FORM 10-KSB/A No. 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997 Commission File No. 0-10772
ESSEX CORPORATION
(Name of small business issuer in its charter)
Virginia 54-0846569
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer
Identification No.)
9150 Guilford Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (301) 939-7000
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of Each Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES NO X
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year. $4,011,589
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $1,914,439 as of June 30, 1998
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AT JUNE 30, 1998
Common Stock, par value $0.10 per share 4,397,861
DOCUMENTS INCORPORATED BY REFERENCE
None
===============================================================================
A list of the Exhibits and Financial Statement Schedules in this Report on Form
10-KSB/A No. 1 appears on page 34.
Transitional Small Business Disclosure Format YES X NO
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Table of Contents
FORM 10-KSB/A No. 1
Essex Corporation
PART I
Item No. Page
-- INTRODUCTORY STATEMENT............................................... 3
1. DESCRIPTION OF BUSINESS.............................................. 3
2. DESCRIPTION OF PROPERTIES............................................ 14
3. LEGAL PROCEEDINGS.................................................... 15
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 15
PART II
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............. 16
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............ 16
7. FINANCIAL STATEMENTS................................................. 22
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................. 22
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.................... 23
10. EXECUTIVE COMPENSATION............................................... 27
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 32
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 33
13. EXHIBITS AND REPORTS ON FORM 8-K..................................... 34
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PART I
INTRODUCTORY STATEMENT
The information contained in this report pertains to the registrant, Essex
Corporation (the "Company").
1. DESCRIPTION OF BUSINESS
The Company was incorporated in Virginia in 1969 to provide professional
engineering and scientific services to support U.S. Government defense, space
and energy programs ("legacy support business"). Since 1988, Company management
has recognized that its (former) heavy dependence upon such program areas had
become vulnerable to sharp declines in government budgets for its legacy human
factors and training business and to increasing competition from entities far
larger than the Company for its logistic support engineering business.
Accordingly, the Company created a strategic plan for both government and
commercial market sectors with better-than-average growth potential in (1)
service activities in which the Company has a clear positional advantage, and
(2) readily discriminated proprietary high-technology products. In 1989, the
Company determined that growth, positional advantage and relative ease of
discrimination were forwarded by acquiring a small, high-technology venture in
Columbia, MD. As a result, the Company now has capabilities in systems
engineering, signal processing and the design of high-speed, relatively low-cost
optoelectronic processors.
The Company's signal processing engineering team had been heavily committed
to performing systems engineering and signal processing activities for
reconnaissance systems under contract to the U.S. Government and its prime
contractors. High skills in mathematics and engineering enabled the team to
produce creative solutions to daunting problems. This capability led in 1990 to
initiation of the Company's continuing eight-year association with Motorola as
its first Industrial Partner on the Iridium(R) global communications satellite
system.
The Company's optoelectronics team has designed, developed and sold special
purpose optoelectronic processors for fifteen years. This experience was gained
in military research and development. The Company performs, and seeks to expand,
such work; however, its internal resources are now largely applied to designing
"dual-use" commercial products, such as its unique ImSyn(TM) Processor, that
also fulfill military needs.
The Company embarked on a vigorous program to develop proprietary
optoelectronic processors with significant performance advantages over
conventional computers and specialized image processing devices in such
applications as radar imaging, magnetic resonance imaging (MRI), microscopy and
ultrawideband signal processing. A number of patents have issued to the Company
and others are in prosecution. The Company is now bringing such optoelectronic
processors to commercial and government markets.
In mid-1997, the Company's Board of Directors voted to discontinue the
legacy support business, focusing upon optoelectronic equipment and services and
systems and software engineering. During late 1997, the sale of the legacy
support business operations was completed. The proceeds are being used in the
Company's continuing operations.
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SYSTEMS AND SOFTWARE ENGINEERING
The Company has long provided systems engineering services in signal
processing and telecommunications to industrial, commercial and government
customers. Such capability is pivotally important in matching products to real-
world applications. The Company's systems engineering capability is also a
major asset and key discriminator in its programs to design and apply its
optoelectronic computers.
The Company has performed modeling, simulation, analysis and software tasks
on commercial and reconnaissance satellite systems for more than 15 years. The
Company's engineering teams perform systems engineering, simulation, modeling
and software development for the Motorola Iridium(R) and Celestri(TM) systems.
Experience includes low earth orbit, medium earth orbit, high earth orbit and
geosynchronous earth orbit constellations such as Iridium(R), Celestri(TM),
MILSTAR, TDRSS, Intelsat and other systems.
In 1990, the Company became Motorola's first Industrial Partner on the
Iridium(R) satellite constellation that will provide global wireless
communications to handheld telephones and pagers. The Company's employees have
been named on more than twenty Motorola patent disclosures. Built upon the
extensive base of related business with the U.S. Government, this activity
includes performance of systems analysis and development of computer software to
model performance and plan the operation of the satellite constellation.
The Company has developed software for mission planning, payload data
processing, geolocation, payload test and evaluation, on-board channel
management and data routing. System modeling and simulation supports the entire
system life-cycle, including system definition, performance analysis, space
segment definition and ground segment design. The Company has developed custom
models for the design and analysis of mobile voice and wideband data systems,
and has developed algorithms for communications system operations.
The Company's satellite system models consist of several integrated
software packages hosted on a Silicon Graphics computer network. MISSMOD models
the coverage and performance aspects of multiple vehicle constellations,
including single or statistical events, motion and pointing effects and
comparisons of constellations. It deals with passive geolocation, time
difference of arrival, frequency difference of arrival, time of arrival,
frequency of arrival, angle of arrival and numerous error sources, and provides
automated link budget computation. GEOGRAPH plots parameter versus parameter
outputs from other modules. GEOMAP plots data and contours from other
computational modules on map backgrounds. It provides selectable projections,
user-specified levels of detail and various antenna patterns.
The Company has also been tasked by Motorola to perform engineering design
services for the next generation Iridium(R) and the Celestri(TM) constellations.
The first is an improved mobile voice and paging system, while the second is an
"internet in the sky" design. Recently, Motorola has become the Teledesic(TM)
System integration contractor. That system will be merged with Celestri(TM) into
a single design. The Company expects to continue in the effort.
From time to time, the Company has provided production software for
Motorola systems. Recently, the Company participated in a competitively awarded
effort to supply production software for a communications analysis console to be
used in managing the Iridium(R)
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constellation. The underlying engineering had not been performed by the Company.
Accordingly, this is viewed by the Company as penetration of a new segment of
this market.
OPTOELECTRONIC PRODUCTS AND SERVICES
BACKGROUND - The Company solves commercially valuable equations by creating
algorithms (computer programs) that can be performed with great efficiency by
optoelectronic processors. The Company designs optoelectronic architectures
optimized for executing such algorithms. They are constructed by use of proven
optical and electronic components. The strength of the Company's optoelectronics
team lies in its ability to visualize applications and, using readily available
components, to coalesce them into unique, economical, robust optical
architectures that provide substantial benefits.
A 1997 U.S. Small Business Administration (SBA) Tibbetts Award for
Technical Excellence recognizes the Company as "one of the best of the best" in
the context of our powerful, developing family of optoelectronic products. They
are focused upon applications for which all- electronic solutions are
technically inadequate or economically unacceptable. The Company's patented
products combine laser optics and digital electronics to compute in faster,
better ways, enabling entirely new levels of performance to be achieved.
Spanning signal processing, these applied technologies also point the way to
telecommunications products that can increase capacity, thus increase revenues,
with reductions in size, weight and power consumption.
The Company has invested heavily in commercial optoelectronic technology
and products since 1989. During the past 15 years, the Company has also
benefitted from substantial product development funding by agencies of the U.S.
Government. The leaders and key members of the Company's optoelectronic team
invented and fielded successful products still in use by the Intelligence
Community before joining the Company in 1983. They were applied to U.S.
Government programs until the Company initiated commercial development in 1989.
The Company's efforts to become the principal developer of top-of-the-line
commercial and military optoelectronic processors stands upon these key
elements:
o Management commitment to commercial optoelectronics since 1989.
o A core optoelectronics team that has worked as a unit far longer than any
other such technical team known to the Company.
o The team possesses extraordinary knowledge of classified and unclassified
branches of optoelectronics.
o The team has been afforded creative flexibility: to learn and to make
mistakes, thereby to improve both processes and products.
o Activity funding during the past 15 years approaches $35 million in Company
and customer investment.
The Company's innovative and productive optoelectronic team is led by Chief
Technical Officer Terry Turpin. Mr. Turpin spent the first two decades of his
career in the National Security Agency (NSA). His assignments included
developing cryptologic and computing engines of the highest capability. He also
funded and oversaw numerous research programs in industrial and academic
laboratories. Most of his career in NSA was spent in leading the
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optoelectronic team in designing and fielding engines to perform signal
processing tasks well beyond the capabilities of conventional technology.
The fields of Electronics and Optics are complementary. The Company's
special-purpose optoelectronic processors make use of the best of proven
technology in both fields. Algorithms developed for carefully selected problems
are designed to run optimally in state-of-the-art optical architectures. The
Company's design strategy assures processors that are optimized for ease of use,
speed and low power consumption. Practical solutions of many commercially
valuable processing problems demand economical computing power provided only by
this technology, either in stand-alone products or as fully compatible elements
of digital systems.
Optoelectronic processors are compact, integrated systems of optical and
electronic devices that perform specific, commercially-valuable mathematical
calculations at very high speeds. This technology has many advantages,
including: (1) use of simple, rugged, hardware incorporating proven, mature,
reliable components; (2) high-performance implementation of demanding signal and
image processing computations; and (3) providing such desirable characteristics
in economical, compact, low power-consuming packages. New products are
considered for markets to which they bring a 10- to 100-fold performance
advantage over conventional technologies in either throughput or throughput per
watt of power used. Although quite flexible in application, processors require
relatively little costly software and software maintenance. In the opinion of
the Company, this technology provides strong, well- discriminated proprietary
capabilities to supply state-of-the-art products in such important fields as
imaging, holography, pattern recognition, communications and signal processing.
The baseline functionality of optoelectronics is very powerful. Better
optics and improved faster semiconductor electronics will provide performance
gains. The ImSyn Processor has the digital-equivalent optical computing rate of
1.6 trillion floating point operations per second (1.6Tfl) in performing
discrete Fourier transforms (DFT) that are highly desirable in many medical,
industrial and military imaging applications. Optical module power is about 25
Watts (W), or 15W/Tfl. The effective processing rate of the ImSyn Processor is
limited by electronic Input/Output (I/O) rates. It will increase as optical
interconnects and microchips improve. Note, purely for rate comparisons, that a
$55 million general purpose supercomputer, recently placed in service, is
reported to currently compute at the rate of 1.4 Tfl and is capable of reaching
1.8Tfl. This very large computer is a powerful tool for solving many problems
unsuitable for the Company's optoelectronic engines; however, the more compact
ImSyn Processor is a more economical means of performing important computations
in medical, industrial and military applications.
