<PAGE> 1
FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File No. 0-10772
ESSEX CORPORATION
(Name of small business issuer in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (301) 953-7797
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of each class Name of each exchange on which
registered
- --------------------
- -----------------------------------------
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Each Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months
(or for such shorter period that the registrant was required to
file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X
--
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. YES X
--
State issuer's revenues for its most recent fiscal year.
$14,192,934
- ----------
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the
stock
was sold, or the average bid and asked prices of such stock, as of
a specified date within the past 60 days. $8,642,000 as of March 4,
1996 ----------
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding at February 29, 1996
----- --------------------------------
Common Stock, par value $0.10 per share 3,586,073
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT Part of Report on Form 10-KSB
into
Which Document is Incorporated
Portions of Registrant's Proxy Statement Part III, Items 10-12 and
used in connection with the 1996 Annual Item 9 as to Directors
Meeting of Shareholders ("1996 Proxy Statement")
Portions of Exhibits filed with Registration Part III, Item
13(a)(2)
Statement on Form SB-2,
Registration No. 33-82920
===================================================================
A list of the Exhibits and Financial Statement Schedules in this
Report on Form 10-KSB appears on page 24.
<PAGE> 3
Table of Contents
FORM 10-KSB
Essex Corporation
PART I
Item No.
Page
- -- INTRODUCTORY STATEMENT
3
1. DESCRIPTION OF BUSINESS
3
2 DESCRIPTION OF PROPERTIES 11
3. LEGAL PROCEEDINGS 12
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 13
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 13
7. FINANCIAL STATEMENTS 18
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 19
10. EXECUTIVE COMPENSATION 23
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 23
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
13. EXHIBITS AND REPORTS ON FORM 8-K 24
<PAGE> 3
PART I
INTRODUCTORY STATEMENT
The information contained in this report pertains to the
registrant, Essex Corporation (the "Company").
1. DESCRIPTION OF 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:
Simulators, Trainers and Interactive Training Materials
Systems Engineering, Logistics and Information Technology
Mechanical and Electromechanical Assembly
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.
<PAGE> 4
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.
IMSYN(trade mark) PROCESSOR - The Company has diligently pursued
application of its proven laser-based optoelectronic technologies
toward the realization of the patented ImSyn(trade mark) processor.
The ImSyn(trade mark) 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(trade mark), 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(trade mark) 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(trade mark) 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(trade mark) 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(trade mark) 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(trade mark) 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
<PAGE> 5
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(trade mark) 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(trade mark)
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(trade
mark) Processor has advanced to the commercial prototype phase.
A proof-of-principle model of the Company's Hawkeye(trade mark)
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(trade mark) correlator program, the
ImSyn(trade mark) 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.
<PAGE> 6
Under its Iris(trade mark) 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(trade mark)
technology is being studied for use on a planned satellite under a
small research contract.
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
<PAGE> 7
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 IRIDIUMR
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
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. 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). In 1995 and 1994, approximately 82% and 88%,
respectively, of the Company's total
<PAGE> 8
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 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.
<PAGE> 9
COMMERCIAL PROGRAMS AND PRODUCTS
- --------------------------------
The Company is endeavoring to expand the commercial portion
ofits 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 IridiumR 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 IridiumR 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.
The Company is developing acousto-optic hardware utilizing its
proprietary ImSyn(trade mark) 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(trade mark), 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(trade mark).
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
<PAGE> 10
covering ImSyn(trade mark) and related imaging technology. The
Company has begun to apply the ImSyn(trade mark) 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(trade mark) technology in addition
to
a new sensing procedure. The Company also plans to apply the
ImSyn(trade mark) 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(trade mark) 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.
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(trade mark) processor products, and products
and
services directed toward Containing Human Error in the
Workplace(service mark) such as Delta(trade mark). The Company
endeavors to control human error in a variety of settings by
applying its well-established capabilities in Human-Centered
Systems
Engineering(service mark), 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.
<PAGE> 11
2. DESCRIPTION OF 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.
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(trade mark)) 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
<PAGE> 12
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.
3. 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. 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.
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 Note 6 in
the Notes To Financial Statements section for further discussion of
this matter.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1995 to a
vote of the Company's security holders, either through the
solicitation of proxies or otherwise.
<PAGE> 13
PART II
5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on The Nasdaq SmallCap
Market(service mark) tier of the Nasdaq Stock Market(service mark)
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.
6. 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(service mark) and Optoelectronic Engineering. The
Company allocates its operations to the following business units.
Systems Effectiveness Division (SED)
Federal Systems Division (FSD) [formerly Space and Defense
Division (SDD) and Information Systems Division (ISD)]
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(trade
mark) 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(trade mark) optoelectronic processor. In
anticipation of the success of the Stock Offering, the Company
began
modest efforts on development of its first ImSyn(trade mark)
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
<PAGE> 14
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(trade
mark) 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(trade mark) 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 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(trade mark) 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(trade mark) prototype unit and has
begun work on initial units for inventory in anticipation of sales
<PAGE> 15
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(trade mark) 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 1% ($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(trade mark) 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 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(trade mark) development,
lawsuit prosecution and legal settlement.
Throughout 1995, the Company incurred expenses in connection
with the development of the ImSyn(trade mark) 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
<PAGE> 16
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 $174,000 in 1994.
While the Company recognized the majority of its remaining tax
benefit amount recoverable from the carryback of net operating
losses prior to 1994, a small income tax refund was received and
credited in 1995. The Company is in a net operating loss (NOL)
carryforward position. Otherwise, no provision or benefit from
income taxes has been recognized for 1995 or 1994.
LIQUIDITY AND CAPITAL RESERVES
The Company evaluates its liquidity position using various
factors. The following represents some of the more important
factors based upon actual results through yearend 1995.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ 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.
<PAGE> 17
The 1995 net loss was primarily attributable to expenditures in
connection with development of the ImSyn(trade mark) 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 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 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 10 consecutive trading days. The
<PAGE> 18
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.
7. FINANCIAL STATEMENTS
See Item 13(a)(1) in Part III of this Form 10-KSB.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 19
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Directors* and executive officers elected by the Board are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <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.
(3) Member of the Ethics Committee of the Board of Directors.
</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
<PAGE> 20
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 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.
<PAGE> 21
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.
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.
<PAGE> 22
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
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
<PAGE> 23
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.
10. EXECUTIVE COMPENSATION
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10, 11 and 12 and certain
additional information required by Item 9 is hereby incorporated by
reference from the Proxy Statement which will be filed within 120
days after yearend, which is the prescribed period.
<PAGE> 24
13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Report of Independent Public Accountants 26
Balance Sheet 27
Statements of Operations 28
Statements of Changes in Stockholders' Equity 29
Statements of Cash Flows 30
Notes to Financial Statements 31 - 45
(2) Exhibits
(i) Exhibit 3(i) - Articles of Incorporation
and Amendments thereto
B
Exhibit 3(ii) -By-Laws, as amended.
Filed as Exhibits 3(i) and 3(ii) to
Registrant's Registration Statement on
Form SB-2 filed October 17, 1994,
Registration No. 33-82920
(ii) Exhibit 4 - Instruments defining the Rights
of Holders
4.1 Form of Warrant Agreement with Mellon
Bank
C
4.2 Specimen of Warrant Certificate
C
4.3 Specimen of Common Stock Certificate
C
4.4 Warrant Agreement with J. Michael
Reisert, Inc.
D
4.5 Specimen of Placement Agent's Warrant
Certificate
D
4.6 Form of 10% Convertible Collateralized
Debenture
A
4.7 Form of Series B Warrant
A
(iii) Exhibit 10 - Material Contracts
10.1 Employment Agreement dated
C
April 8, 1988, between
Dr. Harry Letaw, Jr. and Registrant
10.3 Restricted Stock Bonus Plan
C
10.4 Option and Stock Appreciation Rights
Plan
C
10.5 Incentive Stock Option Plan
C
10.6 Pension Plan and Trust Agreement
C
10.7 Defined Contribution Retirement Plan
C
10.8 Incentive Performance Award Plan
C
10.9 Line of Credit Agreement with Signet
Bank
A
10.10 Settlement Agreement between the
C
Company and Rumsey Associates Limited
Partnership
10.11 Option Agreement between the Company
C
and Rumsey Associates Limited
Partnership
10.13 Registration Rights Agreement
C
10.14 Contract between the U.S. Department of
C
Energy and the Company
(iv) Exhibit 23 - Consents of Experts and Counsel
23.1 Consent of Independent Public 46
Accountants
(v) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
A
(b) Reports on Form 8-K
None
- -----------------------
A Filed herewith
B Incorporated by reference as indicated
C Filed as Exhibit to Registrant's Registration Statement on Form
SB-2 filed October 17, 1994, Registration No. 33-82920
D Filed as Exhibit to Registrant's Registration Statement on Form
SB-2 filed February 17, 1995, Registration No. 33-82920
<PAGE> 25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
Harry Letaw, Jr.
By: ------------------------------------------------
Harry Letaw, Jr.
Chairman of the Board, Chief Executive Officer
and President; Principal Executive Officer
March 8, 1996
Joseph R. Kurry, Jr.
By: --------------------------------------------------
Joseph R. Kurry, Jr.
Vice President, Treasurer and Chief Financial
Officer; Principal Financial and Accounting Officer
March 8, 1996
In accordance with the Exchange Act, this report has been
signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Harold P. Hanson
__________________________________________________
Harold P. Hanson, Director
March 8, 1996
Robert W. Hicks
__________________________________________________
Robert W. Hicks, Director
March 8, 1996
Samuel Hopkins
__________________________________________________
Samuel Hopkins, Director
March 8, 1996
Ray M. Keeler
__________________________________________________
Ray M. Keeler, Director
March 8, 1996
Frank E. Manning
__________________________________________________
Frank E. Manning, Director
March 8, 1996
A. William Perkins
__________________________________________________
A. William Perkins, Director
March 8, 1996
<PAGE> 26
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.
Arthur Andersen LLP
Arthur Andersen LLP
Washington, D.C.,
March 8, 1996
<PAGE> 27
<TABLE>
<CAPTION>
ESSEX CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS
------
Current Assets
- --------------
<S> <C>
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
____________ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
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.
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
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
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(trade mark) 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)
- ------------------ ================ ===============
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
ESSEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD DECEMBER 26, 1993 TO DECEMBER 31, 1995
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.
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
OR 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.
</TABLE>
<PAGE> 31
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
<PAGE> 32
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(trade mark)
optoelectronic processor for which initial production began in late
1995.
<TABLE>
<CAPTION>
1995
-------------
<S> <C>
Purchased Parts $ 97,280
Systems in-process 86,141
-------------
$183,421
=============
</TABLE>
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.
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
<PAGE> 33
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 which 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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
A. Cash paid during the year for-
<S> <C> <C>
Interest $ 78,000 $ 189,000
Income taxes $ 5,700 $ 15,000
</TABLE>
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 obligations of $477,000 (net present value) were
incurred during 1995 when the Company entered into various
leases
for new equipment.
<PAGE> 34
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
<PAGE> 34
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:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
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)
-----------
$ 2,655,046
===========
</TABLE>
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.
<PAGE> 36
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.
<TABLE>
<CAPTION>
A) Industrial Revenue Bond
1995
--------------
<S> <C>
Industrial Development First
Mortgage Revenue Bond $ 313,321
Less: Current portion 80,001
--------------
Long-term debt $ 233,320
===============
</TABLE>
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).
<PAGE> 37
<TABLE>
<CAPTION>
Future payments of this debt are summarized as follows:
<S> <C>
1996 $ 80,001
1997 80,001
1998 80,001
1999 73,318
----------
Total $ 313,321
==========
</TABLE>
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.
<PAGE> 38
<TABLE>
<CAPTION>
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:
Year
----
<S> <C>
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
=============
</TABLE>
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 IridiumR 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.
<PAGE> 39
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.
<TABLE>
<CAPTION>
1995
-----------------
<S> <C>
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
=================
</TABLE>
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:
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C>
1996 $ 450,227
1997 414,123
1998 276,270
1999 42,805
-----------
$ 1,183,425
===========
</TABLE>
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.
<PAGE> 41
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:
<PAGE> 42
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
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-
============= ============
</TABLE>
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 and 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:
<TABLE>
<CAPTION>
1995
--------------
Currently Payable
- -----------------
<S> <C>
Federal $ (12,797)
State 5,751
--------------
(7,046)
--------------
Deferred
- --------
Federal --
State --
--------------
--
--------------
Total $ (7,046)
==============
</TABLE>
<PAGE> 43
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.
<TABLE>
<CAPTION>
Number of Shares Price Per
Share
----------------
- ---------------
<S> <C> <C> <C>
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
========
</TABLE>
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:
<TABLE>
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C> <C>
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
=======
</TABLE>
<PAGE> 44
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(trade mark)
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.
<PAGE> 45
The Company has reserved approximately 1,307,000 shares of common
stock in connection with the possible exercise of all such
warrants.
<PAGE> 46
ESSEX CORPORATION
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent
to
the incorporation of our report dated March 8, 1996, included in
this Form 10-KSB, into Essex Corporation's previously filed
Registration Statement on Form S-8, File No. 33-47900.
