FORM 10-QSB
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 September 29, 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 AT
CLASS SEPTEMBER 29, 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>
September 29, December 31,
1996 1995
(unaudited) (audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,787,670 $ 822,065
Accounts receivable, net 1,694,311 2,655,046
Inventory 290,239 183,421
Prepayments and other current assets 150,953 146,183
-------------------- --------------------
3,923,173 3,806,715
-------------------- --------------------
PROPERTY AND EQUIPMENT
Land 195,175 195,175
Buildings and improvements 1,628,404 1,622,255
Production and special equipment 2,018,065 1,908,586
Furniture and equipment 1,432,168 1,427,125
-------------------- --------------------
5,273,812 5,153,141
Accumulated depreciation and amortization (3,328,284) (3,060,370)
-------------------- --------------------
1,945,528 2,092,771
-------------------- --------------------
OTHER ASSETS
Goodwill 159,439 204,299
Patents, net 168,609 175,226
Deferred debenture financing 111,416 21,470
Other 64,764 50,057
-------------------- --------------------
504,228 451,052
-------------------- --------------------
TOTAL ASSETS $ 6,372,929 $ 6,350,538
- ------------ ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 29, December 31,
1996 1995
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of Industrial Revenue Bond $ 80,001 $ 80,001
Current portion of capital leases 103,833 148,351
Bank line of credit 400,000 917,010
Accounts payable 366,320 770,614
Accrued wages and vacation 561,879 392,372
Accrued retirement contribution 143,688 144,500
Accrued lease settlement 308,832 378,941
Other accrued expenses 624,811 647,834
-------------------- --------------------
2,589,364 3,479,623
LONG-TERM DEBT
Industrial Revenue Bond, net of current portion 173,319 233,320
10% Collateralized Convertible Debentures Due 2000 1,400,000 535,000
Capital leases, net of current portion 136,448 142,677
-------------------- --------------------
Total Liabilities 4,299,131 4,390,620
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
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 (3,600,080) (3,613,645)
-------------------- --------------------
2,073,798 1,959,918
-------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,372,929 $ 6,350,538
- -------------------- ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 24, 1995
<CAPTION>
1996 1995
(unaudited) (unaudited)
Technical Services and Products:
<S> <C> <C>
Revenues $ 9,503,046 $ 9,386,639
Direct costs (6,039,183) (6,169,206)
Indirect costs (3,299,043) (2,946,223)
Provision for contract reserves (30,000) --
------------------ ------------------
Operating Income - Technical Services and Products 134,820 271,210
------------------ ------------------
Optoelectronic Products and Services:
Revenues 1,087,487 443,767
Cost of goods sold and services provided (979,456) (395,038)
Manufacturing overhead (172,524) --
Engineering and product development expenses (684,604) (1,009,001)
Selling, general and administrative expenses (944,266) (461,225)
Provision for contract reserves (280,000) --
------------------ ------------------
Operating Loss - Optoelectronics Products and Services (1,973,363) (1,421,497)
------------------ ------------------
Total Operating Loss (1,838,543) (1,150,287)
Gain on settlement of lawsuit/(expenses),
net of related expenses of $1,773,578 in 1996 2,226,422 (251,055)
Lease settlement (250,000) --
Interest expense (124,314) (45,737)
------------------ ------------------
Income (Loss) Before Income Taxes 13,565 (1,447,079)
Provision for income taxes -- --
------------------ ------------------
Net Income (Loss) $ 13,565 $ (1,447,079)
================== ==================
Weighted Average Number of Shares
Outstanding 3,613,787 2,671,609
================== ==================
Net Income (Loss) Per Share $ 0.00 $ (0.54)
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 24, 1995
<CAPTION>
1996 1995
(unaudited) (unaudited)
Technical Services and Products:
<S> <C> <C>
Revenues $ 2,682,046 $ 3,321,832
Direct costs (1,509,671) (2,243,323)
Indirect costs (1,215,065) (992,727)
Provision for contract reserves (15,000) --
------------------ ------------------
Operating Income (Loss) - Technical Services
and Products (57,690) 85,782
------------------ ------------------
Optoelectronic Products and Services:
Revenues 264,305 115,837
Cost of goods sold and services provided (233,282) (94,435)
Manufacturing overhead (59,988) --
Engineering and product development expenses (343,349) (424,366)
Selling, general and administrative expenses (310,989) (182,734)
Provision for contract reserves (15,000) --
------------------ ------------------
Operating Loss - Optoelectronic Products and Services (698,303) (585,698)
------------------ ------------------
Total Operating Loss (755,993) (499,916)
Lawsuit prosecution expenses -- (41,256)
Interest expense (39,185) (2,645)
------------------ ------------------
Loss Before Income Taxes (795,178) (543,817)
Benefit from income taxes 254,300 --
------------------ ------------------
Net Loss $ (540,878) $ (543,817)
================== ==================
Weighted Average Number of Shares
Outstanding 3,624,098 3,460,759
================== ==================
Net Loss Per Share $ (0.15) $ (0.16)