The optoelectronics industry is huge, with revenues nearing $100 billion
per year. A substantial number of institutions and companies are active in
optoelectronic signal processing. Among them are Lockheed Martin, Litton,
Harris, Hughes, Pacific Sierra Research and several universities, all far larger
than the Company. The Company focuses upon a corner of the business, computing
engines for processing signals. The Company has built powerful, high-speed
signal and image processors for more than fifteen years.
IMSYN(TM) PROCESSOR - The Company has diligently pursued application of its
optoelectronic technologies to realize the patented ImSyn processor. The name
"ImSyn," which stands for "image synthesis," was selected because the processor
is useful in many image processing
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applications, although its utility extends beyond such applications. The
processor implements the well-known DISCRETE Fourier transform (DFT) that is
basic to many image and signal processing applications. Furthermore, its
performance often far exceeds that of conventional technology which must rely
upon the FAST Fourier transform (FFT) algorithm (computer program) to maximize
performance. This technology is making holography into a digital science, a
capability that enables the ImSyn processor to reconstruct images from nonlinear
data sets at supercomputing speeds. Such data sets occur in key applications
such as high-speed MRI, forward-squinting synthetic aperture radar (SAR) systems
and in SAR radars for imaging objects through foliage and under the ground.
Image processing can be grouped into two categories: (1) image
reconstruction (or synthesis), and (2) post-processing image enhancement (or
analysis). The first refers to the computation of an image from data measured by
a particular sensor such as a radar or MRI (magnetic resonance imaging) device.
The second involves improving the image, identifying important features and
otherwise exploiting the picture.
For certain image reconstruction applications, particularly non-linear SAR
and fast MRI, conventional technology is often too slow, expensive, bulky and
energy inefficient. This problem limits the utility of all-electronic systems in
such applications. The high throughput, flexibility, compact size and low power
requirements of the ImSyn processor allow its use in fast MRI and non-linear
SAR. The SAR market niches include aerospace platforms and transportable ground
systems where size, weight, power and processing complexity are most critical,
as well as in accelerating workstations. In addition, ImSyn technology enables
new applications in digital holography, as in the patented Virtual Lens
Microscope(TM) (VLM), invented by the Company, ultrasound and sonar, that are
not otherwise practical.
A prototype ImSyn Processor was completed in mid 1996. Three initial units
were assembled and two were delivered under contracts in January 1997. A small
number of additional units based on this initial design were released for
manufacture and were nearing completion by the end of 1997. Key optical
components are lasers, lenses, CCD cameras and Bragg cells. Of these items, the
Bragg cells are designed by the Company in accordance with commercial practice.
They are, therefore, special order items for which there are 2-3 suppliers (one
national supplier) which the Company has used for the initial build of the
specified cells. Digital circuit boards include both off-the-shelf and
company-designed units fabricated by several different local circuit board
manufacturers. Completion of the program has been delayed, principally by
deficiencies in commercial components discovered long after they had been
selected and incorporated into the processors. The ImSyn Processor clearly
performs in the fashion expected, fully confirming the Company's design
concepts. The known component deficiencies slow its operations in some
applications and reduce the reliability of the initial units. The Company
expects to deal with these problems as it is able to develop financial resources
to do so and is, in technical terms, fully capable of resolving these electronic
circuit problems.
IMSYN(TM) PROCESSOR COMMERCIALIZATION - The Company has identified several
potential markets and market niches for image processing applications. Markets
for these patented products include medical, industrial and military imaging,
microscopy and signal processing. Key product features are digital
compatibility, affordability, high-speed, simplified software, low power
consumption and compact packaging.
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In any given market niche, there are end-users with direct applications and
original equipment manufacturers (OEMs) that can incorporate ImSyn processors in
their products to improve performance or reduce cost. In the case of MRI, market
entry is controlled by the prominent MRI research institutions upon which OEMs
depend for new product and applications information. Accordingly, the Company is
keeping the OEM community informed on its progress while actively contacting
"luminary" researchers. Contacts have been made with both to inform potential
users and begin generation of sales leads.
In this connection, the State of Maryland has joined the Company in making
several cooperative grants to the Radiology Department of the University of
Maryland Medical School under the Maryland Industrial Partnerships (MIPS)
program. The purpose of these grants is to finance application studies by the
Radiology Department to determine the most effective uses of the ImSyn processor
in reconstructing MR images for functional MRI and MRI fluoroscopy. The
principal direction of the work in process is toward real-time processing of
very fast MRI to permit doctors to evaluate dynamic parts of the body such as
the beating heart and thinking brain. Increasingly fast MRI techniques are now
being offered by major OEMs such as GE Medical Systems, Siemens Medical Systems
and Picker. The Company believes that when its ImSyn Processor becomes
available, it will improve the capabilities of such modalities.
The Company expects its patented ImSyn Processor to become the linchpin of
practical ground-penetrating radar systems. Such systems can be used to inspect
roads, bridge decks, tunnels and runways. They can help prevent excavation cuts
of PVC gas pipe, fiberoptic cable and other utilities. Such radar tools are also
efficient sensors for detecting land mines, explosive ordnance and hazardous
materials.
Until now, processing ground-penetrating radar signals has been expensive
and time-consuming because it is a highly computationally intensive task. An
engineer at a national laboratory observed that the use of this modality to
inspect roads and bridge decks is feasible except that supercomputer capability
is needed. The ImSyn Processor is a supercomputer in this context, although far
less costly, and its low weight, size and power consumption enable it to be
mounted in a stepvan. The ImSyn can also provide high-speed pattern matching
capability for automatic fault identification. It reconstructs
ground-penetrating radar images in near real time. For example, radar images of
buried land mines were reconstructed by ImSyn in less than 30 seconds, while the
conventional workstation used took about four hours.
Since 1989, one of the principal objectives of the Company's ImSyn
Processor development has been to support synthetic aperture radar (SAR)
imaging. This is a means of producing nearly photographic quality images using
radar signals instead of light. Because of its great computational power, the
ImSyn Processor is able to reconstruct SAR images of moving targets in a U.S.
Navy development program. It also reconstructs images from foliage-penetrating
radars. An ImSyn Processor, initially purchased by the U.S. Army for use in a
developmental mobile ground-based SAR processing system, is now in use by the
Department of Defense as an element of a hybrid optical-digital SAR equipment
system development.
Under the Company's Egret correlator program, ImSyn Processor technology
demonstrated the pattern recognition capability of optoelectronic processors to
the U.S. Air Force. This program was partially financed by a $730,000 U.S. Air
Force technology demonstration contract entered into in 1994 and completed in
1997. The resulting system is able to identify individual
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objects such as tanks, mobile missile launchers, or other known objects in an
image. The Company received a prestigious Tibbetts Award from the U.S. Small
Business Administration for exemplary performance of this Small Business
Innovative Research (SBIR) contract. Similar discriminations may be useful in
medical radiology or pathology. The Company is seeking program financing to
build a much higher speed correlator.
The Company's marketing strategy is constrained by limited financial
resources to the use of internal staff and a few sales consultants. Military
end-use marketing and sales continue to be carried out by key employees and
outside sales consultants, both directly to government agencies and indirectly
through prime contractors, through the submissions of proposals. Such proposals
may be in response to customer requests while others are unsolicited proposals
by the Company to potential customers to solicit new work.
VIRTUAL LENS MICROSCOPE(TM) - The Virtual Lens Microscope (VLM) is a completely
new kind of microscope, invented and patented by the Company. The VLM is a
coherent imaging device that produces high resolution, high dynamic range, fully
complex 3D imagery. In essence, the VLM is an engine that converts holograms to
digital signals. It originates from the principles of SAR. A large virtual lens
is synthesized by combining Fourier information gathered by many small lenses.
The complex-valued image is reconstructed by an inverse Fourier transform using
the ImSyn Processor. The proof-of-principal instrument allows a high resolution,
submicron image to be obtained at a large working distance, the order of
centimeters, using visible light lasers, with a large field of view.
The VLM provides the characteristics of dark field, bright field, phase
contrast and other classes of microscopes. It can use any coherent radiation
source including ultraviolet or infrared, x-rays, electrons and microwaves. The
principal application of this technology now being pursued by the Company is for
semiconductor device inspection. Experts have also mentioned that VLM has
potential biomedical applications. Among the more interesting of these is IN
VIVO microscopy in real-time support of medical procedures. The VLM requires far
less light intensity than does the laser confocal microscope and, as stated,
provides a substantial working distance above the object or subject.
The 3D, real-time, fully complex capacities of the VLM and its great
working distances lend themselves to the new world of Micro-Nano Technology
(MNT) or Microelectromechanical Systems (MEMS). This technology was developed in
building semiconductor chips, including advanced packaging techniques, and is
now being used to create smart instruments that are infinitesimal in size. The
future of this new industry is unknown, but immensely promising. On the basis of
the Company's exploration of applications of the VLM to semiconductor
microscopy, the Company believes the VLM may be well suited to play a role in
the development or in-process inspection of MNT/MEMS devices.
Scaling the wavelength used in the VLM to millimeter waves, the Company
believes that it can be used to measure changes over time in such structures as
aircraft. In a proper arrangement, a structure can be scanned with millimeter
waves and returned to service. The digital holograms collected can be stored in
a magnetic or optical memory. Later, the structure can again be scanned in the
same apparatus. When the holograms collected at two different times are
compared, changes are highlighted. The Company envisions scanning aircraft or
other structures periodically, comparing digital holograms collected from one
time to the next and
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measuring structural changes, or "stressprinting." Experiments with structures
have not been conducted; however, the process of detecting surface displacements
occurring between collects by holographic means is well established.
OTHER OPTOELECTRONIC ENGINES - In addition to the ImSyn processor, the Company's
other work in process includes Ultrawideband Signal Processors,
Telecommunications Channelizer-Switches and True Time Delay Antenna Array
steering networks. Each of these computing engines can be used in a variety of
applications, for example, the signal processors can be used either as radar
processors or stand-alone signal processors. In contrast to general purpose
computers, however, they are special purpose, albeit very flexible, units.
The Company's Labyrinth(TM) Signal Processors are improvements of earlier
designs developed for the U.S. Government. These are wideband and ultrawideband
signal processors that use optoelectronics for rapid computation of quadratic
functions to characterize complex waveforms. They have high dynamic range and
processing gain, and provide near real-time auto-channel or cross-channel
processing. Equipped with a Motif interface, they have instantaneous bandwidth,
the wideband unit being rated at 30 MHz, and the ultrawideband unit at 250 MHz
to 1 GHz. The processing algorithms include Ambiguity Function, Cyclic Spectra,
Lag Product, Wigner Distribution, Directional Fourier Transforms and
Time-Varying Doppler. The product can be packaged for difficult environments.
