|
HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
For
the nine months ended
|
|
|
|
|
September
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,178,296
|
|
|
$
|
(136,007
|
)
|
|
Adjustments
to reconcile net income from operations
|
|
|
|
|
|
|
|
|
|
to
net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
751,853
|
|
|
|
692,877
|
|
|
Bad
debt expense
|
|
|
69,360
|
|
|
|
292,391
|
|
|
Stock
option expense
|
|
|
192,500
|
|
|
|
266,500
|
|
|
Deferred
income taxes
|
|
|
235,723
|
|
|
|
232,177
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(6,109,603
|
)
|
|
|
6,411,725
|
|
|
Inventory
|
|
|
(568,134
|
)
|
|
|
26,807
|
|
|
Costs
in excess of billings and estimated profits
|
|
|
(3,027,987
|
)
|
|
|
303,892
|
|
|
Retainage
receivable
|
|
|
(588,036
|
)
|
|
|
466,040
|
|
|
Other
assets
|
|
|
125,054
|
|
|
|
(65,172
|
)
|
|
Prepaid
expenses and income tax receivable
|
|
|
819,763
|
|
|
|
(517,176
|
)
|
|
Accounts
payable
|
|
|
3,378,417
|
|
|
|
(2,646,020
|
)
|
|
Accrued
expenses
|
|
|
998,489
|
|
|
|
(1,704,843
|
)
|
|
Taxes
payable
|
|
|
106,701
|
|
|
|
(200,774
|
)
|
|
Billings
in excess of costs and estimated profits
|
|
|
1,195,280
|
|
|
|
(679,666
|
)
|
|
Deferred
income
|
|
|
220,658
|
|
|
|
(100,048
|
)
|
|
Other
liabilities
|
|
|
(11,243
|
)
|
|
|
(96,079
|
)
|
|
Net
cash (used in) provided by operating activities
|
|
|
(1,032,909
|
)
|
|
|
2,546,624
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of businesses
|
|
|
(118,311
|
)
|
|
|
(50,000
|
)
|
|
Purchase
of property and equipment
|
|
|
(86,035
|
)
|
|
|
(291,026
|
)
|
|
Net
cash used in investing activities
|
|
|
(204,346
|
)
|
|
|
(341,026
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercising of stock options - net of fees
|
|
|
-
|
|
|
|
203,669
|
|
|
Borrowings
under revolving loan agreement
|
|
|
3,325,000
|
|
|
|
1,900,000
|
|
|
Repayments
under revolving agreement
|
|
|
(2,600,000
|
)
|
|
|
(1,750,000
|
)
|
|
Payments
of bank loans
|
|
|
-
|
|
|
|
(103,410
|
)
|
|
Net
repayments of other debt
|
|
|
(194,665
|
)
|
|
|
(238,909
|
)
|
|
Payments
of equipment financing
|
|
|
(236,789
|
)
|
|
|
(211,029
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
293,546
|
|
|
|
(199,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(943,709
|
)
|
|
|
2,005,919
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
2,917,046
|
|
|
|
27,704
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
1,973,337
|
|
|
$
|
2,033,623
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Amount
paid for the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
160,793
|
|
|
$
|
204,881
|
|
|
Taxes
|
|
|
66,400
|
|
|
|
707,083
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Equipment
financed
|
|
|
191,389
|
|
|
|
288,140
|
|
|
Issuance
of stock to acquire businesses
|
|
|
665,250
|
|
|
|
103,650
|
|
See
accompanying notes to the condensed consolidated financial
statements.
|
HENRY
BROS. ELECTRONCS, INC. AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
par
value $0.01
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance
at December 31, 2009 (audited)
|
|
|
6,035,366
|
|
|
$
|
60,354
|
|
|
$
|
18,437,288
|
|
|
$
|
(2,557,262
|
)
|
|
$
|
15,940,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
acquisition of CIS Security Systems
|
|
|
25,000
|
|
|
|
250
|
|
|
|
104,550
|
|
|
|
-
|
|
|
|
104,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
acquisition of PST
|
|
|
150,000
|
|
|
|
1,500
|
|
|
|
580,500
|
|
|
|
|
|
|
|
582,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of value assigned to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
option grants
|
|
|
-
|
|
|
|
-
|
|
|
|
192,500
|
|
|
|
-
|
|
|
|
192,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,178,296
|
|
|
|
1,178,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010 (unaudited)
|
|
|
6,210,366
|
|
|
$
|
62,104
|
|
|
$
|
19,314,838
|
|
|
$
|
(1,378,966
|
)
|
|
$
|
17,997,976
|
|
See
accompanying notes to the condensed consolidated financial
statements.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1.
Description of Business and Basis of Presentation
Interim
Financial Statements:
The
information presented as of September 30, 2010 and for the three and nine month
periods ended September 30, 2010 and 2009 are unaudited, and reflect all
adjustments (consisting only of normal recurring adjustments) which Henry Bros.
Electronics, Inc. and its Subsidiaries (the “Company” or “HBE”) considers
necessary for the fair presentation of the Company’s financial position as of
September 30, 2010, the results of its operations for the three and nine month
periods ended September 30, 2010 and 2009, and cash flows and changes in
stockholders’ equity for the nine month period ended September 30, 2010. The
Company’s December 31, 2009 balance sheet information was derived from the
audited consolidated financial statements for the year ended December 31, 2009,
which are included as part of the Company’s Annual Report on Form
10-K.
The
condensed consolidated financial statements included herein have been prepared
in accordance with U.S. generally accepted accounting principles and the
instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the Company’s financial statements and
notes thereto included in the Company’s latest shareholders’ annual
report.
As of
September 30, 2010, there have been no material changes to any of the
significant accounting policies described in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009.
Description
of Business:
Henry
Bros. Electronics, Inc. is an established player in the electronic physical
security industry, specializing in integrated security systems, and emergency
preparedness.
HBE
provides products and services to customers in the public and private sectors.
Customers include transit authorities, seaports, airports, universities,
office-buildings, hospitals and airlines. Each of the Company’s segments markets
its products and services nationwide with an emphasis in Arizona, California,
Colorado, Maryland, New Jersey, New York, Texas and Virginia.
The
company operates through two primary operating segments:
|
1.
|
Security
Systems Integration
|
|
2.
|
Specialty
Product and Services
|
The
Security Systems Integration business operates under the name Henry Bros.
Electronics, Inc. and its approach to client service is core to all of its
businesses. At the beginning of each new client relationship, HBE designates one
member of its professional staff as the client service contact. This individual
is the point person for communications between the client and HBE and often acts
as the client's project manager for all of its security needs, which ensures
that clients receive the best possible security solution to meet its needs. The
Company derives a majority of its revenues from project installations and to a
smaller extent, maintenance service revenue.
