<PAGE>
PROSPECTUS
ESSEX CORPORATION
624,900 Shares of Common Stock
Issuable upon Exercise of Outstanding Warrants
This prospectus (the "Prospectus") and the registration statement of
which this Prospectus forms a part (the "Registration Statement") relate to
the issuance of up to 624,900 shares (the "Shares") of Common Stock, par value
$.10 per share (the "Common Stock") of Essex Corporation, a Virginia
corporation (the "Company"), which shares of Common Stock are issuable upon
exercise of 24,996 outstanding Warrants (the "Warrants"). Each Warrant
entitles the registered holder (a "Warrantholder") thereof to purchase 25
shares of Common Stock at an exercise price of $75.00 or $3.00 per share for a
period ending on June 30, 1998. The Company may require that the Warrants be
exercised at any time from April 1, 1996 through June 30, 1998 at the price of
$75.00 per Warrant if the last price of the Company's Common Stock exceeds
$5.00 per share for ten (10) consecutive trading days upon thirty (30) days'
notice to the registered holder. If not exercised when called, the Warrants
will expire. The exercise price and maturity date of the Warrants are subject
to adjustment under certain circumstances. (See "Description of Securities.")
The Warrants were issued by the Company as components of units (the "Units")
offered and sold by the Company pursuant to a public offering completed in
July 1995. (See "The 1995 Offering.) Each Unit was immediately separable and
consisted of 70 shares of Common Stock and one Warrant. The initial offering
price of each Unit was $100.00. The Company received net proceeds from the
sale of the Units of approximately $2 million after deduction of underwriting
discounts and commissions and expenses related to the offering. The exercise
price of the Warrants was arbitrarily determined by the Company and J. Michael
Reisert, Inc. (the "Placement Agent"), which firm served as the Placement
Agent for 17,500 of the Units on a "best efforts" basis. Such exercise price
was not necessarily related to the Company's asset or book value, net worth or
any other established criteria of value. Warrantholders who exercise the
Warrants and sell or distribute the Common Stock issuable upon such exercise
may be deemed to be statutory "underwriters" as that term is construed under
the Securities Act of 1933, as amended (the "Securities Act").
The Company's Common Stock is currently traded on The NASDAQ SmallCap
Market(sm) ("NASDAQ") but the Warrants are not currently quoted or listed for
trading. There can be no assurance that a trading market for the Common Stock
will be sustained. On March 29, 1996, the closing bid and asked prices for the
Company's Common Stock were $3.13 and $3.31, respectively. Sales of the
securities described herein or even the potential of such sales, would likely
have an adverse effect on the market prices of such securities. The Company
will receive the proceeds from the exercise of the Warrants. (See "Use of
Proceeds.") All costs incurred in connection with the registration of such
shares of Common Stock are being borne by the Company.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" COMMENCING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is May 8, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is a reporting company, subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and,
in accordance therewith, files reports, proxy statements and other information
statements with the Securities and Exchange Commission (the "Commission").
Such reports and other information can be inspected and copied at the Public
Reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at its regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661 and at 75 Park Place, 14th Floor, New York, New York 10007.
Copies of such material can be obtained upon request and payment of the
appropriate fee from the Public Reference Section of the Commission located at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
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PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with the more
detailed information appearing elsewhere in the Prospectus and financial
statements and related notes in this Prospectus. The purchase of the Company's
Securities involves certain risks described in the information set forth under
the heading "Risk Factors" elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety.
The Company
Essex Corporation ("Essex" or the "Company") was incorporated in
Virginia in 1969 to provide professional engineering and scientific services
to support U.S. Government defense, space and energy programs. The Company is
embarked on a vigorous program of development of proprietary optoelectronic
processors with significant performance advantages over conventional
computers. The Company has not yet brought such computers to commercial
markets. (See "Business".)
Core Business Sector
Substantially all of the current revenues of the Company are derived from
its traditional, core services business in the following principal fields of
interest:
o Simulators, Trainers and Interactive Training Materials
o Systems Engineering, Logistics and Information Technology
o Mechanical and Electromechanical Assembly
o Human Performance Measurement and Human Error Avoidance
The Company's Systems Effectiveness Division, headquartered in McLean,
Virginia, and its Federal Systems Division, headquartered in Columbia,
Maryland, operate in both government and commercial markets. They apply the
capabilities of the Company in various combinations to solve problems in such
business areas as Aerospace, Security, Military Operations Other than War,
Ship and Submarine Maintenance Planning, and Satellite Communications Systems
Engineering.
In 1988, the new Company management recognized that its core support
business, although self-sustaining, depended heavily on declining government
budgets. Accordingly, the Company's strategic plan for growth in both
government and industrial sectors was focused upon: (1) fields with
better-than-average potential and (2) development of proprietary
high-technology products. With respect to products, the Company determined to
identify and enter a field that provided both growth and relative ease of
discrimination.
Optoelectronic Business Sector
In mid-1989 in furtherance of its product objectives, the Company
acquired a small company with core capabilities in systems engineering and
high-speed, relatively low-cost, signal processors for the Intelligence
Community. The Company's technical team has designed, developed and sold such
optoelectronic processors for more than a decade. This experience was gained
largely in performing classified military research and development. While the
Company continues to perform such critical work, its internal resources are
largely devoted to industrial, medical and other applications useful in both
military and commercial sectors. The combination of optoelectronics and
systems engineering is a powerful discriminator in many markets.
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Optoelectronic processors are compact, integrated systems of optical and
electronic devices that perform specific, commercially-valuable mathematical
calculations at very high speeds. This technology has many advantages,
including: (1) use of simple, rugged, off-the-shelf hardware; (2)
high-performance implementation of demanding signal and image processing
computations; and (3) providing such desirable characteristics in economical,
compact, low power consuming packages. In the opinion of the Company, this
technology provides the Company strong, well-discriminated proprietary
capabilities to supply state-of-the-art products in such important fields as
imaging, holography, pattern recognition, communications and signal
processing. New products are considered only for markets to which they bring a
10-fold to 100- fold performance advantage in either throughput or throughput
per watt of power used.
The Company's principal executive offices are located at 9150 Guilford
Road, Columbia, Maryland 21046-1891. The Company's telephone number at that
address is (301) 953-7797.
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The Offering
Each of the Warrants entitles the holder thereof to purchase 25 shares of
Common Stock at $3.00 per share for an exercise period through June 30, 1998.
The Company has the right to call the Warrants at any time from April 1, 1996
through June 30, 1998 if the last price of the Company's stock exceeds $5 per
share for ten (10) consecutive trading days upon thirty (30) days' written
notice to the holders of record thereof at a call price of $75.00 per Warrant.
At the end of the exercise period, the Warrants will no longer be exercisable
and will lose any value that they might have had. (See "Description of
Securities".)
So long as this Prospectus is effective and the disclosures set forth
herein are current, the holders of the Warrants may exercise the Warrants and
either (i) hold the Common Stock issued upon exercise of such Warrants or (ii)
sell the Common Stock publicly.
The Company will receive the proceeds of any exercise of the Warrants.
The holders of the Common Stock underlying the Warrants, and not the Company,
will receive all of the proceeds of any sale of the Common Stock.
The following table indicates, among other things, the amount of Common
Stock outstanding prior to the offering, the amount of Common Stock
outstanding and the estimated net proceeds to be received by the Company
assuming exercise of all Warrants. There can be no assurance that all, or any,
of such Warrants will be exercised.
<TABLE>
<S> <C>
Common Stock Outstanding Prior to Exercise of the Warrants
Covered by this Prospectus 1
3,586,073 shares
Common Stock Outstanding Assuming Exercise of All Warrants 1
4,210,973 shares
Estimated Net Proceeds from the Exercise of All Warrants 2
$1,844,700
NASDAQ Symbol3
ESEX
Warrant Agent
Chemical Mellon
Stock Transfer Agent and Registrar
Chemical Mellon
<FN>
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1 Does not include 1,767,821 shares of Common Stock reserved for issuance
upon (i) exercise of stock options issued or issuable pursuant to the
Company's stock option and stock bonus plans (960,850 shares); or (ii)
exercise of former landlord stock option (125,000 shares); and (iii)
exercise of Placement Agents warrants (203,571 shares) and Debenture
holders' warrants (78,400 shares) or conversion of Debentures (400,000
shares).
2 Assumes maximum gross proceeds from the exercise of all Warrants, net of
estimated legal, printing, accounting, blue sky and miscellaneous
offering expenses of $30,000.
3 The Company's Common Stock has been traded on The NASDAQ SmallCap
Market(TM) since January 1994 and prior thereto was quoted on The NASDAQ
National Market System beginning in December 1981. There can be no
assurance that the Company will be able to continue to satisfy the
requirements for quotation on NASDAQ or that any market for such
securities will be sustained. (See "Risk Factors".) The Warrants are not
traded on NASDAQ.
</FN>
</TABLE>
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<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
should be considered carefully in evaluating the Company before exercising
Warrants to purchase Common Stock.
Dependence Upon Government Business
A substantial part of the Company's revenues has been derived from
contracts with departments or agencies of the United States Government,
primarily involving defense, space and energy programs. In 1995, government
prime contracts and subcontracts represented 82% of total revenues, and in
1994, government prime contracts and subcontracts represented 88% of the total
revenues of the Company. While the Company is seeking to expand its
non-governmental business, management believes that the success and
development of a substantial portion of its business will continue to be
dependent upon its ability to participate in government programs.
Risks of Government Business
The Company's business with the United States Government is, in general,
subject to various risks, including: termination of contracts or subcontracts
for the convenience of the government; termination, reduction, or modification
of contracts or subcontracts in the event of changes in the government's
requirements or budgetary constraints; increased or unexpected costs causing
losses or reduced profits under fixed-price contracts and time-and-materials
contracts; award of potential contracts or renewals or extensions of existing
contracts to minority or disadvantaged businesses designated pursuant to
"set-aside" programs administered by the Small Business Administration or
otherwise; and, when the Company participates as a subcontractor, the failure
or inability of the prime contractor to perform its prime contract. In
addition, under cost-reimbursement contracts, the Company's recoverable
contract costs are subject to adjustment as a result of audits by the Defense
Contract Audit Agency ("DCAA"). The Company's records have been audited by
DCAA through December 1990 and results finalized. Audits for subsequent years
are in preliminary stages and no discussions regarding issues, if any, have
been held. A substantial downward adjustment in recoverable costs resulting
from such an audit would have a material adverse effect upon the income and
revenues of the Company.
The Company's revenues and profitability may be adversely affected by
delays in funding and performance of government contracts. The Company may
incur costs not recoverable under any contract while waiting for orders to
proceed. Profit on cost-reimbursement contracts is limited by government
policy and because a substantial portion of the Company's contracts are of the
cost-reimbursement type, it may be difficult or impossible for the Company to
recover cost overruns on such contracts. Unrecoverable costs therefore may
have a disproportionate impact on net income.
Dependence on Key Personnel
The Company's success depends to a significant extent upon certain of
its officers, and key employees, including the Chairman of the Board and Chief
Executive Officer, Dr. Harry Letaw, Jr. Dr. Letaw has been with the Company
since 1988.
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<PAGE>
The Company's expertise in the fields of optoelectronic processors
resides among a few key individuals. One of the individuals, Terry M. Turpin,
Vice President and the Company's Chief Scientist, has been with the Company
since 1984. Mr. Turpin was the inventor of the "Sequential Image Synthesizer
(ImSyn(TM))" technology for which the Company received its first patent in
January 1992.
The loss of any of these key personnel could have a materially adverse
effect on the Company. The Company does not maintain any "key-man" or other
insurance protecting the Company against loss of any executive officers or key
employees. The Company has no employment agreements or other arrangements with
such key persons which would prevent them from leaving the Company.
Obligations Under Landlord Settlement
The Company is obligated to its former landlord to make substantial
payments of potentially up to $349,000 out of its future cash flow through
December 31, 2004 (including up to $212,000 of the funds generated as proceeds
from the exercise of the Warrants). (See "Landlord Settlement Obligations" and
"Use of Proceeds".) The financial obligations of the Company under the
settlement agreement with its former landlord represent a substantial advance
commitment of the Company's cash resources which adversely affects the
financial prospects of the Company.
Business Risks Related to Optoelectronic Processors
As described in this Prospectus, the Company's business development
efforts and recent expenditures of funds and planned expenditures of
substantial portions of the proceeds from the exercise of the Warrants are and
will be principally to further development of its optoelectronic processors
(the "Technology"). The following business risks are related to the
development of the Technology as a profitable line of business for the
Company.
A. No Assurance of Successful Development of Technology Related Products
While basic research and development on the Technology has been conducted to
date and a prototype is nearly developed, additional systems and product
development is still to be completed. There can be no assurance that the
Company will be able to complete the development of any such products. Even if
products embodying the Technology are successfully developed, there can be no
assurance that commercial products utilizing the Technology can be
successfully developed. The successful development of any such products will
require, in addition to technical advances, demonstration that the products
are effective and economically feasible.
B. Use and Acceptance of Company's New Commercial Products The Company's
new optoelectronic processor products are geared for usage both directly by
end-users and by original equipment manufacturers. These processor products
serve to replace computational functions now performed by other means that are
more expensive or in speeds significantly slower than the Company's
processors. The Company's products are state of the art and therefore untried
and untested in mass commercial applications. There can be no assurance that
products can be developed or licensed, or that products utilizing the
Technology can be commercialized profitably. Even if products are
commercialized profitably, the initial losses incurred in development may
never be recovered.
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<PAGE>
With respect to end-users, the Company's products must be functional,
affordable and able to be used automatically by moderately trained personnel.
With respect to original equipment manufacturers (OEMs), the Company's
products must be acceptable and then integrated into such third-party systems.
Because these products have been demonstrated only in prototype form and have
not been produced in quantity, no firm orders in quantity have been received,
and there can be no assurance that such products will achieve sufficiently
wide acceptance in the targeted markets to produce profitable revenue volumes.
C. Importance of the Technology; Requirements for Additional Funds The
Company expects that funds to complete development of the Technology will be
obtained from customer financing, from the Company's operating revenues and
from the exercise of Warrants, but there can be no assurance that such funding
will be available or that any Warrants will be exercised.
D. No Assurance of Successful Marketing Even if products utilizing the
Technology are developed, there can be no assurance that the products can be
successfully marketed. The Company has no significant commercial marketing
capability in this product area. The Company will need to develop commercial
marketing capabilities for such products. If it is determined that the Company
will rely on third-party marketing, there is no assurance that third-party
arrangements can be successfully negotiated, or that any such arrangements
will be available on commercially reasonable terms. Even if acceptable and
timely marketing proves to be available, there is no assurance the products
incorporating the Technology will be accepted in the marketplace.
E. Unpredictability of Patent and Intellectual Property Protection The
Company expects that patent protection will be important in the optoelectronic
industry. Therefore, the Company's success may depend in part upon it being
able to obtain strong patent protection for the Technology. The Company has
been issued four patents in the United States, No. 5,079,555 and No. 5,384,573
for the ImSyn(TM) and No. 5,202,776 and No. 5,390,046 for the True Time Delay
technologies, respectively, which expire in January 2009, January 2012, April
2010 and February 2012, respectively. In addition, Canadian patent No.
2,058,209, corresponding to U.S. patent no. 5,079,555 was issued and will
expire November 25, 2011. Patent applications for the first ImSyn(TM) patent
are pending in Japan, United Kingdom, France, Germany and Italy and for the
second in Canada, Japan, United Kingdom, France, Germany and Italy. Third
patents for both technologies are pending in the U.S. and all of the above
countries. The Company has abandoned its applications for the two issued True
Time Delay U.S. Patents in all foreign countries. Other than those detailed
above, no additional U.S. patents are pending. The Company expects to make
additional filings during the next twelve months. There can be no assurance
that any additional patents will be issued, or that any existing patents or
patents issued in the future will be of commercial benefit. In addition, it is
impossible to anticipate the breadth or degree of protection that any such
patents will afford.
Although a patent has statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to such validity and the
enforceability of a patent after its issuance by the United States Patent
Office can be challenged in litigation. There can be no assurance that patents
covering the Technology will not be infringed or successfully avoided through
design innovation.
If the Company relies on unpatented proprietary technology, there can be
no assurance that others may not independently develop or obtain similar
technologies or products.
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<PAGE>
To protect its intellectual property the Company also relies in part on
agreements with strategic employees and consultants which typically include
provisions concerning confidentiality and ownership of work product. Despite
these precautions, there can be no assurance that such agreements will provide
the Company with meaningful remedies in the event of an improper use or
disclosure of proprietary information. In addition, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that the Company will be able to resolve such claims or disputes
on terms acceptable to the Company.
Revenues; Losses; Working Capital
The Company's revenues declined from $24.2 million in 1990 to $14.2
million in 1995. During the 1995 fiscal year, the Company reported a net loss
of approximately $1,427,000. For the 1994 and 1993 fiscal years, the Company
reported net losses of approximately $466,000 and $1.9 million, respectively.
For 1994, the Company's reported loss of $466,000 included a charge of
$685,000 in connection with the settlement of a lawsuit with its prior
landlord. (See "Landlord Settlement Obligations"). For 1995, the Company's
reported loss of $1,427,000 included charges of $1,254,000 for ImSyn(TM)
prototype development and $284,000 for lawsuit prosecution expenses against a
competitor. As of December 31, 1995, the Company had working capital of
$327,000 and a retained deficit of approximately $3.6 million. The Company had
positive stockholders' equity of $2.0 million as of December 31, 1995. (See
"Management's Discussion and Analysis or Plan of Operation" and "Financial
Statements".)
Extent of Control by Affiliates
Officers and directors of the Company own Common Stock and exercisable
options and warrants to purchase Common Stock totalling 1,150,424 shares (or
approximately 22.15% of the total outstanding stock assuming exercise of
management's options and warrants) and, consequently, current management is
able to generally direct the management and policies of the Company through
the shares of Common Stock owned (or obtainable through exercise of stock
options and warrants) by officers and directors. (See "Principal Stockholders"
and "Executive Compensation - Options to Purchase Securities.") Included in
such Affiliate ownership are 60,250 shares represented by 2,410 Warrants held
by officers and directors of the Company which were acquired in The 1995
Offering. (See "The 1995 Offering".)