The proof-of-principle model of the Company's Wideband Range Doppler Imager
(WRDI) acousto-optic/digital radar signal processor is an adaptation of the
Labyrinth processor. It was constructed under the terms of ongoing U.S. Army and
Ballistic Missile Defense Organization contracts covering testing, evaluation
and upgrade. It has significant advantages over traditional processing
architectures. Its principal discriminating capability is that its ultra-wide
analog front-end enables processing of high-definition radar returns from
advanced wide bandwidth radars without analog-to-digital conversion. Its output
is in digital FFT format. It has high computational efficiency in a compact,
light-weight, inexpensive package. Such real time computation of high-resolution
images from ultrawideband signals using digital technology alone requires
extremely high analog to digital conversion rates and data processing throughput
which is impractical with state-of-the-art digital electronics.
The WRDI has higher dynamic range on true arbitrary waveforms and provides
automatic range-walk correction. The high-performance processor is modular and
reconfigurable while operating. It is low in cost and easily maintainable. These
attributes provide solid benefits such as high probability of intercept and
excellent jamming immunity, including multi-radar operations within a confined
region. The Company believes that this modular, common wideband radar processor
has utility in NMD-GBR, THAAD, AEGIS and tactical missile defense systems.
Under its Iris(TM) program, the Company has proposed to develop a family of
optoelectronic telecommunications channelizers and switches. These products will
be targeted at the wireless and satellite telecommunications markets. The
advantages of optoelectronic processors, especially their size and energy
efficiency, are expected to be attractive to these markets. The technology can
be implemented for TDMA (Time Division Multiple Access), FDMA (Frequency
Division Multiple Access) or CDMA (Code Division Multiple Access) modulation
schemes.
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Iris technology has been studied for use on a planned satellite under a small
research contract. Additional funding and a strategic partner are being sought
to further develop this technology.
Iris is a non-blocking, reversible switch that uses optoelectronic
processing technology to provide a small, low-power package at reasonable cost.
Its design can increase satellite capacity, thus providing added revenue
potential with no power penalty. It can operate on 10 to 50 signals, each
composed of 100 to 500 FDMA or CDMA voice-grade channels and route those signals
to appropriate buffers for transmission. Iris provides non-blocking switching,
bandwidth of 5 to 50 MHz per signal, low-latency processing, over 43 dB dynamic
range and rapid reconfiguration. It is ideal for spacecraft because of small
size, weight and power. Gold and related codes for CDMA are easily implemented,
and FDMA filter shapes are readily controlled. It is modifiable, simple,
redundant and highly reliable.
Chronos(TM) is an acousto-optic processor that generates and controls the
set of time delays required for TRUE TIME DELAY beam steering of wide aperture,
ultrawideband radio frequency (RF) antenna arrays. The time delay controller
scans an RF array beam rapidly over a continuum of angles and provides the
proper relative phases between the carriers of the time delayed signals at the
RF of the antenna array. Using time delays rather than phase delays between the
array elements eliminates beam dispersion. This product avoids beam broadening,
easily controls signal delays and provides continuous high precision beam
steering.
Several other optoelectronic processors are under study by the Company.
Related applications and exploratory development activities are limited by lack
of funding. Additional government contracts and strategic partnerships with
companies active in applicable markets are being sought.
CONTINUING OPERATIONS
Certain amounts or calculations for prior year have been reclassified or
recalculated to conform to the 1997 presentation of continuing operations and
discontinued operations. For further discussion, see Part II Item 6 -
Management's Discussion and Analysis.
CONTRACT MIX
Services of the Company are performed under time and material (58% and 45%
of revenues in 1997 and 1996), cost-reimbursement (26% and 25% in 1997 and 1996)
or fixed-price (16% and 30% in 1997 and 1996) contracts and subcontracts.
Fixed-price contracts have a greater degree of risk and higher potential reward
than cost-type contracts since the Company is obligated to provide specific
deliverables within the confines of the contracted price.
GOVERNMENT PROGRAMS
The major portion of the Company's revenues has been derived from
contracts, or subcontracts thereunder, with departments or agencies of the
United States Government, primarily the military services and other departments
and agencies of the Department of Defense (DoD). In 1997 and 1996, approximately
51% and 43%, respectively, of the Company's total revenues were derived from
government contracts or subcontracts. Revenues from contracts or subcontracts
from DoD programs were 43% and 34% of total revenues in 1997 and 1996,
respectively. Government military programs include work principally with both
the Navy and Army in 1997, and to a lesser extent with the Air Force and other
DoD entities. The Company
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also works with industrial companies, engineering firms, equipment manufacturers
and research institutions.
The Company has proposals outstanding on other key contracts for optical
systems development and equipment design and assembly.
COMMERCIAL PROGRAMS AND PRODUCTS
The Company is endeavoring to expand the commercial portion of its
business. The Company expects that significant personnel and financial resources
will continue to be applied to the targeted commercial product and service
sectors. The application of personnel and financial resources is greatly
constrained by the Company's liquidity problems and lack of capital and the
limited access to capital that the Company presently has.
The Company's efforts to date have been focused in support of Motorola
communications satellites and in optoelectronic products. The Company continues
work which began in 1990 with Motorola, Inc., assisting in the design of the
Iridium(R) satellite constellation that will provide global wireless
communications to handheld telephones and pagers. The Company's engineers
develop and use software to model satellite and intersatellite communications
links to assess system capacity and availability, and help develop
channel-assignment algorithms for maximizing system capacity. The Company's
engineers are named on several pending Motorola patents which are integral to
Iridium(R) system performance. The Company is also involved in modeling the
paging component of the system and user location determination systems. The
Company's contract to perform such work generated over 48% ($1.9 million) of
revenues in 1997 and 56% ($2.1 million) in 1996.
The Company is developing acousto-optic hardware utilizing its proprietary
ImSyn(TM) processor and other units. These products are both stand-alone
commercial items for end users, and units to be sold to original equipment
manufacturers (OEMs) for inclusion in their products. The Company is directly
marketing such products using employee and outside sales personnel to make OEM
and other customer contacts. It will also seek to obtain such contacts by using
direct mail and other traditional advertising approaches, such as new product
releases, technical and trade journal articles and features, space advertising,
participation in trade shows and other opportunities deemed by the Company to be
cost-effective and consistent with the professional nature of the Company's
products. As such products are generally compact in size and weight,
distribution to customers would be through normal third-party shipping means
from the Company's facilities. The Company's products are offered not only to
improve capability but also to improve size, cost and power consumption.
PATENTS
The Company has established a patent portfolio to cover the optoelectronic
processing techniques employed in its products. There is an ImSyn(TM) group of
patents and a set of patents covering an optoelectronic True Time Delay
Beamformer. The majority of the current products are governed by the claims in
the ImSyn(TM) set of patents.
There are currently four ImSyn(TM) patents which have issued in the U.S..
The first three patents cover the optoelectronic architecture and application of
the product ImSyn(TM) including accelerating image reconstructions for synthetic
aperture radar and magnetic resonance imaging. The claims in the fourth patent
employ the sensing and reconstruction techniques of ImSyn(TM) to
12
<PAGE>
the application of the Virtual Lens Microscope (VLM) product. The VLM has
application for semiconductor inspection, biomedical microscopy, and non-
destructive testing.
The first ImSyn(TM) U.S. Patent 5,079,555, "Sequential Image Synthesizer",
includes 20 claims and expires January 7, 2009. The corresponding patent No.
2,058,209, issued in Canada, expires November 25, 2011. The European version of
this patent has been allowed in Europe and the patent will be issued in Great
Britain and Germany.
The second ImSyn(TM) patent, U.S. Patent No. 5,384,573, "Image Synthesis
Using Time Sequential Holography" includes 157 claims and expires on January 24,
2012. The European and Canadian versions are in process.
The third ImSyn(TM) patent issued in the U.S. on April 7, 1998 with 8
claims. The fourth ImSyn(TM) patent issued in the U.S. on May 12, 1998 with 21
claims. The title of these patents is "Image Synthesis Using Time Sequential
Holography".
Three U.S. patents for the invention of the True Time Delay Beamformer
(TTD) have been issued to the Company. U.S. Patent No. 5,202,776 expires on
April 13, 2010. U.S. Patent No. 5,390,046 expires on February 14, 2012. U.S.
Patent No. 5,623,620 expires on April 22, 2014. TTD enables accurate electronic
steering of exceedingly broadband array antennas for aircraft, space, maritime
and ground systems.
COMPETITION
Competition for U.S. Government professional and technical services
contracts has grown in intensity and proposals have become increasingly costly
during the past several years. This stimulated the Company to initiate its
program to develop proprietary products and services. As such proprietary items
are developed, the Company has relied increasingly upon offers of its
specialized capabilities, sharply reducing resources applied in response to
proposals for solely professional and technical services. Examples of such
proprietary items include ImSyn(TM) processor products.
When performing desired functions using conventional technology takes too
long or costs too much, designers do not specify those functions. When Essex
offers cost-effective means of providing such functions, system integrators can
state, correctly, that there is "no requirement" for them. That means that no
expenditure is justified, no matter what the gain in system effectiveness may
be. Such design limitations, laid down for good reasons at the time, are a key
obstacle to market penetration by the Company's products. Electronic systems
integrators are gigantic in size and control an immense portion of the markets
of interest to Essex. They are customers as well as competitors. Lockheed
Martin, Boeing, Motorola, Raytheon, TRW, General Electric, Siemens, Hughes
Telecom and many others are far larger than Essex. As integrators, they are
specifiers. General Electric decides what goes into GE MRI equipment; Lockheed
Martin, what goes into certain aircraft systems; Boeing, what goes into its
commercial, military and space products. Such companies determine which
suppliers' products become a part of military and other systems. Essex is just
beginning to express itself outside the development laboratory and is not yet
firmly in the market. As far as the world of systems integration is concerned,
Essex products are not yet available. When Essex products become readily
available and well known, integrators will have an opportunity to consider
specifying them.
13
<PAGE>
There are many manufacturers of digital signal processors (DSP) boards that
are broadly used in many applications. Virtually all Essex hardware is equipped
with such circuit boards. Mercury Computer Systems is a principal supplier of
such hardware for radar imaging. Mercury is a commercial company with products
well accepted by Department of Defense communities. There is no evidence that
Mercury is interested in entering the optoelectronic processor market. Mercury
is highly profitable, well managed, exceedingly aggressive and a strong
competitor.
As is the case with DSP boards, many companies are in optoelectronics. The
vast majority so identified are not direct competitors, but are in the fiber-
optic telecommunications business. Many others are vendors building components
that the Company purchases. A few, however, do compete, such as Harris
Corporation, which is highly active in the Defense Sector. While the Company
seeks a competitive advantage in its chosen fields as a result of its
proprietary products and services, larger companies with more resources provide
competition and barriers to entry for such business.