The
Specialty Products and Services segment includes three separate
businesses:
1.
Evacuation planning
2. Mobile
digital recording
3.
Airorlite Communications
The
Evacuation Planning business operates under the Diversified Security Solutions,
Inc. name and works with managers of high-rise office buildings to analyze their
specific facilities’ needs with emergency preparedness plans. This division
provides demonstrations, training and recommendations to clients; develops
emergency plans and procedures; and communicates building strategy to the
tenants to increase building community unity, awareness and
confidence.
The
Mobile Digital Recording business operates under the name Viscom Products, Inc.
and has developed an integrated standard solution for the deployment of mobile
digital recorders on municipal buses and trains.
The
Airorlite Communications business provides specialized communications product
design, development and engineering related to RF transmission.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
The table below shows the sales percentages by geographic location for the
following periods:
|
|
|
Nine months
ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
New
Jersey/New York
|
|
|
54
|
%
|
|
|
50
|
%
|
|
California
|
|
|
18
|
%
|
|
|
18
|
%
|
|
Texas
|
|
|
7
|
%
|
|
|
5
|
%
|
|
Arizona
|
|
|
5
|
%
|
|
|
8
|
%
|
|
Colorado
|
|
|
6
|
%
|
|
|
11
|
%
|
|
Virginia
/ Maryland
|
|
|
7
|
%
|
|
|
8
|
%
|
|
Integration
segment
|
|
|
97
|
%
|
|
|
100
|
%
|
|
Specialty
segment
|
|
|
4
|
%
|
|
|
3
|
%
|
|
Inter-segment
|
|
|
-1
|
%
|
|
|
-3
|
%
|
|
Total
revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
2. Summary of Significant
Accounting Policies:
Principles
of Consolidation:
The
condensed consolidated financial statements include the accounts of the
Company. Acquisitions are recorded as of the purchase date, and are
included in the consolidated financial statements from the date of
acquisition. All material intercompany transactions have been
eliminated in consolidation.
Use
of Estimates:
The
preparation of financial statements, in conformity with generally accepted
accounting principles in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities, at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue
and costs relating to security integration systems projects and service
agreements are particularly affected by management’s estimates. The contract
sale price and estimated costs are based upon the facts and circumstances known
at the time of the proposal. Estimates for the costs to complete the contract
are periodically updated during the performance of the contract. Unpredictable
events can occur during the performance of the contract that can increase the
costs and reduce the estimated gross profit. Change orders to record additional
costs may not be approved or can become subject to long negotiations with the
customer and can result in concessions by the Company. Considerable judgments
are made during the performance of the contract that affects the Company’s
revenue recognition and cost accruals that may have a significant impact on the
results of operations reported by the Company.
Fair
Value of Financial Instruments:
The
carrying amounts of the Company’s financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses, short and
long-term debt, approximate their fair values as of September 30,
2010.
Recently
Issued Accounting Pronouncements:
In
May 2009, the FASB issued guidance now codified as FASB ASC Topic 855,
“Subsequent Events,” which establishes general standards of accounting for, and
disclosures of, events that occur after the balance sheet date but before
financial statements are issued. This pronouncement is effective for interim or
fiscal periods ending after June 15, 2009. The adoption of this
pronouncement did not have a material impact on our consolidated financial
position, results of operations or cash flows. However, the provisions of FASB
ASC Topic 855 resulted in additional disclosures with respect to subsequent
events. In February 2010, an update to accounting guidance was issued which
eliminates the disclosure of the date through which subsequent events have been
evaluated. This update was effective immediately. The
adoption of this amendment did not have a significant effect on our financial
statements.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
3. Earnings
Per Share
The
computation of basic earnings per share is based upon the weighted average
number of shares of common stock outstanding during the period. When applicable,
the computation of diluted earnings per share includes the dilutive effects of
common stock equivalents, less the shares that may be repurchased with the funds
received from their exercise and the effect of adding back unrecognized future
stock compensation expense. Potentially dilutive common stock equivalents
include shares issuable upon exercise of options. Contingent shares are excluded
from basic earnings per share.
4. Stock Based
Compensation
For
the three months ended September 30, 2010 and 2009, the Company charged $60,000
and $73,500, respectively, to operations for stock based compensation
expense. For the nine months ended September 30, 2010 and 2009, the
Company charged $192,500 and $266,500, respectively, to operations for stock
based compensation expense. A modification to a stock option,
previously issued to an executive officer, extending the term for one year,
resulted in an expense in the second quarter of 2009, equal to the net increase
in the fair value of the modified stock option of $49,000.
A summary
of stock option activity for the nine months ended September 30, 2010 under the
Company’s various Stock Option Plans’ follows:
|
|
|
|
|
|
|
|
|
Weighted
Average Exercise
|
|
|
|
|
Number
of Shares
|
|
|
Price
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Outstanding
|
|
Exercisable
|
|
|
December
31, 2009 (audited)
|
|
|
997,799
|
|
|
|
628,866
|
|
|
$
|
4.96
|
|
|
$
|
5.17
|
|
|
Granted
at market
|
|
|
113,000
|
|
|
|
|
|
|
|
3.86
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(110,300
|
)
|
|
|
|
|
|
|
7.01
|
|
|
|
|
|
|
September
30, 2010 (unaudited)
|
|
|
1,000,499
|
|
|
|
626,232
|
|
|
$
|
4.61
|
|
|
$
|
4.72
|
|
Stock
based compensation is being amortized over the vesting period of up to five
years. The fair value of the Company’s stock option awards was estimated
assuming no expected dividends and the following weighted-average assumptions
for the nine months ended September 30, 2010 follows:
|
Expected
Life (years)
|
|
|
5.86
|
|
|
Expected
volatility
|
|
|
50.6
|
%
|
|
Risk-free
interest rates
|
|
|
1.9
|
%
|
|
Dividend
yield
|
|
|
-
|
|
|
Weighted-average
grant-date fair value
|
|
$
|
1.67
|
|
There
were 113,000 options issued during the nine month period ending September 30,
2010.
