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 28, 1997
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 OCTOBER 31, 1997
----- -------------------
Common Stock, par value $0.10 per share 3,626,098
Transitional Small Business Disclosure Format (Check One);
YES NO X
----- -----
<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 for the fiscal year ended December
29, 1996.
2
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 28, December 29,
1997 1996
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 495,728 $ 1,507,603
Accounts receivable, net 480,992 431,870
Inventory 823,813 482,317
Prepayments and other 13,831 115,735
Net current assets of discontinued operations 313,531 60,777
-------------------- --------------------
2,127,895 2,598,302
-------------------- --------------------
PROPERTY AND EQUIPMENT
Production and special equipment 1,005,031 1,014,201
Furniture, equipment and other 719,968 831,740
-------------------- --------------------
1,724,999 1,845,941
Accumulated depreciation and amortization (1,412,613) (1,396,475)
-------------------- --------------------
312,386 449,466
-------------------- --------------------
OTHER ASSETS
Net noncurrent assets of discontinued operations 1,126,547 1,196,111
Patents, net 180,355 169,657
Goodwill, net 99,626 144,486
Deferred debenture financing 85,301 104,880
Other 34,482 45,587
-------------------- --------------------
1,526,311 1,660,721
-------------------- --------------------
TOTAL ASSETS $ 3,966,592 $ 4,708,489
- ------------ ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 28, December 29,
1997 1996
(unaudited) (unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
<S> <C> <C>
Current portion of capital leases $ 66,550 $ 82,284
Bank line of credit 750,000 900,000
8% Convertible notes payable 245,000 --
Accounts payable 299,112 278,284
Accrued wages and vacation 191,917 156,064
Deferred revenues and loss reserves -- 265,000
Accrued lease settlement 299,551 308,237
Refundable deposit on sale of discontinued operations 200,000 --
Other accrued expenses 546,199 495,521
-------------------- --------------------
2,598,329 2,485,390
LONG-TERM DEBT
10% Collateralized Convertible Debentures Due 2000 1,400,000 1,400,000
Capital leases, net of current portion 31,594 94,030
REDEEMABLE PREFERRED STOCK - SERIES A 120,000 --
- ------------------------------------- -------------------- --------------------
Total Liabilities 4,149,923 3,979,420
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.10 par value; 25 million shares
authorized; 3,626,098 and 3,625,098 shares issued
and outstanding for 1997 and 1996, respectively 362,610 362,510
Contributions in excess of par value 5,316,308 5,313,888
Retained deficit (5,862,249) (4,947,329)
-------------------- --------------------
(183,331) 729,069
-------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 3,966,592 $ 4,708,489
- ------------------------------ ==================== ====================
<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 28, 1997 AND SEPTEMBER 29, 1996
<CAPTION>
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 2,998,648 $ 2,989,419
Cost of goods sold and services provided (1,474,583) (1,825,526)
Engineering and product development expenses (471,990) (684,604)
Selling, general and administrative expenses (1,940,258) (2,623,236)
------------------ ------------------
Operating Loss (888,183) (2,143,947)
Gain on settlement of lawsuit,
net of related expenses of $1,773,578 in 1996 -- 2,226,422
Lease settlement -- (250,000)
Interest expense (192,462) (124,314)
------------------ ------------------
Loss from Continuing Operations
Before Income Taxes (1,080,645) (291,839)
Provision for income taxes -- --
------------------ ------------------
Loss from Continuing Operations (1,080,645) (291,839)
------------------ ------------------
Discontinued Operations (Note 8):
Income (Loss) from operations (100,973) 305,404
Gain on disposal 266,698 --
------------------ ------------------
Income from Discontinued Operations 165,725 305,404
------------------ ------------------
Net Income (Loss) $ (914,920) $ 13,565
================== ==================
Weighted Average Number of Shares
Outstanding 3,626,036 3,613,787
================== ==================
Primary Earnings (Loss) Per Share:
Continuing Operations $ (0.30) $ (0.08)
Discontinued Operations 0.05 0.08
------------------ ------------------
$ (0.25) $ 0.00
================== ==================
<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 28, 1997 AND SEPTEMBER 29, 1996
<CAPTION>
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 934,172 $ 855,139
Cost of goods sold and services provided (471,535) (408,654)
Engineering and product development expenses (82,934) (343,349)
Selling, general and administrative expenses (499,841) (786,755)