BACKLOG
As of December 28, 1997, the Company had a total backlog (funded and
unfunded) of $1,981,000 as compared with $2,259,000 at December 29, 1996. Of
these amounts, backlog was $1.9 million funded and $.1 million unfunded at
yearend 1997 as compared to $1.7 million funded and $.5 million unfunded at
yearend 1996. Funded backlog generally consists of the sum of all contract
amounts of work for which funding has been approved and contracts signed, less
the value of work performed under such contracts. Even though such contracts are
fully funded by appropriations, they are subject to other risks inherent in
government and commercial contracts, such as termination for the convenience of
the customer.
EMPLOYEES
As of June 30, 1998, the Company had approximately 50 employees, of whom 34
were full-time employees.
2. DESCRIPTION OF PROPERTIES
OFFICE FACILITIES
The Company leases its offices. The Company's corporate headquarters and
offices are located in a one-story building at 9150 Guilford Road, Columbia,
Maryland. The Company occupies approximately 18,000 square feet under a lease
agreement extending through early 1999. The headquarters and offices for its
Commercial Products Division (CPD) are located in an adjacent one-story building
at 9130 Guilford Road, Columbia, Maryland. CPD occupies approximately 7,000
square feet under a lease extending through early 1999. The Company has assigned
certain of its personnel to customer-owned facilities in Chandler, Arizona. The
Company believes that its present facilities are adequate for its current
business needs. The Company has also begun, where applicable, to use a
home-based telecommuting arrangement for certain employees.
The Company closed its Huntsville, Alabama facility in late 1997. This
facility was constructed under a lease-purchase agreement pursuant to which the
Company would, for a nominal percentage of original construction costs, acquire
title to such property at the conclusion of the lease in 1999. This facility was
sold in June 1998 and a portion of the sales proceeds
14
<PAGE>
were used to pay off the remaining balance under the lease-purchase agreement.
(See Note 2 Discontinued Operations in the Notes to Financial Statements.)
EQUIPMENT
The Company owns a variety of computer workstations, test equipment,
microcomputers, printers and reproduction equipment. The Company leases computer
workstations in support of customer work. Other computer hardware and software,
test equipment, word processing and reproduction equipment used by the Company
are leased.
IMAGE SYNTHESIS LABORATORY
The laboratory consists of optical hardware and computer software, optical
benches and test equipment. The laboratory includes the physical property which
demonstrates and tests the capabilities of the Company's patented Image
Synthesizer (ImSyn(TM)) technology as well as other optoelectronic devices and
applications such as the Virtual Lens Microscope(TM).
3. LEGAL PROCEEDINGS
The Company was a party to a legal dispute with its former landlord. This
matter was settled in July 1994 and resulted in certain obligations for the
Company. (See Note 8 Commitments and Contingencies in the Notes To Financial
Statements.)
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 1997, the Company held its 1996 Annual Meeting of
Shareholders. At the meeting, each member of the Board of Directors was elected
to serve until the next annual meeting or until their successors are duly
elected and qualified. The votes cast and withheld for each such director were
as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
Harry Letaw, Jr. 3,111,179 138,427
Frank E. Manning 3,124,334 125,272
Harold P. Hanson 3,124,534 125,072
Robert W. Hicks 3,124,634 124,972
Ray M. Keeler 3,124,534 125,072
A. William Perkins 3,124,634 124,972
Terry M. Turpin 3,117,667 131,939
<FN>
(Note: In March 1998, Mr. Perkins retired from the Board. In June 1998,
Mr. Leonard E. Moodispaw was elected by the Board to fill the vacancy.)
</FN>
</TABLE>
In addition, the Company's shareholders approved the following
proposals:
The ratification of the appointment of Arthur Andersen LLP as
independent accountants, as follows:
FOR 3,171,774 AGAINST 76,270 ABSTAIN 1,562
--------- ------ -----
(Note: In June 1998, Arthur Andersen was released from service and was replaced
by Stegman & Company, Certified Public Accountants.)
15
<PAGE>
PART II
5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Since June 1997, the Company's common stock is quoted and trades executed
through the OTC Bulletin Board under the symbol "ESEX". Previously, the
Company's common stock was traded on The Nasdaq SmallCap Market(sm) tier of the
Nasdaq Stock Market(sm).
The following table sets forth the range of high and low actual sales
prices of the Common Stock for the periods indicated. Sales prices include
prices between dealers, may not reflect mark-ups, mark-downs or commissions and
may not represent final actual transactions.
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First quarter........................ $ 1.88 $ 0.59 $ 3.50 $ 2.25
Second quarter....................... 1.06 0.25 3.63 2.63
Third quarter ....................... 0.81 0.41 3.00 2.00
Fourth quarter....................... 1.06 0.50 2.50 0.94
</TABLE>
At June 30, 1998, there were approximately 1,350 beneficial owners of the
Company's Common Stock which includes 360 holders of record.
6. 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. CERTAIN RISK
FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS FORM 10-KSB/A NO. 1
INCLUDE BUT ARE NOT LIMITED TO: CONCENTRATION OF CURRENT SALES WITH ONE COMPANY,
LACK OF CONTRACT BACKLOG, DELAYS IN COMMERCIALIZATION AND SALES OF IMSYN OPTICAL
PROCESSOR UNITS AND ASSOCIATED INVENTORY REALIZABILITY ISSUES, LACK OF WORKING
CAPITAL, IMPORTANCE OF PATENT PROTECTION AND ENFORCEMENT AND FUTURE CASH PAYMENT
OBLIGATIONS TO A FORMER LANDLORD.
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.
16
<PAGE>
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 and competitive relative to the size of
the Company. On August 4, 1997, the Company sold the FSD operations (except for
the telecommunications and government-related optoelectronics businesses) for
approximately $300,000 in cash and assumption of certain liabilities of
approximately $60,000. 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 which was paid off in June 1998.
The balance of $625,000 was received from escrow through February 1998 as the
respective contracts of SED were 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. 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. The Company intends to concentrate all its efforts and resources in
commercializing its optoelectronics and telecommunications products and
services.
STATUS
The Company delayed filing its 1997 Form 10-KSB due to continuing liquidity
problems as a result of delays in receipt of anticipated new business and
follow-on work. There were also concerns relating to the lack of a backlog of
orders for the Company's ImSyn(TM) processors and the corresponding valuation of
its ImSyn(TM) inventory. Backlog and order issues will continue to be major
concerns until substantial improvements have been achieved.
The Company's backlog of work in the telecommunications and optoelectronics
business areas has always been funded incrementally. The telecommunications work
is principally with one major customer, Motorola, and is approximately 50% of
the Company's revenues from continuing operations for 1997. While the
telecommunications work has been consistently forthcoming over the last few
years, the optoelectronics work has been sporadic. The Company has been unable
to maintain programs of sufficient volume and expand such work to achieve a
breakeven or better level of operations on such revenues.
Since early 1997, the Company has continued development and initial product
improvement of its ImSyn(TM) optoelectronic processor to the extent possible.
The processor is a combination
17
<PAGE>
of digital and optical componentry. Problems in the reliability and performance
of certain digital components as well as the combination of such
state-of-the-art subassemblies have caused delays in the availability of the
ImSyn(TM) processor to potential initial users and customers. Such initially
produced processors were expected to be available in early 1997 but are only
beginning to become available in late 1998. The first-designed units are being
upgraded with more effective electronic componentry, requiring hardware and
software changes and retesting and recalibrating of unit performance. The
Company established in 1997 significant reserves against its ImSyn(TM) inventory
for such changes and delays in the introduction of these first units.
The lack of available units for initial user testing and evaluation has
hindered potential sales and revenues, and delayed inventory turnover. Such
delays have prolonged the outflow of cash resources to maintain core staff and
make additional inventory replacement component purchases. The outflow of cash
in the optoelectronics area was significantly greater than the cash inflows from
all operations in 1996 and 1997, but has moderated somewhat during the first
half of 1998. Net cash used in operating activities was $1.6 million in 1997 but
has declined to $333,000 in the first half of 1998.
The Company is working to reduce the deficit from optoelectronic operations
and to improve its cash flows. The Company has made available initial Imsyn
processors to potential users in mid-1998 on a trial basis with the intention of
turning such use into revenues by late 1998 through the sale or lease of such
processors. The Company continues to pursue new work and expansion of its
existing contracts for telecommunications and optoelectronics products and
services with Government and commercial customers.
1997 COMPARED TO 1996
CONTINUING OPERATIONS
Revenues from continuing operations were $4,012,000 and $3,692,000 for 1997
and 1996, respectively, an increase of 9%. The Company's work for Motorola on
its Iridium cellular satellite communication system accounted for revenues of
$1.9 million and $2.1 million in 1997 and 1996, respectively. This represented
48% and 56% of revenues for 1997 and 1996, respectively. There was a decline in
revenues from this program between 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 yearend 1997 backlog on the Motorola
program of approximately $1.8 million. The Company has a backlog of
approximately $150,000 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 had no firm orders for ImSyn(TM) units as of July 23, 1998.
There were operating losses from continuing operations of $1,264,000 and
$2,939,000 in 1997 and 1996, respectively. Cost of goods sold and services
provided for 1996 was 61.2% as compared to 58.2% 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. In 1997,
cost of goods sold includes a charge of $400,000 to establish a reserve against
18
<PAGE>
ImSyn(TM) processor inventory to provide for design changes and the delay in the
introduction of these first units.
Selling, general and administrative expenses ("SG&A") were $3.6 million in
1996 compared to $2.4 million in 1997 on a slightly higher revenue volume in
1997. The $1.2 million 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 a loss from discontinued operations of $101,000 and $243,000 in
1997 and 1996, respectively. In 1997, the Company recognized a gain of
$1,236,000 from the disposal of certain assets of the Systems Effectiveness
Division and the Federal Systems Division.
Discontinued operations are comprised of the Systems Effectiveness Division
and the Federal Systems Division (except for the telecommunications and
government-related optoelectronics businesses). During 1997 and 1996, the SED
operations had sales of approximately $4.8 million and $5.2 million,
respectively, and produced income of approximately $503,000 and $577,000 during
the applicable periods of 1997 and 1996, respectively. As of October 1, 1997,
the SED operations were sold.
The FSD discontinued operation's revenues were $2.3 million in 1997 and
$4.1 million in 1996. There was a loss from operations of FSD of approximately
$493,000 in 1997 compared to a loss of approximately $819,000 during 1996.
During 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 was
recognized in 1997. As of December 28, 1997, there were net current assets of
discontinued operations of $31,000 and net noncurrent assets of $977,000 shown
on the balance sheet which were sold and proceeds received in 1998.
CORPORATE MATTERS
There was a gain in 1996 on settlement of lawsuit of (approximately
$2,241,000, or $0.62 per share). This gain triggered a payment to the former
landlord and expense of $250,000 ($0.07 per share). The basic income (loss) per
share results are computed on weighted average shares outstanding of 3,617,000
in 1996.
