FORM 10-QSB/A NO. 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
Commission File Number 0-10772
ESSEX CORPORATION
(Exact name of small business issuer as specified 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 21046-1891
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 939-7000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 NO
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT JUNE 30, 1996
----- ----------------
Common Stock, par value $0.10 per share 3,624,098
<PAGE>
ESSEX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments for a fair presentation of results for such
period. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-KSB/A No. 1 for the fiscal year ended
December 31, 1995.
2
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
June 30, December 31,
1996 1995
(unaudited) (audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 2,550,101 $ 822,065
Accounts receivable, net 1,777,290 2,655,046
Inventory 320,985 183,421
Prepayments and other current assets 125,023 146,183
-------------------- --------------------
4,773,399 3,806,715
-------------------- --------------------
PROPERTY AND EQUIPMENT
Land 195,175 195,175
Buildings and improvements 1,628,404 1,622,255
Production and special equipment 2,078,961 1,908,586
Furniture and equipment 1,450,583 1,427,125
-------------------- --------------------
5,353,123 5,153,141
Accumulated depreciation and amortization (3,334,719) (3,060,370)
-------------------- --------------------
2,018,404 2,092,771
-------------------- --------------------
OTHER ASSETS
Goodwill -- 204,299
Patents, net 149,659 175,226
Deferred debenture financing 117,969 21,470
Other 63,567 50,057
-------------------- --------------------
331,195 451,052
-------------------- --------------------
TOTAL ASSETS $ 7,122,998 $ 6,350,538
- ------------ ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
June 30, December 31,
1996 1995
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Current portion of Industrial Revenue Bond $ 80,001 $ 80,001
Current portion of capital leases 103,832 148,351
Bank line of credit 677,000 917,010
Accounts payable 324,330 770,614
Accrued wages and vacation 468,501 392,372
Accrued retirement contribution 101,931 144,500
Accrued lease settlement 308,832 378,941
Other accrued expenses 685,922 647,834
-------------------- --------------------
2,750,349 3,479,623
LONG-TERM DEBT
Industrial Revenue Bond, net of current portion 193,319 233,320
10% Collateralized Convertible Debentures Due 2000 1,400,000 535,000
Capital leases, net of current portion 164,654 142,677
-------------------- --------------------
Total Liabilities 4,508,322 4,390,620
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value; 10 million shares
authorized; 3,624,098 and 3,585,973 issued and
outstanding for 1996 and 1995, respectively 362,410 358,597
Contributions in excess of par value 5,311,468 5,214,966
Retained deficit (3,059,202) (3,613,645)
-------------------- --------------------
2,614,676 1,959,918
-------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,122,998 $ 6,350,538
- -------------------- ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
4
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIX WEEK PERIODS
ENDED JUNE 30, 1996 AND JUNE 25, 1995
<CAPTION>
1996 1995
(unaudited) (unaudited)
Technical Services and Products:
<S> <C> <C>
Revenues $ 6,821,000 $ 6,064,807
Direct costs (4,529,512) (3,925,883)
Indirect costs (2,083,978) (1,953,496)
Provision for contract reserves (15,000) --
------------------ ------------------
Operating Income - Technical Services and Products 192,510 185,428
------------------ ------------------
Optoelectronic Products and Services:
Revenues 823,182 327,930
Cost of goods sold and services provided (746,174) (300,603)
Manufacturing overhead (112,536) --
Engineering and product development expenses (341,255) (584,635)
Selling, general and administrative expenses (633,277) (278,490)
Provision for contract reserves (265,000) --
------------------ ------------------
Operating Loss - Optoelectronics Products and Services (1,275,060) (835,798)
------------------ ------------------
Total Operating Loss (1,082,550) (650,370)
Gain on settlement of lawsuit/(expenses),
net of related expenses of $1,773,578 in 1996 2,226,422 (209,799)
Lease settlement (250,000) --
Interest expense (85,129) (43,092)
------------------ ------------------
Income (Loss) Before Income Taxes 808,743 (903,261)
Provision for income taxes (254,300) --
------------------ ------------------