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 24, 1995
<CAPTION>
1996 1995
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 13,565 $ (1,447,079)
Adjustments to reconcile Net Income (Loss) to Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization 499,407 279,324
Stock award -- 36,960
Provision for contract reserves 310,000 --
Gain on sale of fixed assets (6,727) (11,801)
Change in Assets and Liabilities:
Accounts receivable 650,735 (948,097)
Inventory (106,818) --
Refundable income taxes -- 18,600
Prepayments and other assets (42,690) (90,129)
Accounts payable (404,294) (26,039)
Accrued lease settlement (70,109) (187,809)
Other liabilities 145,672 214,334
-------------- --------------
Net Cash Provided By (Used In) Operating Activities 988,741 (2,161,736)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (158,057) (220,647)
Proceeds from sale of fixed assets 21,473 18,542
-------------- --------------
Net Cash Used In Investing Activities (136,584) (202,105)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings, net (517,010) --
Repayment of long-term debt (60,001) (60,002)
Sale of common stock -- 2,500,000
Stock offering costs -- (286,952)
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 (166,470) (111,249)
-------------- --------------
Net Cash Provided By Financing Activities 113,448 2,041,797
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) 965,605 (322,044)
Balance - beginning of period 822,065 502,800
-------------- --------------
Balance - end of period $ 1,787,670 $ 180,756
============== ==============
<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
In 1996, 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
($400,000 at September 29, 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 September 29, 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.
In 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 cash payments of 25% of
future earnings (as defined) and 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; 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
8
<PAGE>
ESSEX CORPORATION
125,000 shares of the Company's stock at an exercise price (subject to
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. 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 Company has made the deferred rent cash payments of $250,000. The contingent
amounts due, if any, are to be paid quarterly. The period for computation of
such contingent payments ends December 2004. Through September 29, 1996,
contingent amounts totaling approximately $241,000 have been earned, paid and
charged against the accrual. The $309,000 accrual as of September 29, 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
favorably 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 incurred in 1996 of $249,000. The Company had
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. 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 ($1,009,000 in the
first nine months 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.
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
9
<PAGE>
ESSEX CORPORATION
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. For the six-month period ended June 30,
1996, the Company had income for book and tax purposes and recorded income tax
expense, although at a reduced rate due to recognition of NOLs. In the third
quarter of 1996, the loss from operations reduced cumulative results and the
previously recorded income tax expense was reversed.
NOTE 7: Statements of Cash Flows
Supplemental disclosures of cash flow information are as follows:
A. In 1995, the Company issued 12,000 shares of common stock with a market
value of $36,960 under the Restricted Stock Bonus Plan.
B. Capital lease obligations of $116,000 and $368,000 were incurred during
the first nine months of 1996 and 1995, respectively, when the Company
entered into various leases for new equipment.
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 has entered the synthetic aperture radar (SAR)
imaging and magnetic resonance imaging (MRI) markets. As previously announced,
the Company is now in the process of completing three deliverable ImSyn(TM)
Processors, one for Northrop Grumman, one for the U.S. Navy and one for another
government agency. During the quarter, the Company initiated production plans to
build ten additional ImSyn(TM) Processors of which three have been released to
manufacture. One field sales engineer is assigned to each of the SAR and MRI
markets. The SAR market consists of aerospace prime contractors, subcontractors
and government laboratories, while the MRI market consists of luminary medical
research centers. In addition, the Company is continuing to present both its
ImSyn(TM) Processor and its Synthetic Aperture Microscope to original equipment
manufacturers for their consideration.
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
$343,000 and $685,000 for the 1996 third quarter and first nine months,
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.
11
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ESSEX CORPORATION
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 (totaling $1.4 million) of
10% Convertible Collateralized Debentures. The net proceeds are being used for
commercial product development, commercial inventory production and marketing.