Arthur Andersen LLP
Arthur Andersen LLP
Washington, D.C.,
March 8, 1996
<PAGE> 1
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND WAS ACQUIRED BY THE REGISTERED HOLDER
PURSUANT TO A REPRESENTATION AND WARRANTY THAT SUCH HOLDER WAS
ACQUIRING SUCH INDEBTEDNESS FOR SUCH HOLDER'S OWN ACCOUNT WITHOUT
A
VIEW TOWARD DISTRIBUTION. NEITHER THIS DEBENTURE NOR THE COMMON
STOCK UNDERLYING THIS DEBENTURE MAY BE PLEDGED, HYPOTHECATED, SOLD
OR TRANSFERRED IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION
STATEMENT FOR THE DEBENTURE UNDER SAID ACT OR AN OPINION OF
COUNSEL,
WHICH OPINION IS SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY,
TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SAID ACT
OR SUCH TRANSACTION COMPLIES WITH RULES PROMULGATED BY THE
SECURITIES AND EXCHANGE COMMISSION UNDER SAID ACT.
NO. $
------- ------------------
ESSEX CORPORATION
10% Convertible Collateralized Debenture
Due 2000
ESSEX CORPORATION, a corporation duly organized and existing under
the laws of the Commonwealth of Virginia, hereinafter referred to
as
the "Company," whose address is 9150 Guilford Road, Columbia,
Maryland 21046-1891, for value received, hereby promises to pay to
the order of (Name of Debenture Holder), whose address is (Address
of Debenture Holder), the principal sum of (Amount) ($) DOLLARS, on
the 30th day of November, 2000, hereinafter referred to as the
"Maturity Date," upon presentation and surrender of this Debenture
at the office or agency of the Company, and to pay interest thereon
at such office or by mail to the registered address of the owner
hereof from the date hereof at the rate of Ten (10%) percent per
annum, quarterly, on the last day of February, May, August and
November of each year, commencing February 29, 1996, until payment
of such principal sum has been made or duly provided for.
1. Series.
------
This Debenture is one of a duly authorized issue of debentures of
the Company designated as its 10% Convertible Collateralized
Debentures Due 2000, hereinafter referred to as the "Debentures,"
limited to the aggregate principal amount of One Million Four
Hundred Thousand Dollars ($1,400,000), issued or to be issued.
2. Equal Rank.
----------
All Debentures of this issue rank equally and ratably without
priority over one another.
3. Default.
-------
In the event the Company fails to make any payment of principal and
interest within fifteen (15) days of the time required to be made,
any holder obtaining a final judgment (the "Final Judgement") as a
result thereof shall be entitled to proceed against the Collateral
of the Company pursuant to the terms of the Security
<PAGE> 2
Agreement (as such terms are hereinafter defined) limited to a
fraction, the numerator of which shall be the principal amount of
the Debenture included in the Final Judgment and the denominator of
which shall be the aggregate amount of the principal of all
Debentures of this series then outstanding and multiplied by the
value of the Collateral, but in no event greater than the amount of
the Final Judgment.
4. Conversion.
----------
(a) The holder of this Debenture has the right at any time prior
to
the Maturity Date or the date of redemption, whichever is
applicable, to convert (1) in the case of conversion prior to the
Maturity Date, the entire principal amount, and only the entire
principal amount, hereof and (2) in the case of conversion prior to
the date of redemption, the principal amount of this Debenture
which
is to be redeemed on such date into one (1) share of the Company's
Common Stock, $.10 par value per share (a "Conversion Share") at a
price of $3.50 of outstanding principal amount of such Debenture
per
share (the "Conversion Price"), subject to adjustment as set forth
herein.
(b) On or after December 1, 1996, provided the average of the
closing bid prices or the last reported sales price of the
Company's
Common Stock equals or exceeds One Hundred Fifty-Seven (157%)
percent of the Conversion Price for at least ten (10) consecutive
trading days ending within fifteen (15) days of the date the notice
of call is given, the Company shall have the right to call all, but
not less than all, of the Debentures for conversion, together with
payment in cash of accrued interest thereon to the occurrence of
conversion, at the office or agency of the Company, accompanied by
written notice of conversion and accompanied by a written
instrument
of transfer in form satisfactory to the Company duly executed by
the
registered holder or his duly authorized attorney.
If a registration statement (the "Conversion Registration
Statement") under the Securities Act of 1933, as amended (the
"Act")
covering the Conversion Shares is then in effect and current or in
the opinion of counsel to the Company the Conversion Shares are
otherwise freely transferable without registration, such conversion
shall occur upon the date of the notice but if the Conversion
Registration Statement is not then in effect and current or the
Conversion Shares are not otherwise freely transferable without
registration, such conversion shall occur upon the effective date
of
the Conversion Registration Statement.
(c) The Conversion Price in effect from time to time shall be
subject to adjustment, as follows:
(1) In the event the Company shall:
(A) declare a dividend or make a distribution on the
outstanding shares of its capital stock that is payable in shares
of
its Common Stock,
(B)subdivide, split or reclassify the outstanding shares
of its Common Stock into a greater number of shares, or
<PAGE> 3
(C)combine or reclassify the outstanding shares of its
Common Stock into a smaller number of shares, the Conversion Price
in effect immediately after the record date of such subdivision,
combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Conversion Price in
effect immediately prior thereto by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding
immediately before such dividend, distribution, split, subdivision,
combination or reclassification, and of which the denominator shall
be the number of shares of Common Stock outstanding immediately
after such dividend, distribution, split, subdivision, combination
or reclassification. Any shares of Common Stock issuable in
payment
of a dividend shall be deemed to have been issued immediately prior
to the record date for such dividend for purposes of calculating
the
number of outstanding shares of Common Stock of the Company. Such
adjustment shall be made successively upon the occurrence of each
event specified above.
(2) In the event the Company fixes a record date for the
issuance to all holders of its Common Stock of rights, options,
warrants or convertible or exchangeable securities generally
entitling such holders to subscribe for or purchase shares of
Common
Stock at a price per share less than the Current Market Price (as
such term is hereinafter defined) per share of Common Stock on such
record date, the Conversion Price shall be adjusted immediately
thereafter so that it will equal the price determined by
multiplying
the Conversion Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on such record date plus the number of
shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so offered would purchase at
the Current Market Price per share, and of which the denominator
shall be the number of shares of Common Stock outstanding on such
record date plus the number of additional shares of Common Stock
offered for subscription or purchase. Such adjustment shall be
made
successively on each date whenever a record date is fixed. To the
extent that any such rights, options, warrants or convertible or
exchangeable securities are not so issued or expire unexercised,
the
Conversion Price then in effect shall be readjusted to the
Conversion Price which would then be in effect if such unissued or
unexercised rights, options, warrants or convertible or
exchangeable
securities had not been issuable. Notwithstanding the foregoing
provisions of this paragraph, no adjustment shall be made to the
Conversion Price if the Company fixes a record date for the
issuance
to all holders of its Common Stock of rights, options, warrants or
convertible or exchangeable securities generally entitling such
holders to subscribe for or purchase shares of Common Stock if such
right is contingent, in whole or in part, upon the occurrence or
failure to occur of an event until such time, if any, as such event
occurs or fails to occur, as the case may be.
(3) In the event the Company fixes a record date for the
making of a distribution to all holders of its Common Stock:
(A)of shares of any class of capital stock other than its
Common Stock; or
(B)of evidences of indebtedness; or
(C)of assets (excluding cash dividends or distribution)
and
<PAGE> 4
dividends or distributions referred to in sub-paragraph (1) above;
or
(D)of rights, options, warrant or convertible or
exchangeable securities (excluding those rights, options, warrants
or convertible or exchangeable securities referred to in
sub-paragraph (2) above), then, in each such case the Conversion
Price in effect immediately after the record date shall be
determined by multiplying the Conversion Price in effect
immediately
prior thereto by a fraction, of which the numerator shall be the
total number of shares of Common Stock outstanding on the such
record date multiplied by the Current Market Price per share on
such
record date, less the aggregate fair market value as determined in
good faith by the Board of Directors of the Company of said shares
or evidences of indebtedness or assets or rights, options, warrants
or convertible or exchangeable securities so distributed and of
which the denominator shall be the total number of shares of Common
Stock outstanding on such record date multiplied by such Current
Market Price per share. Such adjustment shall be made successively
each time such a record date is fixed. In the event that such
distribution is not so made, the Conversion Price then in effect
shall be readjusted to the Conversion Price which would then be in
effect if such record date had not been fixed.
(4) For the purpose of any computation under sub-paragraphs
(1), (2) or (3) above or (5) below, the "Current Market Price" per
share at any date (the "Computation Date") shall be deemed to be
the
average of the daily closing prices of a share of the Company's
Common Stock of the twenty (20) consecutive trading days ending the
trading day before such date; provided, however, upon the
occurrence, prior to the Computation Date, of any event described
in
sub-paragraphs (1), (2) or (3) above which shall have become
effective with respect to market transactions at any time (the
"Market-Effect Date") on or after the beginning of such 20-day
period, the closing price for each trading day preceding the
Market-Effect Date shall be adjusted for purposes of calculating
such average, by multiplying such closing price by a fraction, the
numerator of which is the Conversion Price immediately after the
Market-Effect Date and the denominator of which is the Conversion
Price immediately prior to the Market-Effect Date, it being
understood that the purpose of this proviso is to ensure that the
effect of such event on the market price of the Common Stock shall,
as nearly as possible, be eliminated in order that the distortion
in
the calculation of the Current Market Price may be minimized.
(5) All calculations pursuant to sub-paragraphs (1), (2) or
(3) above shall be made to the nearest cent. Notwithstanding the
foregoing, no adjustment to the Conversion Price shall be made
until
the aggregate of all amounts that would have constituted
adjustments
but for the provisions of this sentence equal or exceed five (5%)
percent of the Conversion Price.
Upon each adjustment of the Conversion Price pursuant to
sub-paragraphs (1), (2) or (3) above, each Debenture shall
thereupon
evidence the right to purchase that number of shares of Common
Stock
(calculated to the nearest whole share) obtained by multiplying the
number of shares of Common Stock purchasable upon conversion of the
Debenture immediately prior to such adjustment by the Conversion
Price in effect immediately prior to such adjustment and dividing
the product so obtained by the Conversion Price in effect
immediately after such adjustment. Upon any such
<PAGE> 5
conversion, any fractional share issuance shall be paid by the
Company in cash at the Current Market Price.
(6) In the event of any reclassification, capital
reorganization or other change of outstanding shares of Common
Stock
of the Company, or in the event of any consolidation or merger of
the Company with or into another corporation (other than a merger
in
which merger the Company is the continuing corporation and which
does not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock of the class
issuable upon conversion of the Debentures) or in the event of any
sale, lease or conveyance to another corporation of the property of
the Company as an entirety (collectively, such actions being
hereinafter referred to as "Reorganizations"), the Company shall,
as
a condition precedent to such Reorganization transaction, cause
effective provisions to be made so that the holders of the
Debentures shall have the right thereafter by converting the
Debentures to receive in lieu of the number of shares of Common
Stock otherwise deliverable, the kind and amount of shares and
other
securities and property receivable upon such Reorganization by a
holder of the number of shares of Common Stock which might have
been
acquired upon conversion of the Debentures immediately prior to
such
Reorganization. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for herein. The foregoing
provisions shall similarly apply to successive Reorganizations.
(7) Notwithstanding anything herein to the contrary, the
Conversion Price shall not exceed the price of any shares of the
Company's Common Stock:
(A)issued within One Hundred and Eighty (180) days after
the date hereof or issuable upon exercise of or conversion of
securities (other than securities issued pursuant to existing
options, warrants or stock plans); or
(B)issued within One Hundred and Eighty (180) days after
the date hereof in a transaction whose purpose is to provide
financing to the Company.
5. Principal Obligation.
--------------------
No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the
principal of (and premium, if any) and interest on this Debenture
at
the place, at the respective times, and at the rate prescribed.
6. Redemptions.
-----------
On or after November 30, 1997, the Debentures may be redeemed prior
to the Maturity Date, as a whole, or from time to time in part pro
rata, at any time, at the office or agency of the Company upon
notice referred to below, at the following percentages of the
principal amount together with accrued interest to the date fixed
for redemption:
(a) between December 1, 1997 and November 30, 1998 - One Hundred
Five (105%) percent of the principal amount;
(b) between December 1, 1998 and November 30, 1999 - One Hundred
Four (104%) percent of the principal amount; and
<PAGE 6>
(c) between December 1, 1999 and November 29, 2000 - One Hundred
Three (103%) percent of the principal amount.
Notice of redemption to the holders of Debentures shall be given
upon thirty (30) days' written notice by certified mail to the
registered address of all of the holders of all outstanding
Debentures. Not later than five (5) days prior to any redemption
date, the Company shall deposit with a bank or other financial
institution an amount of money (in immediately available funds)
sufficient to pay in full the redemption price of, and accrued
interest on, all the Debentures (or portion thereof) which are to
be
redeemed on such redemption date, and shall certify compliance with
such requirement to any holder of a Debenture upon the request of
such holder prior to such redemption date.