Outstanding Options, Warrants and Convertible Debentures
The Company has issued options to a former landlord (the "Landlord
Options") to purchase 125,000 shares of the Company's Common Stock at an
exercise price of $2.00 per share, exercisable through December 31, 2004,
subject to adjustment to prevent dilution in certain circumstances (see
"Landlord Settlement Obligations"). The Company also has approximately 960,850
shares of Common Stock reserved for issuance under various stock option and
stock bonus plans including outstanding options to purchase 672,869 shares of
Common Stock at prices ranging from $2.50 per share to $3.50 per share
variously exercisable through 2000 (the "Plan Options"). Additionally, in
connection with The 1995 Offering, the Company issued Placement Agent's
Warrants entitling the holder to purchase up to 175,000 shares of the
Company's Common Stock at an exercise price of $2.30 per share exercisable
until December 1, 1999. The Company issued 28,571 and 78,400 Warrants to the
Placement Agent and Debenture Holders, respectively, at an exercise price of
$3.50 per share until November 30, 2000 in connection with the 10% Convertible
Collateralized Debentures Due 2000 ("Debentures") which are convertible
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into an aggregate of 400,000 shares. For the life of the Landlord Options, the
Plan Options, the Debentures and the various Placement Agent's Warrants and
Debenture Holder Warrants (collectively, the "Options and Warrants"), the
holders thereof are given the opportunity to profit from a rise in the market
price of the Company's Common Stock, if any, without assuming the risk of
ownership with resulting dilution of the interest of other stockholders. So
long as the Options and Warrants remain unexercised, and the Debentures remain
outstanding, the Company may find it more difficult to raise additional
capital financing under terms satisfactory to the Company. Moreover, the
holders of the Options and Warrants may be expected to exercise them at a time
when the Company would, in all likelihood, be otherwise able to obtain any
needed capital by a new offering of its securities on terms more favorable
than those provided by such Options and Warrants.
Potential Future Sales of Securities; Registration Rights
The Company has granted certain "demand" and "piggyback" registration
rights to the former Landlord covering 125,000 shares of Common Stock and to
seventeen (17) holders of approximately 140,000 shares of Common Stock who
purchased such Common Stock in 1993 and 1994 (See "Landlord Settlement
Obligations" and "Shares Eligible for Future Sale"). Also, the Company has
granted registration rights to the Placement Agent for registration of up to
175,000 shares of Common Stock issuable on the exercise of the Placement
Agent's Warrants in connection with The 1995 Offering (See " The 1995
Offering"). Furthermore, the Company granted certain registration rights for
28,571 shares and 78,400 shares to the Placement Agent and Debenture Holders,
respectively, in connection with the issuance of the Debentures. Exercise of
these registration rights by such holders could involve substantial expense to
the Company and may affect the terms upon which the Company may obtain
additional financing. The Company is unable to predict the effect that sales
made under the registration rights may have upon the then prevailing market
price of the Common Stock. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Company's Common Stock.
Current Prospectus and Blue Sky Restrictions
Holders of Warrants will have the right to exercise the Warrants only if a
current prospectus relating to the shares underlying the Warrants is then in
effect, and only if such shares purchased upon exercise of the Warrants are
exempted or qualified for sale under applicable state securities laws of the
states in which the various holders of the Warrants reside or are exempt from
such qualification. There can be no assurance that the Company will not be
prevented by financial or other considerations from maintaining a current
Prospectus. The Company qualified the sale of the Warrants in certain states,
although certain exemptions in the securities ("Blue Sky") laws of certain
states might have permitted the Warrants to be transferred to purchasers in
states other than those in which the Warrants were initially qualified. The
Company will be prevented from issuing Common Stock in such states upon the
exercise of the Warrants unless an exemption from qualification is available
or unless the issuance of Common Stock upon exercise of the Warrants is
qualified. The Company may decide not to seek or may not be able to obtain
exemption or qualification of the issuance of such Common Stock in all of the
states in which the ultimate purchasers of the Warrants reside. The holders of
Warrants may be deprived of any value if a current prospectus covering the
Shares issuable upon exercise of the Warrants is not available, or if such
shares are not qualified or exempt in the states in which holders of the
Warrants reside.
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Possible Call for Exercise of Warrants
If a current prospectus is available, the Warrants may be called by the
Company for early exercise under certain circumstances. (See "Description of
Securities - Warrants"). The holder may be unable (for financial or other
reasons including Blue Sky restrictions) to exercise the Warrants at the time
the holder receives notice of such call. If the Company gives a notice of
early exercise of the Warrants, the holders could be forced to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous
for them to do so, or to sell the Warrants at the current market price for the
Warrants (if a market exists for the Warrants and if the Warrants can be sold)
when they might otherwise wish to hold the Warrants.
Discretion Over Use of Proceeds
Although the Company intends to apply the proceeds, if any, from the
exercise of the Warrants as described in "Use of Proceeds," the Company has
significant discretion over a substantial amount of the proceeds.
No Assurance of Continued Public Market or NASDAQ Listing; Penny Stock
Regulations
There can be no assurance that a regular trading market for the Common
Stock will be sustained. If for any reason the Common Stock is not eligible
for continued listing or a public trading market does not develop, purchasers
of the Shares may have difficulty selling their Shares should they desire to
do so.
The Company's Common Stock is listed on NASDAQ. Under the rules of the
National Association of Securities Dealers, Inc. ("NASD"), in order to qualify
for continued listing, a company, among other things, must have $2,000,000 in
total assets, $1,000,000 in total capital and surplus, $1,000,000 in market
value of public float and a minimum bid price of $1.00 per share. There can be
no assurance, however, that the Company will be able to satisfy the
requirements for continued quotation on NASDAQ. If the Common Stock is not
listed on NASDAQ, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Shares.
In addition, if the Common Stock was not listed on NASDAQ, it would become
subject to the Commission's "penny stock" rules. These regulations define a
"penny stock" to be any equity security that has a market price (as defined)
of less than $5.00 per share, subject to certain exceptions, including
securities listed on NASDAQ. For any transaction involving a penny stock,
unless exempt, these rules require the delivery, prior to the transaction, of
a disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered underwriter, current quotations for the
securities, information on the limited market in penny stocks and, if the
broker-dealer is the sole marketmaker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. In addition,
the broker-dealer must obtain a written acknowledgement from the customer that
such disclosure information was provided and must retain such acknowledgement
for at least three years. Monthly statements must be sent disclosing current
price information for the penny stock held in the account. The penny stock
rules also require that broker-dealers engaging in a transaction in a penny
stock make a special suitability determination for the purchaser and receive
the purchaser's written consent to the transaction prior to the purchase.
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These rules may materially and adversely affect the liquidity for the
market of the Company's securities by restricting the ability of
broker-dealers to sell the Company's securities and the ability of holders of
such securities to obtain accurate price quotations. Such rules may therefore
impede the ability of subsequent holders (including, specifically, the
purchasers in this Offering) of the Common Stock to sell such securities in
the secondary market.
Competition
Competition for U.S. Government professional and technical services
contracts has grown in intensity and proposals have become increasingly costly
during the past several years. Many of the Company's competitors for such
government contracts are larger and possess greater financial, technical and
other resources than the Company. In addition, the Company faces competition
from diverse sources in connection with its efforts at commercialization of
its products and services. There can be no assurance that additional
competitors will not enter markets served by the Company or that the Company
will be able to compete with such entities. (See "Business--Competition".)
Absence of Dividends
The Company has not paid any dividends on any of its outstanding
securities to date and does not anticipate paying any dividends on its
securities in the foreseeable future. The Company currently intends to retain
all working capital and earnings, if any, to finance the operations of its
business and to expand its businesses. (See "Dividen Policy.")
-12-
<PAGE>
USE OF PROCEEDS
If all of the Warrants are exercised, the net proceeds to the Company will
be $1,844,700 after deducting estimated offering expenses of $30,000. If 25%
of the Warrants are exercised, net proceeds after such estimated offering
proceeds would be $438,675; and if 50% of the Warrants are exercised, net
proceeds after such estimated offering expenses would be $907,350. No
assurance can be given that all or any of the Warrants will be exercised.
The expected application of the net proceeds assuming the exercise of
25%, 50% and 100% of the Warrants is as follows:
<TABLE>
<CAPTION>
Assuming Number of
Warrants Exercised is -
Description 25%
50% 100%
---------------------------------------------- --------------
- ------------- --------
<S> <C> <C>
<C>
Completion of development of ImSyn(TM)
optoelectronic processor and other commercial
applications/products $ 204,807 $
426,615 $ 832,995
Initiate manufacture of resulting commercial
products 100,000
200,000 400,000
Sales and marketing efforts 75,000
150,000 300,000
Landlord Settlement Obligations 33,868
80,735 211,705
Protection of intellectual property (patent
filings, etc.) 12,500
25,000 50,000
Research and development for other
applications 12,500
25,000 50,000
--------------
- ------------- -------------
$ 438,675 $
907,350 $ 1,844,700
==============
============= =============
</TABLE>
The exact use of any proceeds from the exercise of the Warrants will
depend upon the amount received and the time of receipt, as well as the
discretion of management. Proceeds will not be escrowed pending use but will
be made immediately available to the Company. To the extent that proceeds are
not promptly expended, they may be invested by the Company in bank
certificates of deposit, treasury bills, commercial paper or other high grade,
short-term investment instruments.
While there can be no assurance given, assuming the Company's current
level of revenue remains relatively constant, the Company believes the
proceeds from the exercise of the Warrants, amounts available under its line
of credit and internally generated funds will be adequate to satisfy the
Company's working capital needs for the next twelve (12) months.
Under the Landlord Settlement Obligations, assuming the exercise of all
Warrants pursuant this Prospectus, the Company would be required to pay the
former Landlord approximately $211,705 towards satisfaction of the remaining
$309,000 potential contingent liability related to stock or asset sales or
from future earnings. See "Landlord Settlement Obligations" for further
discussion of the Company's obligations in this regard.
-13-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1995, and as adjusted to give effect to the application of the
net proceeds from the exercise of 25,000 Warrants at the exercise price of
$75.00 per Warrant, in the net amount of $1,845,000. However, there is no
assurance any of the outstanding Warrants will be exercised.
<TABLE>
<CAPTION>
As of
December 31, 1995
As Adjusted
(In
thousands)
<S> <C> <C>
Debt:
Current portion of Industrial Revenue Bond $ 80 $
80
Current portion of capital leases 148
148
Long-term debt:
Industrial Revenue Bond 233
233
10% Collateralized Convertible Debentures 535
535
Capital Leases, net of current portion 143
143
--------------
--------
Total debt 1,139
1,139
----------
--------
Stockholders' equity:
Common Stock, $0.10 par value; 10,000,000 shares
authorized; 3,585,973 issued and outstanding
(4,210,973 shares as adjusted for maximum) 1, 2 359
421
Contributions in excess of par value 1, 2 5,215
6,998
Retained deficit (3,614)
(3,614)
----------
--------
Total stockholders' equity 1,960
3,805
----------
--------
Total capitalization $ 3,099
$ 4,944
==========
========
<FN>
- --------
1 Excludes approximately 960,850 shares of Common Stock reserved for issuance
pursuant to outstanding Stock Option and Stock Bonus Plans and 125,000 shares
of Common Stock reserved for issuance to the former Landlord. (See "Executive
Compensation - Options to Purchase Securities", "Financial Statements - Notes
9 and 10 of Notes to Financial Statements in the Company's 1995 Annual Report
on Form 10-KSB"; and "Risk Factors - Outstanding Options and Warrants" and
"Landlord Settlement Obligations".)
2 Excludes 203,571 shares reserved in connection with issuance of Placement
Agent's Warrants and proceeds therefrom and; 400,000 shares reserved in
connection with conversion of Debentures and reclassification of amounts from
Long-term Debt; and 78,400 shares reserved in connection with issuance of
Debenture Holders Warrants and proceeds therefrom.
</FN>
</TABLE>
-14-
<PAGE>
BUSINESS
The Company was incorporated in Virginia in 1969 to provide professional
engineering and scientific services to support U.S. Government defense, space
and energy programs. The Company is embarked on a vigorous program of
development of proprietary optoelectronic processors with significant
performance advantages over conventional computers. The Company has not yet
brought such computers to commercial markets.
Substantially all of the current revenues of the Company are derived from
its traditional, core services business in the following principal fields of
interest:
o Simulators, Trainers and Interactive Training Materials
o Systems Engineering, Logistics and Information Technology
o Mechanical and Electromechanical Assembly
o Human Performance Measurement and Human Error Avoidance
The Company's Systems Effectiveness Division, headquartered in McLean,
Virginia, and its Federal Systems Division, headquartered in Columbia,
Maryland, operate in both government and commercial markets. They apply the
capabilities of the Company in various combinations to solve problems in such
business areas as Aerospace, Security, Military Operations Other than War,
Ship and Submarine Maintenance Planning, and Satellite Communications Systems
Engineering.
In 1988, the new Company management recognized that its core support
business, although self-sustaining, depended heavily on declining government
budgets. Accordingly, the Company's strategic plan for growth in both
government and industrial sectors was focused upon: (1) fields with
better-than-average potential and (2) development of proprietary
high-technology products. With respect to products, the Company determined to
identify and enter a field that provided both growth and relative ease of
discrimination.
Optoelectronic Business Sector
In mid-1989 in furtherance of its product objectives, the Company acquired
a small company with core capabilities in systems engineering and high-speed,
relatively low-cost, signal processors for the Intelligence Community. The
Company's technical team has designed, developed and sold such optoelectronic
processors for more than a decade. This experience was gained largely in
performing classified military research and development. While the Company
continues to perform such critical work, its internal resources are largely
devoted to industrial, medical and other applications useful in both military
and commercial sectors. The combination of optoelectronics and systems
engineering is a powerful discriminator in many markets.
Optoelectronic processors are compact, integrated systems of optical and
electronic devices that perform specific, commercially-valuable mathematical
calculations at very high speeds. This technology has many advantages,
including: (1) use of simple, rugged, off-the-shelf hardware; (2)
high-performance implementation of demanding signal and image processing
computations; and (3) providing such desirable characteristics in economical,
compact, low power consuming packages. In the opinion of the Company, this
technology provides the Company strong, well-discriminated proprietary
capabilities to supply state-of-the-art products in such important fields as
imaging, holography, pattern recognition, communications and signal
-15-
<PAGE>
processing. New products are considered only for markets to which they bring a
10-fold to 100- fold performance advantage in either throughput or throughput
per watt of power used.
ImSyn(TM) Processor - The Company has diligently pursued application of its
proven laser-based optoelectronic technologies toward the realization of the
patented ImSyn(TM) processor. The ImSyn(TM) processor implements the
well-known Fourier transform formula that is basic to numerous image and
signal processing applications. Further, it does so with a performance that
often far exceeds conventional technology which relies on the fast Fourier
transform (FFT) algorithm (computer program) to maximize performance.
The name ImSyn(TM), which stands for "image synthesis", was selected
because the processor is useful in many image processing modalities, although
its utility extends beyond such applications. Image processing can be grouped
into two categories: (1) image reconstruction (or synthesis), and (2)
post-processing image enhancement (or analysis). The first refers to the
computation of an image from data measured by a particular sensor such as a
radar or MRI (magnetic resonance imaging) device. The second involves
improving the image, identifying important features and otherwise exploiting
the picture.
For certain image reconstruction applications, particularly synthetic
aperture radar (SAR) and fast MRI, conventional technology is too slow,
expensive, and often too bulky and energy inefficient. This problem affects
the overall utility of such applications and limits their use. The high
throughput, flexibility, compact size and low power requirements of the
ImSyn(TM) processor allow its use in fast MRI and SAR. The SAR market niches
include aerospace platforms and transportable ground systems where size,
weight and power are most critical, as well as fixed workstations. In
addition, ImSyn(TM) technology enables new applications in digital holography
and synthetic aperture microscopy (SAM), ultrasound and sonar, that are not
otherwise practical. Synthetic aperture microscopy was invented by the
Company.
A prototype ImSyn(TM) Processor is now in test and evaluation.
Concurrently, three such prototypes are being constructed, one for delivery
under contract for U.S. Army end use. Performance of the prototype is rapidly
improving as technical adjustments are made. The Company anticipates making a
product announcement to applicable markets in 1996.
ImSyn(TM) Processor Commercialization - The Company has identified many market
niches for image processing applications. In any given market niche, there
will be end-users with direct applications and original equipment
manufacturers (OEMs) that can incorporate ImSyn(TM) processors in their
products to improve performance or reduce cost. The Company is concentrating
on the OEM sector because it is readily accessible and less expensive to
serve, and because most users prefer to buy fully integrated systems. In the
case of MRI, however, market entry is controlled by the prominent MRI research
institutions upon which the OEMs depend for new product and applications
information. Accordingly, the Company is keeping the OEM community informed on
its progress while actively contacting "luminary" researchers in approximately
200 sites. Contacts have been made with both OEMs and research institutions to
inform potential users and begin generation of sales leads.
In this connection, the State of Maryland has made a cooperative grant
with the Company to the Radiology Department of the University of Maryland
Medical School under the Maryland Industrial Partnerships (MIPS) program. The
purpose of the grant is to finance application studies by the Radiology
Department to determine the most effective uses of the ImSyn(TM)
-16-
<PAGE>
processor in reconstructing MR images. The principal direction of the work in
process is toward real-time processing of very fast MRI to permit doctors to
evaluate dynamic parts of the body such as the beating heart and thinking
brain. One fast MRI technique, EPI (echo-planar imaging), is now being offered
by major OEMs such as GE Medical Systems, Siemens Medical Systems and Picker,
but without the high-performance processing required for real-time imagery.
The Company's marketing strategy is designed to allow each niche to be
covered by five or fewer sales representatives or consultants. They will be
supported by a tailored public relations campaign for purposes of education
and lead generation. Essex is now retaining a technically advanced sales
consultant with an extensive marketing background in the medical imaging
marketplace. Military end-use marketing and sales continue to be carried out
by key employees who have conducted such efforts successfully, both directly
to government agencies and indirectly through aerospace electronic prime
contractors.
Other Optoelectronic Engines - In addition to the ImSyn(TM) processor, the
Company's other work in process include Radar Signal Processors, Image and
Data Correlators, and Telecommunications Switching Arrays. Each of these
computing engines can be used in a variety of applications. However, in
contrast to desktop and other familiar "general purpose" computers applied to
computing, word processing and other applications, they are "special purpose"
units, albeit very flexible ones. Note that only the Company's ImSyn(TM)
Processor has advanced to the commercial prototype phase.
