from its April 30, 1995 backlog. The
Company expects to receive an acceptable letter of credit from this customer
that will allow the Company to ship the two systems ordered, which are
nearly complete, prior to July 31, 1995, although no assurances can be given
that this contract will be favorably settled. Management will not ship these
systems to their original customer without assurance of payment.
On June 12, 1995, the Company received the long-delayed standard
product order for approximately $1,600,000 and the Company expects to soon
receive a substantial downpayment thereon. As the Company has already
completed most of this system, the Company expects to be able to recognize
a large portion of this contract in fiscal 1995.growth plan. The
Company continues to be engaged in substantive discussions for an
additional substantial standard product order, which would rank among the
largestreceive new orders ever received by the Company. The Company has begun production
for the anticipated standard product order, therefore, the Company will be
able to recognize revenue immediately upon signing it to the extent completed
at that time. However, Management does not anticipate receiving this
anticipated standard product contract in fiscal 1995, or that it will
contribute significantly to fiscal 1995 revenue even if received before the
end of the fiscal year. As is normally the case, the Company is engaged in
discussions with other potential standard product customers and hopes that
these discussions may result in one or more standard product contracts
in the near future. There can be no assurance that the above orders will be
received.
During the first nine months of fiscal 1995, backlog was consumed faster
than orders were received. The rate at which orders were received during the
first nine months of fiscal 1995 wasa level below the levelthat required
for break-even. As the Company
to be profitable. The Company expects to consume all of its
April 30,
October 31, 1995 backlog and it expects to substantially complete the long-delayed contract
and the Defaulted Contract in fiscal 1995. Approximately $185,000 of the
April 30, 1995 backlog consists of lower margin customer-funded development
contracts. Of the $604,000 bookings received by the Company in the first nine
months of fiscal 1995, approximately $365,000 was in customer-funded product
development, with the remainder for standard products.
As the Company expects to consume its April 30, 1995 backlog and to
substantially complete the Defaulted Contract and the long-delayed contract in
fiscal 1995, the Company will beginwithin the next fiscal year with a very small
backlog unless it receives another substantial order before fiscal year end.
Thefew months, the Company's
continued viabilityability to retain its line of credit and maintain its current operating
capabilities depends upon receiving significant orders in the next few
months. See "Liquidity and Sources of Capital." Management is hopeful
that such orders will be received, and that the Company will remain a going concern, although no assurances can be given.
The Company is currently engaged in discussions for several substantial
standard product orders, some of which the Company hopes to receive in
the current fiscal year. However, such negotiations have not been
finalized and there can be no assurance that such orders will be
received. The Company was notified that it has won two Phase II Small
Business Innovative Research (product development) contracts for
approximately $600,000 each. Receipt of these two NASA contracts,
however, has been postponed by delays in approving a US Federal
Government budget for the current fiscal year.
The results of operations for future periods are dependent upon the
receipt of future orders and their timing, and securing payment for the Defaulted
Contract.timing. The Company's long term
success is also dependent onupon the success of Management's growth strategy.plan.
Should the Company continue to receive orders during fiscal 1996 below
the level necessary to achieve profits, the Company would have to reduce
its level of operations accordingly and/or obtain other sources of
financing to allow the Company to continue operations. Many of the
Company's current 24 employees have skills and knowledge that are crucial
to the Company and difficult to replace. As a result, the Company
believes it would be very difficult to achieve substantial savings
through further reductions in staffing without impairing the Company's
ability to perform under current and anticipated contracts.
Cost of Revenue
In the first quarter of fiscal 1996, cost of revenue increased as a
percentage of revenue due primarily to a lower than normal margin on one
of the standard product contracts received in the last quarter of fiscal
1995. The Company operated significantly below capacity in the first
quarter of fiscal 1996 causing overhead rates to increase substantially
which contributed to the high cost of revenue percentage for that period.
The cost of product development revenue in the first quarter of fiscal
1996 exceeded such revenue due to these much higher than normal overhead
rates.
The cost of revenue percentage for the remainder of fiscal 1996 will be
dependent upon the timing and mix of future contracts, some of which are
currently under negotiation. See "Business Development - New Orders and
Backlog."
Research and Development
The majority of the Company's investment into research and development
in the first nine months of fiscal 1995 was related to the development of the
Airborne Digital Camera while the majority of the research and development
expenditures in the third quarter related to the improvement of one of the
Company's standard airborne remote sensing systems.
Research and development expense increased by over 140%declined in the nine month period ended April 30, 1995first quarter of fiscal
1996 as compared to the same period one year earlier while decreasing by 31% in the
quarter then ended as compareddue primarily to the
same quartercompletion of fiscal 1994. The
substantial increase in research andthe development expense inof the nine month
period ended April 30, 1995 over the comparable period of fiscal 1994 would
not have been possible if the Company had a significantly higher level of
customer orders and backlog during the period. The Company expects research
and development costs to remain relatively highfirst generation ADC in fiscal 1995 as1995.