7. Transferability.
---------------
This Debenture shall pass by delivery by transfer hereof made at
such office or agency of the Company by the registered holder
hereof
or by his attorney duly authorized in writing and similarly noted
hereon.
8. Registered Owner.
----------------
The Company may treat the person whose name appears above as the
absolute owner hereof for the purpose of receiving payment of, or
on
account of, the principal or interest due hereon and for all other
purposes.
9. Transfer Restricted.
-------------------
(a) The indebtedness represented by this Debenture has not been
registered under the Act and was acquired by the registered holder
pursuant to a representation and warranty that such holder was
acquiring such indebtedness for such holder's own account without
a
view toward distribution. This Debenture may not be pledged,
hypothecated, sold or transferred in the absence of any effective
registration statement for the Debenture under the Act or an
opinion
of counsel, which opinion is satisfactory in form and substance to
the Company, to the effect that such registration is not required
under the Act or such transaction complies with rules promulgated
by
the Securities and Exchange Commission under the Act.
(b) In addition to the foregoing, this Debenture may not be sold
or
transferred in the absence of the transferee executing the Limited
Power of Attorney in the form set forth as EXHIBIT A, attached
hereto and made a part hereof.
10. Collateral.
----------
This Debenture is secured by a Security Agreement dated December
29,
1995, hereinafter referred to as the "Security Agreement," executed
by the Company in favor of holders of the Debentures. Reference is
hereby made to the Security Agreement for a description of events
of
default and rights of acceleration of the Maturity Date in the
event
of default. It is expressly agreed that all of the covenants,
conditions and agreements contained in the Security Agreement are
made a part of this Debenture.
<PAGE> 7
11. Governing Law.
-------------
This Debenture shall be governed by and construed in accordance
with
the laws of the State of Maryland.
IN WITNESS WHEREOF, ESSEX CORPORATION has caused this Debenture to
be signed in its name by the signature of its President or one of
its Vice Presidents and attested by the signature of its Secretary
or one of its Assistant Secretaries.
Dated:
--------------
ESSEX CORPORATION
By:
--------------------------------
Joseph R. Kurry, Jr.
Its: Chief Financial Officer/Treasurer
Attest:
By:
--------------------------------
Sarah E. Roberts
Its: Assistant Secretary
<PAGE> 1
CERTIFICATE NO. Warrants
-------- ----------
SERIES B
-
VOID AFTER 5:00 P.M. COLUMBIA, MD TIME
ON NOVEMBER 30, 2000
ESSEX CORPORATION
Warrant Certificate
THIS CERTIFIES THAT for value received, (name of
warrant holder) or its registered assigns, is the owner
of the number of Warrants set forth above, each of which
entitles the owner thereof to purchase at any time until
5:00 p.m., Columbia, MD time on November 30, 2000 (the
"Warrant Expiration Date"), (no. of shares) fully paid
and nonassessable Common Shares, par value of $.10 per
share (the Common Shares"), of Essex Corporation, a
Virginia corporation (the "Company"), at the purchase
price of $3.50 per share (the "Exercise Price") upon
presentation and surrender of this Warrant Certificate
with the Form of Election to Purchase duly executed. The
number of Warrants evidenced by this Warrant Certificate
(and the number of shares which may be purchased upon
exercise thereof) set forth above, and the Exercise Price
per share set forth above, are the number and Exercise
Price as of the date of original issuance of the
Warrants, based on the Common Shares of the Company as
constituted at such date. As provided in the Warrant
Agreement dated (warrant agreement date), the Exercise
Price and the number or kind of shares which may be
purchased upon the exercise of the Warrants evidenced by
this Warrant Certificate are, upon the happening of
certain events, subject to modification and adjustment.
Warrants must be exercised for not less than all Warrants
held by holder.
No fractional Common Shares will be issued upon
the exercise of any Warrant or Warrants evidenced hereby,
but in lieu thereof a cash payment will be made, as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be
entitled to vote or receive dividends or be deemed the
holder of Common Shares or any other securities of the
Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained in
the Warrant Agreement or herein be construed to confer
upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon
any recapitalization, issue of stock, reclassification of
stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance, or otherwise)
or, except as provided in the Warrant Agreement, to
receive notice of meeting, or to receive dividends or
subscription rights or otherwise, until the Warrant or
Warrants evidenced by this Warrant Certificate shall have
been exercised and the shares shall have become
deliverable as provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise
within any period during which the transfer books for the
Company's Common Shares or other class of stock
purchasable upon the exercise of this Warrant are closed
for any purpose, the Company shall not be required to
make delivery of certificates for shares purchasable upon
such exercise until the date of the reopening of said
transfer books.
IN WITNESS WHEREOF, ESSEX CORPORATION has caused
the signature (or facsimile signature) of its Chief
Executive Officer or its Treasurer and Secretary or
Assistant Secretary to be printed hereon and its
corporate seal (or facsimile) to be printed hereon.
Dated: ESSEX CORPORATION
---------------
By:
(CORPORATE SEAL) -----------------------
Attest: Its:
By:
-------------------
Its:
<PAGE> 2
ASSIGNMENT
----------
(To Be Signed Only Upon Assignment)
For Value Received, the undersigned hereby sells,
assigns and transfers unto all warrants evidenced by the
within Warrant Certificate and appoints (name) to
transfer said Warrant Certificate and Warrants on the
books of Essex Corporation, with the full power of
substitution in the premises.
Date:
--------------------------------
In the presence of: ----------------------------
(Signature must conform in all
respects to the name of Warrant
Holder specified on the face of
the Warrant Certificate, without
alteration, enlargement or any
change whatsoever, and the
signature must be guaranteed in
the usual manner.)
SUBSCRIPTION FORM
-----------------
To Be Executed By The Warrant Holder
If He Desires To Exercise The Warrant)
To: Essex Corporation
- ------------------------------
- ------------------------------
- ------------------------------
The undersigned (name) hereby irrevocably elects
to exercise the right of purchase represented by the
within Warrant Certificate for, and to purchase
thereunder, all Shares provided for therein and tenders
payment herewith to the order of Essex Corporation in the
amount of $(amount). The undersigned requests that
certificates for such Shares be issued as follows:
Name:
--------------------------------------------
Address:
--------------------------------------------
--------------------------------------------
Social Security No. or Other I.D. No., if any:
--------
---------------------------------------------
Deliver to:
------------------------------------------
Address:
------------------------------------------
Date: Signature
------------------ -------------------
Note: The signature of this
Subscription must correspond
with the name as written upon
the face of this Warrant
Certificate in every
particular, without
alteration or enlargement of
any change whatsoever.
<PAGE> 1
LOAN AGREEMENT
THIS LOAN AGREEMENT between Essex Corporation
("Borrower") and SIGNET BANK ("Lender") is made on the
following terms and conditions. Borrower has received
prior commercial loans from Lender or has applied to
Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on
any exhibit or schedule attached to this Agreement. All
such loans and financial accommodations, together with
all future loans and financial accommodations from Lender
to Borrower, are referred to In this Agreement
Individually as the "Loan" and collectively as the
"Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and
agreements, as set forth In this Agreement; (b) the
granting, renewing, or extending of any Loan by Lender at
all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall
remain subject to the following terms and conditions of
this Agreement.
TERM. This Agreement shall be effective as of 11/29/95,
and shall continue thereafter until all Indebtedness of
Borrower to Lender has been performed in full and the
parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the
following meanings when used in this Agreement. Terms
not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform
Commercial Code. All references to dollar amounts shall
mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan
Agreement, as this Loan Agreement may be amended or
modified from time to time, together with all exhibits
and schedules attached to this Loan Agreement from time
to time.
Account. The word "Account" means a trade account,
account receivable, or other right to payment for goods
sold or services rendered owing to Borrower (or to a
third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the
person or entity obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan
funds under this Agreement.
Borrower. The word "Borrower" means Essex Corporation
and its successors and assigns. The word "Borrower" also
includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean at the
time in question, the sum of (a) 80.0% of Eligible Billed
Government Receivables and Commercial Receivables as
approved by the Lender, and (b) 0.00% of Eligible Billed
Commercial Receivables as depicted in a Borrowing Base
Certificate received by Lender pursuant to the terms of
this Agreement, provided, however, that (i) the Borrowing
Base shall be reduced by the sum of the aggregate face
amount of Letters of Credit outstanding on the date the
Borrowing Base is being calculated plus the aggregate
amount of all drafts drawn under or purporting to be
drawn under the Letters of Credit that have been paid by
Lender and for which Lender has not been reimbursed
pursuant hereto, (ii) at all times the Borrowing Base
shall remain subject to verification by Lender, and (iii)
in no event shall the Borrowing Base attributable to the
Eligible Billed Commercial Receivables described in (b)
of this definition of "Borrowing Base" exceed One Million
Five Hundred Thousand and No/100 Dollars ($1,500,000.00).
CERCLA. The word "CERCLA" means the Comprehensive
Environmental Response, Compensation, and Liability Act
of 1980, as amended.
Collateral. The word "Collateral" means and includes
without limitation all property and assets granted as
collateral security for a Loan, whether real or personal
property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the
form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract,
lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether
created by law, contract, or otherwise. The word
"Collateral" includes without limitation all collateral
described below in the section titled "COLLATERAL."
Eligible Accounts. The words "Eligible Accounts" mean,
at any time, all of Borrower's Accounts which contain
selling terms and conditions acceptable to Lender. The
net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by
Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is
an officer, an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is
a subsidiary of, or affiliated with or related to
Borrower or its shareholders, officers, or directors.
(c) Accounts with respect to which goods are placed on
consignment, guaranteed sale, or other terms by reason of
which the payment by the Account Debtor may be
conditional.
(d) Accounts with respect to which Borrower is or may
become liable to the Account Debtor for goods sold or
services rendered by the Account Debtor to Borrower.
(e) Accounts which are subject to dispute, counterclaim,
or setoff.
(f) Accounts with respect to which the goods have not
been shipped or delivered, or the services have not been
rendered, to the Account Debtor.
(g) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial
condition of the Account Debtor to be unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has
had filed against it a petition in bankruptcy or an
application for relief under any provision of any state
or federal bankruptcy, insolvency, or debtor-in--relief
acts; or who has had appointed a trustee, custodian, or
receiver for the assets of such Account Debtor; or who
has made an assignment for the benefit of creditors or
has become insolvent or fails generally to pay its debts
(including its payrolls) as such debts become due.
(i) Accounts which have not been paid in full within 90
days from the invoice date. The entire balance of any
Account of any single Account debtor will be ineligible
whenever the portion of the Account which has not been
paid within 90 days from the invoice date is in excess of
<PAGE> 2
50.000% of the total amount outstanding on the Account.
(j) Accounts which are defined as Government Final
Invoice Receivables.
ERISA. The word "ERISA" means the Employee Retirement
Income Security Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and
include without limitation any of the Events of Default
set forth below in the section titled "EVENTS OF
DEFAULT."
Expiration Date. The words "Expiration Date" mean the
date of termination of Lender's commitment to lend under
this Agreement.
Grantor. The word "Grantor" means and includes without
limitation each and all of the persons or entities
granting a Security Interest in any Collateral for the
Indebtedness, and their personal representatives,
successors and assigns.
Guarantor. The word "Guarantor" means and includes
without limitation each and all of the guarantors,
sureties, and accommodation parties in connection with
any Indebtedness and their personal representatives,
successors and assigns.
Indebtedness. The word "Indebtedness" means and includes
without limitation all Loans, including ail principal,
interest and other fees, costs and charges, if any,
together with all other present and future liabilities
and obligations of Borrower, or any one or more of them,
to Lender, whether direct or indirect, matured or
unmatured, and whether absolute or contingent, joint,
several, or joint and several, and no matter how the same
may be evidenced or shall arise.
Lender. The word "Lender" means SIGNET BANK, its
successors and assigns.
Line of Credit. The words "Line of Credit" mean the
credit facility described in the Section titled "LINE OF
CREDIT" below.
Loan. The word "Loan" or "Loans" means and includes
without limitation any and all commercial loans and
financial accommodations from Lender to Borrower, whether
now or hereafter existing, and however evidenced,
including without limitation those loans and financial
accommodations described herein or described on any
exhibit or schedule attached to this Agreement from time
to time.
Note. The word "Note" means and includes without
limitation Borrower is promissory note or notes, if any,
evidencing Borrowees Loan obligations in favor of Lender,
as well as any substitute, replacement or refinancing
note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a)
liens and security interests securing Indebtedness owed
by Borrower to Lender; (b) liens for taxes, assessments,
or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or
purchase money security interests upon or in any property
acquired or held by Borrower in the ordinary course of
business to secure indebtedness outstanding on the date
of this Agreement or permitted to be incurred under the
paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the
date of this Agreement, have been disclosed to and
approved by the Lender in writing; and (f) those liens
and security interests which in the aggregate constitute
an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean
and include without limitation all promissory notes,
credit agreements, loan agreements, environmental
agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in
connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean
and include without limitation any agreements, promises,
covenants, arrangements, understandings or other
agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or
creating a Security Interest.