A proof-of-principle model of the Company's Hawkeye(TM)
acousto-optic/digital radar signal processor was constructed under the terms
of a $1.8 million U.S. Army contract. Its principal discriminating capability
is that it can process high-definition radar returns from advanced wide
bandwidth radars with high computational efficiency in a compact,
light-weight, inexpensive package. Such real time computation of high
resolution images from instantaneously wideband signals requires extremely
high analog to digital conversion rates and data processing throughput which
tends to be impractical with state-of-the-art digital electronics. It is
potentially applicable to fixed, mobile and shipboard anti-missile radar
systems.
Under the Company's Egret(TM) correlator program, the ImSyn(TM) processor
technology is being used to demonstrate the pattern recognition capability of
optoelectronic processors to the U.S. Air Force. This program is financed by a
$730,000 U.S. Air Force technology demonstration contract. The goal of the
resulting system is to be able to identify individual objects such as tanks,
mobile missile launchers, or other known objects in an image. Similar
discriminations could be useful in medical radiology or pathology. In the
future, the Company hopes to build a much higher speed correlator that will
perform the functions of the demonstration system.
Under its Iris(TM) program, the Company is in the early stages of
developing a family of optoelectronic telecommunications channelizers and
switches. These products will be targeted at the mobile wireless and satellite
telecommunications markets. The advantages of optoelectronic processors,
especially their size and energy efficiency, are expected to be attractive to
these markets. The technology can be implemented for TDMA (Time Division
Multiple Access), FDMA (Frequency Division Multiple Access) or CDMA (Code
Division Multiple Access) modulation schemes. Iris(TM) technology is being
studied for use on a planned satellite under a small research contract.
-17-
<PAGE>
Several other optoelectronic processors are under study or preliminary
development by the Company. Related applications and exploratory development
activities are being conducted under the terms of several commercial and
government contracts. The latter consist of a mixture of direct contracts from
agencies of the U.S. Government and subcontracts from major aerospace
electronics companies. Additional government contracts and strategic
partnerships with companies active in applicable markets are being sought.
Core Business Sector
In accordance with its business strategy, the Company has focused its core
business activities increasingly upon commercial and government business
opportunities expected to provide significant growth and above average
comparative profitability. Business development resources are being
judiciously applied to concentrate, enhance the quality and improve the
performance of the Company in new and historically served business areas. The
Company continues to provide professional services composed of a variety of
technologies. Several business areas and key programs expected to have better
than average growth potential are described below.
Humanitarian Demining - The Company is well respected by the international
community as a source of solutions to the critical challenge posed by more
than 100 million land mines strangling economic development in 60 countries.
Because people are unwilling to risk life and limb under such conditions, a
small number of antipersonnel mines that may cost only a dollar or two each,
distributed over a wide area, can impede farming, mining and transportation.
Under contract, the Company developed rapidly accessible compact disk programs
to facilitate interactive training on the land mine threat. Now in use in
Bosnia, earlier versions were used in Desert Storm. The Company's products are
multilingual and feature not only detailed information on all such mines of
the world, but also means to produce posters, T-shirts, scarves and other
public information materials. These are used by U.S. Special Forces in-country
teams to create awareness of the threat to which women and children are
particularly vulnerable when gathering firewood and performing other domestic
tasks. The Company offers related logistic support and training services with
a variety of partners for long-term demining campaigns.
Maintenance Trainers - Under terms of a $3.6 million U.S. Navy contract, the
Company is in the process of designing, manufacturing and delivering a total
of 172 trainers of eight types for use in training aircraft maintenance
personnel. The trainers are designed to provide valid, hands-on experience for
trainees with simplicity and low cost in the forefront. Various combinations
of mechanical, electromechanical, electronic and computer technologies are
used to meet those objectives. The Company's extensive experience in this
field includes trainers for NASA mission specialists, advanced maintenance
trainers for U.S. Navy reconnaissance aircraft and other applications. The
Company also operates as a subcontractor to major aerospace electronic
contractors.
Satellite Telecommunications Engineering - In 1990, the Company became
Motorola's first Industrial Partner on the IRIDIUM(R) satellite constellation
that will provide global wireless communications to handheld telephones and
pagers. The Company's employees have been named on more than a dozen Motorola
patent disclosures. Built upon the extensive base of related business with the
U.S. Government, this activity includes performance of systems analysis and
development of computer software to model performance and plan the operation
of the satellite constellation. The Company has long provided excellent
systems engineering services in signal and image processing and communications
to industrial, commercial and
-18-
<PAGE>
government customers. Such capability is pivotally important in matching
products to real world applications. The Company's systems engineering
capability is a major asset and key discriminator in its programs to design
and apply its optoelectronic computers.
Logistic Support - The Company has provided logistic engineering support to
the U.S. Navy submarine program for nearly two decades. Currently, the Company
performs maintenance planning, configuration control, human error avoidance,
and information management analysis for database architecture and support.
Logistic and training support are being provided to the U.S. Department of
Energy to help assure safe, protected transportation of military nuclear
assets. The Company has developed extensive expertise in reliability
engineering, training materials and trainer development, CD/ROM document
compaction, configuration management, safety, human error reduction, material
support and other specialties. The Company's fabrication support facility
permits rapid acquisition and, if required, special modification of required
material. It recently began performing a major new U.S. Navy contract which
was awarded in August 1995 at $16.2 million spread over five years, to provide
unique manufacturing and technical support for weapons systems and associated
materials. The Company is skilled in planning, scheduling and supporting
maintenance activities in complex systems for industrial enterprises,
particularly power utilities and was awarded in February 1995 a five-year
program for $6.2 million from the U.S. Navy for engineering and maintenance
support.
* * *
Contract Mix
Services of the Company are performed under cost-reimbursement (59% and
63% of revenues in 1995 and 1994), fixed-price (19% and 24% in 1995 and 1994)
or time and material (22% and 13% in 1995 and 1994) contracts and
subcontracts. (See Risk Factors - "Dependance upon Government Business" and
"Risks of Government Business".) Fixed-price contracts have a greater degree
of risk and higher potential reward than cost-type contracts since the Company
is obligated to provide specific deliverables within the confines of the
contracted price.
Government Programs
The major portion of the Company's revenues has been derived from
contracts, or subcontracts thereunder, with departments or agencies of the
United States Government, primarily the military services and other
departments and agencies of the Department of Defense (DoD). (See Risk Factors
- - "Dependence on Government Business" and "Risks of Government Business".) In
1995 and 1994, approximately 82% and 88%, respectively, of the Company's total
revenues were derived from government contracts or subcontracts. Revenues from
contracts or subcontracts from DoD programs were 48% and 52% of total revenues
in 1995 and 1994, respectively. Government military programs include work
principally with the Navy, and to a lesser extent with the Army, Air Force and
other DoD entities. The Company is also under contract to the National
Aeronautics and Space Administration (NASA), the Department of Energy (DoE),
the Federal Highway Administration, the Federal Aviation Agency, the Office of
Personnel Management and the National Science Foundation. The Company also
works with industrial companies, architectural and engineering firms,
equipment manufacturers and research institutions.
The Company's largest contract is to support the Transportation Safeguards
Division, DoE, Kirtland Air Force Base, NM. This contract is to develop and
conduct training for nuclear materials couriers. The Company previously had
this contract but it ended in November 1991
-19-
<PAGE>
as the succeeding contract was awarded to another party. In 1991 this
operation accounted for 15% of revenues. The Company contested this award by
protesting to the General Accounting Office (GAO). DoE admitted to GAO that a
flawed process was applied by DoE in this procurement. The previously
successful bidder was disqualified and a reprocurement was won by the Company.
In September 1993, a $1.4 million letter contract was executed and work
commenced. A contract for $16.3 million for the entire project was negotiated
and definitized in March 1994. This contract is funded on an annual basis by
the DoE. The Company is in the third year of the initial three year period for
renewed support of DoE Transportation Safeguards Division, with two following
option years expected. The contract accounted for 19% ($2.7 million) and 21%
($3.2 million) of total revenues for 1995 and 1994, respectively.
In 1994, the Company was competitively awarded a $3.6 million program to
design and build aviation trainers for the U.S. Navy. The Company is
performing mechanical, electrical and software design, engineering and
production of a total of 172 trainers of eight types for delivery to the Naval
Air Station in Pensacola, Florida. Revenues from this program were $1.6
million (11%) in 1995 and $0.9 million (6%) in 1994. This program is scheduled
for completion in 1996.
The Company has contracts with the U.S. Navy to provide engineering and
logistics support for various undersea programs. Revenues derived from these
programs were 14% ($2.0 million) and 6% ($1.0 million) of total revenues for
1995 and 1994, respectively.
The Company continues a major subcontract with Teledyne Brown Engineering
in Huntsville, Alabama for support to NASA. This contract has been ongoing
since 1978 to provide simulation and training for Space Shuttle flight crews
and science teams in support of all Spacelab Missions. Additionally, the
Company provides concept development, research and final production for
brochures, reports, training aids and historical documentation for the
Spacelab Program and Microgravity Experiment Projects. This effort provided
approximately 5% ($0.7 million) of the Company's 1995 revenues and 5% ($0.8
million) in 1994.
The Company is in negotiation on other key contracts for human performance
research, optical systems development, equipment manufacturing, and training
materials production.
Commercial Programs and Products
The Company is endeavoring to expand the commercial portion of its
business. The Company expects that significant personnel and financial
resources will continue to be applied to the targeted commercial products
areas. The Company's efforts to date have been focused in the following areas.
The Company continues work which began in 1990 with Motorola, Inc.,
assisting in the design of the Iridium(R) satellite constellation that will
provide global wireless communications to handheld telephones and pagers. The
Company's engineers develop and use software to model satellite and
intersatellite communications links to assess system capacity and
availability, and help develop channel-assignment algorithms for maximizing
system capacity. The Company's engineers are named on several pending Motorola
patents which are integral to Iridium(R) system performance. The Company is
also involved in modeling the paging component of the system and user location
determination systems. The Company's contract to perform such work generated
over 16% ($2.3 million) of revenues in 1995 and 9% ($1.5 million) in 1994.
-20-
<PAGE>
The Company is developing acousto-optic hardware utilizing its proprietary
ImSyn(TM) processor and other units. These products are both stand-alone
commercial items for end users, and units to be sold to original equipment
manufacturers (OEM) for inclusion in their products. The Company intends to
directly market such products using employee and outside sales personnel to
make OEM and other customer contacts. It will also obtain such contacts by
using direct mail and other traditional advertising approaches, such as new
product releases, technical and trade journal articles and features, space
advertising, participation in trade shows, participation in trade missions as
appropriate and other opportunities deemed by the Company to be cost-effective
and consistent with the professional nature of the Company's products. As such
products are generally compact in size and weight, distribution to customers
would be through normal third-party shipping means from the Company's
facilities. The Company's products are offered not only to improve capability
but also to improve size, cost and power consumption. Such OEMs generally have
established marketing and distribution channels for products in which the
Company's devices would be utilized.
The Company has begun to establish a commercial line of training and
testing products in specific areas. These products capitalize upon the
experience which the Company has developed in human performance and
fitness-for-duty studies. During 1991, the Company completed development and
released in 1992 its research version fitness-for-duty measurement software
product. In early 1994, the Company released its human performance testing
system, Delta/WP(TM), which is designed to measure workplace impairment and
assess fitness-for-duty. Commercial sales of this product to date have not
been significant.
Patents
On January 7, 1992, the Company was awarded its first patent, "Sequential
Image Synthesizer". On January 24, 1995, another patent, "Image Synthesis
Using Time Sequential Holography", was issued. These patents are for the new
image processing technology which the Company calls ImSyn(TM).
Based on an optical signal processing approach, the invention enables the
generation of imagery data at throughput rates which can be ten to one hundred
times faster than conventional technology. These patents are the first of
several patents that the Company expects to obtain covering ImSyn(TM) and
related imaging technology. The Company has begun to apply the ImSyn(TM)
technology to speeding image construction in two diverse fields: magnetic
resonance imaging (MRI) and synthetic aperture radar (SAR). The Company is
also developing a synthetic aperture microscope first patented in the 1995
patent and extended in a patent pending. The microscope relies on the
ImSyn(TM) technology in addition to a new sensing procedure. The Company also
plans to apply the ImSyn(TM) technology to ultrasonic, acoustic, sonar and
seismological imaging modalities. These technologies have broad application in
medicine, earth resources and industrial non-destructive testing.
In SAR, the Company is testing systems with substantial benefits in
rapidly forming imagery from aircraft, earth resources satellites, or remotely
piloted vehicles. The major advantages of ImSyn(TM) systems are that they are
relatively inexpensive, rugged, small, light in weight and consume little
power.
A patent for the invention of the True Time Delay Beam Former (TTD) was
issued to the Company in March 1993. TTD enables accurate electronic steering
of exceedingly broadband array antennas for aircraft, space, maritime and
ground systems.
-21-
<PAGE>
See "Risk Factors - Business Risks Related to Optoelectronic
Processors: Unpredictability of Patent and Intellectual Property Protection".
Competition
Competition for U.S. Government professional and technical services
contracts has grown in intensity and proposals have become increasingly costly
during the past several years. This stimulated the Company to initiate its
program to develop proprietary products and services. As such proprietary
items are developed, the Company has relied increasingly upon offers of its
specialized capabilities, sharply reducing resources applied in response to
proposals for professional and technical services. Examples of such
proprietary items include ImSyn(TM) processor products, and products and
services directed toward Containing Human Error in the Workplace(sm) such as
Delta(TM). The Company endeavors to control human error in a variety of
settings by applying its well-established capabilities in Human-Centered
Systems Engineering(sm), such as CD/ROM-Interactive Training and
Documentation, Human Factors Technology, Human Performance Measurement, and
Integrated Logistic Support. The Company expects to gain increasing
competitive advantage in its chosen fields as a result of its proprietary
products and services, although larger companies with more resources will
continue to provide competition to the Company's business.
Backlog
As of December 31, 1995, the Company had a total backlog (funded and
unfunded) of $41.4 million as compared with $25.5 million at December 25,
1994. Of these amounts, funded backlog was $6.7 million and unfunded was $34.7
million at yearend 1995 as compared to $8.4 million and $17.1 million at
yearend 1994. Funded backlog generally consists of the sum of all contract
amounts of work for which funding has been approved and contracts signed, less
the value of work performed under such contracts. Even though such contracts
are fully funded by appropriations, they may be subject to other risks
inherent in government contracts, such as termination for the convenience of
the government.
Employees
As of February 29, 1996, the Company had approximately 262 employees,
of which 216 were full-time employees.
PROPERTIES
Office Facilities
The Company leases most of its offices and other facilities. The Company's
corporate headquarters and offices for certain of its operations of its
Federal Systems Division (FSD) are located in a one-story building at 9150
Guilford Road, Columbia, Maryland. The Company occupies approximately 18,000
square feet under a lease agreement extending through early 1999. The
headquarters and offices for its Commercial Products Division (CPD) are
located in an adjacent one-story building at 9130 Guilford Road, Columbia,
Maryland. CPD occupies approximately 7,000 square feet under a lease extending
through early 1999.
In addition to these offices, the Company maintains offices and plants in
connection with the performance of its business in Huntsville, Alabama;
Goleta, California; Orlando, Florida; Indian Head, Maryland; Portsmouth, New
Hampshire; Mechanicsburg, Pennsylvania and McLean, Virginia. The Company has
assigned certain of its personnel to customer-owned facilities in Fort Rucker
and Huntsville, Alabama and Kirtland Air Force Base, New Mexico.
-22-
<PAGE>
The Company's Huntsville, Alabama facility was constructed under a
lease-purchase agreement pursuant to which the Company would, for a nominal
percentage of original construction costs, acquire title to such property at
the conclusion of the lease in 1999. All of the Company's other facilities are
leased under standard rental agreements. The Company believes that its present
facilities are adequate for its current business needs.
Equipment
The Company owns a variety of computer workstations, test equipment,
microcomputers, printers and reproduction equipment at several of its offices.
The Company leases computer workstations in support of customer work. The
Company also owns or leases various precision metalworking equipment,
including certain computer numeric-controlled machinery. Other computer
hardware and software, test equipment, word processing and reproduction
equipment used by the Company is leased.
Video Laboratory
A videotape-videodisc design laboratory is located in the Company's
McLean, Virginia office, in which broadcast-quality videotape and interactive
videodisc products are developed.
Image Synthesis Laboratory
The Company completed the initial construction of an Optoelectronics
Laboratory in 1991 and since then has added equipment as needed. The
laboratory consists of externally purchased optical hardware and computer
software, as well as internal labor and related costs for construction and
assembly. The Laboratory includes the physical property which demonstrates and
tests the capabilities of the Company's patented Image Synthesizer (ImSyn(TM))
technology.
Fabrication Facility
The Company's Huntsville, Alabama facility provides engineering, quality
assurance, machine shop, high-bay fabrication, and surface finishing areas.
The Company's engineering area occupies approximately 8,000 sq. ft. The
Company's machine shop, high-bay fabrication and paint shop occupy 25,000 sq.
ft. The machine shop contains standard machine tools as well as certain
precision, computer numeric-controlled machine tools. The high-bay fabrication
area is equipped with a 5-ton traveling overhead crane and has vertical
clearance of 30 feet that is adequate for fabricating Space Shuttle Bay
payload training mockups such as Hubble Telescope and Space Station units, as
well as undersea warfare equipment. Quality assurance equipment includes
coordinate measuring machinery, profile projectors, surface plates and other
standard measuring equipment which is calibrated and maintained to exacting
military and industrial standards.
-23-
<PAGE>
MANAGEMENT
The Directors* and executive officers elected by the Board are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Harry Letaw, Jr. 69 Chairman; Director; Chief
Executive Officer and President
Joseph R. Kurry, Jr. 45 Vice President; Treasurer and
Chief Financial Officer
Anthony L. Ward 56 Vice President; Chief
Administrative Officer
Leonard E. Moodispaw 53 Secretary and Corporate Counsel
Martin G. Every 56 Senior Vice President
Matthew S. Bechta 42 Vice President
Robert S. Kennedy 60 Vice President
Jeffrey R. Lapides 41 Vice President
Craig H. Price 46 Vice President
Terry M. Turpin 53 Vice President
Frank E. Manning 76 Chairman Emeritus; Director
Harold P. Hanson 74 Director (3)
Robert W. Hicks 58 Director (1)
Samuel Hopkins 82 Director (2)
Ray M. Keeler 64 Director (2)
A. William Perkins 70 Director (1)(3)
<FN>
* All Directors are elected annually at the Company's Annual Meeting of
Stockholders. (1) Member of the Audit Committee of the Board of
Directors; (2) Member of the Compensation Committee of the Board of
Directors and (3) Member of the Ethics Committee of the Board of
Directors.