Net Income (Loss) $ 554,443 $ (903,261)
================== ==================
Weighted Average Number of Shares
Outstanding 3,608,628 2,277,035
================== ==================
Net Income (Loss) Per Share $ 0.15 $ (0.40)
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED JUNE 30, 1996 AND JUNE 25, 1995
<CAPTION>
1996 1995
(unaudited) (unaudited)
Technical Services and Products:
<S> <C> <C>
Revenues $ 3,046,721 $ 3,208,547
Direct costs (1,979,533) (2,099,539)
Indirect costs (1,010,223) (1,021,672)
Provision for contract reserves (15,000) --
------------------ ------------------
Operating Income - Technical Services and Products 41,965 87,336
------------------ ------------------
Optoelectronic Products and Services:
Revenues 352,171 156,965
Cost of goods sold and services provided (297,363) (137,754)
Manufacturing overhead (56,352) --
Engineering and product development expenses (183,755) (380,034)
Selling, general and administrative expenses (318,289) (176,331)
Provision for contract reserves (15,000) --
------------------ ------------------
Operating Loss - Optoelectronic Products and Services (518,588) (537,154)
------------------ ------------------
Total Operating Loss (476,623) (449,818)
Lawsuit prosecution expenses -- (116,032)
Interest expense (39,577) (19,683)
------------------ ------------------
Loss Before Income Taxes (516,200) (585,533)
Benefit from income taxes -- --
------------------ ------------------
Net Loss $ (516,200) $ (585,533)
================== ==================
Weighted Average Number of Shares
Outstanding 3,624,081 2,493,558
================== ==================
Net Loss Per Share $ (0.14) $ (0.24)
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEK PERIODS
ENDED JUNE 30, 1996 AND JUNE 25, 1995
<CAPTION>
1996 1995
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 554,443 $ (903,261)
Adjustments to reconcile Net Income (Loss) to Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization 329,670 159,534
Provision for contract reserves 280,000 --
Gain on sale/retirement of fixed assets (850) (11,328)
Change in Assets and Liabilities:
Accounts receivable 597,756 (562,950)
Inventory (137,564) --
Refundable income taxes -- 18,600
Prepayments and other assets 5,934 (54,905)
Goodwill 204,299 --
Accounts payable (446,284) (107,059)
Accrued lease settlement (70,109) (95,538)
Other liabilities 71,648 365,583
-------------- --------------
Net Cash Provided By (Used In) Operating Activities 1,388,943 (1,191,324)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (100,412) (204,694)
Proceeds from sale of fixed assets 850 18,069
-------------- --------------
Net Cash Used In Investing Activities (99,562) (186,625)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net (240,010) --
Repayment of long-term debt (40,001) (40,001)
Sale of common stock -- 1,474,000
Stock offering costs -- (222,785)
Proceeds from exercises of stock options and warrants 100,315 --
Issuance of convertible debentures, net of financing costs 756,614 --
Payment of capital lease obligations (138,263) --
-------------- --------------
Net Cash Provided By Financing Activities 438,655 1,211,214
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) 1,728,036 (166,735)
Balance - beginning of period 822,065 502,800
-------------- --------------
Balance - end of period $ 2,550,101 $ 336,065
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
7
<PAGE>
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: Fiscal Year
Essex Corporation (the "Company") is on a 52/53-week fiscal year ending the last
Sunday in December. 1996 will be a 52-week fiscal year.
NOTE 2: Net Income (Loss) Per Share
Net income (loss) per share has been calculated by dividing net income (loss) by
the weighted average number of shares outstanding during each period. Common
stock equivalents or other dilutive securities were excluded from the
computation of net income (loss) per share because their effect was immaterial
or anti-dilutive.
NOTE 3: Accounts Receivable Financing
The Company has 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
($677,000 at June 30, 1996 and $917,000 at December 31, 1995) constitute
proceeds under the note which bears interest at an annual rate of prime plus
1.5% (total rate approximately 9.75% at June 30, 1996; previously was prime plus
3% totaling 11.50% at December 31, 1995). The Company must also pay certain
administrative and commitment fees which are expected to be less than
$500/month. This agreement was revised in June 1996 and extended through May
1997.