HENRY BROS. ELECTRONICS, INC AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
5. Costs
and Billings on Uncompleted Contracts
Costs and
billing on uncompleted contracts consisted of the following:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost
and estimated profit on uncompleted contracts
|
|
$
|
45,998,023
|
|
|
$
|
46,259,927
|
|
|
Billing
on uncompleted contracts
|
|
|
39,729,657
|
|
|
|
41,824,268
|
|
|
|
|
$
|
6,268,366
|
|
|
$
|
4,435,659
|
|
Included
in accompanying Balance Sheets under the following captions:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost
and estimated profit in excess of billing
|
|
$
|
9,031,520
|
|
|
$
|
6,003,533
|
|
|
Billing
in excess of cost and estimated profit
|
|
|
2,763,154
|
|
|
|
1,567,874
|
|
|
|
|
$
|
6,268,366
|
|
|
$
|
4,435,659
|
|
6. Long-Term
Debt
On June
30, 2005, the Company entered into a loan agreement (the “Loan Agreement”) with
TD Bank, N.A. pursuant to which TD Bank extended a $4 million two-year
credit facility (the “Revolving Loan”), to the Company and refinanced $1 million
of existing indebtedness to TD Bank into a five year term loan (the “Term
Loan”).
On
October 6, 2008, the Company executed its fourth amendment to the Revolving Loan
with TD Bank, increasing its line of credit from $4 million to $8 million. The
Revolving Loan is subject to certain borrowing base limitations. On
August 10, 2010 the term of the Revolving Loan was extended to June 30,
2012. Advances under the Revolving Loan may be used to finance
working capital and acquisitions. Interest is paid monthly in arrears at TD
Bank’s prime rate, subject to a minimum floor rate of 4.0% effective November
11, 2009 as part of the extension of the Revolving Loan. TD Bank has a first
priority security interest on the Company’s accounts receivable and
inventory.
The
Company is required to maintain certain financial and reporting covenants and is
restricted from paying dividends under the terms of the Loan
Agreement.
Long-term debt included
the following balances:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revolving
line at the prime rate of interest, subject to a minimum
floor
|
|
|
|
|
|
|
|
rate
of 4.0% effective November 11, 2009, expires June 30, 2012
|
|
$
|
5,060,898
|
|
|
$
|
4,335,898
|
|
|
Corporate
insurance financed at 5.99% payable in monthly
|
|
|
|
|
|
|
|
|
|
installments thru September 01,
2010
|
|
|
-
|
|
|
|
194,665
|
|
|
Capitalized
lease obligations due in monthly installments,
|
|
|
|
|
|
|
|
|
|
with interest ranging from 6.4%
to 12.7%
|
|
|
796,513
|
|
|
|
836,506
|
|
|
|
|
|
5,857,411
|
|
|
|
5,367,069
|
|
|
Less:
Current portion
|
|
|
(299,625
|
)
|
|
|
(536,552
|
)
|
|
|
|
$
|
5,557,786
|
|
|
$
|
4,830,517
|
|
The
weighted average interest rate on the Revolving Loan was 3.25% for the nine
months ended September 30, 2010 and the year ended December 31,
2009.
HENRY BROS. ELECTRONICS, INC AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
7. Income
Taxes
The
effective income tax rate for the three months and nine months ended September
30, 2010 was 39.4% and 43.5%, respectively. An effective tax rate of 44% was
applied to the loss before tax for the three months and nine months ended
September 30, 2009, which was offset by the effect of permanent differences
which increased taxable income. Income tax expense for
interim reporting is based on an annual effective income tax rate forecast,
which includes estimates and assumptions that could change during the
year. The differences between the effective income tax rate and the
U.S. federal statutory rate of 34% principally result from state and local
taxes, and differences between the book and tax treatment of certain items, such
as incentive stock options.
The
effective income tax rate for the three months and nine months ended September
30, 2010 has not been impacted by any material discrete items. As of
September 30, 2010 the Company has $51,053 of unrecognized income tax benefits,
all of which would impact the Company’s effective tax rate if
recognized. There have been no significant changes during the nine
months ended September 30, 2010.
8. STOCKHOLDERS’
EQUITY
In
connection with the acquisition of all the capital stock of CIS Security Systems
Corp. (“CIS”) on October 2, 2006, the Company issued an aggregate of 20,000
shares of its common stock, valued at $67,200. The Company issued an
additional 60,000 shares during 2009, 2008 and 2007, and 15,000 shares during
the first nine months of 2010 of its restricted common stock to CIS’s selling
shareholder after CIS met certain performance targets. The issuance of the
shares of restricted stock in connection with the aforementioned acquisition was
made in reliance upon the exemption provided in section 4(2) of the Securities
Act of 1933, as amended. In addition, the selling shareholder
achieved certain performance targets to earn an additional 5,000 shares of the
Company’s common stock, the shares and their value has been reflected in
stockholder’s equity as of September 30, 2010.
See Note 12 of these Condensed Consolidated Financial Statements
included in this Quarterly Report for discussion of additional shares of common
stock issued in connection with the acquisition of Professional Security
Technologies LLC.
9. Segment
Data
Selected
information by business segment is presented in the following
tables:
|
|
|
For
the nine months ended September 30,
|
|
|
For
the three months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration
|
|
$
|
45,515,359
|
|
|
$
|
40,463,589
|
|
|
$
|
18,989,952
|
|
|
$
|
11,576,861
|
|
|
Specialty
|
|
|
1,929,937
|
|
|
|
1,193,640
|
|
|
|
593,749
|
|
|
|
532,176
|
|
|
Inter-segment
|
|
|
(507,991
|
)
|
|
|
(268,000
|
)
|
|
|
(238,688
|
)
|
|
|
-
|
|
|
Total
revenue
|
|
$
|
46,937,305
|
|
|
$
|
41,389,229
|
|
|
$
|
19,345,013
|
|
|
$
|
12,109,037
|
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration
|
|
$
|
4,999,853
|
|
|
$
|
2,585,029
|
|
|
$
|
2,698,921
|
|
|
$
|
266,890
|
|
|
Specialty
|
|
|
570,377
|
|
|
|
225,296
|
|
|
|
150,659
|
|
|
|
153,352
|
|
|
Corporate
|
|
|
(3,385,822
|
)
|
|
|
(2,691,269
|
)
|
|
|
(1,600,517
|
)
|
|
|
(850,665
|
)
|
|
Total operating
profit
|
|
$
|
2,184,408
|
|
|
$
|
119,056
|
|
|
$
|
1,249,063
|
|
|
$
|
(430,423
|
)
|
Selected
balance sheet information by business segment is presented in the following
table as of:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
Integration
|
|
|
37,152,642
|
|
|
$
|
27,309,364
|
|
|
Specialty
|
|
|
1,073,541
|
|
|
|
1,454,812
|
|
|
Corporate
|
|
|
3,538,660
|
|
|
|
3,928,119
|
|
|
Total
assets
|
|
$
|
41,764,843
|
|
|
$
|
32,692,295
|
|
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
10. Contingent
Liabilities
From time
to time, the Company is subject to various claims with respect to matters
arising out of the normal course of business. In management’s opinion, none of
these claims is likely to have a material effect on the Company’s consolidated
financial statements.