19
<PAGE>
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 $234,000. The Company had expensed in prior
years approximately $385,000 in connection with this lawsuit. In addition, the
Company recognized an expense of $250,000 as part of the previously concluded
rent dispute with its former landlord. The Company was liable for such a payment
upon successful conclusion of the previously described lawsuit.
In 1997, the Company's interest expense and debenture financing
amortization costs increased due to the increased average borrowings under its
line of credit and the accelerated write off of debenture financing costs due to
the early pay down on the debentures. Total interest expense and debenture
financing amortization costs were $311,000 in 1997 compared to $143,000 in the
same period of 1996.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No significant
provision or benefit from income taxes was recognized in 1997 or 1996.
YEAR 2000 ASSESSMENT
The Company has made a preliminary review of the computer systems and
software utilized in both operations and administration. The Company has
determined that most of its systems and software are either already Year 2000
compliant or are vendor-supported under warranty or maintenance agreements and
are expected to be brought into compliance on a timely basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
SELECTED FINANCIAL DATA ($ Thousands)
<CAPTION>
AS OF
December 28, December 29,
1997 1996
------------------ ------------------
<S> <C> <C>
Total Assets $ 3,191 $ 4,708
================== ==================
Working Capital $ 466 $ 113
================== ==================
Current Ratio 1.36:1 1.05:1
Current and Long-Term Capital Leases $ 65 $ 176
Bank Line of Credit 164 900
Convertible Debentures 1,233 1,400
------------------ ------------------
Total Debt/Financing $ 1,462 $ 2,476
================== ==================
Stockholders' Equity $ 666 $ 729
================== ==================
</TABLE>
The Company's working capital and ratio increased primarily as a result of
the proceeds from the sale of discontinued operations in 1997. At yearend 1997,
the Company has working capital of approximately $466,000 and a stockholders'
equity of approximately $666,000.
20
<PAGE>
During mid 1997, certain insiders and directors invested $245,000 in convertible
unsecured notes payable and $120,000 in redeemable preferred stock. The $245,000
was converted into common stock in December 1997. At year end 1997,the preferred
stock was considered equity since it was converted into common stock in the
second quarter of 1998.
The Company has incurred significant losses over recent years, primarily
due to the development and marketing of its optoelectronics products and
services. The optoelectronics products and services business is currently
experiencing net cash expenditures (including all general and administrative
expenses) over receipts in the range of $75,000 - $100,000 per month. When
combined with the telecommunications operations, the net cash outflow is in the
range of $25,000 - $50,000 per month. The Company has taken steps to increase
revenue volume and reduce expenditures. The Company has cut back on research and
development for 1998 where possible while retaining essential staff and other
capabilities in the optoelectronics and telecommunications businesses. If
current conditions remain unchanged, the Company would not be able to sustain
its overall business operations without additional working capital or further
cost reductions.
The Company settled on the sale of its Huntsville, Alabama facility in June
1998. The facility served as a portion of the collateral on the convertible
debentures. The proceeds from the sale were therefore restricted and used to pay
down approximately $860,000 of debentures.
The Company continues to seek additional funds under appropriate terms from
private financing sources to finance development 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 $400,000 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 July 23, 1998.
The receivable financing arrangement for a line of credit up to $500,000
expired May 31, 1998. The Company is negotiating to replace this financing with
an accounts receivable factoring organization. The terms and conditions of the
factoring agreement are expected to be slightly more costly but otherwise
comparable.
Under the settlement agreement reached with the landlord, certain payments
are triggered only by other future cash inflows. The remaining $282,000
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 $282,000 be paid from the proceeds from
such sales beginning in July 1998.
21
<PAGE>
The Company believes that it will be able to meet its 1998 funding
requirements and obligations from the aforementioned sources of revenue and
capital, and if necessary, by further cost reductions. However, there can be no
assurances in this regard and the Company expects that it will need significant
additional financing in the future.
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.
INFLATION
The Company, because of its substantial activities in professional services
and product development, is more labor intensive than firms involved primarily
in industrial activities. To attract and maintain higher caliber professional
staff, the Company must structure its compensation programs competitively. The
wage demand effect of inflation is felt almost immediately in its costs;
however, the net effect during the years in question is minimal.
The inflation rate in the United States generally has little impact on the
Company's cost- reimbursable type contracts and other short-term contracts. For
longer-term, fixed-price type contracts, the Company endeavors to protect its
margins by including cost escalation provisions or other specific inflation
protective terms in its contracts.
The Company began limited assembly and manufacturing operations in 1997. As
the Company expands these operations, the Company will consider the impact of
inflation in the cost of such operations.
7. FINANCIAL STATEMENTS
See Item 13(a)(1) in Part III of this Form 10-KSB/A No. 1.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In June 1998, the Company selected Stegman & Company as its principal
accountants to audit the Company's financial statements for the 1997 fiscal
year. Stegman & Company replaced Arthur Andersen LLP as the Company's principal
accountants. Arthur Andersen LLP had been the Company's auditors since 1992 and
were dismissed for business considerations entirely unrelated to accounting
standards or practices.
The Company had no disagreement with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, internal
controls, or auditing scope or procedure, in connection with the audits of the
1996 or 1995 fiscal years or any subsequent interim period in 1997.
The Company's financial statements for each of the 1996 and 1995 fiscal
years did not contain an adverse opinion or a disclaimer of opinion, and were
not qualified as to uncertainty, audit scope, or accounting principles. The
decision to change accountants was recommended unanimously by the Audit
Committee of the Company's Board of Directors.
22
<PAGE>
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Directors* and executive officers elected by the Board are:
NAME AGE POSITION
Harry Letaw, Jr. 71 Chairman and Chief Executive Officer
Leonard E. Moodispaw 55 President; Chief Operating Officer and
Director
Terry M. Turpin 55 Senior Vice President; Chief Technical Officer
and Director
Joseph R. Kurry, Jr. 48 Senior Vice President; Treasurer and Chief
Financial Officer
Matthew S. Bechta 44 Vice President
Craig H. Price 49 Vice President
Gerald J. Davieau 42 Vice President
Kimberly J. DeChello 36 Chief Administrative Officer and Secretary
Frank E. Manning 79 Chairman Emeritus; Director (2)
Harold P. Hanson 76 Director (3)
Robert W. Hicks 60 Director (1)
Ray M. Keeler 67 Director (1)(2)(3)
* Directors are elected annually at the Company's Annual Meeting of
Stockholders.
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Ethics Committee of the Board of Directors.
Harry Letaw, Jr. was elected a Director of the Company in June 1988. He is
Chairman of the Board and Chief Executive Officer. Dr. Letaw is President and
founder of Intellinet Corporation, a motor control system manufacturer, based in
Maryland. He previously served in senior management and marketing positions with
Raytheon, Martin Marietta and Bunker Ramo. Dr. Letaw performed military service
during World War II, received a Bachelor of Science degree in Chemistry in 1949,
a Master of Science degree in Chemistry in 1951 and a Doctor of Philosophy
degree in Physical Chemistry in 1952, all from the University of Florida. He was
Research Assistant Professor of Electrical Engineering at the University of
Illinois, 1952 to 1955. Dr. Letaw devotes his full business time to the business
of the Company and his affiliations with other corporations do not involve any
substantial expenditures of time nor do these positions involve any real or
potential conflicts of interest.
Leonard E. Moodispaw, President, Chief Operating Officer and Director of
the Company, rejoined Essex in 1998. Mr. Moodispaw was an employee and
consultant with Essex during 1988 to 1993. From 1988 to 1993, he was President
of the former Essex subsidiary, System Engineering and Development Corporation
(SEDC), and later served as Essex Chief Administrative Officer. Mr. Moodispaw
was Secretary of the Company and has currently been
23
<PAGE>
Corporate Counsel. From April 1994 to April 1998, Mr. Moodispaw was President of
ManTech Advanced Systems International, Inc. (MASI), a subsidiary of ManTech
International Corporation. Mr. Moodispaw will continue his relationship with
ManTech as a member of its Advisory Board and will serve as a consultant to MASI
and to MASI UK Limited where he serves on the board of its joint venture with
Vosper-Thornycroft. Early in his career, Mr. Moodispaw was engaged in a private
practice of law, and from 1965 to 1978 was a senior manager in the National
Security Agency (NSA). He is the Founder of the Security Affairs Support
Association (SASA) that brings government and industry together to solve
problems of mutual interest.
Terry M. Turpin was elected a Director of the Company in January 1997. He
is Senior Vice President and Chief Technical Officer for the Company. He joined
Essex through merger with SEDC where he was Vice President and Chief Scientist
from September 1984 through June 1989. From December 1983 to September 1984 he
was an independent consultant. From 1963 through December 1983, Mr. Turpin was
employed by the NSA. He was Chief of the Advanced Processing Technologies
Division for ten years. He holds patents for optical computers and adaptive
optical components. Mr. Turpin represented NSA on the Tri-Service Optical
Processing Committee organized by the Under Secretary of Defense for Research
and Engineering. He received a Bachelor of Science degree in Electrical
Engineering from the University of Akron in 1966 and a Master of Science in
Electrical Engineering from Catholic University in Washington, D.C. in 1970.
Joseph R. Kurry, Jr. joined Essex Corporation in March 1985. He is
Treasurer, Chief Financial Officer and Senior Vice President. Mr. Kurry was
controller of ManTech International Corporation from December 1979 to March
1985. Mr. Kurry received a Bachelor of Science degree in Business Administration
in 1972 from Georgetown University, in Washington, D.C. and is a Certified
Public Accountant.
Matthew S. Bechta was elected Vice President in October 1993. As Director
of Programs, Mr. Bechta is responsible for technical operations and business
development for Optoelectronics and Signal Processing. Mr. Bechta joined Essex
in 1989 with the merger of Essex and SEDC. As one of the founders of SEDC, he
served in various technical and management capacities since incorporation in
1980. From 1975-1980, Mr. Bechta was employed by NSA as a systems engineer. Mr.
Bechta holds a Bachelor of Science degree in Electrical Engineering from Spring
Garden College, Pennsylvania and a Master of Science degree in Computer Science
from the Johns Hopkins University.
Craig H. Price was elected Vice President in October, 1993. Dr. Price,
Director of Engineering, is now responsible for Essex satellite support
activities. Dr. Price joined Essex in 1989 as a result of the merger of Essex
and SEDC. Dr. Price had joined SEDC in 1985, with varied assignments in
engineering, analysis and advanced technologies. Previously, he served in
numerous technical and project positions in the U.S. Air Force during the period
1974 - 1985, and he was awarded the Distinguished Service Medal. Dr. Price holds
a Bachelor of Science degree in Electrical Engineering from Kansas State
University, a Master of Science degree in Electrical Engineering from Purdue
University and a Doctor of Philosophy degree in Electrical Engineering, from
Stanford University.