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 were waived by the Bank in connection with the
issuance of the Company's convertible debentures.
During the first half of 1995, 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.
NOTE 4: Commitments and Contingencies
LEASE SETTLEMENT
Effective July 1994, the Company settled a legal dispute with a former landlord.
Under the Settlement Agreement ("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
8
<PAGE>
ESSEX CORPORATION
adjustment) of $2 per share. The option is exercisable through December 31, 2004
and has certain registration rights upon exercise of the option. The landlord
released the Company from outstanding and future rent or other obligations
arising from the leases.
Since July 1994, the Company has made 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. 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.
The contingent amounts due, if any, are to be paid quarterly. The period for
computation of such contingent payments ends December 2004. Through June 30,
1996, contingent amounts totalling approximately $241,000 have been earned, paid
and charged against the accrual. The $309,000 accrual as of June 30, 1996
represents the remaining contingent portion which is probable to be paid over
the applicable consideration period.
Per the Agreement, the Company agreed to pay 20% not to exceed $250,000 from the
settlement from the lawsuit described below. As this legal proceeding was
concluded in the first quarter of 1996, the amount payable of $250,000 to the
former landlord was expensed in this period and paid in April 1996.
LEGAL PROCEEDING
On March 28, 1996, the Company and a corporate defendant reached an out-of-court
settlement of the Company's previously reported 1994 lawsuit pending in the
United States District Court in Albuquerque, New Mexico. The express terms of
the settlement, including terms regarding the confidentiality of the settlement,
were definitized. Full payment was received by the Company on March 29, 1996.
Under the terms of the settlement, the Company netted in 1996 approximately $2.2
million from this legal settlement after payment of contingent attorney's fees
of $1,525,000 and related expenses in 1996 of $249,000. The Company had
previously expensed approximately $384,000 in legal fees and related expenses in
prior years.
NOTE 5: Common Stock Offering; 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 were
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 ($585,000 in the
first half of 1995 as shown in the statement of operations), was expended for
ImSyn(TM) prototype development and $183,000 for inventory. A portion of the net
proceeds ($241,000) was used to partially satisfy the contingent obligation to
the landlord.
9
<PAGE>
ESSEX CORPORATION
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 has reserved approximately 400,000 shares of common stock
for conversion. In addition, the Company has issued Warrants to the
broker/dealer for 28,571 shares of common stock. 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 78,400 shares to the purchasers of the Debentures
under essentially the same terms and conditions as the Warrants issued to the
broker/dealer.
The Company has reserved approximately 1,307,000 shares of common stock in
connection with the convertible debentures and the possible exercise of all such
warrants.
NOTE 6: Income Taxes
The Company was in a net operating loss (NOL) carryforward position for book and
tax purposes through December 31, 1995. The Company may have book and taxable
income in 1996. For book purposes, the Company has utilized available NOLs,
principally those obtained in connection with a prior acquisition. The benefits
obtained from the utilization of this acquisition-related NOL resulted in the
elimination of all remaining acquisition-related goodwill ($204,000).
For income tax purposes, the Company expects to utilize available NOLs to reduce
its 1996 Federal and state tax liability per various tax regulations to the
minimum, which the Company estimates to be approximately $50,000. The components
of the Company's provision for income taxes as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
CURRENT TAX PROVISION
<S> <C>
Federal $ 239,300
State 15,000
-------------
$ 254,300
</TABLE>
The Company will utilize its NOL carryforwards to reduce taxable income in 1996
and the amounts payable to approximately $50,000. The balance of the provision
for income taxes is attributable to the elimination of previously recorded
goodwill ($204,000) from an earlier acquisition.
10
<PAGE>
ESSEX CORPORATION
ITEM 2. 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 has
determined that it operates in two business segments: Technical Services and
Products; and Optoelectronic Products and Services. The Company allocates its
operations to the following business units.
o Systems Effectiveness Division (SED)
o Federal Systems Division (FSD)
o Commercial Products Division (CPD)
SED operates in the Technical Services and Products segment; CPD operates in the
Optoelectronics Products and Services segment; and FSD operates in both
segments.