11. Related
Party Transactions
Richard
D. Rockwell, a member of the Board of Directors since November 2007, has been
Owner and Chairman of Professional Security Technologies LLC, a full service
security systems integrator since 1996. The Company had
revenues from PST of $241,167 and $26,139 for the three months ended September
30, 2010 and 2009, respectively and had revenues from PST of $304,315 and
$99,905 for the nine months ended September 30, 2010 and 2009,
respectively. These revenues were principally related to the sale of
equipment by the Company to PST. There were no outstanding accounts
receivable from PST at September 30, 2010, but there was a balance of $39,192 as
of December 31, 2009.
12. Acquisition
of Professional Security Technologies LLC
On
September 2, 2010, the Company purchased certain assets of Professional Security
Technologies LLC ("PST") consisting principally of a customer list of existing
and targeted potential PST customers ("PST Customers") and PST's assignment of
its rights under an existing dealer agreement with a national equipment supplier
pursuant to which the Company will be authorized to sell Supplier's products
("Supplier Products"). PST is a New Jersey limited liability
company owned by the Company's Chairman of the Board of Directors. In
addition, the Company agreed to hire certain PST employees. The
Company accounted for this transaction in accordance with the provisions within
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 805 –
Business
Combinations
. The total consideration expected to be paid to PST for the
assets was $1,062,811, as follows:
|
|
1.
|
Cash
of $80,811 paid at closing;
|
|
|
2.
|
150,000
shares of the Company's common stock, 75,000 of which will be delivered at
closing. The remaining 75,000 shares will be held in escrow
subject to delivery as described in point 4 below;
|
|
|
3.
|
Payment
of five (5%) percent of the net cash proceeds received by the Company,
during the period commencing on July 1, 2010 and ending on December 31,
2012, in connection with (a) sales to PST customers (including sales of
Supplier Products) and (b) sales of Supplier Products to the Company's
other customers, and;
|
|
|
4.
|
75,000
shares of the Company's common stock when the aggregate revenue from the
sales described above, during the period commencing on July 1, 2010 and
ending on December 31, 2012, equal $8,000,000; provided, however, such
shares will be released, prior to reaching the revenue target, in the
event there is a change in control of the Company prior to December 31,
2012.
|
On the
acquisition date, the fair value of the contingent consideration payable to PST
was determined to be $682,344. At the end of each subsequent
reporting period, the Company will record any changes in the fair value of the
liability related to the contingent considerations as a charge to
earnings.
The
following table presents the allocation of the acquisition cost, to the assets
acquired and liabilities assumed, based on their fair values at the date of
acquisition:
|
Inventory
|
|
$
|
14,764
|
|
|
Property,
plant and equipment
|
|
|
66,047
|
|
|
Customer
relationships
|
|
|
130,000
|
|
|
Vendor
agreement
|
|
|
60,000
|
|
|
Goodwill
|
|
|
792,000
|
|
|
Total
assets acquired
|
|
$
|
1,062,811
|
|
Costs
related to this acquisition were approximately $23,847 and are reflected in the
Company’s Condensed consolidated statements of operations.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
13. Subsequent
Event
On
October 5, 2010, the Company entered into an Agreement and Plan of Merger
(the "
Merger
Agreement
") with Kratos Defense & Security Solutions, Inc., a
Delaware corporation ("
Parent
"), and Hammer
Acquisition Inc., a Delaware corporation and a wholly owned subsidiary of Parent
("
Merger Sub
").
The Merger Agreement provides that, upon the terms and subject to the conditions
set forth in the Merger Agreement, Merger Sub will be merged with and into the
Company, with the Company continuing as the surviving corporation and a
wholly-owned subsidiary of Parent (the "
Merger
").
At the
effective time of the Merger (the "
Effective Time
"), by
virtue of the Merger and without any action on the part of the holders of any
Shares, each outstanding Share (other than Shares owned by Parent, Merger Sub,
or the Company's stockholders, if any, who have perfected statutory dissenters'
rights under Delaware law) will be converted into the right to receive
$7.00 in cash, without interest. In addition, at the Effective Time
all outstanding options to purchase the Company's common stock will be assumed
by Parent and converted into options to purchase common stock of Parent (the
"
Assu
med
Options
"). The number of shares of Parent common stock subject
to each Assumed Option and the exercise price of each such option will be
appropriately adjusted based on the exchange ratio, which shall be equal to
0.6552.
The
completion of the Merger is subject to various customary conditions, including,
among other things: (i) the adoption of the Merger Agreement by
stockholders holding at least a majority of the outstanding common stock of the
Company; (ii) subject to certain materiality exceptions, the accuracy of
the representations and warranties made by each of Parent and the Company and
the compliance by each of Parent and the Company with their respective
obligations under the Merger Agreement and (iii) the absence of any pending or
threatened legal proceedings challenging or seeking to restrain the consummation
of the Merger. In addition, certain of the Company's shareholders and
each member of the board of directors, who collectively held approximately 60%
of the Company's issued and outstanding common stock as of October 5, 2010, have
entered into voting agreements whereby they have agreed to vote all shares of
the Company's common stock held by them in favor of the Merger, subject to
termination of such agreements if the Merger Agreement is
terminated.
The
Merger Agreement contains customary representations, warranties and covenants,
including covenants obligating the Company to continue to conduct its business
and the business of its subsidiaries in the ordinary course, hold a meeting of
its stockholders for the purpose of considering the approval and adoption of the
Merger Agreement and to cooperate on seeking regulatory approvals and providing
access to information regarding the Company and its subsidiaries. The
Merger Agreement also contains a "go-shop" provision and a "no-shop"
provision.
This
transaction is a disposal of a business and until all conditions of the merger
have been met, including shareholder’s vote, the business should continue to be
shown in the results from operations of the Company and not as assets held for
disposal.
On
November 3, 2010, a putative shareholder class action lawsuit was filed in
the Superior Court of New Jersey, Bergen County, against the Company, its
directors and Kratos Defense & Security Solutions, Inc. purportedly on
behalf of holders of the Company's common stock.