24
<PAGE>
Gerald J. Davieau joined Essex as a result of the merger of Essex with
SEDC, which he joined in 1987, and was elected Vice President in November 1997.
As technical director of satellite systems engineering operations, Mr. Davieau
is responsible for design and analysis of wireless satellite applications. He is
listed on more than 20 Motorola patent disclosures from work on Iridium(R) and
Celestri(TM) satellite programs. Mr. Davieau was employed by SPACECOM in
Gaithersburg, Maryland, 1982-1987. He served in the U.S. Army, 1978 - 1982. Mr.
Davieau holds a Bachelor of Science degree in Electrical Engineering from Lehigh
University and a Master of Science degree in Electrical Engineering from the
University of Maryland.
Kimberly J. DeChello joined Essex in May 1987 and has served in various
administrative and management capacities. She was appointed Chief Administrative
Officer in November 1997 and Corporate Secretary in January 1998. Ms. DeChello
is responsible for administration, human resources, investor relations and
industrial insurance. Ms. DeChello holds an Associate of Arts degree in
Accounting and a Bachelor of Science degree in Criminal Justice/Criminology. She
is currently a Master of Science Degree Candidate at the University of Maryland.
Frank E. Manning, Chairman Emeritus, is the founder of the Company. Mr.
Manning has served as a Director of the Company since its organization in 1969.
Mr. Manning received a Bachelor of Science degree in Economics from Franklin and
Marshall College in 1942, and a Masters of Letters degree in Industrial
Relations from the University of Pittsburgh in 1946
Harold P. Hanson, formerly executive director of the Committee on Science,
Space and Technology of the U.S. House of Representatives from 1980-1982 and
1984-1990, was elected a Director of the Company in June 1990. Dr. Hanson is now
adjunct professor of physics, University of Florida, Gainesville and the editor
and publisher of DELOS, a non-profit journal of translation. He is a member of
the Essex Scientific Advisory Board, and a Fellow of the American Physical
Society and a National Science Foundation Franklin medalist. Dr. Hanson was
previously provost of Wayne State University and Boston University. He was an
executive vice president, vice president for academic affairs, dean of the
Graduate School and professor of physics of the University of Florida,
Gainesville. He was also chairman of the Department of Physics and director,
Center for Structural Studies, University of Texas, Austin. A naval officer
during World War II, Dr. Hanson served as research physicist at the Naval
Ordnance Laboratory and was later a Fulbright research fellow in 1961-1962. Dr.
Hanson earned graduate degrees at the University of Wisconsin.
Robert W. Hicks was elected a Director of the Company in August 1988. He
has been an independent consultant since 1986. During this period he was engaged
for three and one-half years by the State of Maryland Deposit Insurance Fund
Corporation, Receiver of several savings and loan associations, first as an
Agent and then as a Special Representative (both court-approved positions). He
was a principal officer and stockholder in Asset Management & Recovery, Inc., a
consulting firm which primarily provided services, directly and as a
subcontractor, to the Resolution Trust Corporation and law firms engaged by the
Resolution Trust Corporation. Mr. Hicks is also a Director and the Corporate
Secretary of the Kirby Lithographic Company, Inc.
Ray M. Keeler was elected a Director of the Company in July 1989. Since
1986, he has been an independent consultant to both industry and government
organizations in areas related
25
<PAGE>
to national and tactical intelligence programs. Mr. Keeler served on the Board
of Directors of SEDC from December 1987 through April 1989. From 1988 to
November 1995, he was President of CRYTEC, Inc., a service company providing
management, business development and technical support to companies involved in
classified cryptologic projects. Since December 1995, he has been a consultant
to companies involved in national technical intelligence programs. From 1982 to
1986, Mr. Keeler was Director of Program and Budget for the NSA. He received a
Bachelor of Arts degree from the University of Wisconsin-Madison in 1957.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the Company
pursuant to Rule 16(a)-3 under the Exchange Act during its most recent fiscal
year and Forms 5 with respect to its most recent fiscal year, the Company
believes that all such forms required to be filed pursuant to Section 16(a) of
the Exchange Act were timely filed, as necessary, by the officers, directors,
and security holders required to file the same during the fiscal year ended
December 28, 1997.
26
<PAGE>
10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers who served as such at the end of the last fiscal
year and whose total compensation exceeds $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ---------------------------- ---------
- -----------------------------------------------------------------------------------------------------------------------------------
Other Restricted Securities All Other
Annual Stock Underlying LTIP Compen-
Name and Compensation Award(s) Options/SARs Payouts sation
Principal Position Year Salary($)(1) Bonus ($) ($)(2) ($)(3) (#) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harry Letaw, Jr. 1997 135,200 0 0 0 0 0 0
Chairman and CEO 1996 135,200 35,000 0 0 0 0 0
1995 113,920 10,000 0 0 0 0 0
Terry M. Turpin 1997 122,720 0 3,540 0 35,000 0 0
Senior Vice President 1996 115,120 15,000 3,465 0 8,000 0 0
and Director 1995 102,848 7,500 3,095 0 8,000 0 0
Joseph R. Kurry, Jr. 1997 114,400 0 3,300 0 30,000 0 0
Treasurer, Senior Vice 1996 114,400 25,000 3,439 0 23,500 0 0
President and CFO 1995 106,400 7,500 3,198 0 5,000 0 0
Craig H. Price 1997 102,960 0 2,970 0 29,000 0 0
Vice President 1996 102,960 15,000 3,094 0 8,500 0 0
1995 95,760 5,000 2,878 0 5,000 0 0
Matthew S. Bechta 1997 102,960 0 2,970 0 25,500 0 0
Vice President 1996 102,960 15,000 3,089 0 8,500 0 0
1995 95,760 5,000 2,876 0 8,500 0 0
- ------------------------------------
<FN>
(1) Includes amounts deferred at the election of the named executive officer
pursuant to Section 401(k) of the Internal Revenue Code ("401(k)").
(2) Represents matching 401(k) contributions made on behalf of the respective
named executive officer pursuant to the Company's Retirement Plan and
Trust. Excludes other perquisites and benefits not exceeding the lesser of
$50,000 or 10% of the named executive officer's total annual salary and
bonus.
(3) No restricted stock awards were made for the periods indicated. The number
and value of the aggregate restricted stock holdings for the named
executive officers at the end of the 1997 fiscal year, based on the closing
bid price of the Common Stock on OTC Bulletin Board on December 26, 1997,
without giving effect to the consideration paid by the named executive
officer, were as follows: Dr. Letaw, 668,559 shares, $376,064 value; Mr.
Turpin, 75,781 shares, $42,627 value; Mr. Kurry, 36,359 shares, $20,452
value; Dr. Price, 14,342 shares, $8,067 value; and Mr. Bechta, 39,198
shares, $22,049 value.
</FN>
</TABLE>
27
<PAGE>
DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan, the Essex
Corporation Retirement Plan and Trust, which includes a 401(k) salary reduction
feature for its employees. The Plan calls for a discretionary contribution as
determined by the Board of Directors, and an employer matching contribution of
up to 3% of eligible employee compensation under the salary reduction feature.
Discretionary contributions are determined annually by the Board of Directors.
No discretionary contribution was made by the Company to the Retirement Plan for
1997. The total authorized contribution under the matching contribution feature
of the Plan was approximately $125,500 in 1997. All employee contributions are
100% vested at all times and Company contributions vest based on length of
service. Vested contributions are distributable and benefits are payable only
upon death, disability, retirement or break in service. Participants may request
that their accrued benefits under the Section 401(k) portion of the Plan be
allocated among various investment options established by the Plan
administrator.
The Company contributions under the Retirement Plan for the persons referred
to in the Summary Compensation Table are included in that Table.
EMPLOYEE INCENTIVE PERFORMANCE AWARD PLAN
The Company has an Employee Incentive Performance Award Plan under which
bonuses are distributed to employees. All employees are eligible to receive such
awards under flexible criteria designed to compensate for superior division and
individual performance during each fiscal year. Awards are generally recommended
annually by management and approved by the Board of Directors. Such awards may
be constrained by overall Company performances. There were no awards in 1997 to
persons employed in the continuing operations of the Company. The incentive
awards under the Performance Award Plan for the persons referred to in the
Summary Compensation Table are included in that Table.
RESTRICTED STOCK BONUS PLAN
Essex Corporation has a Restricted Stock Bonus Plan under which up to 50,000
shares of the Company's common stock may be reserved for issuance to
non-employee members of the Board of Directors and key employees of the Company
selected by the Board of Directors. Shares of restricted stock may be issued
under the Plan subject to forfeiture during a restriction period, fixed in each
instance by the Board of Directors, whereby all rights of the grantee to the
stock terminate upon certain conditions such as cessation of continuous
employment during the restriction period. Upon expiration of the restriction
period, or earlier upon the death or substantial disability of the grantee, the
restrictions applicable to all shares of restricted stock of the grantee expire.
The Plan also provides that loans may be advanced by the Company to a grantee to
pay income taxes due on the taxable value of shares granted under the Plan. Such
loans must be evidenced by an interest bearing promissory note payable five (5)
years after the date of the loan, and be secured by shares of stock of the
Company (which may be restricted stock) having a fair market value equal to 200
percent of the loan.
During 1995, the Board awarded a total of 12,000 shares to six directors and
none were awarded in 1997 or 1996. There are approximately 22,050 shares
remaining in the Essex Corporation Restricted Stock Bonus Plan as of December
28, 1997.
28
<PAGE>
EMPLOYMENT AGREEMENTS
Since 1988, the Company has had an Agreement of Employment with Harry Letaw,
Jr., Chairman of the Board and Chief Executive Officer. Dr. Letaw's annual
compensation was increased to $135,200 effective October 2, 1995. The term of
this Agreement is extended on a month-to-month basis by mutual agreement. The
Agreement restricts the individual's rights to compete with the Company and
prohibits misappropriation of proprietary rights of the Company, both during and
after the term of employment.
OPTIONS TO PURCHASE SECURITIES
The Company has a 1996 Stock Option and Appreciation Rights Plan (the "1996
Plan"). The 1996 Plan as presently in effect provides for the grant of tax
qualified Incentive Stock Options ("ISOs") and options that are not tax
qualified ("NSOs") and Stock Appreciation Rights ("SARs") which rights may be
related to, but not necessarily be granted in tandem with, options granted under
the 1996 Plan. Persons eligible to receive awards of options and SARs under the
1996 Plan include officers, directors, key employees and other persons who
provide valuable services to the Company. SARs entitle the holder to cash or
Company Common Stock measured by the increase in market value of the Company's
Common Stock from the date of grant to the date of exercise. The exercise price
of an ISO under the 1996 Plan may not be less than the fair market value of the
Company stock on the date of grant; the exercise price of NSOs and the
appreciation base price of SARs are determined in the discretion of the Board of
Directors except that the SAR appreciation base price may not be less than 50%
of the fair market value of a share of Common Stock on the grant date with
respect to awards to persons who are officers or directors of the Company. The
1996 Plan reserves 300,000 shares of the Company's Common Stock for issuance.
There are options for 263,200 shares outstanding at prices ranging from $1.00 -
$3.00, including options for 112,000 shares held by officers or directors
(options for 160,975 shares are exercisable, including exercisable options held
by officers and directors of 63,400). As of June 30, 1998, there remain 36,800
shares available for future grants of options or SARs.