------------------ ------------------
Operating Loss (120,138) (683,619)
Interest expense (75,912) (39,185)
------------------ ------------------
Loss from Continuing Operations
Before Income Taxes (196,050) (722,804)
Benefit for income taxes -- 254,300
------------------ ------------------
Loss from Continuing Operations (196,050) (468,504)
------------------ ------------------
Discontinued Operations (Note 8):
Loss from operations -- (72,374)
Gain on disposal 266,698 --
------------------ ------------------
Income (Loss) from Discontinued Operations 266,698 (72,374)
------------------ ------------------
Net Income (Loss) $ 70,648 $ (540,878)
================== ==================
Weighted Average Number of Shares
Outstanding 3,626,098 3,624,098
================== ==================
Primary Earnings (Loss) Per Share:
Continuing Operations $ (0.05) $ (0.13)
Discontinued Operations 0.07 (0.02)
------------------ ------------------
$ 0.02 $ (0.15)
================== ==================
<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 28, 1997 AND SEPTEMBER 29, 1996
<CAPTION>
1997 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ (914,920) $ 13,565
Adjustments to reconcile Net Income (Loss) to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization 305,951 499,407
Provision for contract reserves -- 280,000
Gain on sale/retirement of fixed assets (2,331) (6,727)
Gain on sale of discontinued operations (239,345) --
Change in Assets and Liabilities:
Accounts receivable (49,122) 278,176
Inventory (341,496) (106,818)
Prepayments and other assets 94,670 (60,985)
Accounts payable 20,828 (247,158)
Accrued lease settlement (8,686) (70,109)
Other liabilities (172,906) 90,128
Non-cash charges and working capital
changes of discontinued operations (272,182) 171,087
-------------- --------------
Net Cash (Used In) Provided By Operating Activities (1,579,539) 840,566
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,437) (80,267)
Proceeds from sale of fixed assets 2,594 20,567
Proceeds from sale of discontinued operations 225,000 --
-------------- --------------
Net Cash Provided By (Used In) Investing Activities 220,157 (59,700)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net (150,000) (517,010)
Issuance of convertible notes payable 245,000 --
Issuance of preferred stock 120,000 --
Deposit on sale of operations 200,000 --
Issuance of convertible debentures, net of financing costs -- 756,614
Proceeds from exercises of stock options 2,520 100,315
Payment of capital lease obligations (70,013) (155,180)
-------------- --------------
Net Cash Provided By Financing Activities 347,507 184,739
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (1,011,875) 965,605
Balance - beginning of period 1,507,603 822,065
-------------- --------------
Balance - end of period $ 495,728 $ 1,787,670
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
7
<PAGE>
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: General
FISCAL YEAR AND PRESENTATION
Essex Corporation (the "Company") is on a 52-week fiscal year ending the last
Sunday in December. Certain amounts for 1996 have been reclassified to conform
to the 1997 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 128, "Earnings Per Share" and
No. 129 "Disclosure of Information about Capital Structure" are effective for
periods ending after December 15, 1997. The information required will be
provided in the Company's 1997 year end financial statements.
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 reporting period.
Actual results could differ from those estimates.
IMPORTANT BUSINESS RISK FACTORS
Historically the Company has 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 funds to transition into
the commercial marketplace, particularly the productization of its proprietary
technologies in optoelectronic processors. 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 processors. The success of these efforts
is subject to changing technologies, availability of financing, competition, and
ultimately market acceptance.
The Company has incurred significant losses since 1989, primarily due to the
costs related to the development and marketing of its optoelectronics products
and services. The Company has also experienced difficulty in sustaining and
expanding revenue volume in certain areas of the technical services business.
The optoelectronics products and services business is currently experiencing net
cash expenditures (including all general and administrative expenses) over
receipts of approximately $100,000 per month. The Company has taken steps to
increase revenue volume and reduce expenditures. If current conditions remain
unchanged, the Company would not be able to sustain its business without
additional working capital or further cost reductions.