Atoll Advisors v. James
E. Henry, et al.
, alleges that the individual defendants breached their
fiduciary duties owed to the Company's stockholders in an attempt to sell the
Company to Hammer Acquisition Inc., a wholly-owned subsidiary of
Kratos, and Kratos at an unfair price and through an unfair and self
serving process and by omitting material information in the preliminary proxy
statement the Company filed with the Securities and Exchange Commission on
October 25, 2010. The lawsuit further alleges that the
Company and Kratos aided and abetted the Company's directors in
their alleged breaches of fiduciary duty. The complaint seeks, among other
relief, class certification, unspecified damages and plaintiff's costs,
disbursements and reasonable attorneys' and experts' fees. The Company and
the other defendants have not yet responded to the complaint. Based
on the Company's review of the lawsuit, it believes that the
claims are without merit and it intends to vigorously defend against
them. Regardless of the merits or eventual outcome, the lawsuit may cause
a diversion of the Company's management's time and attention and the expenditure
of legal fees and expenses.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
Henry
Bros. Electronics, Inc. is an established player in the electronic physical
security industry, specializing in integrated security systems, and emergency
preparedness.
HBE
provides products and services to customers in the public and private sectors.
Customers include transit authorities, seaports, airports, universities,
office-buildings, hospitals and airlines. Each of the Company’s segments markets
its products and services nationwide with an emphasis in Arizona, California,
Colorado, Maryland, New Jersey, New York, Texas and Virginia.
The
company operates through two primary operating segments:
|
1.
|
Security
Systems Integration
|
|
2.
|
Specialty
Product and Services
|
The
Security Systems Integration business operates under the name Henry Bros.
Electronics, Inc. and its approach to client service is core to all of its
businesses. At the beginning of each new client relationship, HBE designates one
member of its professional staff as the client service contact. This individual
is the point person for communications between the client and HBE and often acts
as the client's project manager for all of its security needs, which ensures
that clients receive the best possible security solution to meet its needs. The
Company derives a majority of its revenues from project installations and to a
smaller extent, maintenance service revenue.
The
Specialty Products and Services segment includes three separate
businesses:
1.
Evacuation planning
2. Mobile
digital recording
3.
Airorlite Communications
The
Evacuation Planning business operates under the Diversified Security Solutions,
Inc. name and works with managers of high-rise office buildings to analyze their
specific facilities’ needs with emergency preparedness plans. This division
provides demonstrations, training and recommendations to clients; develops
emergency plans and procedures; and communicates building strategy to the
tenants to increase building community unity, awareness and
confidence.
The
Mobile Digital Recording business operates under the name Viscom Products, Inc.
and has developed an integrated standard solution for the deployment of mobile
digital recorders on municipal buses and trains.
The
Airorlite Communications business provides specialized communications product
design, development and engineering related to RF transmission.
Subsequent
Event – Merger Agreement
On
October 5, 2010, the Company entered into an Agreement and Plan of Merger
(the "
Merger
Agreement
") with Kratos Defense & Security Solutions, Inc., a
Delaware corporation ("
Parent
"), and Hammer
Acquisition Inc., a Delaware corporation and a wholly owned subsidiary of Parent
("
Merger Sub
").
The Merger Agreement provides that, upon the terms and subject to the conditions
set forth in the Merger Agreement, Merger Sub will be merged with and into the
Company, with the Company continuing as the surviving corporation and a
wholly-owned subsidiary of Parent (the "
Merger
").
At the
effective time of the Merger (the "
Effective Time
"), by
virtue of the Merger and without any action on the part of the holders of any
Shares, each outstanding Share (other than Shares owned by Parent, Merger Sub,
or the Company's stockholders, if any, who have perfected statutory dissenters'
rights under Delaware law) will be converted into the right to receive $7.00 in
cash, without interest. In addition, at the Effective Time all
outstanding options to purchase the Company's common stock will be assumed by
Parent and converted into options to purchase common stock of Parent (the
"
Assumed
Options
"). The number of shares of Parent common stock subject
to each Assumed Option and the exercise price of each such option will be
appropriately adjusted based on the exchange ratio, which shall be equal to
0.6552.
The
completion of the Merger is subject to various customary conditions, including,
among other things: (i) the adoption of the Merger Agreement by
stockholders holding at least a majority of the outstanding common stock of the
Company; (ii) subject to certain materiality exceptions, the accuracy of the
representations and warranties made by each of Parent and the Company and the
compliance by each of Parent and the Company with their respective obligations
under the Merger Agreement and (iii) the absence of any pending or threatened
legal proceedings challenging or seeking to restrain the consummation of the
Merger. In addition, certain of the Company's shareholders and each
member of the board of directors, who collectively held approximately 60% of the
Company's issued and outstanding common stock as of October 5, 2010, have
entered into voting agreements whereby they have agreed to vote all shares of
the Company's common stock held by them in favor of the Merger, subject to
termination of such agreements if the Merger Agreement is
terminated.
The
Merger Agreement contains customary representations, warranties and covenants,
including covenants obligating the Company to continue to conduct its business
and the business of its subsidiaries in the ordinary course, hold a meeting of
its stockholders for the purpose of considering the approval and adoption of the
Merger Agreement and to cooperate on seeking regulatory approvals and providing
access to information regarding the Company and its subsidiaries. The
Merger Agreement also contains a "go-shop" provision and a "no-shop"
provision.
This
transaction is a disposal of a business and until all conditions of the merger
have been met, including shareholder’s vote, the business should continue to be
shown in the results from operations of the Company and not as assets held for
disposal.
On
November 3, 2010, a putative shareholder class action lawsuit was filed in
the Superior Court of New Jersey, Bergen County, against the Company, its
directors and Kratos Defense & Security Solutions, Inc. purportedly on
behalf of holders of the Company's common stock.
Atoll Advisors v. James
E. Henry, et al.
, alleges that the individual defendants breached their
fiduciary duties owed to the Company's stockholders in an attempt to sell the
Company to Hammer Acquisition Inc., a wholly-owned subsidiary of
Kratos, and Kratos at an unfair price and through an unfair and self
serving process and by omitting material information in the preliminary proxy
statement the Company filed with the Securities and Exchange Commission on
October 25, 2010. The lawsuit further alleges that the
Company and Kratos aided and abetted the Company's directors in
their alleged breaches of fiduciary duty. The complaint seeks, among other
relief, class certification, unspecified damages and plaintiff's costs,
disbursements and reasonable attorneys' and experts' fees. The Company and
the other defendants have not yet responded to the complaint. Based
on the Company's review of the lawsuit, it believes that the
claims are without merit and it intends to vigorously defend against
them. Regardless of the merits or eventual outcome, the lawsuit may cause
a diversion of the Company's management's time and attention and the expenditure
of legal fees and expenses.