</FN>
</TABLE>
Harry Letaw, Jr. was elected a Director of the Company in June 1988.
He is Chairman of the Board, President and Chief Executive Officer.
Previously, he was a Director of the Company and a member of the Executive
Committee of its Board from July 1981 to September 1983. Dr. Letaw is
President and founder of Severn Communications Corporation, a technical
software firm, and President and founder of Intellinet Corporation, a motor
control system manufacturer, both based in Maryland. In addition Dr. Letaw
served in senior management and marketing positions with Raytheon, Bunker-Ramo
and Martin-Marietta. He performed military service during World War II. Dr.
Letaw received a Bachelor of Science degree in Chemistry in 1949, a Master of
Science degree in Chemistry in 1951 and a Doctor of Philosophy degree in
Physical Chemistry in 1952, all from the University of Florida. Dr. Letaw has
an employment contract with the Company extending month-to-month by mutual
agreement. Dr. Letaw devotes his full business time to the business of the
Company and his affiliations with other corporations do not involve any
substantial expenditures of time nor do these positions involve any real or
potential conflicts of interest.
Joseph R. Kurry, Jr. joined Essex Corporation in March 1985 as
Treasurer and Chief Financial Officer and was appointed Vice President in May
1987. He was controller of ManTech International Corporation from December
1979 to March 1985. Mr. Kurry received a Bachelor of Science degree in
Business Administration in 1972 from Georgetown University, Washington, D.C.
and is a Certified Public Accountant.
Anthony L. Ward joined Essex in February 1991. He is currently Vice
President, Chief Administrative Officer, Director of Corporate Development and
Assistant Secretary. Additionally, Mr. Ward is the General Manager of the
Federal Systems Division. Prior to employment with the Company, Mr. Ward
served as Vice President of C3 Operations in the ARC Professional Services
Group, a position he held since 1987. He was with ARC (or ARC subsidiaries)
for a total of 13 years with varied roles in engineering, advanced programs
and management oriented to the DoD C3I arena. From 1972 - 1977 he was with
Litton Data
-24-
<PAGE>
Systems and held software engineering and management positions on key U.S.
Navy and U.S. Army programs. Mr. Ward served honorably in the U.S. Marine
Corps from 1958 - 1971. Mr. Ward holds a Bachelor of Arts degree in Business
Administration from Chapman College in Orange, California and has completed
all course work for a Masters of Science in Financial Systems Management.
Leonard E. Moodispaw was an active partner in the law firm of Dalnekoff &
Mason from February 1993 through September 1993 and was a partner in the law
firm of Blumenthal, Wayson, Downs and Offutt from 1978 to 1988, both firms are
located in Annapolis, Maryland and specialize in litigation. From September
1993 to April 1994, Mr. Moodispaw served as Executive Vice President of
ManTech International Corporation, a privately held company. Since April 1994,
he has served as President of ManTech Advanced Systems International
Corporation. He was a Director of the Essex subsidiary, System Engineering and
Development Corporation (SEDC) from its inception in 1980 until it was
acquired by Essex in 1989. In 1988, he joined SEDC as Vice President and
Corporate Counsel. From June 1989 until September 1991, he served as Vice
President, Corporate Counsel and Chief Administrative Officer of Essex and
from July 1989 has served as Secretary to the Board of Directors. Mr.
Moodispaw also serves as Director of the MVM Group, Inc., a small consulting
firm in Maryland since 1991 and as Founder and General Counsel of the Security
Affairs Support Association, a not-for-profit organization since 1990. From
September 1991 to February 1993 Mr. Moodispaw was Director of International
Business with GTE Government Systems. Mr. Moodispaw received a Bachelor's
degree in Business Administration from American University in 1965, a Masters
Degree in Business Administration in 1969 and a Juris Doctor degree in 1977
from the University of Baltimore. Mr. Moodispaw spends less than 5% of his
business time in his capacities with the Company, and his affiliations with
other corporations do not involve any real or potential conflicts of interest.
Martin G. Every joined the Company in October 1983. He was
subsequently promoted to the position of Director, Security/Special Military
Operations Group of the Company and elected Senior Vice President of the
Company in December 1986. Mr. Every has served as General Manager of the
Company's Systems Effectiveness Division since mid 1990. In 1992 Mr. Every was
named to the Board of Directors of James Madison University (JMU) Research and
Development Center, Inc. and is the Essex manager for the Center for Crisis
Prevention, an Academic-Industrial Coventure between JMU and Essex.
Previously, Mr. Every was with BioTechnology, Inc. From 1961-1966, he served
with the U.S. Navy, first as an operations officer aboard an ocean minesweeper
and later as a member of a Navy Special Warfare Team. Mr. Every received a
Bachelor of Science degree in Biochemistry from Notre Dame in 1961 and a
Master of Science degree in Oceanography from Texas A & M University in 1968.
Matthew S. Bechta was elected Vice President in October 1993. As the
Director of the Columbia Operations within the Federal Systems Division, Mr.
Bechta is responsible for technical operations and business development for
programs for Satellite Communications Engineering and Optoelectronic Signal
Processing. Mr. Bechta joined Essex in 1989 with the merger of Essex and SEDC.
As one of the founders of SEDC, he served in various technical and management
capacities since incorporation in 1980. From 1975-1980 Mr. Bechta worked at
the National Security Agency (NSA) as a systems engineer on several
collection, signal processing and communications projects. Mr. Bechta holds a
Bachelor of Science degree in Electrical Engineering from Spring Garden
College, Pennsylvania and a Master of Science degree in Computer Science from
the Johns Hopkins University.
-25-
<PAGE>
Robert S. Kennedy has been a Vice President of the Company since August
1987. Dr. Kennedy joined the Company in January 1981 and has served as
principal investigator for over twenty five scientific studies in human
factors engineering, human performance measurement, and simulation and
training. He was an aviation research psychologist in the U.S. Navy from 1959
to 1981. Dr. Kennedy received a Bachelor of Arts degree in English and
Philosophy from Iona College in 1957, a Master of Arts degree in Experimental
Psychology from Fordham University in 1959, and a Doctor of Philosophy in
Experimental Psychology from the University of Rochester in 1972.
Jeffrey R. Lapides has been a Vice President of Essex, Commercial
Products since October 1990. Dr. Lapides held a variety of positions including
President at Alleco, Inc., formerly a national commercial services firm. He
also held the position of president of its largest subsidiary, Service
America. He has held research positions both at NASA's Goddard Space Flight
Center and the National Institutes of Health. Dr. Lapides received a Bachelor
of Arts degree from Clark University and a Master of Science degree and Doctor
of Philosophy degree in Physics from the University of Maryland at College
Park.
Craig H. Price was elected Vice President in October 1993. As the
Director of Engineering for the Commercial Products Division, Dr. Price is
responsible for all products, development and research within the Division.
Dr. Price joined Essex in 1989 as a result of the merger of Essex and SEDC.
Dr. Price had joined SEDC in 1985, with varied assignments in engineering,
analysis and advanced technologies. Previously, he served in numerous
technical and project positions in the U.S. Air Force during the period 1974 -
1985 during which he was awarded the Distinguished Service Medal. Dr. Price
holds a Bachelor of Science degree in Electrical Engineering from Kansas State
University, a Master of Science degree in Electrical Engineering from Purdue
University and a Doctor of Philosophy degree also in Electrical Engineering,
from Stanford University.
Terry M. Turpin is Vice President and Science Advisor of Essex, a
position he has held since the acquisition of SEDC in June 1989. He was Vice
President and Chief Scientist of SEDC from September 1984 through June 1989.
From December 1983 to September 1984 he was an independent consultant. From
1963 through December 1983, Mr. Turpin was employed by NSA. For the last ten
years of this period, he was Chief of the Advanced Processing Technologies
Division. He holds patents for optical computers and adaptive optical
components. Mr. Turpin represented NSA on the Tri-Service Optical Processing
Committee organized by the Under Secretary of Defense for Research and
Engineering. He received a Bachelor of Science degree in Electrical
Engineering from the University of Akron in June 1966 and a Master of Science
in Electrical Engineering from Catholic University in Washington, D.C. in June
1970.
Frank E. Manning, Chairman Emeritus, is the founder of the Company. Mr.
Manning has served as a Director of the Company since its organization in
1969. Mr. Manning received a Bachelor of Science degree in Economics from
Franklin and Marshall College in 1942, and a Masters of Letters degree in
Industrial Relations from the University of Pittsburgh in 1946.
Harold P. Hanson, formerly executive director of the Committee on
Science, Space and Technology of the U.S. House of Representatives from
1980-1982 and 1984-1990, was elected a Director of the Company in June 1990.
Dr. Hanson is now adjunct professor of physics, University of Florida,
Gainesville and the editor and publisher of DELOS, a non-profit journal of
translation. He is a member of the Essex Scientific Advisory Board, and a
Fellow of the
-26-
<PAGE>
American Physical Society and a National Science Foundation Franklin medalist.
Dr. Hanson was previously provost of Wayne State University and Boston
University. He was an executive vice president, vice president for academic
affairs, dean of the Graduate School and professor of physics of the
University of Florida, Gainesville. He was also chairman of the Department of
Physics and director, Center for Structural Studies, University of Texas,
Austin. A naval officer during World War II, Dr. Hanson served as research
physicist at the Naval Ordnance Laboratory and was later a Fulbright research
fellow in 1961-1962. Dr. Hanson earned graduate degrees at the University of
Wisconsin.
Robert W. Hicks was elected a Director of the Company in August 1988. He
has been an independent consultant since 1986. During this period he was
engaged for three and one-half years by the State of Maryland Deposit
Insurance Fund Corporation, Receiver of several savings and loan associations,
first as an Agent and then as a Special Representative (both court-approved
positions). He also engages in consulting in the commercial sector. He is a
principal officer and stockholder in Asset Management & Recovery, Inc., a
consulting firm which has primarily provided services, directly and as a
subcontractor, to the Resolution Trust Corporation and law firms engaged by
the Resolution Trust Corporation. Mr. Hicks is also a Director and Secretary
of the Kirby Lithographic Company, Inc.
Samuel Hopkins was elected a Director of the Company in August 1988. From
January 1970 until retirement in October 1987 he was a partner of Alex. Brown
& Sons (investment bankers) in Baltimore, Maryland. Since 1976, Mr. Hopkins
has been a Director of American Maritime Cases, Inc. (legal publisher) in
Baltimore, Maryland. He received a Bachelor of Science degree in Business
Economics from Johns Hopkins University in 1934 and a Juris Doctor degree from
the University of Maryland in 1938. Mr. Hopkins is a Chartered Financial
Analyst.
Ray M. Keeler was elected a Director of the Company in July 1989. Since
1986, he has been an independent consultant to both industry and government
organizations in areas related to national and tactical intelligence programs.
Mr. Keeler served on the Board of Directors of SEDC from December 1987 through
April 1989. From 1988 to November 1995, he was President of CRYTEC, Inc., a
service company providing management, business development and technical
support to companies involved in classified cryptologic projects. Since
December 1995 he has been a consultant to companies involved in national
technical intelligence programs. From 1982 to 1986, Mr. Keeler was Director of
Program and Budget for the NSA. He received a Bachelor of Arts degree from the
University of Wisconsin-Madison in 1957.
A. William Perkins has been a Director of the Company since its
organization in 1969. He is President of Perkins Warehouse Company, of
Alexandria, Virginia. He is retired from 23 years in the printing industry,
having served as President and Chairman of the Board of Directors of Old
Dominion Printing Co. Mr. Perkins served in the U.S. Navy during World War II
and the Korean Conflict.
There are no family relationships between any present executive officers
and directors. Each officer of the Company is chosen by the Board of Directors
and holds his office until his successor shall have been duly chosen and
qualified or until his death or until he shall resign or be removed as
provided by the By-Laws.
-27-
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers who served as such at the end of the last
fiscal year and whose total compensation exceeds $100,000.
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation
Awards Payouts
- --------------------------------------------------------------------------------
- ----------------------------------------------------
Other
Restricted Securities All Other
Annual
Stock Underlying LTIP Compen-
Name and Compensation
Award(s) Options/SARs Payouts sation
Principal Position Year Salary($)(1) Bonus ($) ($)(2)
($)(3) (#) (#) ($)
- --------------------------------------------------------------------------------
- ----------------------------------------------------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Harry Letaw, Jr. 1995 113,920 10,000 0
0 0 0 0
Chairman and CEO 1994 107,536 0 0
0 0 0 0
1993 111,672 0 0
0 0 0 0
Anthony L. Ward 1995 107,680 7,500 3,235
0 8,000 0 0
Vice President and CAO 1994 105,040 0 3,151
0 0 0 0
1993 109,080 0 3,282
0 2,000 0 0
Joseph R. Kurry, Jr. 1995 106,400 7,500 3,198
0 5,000 0 0
Treasurer, Vice President 1994 104,000 0 3,123
0 20,000 0 0
and CFO 1993 100,500 0 3,018
0 2,000 0 0
Terry M. Turpin 1995 102,848 7,500 3,095
0 8,000 0 0
Vice President 1994 100,006 0 3,009
0 17,778 0 0
1993 103,853 0 3,124
0 2,000 0 0
Martin G. Every 1995 102,640 5,000 3,094
0 5,000 0 0
Senior Vice President 1994 100,360 0 3,025
0 0 0 0
1993 90,360 0 2,717
0 2,000 0 0
- ------------------------------------
<FN>
(1) The decrease in salaries shown for 1994 from 1993 is primarily
attributable to one additional pay period which occurred during 1994. The
increase in salary for Mr. Kurry and Mr. Every in 1994 is attributable to
raises in their annual compensation. Includes amounts deferred at the
election of the named executive officer pursuant to Section 401(k) of the
Internal Revenue Code ("401(k)").
(2) Represents matching 401(k) contributions made on behalf of the respective
named executive officer pursuant to the Company's Retirement Plan and
Trust. Excludes other perquisites and benefits not exceeding the lesser
of $50,000 or 10% of the named executive officer's total annual salary
and bonus.
(3) No restricted stock awards were made for the periods indicated. The
number and value of the aggregate restricted stock holdings for the named
executive officers at the end of the 1995 fiscal year, based on the
closing bid price of the Common Stock on NASDAQ on December 29, 1995,
without giving effect to the consideration paid by the named executive
officer, were as follows: Dr. Letaw, 211,357 shares, $475,553 value; Mr.
Ward, 17,331 shares, $38,994 value; Mr. Kurry, 29,859 shares, $67,182
value; Mr. Turpin, 72,781 shares, $163,757 value; and Mr. Every, 6,037
shares, $13,583 value.
</FN>
</TABLE>
-28-
<PAGE>
Defined Contribution Retirement Plan
The Company has a qualified defined contribution retirement plan, the
Essex Corporation Retirement Plan and Trust, which includes a 401(k) salary
reduction feature for its employees. The Plan calls for a discretionary
contribution as determined by the Board of Directors, and an employer matching
contribution of up to 3% of eligible employee compensation under the salary
reduction feature. Discretionary contributions are determined annually by the
Board of Directors. No discretionary contribution was made by the Company to
the Retirement Plan for 1995. The total authorized contribution under the
matching contribution feature of the Plan was approximately $145,000 in 1995.
All employee contributions are 100% vested at all times and Company
contributions vest based on length of service. Vested contributions are
distributable and benefits are payable only upon death, disability, retirement
or break in service. Participants may request that their accrued benefits
under the Section 401(k) portion of the Plan be allocated among various
investment options established by the Plan administrator.
The Company contributions under the Retirement Plan for the persons
referred to in the Summary Compensation Table are included in that Table.
Employee Incentive Performance Award Plan
The Company has an Employee Incentive Performance Award Plan under which
bonuses are distributed to employees. All employees are eligible to receive
such awards under flexible criteria designed to compensate for superior
division and individual performance during each fiscal year. Awards are
generally recommended annually by management and approved by the Board of
Directors. Such awards may be constrained by overall Company performances.
There were 93 awards in 1995 totaling $144,000. There was one award in 1994
for $500. The incentive awards under the Performance Award Plan for the
persons referred to in the Summary Compensation Table are included in that
Table.
Restricted Stock Bonus Plan
Essex Corporation has a Restricted Stock Bonus Plan under which up to
50,000 shares of the Company's common stock may be reserved for issuance to
non-employee members of the Board of Directors and key employees of the
Company selected by the Board of Directors. Shares of restricted stock may be
issued under the Plan subject to forfeiture during a restriction period, fixed
in each instance by the Board of Directors, whereby all rights of the grantee
to the stock terminate upon certain conditions such as cessation of continuous
employment during the restriction period. Upon expiration of the restriction
period, or earlier upon the death or substantial disability of the grantee,
the restrictions applicable to all shares of restricted stock of the grantee
expire. The Plan also provides that loans may be advanced by the Company to a
grantee to pay income taxes due on the taxable value of shares granted under
the Plan. Such loans must be evidenced by an interest bearing promissory note
payable five (5) years after the date of the loan, and be secured by shares of
stock of the Company (which may be restricted stock) having a fair market
value equal to 200 percent of the loan.
During 1995, the Board awarded a total of 12,000 shares to six
directors. During 1993, the Board awarded 2,000 shares and none were awarded
in 1994. There are approximately 22,050 shares remaining in the Essex
Corporation Restricted Stock Bonus Plan as of December 31, 1995.
-29-
<PAGE>
Employment Agreements
Since 1988, the Company has had an Agreement of Employment with Harry
Letaw, Jr., Chairman of the Board, President and Chief Executive Officer. Dr.
Letaw's annual compensation was originally established at $120,000 but was
reduced, at his recommendation to the annual amounts shown in the Summary
Compensation Table. Dr. Letaw's annual compensation was increased to $135,200
effective October 2, 1995. The term of this Agreement is extended on a
month-to-month basis by mutual agreement.
The Company has an Agreement of Employment with Frank E. Manning, Chairman
Emeritus and Member of the Essex Board of Directors, whereby Mr. Manning is a
part-time employee of the Company with duties to provide advice and counsel to
the management of Essex. The Agreement may be terminated by either party with
60 days advance notice. Mr. Manning also receives reimbursement of medical
costs not covered by Medicare. Mr. Manning received compensation of $30,000 in
fiscal year 1995 for his services as an employee of the Company and medical
reimbursement of $1,250.