8
<PAGE>
ESSEX CORPORATION
The Company has addressed the current working capital shortfall by selling the
majority of its technical services operations. One transaction for the sale of
certain operations was closed in early August 1997 and another transaction was
closed in October 1997. In addition, the Company has placed its Huntsville,
Alabama facility for sale. However, the proceeds from the sale of the Huntsville
facility would be restricted as to the use of the funds as the facility
currently serves as a portion of the collateral on the convertible debentures.
The Company continues to seek additional funds from private financing sources to
finance operations and to achieve desired product inventory levels and initial
market penetration. The Company is also seeking to establish joint ventures or
strategic partnerships with major industrial concerns to facilitate these goals.
Significant further delays in the commercialization of the Company's
optoelectronic products or failure to raise substantial additional working
capital and to commercialize such optoelectronic products would have a
significant adverse effect on the Company's future operating results and future
financial position.
The current receivable financing arrangement expires November 30, 1997 (see Note
3). While the Company believes the financing arrangement should be renewed,
terms and conditions of succeeding agreements may change. If the current
arrangement is not renewed, the Company will need to obtain financing from other
sources to finance its operations.
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 were excluded from the computation of primary earnings per
share for 1997 because their effect was antidilutive or immaterial.
NOTE 3: Accounts Receivable Financing
The Company has a receivables financing arrangement with Signet Bank. This
arrangement is evidenced by a Loan Agreement, $750,000 Promissory Note and
Commercial Security Agreement ("Agreements"). Under the Agreements, the Bank
will advance funds against certain accounts receivable. The funds advanced
($750,000 at September 28, 1997 and $900,000 at December 29, 1996) constitute
proceeds under the note which currently bears interest at an annual rate of
prime plus 4.0% (previously 1.5% over prime through May 30, 1997; total rate
approximately 12.50% at September 28, 1997 and 9.75% at December 29, 1996). The
maximum borrowings available based upon the level of accounts receivable were
approximately $750,000 at September 28, 1997 and $1,308,000 at December 29,
1996. The Company must also pay certain administrative and commitment fees which
are expected to be less than $1,000/month. This agreement expires November 30,
1997.
This $750,000 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, preferred stock, 8% notes payable and
divestiture of certain operations.
9
<PAGE>
ESSEX CORPORATION
NOTE 4: Commitments and Contingencies
LEASE SETTLEMENT
Effective July 1994, the Company settled a legal dispute with a former landlord.
Under the remaining terms of the Settlement Agreement ("Agreement"), the Company
agreed to make 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. The Company also
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 option is
exercisable through December 31, 2004 and has certain registration rights upon
exercise of the option.
The contingent amounts due are to be paid quarterly. The period for computation
of such contingent payments ends December 2004. The $300,000 accrual as of
September 28, 1997 represents the remaining contingent portion which is probable
to be paid over the applicable consideration period.
In accordance with 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 1996, the amount payable of $250,000 to
the former landlord was expensed in the first quarter of 1996 and paid in April
1996.
LEGAL PROCEEDING
In 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 and full payment was received by the Company in 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 Outstanding; Preferred Stock;
Convertible Notes Payable and Debentures
In July 1995, the Company successfully completed a $2.5 million Stock Offering
("Offering"). 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.
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
10
<PAGE>
ESSEX CORPORATION
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.
In connection with the issuance of $245,000 of 8% Convertible notes payable in
1997, the Company has reserved 490,000 shares of common stock for conversion.
In January 1997, a class of preferred stock was approved by the shareholders.
The Company's Articles of Incorporation were amended to authorize a class of
preferred stock, 1 million shares, par value $0.01 per share, the series and
rights of which may be designated from time-to-time by the Board of Directors in
accordance with applicable state and federal law. In June 1997, the Board
designated 2,500 shares of such preferred stock as Series A with a $100 par
value and an 8% annual dividend. Such shares are redeemable after 90 days and
before 1 year from date of issuance at the option of the holder. These preferred
shares are convertible into shares of Essex common stock at $0.50 per share and
have certain other conversion protection features. There were 1,200 shares of
preferred stock issued and outstanding at September 28, 1997. The Company has
reserved 240,000 shares of common stock for conversion.
The Company has reserved approximately 2,037,000 shares of common stock in
connection with the convertible debentures, notes and preferred stock and the
possible exercise of all such warrants.