OUR
VISION AND STRATEGY
Our
vision is to maintain our leadership position in security technology. We
intend to do this in part by:
|
|
·
|
Providing
advice on product selection and system design;
|
|
|
·
|
Examining
and thoroughly testing each security product as it would be set up for use
in our customers’ facilities; and,
|
|
|
·
|
Using
only systems and components that are reliable and efficient to
use.
|
In
addition to growing the business organically, we are opportunistically open to
the possibility of pursuing the strategic acquisition of synergistic integrators
and specialty products and service companies. To finance our
acquisitions, we have used a combination of internally generated cash, the sale
of Company common stock and bank debt. We currently have an $8 million revolving
credit facility, subject to certain borrowing base limitations, with TD
Bank. Borrowings under the revolving credit facility were $5,060,898
at September 30, 2010. It is our expectation and intent to use cash and to incur
additional debt as appropriate to finance future working capital and
acquisitions. Additionally, to fund future acquisitions we would
consider the issuance of subordinated debt, the sale of equity securities, or
the sale of existing Company assets.
TRENDS
There are
several factors impacting operating margins, including levels of competition for
a particular project and the size of the project. As a significant
amount of our costs are relatively fixed, such as labor costs,
increases or decreases in revenues can have a significant impact on operating
margins. The Company continually monitors costs and pursues various
cost control measures and sales initiatives to improve operating
margins.
In
February 2008, the Company entered into a subcontractor agreement with Global
Security & Engineering Solutions, a division of L-3 Services, Inc. (the “L-3
Contract”) pursuant to which L-3 would issue task orders under its Indefinite
Quantity Firm Fixed Price Contract with the U.S. Marine Corp Systems Command to
deliver a Tactical Video Capture System (“TVCS”). TVCS is used for
real-time visualization and situational awareness while Marine units are
conducting military operations in urban terrain training
exercises. The performance period of the contract is three
years. In the first nine months of 2010, the revenue recognized under
this contract represented $4.1 million, compared to $4.8 million in the
first nine months of 2009. There were outstanding task orders included in our
backlog of approximately $6.1 million at September 30, 2010. During
the third quarter, we completed one site under the L-3 Contract and are close to
completion on the second. The additional four sites that were
scheduled to begin before the year-end are coming online slower than
anticipated, but are now in progress. As a result, we project our
2010 revenue to come in at range of $68 million - $70 million, down
from the previously disclosed range of $70 million-$75 million, with the
operating margin continuing to be between 5% and 6%.
Booked
orders increased 57.2% to $20,755,320 in the third quarter of 2010, as compared
to $13,199,733 in same quarter of 2009. Booked orders increased 69.7%
to $70,326,095 in the first nine months of 2010, as compared to $41,441,455 in
the first nine months of 2009.
The
Company’s backlog of $51,410,584 at September 30, 2010 increased 116.4% from the
September 30, 2009 backlog of $23,753,469. The principal drivers of
this increase were increased bookings in our New Jersey / New York, TVCS,
California, Airorlite and Texas operations.
Three
Months Ended September 30, 2010 compared to September 30, 2009
|
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
%
change
|
|
|
Revenue
|
|
$
|
19,345,013
|
|
|
$
|
12,109,037
|
|
|
|
59.8
|
%
|
|
Cost
of revenue
|
|
|
13,608,160
|
|
|
|
9,086,980
|
|
|
|
49.8
|
%
|
|
Gross
profit
|
|
|
5,736,853
|
|
|
|
3,022,057
|
|
|
|
89.8
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses
|
|
|
3,947,944
|
|
|
|
3,452,480
|
|
|
|
14.4
|
%
|
|
Merger
and acquisition costs
|
|
|
539,846
|
|
|
|
-
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
1,249,063
|
|
|
|
(430,423
|
)
|
|
|
390.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
14,335
|
|
|
|
11,986
|
|
|
|
19.6
|
%
|
|
Other
income (expense)
|
|
|
(16
|
)
|
|
|
13,481
|
|
|
|
-100.1
|
%
|
|
Interest
expense
|
|
|
(63,089
|
)
|
|
|
(56,926
|
)
|
|
|
10.8
|
%
|
|
Income
(loss) before income tax expense
|
|
|
1,200,293
|
|
|
|
(461,882
|
)
|
|
|
359.9
|
%
|
|
Income
tax expense (benefit)
|
|
|
473,188
|
|
|
|
(104,500
|
)
|
|
|
552.8
|
%
|
|
Net
income (loss)
|
|
$
|
727,105
|
|
|
$
|
(357,382
|
)
|
|
|
303.5
|
%
|
Revenue
- Revenue for the
three months ended September 30, 2010 was $19,345,013, representing an increase
of $7,235,976 or 59.8%, as compared to revenue of $12,109,037 for the three
months ended September 30, 2009. Our New Jersey/New York and California
operations each experienced significant revenue increases in the third quarter
of 2010 compared with the third quarter of 2009. Although the overall
market continues to be very price competitive as a result of the slowly
recovering U.S. economy, a significant amount of the New Jersey/New York
increase in revenue in the third quarter of 2010 relates to revenue driven from
the public sector transportation vertical market. The California integration
operation benefited from a strong booking performance during the first half of
2010, which allowed us to enter the third quarter with an increased installation
revenue backlog. In addition, revenues recognized under the L-3
Contract increased by $1.3 million in the third quarter of 2010 compared to the
same period in 2009. Currently, two sites are in progress and four
additional sites are scheduled to begin in the fourth quarter of 2010 and the
first quarter of 2011. Partially offsetting these increases
were declines in our Colorado and Arizona operations.
Cost of Revenue and Gross Profit
-
Cost of revenue for the three months ended September 30, 2010 was
$13,608,160, as compared to $9,086,980 for the three months ended September 30,
2009. Gross profit for the three months ended September 30, 2010 was $5,736,853
as compared to gross profit of $3,022,057 for the three months ended September
30, 2009. The gross profit margin for the three months ended September 30, 2010
was 29.7% as compared to 25.0% for the three months ended September 30,
2009. The increase in gross profit was directly related to the
higher revenues discussed above. A significant driver of the gross profit as a
percentage of revenue (“gross profit margin”) increase in the third quarter of
2010 compared to the third quarter of 2009 came from the restructuring of our
California operations that began in 2009.
Selling, General and Administrative
Expenses -
Selling, general and administrative expense (“SG&A”) was
$3,947,944 for the three months ended September 30, 2010 as compared
to $3,452,480 for the three months ended September 30, 2009. This
increase of $495,464 or 14.4% was mainly attributable to higher compensations
costs resulting from higher commissions and performance incentive driven by the
increased profitability of the Company.
Merger and Acquisition
Costs
-
Included
in merger and acquisition costs for the three months ended September 30,
2010 are $515,999 of legal and professional fees related to the Merger discussed
above (also see Note 13 of these Condensed Consolidated Financial Statements
filed in this Quarterly Report), and $23,847 of legal and professional fees
related to the acquisition of Professional Security Technologies LLC (see Note
12 to the Condensed Consolidated Financial Statements included in this Quarterly
Report).
