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 March 30, 1997.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period to
--------- ---------
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) 959-7000
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 MARCH 30, 1997
----- -----------------
Common Stock, par value $0.10 per share 3,626,098
<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 for the fiscal year ended December
29, 1996.
2
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
March 30, December 29,
1997 1996
(unaudited) (audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 856,200 $ 1,507,603
Accounts receivable, net 1,668,224 1,482,118
Inventory 673,856 482,317
Prepayments and other 149,945 156,041
-------------------- --------------------
3,348,225 3,628,079
-------------------- --------------------
PROPERTY AND EQUIPMENT
Production and special equipment 1,597,405 1,596,491
Furniture, equipment and other 1,537,773 1,533,467
-------------------- --------------------
3,135,178 3,129,958
Accumulated depreciation and amortization (2,585,683) (2,501,651)
-------------------- --------------------
549,495 628,307
-------------------- --------------------
OTHER ASSETS
Assets held for sale, net 1,205,409 1,205,409
Patents, net 177,916 169,657
Goodwill, net 129,533 144,486
Deferred debenture financing 98,325 104,880
Other 44,505 58,696
-------------------- --------------------
1,655,688 1,683,128
-------------------- --------------------
TOTAL ASSETS $ 5,553,408 $ 5,939,514
- ------------ ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
March 30, December 29,
1997 1996
(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 105,806 111,895
Bank line of credit 758,469 900,000
Accounts payable 1,012,082 506,999
Accrued wages and vacation 533,242 350,099
Deferred revenues and loss reserves 240,000 640,000
Accrued lease settlement 299,551 308,237
Other accrued expenses 611,742 631,045
-------------------- --------------------
3,640,893 3,528,276
LONG-TERM DEBT
Industrial Revenue Bond, net of current portion 133,318 153,319
10% Collateralized Convertible Debentures Due 2000 1,400,000 1,400,000
Capital leases, net of current portion 106,157 128,850
-------------------- --------------------
Total Liabilities 5,280,368 5,210,445
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
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 (5,405,878) (4,947,329)
-------------------- --------------------
273,040 729,069
-------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,553,408 $ 5,939,514
- -------------------- ==================== ====================
<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 THIRTEEN WEEK PERIODS
ENDED MARCH 30, 1997 AND MARCH 31, 1996
<CAPTION>
1997 1996
(unaudited) (unaudited)
Technical Services and Products:
<S> <C> <C>
Revenues $ 2,868,503 $ 3,774,279
Direct costs (2,190,618) (2,549,979)
Indirect costs (722,034) (1,073,755)
------------------ ------------------
Operating Income (Loss) - Technical
Services and Products (44,149) 150,545
------------------ ------------------
Optoelectronic Products and Services:
Revenues 678,651 471,011
Cost of goods sold and services provided (436,515) (754,995)
Engineering and product development expenses (214,954) (157,500)
Selling, general and administrative expenses (389,430) (314,988)
------------------ ------------------
Operating Loss - Optoelectronics Products and Services (362,248) (756,472)
------------------ ------------------
Total Operating Loss (406,397) (605,927)
Gain on settlement of lawsuit,
net of related expenses of $1,773,578 in 1996 -- 2,226,422
Lease settlement -- (250,000)
Interest expense (52,152) (45,552)
------------------ ------------------
Income (Loss) Before Income Taxes (458,549) 1,324,943
Provision for income taxes -- 254,300
------------------ ------------------
Net Income (Loss) $ (458,549) $ 1,070,643
================== ==================
Weighted Average Number of Shares
Outstanding 3,625,911 3,593,183
================== ==================
Earnings (Loss) Per Share
Primary $ (0.13) $ 0.30
================== ==================
Fully Diluted $ (0.13) $ 0.28
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 30, 1997 AND MARCH 31, 1996
<CAPTION>
1997 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ (458,549) $ 1,070,643
Adjustments to reconcile Net Income (Loss) to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization 108,088 166,313
Provision for contract reserves -- 250,000
Gain on sale/retirement of fixed assets (1,780) (850)
Change in Assets and Liabilities:
Accounts receivable (186,106) 183,452
Inventory (191,539) (87,194)
Prepayments and other assets 9,481 6,303
Goodwill -- 204,299
Accounts payable 505,083 116,083
Accrued lease settlement (8,686) 220,000
Other liabilities (236,160) 326,454
-------------- --------------
Net Cash (Used In) Provided By Operating Activities (460,168) 2,455,503
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,221) (43,367)
Proceeds from sale of fixed assets 1,780 850
-------------- --------------
Net Cash Used In Investing Activities (3,441) (42,517)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net (141,531) (239,970)
Repayment of long-term debt (20,001) (20,000)
Proceeds from exercises of stock options 2,520 100,240
Issuance of convertible debentures, net of financing costs -- 764,737
Payment of capital lease obligations (28,782) (82,014)
-------------- --------------