Security Interest. The words "Security Interest" mean
and include without limitation any and all types of liens
and encumbrances, whether created by law, contract, or
otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
LINE OF CREDIT. Lender agrees to make Advances to
Borrower from time to time from the date of this
Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not
exceed the Borrowing Base. Within the foregoing limits,
Borrower may borrow, partially or wholly prepay, and
reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's
obligation to make any Advance to or for the account of
Borrower under this Agreement is subject to the following
conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to
Lender:
(a) Lender shall have received evidence that this
Agreement and all Related Documents have been duly
authorized, executed, and delivered by Borrower to
Lender.
(b) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may
request.
c) The security interests in the Collateral shall have
been duly authorized, created, and perfected with first
lien priority and shall be in full force and effect.
(d) All guaranties required by Lender for the Line of
Credit shall have been executed by each Guarantor,
delivered to Lender, and be in full force and effect.
(e) Lender, at its option and for its sole benefit, shall
have conducted an audit of Borrower's Accounts, books,
records, and operations, and Lender shall be satisfied as
to their condition.
(f) Borrower shall have paid to Lender all fees, costs,
and expenses specified in this Agreement and the Related
Documents as are then due and payable.
(g) There shall not exist at the time of any Advance a
condition which would constitute an Event of Default
under this Agreement, and Borrower shall have delivered
to Lender the compliance certificate called for in the
paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the credit
facility, as well as directions for payment from
Borrower's accounts, shall be requested in writing by
authorized persons. Each Advance shall be conclusively
deemed to have been made at the request of and for the
benefit of Borrower (a) when credited to any deposit
account of Borrower maintained with Lender or (b) when
advanced in accordance with the instructions of an
authorized person. Lender. at its option, may set a
cutoff time, after which all requests for Advances will
be treated as having been requested on the next
succeeding Business Day. Under no circumstances shall
Lender be required to make an Advance in an amount less
than $1,000.
Mandatory Loan Repayments. If at any time the aggregate
principal amount of the outstanding Advances shall exceed
the applicable Borrowing Base, Borrower, immediately upon
written or oral notice from Lender, shall pay to Lender
an amount equal to the difference between the
<PAGE> 3
outstanding principal balance of the Advances and the
Borrowing Base. On the Expiration Date, Borrower shall
pay to Lender in full the aggregate unpaid principal
amount of all Advances then outstanding and all accrued
unpaid interest, together with all other applicable fees,
costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a
record of account in which Lender shall make entries for
each Advance and such other debits and credits as shall
be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of
Borrower's account, which statements shall be considered
to be correct and conclusively binding on Borrower unless
Borrower notifies Lender to the contrary within thirty
(30) days after Borrower's receipt of any such statement
which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and
performance of all other Loans, obligations and duties
owed by Borrower to Lender, Borrower (and others, if
required) shall grant to Lender Security Interests in
such property and assets as Lender may require (the
"Collateral"), including without limitation Borrower's
present and future Accounts and general intangibles.
Lender's Security Interests in the Collateral shall be
continuing liens and shall include the proceeds and
products of the Collateral, including without limitation
the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants
to Lender:
Perfection of Security Interests. Borrower agrees to
execute such financing statements and to take whatever
other actions are requested by Lender to perfect and
continue Lender's Security Interests in the Collateral.
Upon request of Lender, Borrower will deliver to Lender
any and all of the documents evidencing or constituting
the Collateral, and Borrower will note Lender's interest
upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the
execution of this Agreement, Borrower will execute one or
more UCC financing statements and any similar statements
as may be required by applicable law, and will file such
financing statements and all such similar statements in
the appropriate location or locations. Borrower hereby
appoints Lender as its irrevocable attorney-in-fact for
the purpose of executing any documents necessary to
perfect or to continue any Security Interest. Lender may
at any time, and without further authorization from
Borrower, file a carbon, photograph, facsimile, or other
reproduction of any financing statement for use as a
financing statement. Borrower will reimburse Lender for
all expenses for the perfection, termination, and the
continuation of the perfection of Lender's security
interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including
any change to the assumed business names of Borrower.
Borrower also promptly will notify Lender of any change
in Borrower's Social Security Number or Employer
Identification Number. Borrower further agrees to notify
Lender in writing prior to any change in address or
location of Borrower's principal governance office or
should Borrower merge or consolidate with any other
entity.
Collateral Records. Borrower does now, and at all times
hereafter shall, keep correct and accurate records of the
Collateral, all of which records shall be available to
Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With
respect to the Accounts, Borrower agrees to keep and
maintain such records as Lender may require, including
without limitation information concerning Eligible
Accounts and Account balances and agings.
Collateral Schedules. Concurrently with the execution
and delivery of this Agreement, Borrower shall execute
and deliver to Lender a schedule of Accounts and Eligible
Accounts, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to
Lender such supplemental schedules of Eligible Accounts
and such other matters and information relating to
Borrower's Accounts as Lender may request. Supplemental
schedules shall be delivered according to the following
schedule: no less than monthly, within 10 days after the
end of each month end, but In any event at such other
frequency as Lender may require. Supplemental schedules
shall include, but not limited to, an accounts receivable
aging and a schedule of accounts payable.
Representations and Warranties Concerning Accounts. With
respect to the Accounts, Borrower represents and warrants
to Lender: (a) Each Account represented by Borrower to
been Eligible Account for purposes of this Agreement
conforms to the requirements of the definition of an
Eligible Account; (b) All Account information listed on
schedules delivered to Lender will be true and correct,
subject to immaterial variance; and (c) Lender, its
assigns, or agents shall have the right at any time and
at Borrower's expense to inspect, examine, and audit
Borrowees records and to confirm with Account Debtors the
accuracy of such Accounts.
Remittance Account. Borrower agrees that Lender may at
any time require Borrower to institute procedures whereby
the payments and other proceeds of the Accounts shall be
paid by the Account Debtors under a remittance account or
lock box arrangement with Lender, or Lender's agent, or
with one or more financial institutions designated by
Lender. Borrower further agrees that, if no Event of
Default exists under this Agreement, any and all of such
funds received under such a remittance account or lock
box arrangement shall, at Lender's sole election and
discretion, either be (a) paid or turned over to
Borrower; (b) deposited into one or more accounts for the
benefit of Borrower (which deposit accounts shall be
subject to a security assignment in favor of Lender); (c)
deposited into one or more accounts for the joint benefit
of Borrower and Lender (which deposit accounts shall
likewise be subject to a security assignment in favor of
Lender); (d) paid or turned over to Lender to be applied
to the Indebtedness in such order and priority as Lender
may determine within its sole discretion; or (e) any
combination of the foregoing as Lender shall determine
from time to time. Borrower further agrees that, should
one or more Events of Default exist, any and all funds
received under such a remittance account or lock box
arrangement shall be paid or turned over to Lender to be
applied to the Indebtedness, again in such order and
priority as Lender may determine within its sole
discretion.
REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to Lender, as of the date of this Agreement, as
of the date of each disbursement of Loan proceeds, as of
the date of any renewal, extension or modification of any
Loan, and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly
organized, validly existing, and in good standing under
the laws of the Commonwealth of Virginia and is validly
existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power
and authority to own its properties and to transact the
businesses in which it is presently engaged or presently
proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all
states in which the failure to so qualify would have a
material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance
of this Agreement and all Related Documents by Borrower,
to the extent to be executed, delivered or performed by
Borrower, have been duly authorized by all necessary
action by Borrower; do not require the consent or
approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a
violation of, or constitute a default under (a) any
provision of its articles of incorporation or
organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order
applicable to Borrower.
Financial Information. Each financial statement of
Borrower supplied to Lender truly and completely
disclosed Borrower's financial condition as of the date
of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to
the date of the most recent financial statement supplied
to Lender. Borrower has no material contingent
obligations except as disclosed in such financial
statements.
Legal Effect. This Agreement constitutes, and any
instrument or agreement required hereunder to be given by
Borrower when delivered will constitute, legal, valid and
binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns
and has good title to all of Borrower's properties free
and clear of all Security Interests, and has not executed
any security documents or financing statements relating
to such properties. All of Borrowees properties are
titled in Borrowees legal name, and Borrower has not
used, or filed a financing statement under, any other
name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste,"
"hazardous substance," "disposal," "release," and
"threatened release," as used in this
<PAGE> 4
Agreement, shall have the same meanings as set forth in
the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. Section
9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499
("SARA"), the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation
and Recovery Act, 49 U.S.C. Section 6901, et seq., or
other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in
writing, Borrower represents and warrants that: (a)
During the period of Borrower's ownership of Borrower's
properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by
any person on, under, or about any such properties. (b)
Borrower has no knowledge of, or reason to believe that
there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance by any prior
owners or occupants of any such properties, or (ii) any
actual or threatened litigation or claims of any kind by
any person relating to such matters. (c) Neither Borrower
nor any tenant, contractor, agent or other authorized
user of any such properties shall use, generate,
manufacture, store, treat, dispose of, or release any
hazardous waste or substance on, under, or about any such
properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its
agents to enter upon such properties to make such
inspections and tests as Lender may deem appropriate to
determine compliance of such properties with this section
of the Agreement. Any inspections or tests made by
Lender shall be for Lender's purposes only and shall not
be construed to create any responsibility or liability on
the part of Lender to Borrower or to any other person.
The representations and warranties contained herein are
based on Borrower's due diligence in investigating such
properties for hazardous waste. Borrower hereby (a)
releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws,
and (b) agrees to indemnify and hold harmless Lender
against any and all claims, losses, liabilities, damages,
penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any
use, generation, manufacture, storage, disposal, release
or threatened release occurring prior to Borrower's
ownership or interest in such properties, whether or not
the same was or should have been known to Borrower. The
provisions of this section of the Agreement, including
the obligation to indemnify, shall survive the payment of
the Indebtedness and the termination or expiration of
this Agreement and shall not be affected by Lender's
acquisition of any interest in any such properties,
whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim,
investigation, administrative proceeding or similar
action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's
financial condition or properties, other than litigation,
claims, or other events, if any, that have been disclosed
to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax
returns and reports of Borrower that are or were required
to be filed, have been filed, and all taxes, assessments
and other governmental charges have been paid in full,
except those presently being or to be contested by
Borrower in good faith in the ordinary course of business
and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to
Lender in writing, Borrower has not entered into or
granted any Security Agreements, or permitted the filing
or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing
repayment of Borrower's Loan and Note, that would be
prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security
Agreements directly or indirectly securing repayment of
Borrower's Loan and Note and all of the Related Documents
are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan
proceeds solely for business or commercial related
purposes.
Employee Benefit Plans. Each employee benefit plan as to
which Borrower may have any liability complies in all
material respects with all applicable requirements of law
and regulations, and (I) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred
with respect to any such plan, (ii) Borrower has not
withdrawn from any such plan or initiated steps to do so,
and (iii) no steps have been taken to terminate any such
plan.
Location of Borrower's Offices and Records. Borrower's
place of business, or Borrower's Chief executive office,
if Borrower has more than one place of business, is
located at 9150 Guilford Road, Columbia, MD 21046-1891.
Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower
keeps its records concerning the Collateral.
Information. All information heretofore or
contemporaneously herewith furnished by Borrower to
Lender for the purposes of or in connection with this
Agreement or any transaction contemplated hereby is, and
all information hereafter furnished by or on behalf of
Borrower to Lender will be, true and accurate in every
material respect on the date as of which such information
is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact
necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower
understands and agrees that Lender, without independent
investigation, is relying upon the above representations
and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing
representations and warranties shall be continuing in
nature and shall remain in full force and effect until
such time as Borrower's Indebtedness shall be paid in
full, or until this Agreement shall be terminated in the
manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees
with Lender that, while this Agreement is in effect,
Borrower will:
Litigation. Promptly inform Lender in writing of (a) all
material adverse changes in Borrower's financial
condition, and (b) all existing and all threatened
litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any
Guarantor which could materially affect the financial
condition of Borrower or the financial condition of any
Guarantor.
Financial Records. Maintain its books and records in
accordance with generally accepted accounting principles,
applied on a consistent basis, and permit Lender to
examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as
available, but in no event later than ninety (90) days
after the end of each fiscal year, Borrower's balance
sheet and income statement for the year ended, audited by
a certified public accountant satisfactory to Lender, who
shall state that such financial statements present fairly
the consolidated financial position of Borrower as of the
date of such financial statements and the results of its
operations for the period covered by such financial
statements in conformity with generally accepted
accounting principles applied on a consistent basis
(except for changes in the application of which such
accountants concur) and shall not contain any "going
concern" or like qualification or exception or
qualifications arising out of the scope of the audit,
and, as soon as available, but in no event later than ten
(10) days after the end of each month, Borrower's balance
sheet and profit and loss statement for the period ended,
prepared and certified as correct to the best knowledge
and belief by Borrower's chief financial officer or other
officer or person acceptable to Lender. All financial
reports required to be provided under this Agreement
shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Additional Information. Furnish such additional
information and statements, lists of assets and
liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial
condition and business operations as Lender may request
from time to time.