Except for historical information, statements in this Management's Discussion
and Analysis or Plan of Operation section are forward-looking. Actual results
may differ materially due to a variety of factors, including the results of
product development and commercialization of new products, the Company's ability
to obtain and retain contracts and customers, the effect of national and
regional economic conditions, and the availability of capital to fund
operations. The Company undertakes no obligation and does not intend to update,
revise or otherwise publicly release the result of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.
STATUS
OPTOELECTRONIC PRODUCTS AND SERVICES
The Company began modest efforts on development of its first ImSyn(TM) processor
prototype in late 1994 and full fledged work on such development in 1995. As of
June 30, 1996, the Company completed initial development of its first ImSyn(TM)
processor prototype. The Company initially plans to sell in advanced radar
imaging and magnetic resonance imaging (MRI) markets. The Company has ongoing
efforts for further product development and applications engineering. In
accordance with generally accepted accounting principles governing such
engineering and development expenses, costs of approximately $184,000 and
$341,000 for the 1996 second quarter and first half, respectively, have been
recognized through the Company's statements of operations as 1996 period
expenses. Such expenses were $1,254,000 and $102,000 in full fiscal years 1995
and 1994, respectively.
Selling and marketing efforts are continuing as are product refinements and
further product development. Additional funding is necessary for commercial
products' inventory buildup, marketing and further development of commercial
applications and products. In order to partially fund such requirements, the
Company issued $865,000 in the first quarter of 1996, and $535,000 in December
1995 (totalling $1.4 million) of 10% Convertible Collateralized Debentures. The
net proceeds are being used for commercial product development, commercial
inventory production and marketing.
11
<PAGE>
ESSEX CORPORATION
At June 30, 1996, the Optoelectronic Products and Services segment has a small
initial backlog of approximately $1 million which is comprised primarily of
fixed-price contracts. There are two contracts included in this backlog with
remaining values of $466,000 for delivery of optoelectronic processors utilizing
ImSyn(TM) technology and related services to U.S. Government end users and one
contract with a remaining value of $380,000 for government-sponsored research
utilizing an ImSyn(TM) unit in synthetic aperture microscope applications.
TECHNICAL SERVICES AND PRODUCTS
At June 30, 1996, the Technical Services and Products contract backlog was $37.0
million ($5.3 million funded and $31.7 million unfunded). 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 $37 million is approximately: $33.6 million (91%)
in cost-plus-fee type contracts; $2.5 million (7%) in time and material and
$900,000 (2%) in fixed-price type contracts. Costs are charged to contracts as
incurred as the Technical Services and Products segment is generally providing
labor-based services and therefore does not normally accumulate or stock
inventory. The percentage-of-completion method of accounting is utilized for
revenue recognition. Anticipated losses, if any, are recognized as soon as they
become known.
CORPORATE MATTERS
On March 28, 1996, the Company and a corporate defendant reached an out-of-court
settlement of the Company's previously reported 1994 lawsuit. Under the terms of
the settlement, the Company netted in 1996 approximately $2.2 million from this
legal settlement after payment of contingent attorney's fees of $1,525,000 and
related expenses in 1996 of $249,000. The Company had previously expensed
approximately $384,000 in legal fees and related expenses in prior years.
OPERATING RESULTS
TECHNICAL SERVICES AND PRODUCTS:
REVENUE
This segment's revenues for the first twenty-six weeks of 1996 totaled
$6,821,000, which was $756,000 or 12% higher than the $6,065,000 reported during
the same period in 1995. The increase in revenues was primarily attributable to
a new U.S. Navy contract to provide manufacturing and technical support for
weapons systems and associated materials.
12
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ESSEX CORPORATION
Revenues for the 1996 second quarter were $3,047,000, a decline of $162,000 or
5% from the second quarter of 1995. This segment is experiencing a slowdown in
receipt of new awards and funding on existing contracts with U.S. government
customers. This slowdown is likely to continue as these customers deal with
budgetary matters and election year issues.
INCOME
This segment had operating income in the first twenty-six weeks of $193,000 (3%
gross profit) and $185,000 (3.1% gross profit) in 1996 and 1995, respectively.