The Company had an Option and Stock Appreciation Rights Plan ("OSAR Plan")
which expired on January 31, 1997 with no shares available for future grants. As
of June 30, 1998, options for 658,750 shares of the Company's Common Stock
remain outstanding under this Plan. Of this amount, options for 583,920 shares
are exercisable at prices ranging from $2.50 - $3.08 including options held by
officers and directors to purchase 545,000 shares (of which options for 493,940
shares are exercisable).
29
<PAGE>
The following Table shows for the fiscal year ended December 28, 1997 for
the persons named in the Summary Compensation Table, information with respect to
options to purchase Common Stock granted during 1997 under the OSAR Plan and the
1996 Plan. No options granted under the stock plans were exercised by the
persons listed below in 1997.
<TABLE>
STOCK OPTIONS GRANTS TABLE
FOR FISCAL YEAR ENDED DECEMBER 28, 1997
<CAPTION>
Number of
Securities
Underlying % Of Total Options/
Options SARs Granted to Exercise or
Granted Employees in Base Price Expiration
NAME (#)(1) Fiscal Year ($/Sh) Date
========================================================================================================
<S> <C> <C> <C> <C>
Harry Letaw, Jr. --- --- --- ---
Terry M. Turpin 20,000 5.1 3.00 01/30/07
15,000 3.8 1.00 11/16/07
Joseph R. Kurry, Jr. 22,000 5.6 3.00 01/30/07
8,000 2.0 1.00 11/16/07
Craig H. Price 21,500 5.4 3.00 01/30/07
7,500 1.9 1.00 11/16/07
Matthew S. Bechta 18,000 4.6 3.00 01/30/07
7,500 1.9 1.00 11/16/07
- ------------------------------------
<FN>
(1) Such options became exercisable beginning June 30, 1997.
</FN>
</TABLE>
30
<PAGE>
The following Table shows for the fiscal year ended December 28, 1997 for
the persons named in the Summary Compensation Table, information with respect to
option/SAR exercises and fiscal year-end values for unexercised options/SARs.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FY-END OPTION/SAR VALUES TABLE
FOR FISCAL YEAR ENDED DECEMBER 28, 1997
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End($)
Shares Value
Acquired on Realized Exercisable/ Exercisable/
NAME Exercise (#) ($) Unexercisable Unexercisable
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Harry Letaw, Jr. --- --- 290,000/0 0/0
Terry M. Turpin --- --- 21,400/29,600 0/0
Joseph R. Kurry, Jr. --- --- 22,100/36,400 0/0
Craig H. Price --- --- 15,900/26,600 0/0
Matthew S. Bechta --- --- 17,170/25,330 0/0
</TABLE>
REMUNERATION OF DIRECTORS
The Company's Directors generally meet quarterly. Additionally, the By-Laws
provide for special meetings and, as also permitted by Virginia law, Board
action may be taken without a meeting upon unanimous written consent of all
Directors. Board members not employed by the Company receive a maximum of $1,500
for each Board or Board Committee Meeting attended. Such compensation was
suspended for 1997. In 1997 the Board held seven meetings; the entire membership
of the Board was present at all of the meetings except two where one director
was absent.
31
<PAGE>
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table and accompanying notes set forth as of June 30, 1998,
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person or group who beneficially own more than 5% of the
Common Stock, (ii) each of the directors of the Company, (iii) each of the
officers of the Company named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Shares of Common Stock
OF BENEFICIAL OWNER* OWNERSHIP (1) BENEFICIALLY OWNED
<S> <C> <C> <C>
Harry Letaw, Jr. (2) 989,809 15.72
Terry M. Turpin (3) 313,593 4.98
Frank E. Manning (4) 129,275 2.05
Leonard E. Moodispaw (5) 122,650 1.95
Joseph R. Kurry, Jr. (6) 75,009 1.19
Matthew S. Bechta (7) 70,368 1.12
Harold P. Hanson (8) 69,344 1.11
Robert W. Hicks (9) 59,200 **
Craig H. Price (10) 40,742 **
Ray M. Keeler (11) 33,250 **
All Directors and Executive Officers
as a Group (12 persons) (12) 2,118,836 33.67
- ------------------------------------
<FN>
* All beneficial owners are directors and/or officers of the Company and
can be reached c/o Essex Corporation, 9150 Guilford Road, Columbia, MD
21046.
** Less than 1%
(1) Under the rules of the Commission, a person is deemed to be a
"beneficial owner" of a security if that person has or shares the power
to vote or to direct the voting of such security, or the power to
dispose or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person
has the right to acquire beneficial ownership within sixty (60) days.
Under these rules, more than one person may be deemed to be a
beneficial owner of the same securities and a person may be deemed to
be a beneficial owner of securities as to which he has no record
ownership interest. The shares listed above include options and rights
to acquire shares within sixty (60) days and shares held of record by
the Essex Corporation Retirement Trust as to which shares the
respective participant has disposition and voting rights. The
percentage ownership is computed based upon the number of shares which
would be outstanding if such options and rights were exercised.
(2) Dr. Harry Letaw, Jr. is Chairman of the Board and Chief Executive
Officer of the Company. Of the 989,809 shares beneficially shown as
owned by Dr. Letaw, 321,250 shares represent presently exercisable
rights to acquire Common Stock through stock options and warrants.
(3) Terry M. Turpin is a Director and Senior Vice President of the Company.
Of the shares shown as beneficially owned, 34,900 represent presently
exercisable rights to acquire common stock through stock options and
warrants.
(4) Mr. Frank E. Manning is the record and beneficial owner of
approximately 2.05% of the outstanding shares of the Company (129,275
shares), including presently exercisable options to purchase 31,500
shares. Mr. Manning is the Chairman Emeritus and a Director of the
Company. Does not include 40,000 shares of the Company's Common Stock
owned of record and beneficially by Mrs. Eva L. Manning, wife of Mr.
Frank E. Manning. Also does not include 157,500 shares beneficially
owned by six separate family trusts of which Mrs. Manning is the sole
trustee and over which trusts she has exclusive voting and dispositive
power.
(5) Leonard E. Moodispaw is President, Chief Operating Officer and a
Director of the Company. Of the shares shown as beneficially owned,
65,500 represent presently exercisable rights to acquire common stock
through stock options.
32
<PAGE>
(6) Joseph R. Kurry, Jr. is Senior Vice President, Treasurer and Chief
Financial Officer of the Company. Of the shares shown as beneficially
owned, 38,650 represent presently exercisable rights to acquire common
stock through stock options and warrants.
(7) Matthew S. Bechta is Vice President of the Company. Of the shares shown
as beneficially owned, 31,170 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(8) Harold P. Hanson is a Director of the Company. Of the shares shown as
beneficially owned, 20,500 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(9) Robert W. Hicks is a Director of the Company. Of the shares shown as
beneficially owned, 19,000 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(10)Craig H. Price is Vice President of the Company. Of the shares shown as
beneficially owned, 26,400 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(11)Ray M. Keeler is a Director of the Company. Of the shares shown as
beneficially owned, 18,250 represent presently exercisable rights to
acquire common stock through stock options and warrants.
(12)Of the shares shown as beneficially owned, 621,640 represent presently
exercisable rights to acquire common stock through stock options and
warrants.
</FN>
</TABLE>
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
33
<PAGE>
<TABLE>
<CAPTION>
13. EXHIBITS AND REPORTS ON FORM 8-K
<S> <C>
(a) (1) Financial Statements
Report of Independent Auditors 37
Balance Sheet 38
Statements of Operations 39
Statements of Changes in Stockholders' Equity 40
Statements of Cash Flows 41
Notes to Financial Statements 42 - 55
Report of Independent Auditors - 1996 56
(2) Exhibits
(i) Exhibit 2 - Plan of Acquisition, Reorganization,
Arrangement, Liquidation and Succession
2.2 Asset Purchase Agreement dated October 16, 1997
between Essex Corporation and Star Mountain, Inc. H
(ii) Exhibit 3(i) - Articles of Incorporation and Amendments B
thereto
Exhibit 3(ii)- By-Laws, as amended Filed as
Exhibits 3(i) and 3(ii) to Registrant's Registration
Statement on Form SB-2 filed October 17, 1994, Registration
No. 33-82920
(iii) Exhibit 4 - Instruments defining the Rights of Holders
4.1 Form of Warrant Agreement with Mellon Bank C
4.2 Specimen of Warrant Certificate C
4.3 Specimen of Common Stock Certificate C
4.4 Warrant Agreement with J. Michael Reisert, Inc. D
4.5 Specimen of Placement Agent's Warrant Certificate D
4.6 Form of 10% Convertible Collateralized Debenture E
4.7 Form of Series B Warrant E
4.8 Specimen of Preferred Stock - Series A G
(iii) Exhibit 10 - Material Contracts
10.1 Employment Agreement dated April 8, 1988, between C
Dr. Harry Letaw, Jr. and Registrant
10.3 Restricted Stock Bonus Plan C
10.4 Option and Stock Appreciation Rights Plan C
10.6 Pension Plan and Trust Agreement C
10.7 Defined Contribution Retirement Plan C
10.8 Incentive Performance Award Plan C
10.9 Line of Credit Agreement with Signet Bank E
10.10 Settlement Agreement between the Company and C
Rumsey Associates Limited Partnership
10.11 Option Agreement between the Company and Rumsey C
Associates Limited Partnership
10.13 Registration Rights Agreement C
10.15 1996 Stock Option and Appreciation Rights Plan F
10.16 Subscription Agreement between the Company and
Harry Letaw, Jr. and Joyce Letaw G
34
<PAGE>
10.17 Subscription Agreement between the Company and Samuel Hopkins G
10.18 Subscription Agreement between the Company and Harold P. Hanson G
10.19 8% Convertible Note Payable - Harry Letaw, Jr. and Joyce Letaw G
10.20 8% Convertible Note Payable - Samuel Hopkins G
10.21 8% Convertible Note Payable - Harold P. Hanson G
(iv) Exhibit 23 - Consents of Experts and Counsel
23.1 Consents of Independent Auditors 56
(v) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule A
(b) Reports on Form 8-K
In November 1996, the Company reported results of its 1996 Annual
Meeting. No financial statements were included.