NOTE 6: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. Such NOL was utilized to reduce the provision for income taxes in
the first half of 1996 to $254,300. However, as no book or taxable income was
ultimately realized in fiscal 1996, this provision was reversed in the third
quarter of 1996.
NOTE 7: Statements of Cash Flows
Supplemental disclosures of cash flow information are as follows:
Capital lease obligations of $116,000 were incurred during the first
three quarters of 1996, when the Company entered into various leases for
new equipment. There were no new capital leases entered into in the first
three quarters of 1997.
11
<PAGE>
ESSEX CORPORATION
NOTE 8: Discontinued Operations
In June 1997, the Board of Directors unanimously approved, effective June 29,
1997, the disposition of the Systems Effectiveness Division ("SED") and
operations of the Federal Systems Division ("FSD") except for the
telecommunications and government-related optoelectronics businesses which are
comprised of different customers, a separate location in Columbia, Maryland and
distinguishable operations. The operations to be discontinued comprised the
majority of the Company's Technical Services and Products business operations.
On August 4, 1997, the Company completed the sale of certain of the assets and
operations of FSD for approximately $225,000 in cash and assumption of certain
liabilities of approximately $60,000. The net gain of approximately $193,000 was
recognized in the third quarter of 1997. There was an additional gain from the
sale of the fixed assets of approximately $46,000 and operating income during
the third quarter of approximately $28,000 for a total gain of $267,000 in the
third quarter of 1997. There is a contingent payment of $75,000 due upon award
of certain new business expected during the 1997 fourth quarter which could
increase the total proceeds and the net gain.
Another portion of the operations of FSD which were performed primarily in the
Company's facility in Huntsville, Alabama were discontinued. The Huntsville
facility has been placed for sale and is included in the net noncurrent assets
shown in the balance sheets.
On July 8, 1997, the Company entered into a Letter of Intent to sell SED and
received a $200,000 refundable deposit. Effective October 1, 1997, the Company
sold the business and net assets of SED. The aggregate sale price was
$1,475,000. The Company sold the accounts receivable, contracts, fixed assets
and certain other assets. The acquiring company assumed certain liabilities,
such as accounts payable, accrued vacation and certain operating and capital
lease obligations.
The Company received $525,000 in cash (including the deposit) at closing and
took a note receivable for $325,000 payable in equal monthly installments over
15 months commencing November 1997 and ending January 1999. The balance of
$625,000 was placed in escrow and is expected to be paid through January 1998 as
the respective contracts of SED are novated to the acquiror. The approval of
SED's customers, principally agencies of the U.S. Government, is required in
order to novate the contracts to the acquiror. The sale price is subject to
adjustment for any change in the net assets and to certain indemnifications and
warranties by the Company which could affect the ultimate amount of proceeds
received.
Summarized results of operations for the discontinued operations are as follows:
<TABLE>
NINE MONTHS ENDED SEPTEMBER 28, 1997
------------------------------------
<CAPTION>
REVENUES NET INCOME (LOSS)
-------- -----------------
<C> <C>
SED $ 4,201,000 $ 385,000
FSD $ 1,913,000 $ (412,000)
</TABLE>
12
<PAGE>
ESSEX CORPORATION
<TABLE>
NINE MONTHS ENDED SEPTEMBER 29, 1996
------------------------------------
<CAPTION>
REVENUES NET INCOME (LOSS)
-------- -----------------
<C> <C>
SED $ 3,850,000 $ 349,000
FSD $ 3,751,000 $ (44,000)
</TABLE>
Net current and noncurrent assets of discontinued operations are comprised of
the following:
<TABLE>
<CAPTION>
NET CURRENT As of As of
SEPTEMBER 28, 1997 DECEMBER 29, 1996
<C> <C>
Receivables, net $ 931,602 $ 1,002,676
Other assets 30,572 53,415
Accounts payable (192,947) (181,145)
Accrued wages and vacation (183,998) (194,035)
Other accrued liabilities (271,698) (245,134)
Deferred revenues and loss reserves -- (375,000)
----------------------- ------------------------
$ 313,531 $ 60,777
======================= ========================
NET NONCURRENT
Property, plant and equipment,
net of accumulated
depreciation $ 1,241,993 $ 1,384,250
Industrial Revenue Bond (93,318) (153,319)
Other long-term liabilities (22,128) (34,820)
----------------------- ------------------------
$ 1,126,547 $ 1,196,111
======================= ========================
</TABLE>
13
<PAGE>
ESSEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER SECTIONS
CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS,
ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS", "ANTICIPATES",
"PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT
INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT
PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
FORECAST IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS.