Direct costs have remained fairly proportional as a percentage of revenues
(66.4% in the first twenty-six weeks of 1996 and 64.7% for the same period in
1995). There has been a significant increase in 1996 compared to 1995 in other
direct costs (such as materials and subcontracts) and a decrease in direct labor
and related expenses. The increase in other direct costs is primarily due to
increased material purchases on contract work in the first half of 1996. The
Company generally receives a smaller gross profit from revenues generated by
other direct costs.
OPTOELECTRONIC PRODUCTS AND SERVICES:
REVENUES
This segments' revenues for the first half of 1996 totaled $823,000 as compared
to $328,000 in the same period of 1995. During 1995, significant resources were
devoted to initial prototype development. Sales orders and work on such orders
was limited in 1995 due to the status of such development. In 1996, work on two
contracts is being performed and components are being assembled for delivery of
an optoelectronic processor on each contract using ImSyn(TM) technology together
with related services. Work is also being performed on another contract for
government-sponsored research on the Company's proprietary synthetic aperture
microscope technology. This technology will utilize the ImSyn(TM) unit.
INCOME
This segment had an operating loss of $1,275,000 in the first half of 1996 as
compared to an operating loss of $836,000 in the same period of 1995. Initial
revenues are comprised primarily of services provided. The cost of goods sold is
a relatively high percentage of such revenues (90.6% in 1996 and 91.7% in 1995)
as there is a small gross margin on service revenues.
Beginning January 1, 1996, this segment began to establish a manufacturing
operation for optoelectronic products. As the manufacturing operation is in
start up phase, manufacturing overhead is underabsorbed. Such additional expense
was $113,000 in the first half of 1996.
The Company incurred expenses in connection with the development of the initial
ImSyn(TM) prototype and further product development and applications
engineering. Such expenses were $341,000 in the first twenty-six weeks of 1996
and $585,000 in the same period of 1995. The Company expensed $1,254,000 and
$102,000 in full fiscal years 1995 and 1994, respectively.
13
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ESSEX CORPORATION
In addition to the engineering and product development expenditures, this
segment is increasing expenditures for selling, general and administrative
expenses in order to achieve initial market penetration. Such expenditures were
$633,000 and were over twice as large in the first twenty-six weeks of 1996 as
the $278,000 expended in the same period in 1995.
The Company made a contract reserve provision of $265,000 in the first half of
1996. The completion status of a fixed-price contract to deliver an
optoelectronic correlator has been negatively impacted by design and
specification changes which are not expected to be recoverable under the
$729,000 Small Business Innovative Research contract.
CORPORATE MATTERS
Total revenues were $7,644,000 in the first half of 1996, an increase of
$1,251,000 or 20% over the $6,393,000 in the first half of 1995. The net income
in 1996 resulted from the gain on settlement of lawsuit (approximately
$1,972,000 net of $254,000 of income taxes, or $0.55 per share). This gain
triggered a payment to the former landlord and expense of $250,000 ($0.07 per
share). Excluding these items, results from total operations would have produced
a net loss of $1,168,000 or $0.33 per share in the first twenty-six weeks of
1996 compared with a net loss of $903,000 or $0.40 per share in the same period
in 1995. The income (loss) per share results are computed on weighted average
shares outstanding of 3,609,000 in 1996 compared to 2,277,000 in 1995. For the
second quarter of 1996, the Company is reporting a net loss of $516,000 or $0.14
per share, as compared to a net loss of $586,000 or $0.24 per share reported in
the second quarter of 1995. The net loss in the 1996 quarterly period is also
computed on a higher number of outstanding shares (3,624,000) as compared to the
1995 period (2,494,000).
The Company and a corporate defendant reached an out-of-court settlement. Under
the terms of the Settlement Agreement, the Company recognized a gain of
approximately $2.2 million after payment of contingent attorney's fees of
$1,525,000 and related expenses of $249,000. The Company had expensed in prior
years approximately $385,000 in connection with this lawsuit. In addition, the
Company recognized an expense of $250,000 as part of the previously concluded
rent dispute with its former landlord. The Company was liable for such a payment
upon successful conclusion of the previously described lawsuit.