The company is currently performing research on
enhancements to the Company
works toward accomplishing its growth plan. See "Business Development -
Growth Plan".system, but this research requires less material and
labor than did the development of the original system.
Selling and Administrative Expense
Selling and administrative expense increased by 11%expenses were lower in the nine months
ended April 30, 1995 but decreased by 6% in thefirst quarter then endedof
fiscal 1996 as compared to the same periods one year earlier. The increase for the nine month period
was primarily due to increased expenditures on marketing partially offset by
a decline in commission expense resulting from a decline in international sales
and revenue. The decline in the three month period was primarily due to a
decline in commission expense partially offset by increases in other marketing
costs. The level of commission expense and the total of selling and
administrative expense for the remainderfirst quarter of fiscal 1995 will be highly
dependent upon the favorable settlementas a result
of the Defaulted Contract and are
likely to be higher than that experiencednon-recurring marketing expenses which were incurred in the previous quartersfirst
quarter of fiscal 1995. Selling and administrative expense is likely to remain above the fiscal
1994 level if the Defaulted Contract is favorably settled in fiscal 1995,
or if the Company receives standard product contracts as hoped. Included in
selling and administrative expense for the nine and three month periods
ended April 30, 1994 was commission expense relating to the Defaulted
Contract of approximately $119,000 and $40,000, respectively. See "Business
Development - New Orders and Backlog".
Interest
Interest expense increased in the first quarter of fiscal 1995 as compared to fiscal 19941996 over the
same period one year earlier primarily due
principally to the Company's increased use
of its line of credit. Interest expense for
the remainder of fiscal 1995 will be dependent upon future interest rates and
the extent of the Company's utilization of its line of credit during this
fiscal year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's primary sources of liquidity arewere funds from operations and
borrowings under a $3,000,000 secured line of credit with availability subject tocredit. On October 30, 1995, the
Company and its bank entered into an agreement on a formula.
Thenew line of credit
expiresand a new mortgage. The interest rate on November 30, 1995,both the new line of credit and
borrowings thereunder
bear interest atthe mortgage are one and one-half percent over the bank's prime rate,
(9.5%10.25% at April
30, 1995). When necessary,October 31, 1995. The new mortgage requires the Company has used short-termto
make monthly payments of $3,583 for both principal and interest and
requires a balloon payment on November 1, 2000. The new line of credit
agreement, under which availability is subject to a formula, had a
ceiling of $1,700,000 which decreased to $1,500,000, with availability
subject to a formula, on December 1, 1995.
As of October 31, 1995, borrowings under the line of credit were limited
to finance cash shortfalls.approximately $1,476,000 pursuant to the availability formula. At
April 30, 1995,that date, the Company had $882,000an outstanding balance of $405,000 under the
line of credit and $79,000approximately $1,029,000 of the line reserved to back upcover
two standby letters of credit. On November 21, 1995, one of the standby
letters of credit, for $950,000, was canceled increasing availability by
a standby
letterlike amount. The Company is currently in compliance with the covenants
of its financing agreements but the Company may fall into default in the
second quarter of fiscal 1996 if it fails to obtain a significant amount
of new business very soon.
The Company's bank has expressed concern over the Company's recent
losses. The Company must receive a substantial amount of new business in
the second quarter of fiscal 1996 in order for it to maintain compliance
with the financial covenants in its financing agreements. The Company
also requires additional new business in the next few months to allow it
to retain its current line of credit. The Company hadCompany's ability to implement
its growth plan as a means of generating new business has been impaired
by the Company's low level of working capital. See "Business
Development." Management is currently exploring various alternatives to
acquire additional cash resources.
Working capital remained relatively unchanged between July 31, 1995 and
October 31, 1995, due largely to the reclassification of the non-current
portion of the mortgage from current liabilities to long-term debt.
Without this reclassification, working capital would have declined
approximately $370,000$240,000 in the first quarter of availability
remainingfiscal 1996. Current
assets declined by approximately $661,000 due primarily to the loss for
the quarter and payments on itsthe line of credit at such date. Asfrom funds generated by
the collection of April 30,a large portion of the July 31, 1995 unbilled accounts
receivable. Contributing to the bank
has waiveddecline in current assets in the Company's noncompliance withfirst
quarter of fiscal 1995 was the tangible net worth and liquid
assetreduction in deposits caused by the
shipment of certain prepaid deliverables to currenta customer pursuant to one of
the contracts received in the fourth quarter of fiscal 1995.