Interest Income –
Interest
income for the three months ended September 30, 2010 was $14,335 as compared to
$11,986 for the three months ended September 30, 2009. This increase
was attributable to higher average cash balances during the three month period
ended September 30, 2010 versus the same period in the prior year.
Interest Expense -
Interest
expense for the three months ended September 30, 2010 was $63,089 as compared to
$56,926 for the three months ended September 30, 2009. The increase
is due to the average outstanding revolving debt balance being $1,491,031
higher in the three month period ended September 30, 2010 versus that in the
three months ended September 30, 2009.
Tax Expense –
The
Company recognized income tax expense for the three months ended September 30,
2010 of $473,188, based upon income before income taxes of
$1,200,293, compared with an income tax benefit of $104,500 for the three months
ended September 30, 2009, based upon a loss before income taxes of $461,882.
Income tax expense for interim reporting is based on an annual
effective income tax rate forecast, which includes estimates and assumptions
that could change during the year. The differences between the
effective income tax rate and the U.S. federal statutory rate of 34% principally
result from state and local taxes, and differences between the book and tax
treatment of certain items, such as incentive stock options. The effective
income tax rate for the three months ended September 30, 2010 was 39.4%,
compared to a tax benefit at an effective income tax rate of 22.6% for the three
months ended September 30, 2009.
Net Income
- As a result of
the above noted factors our net income was $727,105 for the three months ended
September 30, 2010, compared to a net loss of $357,382 for the three months
ended September 30, 2009. This resulted in diluted income per share of $0.12 on
weighted average diluted common shares outstanding of 6,179,659 for the three
months ended September 30, 2010, as compared to diluted loss per share of $0.06
on weighted average diluted common shares outstanding of 5,877,798 for the three
month period ended September 30, 2009.
Nine
Months Ended September 30, 2010 compared to September 30, 2009
|
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
%
change
|
|
|
Revenue
|
|
$
|
46,937,305
|
|
|
$
|
41,389,229
|
|
|
|
13.4
|
%
|
|
Cost
of revenue
|
|
|
33,502,994
|
|
|
|
30,255,049
|
|
|
|
10.7
|
%
|
|
Gross
profit
|
|
|
13,434,311
|
|
|
|
11,134,180
|
|
|
|
20.7
|
%
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses
|
|
|
10,710,057
|
|
|
|
11,015,124
|
|
|
|
-2.8
|
%
|
|
Merger
and acquisition costs
|
|
|
539,846
|
|
|
|
-
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
2,184,408
|
|
|
|
119,056
|
|
|
|
1734.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
70,668
|
|
|
|
21,023
|
|
|
|
236.1
|
%
|
|
Other
income (expense)
|
|
|
4,449
|
|
|
|
29,274
|
|
|
|
-84.8
|
%
|
|
Interest
expense
|
|
|
(174,874
|
)
|
|
|
(222,333
|
)
|
|
|
-21.3
|
%
|
|
Income
(loss) before income tax expense
|
|
|
2,084,651
|
|
|
|
(52,980
|
)
|
|
|
4034.8
|
%
|
|
Income
tax expense (benefit)
|
|
|
906,355
|
|
|
|
83,027
|
|
|
|
991.6
|
%
|
|
Net
income (loss)
|
|
$
|
1,178,296
|
|
|
$
|
(136,007
|
)
|
|
|
966.3
|
%
|
Revenue
- Revenue for the nine
months ended September 30, 2010 was $46,937,305, representing an increase of
$5,548,076 or 13.4%, as compared to revenue of $41,389,229 for the nine months
ended September 30, 2009. While our New Jersey/New York, California, Texas and
Airorlite operations each experienced significant revenue increases in the first
nine months of 2010 compared with the first nine months of 2009, the overall
market continues to be very price competitive as a result of the slowly
recovering U.S. economy, which contributed to revenue declines in our Colorado,
Arizona and Mid-Atlantic operations. The wind down of a large project
in our Colorado operation in 2009 that did not repeat in 2010 was a significant
contributor to the decline in that operation. The L-3 Contract
generated $0.7 million lower revenue in the first nine months of 2010 compared
to the same period in 2009. Revenues under the L-3 Contract slowed in
2010 due to the government adopting the Unified Facilities Criteria (“UFC”) in
the first quarter of 2010. The UFC called for enhancing existing
installation drawing packages prior to construction
approval. Currently, two sites are in progress and four
additional sites are scheduled to begin in the fourth quarter of 2010 and the
first quarter of 2011.
Cost of Revenue and Gross Profit
-
Cost of revenue for the nine months ended September 30, 2010 was
$33,502,994, as compared to $30,255,049 for the nine months ended September 30,
2009. Gross profit for the nine months ended September 30, 2010 was $13,434,311
as compared to gross profit of $11,134,180 for the nine months ended September
30, 2009. The gross profit margin for the nine months ended September 30, 2010
was 28.6% as compared to 26.9% for the nine months ended September 30,
2009. The increase in gross profit was directly related to the higher
revenues discussed above. A significant driver of the gross profit as a
percentage of revenue (“gross profit margin”) increase in the third quarter of
2010 compared to the third quarter of 2009 came from the restructuring of our
California operations that began in 2009, as well as from higher gross profit
margins from our Airorlite operations.
Selling, General and Administrative
Expenses -
Selling, general and administrative expense was $10,710,057
for the nine months ended September 30, 2010 as compared to
$11,015,124 for the nine months ended September 30, 2009. This decrease of
$305,067 or 2.8% was mainly attributable to lower personnel costs, (partially
offset by higher commissions and performance incentive costs driven by the
increased profitability of the Company), lower facility and insurance costs and
overall cost containment.
Merger and Acquisition
Costs
-
Included
in merger and acquisition costs for the nine months ended September 30,
2010 are $515,999 of legal and professional fees related to the Merger discussed
above (also see Note 13 of these Condensed Consolidated Financial Statements
filed in this Quarterly Report), and $23,847 of legal and professional fees
related to the acquisition of Professional Security Technologies LLC (see Note
12 to the Condensed Consolidated Financial Statements included in this Quarterly
Report).
Interest Income –
Interest
income for the nine months ended September 30, 2010 was $70,668 as compared to
$21,023 for the nine months ended September 30, 2009. This increase
was attributable to interest earned on an income tax refund and higher average
cash balances during the nine month period ended September 30, 2010 versus the
same period in the prior year.