The above agreements restrict the individuals' rights to compete with the
Company and prohibit misappropriation of proprietary rights of the Company,
both during and after the term of employment.
Options to Purchase Securities
The Company has an Option and Stock Appreciation Rights Plan (The "OSAR
Plan"). The OSAR Plan as presently in effect provides for the grant of tax
qualified Incentive Stock Options ("ISOs") and options that are not tax
qualified ("NSOs") and Stock Appreciation Rights ("SARs") which rights may be
related to, but not necessarily be granted in tandem with, options granted
under the OSAR Plan. Persons eligible to receive awards of options and SARs
under the OSAR Plan include officers, directors, key employees and other
persons who provide valuable services to the Company. SARs entitle the holder
to cash or Company Common Stock measured by the increase in market value of
the Company's Common Stock from the date of grant to the date of exercise. The
exercise price of an ISO under the OSAR Plan may not be less than the fair
market value of the Company stock on the date of grant; the exercise price of
NSOs and the appreciation base price of SARs are determined in the discretion
of the Board of Directors except that the SAR appreciation base price may not
be less than 50% of the fair market value of a share of Common Stock on the
grant date with respect to awards to persons who are officers or directors of
the Company. As originally adopted, the OSAR Plan reserved 400,000 shares of
the Company's Common Stock for issuance. At the 1989 and 1994 Annual Meetings,
Company stockholders approved increases in the number of shares of Common
Stock subject to the OSAR Plan by 250,000 shares and 200,000 shares
respectively, making 850,000 the total number of shares subject to the Plan.
As of February 29, 1996, there remain 232,639 shares available for future
grants of options or SARs.
The Company had an Incentive Stock Option Plan which expired on March 12,
1992 with no shares available for future grants. As of February 29, 1996,
options for 88,800 shares of the Company's Common Stock remain outstanding
under this Plan and are fully exercisable at prices ranging from $2.52 - $3.00
including options held by officers and directors of the Company to purchase
64,000 shares.
-30-
<PAGE>
The following Table shows for the fiscal year ended December 31, 1995 for
the persons named in the Summary Compensation Table, information with respect
to options to purchase Common Stock granted during 1995 under the OSAR Plan.
No options or stock appreciation rights granted under the OSAR Plan have been
exercised by the persons listed below.
<TABLE>
<CAPTION>
STOCK OPTIONS GRANTS TABLE
FOR FISCAL YEAR ENDED DECEMBER 31,
1995
Number of
Securities
Underlying % Of Total Options/
Options SARs Granted to
Exercise or
Granted Employees in
Base Price Expiration
Name (#)(1) Fiscal Year
($/Sh) Date
================================================================================
=========================================
<S> <C> <C>
<C> <C>
Harry Letaw, Jr. --- ---
--- ---
Anthony L. Ward 8,000 7.4
3.08 09/10/99
Joseph R. Kurry, Jr. 5,000 4.7
3.08 09/10/99
Terry M. Turpin 8,000 7.4
3.08 09/10/99
Martin G. Every 5,000 4.7
3.08 09/10/99
- ------------------------------------
<FN>
(1) Such options become exercisable beginning September 11, 1996.
</FN>
</TABLE>
-31-
<PAGE>
The following Table shows for the fiscal year ended December 31, 1995 for
the persons named in the Summary Compensation Table, information with respect
to option/SAR exercises and fiscal year-end values for unexercised
options/SARs.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES AND FY-END OPTION/SAR
VALUES TABLE
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End($)
Name Shares Value
Acquired on Realized
Exercisable/ Exercisable/
Exercise (#) ($)
Unexercisable Unexercisable
================================================================================
================================================
<S> <C> <C>
<C> <C>
Harry Letaw, Jr. None ---
238,091/61,909 0/0
Anthony L. Ward None ---
30,000/8,000 0/0
Joseph R. Kurry, Jr. None ---
43,500/5,000 0/0
Terry M. Turpin None ---
25,778/8,000 0/0
Martin G. Every None ---
29,500/5,000 0/0
</TABLE>
Remuneration of Directors
The Company's Directors generally meet quarterly. Additionally, the
By-Laws provide for special meetings and, as also permitted by Virginia law,
Board action may be taken without a meeting upon unanimous written consent of
all Directors. Board members not employed by the Company receive a maximum of
$750 for each Board or Board Committee Meeting attended. In order to improve
the Company's cash position, the Company's outside Directors, during the
1995-1996 term year, relinquished cash payments for certain board meetings. In
1995 the Board held three meetings; the entire membership of the Board was
present at all meetings of the Board of Directors except for one meeting when
one Director was absent from the meeting.
-32-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table and accompanying notes set forth as of February 29,
1996, information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person or group who beneficially own more than 5% of
the Common Stock, (ii) each of the directors of the Company, (iii) each of the
officers of the Company named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percent of Class
Amount and Nature
Name and Address of Beneficial
Before After
of Beneficial Owner* Ownership (1)
Offering Offering(2)
--------------------------------- -----------------------
- ------------- ------------
<S> <C>
<C> <C>
Harry Letaw, Jr. (3) 480,698
10.46 9.21
Frank E. Manning (4) 106,275
2.31 2.04
Terry M. Turpin (5) 98,059
2.13 1.89
Joseph R. Kurry, Jr. (6) 60,909
1.33 1.17
Anthony L. Ward (7) 49,331
1.07 **
Samuel Hopkins (8) 42,875
** **
Robert W. Hicks (9) 39,200
** **
Harold P. Hanson (10) 30,500
** **
Ray M. Keeler (11) 15,250
** **
A. William Perkins (12) 15,100
** **
Martin G. Every (13) 15,537
** **
All Directors and Executive Officers
as a Group (16 persons) (14) 1,150,424
25.04 22.04
- ------------------------------------
* All beneficial owners are directors and/or officers of the Company
and can be reached c/o Essex Corporation, 9150 Guilford Road,
Columbia, MD 21046.
** Less than 1%
(1) Under the rules of the Commission, a person is deemed to be
a "beneficial owner" of a security if that person has or shares the
power to vote or to direct the voting of such security, or the power
to dispose or to direct the disposition of such security. A person
is also deemed to be a beneficial owner of any securities of which
that person has the right to acquire beneficial ownership within
sixty (60) days. Under these rules, more than one person may be deemed
to be a beneficial owner of the same securities and a person may be
deemed to be a beneficial owner of securities as to which he has no
record ownership interest. The shares listed above include options
and rights to acquire shares within sixty (60)days and shares held of
record by the Essex Corporation Retirement Trust as to which shares
the respective participant has disposition and voting rights. The
percentage ownership is computed based upon the number of shares
which would be outstanding if such options and rights were
exercised.
(2) Assumes exercise of all 25,000 warrants but does not assume exercise
or conversion of any other outstanding options or warrants or the
Debentures.
(3) Dr. Harry Letaw, Jr. is Chairman of the Board, President and Chief
Executive Officer of the Company. Of the 480,698 shares beneficially
shown as owned by Dr. Letaw, 269,341 shares represent presently
exercisable rights to acquire Common Stock through stock options and
warrants.
(4) Mr. Frank E. Manning is the record and beneficial owner of
approximately 2.04% of the outstanding shares of the Company (106,275
shares), including presently exercisable options to purchase 1,500
shares. Mr. Manning is the Chairman Emeritus and a Director of the
Company. Does not include 40,000 shares of the Company's Common Stock
owned of record and beneficially by Mrs. Eva L. Manning, wife of Mr.
Frank E. Manning. Also does not include 147,500 shares beneficially
owned by six separate family trusts of which Mrs. Manning is the sole
trustee and over which trusts she has exclusive voting and
dispositive power.
-33-
<PAGE>
(5) Terry M. Turpin is a Vice President of the Company. Of the shares
shown as beneficially owned, 25,278 represent presently exercisable
rights to acquire common stock through stock options and warrants.
(6) Joseph R. Kurry, Jr. is Vice President, Treasurer and Chief
Financial Officer of the Company. Of the shares shown as
beneficially owned, 31,050 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(7) Anthony L. Ward is Vice President, Chief Administrative Officer and
Assistant Secretary of the Company. Of the shares shown as
beneficially owned, 32,000 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(8) Samuel Hopkins is a Director of the Company. Of the shares shown as
beneficially owned, 9,125 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(9) Robert W. Hicks is a Director of the Company. Of the Shares shown as
beneficially owned, 6,000 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(10)Harold P. Hanson is a Director of the Company. Of the Shares shown as
beneficially owned, 7,500 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(11)Ray M. Keeler is a Director of the Company. Of the Shares shown as
beneficially owned, 5,250 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(12)A. William Perkins is a Director of the Company.Of the Shares shown as
beneficially owned, 3,500 represent presently exercisable rights to
acquire common stock through stock options and warrants
(13)Martin G. Every is a Senior Vice President of the Company. Of the
shares shown as beneficially owned, 9,500 represent presently
exercisable rights to acquire common stock through stock options.
(14)Of the shares shown as beneficially owned, 512,781 represent
presently exercisable rights to acquire common stock through stock
options and warrants.
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Essex Corporation is a diversified, technology-based company providing
quality products and professional services to government and industry. Essex
specializes in Human-Centered Systems Engineering(sm) and Optoelectronic
Engineering. The Company allocates its operations to the following business
units.
o Systems Effectiveness Division (SED)
o Federal Systems Division (FSD)[formerly Space and Defense Division
(SDD) and Information Systems Division (ISD)]
o Commercial Products Division (CPD)
The discussion that follows speaks to the changes, where significant,
that occurred in the business operations of the Company.
1995 Compared to 1994
Successful financing efforts and expenditures for ImSyn(TM) development
dominated 1995 activity and results of operations. The Company raised the
entire $2.5 million of its Stock Offering by the end of July 1995. The net
proceeds were approximately $2 million before payments to the former landlord
of approximately $240,000. The funds improved liquidity and temporarily
reduced costly accounts receivable financing. The principal usage of the net
proceeds of the Offering have been for development of the prototype ImSyn(TM)
optoelectronic processor. In anticipation of the success of the Stock
Offering, the Company began modest efforts on development of its first
ImSyn(TM) processor prototype in late 1994 and full fledged work on such
development in 1995. In accordance with generally accepted accounting
principles governing such development expenses, costs of approximately
$1,254,000 have been recognized through the Company's 1995 statement of
operations as 1995 period expenses and $102,000 in 1994.
Additional funding is necessary for commercial products' inventory
buildup, marketing and further development of commercial applications and
products. In December 1995, the Company issued $535,000 of 10% Convertible
Collateralized Debentures. The net proceeds will be used for initial
commercial product development, to initiate commercial inventory production
and for marketing.
As 1995 began, the Company continued to have a relatively high backlog of
approximately $25.5 million. In 1995, the Company won or added approximately
$30.1 million in new contract business. During 1995, the Company's contract
backlog reached a record $43.2 million ($7.7 million funded and $35.5 million
unfunded) at the end of September 1995. At December 31, 1995, the Company's
contract backlog was $41.4 million ($6.7 million funded and $34.7 million
unfunded). Included in this backlog are two contracts with remaining values of
$798,000 for delivery of initial ImSyn(TM) units and related services to U.S.
Government end users and one contract with a remaining value of $543,000 for
government-sponsored research utilizing an ImSyn(TM) unit in synthetic
aperture microscope applications.
Funded contract backlog generally consists of the sum of all contract
amounts for which funding has been approved and contracts signed, less the
value of work performed under such contracts. Unfunded contract backlog
generally is the amount of work on contracts which has not yet been funded
(such as for option years, open purchase orders and indefinite quantity
contracts). The costs of completing such contracts in backlog are estimated to
be 92-94% of such backlog and generally result in gross profit margins of 6-8%
before such costs as interest
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<PAGE>
expense, amortization of intangibles, volume variance and income taxes.
However, there can be no assurances that revenues from this contract backlog
or the gross margins therefrom will ultimately be realized. The mix of
contracts in this total backlog of approximately $41 million is approximately:
$34 million (83%) in cost-plus-fee type contracts; $4 million (10%) in time
and material and $3 million (7%) in fixed-price type contracts. Costs are
charged to contracts as incurred as the Company is generally providing
labor-based services and therefore does not normally accumulate or stock
inventory. The Company utilizes the percentage-of-completion method of
accounting for revenue recognition. Anticipated losses, if any, are recognized
as soon as they become known.
While high contract backlog and proposal activity are positive
indicators, the Company has experienced net losses since 1989 and must
demonstrate the ability to complete such contract backlog within budget cost
constraints, both for direct and indirect operating costs. Although the high
backlog supported a continuation of the 1994 revenue levels into 1995, revenue
levels were lower during 1995 compared to 1994. The Company devoted
significant labor effort to the ImSyn(TM) prototype development. This lowered
revenue levels on some customer work and generated charges of $1,254,000
against earnings. During the first nine months of 1995, revenues were $9.8
million or approximately $3.3 million per quarter. The Company expects that
the increased revenue levels demonstrated in the fourth quarter of 1995 of
approximately $4.4 million will continue into 1996.
In the Commercial Products area, the Company is working toward completion
of the initial ImSyn(TM) prototype unit and has begun work on initial units
for inventory in anticipation of sales orders. Selling and marketing efforts
are continuing as are product refinements and further product development. The
Company also continues to work with its patent attorneys in obtaining domestic
and international patents on proprietary technology. The Company initially
plans to sell in magnetic resonance imaging (MRI) and advanced radar imaging
markets. The prototype development costs were approximately $1,254,000 in 1995
and $102,000 in 1994.
The Company's revenues for 1995 were $14,193,000, which were $1,171,000
or 7.6% lower than the $15,364,000 for 1994. In SED, revenues on the
multi-year DoE Transportation Safeguards program were $2.7 million in 1995
compared to $3.2 million in 1994, which accounts for $500,000 of the overall
decline. ISD revenues were also lower by $545,000 (13%) in 1995 as compared to
1994. This revenue decrease is due to the ImSyn(TM) prototype development
being staffed primarily by ISD personnel which lowered revenue levels on some
customer work.
While total direct costs have remained fairly proportional as a
percentage of revenues (65% in 1995 and 68% in 1994), there has been an
increase in direct labor and related expenses as a percentage of revenues (47%
in 1995 compared to 40% in 1994) and a significant decrease in other direct
costs as such costs declined as a percentage of revenue from 28% ($4.3
million) in 1994 to 18% ($2.5 million) in 1995. The decrease in other direct
costs as a percentage of revenue is primarily due to the completion or lower
usage on certain contracts of outside subcontractors and consultants. Also,
increased material purchases on new contract work that was scheduled for 1995
was delayed until late 1995 and into 1996, whereas there was a higher degree
of such purchases in 1994.
The Company incurred a net loss in 1995 of $1,427,000 or $0.49 per share
as compared to a net loss of $466,000 or $0.26 per share in 1994. For 1995,
excluding expenses totaling $1,538,000 for ImSyn(TM) development ($1,254,000)
and lawsuit prosecution ($284,000), the Company would have an operating profit
of $111,000 ($0.04 per share based on 2,913,000
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<PAGE>
shares). For 1994, excluding the landlord settlement expense of $685,000
(discussed later in this section), Essex would have earned $219,000 ($0.12 per
share based on 1,821,000 shares). The net results in the 1995 period are
computed on a higher weighted average number of share outstanding (2,913,000)
compared to the 1994 period (1,821,000 shares outstanding).
While revenue levels decreased 7.6% in 1995 from 1994, the Company was
still able to cover most of the variable expenses such as business development
and fixed expenses such as facility costs. However, underabsorbed indirect
expenses due to the lower revenue volume account for the decline in 1995
operating profit as compared to 1994, excluding charges for ImSyn(TM)
development, lawsuit prosecution and legal settlement.
Throughout 1995, the Company incurred expenses in connection with the
development of the ImSyn(TM) prototype. The Company has expensed $1,254,000 in
1995 and $102,000 in 1994. The Company expects that this initial development
will be completed during 1996. Such development expenses have continued beyond
original targets as the Company has experienced deficiencies in the
performance of components supplied by outside vendors. The replacement or
correction of such components created additional costs and time delays.
The Company incurred expenditures for lawsuit prosecution of $284,000 in
1995 and $100,000 in 1994. The Company and a corporate defendant agreed to
reach an out-of-court settlement. Under the proposed terms of the Settlement
Agreement, the Company expects to net approximately $2.2 million after payment
of contingent attorney's fee and related expenses. Until full payment is
received by the Company, it is Management's opinion that there can be no
certainty concerning payment to the Company.
In 1994, the Company increased its expense provision estimate in
connection with the now concluded rent dispute with its former landlord. The
Company made a provision of $685,000 ($0.38 per share) in 1994 in connection
with this matter. See Note 6 of Notes to Financial Statements for further
discussion of this matter. There were no additional expenses for this matter
in 1995.
In 1995, the Company's interest costs declined as the Company was able to
temporarily utilize the proceeds from the Stock Offering to reduce costly
outside financing. Total interest costs were $63,000 in 1995 compared to
$174,000 in 1994.
While the Company recognized the majority of its remaining tax benefit
amount recoverable from the carryback of net operating losses prior to 1994, a
small income tax refund was received and credited in 1995. The Company is in a
net operating loss (NOL) carryforward position. Otherwise, no provision or
benefit from income taxes has been recognized for 1995 or 1994.
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<PAGE>
Liquidity and Capital Reserves
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors based upon actual
results through yearend 1995.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
December 31,
December 25,
1995
1994
------------------
-----------
<S> <C>
<C>
Total Assets $ 6,351
$ 4,209
Working Capital $ 327
$ (409)
Current Ratio 1.09:1
0.82:1
Current and Long-Term Debt $ 313
$ 393
Current and Long-Term Capital Leases 291
--
Bank Note Payable (in 1995)/Accounts
Receivable Financing (in 1994) 917
839
10% Convertible Debentures 535
--
------------------
------------------
Total Debt/Financing $ 2,056
$ 1,232
==================
==================
Stockholders' Equity $ 1,960
$ 1,329
==================
==================
</TABLE>
The Company experienced an improvement in its working capital dollars and
ratio due to receipt of the net proceeds of approximately $500,000 from the
sale of the debentures. The stockholders' equity increased by approximately $2
million of net proceeds from the Stock Offering and decreased by the 1995 net
loss of $1.4 million, a net improvement of approximately $0.6 million.