Current liabilities covenantsdecreased in the quarter ended October 31, 1995 largely
due to the reduction in the balance in the Company's line of credit resulting fromand the
loss in the first nine months of fiscal 1995. The Company
may be obliged to request a further waiver, from its principal lender,reclassification of the covenant defaults described above at fiscal year-end even if it receives
adequate assurancenon-current portion of payment on the Defaulted Contract before such time.
The Company's ability to extend its line of credit prior to its expiration in
November 1995 and the Company's ability to obtain the necessary waivers of
covenants and availability formula on its line of credit will depend largely
on the results of operations for the last quarter of fiscal 1995 and early
fiscal 1996 and its business prospects at such times. Failure to obtain
sufficient new business, the required waiver, or new financing could cause the
Company to cease operations.
Management is actively pursuing various means of improving the Company's
liquidity position to allow the Company to continue operations and more
aggressively pursue its growth plan.
The Company's mortgage has a balloon payment due on March 1, 1996.
Management and the Company's bank are working on refinancing the mortgage and
Management expectsfrom current
liabilities to refinance the mortgage prior to the end of fiscal 1995
under acceptable terms, although there can be no assurance that the Company
will be able to do so.
Cash and working capital declined in the nine months ended April 30,
1995 as a result of the loss for the period. Accounts receivable and unbilled
accounts receivable decreased during the first nine months of fiscal 1995 as a
result of the normal course of business. The increase in inventory is
attributable, in part, to work performed in anticipation of the long-delayed
standard product order that the Company received on June 12, 1995. See
"Business Development - New Orders and Backlog". Machinery and equipment
increased primarily as a result of the Company building an AMS system for its
use in testing components and possible use in its domestic and international
remote sensing operations. See "Business Development - Growth Plan".
Short-term liabilities increased in the nine months ended April 30, 1995
primarily as a result of borrowings against the Company's line of credit.long-term debt.
The Company expects to invest approximately $150,000$300,000 for capital
expenditures, primarily for equipment and software relating to the
Company's growth plan, during fiscal 1995.1996; but as of December 11, 1995,
the majority of these expenditures had not yet been incurred. The
Company also expects fiscal 1995 internal research and development costs to remain aboveexceed
the fiscal 1994 levels1995 level in the upcoming year as additional products are
developed and introduced. See
"Business Development - Growth Plan".During fiscal 1996, the Company also expects
to make significant investments in accordance with its growth plan in
selling and administrative expense. These expenditures are vital to the
future growth of the Company, and are expected to be funded by
working capital
andoperations, the Company's line of credit.credit and possibly by other sources of
capital as described above.
Although Management believes that the Company has access to sufficient
sources of cash to meet its needs for the foreseeable future, this belief
is based upon Management's expectation that certain substantial contracts
will be received by the Company in fiscal 1996 and that the Company will
collect in excess of $600,000 in December 1995 on an order completed in
November 1995. If the receipt of such contracts and payments do not
occur or are significantly delayed, and if the Company is unable to raise
additional capital as needed, the Company's liquidity, financial
position, results of operations and ability to successfully execute its
growth plan will be materially adversely affected. Management believes
that should the Company receive the expected contracts in fiscal 1996 and
should an expansion of the current line of credit become required, the
Company will be able to obtain such a credit line expansion.
PART II - OTHER INFORMATION
All items omitted are not applicable or the answers thereto are negative.
Item 6(a): Exhibits
Exhibit No. Description
11.01 Computation of earnings per share4.53 Fifth Amendment to Revolving Credit, Overline Credit and
Term Loan Agreement, between the Company and Comerica
Bank, dated October 30, 1995
4.54 Revolving Credit Note between the Company and Comerica
Bank, dated October 30, 1995
4.55 Mortgage Extension Agreement between the Company and
Comerica Bank, Dated October 30, 1995
27 Financial Data Schedule
(EDGAR filing only)
Item 6(b): No reports on Form 8-K were filed during the period.
SIGNATURESSignatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAEDALUS ENTERPRISES, INC.
Date: June 13,December 11, 1995 By: /S/by: /s/ Thomas R. Ory
--------------------------------
Thomas R. Ory, President
(Duly Authorized Officer)Officer,)
Date: June 13,December 11, 1995 By: /S/by: /s/ Vincent J. Killewald
--------------------------------
Vincent J. Killewald, VP-Finance
(Principal Financial Officer)
EXHIBIT INDEX TO EXHIBITS
Exhibit No. Description
11.01 Computation of earnings per share4.53 Fifth Amendment to Revolving Credit, Overline
Credit and Term Loan Agreement, between the Company
and Comerica Bank, dated October 30, 1995
4.54 Revolving Credit Note between the Company and
Comerica Bank, dated October 30, 1995
4.55 Mortgage Extension Agreement between the Company
and Comerica Bank, Dated October 30, 1995
27 Financial Data Schedule
(EDGAR filing only)