At September 29, 1996, the Optoelectronic Products and Services segment has a
backlog of approximately $1.8 million which is comprised primarily of
fixed-price contracts. There is a new contract which was received in July 1996
included in this backlog with a value of approximately $600,000 for delivery of
an optoelectronic processor utilizing ImSyn(TM) technology and related services
to U.S. Government end users. Another contract with a remaining value of
$290,000 is for government-sponsored research utilizing an ImSyn(TM) unit in
synthetic aperture microscope applications. Additional funding of approximately
$400,000 is included in backlog from another U.S. Government customer to
complete the prototype optoelectronic range-doppler imager and demonstrate new
radar techniques to combat ballistic missile threat.
TECHNICAL SERVICES AND PRODUCTS
At September 29, 1996, the Technical Services and Products contract backlog was
$35 million ($4 million funded and $31 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 $35 million is approximately: $33 million (94%)
in cost-plus-fee type contracts; $1.6 million (5%) in time and material and
$400,000 (1%) 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.
OPERATING RESULTS
TECHNICAL SERVICES AND PRODUCTS:
REVENUES
This segment's revenues for the first thirty-nine weeks of 1996 totaled
$9,503,000, which was comparable to the $9,387,000 reported during the same
period in 1995. The slight 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
<PAGE>
ESSEX CORPORATION
Revenues for the 1996 third quarter were $2,682,000, a decline of $640,000 or
19% from the $3,322,000 third quarter revenues 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 thirty-nine weeks of $135,000
(1.4% gross profit) and $271,000 (2.9% gross profit) in 1996 and 1995,
respectively. This segment had an operating loss in the third quarter of 1996 of
$58,000 as compared to operating income of $86,000 in the same quarterly period
of 1995. In this segment, the Company experienced overruns in the final phase of
a $3.6 million program which spanned three years to provide training devices to
a U.S. Government customer. This segment recognized approximately $209,000 of
loss on this program during the first nine months of 1996, including $97,000
during the 1996 third quarter. This program is scheduled to be completed in the
fourth quarter of 1996.
Direct costs have remained fairly proportional as a percentage of revenues
(63.6% in the first thirty-nine weeks of 1996 and 65.7% 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 nine months of 1996.
The Company generally receives a smaller gross profit from revenues generated by
other direct costs.
OPTOELECTRONIC PRODUCTS AND SERVICES:
REVENUES
This segment's revenues for the first nine months of 1996 totaled $1,087,000 as
compared to $444,000 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 to date, 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. Another order from a government customer has been
received for an ImSyn(TM) unit and should be recognized as a product sale in the
fourth quarter of 1996.
INCOME
This segment had an operating loss of $1,973,000 in the first nine months of
1996 as compared to an operating loss of $1,421,000 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% in 1996 and 89% in
1995) as there is a small gross margin on service revenues.
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ESSEX CORPORATION
Beginning January 1, 1996, this segment began to establish a manufacturing
operation for optoelectronic products. As the manufacturing operation is in
start-up phase, a portion of manufacturing overhead is underabsorbed. Such
additional expense was $173,000 in the first nine months of 1996.
The segment incurred expenses in connection with the development of the initial
ImSyn(TM) prototype and further product development and applications
engineering. Such expenses were $685,000 in the first thirty-nine weeks of 1996
and $1,009,000 in the same period of 1995. Such expenses were $1,254,000 and
$102,000 in full fiscal years 1995 and 1994, respectively.
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
$944,000 and were more than double the amount in the first thirty-nine weeks of
1996 as the $461,000 expended in the same period in 1995.
A contract reserve provision of $280,000 was made in the first nine months of
1996. The completion status of the fixed-price contracts to deliver an
optoelectronic correlator and to deliver the first optoelectronic processor have
been negatively impacted by design and specification changes which are not
expected to be recoverable under the contracts.
CORPORATE MATTERS
Total revenues were $10,591,000 in the first nine months of 1996, an increase of
$761,000 or 8% over the $9,830,000 in the same period of 1995. The breakeven net
income results for the first nine months of 1996 stemmed from several items.
There was the gain on settlement of lawsuit (approximately $2,226,000, or $0.62
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 $1,963,000 or $0.54 per share in the first
thirty-nine weeks of 1996 compared with a net loss of $1,447,000 or $0.54 per
share in the same period in 1995. The income (loss) per share results are
computed on weighted average shares outstanding of 3,614,000 in 1996 compared to
2,672,000 in 1995. For the third quarter of 1996, the Company is reporting a net
loss of $541,000 or $0.15 per share, as compared to a net loss of $544,000 or
$0.16 per share reported in the third quarter of 1995. The net loss in the 1996
quarterly period is computed on a comparable number of outstanding shares
(3,624,000) as compared to the 1995 period (3,461,000).