Net Cash (Used In) Provided By Financing Activities (187,794) 522,993
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (651,403) 2,935,979
Balance - beginning of period 1,507,603 822,065
-------------- --------------
Balance - end of period $ 856,200 $ 3,758,044
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
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ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: General
FISCAL YEAR
Essex Corporation (the "Company") is on a 52-week fiscal year ending the last
Sunday in December.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 128, "Earnings Per Share" and
No. 125 "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 internal funds to
transition into the commercial marketplace, particularly the productization of
its proprietary technologies in optoelectronic processors, testing and
evaluation. The long-term success of the Company in this area is dependent on
its ability to successfully develop and market products related to its
optoelectronic processors. The success of these efforts is subject to changing
technologies, availability of financing, competition, and ultimately market
acceptance.
The Company has incurred losses over the past three 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 segment.
The Optoelectronics Products and Services business segment is currently
experiencing net cash expenditures (including all general and administrative
expenses) over receipts of approximately $150,000 per month. If current
conditions remain unchanged, the Company would not be able to sustain its
business without additional working capital.
7
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ESSEX CORPORATION
The Company is attempting to address the working capital shortfall, principally
by seeking additional funds from private financing sources. If necessary, the
Company may sell certain operations or may sell 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. 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. There are no definitive arrangements for sales for any
such assets at this time.
The Company is seeking 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 or failure to raise substantial additional working capital and to
commercialize would have a significant adverse effect on the Company's future
operating results and future financial position.
The current receivable financing arrangement expires May 31, 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. Fully diluted earnings per
share were different from primary earnings per share in the first quarter of
1996 due to the consideration of the dilutive effect of the convertible
debentures.
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
($758,469 at March 30, 1997 and $900,000 at December 29, 1996) constitute
proceeds under the note which bears interest at an annual rate of prime plus
1.5% (total rate approximately 10.00% at March 30, 1997 and 9.75% at December
29, 1996). The maximum borrowings available based upon the level of accounts
receivable were $758,469 at March 30, 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 May 31, 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.
8
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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 March
30, 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; Preferred Stock
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 provisions of the Warrant Agreement. The
warrant holders have certain registration rights for these shares of common
stock.
9
<PAGE>
ESSEX CORPORATION
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.
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.
NOTE 6: Income Taxes
The Company was 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 quarter of 1996.
NOTE 7: Statements of Cash Flows
Supplemental disclosures of cash flow information are as follows:
Capital lease obligations of $59,642 were incurred during the first
quarter of 1996, when the Company entered into various leases for new
equipment. There were no new leases entered into in the first quarter of
1997.
10
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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.
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.
GENERAL
TECHNICAL SERVICES AND PRODUCTS
At March 30, 1997, the Technical Services and Products contract backlog was
$14.9 million ($4.8 million funded and $10.1 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 $14.9 million is
approximately: $12.0 million (81%) in cost-plus-fee type contracts; $2.0 million
(13%) in time and material and $0.9 million (6%) 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
11
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ESSEX CORPORATION
percentage-of-completion method of accounting is utilized for revenue
recognition. Anticipated losses, if any, are recognized as soon as they become
known.
OPTOELECTRONIC PRODUCTS AND SERVICES
In mid-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. During late 1996, the
Company initiated production plans to build ten additional ImSyn(TM) Processors
which were released to manufacture in early 1997. The SAR market consists of
aerospace prime contractors, subcontractors and government laboratories, while
the initial 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 ("SAM") design model to original equipment
manufacturers for their consideration. The SAM is sponsored in part by a U.S.