The 1995 net loss was primarily attributable to expenditures in
connection with development of the ImSyn(TM) prototype and lawsuit prosecution
expenses. The net cash used in operations was approximately $2.8 million,
including the net loss of $1.4 million and increase in accounts receivables of
$1.4 million. Such operating expenditures were funded from the proceeds of the
Stock Offering. Of the increase in accounts receivables, approximately
$839,000 is due to the repurchase of receivables by the Company from its
previous working capital lender. Accounts receivable are no longer sold to an
outside third party lender but are financed as described below by a line of
credit with a local bank.
Under the settlement agreement reached with the landlord, certain
payments are to be spread over future periods or are triggered only by other
future cash inflows. There is a $70,000 remaining balance payable ratably
through July 1996. The Company expects that the results of operations from its
total contracts backlog of approximately $41 million will generate sufficient
positive cash flow over the remaining period of this obligation to make the
required payments. The contingent portions of the landlord settlement
obligation, of which $309,000 remain after December 31, 1995, are not payable
until future earnings (as defined), operating asset sales or equity capital
funding occur. When such future events transpire, only a portion of the cash
flows or proceeds generated are payable.
Beginning October 1995 and revised in November 1995 to increase the
amount and extend the term, the Company entered into an accounts receivable
financing arrangement with a local bank. The current loan arrangement provides
for a line of credit up to $1,500,000 for financing
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<PAGE>
at the bank's prime rate plus 3%. The Company can utilize certain accounts
receivable and obtain a percentage advance as a loan under the financing
arrangement. At December 31, 1995, the funds advanced were $917,000, the
maximum available based upon the eligible accounts receivable. The current
arrangement extends through November 30, 1996.
The line of credit is secured by all accounts receivables and certain
general intangibles (excluding patents). The Company is subject to certain
operating restrictions, such as acquisitions or mergers; or creation or
incurrence of new debt. Such restrictions have been waived by the Bank in
connection with the issuance of the Company's convertible debentures.
The Company was able to temporarily curtail the requirement for accounts
receivable financing during 1995 due to the proceeds received from the Stock
Offering. This reduced interest expense from $174,000 in 1994 to $63,000 in
1995.
In March 1996, the Company completed a private placement of an
aggregate of $1.4 million in 10% Convertible Collateralized Debentures Due
2000 (the "Debentures"), $535,000 of which had been placed as of December 31,
1995. The Debentures are convertible into an aggregate of 400,000 shares of
Common Stock at $3.50 per share, are collateralized by certain current and
fixed assets and inventory, and mature November 30, 2000. In connection with
the private placement, the Company also issued warrants to purchase an
aggregate of 78,400 shares of Common Stock and issued warrants to the
placement agent to purchase an aggregate of 28,600 shares of Common Stock. All
of such warrants are exercisable through December 1, 2000 at $3.50 per share,
subject to adjustment. The net proceeds of the private placement of
approximately $1,270,000 have been allocated to general business and working
capital purposes including reducing accounts payable and increasing inventory
as well as providing funds for sales and marketing efforts.
In 1996, the Company plans to make significant expenditures for
commercial product inventory, commercial marketing and certain capital
expenditures. The Company expended $183,000 for inventory in 1995. The Company
purchased $301,000 of property and equipment, mostly computers and other
special equipment, through direct cash purchase during 1995. The Company
further acquired approximately $477,000 of similar equipment under capital
leases having terms which spread out monthly payments from twelve to
thirty-six months. The Company intends to utilize leasing arrangements to
finance capital expenditures to the extent practical. The Company may sell
certain assets which are underutilized or not part of its mainstream
operations; there are, however, no definitive arrangements for any such sale.
The Company has stock warrants outstanding with potential cash proceeds of
$1.9 million which are callable for exercise beginning April 1, 1996 upon
certain conditions, such as when the last price of the Company's common stock
exceeds $5 per share for ten (10) consecutive trading days. The Company
believes that its anticipated needs for working capital will be adequately met
by the combination of its projected cash flow from its 1996 operations,
utilization of available credit from its secured asset lending agreement and
access to public and private financing markets.
Inflation
The Company, because of its substantial activities in professional
services and product development, is more labor intensive than firms involved
primarily in industrial activities. To attract and maintain higher caliber
professional staff, the Company must structure its compensation programs
competitively. The wage demand effect of inflation is felt almost immediately
in its costs; however, the net effect during the years in question is minimal.
The inflation rate in the United States generally has little impact on
the Company's cost- reimbursable type contracts and other short-term
contracts. For longer-term, fixed-price type contracts, the Company endeavors
to protect its margins by including cost escalation provisions or other
specific inflation protective terms in its contracts.
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<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $.10 par value, of which 3,586,073 shares are issued and
outstanding as of February 29, 1996. Each share of Common Stock is entitled to
one vote with respect to all matters voted upon by stockholders, including the
election of directors. The holders of Common Stock are entitled to receive
such dividends as may be declared by the Board of Directors and are also
entitled to share pro rata in the distribution of the Company's assets
available for such purpose in the event of liquidation. Holders of Common
Stock of the Company have no preferential or preemptive right to subscribe
for, purchase or receive any additional shares of Common Stock of the Company,
or any options or warrants for such shares.
Warrants
Each Warrant entitles the registered holder thereof to purchase
twenty-five (25) shares of Common Stock from the Company at a price of $75.00,
subject to adjustment in certain circumstances, at any time, and subject to a
required early exercise (see below), up to and including June 30, 1998.
Warrants must be exercised in their entirety.
The Warrants were issued in registered form pursuant to the terms of a
Warrant Agreement (the "Warrant Agreement") between the Company and Mellon
Bank as Warrant Agent. Reference is made to the Warrant Agreement (which as
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) for a complete description of the terms and condition
thereof and the description herein is qualified in its entirety by reference
thereto.
The Company may require that the Warrants be exercised at any time from
April 1, 1996 through June 30, 1998 at the price of $75.00 per Warrant (the
"Exercise Price") if the last price of the Company's stock exceeds $5.00 per
share for ten (10) consecutive trading days (the "Early Exercise Event"). If
the Company elects to require early exercise of the Warrants, it will contact
the Warrant Agent by the second business day following the Early Exercise
Event. By virtue of the Warrant Agreement, the Warrant Agent shall be
authorized to notify the Warrant Holder that the Company is exercising its
early exercise right. The Warrant Holder shall receive a thirty (30) day
notice of exercise from the date of the Early Exercise Event. IF THE WARRANT
HOLDER HAS NOT EXERCISED ITS WARRANT(S) PRIOR TO THE TERMINATION OF SUCH
THIRTY (30) DAY PERIOD, THE WARRANT(S) SHALL CEASE TO BE EXERCISABLE.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the certificate completed as indicated,
accompanied by full payment of the Exercise Price (by certified check payable
to the Company) to the Warrant Agent for the number of Warrants being
exercised. The Warrant holders do not have the rights or privileges of holders
of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering shares of Common
Stock issuable upon exercise of such Warrant and such shares have been
registered or qualified or deemed to be exempt under the securities laws of
the state of residence of the holder of such Warrant. There can be no
assurance that the Company will keep this Prospectus or any prospectus
covering such shares current. (See "Risk Factors".)
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<PAGE>
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant holder exercises all Warrants then owned of record by
him, the Company will pay to such Warrant holder, in lieu of the issuance of
any fractional shares which is otherwise issuable, an amount in cash based
upon the market value of the fractional shares of Common Stock on the last
trading day prior to the exercise date.
The exercise price or number of shares of Common Stock issuable upon the
exercise of each Warrant is subject to adjustment in the event the Company
pays a dividend on its Common Stock in Common Stock, subdivides its
outstanding shares of Common Stock into a greater number of shares, combines
its outstanding shares of Common Stock into a lesser number of shares, or
issues by reclassification of its Common Stock any other shares of its capital
stock. However, the Warrants are not subject to adjustment for issuances of
Common Stock at prices below the Exercise Price of the Warrants. In case of
consolidation, merger or sale of all or substantially all of the assets of the
Company, the holder of each outstanding Warrant shall have the right to the
kind and amount of securities, cash or other assets; if any, receivable by a
holder of the number of shares of Common Stock into which such Warrants were
exercisable immediately prior thereto.
Placement Agent's Warrants
1995 Offering
The Company has issued to the Placement Agent and selected dealers
warrants to purchase 175,000 shares of the Company's Common Stock sold by the
Company through the efforts of the Placement Agent or Selected Dealers
pursuant to the Placement Agency Agreement at a price of $2.30 per share
exercisable from August 1, 1996 until December 1, 1999 (the "Placement Agent's
Warrants"). The Placement Agent's Warrants are non-transferable until August
1, 1996, except that they may be assigned by the Placement Agent to its
officers. The Placement Agent's Warrants contain provisions for adjustments of
the number of shares and the purchase price per share in certain events,
including combinations, subdivisions or reclassifications of the Company's
Common Stock. The Company has agreed to prepare and process to effectiveness
any new registration statements required to permit the public offering of the
shares issuable upon exercise of the Placement Agent's Warrants when
requested, one time upon demand, at any time ending December 1, 1999, by the
holders of at least 66-2/3% thereof, and to pay the costs of such new
registration statement. In addition, the holders of the shares issuable upon
exercise of the Placement Agent's Warrants will have the right, at the
Company's expense, to require inclusion of the shares underlying the Placement
Agent's Warrants in certain registration statements filed by the Company under
the Securities Act within the period ending December 1, 1999.
Debenture Placement
The Company has issued to the Placement Agent and selected dealers
warrants to purchase 28,571 shares of the Company's Common Stock at a price of
$3.50 per share exercisable at any time until 5:00PM, Columbia, Maryland time
on November 30, 2000. The exercise price and shares issuable upon exercise are
subject to adjustment upon the occurrence of certain events. There are no
demand registration rights, but the holders of the shares issuable upon
exercise will have the right, at the Company's expense, to require inclusion
of the shares underlying the warrants in certain registration statement filed
by the Company under the Securities Act within the period ending November 30,
2000.
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<PAGE>
For the life of the Placement Agent's Warrants, the holders thereof are
given, at nominal cost, the opportunity to profit from a rise in the market
price of the underlying shares of Common Stock with a resulting dilution to
the other stockholders of the Company. For the life of the Placement Agent's
Warrants, the terms on which the Company could obtain additional capital may
be adversely affected, and the holders of the Placement Agent's Warrants may
be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain equity capital, if it needed capital at that
time, by sale of its Common Stock on terms more favorable than those provided
by the Placement Agent's Warrants.
The holders of the Placement Agent's Warrants have no voting, dividend or
other rights as shareholders of the Company with respect to shares underlying
the Placement Agent's Warrants unless the Placement Agent's Warrants have been
exercised.
Debenture Holder Warrants
The Company has issued to the holders of the Debentures warrants
("Debenture Holder Warrants") to purchase 78,400 shares of the Company's
Common Stock at a price of $3.50 per share exercisable at any time until
5:00PM, Columbia, Maryland time on November 30, 2000. The exercise price and
shares issuable upon exercise are subject to adjustment upon the occurrence of
certain events. There are no demand registration rights, but the holders of
the shares issuable upon exercise will have the right, at the Company's
expense, to require inclusion of the shares underlying the warrants in certain
registration statement filed by the Company under the Securities Act within
the period ending November 30, 2000.
Transfer Agent
The transfer agent for the Common Stock and Warrants is Chemical Mellon.
MARKET FOR THE COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq SmallCap Market(sm)
tier of the Nasdaq Stock Market(sm) under the symbol "ESEX". The following
table sets forth the range of high and low sales prices of the Common Stock
for the periods indicated. Sales prices represent prices between dealers, may
not reflect mark-ups, mark-downs or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
1995
1994
------------------------
----------------------
High Low
High Low
<S> <C> <C>
<C> <C>
First quarter.................................... $ 1.63 $ 1.13
$ 2.63 $ 1.50
Second quarter................................... 1.63 1.00
1.63 1.00
Third quarter ................................... 3.63 1.25
1.88 1.63
Fourth quarter................................... 3.38 2.13
2.00 .88
</TABLE>
At February 29, 1996, there were approximately 1,200 beneficial
owners of the Company's Common Stock which includes 306 holders of record.
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<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Board of Directors presently intends to retain all earnings to
support the growth of the Company's business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE
The shares of Common Stock issuable upon exercise of Warrants will be
freely tradable (except by "affiliates" of the Company) without restriction or
further registration under the Securities Act. (See Risk Factors- "No
Assurance of Continued Public Market or NASDAQ Listing; Penny Stock
Regulations"). Upon completion of this Offering, the Company will have
4,210,973 shares of Common Stock issued and outstanding assuming all of the
Warrants are exercised. The Company also has approximately 960,850 shares
reserved for issuance under various qualified and non-qualified stock option
and stock bonus plans, 125,000 shares reserved for issuance under options
issued to the former Landlord, up to 203,571 shares issuable upon exercise of
the Placement Agent's Warrants, and 478,400 shares reserved for conversion of
the Debentures and Debenture Holder Warrants. (See "Risk Factors - Outstanding
Options, Warrants and Convertible Debentures" and "Landlord Settlement
Obligations").
As of the date of this Prospectus, approximately 140,000 shares of Common
Stock which were sold to seventeen (17) persons in 1993 and 1994 are
"Restricted Securities" as defined in Rule 144 under the Securities Act ("Rule
144"). In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Securities
for more than two years or persons who may be deemed "affiliates" of the
Company, as that term is defined under the Securities Act, would be entitled
to sell within any three-month period a number of shares of such Restricted
Securities that does not exceed the greater of (i) 1% of the then outstanding
shares of the Company's Common Stock (42,110 shares assuming sale of all
Shares offered by this Prospectus) or (ii) the average weekly trading volume
in the public market for the Company's Common Stock during the four calendar
weeks preceding the filing of the notice of such sale. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company.
Of the above described Restricted Securities, all such shares have certain
rights to require the Company to register such shares for sale. Additionally,
the persons who will be holders of the 328,571 shares of Common Stock upon
exercise of the Landlord Options and Placement Agent's Warrants have
registration rights. (See "Risk Factors - Potential Future Sales of
Securities; Registration Rights").
The Company has on file a registration statement under the Securities Act
which registers shares of Common Stock issued or reserved for issuance upon
the exercise of options which have been or may be granted pursuant to the
Company's Stock Option Plans. As of the effective date of such registration
statement, shares acquired upon the exercise of such options may generally be
sold without restriction in the public market, subject to Rule 144 notice
requirements and volume limitations for stockholders who are affiliates of the
Company.
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<PAGE>
PLAN OF DISTRIBUTION
The shares of Common Stock issuable upon exercise of outstanding Warrants
will be issued by the Company subsequent to the date hereof upon exercise of
such Warrants and the Company will receive the net proceeds thereof. The
exercise price of the Warrants was determined arbitrarily by the Company and
the Placement Agent and is not necessarily related to the asset, book value or
net worth of the Company or any other established criteria of value. None of
the securities being offered hereby are being offered on an underwritten basis
or through or by any underwriter. Consequently, no sales commissions are
expected to be paid in connection with the offer and sale of such securities.
In order to facilitate the exercise of the Warrants, the Company will
furnish, at its expense, such number of copies of this Prospectus to the
recordholder of the Warrants as the recordholder may request together with
instructions that such copies of this Prospectus be delivered to the
beneficial owners of the Warrants. Persons who wish to exercise the Warrants
must deliver the executed warrant certificates with the purchase forms, duly
executed, accompanied by payment in the form of a certified or bank cashier's
check or money order payable to the Company for the number of Warrants
exercised to Chemical Mellon, 13th Floor, 120 Broadway, New York, New York.
All such payments must be received prior to termination of the exercise period
thereof. The Company shall then issue and sell such fully paid and
non-assessable shares of Common Stock to the Warrant Holder as specified on
the warrant certificates so tendered. Warrants not exercised prior to
termination of the exercise period will expire. (See "Description of
Securities".)
THE 1995 OFFERING
The Company's offering of Units commenced December 1, 1994 as a best
efforts minimum/maximum offering of rights (the "Rights") to security holders
of the Company to purchase Units (the "Rights Offering"). The subscription
period for the Rights terminated on January 16, 1995 during which period
eligible holders of Rights, including certain officers and directors,
exercised their subscription privileges for 6,054 Units. Subsequently, an
additional 1,446 Units were subscribed for in the Company's public offering of
Units and, with respect to the remaining 17,500 Units registered for sale by
the Company, the Company entered into a Placement Agency Agreement with J.
Michael Reisert, Inc. for the sale of such remaining Units on a best efforts
basis. Each Unit was immediately separable and consisted of 70 shares of
Common Stock and one Warrant. The initial offering price of each Unit was
$100.00. The Company received net proceeds from the sale of the Units of
approximately $2 million after deduction of underwriting discounts and
commissions and expenses relating to the 1995 Offering. The exercise price of
the Warrants was arbitrarily determined by the Company and J. Michael Reisert,
Inc. (previously defined as the "Placement Agent"), which firm served as the
Placement Agent for 17,500 of the Units on a "best efforts" basis. Such
exercise price was not necessarily related to the Company's asset or book
value, net worth or any other established criteria of value.
LANDLORD SETTLEMENT OBLIGATIONS
The Company was in a legal dispute with the landlord of its former
corporation headquarters and Information Systems Division facility. Effective
July 1994, the parties entered into a Settlement Agreement ("Agreement").
Under the Agreement, the Company agreed to make deferred rent cash payments of
$250,000; contingent rent payments up to $550,000 from future earnings and/or
proceeds from common stock sales or asset sales; an additional contingent
-44-
<PAGE>
payment up to $250,000 from any net proceeds awarded from settlement of an
outstanding lawsuit; and issued an option (previously defined as the "Landlord
Options") to purchase up to 125,000 shares of the Company's stock at an
exercise price (subject to adjustment) of $2 per share. The landlord released
the Company from outstanding and future rent or other obligations arising from
the leases.
Starting July 1994, the Company began to make the deferred cash rent
payments over 25 months at $10,000/month. As additional rent, the Company is
obligated to make contingent cash payments of 25% of future earnings (as
defined) or 10-15% of the net proceeds from the sale of common stock
(including the shares of Common Stock issuable upon exercise of the Warrants)
or operating assets, the total of such payments not to exceed $550,000. The
Landlord Options are exercisable through December 31, 2004 and have certain
registration rights upon exercise thereof. Prior to 1995, the Company expensed
$800,000 toward amounts potentially due under the above terms of this
Agreement and recognized a $35,000 expense for the estimated value of the
option.