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 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 $124,000 in the
first nine months of 1996 compared to $46,000 in the same period of 1995.
14
<PAGE>
ESSEX CORPORATION
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No provision or
benefit from income taxes was recognized in the first nine months of 1996 or
1995. In the first six months of 1996, the Company had income for book and tax
purposes and recorded a book income tax expense, although lower than at
statutory rates due to recognition of NOLs. In the third quarter of 1996, the
loss from operations reduced cumulative results and the previously recorded
income tax expense was reversed.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
September 29, December 31, September 24,
1996 1995 1995
<S> <C> <C> <C>
Total Assets $ 6,373 $ 6,351 $ 5,017
Working Capital $ 1,334 $ 327 $ 21
Current Ratio 1.52:1 1.09:1 1.01:1
================= ================= =================
Current and Long-Term Debt $ 253 $ 313 $ 333
Current and Long-Term
Capital Leases 240 291 --
Bank Note Payable/ 400 917 --
Accounts Receivable Financing -- -- 125
10% Convertible Debentures Due 2000 1,400 535 --
----------------- ----------------- -----------------
Total Debt/Financing $ 2,293 $ 2,056 $ 458
================= ================= =================
Stockholders' Equity $ 2,074 $ 1,960 $ 1,940
</TABLE>
In 1996, the Company experienced an improvement in its working capital dollars
and ratio due primarily to receipt of the net proceeds of $757,000 from the
placement of the convertible debentures. The stockholders' equity increased by
approximately $100,000 from the proceeds from the exercise of stock options.
The net cash provided by operating activities was approximately $1 million and
primarily resulted from the collections of accounts receivables of approximately
$651,000.
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.
15
<PAGE>
ESSEX CORPORATION
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 September 29, 1996, the funds advanced were $400,000.
These borrowings were repaid on September 30, 1996 and there are no borrowings
outstanding. The current arrangement extends through May 31, 1997.
The 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 of or mergers with other entities; and 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.
During the remainder of 1996 and in 1997, the Company plans to utilize its cash
for optoelectronic products inventory and commercial marketing expenses. The
Company anticipates that cash requirements in these areas will be at
increasingly higher levels than those experienced in 1996 in preparation for
initial market penetration for its optoelectronic products. To a large extent,
the Company's ability to develop and commercialize its optoelectronic products
and the timing thereof is dependent on the working capital available to the
Company. Such working capital can be derived from several sources, such as cash
from operating activities, public or private financings and asset sales. The
Company may sell certain operating or other assets which are underutilized or
deemed not to be a part of its ongoing operations. The Company has placed its
Huntsville, Alabama facility for sale as operations previously performed there
are being reestablished in Maryland. There are, however, no definitive
arrangements for any such asset sales. The Company has outstanding warrants to
purchase approximately 625,000 shares of common stock at an exercise price of
$3.00 per share (with potential cash proceeds of $1.9 million). Upon meeting
certain conditions, the warrants are callable by the Company for exercise
through June 30, 1998 when the last price of the Company's common stock exceeds
$5 per share for 10 consecutive trading days. As of October 23, 1996, the last
price per share of the Company's common stock was approximately $2.25.
The Company believes that its anticipated short-term needs for working capital
will be adequately met by the utilization of its existing cash balances or
available credit from its secured asset lending agreement. However, the Company
anticipates that additional funds will be necessary from public or private
financing markets to achieve desired product inventory levels and initial market
penetration. There can be no assurance that the Company will be able to obtain
additional financing when needed whether from the exercise of warrants or
otherwise.
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: October 24, 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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 1,787
<SECURITIES> 0
<RECEIVABLES> 1,994
<ALLOWANCES> (300)
<INVENTORY> 290
<CURRENT-ASSETS> 3,923
<PP&E> 5,274
<DEPRECIATION> (3,328)
<TOTAL-ASSETS> 6,373
<CURRENT-LIABILITIES> 2,589
<BONDS> 1,573
0
0
<COMMON> 362
<OTHER-SE> 5,311
<TOTAL-LIABILITY-AND-EQUITY> 6,373
<SALES> 10,590
<TOTAL-REVENUES> 10,590
<CGS> 11,175
<TOTAL-COSTS> 12,119
<OTHER-EXPENSES> 2,024
<LOSS-PROVISION> 310
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> 14
<INCOME-TAX> 0
<INCOME-CONTINUING> 14
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