Historically, Essex Corporation has been a diversified, technology-based company
providing quality products and professional services to government and industry.
Essex operated in two business segments: Technical Services and Products; and
Optoelectronic Products and Services. The Company allocated its operations to
the following business units:
o Systems Effectiveness Division (SED)
o Federal Systems Division (FSD)
o Commercial Products Division (CPD)
SED operated in the Technical Services and Products segment; CPD operated in the
Optoelectronics Products and Services segment; and FSD operated in both
segments.
In June 1997, the Board of Directors unanimously authorized the sale of the SED
and the FSD operations (except for the telecommunications and government-related
optoelectronics businesses). The historical technical services business areas
were too diverse relative to the size of the Company. The Company intends to
concentrate all its efforts and resources in commercializing its optoelectronics
and telecommunications products and services. On August 4, 1997, the Company
sold the FSD operations (except for the telecommunications and
government-related optoelectronics businesses) for approximately $225,000 in
cash and assumption of certain liabilities of approximately $60,000. There is a
contingent payment of $75,000 due upon award of certain new business expected
during the 1997 fourth quarter which could increase the total proceeds.
Effective October 1, 1997, the Company sold the SED operations for approximately
$1,475,000. The Company received $525,000 cash at closing and took a note
receivable for $325,000 payable in equal monthly installments over 15 months.
The balance of $625,000 is in escrow and is expected to be paid through January
1998 as the respective contracts of SED are novated to the acquiror. Effective
June 29, 1997, the Company has presented the results of these SED and FSD
operations as "discontinued operations". Prior years' figures have been restated
to reflect the amounts of such discontinued operations.
Continuing operations reflect the results of the Commercial Products Division
which provides optoelectronic products and services, as well as
telecommunications engineering services.
14
<PAGE>
ESSEX CORPORATION
Continuing operations also include related optoelectronic products and services
revenues provided to ongoing U.S. Government customers which were previously
provided through the Federal Systems Division.
CONTINUING OPERATIONS
Revenues were $934,000 and $855,000 for the third quarters of 1997 and 1996,
respectively, an increase of 9%. Revenues were $2,999,000 and $2,989,000 for the
first thirty-nine week periods of 1997 and 1996, respectively. The Company's
work for Motorola on its Iridium cellular satellite communication system
accounted for revenues of $1,358,000 and $1,668,000 in the first three quarters
of 1997 and 1996, respectively. This represented 45% and 56% of total revenues
for the first three quarters of 1997 and 1996, respectively. There was a decline
in revenues from this program between the first three quarters of 1996 and 1997
as tasks were completed for the initial satellite system. The Company continues
to perform work on the current and successor satellite systems and has a backlog
on the Motorola program of approximately $675,000. The Company has a backlog of
approximately $400,000 on programs related to optoelectronic devices and
services.
The decline in revenues on the Motorola contract was partially offset by the
sale of one Imsyn(TM) unit for $250,000 during the first quarter of 1997 for
U.S. Government end use under a development and applications contract. The
Company does not have any firm orders for ImSyn(TM) units as of November 6,
1997.
There were operating losses from continuing operations of $120,000 and $684,000
in the third quarters of 1997 and 1996, respectively. There were operating
losses of $888,000 and $2,144,000 in the first thirty-nine week periods of 1997
and 1996, respectively. Cost of goods sold and services provided for the first
thirty-nine weeks of 1996 was 61.1% as compared to 49.2% in 1997. In 1996,
significant additional costs in excess of amounts which could be recovered were
incurred on two contracts for delivery of initial optoelectronic processor
devices.
Selling, general and administrative expenses ("SG&A") were $1.9 million in the
first thirty-nine weeks of 1996 compared to $2.6 million in the first
thirty-nine weeks of 1997 on approximately the same overall revenue volume. The
$683,000 of such higher SG&A expenses contributed to the larger loss in 1996.