Contingent amounts due, if any, are to be paid quarterly. The period for
computation of such contingent payments ends December 2004. Through December
31, 1995, contingent amounts totalling approximately $241,000 have been
earned, paid and charged against the accrual. The $379,000 total accrual as of
December 31, 1995 is comprised of $70,000 to be paid ratably over the next 7
months and the remaining contingent portion which is probable to be paid over
the applicable consideration period.
Also under the Agreement, the Company agreed to pay 20% not to exceed
$250,000 from the net award or settlement from the lawsuit against a
competitor described below. (See "Legal Proceedings".) When this legal
proceeding is concluded, then the appropriate amount payable to the former
landlord will be calculated and expensed.
The Company has issued a stock option to the former Landlord to purchase
up to 125,000 shares of the Company's Common Stock at an option price of $2.00
per share. The option is for a period of ten years, and it has registration
rights (both "demand rights" and "piggyback rights") with respect to Common
Stock issuable upon exercise of the option. (See "Shares Eligible for Future
Sale".)
LEGAL PROCEEDINGS
On March 1, 1996, the Company and a corporate defendant agreed to reach an
out-of-court settlement of the Company's previously reported 1994 lawsuit
pending in the United States District Court in Albuquerque, New Mexico. On
March 28, 1996, settlement was reached, and the express terms of the
settlement, including terms regarding the confidentiality of the settlement,
were definitized. Full payment was received by the Company on March 29, 1996.
Under the terms of the settlement, the Company expects to net approximately
$2.2 million from this legal settlement after payment of contingent attorney's
fees and related expenses and such amount will be shown as gain from lawsuit
settlement in the 1996 first quarter statement of operations. The Company had
previously expensed approximately $500,000 in legal fees and related expenses
since 1994 when the suit was originally filed.
The Company was a party to a legal dispute which arose in mid 1993 with
its former landlord. This matter was settled in July 1994 and resulted in
certain obligations for the Company. See "Landlord Settlement Obligations"
section for further discussion of this matter.
-45-
<PAGE>
The Company is not currently a party to any pending material legal
proceedings.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Common Stock
being offered hereby have been passed upon for the Company by Fisher, Wayland,
Cooper, Leader and Zaragoza, LLP., 2001 Pennsylvania Avenue, N.W., Suite 400,
Washington, D.C.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event a claim for indemnification against such liabilities (other
than the payment by the Company of expense incurred or paid by a director,
officer, or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person of the Company in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Virginia Stock Corporation Act ("Act") permits indemnification of
directors and officers of a corporation under certain conditions and subject
to certain limitations. Articles (h) and (i) of the Articles of Incorporation
of the Company contain provisions for the indemnification of directors and
officers and limitations of their liability for their actions on behalf of the
Company within the limitations permitted by the Act. In addition, the Company
has entered into indemnity agreements with certain of its directors and
officers which provide the maximum indemnification allowed by the Act.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form SB-2 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement,
exhibits and schedules which may be obtained from the Commission's principal
office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
-46-
<PAGE>
ESSEX CORPORATION
INDEX TO FINANCIAL STATEMENTS
Annual Audited Financial Statements - Fiscal Year Ended December 31, 1995
Report of Independent Public Accountants F-2
Balance Sheet F-3
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7/F-21
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Essex Corporation:
We have audited the accompanying balance sheet of Essex
Corporation as of December 31, 1995, and the related statements of operations,
changes in stockholders' equity and cash flows for the years ended December
31, 1995 and December 25, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Essex
Corporation as of December 31, 1995 and the results of its operations and its
cash flows for the years ended December 31, 1995 and December 25, 1994, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, D.C.,
March 8, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
ESSEX CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS
<S> <C>
Current Assets
Cash $ 822,065
Accounts receivable, net 2,655,046
Inventory 183,421
Prepayments and other current assets 146,183
--------------
3,806,715
Property and Equipment
Land 195,175
Buildings and improvements 1,622,255
Production and special equipment 1,908,586
Furniture and equipment 1,427,125
--------------
5,153,141
Accumulated depreciation and amortization (3,060,370)
2,092,771
Other Assets
Goodwill, net 204,299
Patents, net 175,226
Deferred debenture financing 21,470
Other 50,057
--------------
451,052
TOTAL ASSETS $ 6,350,538
- ------------ ==============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current Liabilities
Current portion of Industrial Revenue Bond $ 80,001
Current portion of capital leases 148,351
Bank line of credit 917,010
Accounts payable 770,614
Accrued wages and vacation 392,372
Accrued retirement contribution 144,500
Accrued lease settlement 378,941
Other accrued expenses 647,834
--------------
3,479,623
Long-term Debt
Industrial Revenue Bond, net of current portion 233,320
10% Collateralized Convertible Debentures Due 2000 535,000
Capital Leases, net of current portion 142,677
--------------
Total Liabilities 4,390,620
Commitments and Contingencies (Note 6)
Stockholders' Equity
Common stock $0.10 par value; 10 million shares
authorized; 3,585,973 shares issued and outstanding 358,597
Contributions in excess of par 5,214,966
Retained deficit (3,613,645)
--------------
1,959,918
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,350,538
- ------------------------------------------ ==============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
ESSEX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE 53-WEEK FISCAL YEAR ENDED DECEMBER 31, 1995 AND
THE 52-WEEK FISCAL YEAR ENDED DECEMBER 25, 1994
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
REVENUES $ 14,192,934 $ 15,363,871
--------------- ---------------
COSTS AND EXPENSES
Direct Costs:
Direct labor and related expenses 6,644,201 6,113,618
Other direct costs 2,536,946 4,286,216
--------------- ---------------
Total Direct Costs 9,181,147 10,399,834
--------------- ---------------
Indirect Expenses:
Operating expenses 4,404,167 3,991,915
Depreciation and amortization 440,508 376,944
--------------- ---------------
Total Indirect Expenses 4,844,675 4,368,859
Lease settlement -- 685,000
ImSyn(TM)prototype development expenses 1,254,247 101,807
Lawsuit prosecution expenses 283,997 99,661
--------------- ---------------
Operating Loss (1,371,132)
(291,290)
Interest expense 63,368 174,305
--------------- ---------------
LOSS BEFORE INCOME TAXES (1,434,500)
(465,595)
---------------
- ---------------
Benefit from income taxes 7,046 --
--------------- ---------------
NET LOSS $ (1,427,454) $
(465,595)
================ ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,913,139 1,821,394
=============== ===============
NET LOSS PER SHARE $ (0.49) $
(0.26)
===============
===============
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
<TABLE>
ESSEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD DECEMBER 26, 1993 TO DECEMBER 31,
1995
<CAPTION>
Contri- Total
Common Stock
butions Stock-
Shares
In Excess Retained holders'
Issued Amount
Of Par Deficit Equity
<S> <C> <C>
<C> <C> <C>
BALANCE, DECEMBER 26, 1993 1,816,328 $181,633
$3,280,916 $(1,720,596) $1,741,953
-----------
Private placement issuance 7,145 714
15,361 -- 16,075
Lease settlement stock option -- --
35,000 -- 35,000
Other 500 50
1,075 -- 1,125
Net loss for 1994 -- --
-- (465,595) (465,595)
--------- --------
---------- ----------- -----------
BALANCE, DECEMBER 25, 1994 1,823,973 182,397
3,332,352 (2,186,191) 1,328,558
-----------
Common stock offering 1,750,000 175,000
1,846,854 -- 2,021,854
Common stock bonus 12,000 1,200
35,760 -- 36,960
Net loss for 1995 -- --
-- (1,427,454) (1,427,454)
--------- --------
---------- ----------- -----------
BALANCE, DECEMBER 31, 1995 3,585,973 $358,597
$5,214,966 $(3,613,645) $1,959,918
- ---------------------------------------------- ========= ========
========== =========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 25, 1994
1995 1994
- -------------- --------------
<S> <C>
<C>
Cash Flows From Operating Activities:
Net Loss
$(1,427,454) $(465,595)
Adjustments to reconcile Net Loss to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization
440,508 376,944
Gain on sale/retirement of fixed assets
(11,802) (6,341)
Stock awards
36,960 1,125
Lease settlement stock option
-- 35,000
Change in Assets and Liabilities:
Accounts receivable
(1,441,510) 199,480
Inventory
(183,421) --
Refundable income taxes
18,600 213,200
Prepayments and other assets
(55,316) 133,389
Accounts payable
18,127 (262,579)
Accrued lease settlement
(361,059) 590,000
Other liabilities
190,442 66,622
- ----------- ---------
Net Cash (Used In) Provided By Operating Activities
(2,775,925) 881,245
- ----------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment
(300,523) (113,110)
Proceeds from sale of fixed assets
18,542 9,015
- ----------- ---------
Net Cash Used In Investing Activities
(281,981) (104,095)
- ----------- ---------
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net
917,010 (350,000)
Repayment of long-term debt
(80,001) (80,001)
Sale of common stock
2,500,000 16,075
Stock offering costs
(286,952) (191,194)
Issuance of convertible debentures, net of financing costs
513,530 --
Payment of capital lease obligations
(186,416) --
- ----------- ---------
Net Cash Provided by (Used In) Financing Activities
3,377,171 (605,120)
- ----------- ---------
Cash And Cash Equivalents
Net Increase
319,265 172,030
Balance - Beginning of year
502,800 330,770
- ----------- ---------
Balance - End of year
$822,065 $502,800
=========== =========
<FN>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Important Factors
These statements cover Essex Corporation (the "Company"). Certain amounts
for prior years have been reclassified to conform to the 1995
presentation.
Reporting Year
The Company is on a 52/53 week fiscal year ending the last Sunday in
December. 1995 was a 53-week fiscal year and 1994 was a 52-week fiscal
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the report period. Actual results could differ from those
estimates.
Important Business Risk Factors
The Company has historically been principally a supplier of technical
services under contracts or subcontracts with departments or agencies of
the U.S. Government, primarily the military services and other
departments and agencies of the Department of Defense.
Beginning in 1989, the Company has expended significant internal funds to
transition into the commercial marketplace, particularly the
productization of its proprietary technologies in optoelectronic
processors, testing and evaluation. The long-term success of the Company
in this area is dependent on its ability to successfully develop and
market products related to its optoelectronic computing processors. The
success of these efforts is subject to changing technologies,
availability of financing, competition, and ultimately market acceptance.
The Company has experienced net losses since 1989. In 1995, revenues
decreased and its net loss increased as compared to 1994 as substantial
resources were utilized in commercial product development. Management is
continuing to maintain the cost controls implemented as it rightsized
core business operations.
Contract Accounting
Revenues consist of services rendered on fixed-price, time and materials
and cost-plus-fixed-fee contracts and are recognized on the
percentage-of-completion method. Revenue on fixed-price contracts
(approximately 19% and 24% of contract revenues in 1995 and 1994,
respectively) is recognized on the percentage-of-completion method of
accounting based on costs incurred in relation to the total estimated
costs. Revenue on cost-plus-fixed- fee contracts (approximately 59% and
63% of contract revenues in 1995 and 1994, respectively) is recognized
to the extent of costs incurred plus a proportionate amount of fee
earned. Revenue on time and materials contracts (approximately 22% and
13% of contract revenues in 1995 and 1994, respectively) is recognized
to the extent of billable rates multiplied by hours delivered, plus
materials expense incurred. Anticipated losses are
F-7
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
recognized as soon as they become known. In accordance with industry
practice, accounts receivable relating to long-term contracts are
classified as current assets, although an indeterminable portion of these
amounts is not expected to be realized within one year. A substantial
portion of the Company's business is with agencies of the U.S. Government
and such contracts are subject to audit by cognizant government audit
agencies. Furthermore, while such contracts are fully funded by
appropriations, they may be subject to other risks inherent in government
contracts, such as termination for the convenience of the government.
Income Taxes
Deferred income taxes are recorded under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future
tax consequences, measured by enacted tax rates, attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will
not be realized.
Inventory
Inventory costs included purchased parts, labor and manufacturing
overhead. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventory costs
are all related to the Company's ImSyn(TM) optoelectronic processor for
which initial production began in late 1995.
1995
-------------
Purchased Parts $ 97,280
Systems in-process 86,141
-------------
$ 183,421
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using straight-line methods based on useful lives as follows:
Buildings and improvements Life of lease or 40 years
Production and special equipment 3 to 10 years
Furniture and equipment 3 to 10 years
Repairs and maintenance are charged to expense as incurred. When assets
are retired or otherwise disposed of, the asset and related allowance for
depreciation are eliminated from the accounts and any resulting gain or
loss is reflected in income.
F-8
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Intangible Assets
The excess of cost over the fair value of assets acquired (goodwill)
resulting from an acquisition in 1989 is being amortized on a
straight-line basis over 10 years. Such amortization amounted to $60,000
in 1995 and 1994. Other intangible assets related to the acquisition
were being expensed over the lives of the respective assets and ended in
1994. Such amortization expense was $12,000 in 1994.
Patent costs include legal and filing fees covering the various patents
each have been issued to the Company. Patent costs are amortized over
their respective lives (15 - 20 years) and amortization was $12,000 in
1995 and $9,000 in 1994.
Deferred debenture financing costs ($21,470 at December 31, 1995) will be
amortized over the life of the debentures.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles (including goodwill) to
be held and used are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount should be addressed.
Impairment is measured by comparing the carrying value to the estimated
undiscounted future cash flows expected to result from use of the assets
and their eventual disposition. During 1994, the Company expensed
approximately $140,000 of capitalized software development costs related
to the Company's fitness-for- duty software. The Company has determined
that as of December 31, 1995, there has been no impairment in the
carrying value of long-lived assets.
Net Loss Per Share
Net loss per share has been calculated by dividing net loss by the
weighted average number of common shares outstanding during each of the
years presented. There were no dilutive common stock equivalents during
any years presented.
Statements of Cash Flows
Supplemental disclosures of cash flow information are as follows:
1995 1994
------------ --------
A. Cash paid during the year for-
Interest $ 78,000 $ 189,000
Income taxes $ 5,700 $ 15,000
B. In 1995, the Company issued 12,000 shares of common stock with a
market value of $36,960 under its Restricted Stock Bonus Plan.
In 1994, the Company had a private placement of its unregistered
common stock. The Company sold 7,145 shares of its unregistered
common stock with a market value of $16,075. Also in 1994, the
Company issued 500 shares of common stock with a market value of
$1,125.
C. Capital lease bligations of $477,000 (net present value) were
incurred during 1995 when the Company entered into various leases
for new equipment.
F-9
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
D. At December 25, 1994 the gross amount of open accounts receivable
purchased by Capitol Resource Funding, Inc. was $1,049,000. Funds
received were $839,000. See Note 3 for further information.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value of Financial Instruments", requires
disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present
values or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including discount rate and estimates
of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the
instrument.
The carrying amount reported in the balance sheet approximates the fair
value for cash, accounts receivable, accounts payable and other variable
rate debt (including borrowings under the line of credit agreement).
The carrying amount of the Company's fixed rate convertible debentures
reported in the balance sheet at December 31, 1995 approximates the fair
value of the instrument as the debentures were issued in December of
1995.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 defines a "fair
value based method" of accounting for an employee stock option or
similar equity instrument. Under the fair value based method,
compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period. Prior to issuance
of SFAS No. 123, employee stock options or similar equity instruments
were accounted for under the "intrinsic value method" as defined by APB
Opinion No. 25, "Accounting for Stock Issued to Employees". Under the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method. However, entities electing to remain with the accounting in APB
Opinion No. 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value based method of accounting had
been applied.
SFAS No. 123 accounting disclosure requirements are effective for
financial statements for fiscal years beginning after December 15, 1995,
or for an earlier fiscal year for which this Statement is initially
adopted for recognizing compensation cost. Management will continue
F-10
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
to use the intrinsic value method of APB Opinion No. 25, but will make
the necessary disclosure requirements in the 1996 financial
statements.
2. Accounts Receivable
Accounts receivable consist of the following:
1995
--------------
U.S. Government:
Amounts billed, excluding retainages $ 1,799,988
Recoverable costs and accrued profits not yet
billed, including retainages 786,301
2,586,289
Commercial and Other 274,757
Contract reserves and allowances for doubtful accounts (206,000)
U.S. Government receivables arise from U.S. Government prime contracts
and subcontracts. Unbilled receivables represent revenue recognized for
work performed prior to yearend, which had not been billed. The
government unbilled receivables can be invoiced in accordance with
funding on cost-type contracts or upon attaining certain milestones under
fixed-price contracts.
Retainages, of approximately $209,000 at December 31, 1995, will be
collected upon job completion or settlement of audits performed by
cognizant U.S. Government audit agencies. Company cost records have been
audited through 1990. In the year an audit is settled, the difference
between audit adjustments and previously established reserves is
reflected in income. Management anticipates that a substantial portion of
the December 31, 1995 unbilled retainages will not be billed or collected
until after 1996.
Contract reserves and allowances for doubtful accounts have been provided
where less than full recovery under the contract is expected.
3. Accounts Receivable Financing
Beginning October 1995 and revised in November 1995 to increase the
amount and extend the term, the Company entered into a receivables
financing arrangement with Signet Bank. This arrangement is evidenced by
a Loan Agreement, $1.5 million Promissory Note and Commercial Security
Agreement ("Agreements"). Under the Agreements, the Bank will advance
funds against certain accounts receivable. The funds advanced ($917,000
at December 31, 1995, the maximum available based upon the eligible
accounts receivable) constitute proceeds under the note which will bear
interest at an annual rate of prime plus 3% (total rate approximately
11.50% at December 31, 1995). The Company must also pay certain
administrative and commitment fees which are expected to be less than
$1,000/month. This agreement expires November 1996.
F-11
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
This $1.5 million line of credit is secured by all accounts receivables
and certain general intangibles (excluding patents). The Company is
subject to certain restrictions, such as acquisitions or mergers; or
creation or incurrence of new debt. Such restrictions have been waived by
the Bank in connection with the issuance of the Company's convertible
debentures.
Previously, the Company had a Purchase and Assignment Agreement
(Agreement) regarding its accounts receivable with Capitol Resource
Funding, Inc. (Capitol). Under the Agreement, Capitol would purchase
certain of the Company's accounts receivable. The Company generally
received 80% of the invoice amount at the time of purchase and the
balance when the invoice was paid. The Company was charged an interest
fee on the funded amount at an annualized rate of 20%, payable at the
time each invoice was paid.
4. Long-Term Debt
Long-term debt consists of the following.