<PAGE> 5
Insurance. Maintain fire and other risk insurance,
public liability insurance, and such other insurance as
Lender may from time to time reasonably require with
respect to Borrower's properties and operations, in form,
amounts, coverages and with insurance companies
acceptable to Lender. Borrower, upon request of Lender,
will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be
canceled or diminished without at least thirty (30) days'
prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage
in favor of Lender will not be impaired in any way by any
act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which
Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss
payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of
Lender, reports on each existing insurance policy showing
such information as Lender may reasonably request,
including without limitation the following: (a) the name
of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the properties insured; (e) the then
current property values on the basis of which insurance
has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In
addition, upon request of Lender (however not more often
than annually), Borrower will have an independent
appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of
any Collateral. The cost of such appraisal shall be paid
by Borrower.
Other Agreements. Comply with all terms and conditions
of all other agreements, whether now or hereafter
existing, between Borrower and any other party and notify
Lender immediately in writing of any default in
connection with any other such agreements.
Loan Fees and Charges. In addition to all other agreed
upon fees and charges, pay the following: (a)
Administrative Fee. The obligation of Borrower to pay
the Administrative Fee shall commence on the date hereof
and shall continue until the Loans have been fully and
completely paid and discharged. Commencing on the last
day of the month after the date hereof and continuing on
the last day of each subsequent month, until the Loans
have been fully and completely paid and discharged,
Borrower shall pay the Administrative Fee due for the
month (or partial month). Any accrued and unpaid portion
of this fee shall be paid on the Termination Date. (b)
Commitment Fee. The obligation of Borrower to pay the
Commitment Fee shall commence on the date hereof and
shall continue until the Indebtedness has been fully and
completely paid and discharged. Commencing on the last
day of the quarter following the date hereof and
continuing on each subsequent quarter thereafter until
the Indebtedness has been fully and completely
discharged, Borrower shall pay the Commitment Fee due for
the quarter (or portion thereof). Any accrued and unpaid
portion of this fee shall be paid on the Termination
Date.
Loan Proceeds. Use all Loan proceeds solely for
Borrower's business operations, unless specifically
consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all
of its indebtedness and obligations, including without
limitation all assessments, taxes, governmental charges,
levies and liens, of every kind and nature, imposed upon
Borrower or its properties, income, or profits, prior to
the date on which penalties would attach, and all lawful
claims that, if unpaid, might become a lien or charge
upon any of Borrower's properties, income, or profits.
Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy,
lien or claim so long as (a) the legality of the same
shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on
its books adequate reserves with respect to such
contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting
practices. Borrower, upon demand of Lender, will furnish
to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the
appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes,
charges, levies, liens and claims against Borrower's
properties, income, or profits.
Performance. Perform and comply with all terms,
conditions, and provisions set forth in this Agreement
and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of
Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel
with substantially the same qualifications and experience
as the present executive and management personnel;
provide written notice to Lender of any change in
executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in
compliance with all applicable federal, state and
municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and
operations, including without limitation, compliance with
the Americans With Disabilities Act and with all minimum
funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any
reasonable time to inspect any and all Collateral for the
Loan or Loans and Borrower's other properties and to
examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books,
accounts, and records. If Borrower now or at any
time hereafter maintains any records (including without
limitation computer generated records and computer
software programs for the generation of such records) in
the possession of a third party, Borrower, upon request
of Lender, shall notify such party to permit Lender free
access to such records at all reasonable times and to
provide Lender with copies of any records it may request,
all at Borrower's expense.
Compliance Certificate. Unless waived in writing by
Lender, provide Lender at least annually and at the time
of each disbursement of Loan proceeds with a certificate
executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that
the representations and warranties set forth in this
Agreement are true and correct as of the date of the
certificate and further certifying that, as of the date
of the certificate, no Event of Default exists under this
Agreement.
Environmental Compliance and Reports. Borrower shall
comply in all respects with all environmental protection
federal, state and local laws, statutes, regulations and
ordinances; not cause or permit to exist, as a result of
an intentional or unintentional action or omission on its
part or on the part of any third party, on property owned
and/or occupied by Borrower, any environmental activity
where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance
with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall
furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other
communication from any governmental agency or
instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not
there is damage to the environment and/or other natural
resources.
Additional Assurances. Make, execute and deliver to
Lender such promissory notes, mortgages, deeds of trust,
security agreements, financing statements, instruments,
documents and other agreements as Lender or its attorneys
may reasonably request to evidence and secure the Loans
and to perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or
any change in any law, rule, regulation or guideline, or
the interpretation or application of any thereof by any
court or administrative or governmental authority
(including any request or policy not having the force of
law) shall impose, modify or make applicable any taxes
(except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital
adequacy requirements or other obligations which would
(a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement
relates, (b) reduce the amounts payable to Lender under
this Agreement or the Related Documents, or (c) reduce
the rate of return on Lenders capital as a consequence of
Lender's obligations with respect to the credit
facilities to which this Agreement relates, then Borrower
agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after
Lender's written demand for such payment, which demand
shall be accompanied by an explanation of such imposition
or charge and a calculation in reasonable detail of the
additional amounts payable by Borrower, which explanation
and calculations shall be conclusive in the absence of
manifest error.
<PAGE> 6
NEGATIVE COVENANTS. Borrower covenants and agrees with
Lender that while this Agreement is in effect, Borrower
shall not, without the prior written consent of Lender:
(Consent of Lender shall not be unreasonably withheld)
Indebtedness and Liens. (a) Except for trade debt
incurred in the normal course of business and
indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a
Permitted Lien, sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business
activities substantially different than those in which
Borrower is presently engaged, (b) cease operations,
liquidate, merge, transfer, acquire or consolidate with
any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the
ordinary course of business, or (c) purchase or retire
any of Borrower's outstanding shares or alter or amend
Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in
or advance money or assets over $50,000 in aggregate (b)
purchase, create or acquire any interest in another
enterprise or entity, or (c) incur any obligation as
surety or guarantor other than in the ordinary course of
business.
CESSATION OF ADVANCES. If Lender has made any commitment
to make any Loan to Borrower, whether under this
Agreement or under any other agreement, Lender shall have
no obligation to make Loan Advances or to disburse Loan
proceeds if: (a) Borrower or any Guarantor is in default
under the terms of this Agreement or any of the Related
Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or
similar proceedings, or is adjudged a bankrupt; (c) there
occurs a material adverse change in Borrowees financial
condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; (d)
any Guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such Guarantor's guaranty of the
Loan or any other loan with Lender; or (e) Lender in good
faith deems itself insecure, even though no Event of
Default shall have occurred.
REQUESTS FOR LOAN ADVANCES AND LETTERS OF CREDIT. (a) Any
requests for an Advance must be received by Lender not
later than 1:00 p.m. (Washington, D. C. time) on the date
prior to the Advance is to be made. Each request must
specify the amount of the Advance, and at the option of
Lender, shall be accompanied by a current Borrowing Base
Certificate, which may be transmitted by telecopy to
Lender at (703) 506-9553, or such other number as Lender
may designate in written notice to Borrower. If a
Borrowing Base Certificate is transmitted by telecopy,
the Borrower shall maintain the original of such
Borrowing Base Certificate as a permanent record for so
long as any of the Advances remain outstanding and shall
allow Lender to inspect such Borrowing Base Certificate
and shall provide copies of such original to Lender upon
its request therefor. The proceeds of the Advances will
be credited to the Operating Account. Advances may be
requested by those individuals designated by Borrower
from time to time in written instructions delivered t
Lender; provided, however, that Borrower shall remain
liable with respect to any Loan disbursed by Lender i
good faith hereunder, even if such an Advance is
requested by an individual who has not been designated.
Borrower agrees to confirm in writing from time to time,
when and as requested by Lender, the purpose for which
the proceeds of each Advance are used. Each request for
and Advance must also be accompanied by copy(ies) of the
supporting invoice(s), which are to be confirmed by an
authorized representative of the United States Government
or commercial entity prior to funding the requested
Advance. (b) Any request for a letter of credit to be
issued must be made by delivery to Lender, not later than
five (5) Business Days prior to the date of issuance of
such requested letter of credit, of a properly completed
and executed application and agreement (the
"Application") in form and content satisfactory to
Lender. The fee for each Letter of Credit shall be an
amount equal to an opening fee of $0.00, plus a
non-refundable commission of 0.00% per annum of the
undrawn portion of the Letter of Credit, payable in
advance upon issuance and thereafter on each anniversary
of the date of issuance of such Letter of Credit. Lender
is authorized to advance on behalf of Borrower as a loan
all sums required to be paid by Borrower to Lender in
respect of any such Letter of Credit pursuant to the
terms of the Application (including the fee set forth
above), provided that Lender may, but shall not be
obligated to make such Loans, if, after the disbursement
thereof, the aggregate principal amount of the Loans then
outstanding would exceed the Maximum Amount. The
provisions of the Application are deemed incorporated in
this Agreement by this reference and shall be binding
upon Lender and Borrower as if fully set forth herein.
If a conflict exists between the terms of the Application
and any other Loan Document, the terms of the Application
shall control with respect to any Letter of Credit issued
pursuant to such Application but not as to other matters
governed by this Agreement.
ADDITIONAL DEFINITIONS.
Administrative Fee. The words "Administrative Fee" means
the fee in the amount of $750.00 for each calendar month
(or partial month) to be paid by Borrower to Lender
pursuant to the paragraph entitled Loan Fees and Charges
in consideration of the expenses incurred by Lender in
connection with administering the Loans and monitoring
the Collateral.
Borrowing Base Certificate. The words "Borrowing Base
Certificate" mean a certificate of Borrower, in form and
substance satisfactory to Lender, containing a
computation of the Borrowing Base as of the date depicted
therein and a certification that no Default or Event of
Default has occurred or is continuing.
Closing. The word "Closing" means the date on which the
initial disbursement of the Loans is made. Commercial
Customer. The words "Commercial Customer" mean any
Customer other than the Government.
Commitment Fee. The words "Commitment Fee" mean the
quarterly fee to be paid by Borrower to Lender pursuant
to the paragraph entitled Loan Fees and Charges in
consideration of the commitment by Lender to make Loans
hereunder. The Commitment Fee due for each calendar
quarter (or portion thereof) shall equal the product of
the Commitment Fee Rate in effect for such quarter (or
portion thereof) multiplied by the difference between
$1,500,000.00 and the sum of the average daily principal
balance of the Loans during such quarter (or applicable
portion thereof) plus the average daily face amount of
all Letters of Credit outstanding during such quarter (or
applicable portion thereof).
Commitment Fee Rate. The words "Commitment Fee Rate"
mean the rate, expressed as a percentage, calculated as
by multiplying 0.50% by a fraction, the numerator of
which is the number of days in the calendar quarter, or
shorter period, for which the Commitment Fee Rate is
being calculated and denominator of which is 360.
Customer. The word "Customer" means any Person obligated
on an Account.
<PAGE> 7
Eligible Billed Commercial Receivable. The words
"Eligible Billed Commercial Receivable" mean any Eligible
Billed Receivable which does not arise out of a prime
contract between Borrower and the Government; provided
that, for so long as more than 50% of the Eligible
Accounts due from any Commercial Customer remains unpaid
for more than 90 days following the date of initial
invoice to such Commercial Customer for such Eligible
Accounts, then no Accounts of such Commercial Customer
may be included as Eligible Billed Commercial
Receivables.
Eligible Billed Government Receivable. The words
"Eligible Billed Government Receivable" mean any Eligible
Billed Receivable which arises out of a prime contract
between Borrower and the Government.
Eligible Billed Receivable. The words "Eligible Billed
Receivable" mean any Eligible Account that has been
billed to the appropriate Customer and is aged less than
90 days from the date of the initial invoice.
General Intangibles. "General Intangibles" means
collectively and includes all of the following, whether
now owned or hereafter acquired by Borrower: chooses in
action, causes in action and all other intangible
property of every kind and nature, including, without
limitation, corporate or other business records,
inventions, designs, trademarks, trademark application,
trade names, trade secrets, goodwill, registrations,
copyrights, licenses, franchises, customer lists, tax
refunds, tax refunds claims, rights of claims against
carriers and shippers, leases and rights to
indemnification, together with all property which is
included with all property which is included within the
definition of "General Intangibles" as set forth in the
UCC except for patents and patent applications.
Government Final Invoice Receivable. The words
"Government Final Invoice Receivable" mean any Account
relating to the last payment due to Borrower under a
prime contract between Borrower and the Government unless
(a) such contract is a "Fixed Price Contract (as defined
in Federal Acquisition Regulation Part 16.2, or any
successor regulation) which does not include any
provisions for progress payments, incentive arrangements,
or price redetermination or (b) Lender has consented in
writing to the exclusion of such Account from the
category of Government Final Invoice Receivables.
Government. The word "Government" means the United
States of America or any agency or instrumentality
thereof.
Maximum Amount. The words "Maximum Amount" mean, at any
time, the lesser of (a)$1,500,000-00 or (b) the then
applicable Borrowing Base.
Operating Account. The words "Operating Account" mean
the demand deposit account maintained with Lender by
Borrower on which Borrower draws checks to pay its
operating expenses.
Person. The word "Person" means an individual,
partnership, corporation, business trust, joint stock
company, trust, unincorporated association, joint
venture, government authority or other entity of whatever
nature.
Termination Date. The words "Termination Date" mean
November 30, 1996, and any extension or extensions
thereof granted by Lender in its sole discretion.