Government development contract.
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
$215,000 and $158,000 have been recognized through the Company's statements of
operations as first quarter 1997 and 1996 period expenses, respectively.
Additional funding is necessary for commercial products' inventory buildup,
marketing and further development of commercial applications and products.
At March 30, 1997, the Optoelectronic Products and Services segment has a
backlog of approximately $950,000 ($400,000 funded and $550,000 unfunded) which
is comprised of cost- plus-fixed-fee (84%) and fixed-price (16%) contracts from
the U.S. Government. There is a contract which was received in July 1996
included in this backlog with a remaining value of approximately $280,000
(funded value of $30,000) for delivery of an optoelectronic processor utilizing
ImSyn(TM) technology and related services to U.S. Government end-users. Another
contract with a remaining funded value of $157,000 is for government-sponsored
research utilizing an ImSyn(TM) unit in synthetic aperture microscope
applications. Additional backlog of approximately $350,000 (funded value of
$50,000) is included from another U.S. Government customer to complete the
prototype optoelectronic range-doppler imager and demonstrate new radar
techniques to combat ballistic missile threats.
OPERATING RESULTS
TECHNICAL SERVICES AND PRODUCTS:
REVENUES
This segment's revenues for the first thirteen weeks of 1997 totaled $2,869,000,
which was $905,000 (24%) less than the $3,774,000 reported during the same
period in 1996. Revenues for the 1997 first quarter were approximately $1.4
million in SED and $1.5 million in FSD as compared to $1.2 million in SED and
$2.6 million in FSD in the 1996 first quarter. FSD continues to experience a
slowdown in receipt of new awards and funding on existing contracts with U.S.
Government customers.
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ESSEX CORPORATION
INCOME
This segment had an operating loss in the first quarter of 1997 of $44,000
compared with an operating profit of $151,000 (4.0% gross profit) in the same
quarterly period of 1996. In this segment, the Company experienced in its
Federal Systems Division additional unanticipated overruns in the final phase of
a $3.6 million program ("Trainers program") which spanned three years to provide
training devices to a U.S. Government customer. This segment recognized
approximately $250,000 of loss on this Trainers program during the first quarter
of 1997 as compared to a profit of $15,000 in the first quarter of 1996. During
early 1996, the Company was not estimating that this contract would incur
losses. This program is scheduled to be completed in mid 1997.
Direct costs have increased as a percentage of revenues to 76.4% in the first
thirteen weeks of 1997 and as compared to 67.6% for the same period in 1996. The
direct costs necessary to complete the Trainers program exceed the revenue
recognized on that program.
OPTOELECTRONIC PRODUCTS AND SERVICES:
REVENUES
This segment's revenues for the first thirteen weeks of 1997 totaled $679,000 as
compared to $471,000 in the same period of 1996. During the first quarter of
1997, an order from a government customer for an ImSyn(TM) unit was filled from
inventory and recognized as a $250,000 product sale. The remaining revenues for
the quarter of approximately $429,000 were from a mix of labor services and
recoverable direct costs on government contracts. During the 1997 first quarter,
work on two contracts was performed and components were being assembled for
delivery of an optoelectronic processor on each contract using ImSyn(TM)
technology together with related services. Work was also 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 $362,000 in the first quarter of 1997 as
compared to an operating loss of $756,000 in the same period of 1996. Initial
revenues are comprised primarily of services provided. The cost of goods sold
exceeded revenues in the first quarter of 1996 as cost overruns were incurred on
two initial government contracts to provide optoelectronic processors. A
contract reserve provision of $250,000 was made in the first quarter of 1996 for
these two overrun contracts and is included in cost of goods sold. The
completion status of these fixed-price contracts to deliver an optoelectronic
correlator and to deliver the first optoelectronic processor were negatively
impacted by design and specification changes which were not recoverable under
the contracts.
Beginning January 1, 1996, this segment began to establish a manufacturing
operation for optoelectronic products. As the manufacturing operation is its
initial phase, a portion of manufacturing overhead is underabsorbed. Such
additional expense was $60,000 in the first
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ESSEX CORPORATION
quarter of 1997 and $56,000 in the same quarterly period of 1996 and such costs
are included in cost of goods sold.