In 1996, the Company's interest costs increased due to the issuance of $1.4
million of 10% convertible debentures. Total interest costs were $85,000 in the
first half of 1996 compared to $43,000 in the same period of 1995.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No provision or
benefit from income taxes was recognized in the first half of 1995. In the first
half of 1996, the Company recorded a book income tax expense, although lower
than at statutory rates. The Company will utilize its NOL carryforwards to
reduce taxable income in 1996 and the amounts payable to approximately $50,000.
The balance of the provision for income taxes is attributable to the elimination
of previously recorded goodwill ($204,000) from an earlier acquisition.
14
<PAGE>
ESSEX CORPORATION
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
SELECTED FINANCIAL DATA ($ Thousands)
<CAPTION>
AS OF
June 30, December 31, June 25,
1996 1995 1995
<S> <C> <C> <C>
Total Assets $ 7,123 $ 6,351 $ 4,488
Working Capital $ 2,023 $ 327 $ (191)
Current Ratio 1.74:1 1.09:1 0.92:1
================ =============== ==============
Current and Long-Term Debt $ 273 $ 313 $ 353
Current and Long-Term
Capital Leases 269 291 --
Bank Note Payable/ 677 917 --
Accounts Receivable Financing -- -- 146
10% Convertible Debentures Due 2000 1,400 535 --
---------------- --------------- --------------
Total Debt/Financing $ 2,619 $ 2,056 $ 499
================ =============== ==============
Stockholders' Equity $ 2,615 $ 1,960 $ 1,485
</TABLE>
In 1996, the Company experienced an improvement in its working capital dollars
and ratio due primarily to receipt of the net proceeds of $2.2 million from the
lawsuit settlement. The stockholders' equity increased by approximately $550,000
from the 1996 first half net income.
The net cash provided by operations was approximately $1.4 million and primarily
resulted from the $550,000 net income (including the lawsuit gain) and
collections of accounts receivables of approximately $600,000. A significant
first half 1996 non cash item was the $280,000 provision for contract reserves.
This item is expected to result in uses of cash in future quarters of 1996.
Under the settlement agreement reached with the landlord, certain payments are
triggered only by other future cash inflows. The remaining $309,000 contingent
portion of the landlord settlement obligation (which has been accrued and
expensed in prior years), is 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.
The Company has 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 1.5%. The Company can utilize certain
accounts receivable and obtain a percentage advance as a loan under the
financing arrangement. At June 30, 1996, the funds advanced were $677,000. The
current arrangement extends through May 31, 1997. These borrowings were repaid
on July 1, 1996 and there are no borrowings outstanding.
15
<PAGE>
ESSEX CORPORATION
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.
In 1996, the Company plans to make significant expenditures for commercial
product inventory, commercial marketing and certain capital expenditures. The
Company expended $138,000 for inventory in the first half of 1996. The Company
purchased $100,000 of property and equipment, mostly computers and other special
equipment, through direct cash purchase during the first half of 1996. The
Company further acquired approximately $116,000 of similar equipment under
capital leases having terms which generally 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 became 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 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.
16
<PAGE>
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
Date: 24 October 1996 /s/ Joseph R. Kurry, Jr.
-------------------------
Joseph R. Kurry, Jr.
Vice President, Treasurer and Chief Financial Officer
(Mr. Kurry is the Principal Financial and Accounting Officer and has been duly
authorized to sign on behalf of the Registrant.)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,550
<SECURITIES> 0
<RECEIVABLES> 1,777
<ALLOWANCES> (390)
<INVENTORY> 321
<CURRENT-ASSETS> 4,773
<PP&E> 5,353
<DEPRECIATION> (3,335)
<TOTAL-ASSETS> 7,123
<CURRENT-LIABILITIES> 2,750
<BONDS> 1,758
0
0
<COMMON> 362
<OTHER-SE> 2,252
<TOTAL-LIABILITY-AND-EQUITY> 7,123
<SALES> 7,644
<TOTAL-REVENUES> 7,644
<CGS> 5,729
<TOTAL-COSTS> 2,717
<OTHER-EXPENSES> 2,233
<LOSS-PROVISION> 280
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 809
<INCOME-TAX> 254
<INCOME-CONTINUING> 554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 554
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