ADDITIONAL AFFIRMATIVE COVENANTS.
Dividend Payments. Borrower may pay cash dividends on
its stock from time to time so long as no Event of
Default has occurred and is continuing or would result
from the payment of dividends.
Payroll Tax Payments. Borrower will furnish Lender
within fifteen (15) days of the end of each quarter,
copies of the Borrower's 941 tax statements.
SEC Reports and Filings. Borrower will furnish Lender
within fifteen (15) days of filing with the SEC, copies
of all filed reports.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon
and rights of setoff against the moneys, securities or
other property of Borrower given to Lender by law, Lender
shall have, with respect to Borrower's obligations to
Lender under this Agreement and to the extent permitted
by law, a contractual possessory security interest in and
a right of setoff against, and Borrower hereby assigns,
conveys, delivers, pledges, and transfers to Lender all
of Borrower's right, title, and interest in and to all
deposits, moneys, securities, and other property of
Borrower now or hereafter in the possession of or on
deposit with Lender, whether held in a general or special
account or deposit, whether held jointly with someone
else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts.
Every such security interest and right of setoff may be
exercised without demand upon or notice to Borrower. No
security interest or right of setoff shall be deemed to
have been waived by any act or conduct on the part of
Lender or by any neglect to exercise such right of setoff
or to enforce such security interest or by any delay in
so doing. Every right of setoff and security interest
shall continue in full force and effect until such right
of setoff or security interest is specifically waived or
released by an instrument in writing executed by Lender.
EVENTS OF DEFAULT. Each of the following shall
constitute an Event of Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any
payment when due on the Indebtedness.
Other Defaults. Failure of Borrower or any Grantor to
comply with or to perform when due any other term,
obligation, covenant or condition contained in this
Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other
agreement between Lender and Borrower.
Default In Favor of Third Parties. Should Borrower or
any Grantor default under any loan, extension of credit,
security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person
that may materially affect any of Borrowers property or
Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement
or any of the Related Documents.
False Statements. Any warranty, representation or
statement made or furnished to Lender by or on behalf of
Borrower or any Grantor under this Agreement or the
Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false
or misleading at any time thereafter.
Defective Collateralization. This Agreement or any of
the Related Documents ceases to be in full force and
effect (including failure of any Security Agreement to
create a valid and perfected Security Interest) at any
time and for any reason.
Insolvency. The dissolution or termination of Borrower's
existence as a going business, or a trustee or receiver
is appointed for Borrower or for all or a substantial
portion of the assets of Borrower, or Borrower makes a
general assignment for the benefit of Borrowers
creditors, or Borrower files for bankruptcy, or an
involuntary bankruptcy petition is filed against Borrower
and such involuntary petition remains undismissed for
sixty (60)days.
Creditor or Forfeiture Proceedings. Commencement of
foreclosure or forfeiture proceedings, whether by
judicial proceeding, self-help, repossession or any other
method, by any creditor of Borrower, any creditor of any
Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of
Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events
occurs with respect to any Guarantor of any of the
Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
<PAGE> 8
Change In Ownership. Any change in ownership of
twenty-five percent (25%) or more of the common stock of
Borrower.
Adverse Change. A material adverse change occurs in
Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is
impaired.
Insecurity. Lender, in good faith, deems itself
insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default
shall occur, except where otherwise provided in this
Agreement or the Related Documents, all commitments and
obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will
terminate (including any obligation to make Loan Advances
or disbursements), and, at Lender's option, all sums
owing in connection with the Loans, including all
principal, interest, and all other fees, costs and
charges, if any, will become immediately due and payable,
all without notice of any kind to Borrower, except that
in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender
shall have all the rights and remedies provided in the
Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable
law, all of Lender's rights and remedies shall be
cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy
shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall
not affect Lender's right to declare a default and to
exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous
provisions are a part of this Agreement:
Amendments. This Agreement, together with any Related
Documents, constitutes the entire understanding and
agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charge for
bound by the alteration or amendment.
Applicable Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of the
Commonwealth of Virginia. Lender and Borrower hereby
waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either party
against the other.
Caption Headings. Caption headings in this Agreement are
for convenience purposes only and are not to be used to
interpret or define the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations
of Borrower under this Agreement shall be joint and
several, and all references to Borrower shall mean each
and every Borrower. This means that each of the
Borrowers signing below is responsible for all
obligations in this Agreement.
Consent to Loan Participation. Borrower agrees that
Lender may at any time grant participating interests in
the Loans to one or more purchasers (each a
"Participant"). In such event, whether or not upon
notice to Borrower, Lender shall remain responsible for
the performance of its obligations hereunder, and Lender
shall continue to deal solely and directly with Borrower
in connection with Lender's rights and obligations under
this Agreement. Any agreement pursuant to which Lender
may grant such a participation interest shall provide
that Lender shall retain the sole right and
responsibility to enforce the obligations of Borrower
hereunder including, without limitation, the right to
approve any amendment, modification or waiver of any
provision of concerning the Loans; provided that such
participation agreement may provide that Lender will not
agree to any such modification, amendment or waiver which
would have the effect increasing or extending the term
hereof or subjecting Lender to any additional obligation,
reducing the principal of or rate of interest on any
Loan, postponing the date fixed for any payment of
principal or of interest on any Loan or fees hereunder
without the consent of the Participant. Lender may at
any time assign all or any portion of its rights with
respect to the Loans to a Federal Reserve Bank. No such
assignment shall release Lender from its obligations
hereunder. Lender may furnish any information concerning
Borrower in its possession from time to time to
Participants (including prospective Participants) and may
furnish such information in response to credit inquiries
consistent with general banking practice.
Costs and Expenses. Borrower agrees to pay upon demand
all of Lender's out-of-pocket expenses incurred in
connection with this Agreement or in connection with the
Loans made pursuant to this Agreement. Subject to any
limits under applicable law, if Lender hires an attorney
to help enforce this Agreement or to collect any
Indebtedness, Borrower agrees to pay Lender's attorney
fees equal to 25.000% of the principal balance due on the
Note, and all of Lender's other collection expenses,
whether or not there is a lawsuit and including legal
expenses for bankruptcy proceedings.
Notices. All notices required to be given under this
Agreement shall be given in writing, may be sent by
telefacsimilie, and shall be effective when actually
delivered if hand delivered or when deposited with a
nationally recognized overnight courier or deposited as
certified or registered mail in the United States
mail,first class, postage prepaid, addressed to the party
to whom the notice is to be given at the address shown
above. Any party may change its address for notices
under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the
notice is to change the party's address. To the extent
permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice
to all Borrowers. For notice purposes, Borrower agrees
to keep Lender informed at all times of Borrower's
current address(es).
Severability. If a court of competent jurisdiction finds
any provision of this Agreement to be invalid or
unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances.
If feasible, any such offending provision shall be deemed
to be modified to be within the limits of enforceability
or validity; however, if the offending provision cannot
be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall
remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent
the context of any provisions of this Agreement makes it
appropriate, including without limitation any
representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and
affiliates of Borrower. Notwithstanding the foregoing
however, under no circumstances shall this Agreement be
construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of
Borrower.
Successors and Assigns. All covenants and agreements
contained by or on behalf of Borrower shall bind its
successors and assigns and shall inure to the benefit of
Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this
Agreement or any interest therein, without the prior
written consent of Lender.
Survival. All warranties, representations, and
agreements of Borrower in this Agreement shall survive
the making of the Loan or Loans contemplated hereby, and
shall be deemed made and redated by Borrower at the time
of the making of each disbursement of Loan proceeds.
Time Is of the Essence. Time is of the essence in the
performance of this Agreement.
Waiver. Indulgence by Lender with respect to any of the
terms and conditions of this Agreement or the failure of
Lender to exercise any of its rights under this Agreement
shall not constitute a waiver thereof, and Borrower shall
remain liable for the strict performance of such terms
and conditions until this Agreement shall be terminated.
No provision of this Agreement may be waived or modified
orally, but all such waivers or modifications shall be in
writing. Whenever the consent of Lender is required
under this Agreement, the granting of such consent by
Lender in one instance shall not constitute Lender's
continuing consent in subsequent instances, and in all
cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE> 9
THIS LOAN AGREEMENT IS SIGNED, SEALED AND DELIVERED
EFFECTIVE IN ALL RESPECTS AS OF 11/29/95.
-------------------
BORROWER:
Essex Corporation
BY: Joseph R. Kurry, Jr.
-------------------- (SEAL)
Name and Title (Print)
Joseph R. Kurry, Jr. - VP/Treasurer
LENDER:
SIGNET BANK
BY: Randall W. Connelly
----------------------
Authorized Officer
<PAGE> 10
COMMERCIAL SECURITY AGREEMENT
THIS COMMERCIAL SECURITY AGREEMENT Is entered Into
between Essex Corporation (referred to below
as "Grantor"); and SIGNET BANK (referred to below as
"Lender"). For valuable consideration, Grantor grants
to Lender a security Interest In the Collateral to secure
the Indebtedness and agrees that Lender shall have the
rights stated in this Agreement with respect to the
Collateral, In addition to all other rights which Lender
may have by law.
DEFINITIONS. The following words shall have the
following meanings when used in this Agreement. Terms
not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform
Commercial Code. All references to dollar amounts shall
mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial
Security Agreement, as this Commercial Security
Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to
this Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following
described property of Grantor, whether now owned or
hereafter acquired, whether now existing or hereafter
arising, and wherever located:
All chattel paper, accounts and general Intangibles,
together with the following specifically described
property: General lntangibles excludes patents and
patent applications
In addition, the word "Collateral" includes all the
following, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever
located:
(a) All accessions, accessories, increases, and
additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property
described in this Collateral section.
(c) All accounts, contract rights, general intangibles,
instruments, rents, monies, payments, and all other
rights, arising out of a sale, lease,
or other disposition of any of the property described in
this Collateral section.
(d) All proceeds (including insurance proceeds) from the
sale, destruction, loss, or other disposition of any of
the property described in this Collateral section.
All records and data relating to any of the property
described in this Collateral section, whether in the form
of a writing, photograph, microfilm, microfiche, or
electronic media, together with all of Grantor's right,
title, and interest in and to all computer software
required to utilize, create, maintain, and process any
such records or data on electronic media.
Event of Default. The words "Event of Default" mean and
include without limitation any of the Events of
Default set forth below in the section titled "Events of
Default."
Grantor. The word "Grantor" means Essex Corporation, its
successors and assigns.
Guarantor. The word "Guarantor" means and includes
without limitation each and all of the guarantors,
sureties, and accommodation parties in connection with
the Indebtedness and their personal representatives,
successors and assigns.
Indebtedness. The word "Indebtedness" means the
indebtedness evidenced by the Note, including all
principal, interest, and fees, costs, and expenses, if
any, together with all modifications of and renewals,
replacements and substitutions for any of the foregoing.
"Indebtedness" also includes all other present and future
liabilities and obligations of Grantor to Lender, whether
direct or indirect, matured or unmatured, and whether
absolute or contingent, joint, several or joint and
several, and no matter how the same may be evidenced or
shall arise.
Lender. The word "Lender" means SIGNET BANK, its
successors and assigns.
Note. The word "Note" means the note or credit agreement
dated , 11-29-95 in the principal amount of
$1,500,000.00 from Grantor to Lender, together with all
modifications of and renewals, replacements, and
substitutions for the note or credit agreement.
Related Documents. The words "Related Documents" mean
and include without limitation all promissory notes,
credit agreements, loan agreements, environmental
agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in
connection with the Indebtedness.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon
and rights of setoff against the moneys,
securities or other property of Grantor given to Lender
by law, Lender shall have, with respect to Grantor's
obligations to Lender under this Agreement and to the
extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and
Grantor hereby assigns, conveys, delivers, pledges, and
transfers to Lender all of Grantor's right, title, and
interest in and to all deposits, moneys, securities, and
other property of Grantor now or hereafter in the
possession of or on deposit with Lender, whether held in
a general or special account or deposit, whether held
jointly with someone else, or whether held for
safekeeping or otherwise, excluding however all IRA,
Keogh, and trust accounts. Every such security interest
and right of setoff may be exercised without demand upon
or notice to Grantor. No security interest or right of
setoff shall be deemed to have been waived by any act or
conduct on the part of Lender or by any neglect to
exercise such right of setoff or to enforce such security
interest or by any delay in so doing. Every right of
setoff and security interest shall continue in full force
and effect until such right of setoff or security
interest is specifically waived or released by
an instrument in writing executed by Lender.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants
to Lender as follows:
Perfection of Security Interest. Grantor agrees to
execute such financing statements and to take whatever
other actions are requested by Lender to perfect and
continue Lender's security interest in the Collateral.
Upon request of Lender, Grantor will deliver to Lender
any and all of the documents evidencing or constituting
the Collateral, and Grantor will note Lender's interest
upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender
as its irrevocable attorney-in-fact for the purpose of
executing any documents necessary to perfect or to
continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization
from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this
Agreement for use as a
<PAGE> 11
financing statement. Grantor will reimburse Lender for
all expenses for the perfection and the continuation of
the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before
any change in Grantor's name including any change to the
assumed business names of Grantor. This Is a continuing
Security Agreement and will continue In effect even
though all or any part of the Indebtedness is paid In
full and even though for a period of time Grantor may not
be Indebted to Lender.