Overall, SG&A expenses remain high relative to the revenue volume as the Company
seeks to commercialize its optoelectronic products and services. The Company has
reduced expenses between the 1996 and 1997 periods and has curtailed
expenditures where possible while retaining essential technical capabilities and
personnel in the optoelectronics and telecommunications businesses.
DISCONTINUED OPERATIONS
There was income from discontinued operations of $267,000 and $166,000 in the
third quarter and first thirty-nine week periods of 1997, respectively. There
was a loss of $72,000 and income of $305,000 in the third quarter and first
thirty-nine week periods in 1996, respectively, from such discontinued
operations. In the 1997 third quarter the Company recognized a gain of $193,000
from the disposal of certain assets of the Federal Systems Division.
15
<PAGE>
ESSEX CORPORATION
Discontinued operations are comprised of the results of the Systems
Effectiveness Division and the operations of the Federal Systems Division
(except for the telecommunications and government-related optoelectronics
businesses). During 1997 and 1996, the SED operations had first thirty-nine week
sales of approximately $4.2 million and $3.8 million, respectively, and produced
income of approximately $385,000 and $349,000 during each thirty-nine week
period of 1997 and 1996, respectively. As of October 1, 1997, the SED operations
were sold. The results of the sale will be recognized in the 1997 fourth
quarter.
The FSD discontinued operation's revenues declined from $3.9 million in the
first thirty-nine weeks of 1996 to $1.9 million in the first thirty-nine weeks
of 1997. There was a loss from operations of approximately $412,000 in the first
thirty-nine weeks of 1997 compared to a loss of approximately $44,000 during the
first thirty-nine weeks of 1996. During the first thirty-nine weeks of 1996, FSD
was working on several programs, including a program to produce aviation
maintenance trainers (the "Trainers Program"), which were estimated to be on
budget and provided volume to recover indirect expenses. In late 1996, the
Trainers Program incurred performance difficulties which produced significant
losses on this program in the last quarter of 1996. Additional significant
completion problems were encountered in the first half of 1997 which produced
additional losses. FSD was unable to secure additional new business on a timely
basis resulting in the decision to close the Huntsville, Alabama production
facility in September 1997 concurrent with the substantial completion of the
Trainers Program. The sale of certain other FSD technical service operations
located elsewhere was completed in early August 1997 and the net gain of
$193,000 was reported in the third quarter of 1997.
CORPORATE MATTERS
There was a gain in 1996 on settlement of lawsuit of (approximately $2,286,000,
or $0.63 per share). This gain triggered a payment to the former landlord and
expense of $250,000 ($0.07 per share). The income (loss) per share results are
computed on weighted average shares outstanding of 3,614,000 in 1996.
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 $384,000 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 1997, the Company's interest costs increased due to the increased borrowings
under its line of credit. Total interest costs were $192,000 in the first
thirty-nine weeks of 1997 compared to $124,000 in the same period of 1996.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No provision or
benefit from income taxes was recognized in the first thirty-nine weeks of 1997.
In the first half of 1996, the Company recorded a book income tax
16
<PAGE>
ESSEX CORPORATION
expense, although lower than at statutory rates. However, as no book or taxable
income was ultimately realized in fiscal year 1996, this provision was reversed
in the third quarter of 1996.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
SELECTED FINANCIAL DATA ($ Thousands)
-------------------------------------
<CAPTION>
AS OF
September 28, December 29, September 29,
1997 1996 1996
---- ---- ----
<C> <C> <C>
Total Assets $ 3,967 $ 4,708 $ 6,373
Working Capital (Deficit) $ (470) $ 113 $ 1,334
Current Ratio 0.82:1 1.05:1 1.52:1
Current and Long-Term
Capital Leases $ 98 $ 176 $ 240
Bank Line of Credit 750 900 400
Convertible Notes Payable 245 -- --
Convertible Debentures 1,400 1,400 1,400
Redeemable Preferred Stock 120 -- --
---------------- --------------- --------------
Total Debt/Financing $ 2,613 $ 2,476 $ 2,040
================ =============== ==============
Stockholders' Equity (Deficit) $ (183) $ 729 $ 2,074
</TABLE>
The Company experienced a substantial decrease in its working capital and ratio
due primarily to the net loss of $915,000 in the first thirty-nine weeks of
1997. The net loss was the primary factor in the $1,580,000 of net cash used in
operations in the first thirty-nine weeks of 1997.