A) Industrial Revenue Bond
1995
------------
Industrial Development First
Mortgage Revenue Bond $ 313,321
Less: Current portion 80,001
-------------
Long-term debt $ 233,320
=============
In 1984, in connection with the construction of an office and plant
facility in Huntsville, Alabama, the Company entered into a financing
agreement with the Industrial Development Board (Board) of the City of
Huntsville and AmSouth Bank, N.A. Under the terms of the agreement, an
Industrial Development First Mortgage Revenue Bond-Series 1984 in the
amount of $1,200,000, with interest at a floating rate of 75% of the
bank's prime rate, was issued by the Board to AmSouth Bank, N.A. and
guaranteed by the Company. The construction was completed in March 1985.
Repayments of principal began in 1985, with monthly payments of
approximately $6,667 ($80,001 per annum) plus interest. The interest
rate at December 31, 1995 and December 25, 1994 was 6.4%. After the
Revenue Bond is fully repaid in the year 1999, the Company is obligated
to pay an additional $18,000 and take legal title to the facility.
Accordingly, the Company has capitalized the assets related to this
agreement. (See Note 6).
F-12
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Future payments of this debt are summarized as follows:
1996 $ 80,001
1997 80,001
1998 80,001
1999 73,318
-------------
Total $ 313,321
=============
B) 10% Convertible Collateralized Debentures
In December 1995, the Company effected a private placement of $535,000
of 10% Convertible Collateralized Debentures ("Debentures"). An
additional $438,000 of these Debentures were sold through March 8, 1996.
The Debentures pay interest quarterly at 10% per year and are
convertible into common stock at a conversion price per share of $3.50
of face value. The Debentures may be called for redemption by the
Company after December 1, 1997 at premiums ranging from 103% to 105% of
face value. Beginning December 1, 1996, the Company can require
conversion if the Company's common stock trades at or above $5.50
(subject to future adjustment) for 10 consecutive trading days. Other
restrictions or requirements for conversion, such as an effective
registration statement, also apply. The holders of the Debentures have
certain demand and other registration rights upon conversion.
The Debentures are collateralized with certain current assets (except
accounts receivable) and certain fixed assets, subject to existing
mortgage and lease obligations. As of the last day of each fiscal
quarter the collateral shall have a value of at least 150% of the amount
of the outstanding obligations and meet certain other requirements. As
of December 31, 1995, the Company was in compliance with these
collateral requirements.
The Company is subject to default provisions for not meeting collateral
requirements, failure to make timely interest payments and other
standard representations and covenants. The Company is in compliance
with such terms and conditions.
The Debentures are due November 30, 2000 if not converted or called
prior to maturity.
C) Capital Leases
The Company leases a variety of computer hardware and software and
special equipment for its Image Synthesis and video laboratories, and
other office equipment under capital leases. The fixed assets under
capital leases are shown in Note 6.
The following is a schedule of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments as of December 31, 1995:
F-13
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Year
1996 $ 185,331
1997 79,382
1998 64,739
1999 20,383
2000 14,586
------------
Total minimum lease payment 364,421
Less: Amount representing interest 73,393
Present value of net minimum lease payments $ 291,028
============
5. Major Customer Information
The Company operates primarily in one segment, which is technical
services consulting. A major portion of the Company's revenues has been
derived from contracts, or subcontracts thereunder, with departments or
agencies of the U.S. Government, primarily the military services and
other departments and agencies of the Department of Defense. Contract
revenues from programs for the U.S. Government accounted for
approximately 82% for 1995 and 88% for 1994 of total revenues.
The Company's largest contract is to support the Transportation
Safeguards Division, Department of Energy (DoE), Kirtland Air Force
Base, NM. This contract is to develop and conduct training for nuclear
materials couriers. The Company previously had this contract but it
ended in November 1991 as the succeeding contract was awarded to another
party. In 1991, this operation accounted for 15% of revenues. The
Company contested this award by protesting to the General Accounting
Office (GAO). DoE admitted to GAO that a flawed process was applied by
DoE in this procurement. The previously successful bidder was
disqualified and a reprocurement was won by the Company. In September
1993, a $1.4 million letter contract was executed and work commenced. A
contract for $16.3 million for the entire project was negotiated and
definitized in March 1994. This contract is funded on an annual basis by
the DoE. The Company is in the third year of the initial three year
period for renewed support of DoE Transportation Safeguards Division,
with two following optional years. The contract accounted for 19% ($2.7
million) and 21% ($3.2 million) of total revenues for 1995 and 1994,
respectively.
The Company continues work which began in 1990 with Motorola, Inc.
assisting in the design of the Iridium(R) satellite constellation that
will provide global wireless communications to handheld telephones and
pagers. The Company's contract to perform such work amounted to over 16%
($2.3 million) of revenues in 1995 and 9% ($1.5 million) in 1994.
F-14
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company has contracts with the U.S. Navy to provide engineering and
logistics support for various undersea programs. Revenues derived from
these programs were 14% ($2.0 million) and 6% ($1.0 million) of total
revenues for 1995 and 1994, respectively.
In 1994, the Company was competitively awarded a $3.6 million program to
design and build aviation trainers for the U.S. Navy. The Company is
performing mechanical, electrical and software design, engineering and
production of a total of 172 trainers of eight types for delivery to the
Naval Air Station in Pensacola, Florida. Revenues from this program were
$1.6 million (11%) in 1995 and $0.9 million (6%) in 1994. This program
is scheduled for completion in 1996.
The Company continues a major subcontract with Teledyne Brown
Engineering in Huntsville, Alabama for support to NASA. This contract
has been ongoing since 1978 to provide simulation and training for Space
Shuttle flight crews and science teams in support of all Spacelab
Missions. Additionally, the Company provides concept development,
research and final production for brochures, reports, training aids and
historical documentation for the Spacelab Program and Microgravity
Experiment Projects. This effort provided approximately 5% ($0.7
million) of the Company's 1995 revenues and 5% ($0.8 million) in 1994.
6. Commitments and Contingencies
Lease Obligations
Leases that meet the criteria requiring capitalization as specified
in Statement of Financial Accounting Standards No. 13 "Accounting
for Leases" are capitalized. Such assets and the related liabilities
(See Note 4) are included in the accompanying balance sheet.
Property and equipment includes the following amounts for
capitalized leases.
1995
Land $ 195,175
Buildings and improvements 1,059,625
Production and special equipment 336,765
Furniture and equipment 85,878
----------------
1,677,443
Less-depreciation taken 397,735
$ 1,279,708
The Company leases equipment and certain office facilities under
operating leases generally ranging from one to five years with options
to renew. The leases contain provisions to pay for proportionate
increases in operating costs and property taxes. The Company is
committed to pay aggregate rentals under these leases as follows:
F-15
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1996 $ 450,227
1997 414,123
1998 276,270
1999 42,805
--------------
$ 1,183,425
Rental expense charged to operations, including payments made under
short-term leases, amounted to $844,000 and $1,617,000 in 1995 and 1994,
respectively.
Lease Settlement
The Company was in a legal dispute with the landlord of its former
corporation headquarters and Information Systems Division facility.
Effective July 1994, the parties entered into a Settlement Agreement
("Agreement"). Under the Agreement, the Company agreed to make deferred
rent cash payments of $250,000; contingent rent payments up to $550,000
from future earnings and/or proceeds from common stock sales or asset
sales; an additional contingent payment up to $250,000 from any net
proceeds awarded from settlement of an outstanding lawsuit; and issued an
option to purchase up to 125,000 shares of the Company's stock at an
exercise price (subject to adjustment) of $2 per share. The landlord
released the Company from outstanding and future rent or other
obligations arising from the leases.
Starting July 1994, the Company began to make the deferred cash rent
payments over 25 months at $10,000/month. As additional rent, the Company
is obligated to make contingent cash payments of 25% of future earnings
(as defined) or 10-15% of the net proceeds from the sale of common stock
or operating assets, the total of such payments not to exceed $550,000.
The Company issued an option for the landlord to purchase up to 125,000
shares of the Company's unregistered common stock at an option price of
$2 per share. The option is exercisable through December 31, 2004 and has
certain registration rights upon exercise of the option. Prior to 1995,
the Company expensed $800,000 toward amounts potentially due under the
above terms of this Agreement and recognized a $35,000 expense for the
estimated value of the option.
Contingent amounts due, if any, are to be paid quarterly. The period for
computation of such contingent payments ends December 2004. Through
December 31, 1995, contingent amounts totalling approximately $241,000
have been earned, paid and charged against the accrual. The $379,000
total accrual as of December 31, 1995 is comprised of $70,000 to be paid
ratably over the next 7 months and the remaining contingent portion which
is probable to be paid over the applicable consideration period.
Also under the Agreement, the Company agreed to pay 20% not to exceed
$250,000 from the net award or settlement from the lawsuit against a
competitor described below. When this legal proceeding is concluded, then
the appropriate amount payable to the former landlord will be calculated
and expensed.
F-16
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Legal Proceeding
On March 1, 1996, the Company and a corporate defendant agreed to reach
an out-of-court settlement of the Company's previously reported 1994
lawsuit pending in the United States District Court in Albuquerque, New
Mexico. No Settlement Agreement has been executed, and the express terms
of the Settlement Agreement, including terms regarding the
confidentiality of the settlement, remain to be definitized. Until full
payment is received by the Company, it is Management's opinion that there
can be no certainty concerning payment to the Company. Under the proposed
terms of the settlement, the Company expects to net approximately $2.2
million from this legal settlement after payment of contingent attorney's
fees and related expenses. The Company had previously expensed
approximately $500,000 in legal fees and related expenses since 1994 when
the suit was originally filed.
7. Retirement Plan
The Company has a qualified defined contribution retirement plan, the
Essex Corporation Retirement Plan and Trust, which includes a salary
reduction 401(k) feature for its employees. The Plan calls for an
employer matching contribution of up to 3% of eligible employee
compensation under the salary reduction feature and allows for a
discretionary contribution. Discretionary contributions are determined
annually by the Board of Directors. Total authorized contributions under
the matching contribution feature of the Plan were approximately $145,000
in 1995 and 1994. There were no discretionary contributions in these
years.
In accordance with the retirement plan and trust, as amended, such
authorized contributions and the resulting annual expense can be reduced
by forfeitures by terminated employees of unvested amounts of prior
years' contributions. For 1994, such forfeitures were approximately
$7,000. The 1994 retirement contribution payable and corresponding
expense was reduced accordingly to $138,000. There were no such
forfeitures utilized in 1995.
8. Income Taxes
The Company records income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes". The components of the Company's net deferred tax asset
account are as follows as of December 31, 1995 and December 25, 1994:
F-17
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1995 1994
-------------- ---------
Acquisition NOL and tax credit carryforward $ 340,100 $ 479,000
NOL carryforward 692,700 208,700
Tax credit carryforward 105,000 116,000
Allowance for doubtful accounts 72,100 78,300
Depreciation and amortization (153,100) (40,900)
Accrued employee benefit costs 92,100 135,000
Lease settlement accrual 132,700 281,200
Other (66,200) 8,200
Valuation Reserve (1,215,400) (1,265,500)
-------------- -------------
Net Deferred Tax Asset $ -0- $ -0-
============== =============
As a result of an acquisition, the Company has net operating loss (NOL)
and tax credit carryforwards of $726,000 and $86,000, respectively, that
are available, subject to certain limitations, to offset future book and
taxable income and taxes payable. The net operating loss and the tax
credits begin to expire in 2001 and 1997, respectively. These
carryforwards, when utilized, will be used partially to offset previously
recorded goodwill.
The Company also has a regular NOL of $1,979,000 and tax credit
carryforwards of $105,000 that are available, subject to certain
limitations, to offset book income and future taxes payable. The NOL and
tax credit carryforwards expire through 2011 and 2007, respectively.
The evaluation of the realizability of such deferred tax assets in future
periods is made based upon a variety of factors for generating future
taxable income, such as intent and ability to sell assets and historical
and projected operating performance. At this time, the Company has
established a valuation reserve for all of its deferred tax assets. Such
tax assets are available to be recognized and benefit future periods.
The Company recorded no benefit or provision for income taxes in 1994.
The components of the benefit from income taxes in 1995 consisted of the
following:
1995
Currently Payable
Federal $ (12,797)
State 5,751
---------------
(7,046)
Deferred
Federal --
State --
--
Total $ (7,046)
===============
F-18
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Stock Option and Stock Bonus Plans; Other Stock Options
The Company has an Option and Stock Appreciation Rights (SAR) Plan and an
Incentive Stock Option Plan. No SARs are outstanding.
The Option and Stock Appreciation Rights Plan was adopted in March 1988.
This Plan reserves 850,000 shares of the Company's unissued shares for
option and SAR grants. Options, which may be tax qualified (ISOs) and
non-qualified (NSOs), are exercisable for a period of up to 10 years at
prices at or below market price as established on the date of grant. The
activity in this plan for the last two years is as follows.
Number of Shares Price Per Share
Outstanding, 12/26/93 573,811 $ 2.46 - $ 3.43
Granted 166,811 $ 2.50 - $ 2.52
Canceled/Expired (126,811) $ 2.46 - $ 3.43
-------------
Outstanding, 12/25/94 613,811 $ 2.50 - $ 3.00
Granted 107,550 $ 3.08 - $ 3.50
Canceled/Expired (48,500) $ 2.50 - $ 2.52
-------------
Outstanding, 12/31/95 672,861 $ 2.50 - $ 3.50
=============
Exercisable, 12/31/95 485,932
=============
There are 177,139 shares available for future grants of options or SARs.
This Plan results in a charge to expense when options are granted below
market price. Upon the exercise of a stock appreciation right, the
recipient will receive payment in the form of stock, cash, or both, as
determined by the Company, equal to the appreciation in value of the
shares as to which the rights were awarded. In addition, increases and
decreases in the market price of the stock also cause an increase in or
reduction to plan expense to record the impact of the SARs outstanding.
For 1995 and 1994, there was no impact on the results of operations for
options or SARs outstanding under this plan.
The Incentive Stock Option Plan expired in March 1992 and no additional
options can be granted. The Plan reserves shares of the Company's
unissued shares for options previously granted. At December 31, 1995,
there were 154,900 options granted at prices ranging from $2.52 to $3.25
per share, as follows:
Shares Option Price
Outstanding at December 26, 1993 169,400 $ 2.52 - 3.25
Expired (6,000) $ 2.52
------------
Outstanding at December 25, 1994 163,400 $ 2.52 - 3.25
Expired (8,500) $ 2.52 - 3.00
------------
Outstanding and exercisable
at December 31, 1995 154,900 $ 2.52 - 3.25
============
F-19
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company has a Restricted Stock Bonus Plan covering key employees and
directors of the Company. The Plan can reserve up to 50,000 of the
Company's unissued shares for awards. The Board awarded 12,000 shares in
1995 and no shares in 1994. As of December 31, 1995, there were 22,050
shares available for award under the Plan.
In July 1994, the Company issued an option for 125,000 shares of
unregistered common stock under a lease settlement (see Note 6). The
option is exercisable through December 31, 2004 at an exercise price of
$2.00 per share. The option price is subject to adjustment under
anti-dilution provisions of the option agreement. The optionholders have
certain registration rights for these shares of common stock.
10. Common Stock Offerings; Warrants
In July 1995, the Company successfully completed a $2.5 million Stock
Offering ("Offering"). The Company sold 25,000 Units for $2,500,000 and
received such proceeds less offering costs. The net proceeds of
approximately $2 million are recognized as increases to the common stock
and contributions in excess of par value accounts. Through the Offering,
the Company sold 25,000 Units consisting of 1,750,000 newly issued shares
of common stock and warrants (expiring June 30, 1998 and exercisable at
$75.00 for 25 shares) to obtain an additional 625,000 new shares.
Proceeds from the Offering have been used for general business purposes
including, principally, development of commercial products. During the
fiscal year ended December 31, 1995, approximately $1,254,000 as shown in
the statement of operations, was expended for ImSyn(TM) prototype
development and $183,000 for parts inventory. A portion of the net
proceeds ($241,000) was used to partially satisfy the contingent
obligation to the landlord.
In connection with the Offering, the Company entered into a Placement
Agency Agreement with a registered broker/dealer. In addition to cash
compensation, the broker/dealer received warrants for 175,000 shares of
common stock. The warrants are exercisable through December 1, 1999 at a
price of $2.30 per share, subject to adjustment under anti-dilution
provisions of the Warrant Agreement. The warrant holders have certain
registration rights for these shares of common stock.
In connection with the issuance of the 10% Convertible Collateralized
Debentures Due 2000, the Company will reserve approximately 400,000
shares of common stock for conversion. In addition, the Company has
issued Warrants to the broker/dealer for 15,300 shares of common stock
through December 31, 1995, and issued warrants for 13,300 shares
subsequent to yearend. The warrants are exercisable through December 1,
2000 at a price of $3.50 per share, subject to adjustment under
anti-dilution provisions of the Warrant Agreement. The warrant holders
have certain registration rights for these shares of common stock. The
Company has also issued warrants for 30,000 shares to the purchasers of
the Debentures under essentially the same terms and conditions as the
Warrants issued to the broker/dealer through December 31, 1995, and will
issue warrants for up to 48,400 shares subsequent to yearend.
F-20
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company has reserved approximately 1,307,000 shares of common
stock in connection with the possible exercise of all such warrants.
</FN>
</TABLE>
F-21
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the shares
of Common Stock to which it relates, nor does it constitute an offer to or
solicitation of any person in any jurisdiction in which such solicitation or
offer would be unlawful. All information contained in this Prospectus is as of
the date of this Prospectus. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to the date hereof.
----------------
TABLE OF CONTENTS
Page
Prospectus Summary...........................................................3
Risk Factors.................................................................6
Use of Proceeds.............................................................13
Capitalization..............................................................14
Business....................................................................15
Properties..................................................................22
Management..................................................................24
Executive Compensation......................................................28
Principal Stockholders......................................................33
Management's Discussion and Analysis........................................35
Description of Securities...................................................40
Market for the Common Equity and Related
Stockholder Matters .......................................................42
Dividend Policy.............................................................43
Shares Eligible for Future Sale.............................................43
Plan of Distribution........................................................44
The 1995 Offering...........................................................44
Landlord Settlement Obligations.............................................44
Legal Proceedings...........................................................45
Legal Matters...............................................................46
Experts.....................................................................46
Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities.........................................46
Additional Information......................................................46
Financial Statements.......................................................F-1
-----------------
<PAGE>
ESSEX CORPORATION
624,900 Shares of Common Stock
PROSPECTUS
May 8, 1996