Interest Expense -
Interest
expense for the nine months ended September 30, 2010 was $174,874 as compared to
$222,333 for the nine months ended September 30, 2009. The decrease
is due to the average outstanding revolving debt balance being $1,723,912
lower in the nine month period ended September 30, 2010 versus that in the nine
months ended September 30, 2009.
Tax Expense –
The Company
recognized income tax expense for the nine months ended September 30, 2010 of
$906,355, based upon income before income taxes of $2,084,651, compared with
income tax expense of $83,027 for the nine months ended September 30, 2009,
based upon a loss before income taxes of $52,980. Income tax expense
for interim reporting is based on an annual effective income tax rate forecast,
which includes estimates and assumptions that could change during the
year. The differences between the effective income tax rate and the
U.S. federal statutory rate of 34% principally result from state and local
taxes, and differences between the book and tax treatment of certain items, such
as incentive stock options. The effective income tax rate for the nine months
ended September 30, 2010 was 43.5%.
Net Income
- As a result of
the above noted factors, our net income was $1,178,296 for the nine months ended
September 30, 2010, compared to a net loss of $136,007 for the nine months ended
September 30, 2009. This resulted in diluted income per share of $0.19 on
weighted average diluted common shares outstanding of 6,124,694 for the nine
months ended September 30, 2010, as compared to diluted loss per share of $0.02
on weighted average diluted common shares outstanding of 5,859,400 for the nine
month period ended September 30, 2009.
Liquidity and Capital
Resources
As of
September 30, 2010, we had cash and cash equivalents of
$1,973,337. Our net current assets were $16,294,895 at September 30,
2010 versus $13,748,867 at December 31, 2009. Total debt at September
30, 2010 was $5,857,411 compared to the December 31, 2009 balance of
$5,367,069.
Cash used
in operating activities was $1,032,909 during the nine months ended September
30, 2010. This use of cash was principally driven from an increase in
working capital requirements to support the higher revenue in the quarter. The
most significant use of cash resulted from an increase in accounts receivable of
$6,109,603, a net increase in costs in excess of billings and estimated profits
of $1,832,707, as well as an increase in retainage receivable and inventory of
$588,036 and $568,134, respectively. Partially offsetting these uses of
cash was an increase in accounts payable and accrued expenses of $3,378,417
and $998,489, respectively.
Cash used
in investing activities was $204,346, comprised of $86,035 for the purchase of
property and equipment and $118,311 of acquisition payments.
Cash
provided by financing activities was $293,546, which represents the net
borrowing under the revolving line of credit with TD Bank of $725,000, partially
offset by repayment of other debt and payments of equipment
financing.
Borrowings
under the revolving credit facility were $5,060,898 at September 30, 2010 and
were $4,335,898 at December 31, 2009. On October 6, 2008, the Company
executed an amendment to its revolving credit agreement with TD Bank, increasing
its line of credit from $4 million to $8 million. On August 10, 2010 the
term of the revolving credit agreement was extended to September 30, 2012.
As part of this extension, interest will continue be paid monthly in arrears at
TD Bank’s prime rate, however, interest will now be subject to a minimum floor
rate of 4.0%. The Company is required to maintain certain financial and
reporting covenants and restrictions on dividend payments under the terms of the
Loan Agreement with TB Bank, N.A. (See Note 6 to the Condensed Consolidated
Financial Statements included in this Quarterly Report.)
Critical
Accounting Policies and Estimates
Disclosure
of the Company’s significant accounting policies is included in Note 1 to the
consolidated financial statements of the Company’s Annual Report on Form 10-K
for year ended December 31, 2009. Some of these policies require
management to make estimates and assumptions that may affect the reported
amounts in the Company’s financial statements.
Forward
Looking Statements
When used
in this discussion, the words "believes", "anticipates", "contemplated",
"expects", or similar expressions are intended to identify forward looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Those
risks and uncertainties include changes in interest rates, the ability to
control costs and expenses, significant variations in recognized revenue due to
customer caused delays in installations, cancellations of contracts by our
customers, and general economic conditions which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company undertakes no obligation to publicly release the results
of any revisions to those forward looking statements that may be made to reflect
events or circumstances after this date or to reflect the occurrence of
unanticipated events.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
We have
one revolving credit facility for which the interest rate on outstanding
borrowings is variable and is based upon the prime rate of interest, subject to
a minimum floor rate of 4.0%. At September 30, 2010, there was
$5,060,898 outstanding under this credit facility.
Our
business is impacted by the health of the U.S economy. Current
economic conditions have caused a decline in business spending which has
adversely affected our business and financial performance and our operating
results. Accordingly, our business and financial performance has been
adversely affected by current economic conditions, and any future deterioration
of economic conditions, could cause a further reduction in the availability of
credit in the capital markets to our customers.
Item
4. Controls and Procedures
(a) Evaluation of Disclosure
Controls and Procedures
The
Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of
September 30, 2010. Based on such evaluation, such officers have
concluded that, as of September 30, 2010, the Company’s disclosure controls and
procedures are effective.
(b) Changes in Internal
Control Over Financial Reporting
During
the three months ended September 30, 2010, management did not identify any
changes in the Company’s internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Part II - Other
Information
|
Item
1.
|
Legal
Proceedings
|
We know
of no material litigation or proceeding, pending or threatened, to which we are
or may become a party.
|
Number
|
|
Description
|
|
|
|
|
|
31.1
|
|
Rule
13a-14(a) 15d-14(a) Certification of Chief Executive
Officer
|
|
31.2
|
|
Rule
13a-14(a) 15d-14(a) Certification of Chief Operating
Officer
|
|
31.3
|
|
Rule
13a-14(a) 15d-14(a) Certification of Chief Financial
Officer
|
|
32
|
|
Section
1350 Certification
|
In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
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.
|
|
Henry
Bros. Electronics, Inc.
|
|
|
(Registrant)
|
|
|
|
|
|
Date:
November 12, 2010
|
|
By: /s/
JAMES E. HENRY
|
|
|
|
|
|
|
|
James
E. Henry
|
|
|
|
|
|
|
|
Vice
Chairman, Chief Executive Officer,
Treasurer
and Director
|
|
|
|
|
|
Date:
November 12, 2010
|
|
By: /s/
BRIAN REACH
|
|
|
|
|
|
|
|
Brian
Reach
|
|
|
|
|
|
|
|
President,
Chief Operating Officer,
Secretary
and Director
|
|
|
|
|
|
Date:
November 12, 2010
|
|
By: /s/
JOHN P. HOPKINS
|
|
|
|
|
|
|
|
John
P. Hopkins
|
|
|
|
|
|
|
|
Chief
Financial Officer
|