At September 28, 1997, Company has negative working capital of approximately
$470,000 and a stockholders' deficit of approximately $183,000. During mid 1997,
certain insiders and directors invested $365,000 in convertible unsecured notes
payable and redeemable preferred stock. Such amounts are not considered equity
since they are primarily debt instruments. The Company should have a positive
equity after the conclusion of the sales of all discontinued operations as
discussed below.
The Company has incurred significant losses over recent years, primarily due to
the development and marketing of its optoelectronics products and services. The
Company has also experienced difficulty in sustaining and expanding revenue
volume in certain areas of the technical services and products business. The
optoelectronics products and services business is currently experiencing net
cash expenditures (including all general and administrative expenses) over
receipts of approximately $100,000 per month. The Company has taken steps to
increase revenue volume and reduce expenditures. If current conditions remain
unchanged, the Company would not be able to sustain its business without
additional working capital or further cost reductions.
17
<PAGE>
ESSEX CORPORATION
As previously discussed in the Company's 1996 Form 10-KSB, the Company has
addressed the current working capital shortfall by selling the majority of its
technical services operations. One arrangement for the sale of certain FSD
operations was closed in early August 1997 and another arrangement for the sale
of SED operations was closed in October 1997. The Company has also placed its
Huntsville, Alabama facility for sale. However, the proceeds from the sale of
the Huntsville facility would be restricted as to the use of the funds as the
facility currently serves as a portion of the collateral on the convertible
debentures. Also, a portion (approximately $140,000) of the proceeds from the
various sales of the technical services operations are designated for repayment
of a comparable portion of the outstanding convertible debentures.
The Company continues to seek additional funds from private financing sources to
finance operations and to achieve desired product inventory levels and initial
market penetration. The Company is also seeking to establish joint ventures or
strategic partnerships with major industrial concerns to facilitate these goals.
Significant delays in the commercialization of the Company's optoelectronic
products, failure to commercialize such products or failure to raise substantial
additional working capital would have a significant adverse effect on the
Company's future operating results and future financial position.
The Company has approximately $824,000 of inventory in current assets. This
inventory is comprised of ImSyn(TM) optoelectronic processors and consists of
finished goods and work-in-process. Sales of such units will be necessary in
order to maintain working capital liquidity. There are no firm orders for sales
of such units as of November 6, 1997.
The current receivable financing arrangement expires November 30, 1997. While
the Company believes the financing arrangement should be renewed, terms and
conditions of succeeding agreements may change.
In order to fund its operations, the Company will be required to replace or
extend such receivables financing arrangement and to raise additional working
capital. There can be no assurance that the Company will be successful in doing
so. At November 6, 1997, there were no borrowings outstanding under the
receivable financing agreement as proceeds received from sales of discontinued
operations were used to pay down borrowings.
Under the settlement agreement reached with the landlord, certain payments are
triggered only by other future cash inflows. The remaining $300,000 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 sales of the discontinued operations of the Company requires that
approximately $100,000 of the remaining $300,000 be paid from the proceeds from
such sales in the fourth quarter of 1997.
The preceding paragraphs contain forward-looking statements and the factors
affecting the ability of the Company to meet its funding requirements and manage
its cash resources include, among other things, the magnitude and timing of
product sales and the magnitude of fixed costs.
18
<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
The Company filed a Form 8-K on October 30, 1997 which reported the
divestiture of certain operations.
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)
/Joseph R. Kurry, Jr./
Date: 6 November 1997 ----------------------------------
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.)
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 496
<SECURITIES> 0
<RECEIVABLES> 397
<ALLOWANCES> (198)
<INVENTORY> 823
<CURRENT-ASSETS> 2,128
<PP&E> 1,725
<DEPRECIATION> (1,413)
<TOTAL-ASSETS> 3,967
<CURRENT-LIABILITIES> 2,598
<BONDS> 1,400
120
0
<COMMON> 363
<OTHER-SE> 5,316
<TOTAL-LIABILITY-AND-EQUITY> 3,967
<SALES> 2,999
<TOTAL-REVENUES> 2,999
<CGS> 1,946
<TOTAL-COSTS> 3,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> (1,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,081)
<DISCONTINUED> 166
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (915)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