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 $215,000 in the first thirteen weeks of 1997 and
$158,000 in the same period of 1996.
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
$389,000 in the first thirteen weeks of 1997 and $315,000 in the same period of
1996.
CORPORATE MATTERS
Total revenues were $3,547,000 in the first thirteen weeks of 1997, a decrease
of $698,000 or 16% over the $4,245,000 in the same period of 1996. There was a
net loss of $459,000 or $0.13 per share (primary) for the first quarter 1997
compared to net income of $1,071,000 or $0.30 per share (primary). In 1996,
there was the gain on settlement of a 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 $651,000 or $0.18 per share in the
first quarter of 1996. The primary income (loss) per share results are computed
on weighted average shares outstanding of 3,626,000 in 1997 compared to
3,593,000 in 1996.
The Company and a corporate defendant reached an out-of-court settlement in
1996. 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.
Total interest costs were $52,000 in the first quarter of 1997 as compared to
$46,000 in the same quarterly period of 1996. In 1997, the Company's interest
costs increased due to higher average borrowings under its bank line of credit.
The Company is in a net operating loss (NOL) carryforward position for book and
income tax purposes. The provision for income taxes was reduced in the first
quarter of 1996 by use of NOL carryforward amounts. No provision or benefit from
income taxes was recognized in the first quarter of 1997.
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ESSEX CORPORATION
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
March 30, December 29, March 31,
1997 1996 1996
<S> <C> <C> <C>
Total Assets $ 5,553 $ 5,940 $ 8,767
Working Capital (Deficit) $ (293) $ 100 $ 2,524
Current Ratio 0.92:1 1.03:1 1.65:1
Current and Long-Term Debt $ 213 $ 233 $ 293
Current and Long-Term
Capital Leases 212 241 269
Bank Line of Credit 758 900 677
10% Convertible Debentures Due 2000 1,400 1,400 1,400
---------------- --------------- --------------
Total Debt/Financing $ 2,583 $ 2,774 $ 2,639
================ =============== ==============
Stockholders' Equity $ 273 $ 729 $ 3,131
</TABLE>
The Company experienced a substantial decrease in its working capital and ratio
due primarily to the net loss of $459,000 in the first quarter of 1997. The net
loss was the primary factor in the $460,000 of net cash used in operations in
the first quarter of 1997.
The Company has incurred losses over the past three 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 segment.
The Optoelectronics Products and Services business segment is currently
experiencing net cash expenditures (including all general and administrative
expenses) over receipts of approximately $150,000 per month. If current
conditions remain unchanged, the Company would not be able to sustain its
business without additional working capital.
As previously disclosed in the Company's 1996 Form 10-KSB, the Company is
attempting to address the working capital shortfall, principally by seeking
additional funds from private financing sources. If necessary, the Company may
sell certain operations or may sell 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. 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. There are no
15
<PAGE>
ESSEX CORPORATION
definitive arrangements for sales for any such assets at this time. There can be
no assurance that the Company's attempts to raise working capital will be
successful.
The Company is seeking 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 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 current receivable financing arrangement expires May 31, 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 arrangement and to raise
additional working capital. There can be no assurance that the Company will be
successful in doing so.
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 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.
16
<PAGE>
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 5. Other Information
Effective May 16, 1997, Mr. E. Ted Prince resigned from the Board of Directors
for reasons related to other outside business commitments.
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: 20 May 1997 /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> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 856
<SECURITIES> 0
<RECEIVABLES> 1,904
<ALLOWANCES> (236)
<INVENTORY> 674
<CURRENT-ASSETS> 3,348
<PP&E> 3,135
<DEPRECIATION> (2,586)
<TOTAL-ASSETS> 5,553
<CURRENT-LIABILITIES> 3,641
<BONDS> 1,533
0
0
<COMMON> 363
<OTHER-SE> 5,316
<TOTAL-LIABILITY-AND-EQUITY> 5,553
<SALES> 3,547
<TOTAL-REVENUES> 3,547
<CGS> 3,565
<TOTAL-COSTS> 3,954
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (459)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