No Violation. The execution and delivery of this
Agreement will not violate any law or agreement governing
Grantor or to which Grantor is a party, and its
certificate or articles of incorporation and bylaws do
not prohibit any term or condition of this Agreement.
Enforceable of Collateral. To the extent the Collateral
consists of accounts, chattel paper, or general
intangibles, the Collateral is enforceable in accordance
with its terms, is genuine, and complies with applicable
laws concerning form, content and manner of preparation
and execution, and all persons appearing to be obligated
on the Collateral have authority and capacity to contract
and are in fact obligated as they appear to be on the
Collateral. At the time any account becomes subject to
a security interest in favor of Lender, the account shall
be a good and valid account representing an undisputed,
bona fide indebtedness incurred by the account debtor,
for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract
of sale, or for services theretofore performed by Grantor
with or for the account debtor; there shall be no setoffs
or counterclaims against any such account; and no
agreement under which any deductions or discounts may be
claimed shall have been made with the account debtor
except those disclosed to Lender in writing.
Removal of Collateral. Grantor shall keep the Collateral
(or to the extent the Collateral consists of intangible
property such as accounts, the records concerning the
Collateral) at Grantor's address shown above, or at such
other locations as are acceptable to Lender. Except in
the ordinary course of its business, including the sales
of inventory, Grantor shall not remove the Collateral
from its existing locations without the prior written
consent of Lender. To the extent that the Collateral
consists of vehicles, or other titled property, Grantor
shall not take or permit any action which would require
application for certificates of title for the vehicles
outside the Commonwealth of Virginia, without the prior
written consent of Lender.
Transactions Involving Collateral. Except for inventory
sold or accounts collected in the ordinary course of
Grantor's business, Grantor shall not sell, offer to
sell, or otherwise transfer or dispose of the Collateral.
Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security
interest, encumbrance, or charge, other than the security
interest provided for in this Agreement, without the
prior written consent of Lender. This includes security
interests even if junior in right to the security
interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the
Collateral (for whatever reason) shall be held in trust
for Lender and shall not be commingled with any other
funds; provided however, this requirement shall not
constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately
deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it
holds good and marketable title to the Collateral, free
and clear of all liens and encumbrances except for the
lien of this Agreement. No financing statement covering
any of the Collateral is on file in any public office
other than those which reflect the security interest
created by this Agreement or to which Lender has
specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands
of all other persons.
Collateral Schedules and Locations. As often as Lender
shall require, and insofar as the Collateral consists of
accounts and general intangibles, Grantor shall deliver
to Lender schedules of such Collateral, including such
information as Lender may require, including without
limitation names and addresses of account debtors and
agings of accounts and general intangibles. Such
information shall be submitted for Grantor and each of
its subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall
maintain all tangible Collateral in good condition and
repair. Grantor will not commit or permit damage to or
destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives
and agents shall have the right at all reasonable times
to examine, inspect, and audit the Collateral wherever
located.
Taxes, Assessments and Liens. Grantor will pay when due
all taxes, assessments and liens upon the Collateral,
its use or operation, upon this Agreement, upon any
promissory note or notes evidencing the Indebtedness, or
upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any
lien if Grantor is in good faith conducting an
appropriate proceeding to contest the obligation to pay
and so long as Lender's interest in the Collateral is not
jeopardized in Lender's sole opinion. If the Collateral
is subjected to a lien which is not discharged within
fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest,
costs, attorneys' fees or other charges that could accrue
as a result of foreclosure or sale of the Collateral. In
any contest Grantor shall defend itself and Lender and
shall satisfy any final adverse judgment before
enforcement against the Collateral. Grantor shall name
Lender as an additional obligee under any surety bond
furnished in the contest proceedings.
Compliance With Governmental Requirements. Grantor shall
comply promptly with all laws, ordinances, rules and
regulations of all governmental authorities, now or
hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral.
Grantor may contest in good faith any such law, ordinance
or regulation and withhold compliance during any
proceeding, including appropriate appeals, so long as
Lender's interest in the Collateral, in Lender's opinion,
is not jeopardized.
Hazardous Substances. Grantor represents and warrants
that the Collateral never has been, and never will be so
long as this Agreement remains a lien on the Collateral,
used for the generation, manufacture, storage,
transportation, treatment, disposal, release or
threatened release of any hazardous waste or substance,
as those terms are defined in the Comprehensive
Environmental Response, Compensation, and Liability Act
of 1980, as amended, 42 U.S.C. Section 9601, et seq.
("CERCLA"), the Superfund Amendments and Reauthorization
Act of 1986, Pub. L. No. 99-499 ("SARA), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 49
U.S.C. Section 6901, et seq., or other applicable state
or Federal laws, rules, or regulations adopted pursuant
to any of the foregoing. The terms "hazardous waster and
"hazardous substance" shall also include, without
limitation, petroleum and petroleum by-products or any
fraction thereof and asbestos. The representations and
warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous
wastes and substances. Grantor hereby (a) releases and
waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for
cleanup or other costs under any such laws, and (b)
agrees to indemnify and hold harmless Lender against any
and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to
indemnity shall survive the payment of the Indebtedness
and the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure
and maintain all risks insurance, including without
limitation fire, theft and liability coverage together
with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages
and basis acceptable to Lender and issued by a company or
companies acceptable to Lender. Grantor, upon request of
Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form
satisfactory to Lender, including stipulations that
coverages will not be canceled or diminished without at
least thirty (30) days' prior written notice to Lender
and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each
insurance policy also shall include an
endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or
default of Grantor or any other person. In connection
with all policies covering assets in which Lender holds
or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as
Lender may require. If Grantor at any time fails to
obtain or maintain any insurance as required under this
Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate,
including if it so chooses "single interest insurance,"
which will cover only Lendees interest in the Collateral.
<PAGE> 12
Application of Insurance Proceeds. Grantor shall
promptly notify Lender of any loss or damage to the
Collateral. Lender may make proof of loss if Grantor
fails to do so within fifteen (15) days of the casualty.
All proceeds of any insurance on the Collateral,
including accrued proceeds thereon, shall be held by
Lender as part of the Collateral. If Lender consents to
repair or replacement of the damaged or destroyed
Collateral, Lender shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds
for the reasonable cost of repair or restoration. If
Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of
the proceeds to pay all of the Indebtedness, and shall
pay the balance to Grantor. Any proceeds which have not
been disbursed within six (6) months after their receipt
and which Grantor has not committed to the repair or
restoration of the Collateral shall be used to prepay the
Indebtedness.
Insurance Reports. Grantor, upon request of Lender,
shall furnish to Lender reports on each existing policy
of insurance showing such information as Lender may
reasonably request including the following: (a) the name
of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (a) the then
current value on the basis of which insurance has been
obtained and the manner of determining that value; and (9
the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to
Lender determine, as applicable, the cash value or
replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS.
Until default and except as otherwise provided below with
respect to accounts, Grantor may have possession of the
tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not
inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral
where possession of the Collateral by Lender is required
by law to perfect Lender's security interest in such
Collateral. Until otherwise notified by Lender, Grantor
may collect any of the Collateral consisting of accounts.
At any time and even though no Event of Default exists,
Lender may exercise its rights to collect the accounts
and to notify account debtors to make payments directly
to Lender for application to the Indebtedness. If Lender
at any time has possession of any Collateral, whether
before or after an Event of Default, Lender shall be
deemed to have exercised reasonable care in the custody
and preservation of the Collateral if Lender takes such
action for that purpose as Grantor shall request or as
Lender, in Lender's sole discretion, shall
deem appropriate under the circumstances, but failure to
honor any request by Grantor shall not of itself be
deemed to be a failure to exercise reasonable care.
Lender shall not be required to take any steps necessary
to preserve any rights in the Collateral against prior
parties, nor to protect, preserve or maintain any
security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when
due, Lender may (but shall not be obligated
to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement,
including without limitation all taxes, liens, security
interests, encumbrances, and other claims, at any time
levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring,
maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the
Note from the date incurred or paid by Lender to the date
of repayment by Grantor. All such expenses shall become
a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of
the Note and be apportioned among and be payable with any
installment payments to become due during either (i) the
term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a
balloon payment which will be due and payable at the
Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all
other rights and remedies to which Lender may be entitled
upon the occurrence of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall
constitute an Event of Default under this Agreement:
Default on Indebtedness. Failure of Grantor to make any
payment when due on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to
perform any other term, obligation, covenant or
condition contained in this Agreement or in any of the
Related Documents or in any other agreement between
Lender and Grantor.
Insolvency. The dissolution or termination of Grantor's
existence as a going business, the insolvency of Grantor,
the appointment of a receiver for any part of Grantor's
property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by
or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of
foreclosure or forfeiture proceedings, whether by
judicial proceeding, self-help, repossession or any other
method, by any creditor of Grantor or by any governmental
agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment
of any of Grantor's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events
occurs with respect to any Guarantor of any of the
Indebtedness or such Guarantor dies or becomes
incompetent.
Adverse Change. A material adverse change occurs in
Grantor's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is
impaired.
Insecurity. Lender, in good faith, deems itself
insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default
occurs under this Agreement, at any time thereafter,
Lender shall have all the rights of a secured party under
the Virginia Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more
of the following rights and remedies:
Accelerate Indebtedness. Lender may declare the entire
Indebtedness, including any prepayment penalty which
Grantor would be required to pay, immediately due and
payable, without notice.
Assemble Collateral. Lender may require Grantor to
deliver to Lender all or any portion of the Collateral
and any and all certificates of title and other documents
relating to the Collateral. Lender may require Grantor
to assemble the Collateral and make it available to
Lender at a place to be designated by Lender. Lender
also shall have full power to enter upon the property of
Grantor to take possession of and remove the Collateral.
If the Collateral contains other goods not covered by
this Agreement at the time of repossession, Grantor
agrees Lender may take such other goods, provided that
Lender makes reasonable efforts to return them to Grantor
after repossession.
Sell the Collateral. Lender shall have full power to
sell, lease, transfer, or otherwise deal with the
Collateral or proceeds thereof in its own name or that of
Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens
to decline speedily in value or is of a type customarily
sold on a recognized market, Lender will give Grantor
reasonable notice of the time after which any private
sale or any other intended disposition of the Collateral
is to be made. The requirements of reasonable notice
shall be met if such notice is given at least ten (10)
days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking,
holding, issuing, preparing for sale and selling the
Collateral, shall become a part of the Indebtedness
secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of
expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable
law, Lender shall have the following rights and
remedies regarding the appointment of a receiver: (a)
Lender may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lender and
may serve without bond, and (c) all fees of the receiver
and his or her attorney shall become part of the
Indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from
date of expenditure until repaid.
Collect Revenues, Apply Accounts. Lender, either itself
or through a receiver, may collect the payments, rents,
income, and revenues from the Collateral. Lender may at
any time in its discretion transfer any Collateral into
its own name or that of its nominee and receive the
payments,
<PAGE> 13
rents, income, and revenues therefrom and hold the same
as security for the Indebtedness or apply it to payment
of the Indebtedness in such order of preference as Lender
may determine. Insofar as the Collateral consists of
accounts, general intangibles, insurance policies,
instruments, chattel paper, chooses in action, or similar
property, Lender may demand, collect, receipt for,
settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine,
whether or not Indebtedness or Collateral is then due.
For these purposes, Lender may, on behalf of and in the
name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail
and payments are to be sent; and endorse notes, checks,
drafts, money orders, documents of title, instruments and
items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, Lender may notify
account debtors and obligers on any Collateral to make
payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all
of the Collateral, Lender may obtain a judgment against
Grantor for any deficiency remaining on the Indebtedness
due to Lender after application of all amounts received
from the exercise of the rights provided in this
Agreement. Grantor shall be liable for a deficiency even
if the transaction described in this subsection is a sale
of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the
rights and remedies of a secured creditor under the
provisions of the Uniform Commercial Code, as may be
amended from time to time. In addition, Lender shall
have and may exercise any or all other rights and
remedies it may have available at law, in equity, or
otherwise.
Cumulative Remedies. All of Lender's rights and
remedies, whether evidenced by this Agreement or the
Related Documents or by any other writing, shall be
cumulative and may be exercised singularly or
concurrently.
Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation
of Grantor under this Agreement, after Grantor's failure
to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous
provisions are a part of this Agreement:
Amendments. This Agreement, together with any Related
Documents, constitutes the entire understanding and
agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and
signed by the party or parties sought to be charged or
bound by the alteration or amendment.
Applicable Law. This Agreement shall be governed by,
construed and enforced in accordance with the laws of
the Commonwealth of Virginia. Lender and Grantor hereby
waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either party
against the other.
Attorneys' Fees; Expenses. Grantor agrees that if Lender
hires an attorney to help enforce this Agreement or to
collect any sums owing under this Agreement, Grantor will
pay, subject to any limits under applicable law,
Lender's attorney fees equal to 25.000% of the principal
balance due on the Note, and all of Lender's other
collection expenses, whether or not there is a lawsuit
and including without limitation additional legal
expenses for bankruptcy proceedings.
Caption Headings. Caption headings in this Agreement are
for convenience purposes only and are not to be used
to interpret or define the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations
of Grantor under this Agreement shall be joint and
several, and all references to Grantor shall mean each
and every Grantor. This means that each of the Borrowers
signing below is responsible for all obligations in this
Agreement.
Notices. All notices required to be given under this
Agreement shall be given in writing, may be sent by
telefacsimilie, and shall be effective when actually
delivered if hand delivered or when deposited with a
nationally recognized overnight courier or deposited as
certified or registered mail in the United States mail,
first class, postage prepaid, addressed to the party to
whom the notice is to be given at the address shown
above. Any party may change its address for notices
under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the
notice is to change the party's address. To the extent
permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to
all Grantors. For notice purposes, Grantor agrees to
keep Lender informed at all times of Grantor's current
address(es).
Power of Attorney. Grantor hereby appoints Lender as its
true and lawful attorney-in-fact, irrevocably, with full
power of substitution to do the following: (a) to demand,
collect, receive, receipt for, sue and recover all sums
of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to
execute, sign and endorse any and all claims,
instruments, receipts, checks, drafts or warrants issued
in payment for the Collateral; (c) to settle or
compromise any and all claims arising under the
Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the
claim; and (d) to file any claim or claims or to take any
action or institute or take part in any proceedings,
either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to
be necessary or advisable. This power is given as
security for the Indebtedness, and the authority hereby
conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
Severability. If a court of competent jurisdiction finds
any provision of this Agreement to be invalid or
unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances.
If feasible, any such offending provision shall be
deemed to be modified to be within the limits of
enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other
respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set
forth above on transfer of the Collateral, this Agreement
shall be binding upon and inure to the benefit of the
parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any
rights under this Agreement unless such waiver is
given in writing and signed by Lender. No delay or
omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other
right. A waiver by Lender of a provision of this
Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with
that provision or any other provision of this Agreement.
No prior waiver by Lender, nor any course of dealing
between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations
as to any future transactions. Whenever the consent of
Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances
where such consent is required and in all cases such
consent may be granted or withheld in the sole discretion
of Lender.
<PAGE> 14
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF
THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR
AGREES TO ITS TERMS. THIS AGREEMENT IS DATED 11-29-95 .
--------
GRANTOR:
Essex Corporation
BY: Joseph R. Kurry, Jr.
-------------------- (SEAL)
Name and Title (Print)
Joseph R. Kurry, Jr. - VP/Treasurer
LENDER:
SIGNET BANK
BY: Randall W. Connelly
----------------------
Authorized Officer
<PAGE> 15
PROMISSORY NOTE
Principal Amount: $1,500,000.00 Initial Rate: 11.750%
Date of Note: 11-29-95
--------
PROMISE TO PAY. Essex Corporation ("Borrower") promises
to pay to SIGNET BANK ("Lender"), or order,
In lawful money of the United States of America, the
principal amount of One Million Five Hundred Thousand
& 00/100 Dollars ($1,500,000.00) or so much as may be
outstanding, together with Interest on the unpaid
outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until
repayment of each advance.
PAYMENT. Borrower will pay this loan In one payment of
all outstanding principal plus all accrued unpaid
Interest on November 30, 1996. In addition, Borrower
will pay regular monthly payments of accrued unpaid
interest beginning December 30, 1995, and all subsequent
interest payments are due on the same day of each
month after that. Interest on this Note is computed on
a 365/360 simple interest basis; that is, by applying the
ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal
balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will be
applied first to accrued unpaid interest, then to
principal, and any remaining amount to any unpaid
collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note
is subject to change from time to time based on
changes in an index which is Lender's Prime Rate (the
"Index). This is the rate of interest announced from
time to time by Lender as its "Prime Rate." Borrower and
each other party liable under this Note in any capacity,
whether as maker, endorser, surety, guarantor or
otherwise, acknowledge and agree that the Prime Rate is
a reference used by Lender in determining interest rates
on certain loans and is not intended to be the lowest
rate of interest charged on any extension of credit to
any customer. Lender will tell Borrower the current
Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than
each day. The Index currently Is 8.750% per annum. The
Interest rate to be applied to the unpaid principal
balance of this Note will be at a rate of 3.000
percentage points over the Index, resulting in an Initial
rate of 11.750% per annum. ONCE: Under no circumstances
will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a
portion of the amount owed earlier than it is due.
Easy payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to
continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the
following happens: (a) the failure of any "Party" (which
term shall mean and include each Borrower, endorser,
surety and guarantor of this Note) to make any payment
on this Note or on any other indebtedness due Lender when
due; (b) if any asset(s) of a Party are attached,
levied upon, seized or repossessed or if any asset(s) of
a Party should come into the possession of a receiver,
trustee, custodian or assignee for the benefit of
creditors, or if a Party makes an assignment for the
benefit of creditors; (c) the failure of a Party to
observe or perform any obligation or covenant contained
in any agreement, document or instrument furnished in
connection herewith or in any other agreement between a
Party and Lender; (d) any representation or warranty at
any time made by a Party to Lender in connection herewith
or in any other agreement between a Party and Lender, or
in any document or instrument delivered to Lender in
connection herewith or pursuant to such other agreement,
shall have been materially false at the time it was
made, (e) the termination or withdrawal of a Party's
guaranty with respect to any indebtedness due Lender; (f)
any Party files a petition in bankruptcy, petitions or
applies to any tribunal for any receiver or any trustee
of a Party or any substantial part of its property, or
commences any proceeding relating to such party under any
insolvency, reorganization, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; (g) if,
within 30 days after the filing of a petition in
bankruptcy against a Party or the commencement of any
proceeding against a Party seeking any reorganization,
arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future
statute, law or regulation, such petition or proceeding
shall not have dismissed, or, if, within 30 days after
the appointment, without the consent or acquiescence of
a Party, of any trustee, receiver or liquidator of such
Party or of all or any substantial part of the properties
of the such Party, such appointment shall not have been
vacated; (h) the application for the appointment of a
receiver for a party or for property of a Party; (i) the
making or sending of a notice of an intended bulk sale by
a Party; 0) commencement of any foreclosure, levy,
seizure or forfeiture proceeding, whether by judicial,
self-help, repossession, or any other method, by any
creditor of a Party, any creditor of the owner of any
collateral securing this Note, or by any governmental
agency with respect to a Party or such collateral, (k) if
any event occurs which is or, with the passage of time
and/or the giving of notice, could be a default under or
breach of the terms of any instrument or document
evidencing a debt or obligation of a Party to any third
party and is not cured within five (5) days after the
occurrence thereof; (1) any judgment against a Party or
any attachment against it or its property remains unpaid,
undischarged, unbonded or undismissed for a period of 30
days, unless and to the extent that such judgment is
appealed in good faith in a court of higher jurisdiction
and such appeal remains pending; (m) if any proceeding is
filed for the dissolution or liquidation of a Party; (n)
if any Party shall be enjoined or restrained in any
manner from conducting its business in whole or in part,
and such injunction shall not be dismissed or dissolved
within thirty (30) days after the filing thereof; (o) if
any tax lien or notice thereof is filed against a Party
or any of the assets of a Party and remains
undismissed, unpaid or unbonded for a period of thirty
(30) days; (p) if, without Lender's prior written
consent, any Party which is not a natural person enters
into or becomes a party to any merger, consolidation or
share exchange or if any Party sells, transfers, conveys
or leases, except in the ordinary course of business, any
significant part of its assets or properties or (if not
a natural person) alters its capital structure, business
activities or scope of operations; (q) if, without
Lender's prior written consent, there is a sale, exchange
or transfer of the voting control or any significant
portion of the stock or ownership interests of any Party
which is not a natural person; (r) if any Party who is a
natural person shall die or become incompetent; or (s)
the good faith determination by Lender that it deems
itself insecure or that a material adverse change in the
financial condition of a Party has occurred since the
date hereof or that Lendees prospect of payment hereunder
has been materially impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the
entire unpaid principal balance on this Note and all
accrued unpaid interest, together with all other
applicable fees costs and charges if any immediately due
and payable without notice and then Borrower will pay
that amount. Upon
<PAGE> 16
default, including failure to pay upon final maturity,
Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on
this Note to 6.000 percentage points over the Index. The
interest rate will not exceed the maximum rate permitted
by applicable law. Furthermore, subject to any limits
under applicable law, upon default, Borrower also agrees
to pay Lendees attorney fees equal to 25.000% of the
principal balance due on the Note, and all of Lender's
other collection expenses, whether or not there is a
lawsuit and including without limitation legal
expenses for bankruptcy proceedings. This Note shall be
governed by, construed and enforced in accordance
with the laws of the Commonwealth of Virginia. Lender
and Borrower hereby waive the right to any jury trial
in any action, proceeding, or counterclaim brought by
either party against the other.
CONFESSION OF JUDGMENT. Upon a default in payment of the
Indebtedness at maturity, whether by acceleration or
otherwise, Borrower hereby irrevocably authorizes and
empowers Thomas L. Hotchkiss or Donald E. Miles as
Borrower's attorney-in-fact to appear in the City of
Richmond clerk's office and to confess judgment against
Borrower for the unpaid amount of this Note as evidenced
by an affidavit signed by an officer of Lender setting
forth the amount then due, plus attorneys' fees as
provided in this Note, plus costs of suit, and to release
all errors, and waive all rights of appeal. if a copy of
this Note, verified by an affidavit, shall have been
filed in the proceeding, it will not be necessary to file
the original as a warrant of attorney. Borrower waives
the right to any stay of execution and the benefit of all
exemption laws now or hereafter in effect. No single
exercise of the foregoing warrant and power to confess
judgment will be deemed to exhaust the power, whether or
not any such exercise shall be held by any court to be
invalid, voidable, or void; but the power will continue
undiminished and may be exercised from time to time as
Lender may elect until all amounts owing on this Note
have been paid in full.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender
of $15.00 if Borrower makes a payment on Borrower's loan
and the check or preauthorized charge with which Borrower
pays is later dishonored.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon
and rights of setoff against the moneys, securities or
other property of Borrower given to Lender by law, Lender
shall have, with respect to Borrower's obligations to
Lender under this Note and to the extent permitted by
law, a contractual possessory security interest in and a
right of setoff against, and Borrower hereby assigns,
conveys, delivers, pledges, and transfers to Lender all
of Borrower's Right, title, and interest in and to all
deposits, moneys, securities, and other property of
Borrower now or hereafter in the possession of or on
deposit with Lender, whether held in a general or special
account or deposit, whether held jointly with someone
else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts.
Every such security interest and night of setoff may be
exercised without demand upon or notice to Borrower. No
security interest or right of setoff shall be deemed to
have been waived by any act or conduct on the part of
Lender or by any neglect to exercise such right of setoff
or to enforce such security interest or by any delay in
so doing. Every right of setoff and security interest
shall continue in full force and effect until such right
of setoff or security interest is specifically waived or
released by an instrument in writing executed by Lender.
LINE OF CREDIT. This Note evidences a revolving line of
credit. Advances hereunder shall be conclusively
presumed to have been made to and for the benefit of and
at the request of Borrower when: (1) deposited or
credited to an account of Borrower with Lender,
notwithstanding that such advance was requested, orally
or in writing, by someone other than the person(s)
signing below or that someone other than the person(s)
signing below is authorized to draw on such account and
may or does withdraw the whole or part of any such
advance; or (2) made in accordance with oral or written
instructions of Borrower or anyone signing below for or
on behalf of Borrower. Lender is hereby authorized to
maintain records of the date and amount of each advance,
the date and amount of any payment of principal or
interest and the principal balance then remaining unpaid
hereon. Borrower hereby agrees that the amount so
evidenced in such records shall, for all purposes,
constitute prima facie evidence thereof and shall be
binding upon Borrower, absent manifest error.
LATE CHARGE. Borrower agrees to pay to Lender on demand
a late charge not to exceed 5% of the amount of any
payment of principal or interest, or both, that is more
than ten (10) days past due.
GENERAL PROVISIONS. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without
losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed
by law, waive presentment, demand for payment, protest
and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that
Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take
any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with
whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD
ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE
INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS
OF THE NOTE.
BORROWER:
Essex Corporation
BY: Joseph R. Kurry, Jr.
-------------------- (SEAL)
Name and Title (Print)
Joseph R. Kurry, Jr. - VP/Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Dec-26-1994
<PERIOD-END> Dec-31-1995
<PERIOD-TYPE> 12-MOS
<CASH> 882
<SECURITIES> 0
<RECEIVABLES> 2,655
<ALLOWANCES> (206)
<INVENTORY> 183
<CURRENT-ASSETS> 3,807
<PP&E> 5,153
<DEPRECIATION> (3,060)
<TOTAL-ASSETS> 6,351
<CURRENT-LIABILITIES> 3,480
<BONDS> 911
0
0
<COMMON> 359
<OTHER-SE> 5,214
<TOTAL-LIABILITY-AND-EQUITY> 6,351
<SALES> 14,193
<TOTAL-REVENUES> 14,193
<CGS> 0
<TOTAL-COSTS> 14,026
<OTHER-EXPENSES> 1,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (1,435)
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</TABLE>