- -----------------------
<FN>
A Filed herewith
B Incorporated by reference as indicated
C Filed as Exhibit to Registrant's Registration Statement on Form SB-2 filed October 17, 1994, Registration No. 33-82920
D Filed as Exhibit to Registrant's Registration Statement on Form SB-2 filed February 17, 1995, Registration No. 33-82920
E Filed as Exhibit to Registrant's 1995 Form 10-KSB
F Filed as Exhibit to Registrant's Form 8-K dated November 13, 1996
G Filed as Exhibit to Form 10-QSB dated August 11, 1997
H Filed as Exhibit to Form 8-K/A No. 1 dated November 21, 1997
</FN>
</TABLE>
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ESSEX CORPORATION
(Registrant)
/s/ Harry Letaw, Jr.
By: ------------------------------------------------------
Harry Letaw, Jr.
Chairman of the Board and Chief Executive Officer;
Principal Executive Officer
September 14, 1998
/s/ Joseph R. Kurry, Jr.
By: --------------------------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President, Treasurer and Chief Financial Officer;
Principal Financial and Accounting Officer
September 14, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Harold P. Hanson /s/ Frank E. Manning
- ------------------------------ ------------------------------
Harold P. Hanson, Director Frank E. Manning, Director
September 14, 1998 September 14, 1998
/s/ Robert W. Hicks /s/ Leonard E. Moodispaw
- ------------------------------ ------------------------------
Robert W. Hicks, Director Leonard E. Moodispaw, Director
September 14, 1998 September 14, 1998
/s/ Ray M. Keeler /s/ Terry M. Turpin
- ------------------------------ ------------------------------
Ray M. Keeler, Director Terry M. Turpin, Director
September 14, 1998 September 14, 1998
/s/ Harry Letaw, Jr.
- ------------------------------
Harry Letaw, Jr., Director
September 14, 1998
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Essex Corporation:
We have audited the accompanying balance sheet of Essex Corporation as of
December 28, 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Essex Corporation as of
December 28, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Stegman & Company
Baltimore, Maryland
July 23, 1998
37
<PAGE>
<TABLE>
ESSEX CORPORATION
BALANCE SHEET
AS OF DECEMBER 28, 1997
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 367,136
Accounts receivable, net 469,427
Inventory 399,488
Note receivable and other 411,742
Prepayments and other 65,483
Net current assets of discontinued operations 31,098
--------------
1,744,374
--------------
PROPERTY AND EQUIPMENT
Production and special equipment 875,983
Furniture, equipment and other 592,428
--------------
1,468,411
Accumulated depreciation and amortization (1,227,806)
--------------
240,605
--------------
OTHER ASSETS
Net noncurrent assets of discontinued operations 977,256
Patents, net 175,374
Deferred debenture financing 20,928
Other 32,445
--------------
1,206,003
--------------
TOTAL ASSETS $ 3,190,982
- ------------ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital leases $ 51,835
Bank line of credit 163,874
Accounts payable 301,195
Accrued wages and vacation 151,887
Accrued lease settlement 281,531
Other accrued expenses 328,442
--------------
1,278,764
LONG-TERM DEBT
10% Convertible Collateralized Debentures 1,233,100
Capital Leases, net of current portion 13,140
--------------
Total Liabilities 2,525,004
--------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY
Common stock $0.10 par value; 25 million shares
authorized; 4,134,065 shares issued and outstanding 413,406
Redeemable Preferred stock $0.01 par value; 1 million total shares
authorized; 2,500 shares of Series A authorized, $100 liquidation
value, 8% dividend rate; 1,200 shares outstanding 120,000
Contributions in excess of par 5,519,496
Retained deficit (5,386,924)
--------------
Total Stockholders' Equity 665,978
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,190,982
- ------------------------------------------ ==============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
38
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEK FISCAL YEARS
ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Revenues $ 4,011,589 $ 3,691,719
Cost of goods sold and services provided (2,332,956) (2,260,442)
Engineering and product development expenses (582,400) (743,662)
Selling, general and administrative expenses (2,360,107) (3,626,180)
------------------ -----------------
Operating Loss (1,263,874) (2,938,565)
Gain on settlement of lawsuit,
net of related expenses of $1,759,450 in 1996 -- 2,240,550
Lease settlement -- (250,000)
Interest expense, net and debenture financing
amortization (310,566) (142,991)
------------------ -----------------
Loss from Continuing Operations
Before Income Taxes (1,574,440) (1,091,006)
Benefit from income taxes -- --
------------------ -----------------
Loss from Continuing Operations (1,574,440) (1,091,006)
------------------ -----------------
Discontinued Operations (Note 2):
Loss from operations (100,973) (242,678)
Gain on disposal 1,235,818 --
------------------ -----------------
Income (Loss) from Discontinued Operations 1,134,845 (242,678)
------------------ -----------------
Net Loss $ (439,595) $ (1,333,684)
================== =================
Weighted Average Number of Shares
Outstanding 3,649,775 3,616,519
================== =================
Basic Earnings (Loss) Per Share:
Continuing Operations $ (0.43) $ (0.30)
Discontinued Operations 0.31 (0.07)
------------------ -----------------
$ (0.12) $ (0.37)
================== =================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
39
<PAGE>
<TABLE>
ESSEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
<CAPTION>
Contri- Total
COMMON STOCK PREFERRED STOCK butions Stock-
Shares Shares In Excess Retained holders'
ISSUED AMOUNT ISSUED AMOUNT OF PAR DEFICIT EQUITY
---------- ----------- ------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 3,585,973 $ 358,597 -- $ -- $ 5,214,966 $ (3,613,645) $ 1,959,918
Stock options exercised 39,000 3,900 -- -- 98,560 -- 102,460
Warrants exercised 125 13 -- -- 362 -- 375
Net loss -- -- -- -- -- (1,333,684) (1,333,684)
---------- ----------- ------ -------- ------------ ------------ ------------
BALANCE, DECEMBER 29, 1996 3,625,098 362,510 -- -- 5,313,888 (4,947,329) 729,069
Stock options exercised 1,000 100 -- -- 2,420 -- 2,520
Common stock issued upon conversion
of convertible note 507,967 50,796 -- -- 203,188 -- 253,984
Preferred stock issued -- -- 1,200 120,000 -- -- 120,000
Net loss -- -- -- -- -- (439,595) (439,595)
---------- ----------- ------ -------- ------------ ------------ ------------
BALANCE, DECEMBER 28, 1997 4,134,065 $ 413,406 1,200 $120,000 $ 5,519,496 $ (5,386,924) $ 665,978
========== =========== ====== ======== ============ ============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
40
<PAGE>
<TABLE>
ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
<CAPTION>
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (439,595) $ (1,333,684)
Adjustments to reconcile Net Loss to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization 476,427 476,512
Gain on sale/retirement of fixed assets (1,555) (73,707)
Gain on sale of discontinued operations (1,235,818) --
Allowance for bad debts (82,000) --
Inventory valuation reserve 400,000 --
Change in Assets and Liabilities:
Accounts receivable 44,443 308,704
Inventory (317,171) (298,896)
Prepayments and other 40,725 (85,477)
Accounts payable 22,911 (138,218)
Accrued lease settlement (26,706) (70,704)
Other liabilities (436,256) 149,752
Non-cash charges and working capital changes of
discontinued operations (52,121) 1,187,311
-------------- --------------
Net Cash (Used In) Provided By Operating Activities (1,606,716) 121,593
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,511) (101,946)
Proceeds from sale of fixed assets 23,279 810
Proceeds from sales of discontinued operations 1,088,258 --
-------------- --------------
Net Cash Provided By (Used In) Investing Activities 1,090,026 (101,136)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term repayments of bank line of credit, net (736,126) (17,010)
Issuance of preferred stock 120,000 --
Proceeds from issuance of convertible notes 256,504 --
Proceeds from exercises of stock options -- 102,835
Issuance of convertible debentures, net of financing costs -- 756,594
Repayment of convertible debentures principal (166,900) --
Payment of capital lease obligations (97,255) (177,338)
-------------- --------------
Net Cash (Used In) Provided By Financing Activities (623,777) 665,081
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (1,140,467) 685,538
Balance - beginning of year 1,507,603 822,065
-------------- --------------
Balance - end of year $ 367,136 $ 1,507,603
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
41
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER IMPORTANT FACTORS
These statements cover Essex Corporation (the "Company"). Certain amounts
for prior years have been reclassified or recalculated to conform to the
1997 presentation.
REPORTING YEAR
The Company is on a 52-week fiscal year ending the last Sunday in December
for 1996 and 1997.
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. Estimates are used when accounting for
uncollectible accounts receivable, inventory obsolescence and valuation,
depreciation and amortization, intangible assets, employee benefit plans
and contingencies, among others. Actual results could differ from those
estimates.
IMPORTANT BUSINESS RISK FACTORS
The Company has historically been principally a supplier of technical
services under contracts or subcontracts with departments or agencies of
the U.S. Government, primarily the military services and other departments
and agencies of the Department of Defense.
Beginning in 1989, the Company has expended significant 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 last five years, primarily due to
the development and marketing of its optoelectronics products and
services. The Company also experienced difficulty in sustaining and
expanding revenue volume in certain areas of the Technical Services and
Products business segment which it discontinued in 1997. The
Optoelectronics Products and Services business area, which is part of
continuing operations, was experiencing net cash expenditures (including
all general and administrative expenses) over receipts of approximately
$100,000 per month.
The Company is seeking additional funds from public or private financing
markets 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. The Company believes that it will be
able to meet its 1998 funding requirements from the aforementioned
sources, although there can be no assurances in this regard. Failure to
commercialize or significant delays in the commercialization of the
Company's optoelectronic products would have a
42
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
significant adverse effect on the Company's future operating results and
future financial position; however, the Company believes that in such
event it could successfully manage and reduce cash requirements for
operations by curtailing expenditures in optoelectronics operations
(including general and administrative expenses), although there can be no
assurances in this regard.
CONTRACT ACCOUNTING
Revenues consist of services rendered on fixed-price, time and materials
and cost-plus- fixed-fee contracts. Revenue on time and materials
contracts (approximately 58% and 45% of total revenues in 1997 and 1996,
respectively) is recognized to the extent of billable rates multiplied by
hours delivered, plus materials expense incurred. Revenue on fixed-price
contracts (approximately 16% and 30% of total revenues in 1997 and 1996,
respectively) is recognized on the percentage-of-completion method of
accounting based on costs incurred in relation to the total estimated
costs. Revenue on cost-plus-fixed-fee contracts (approximately 26% and 25%
of total revenues in 1997 and 1996, respectively) is recognized to the
extent of costs incurred plus a proportionate amount of fee earned.
Anticipated losses are recognized as soon as they become known. In
accordance with industry practice, accounts receivable relating to
long-term contracts are classified as current assets, although a portion
of these amounts is not expected to be realized within one year. A
substantial portion of the Company's business is with agencies of the U.S.
Government and such contracts are subject to audit by cognizant government
audit agencies. Furthermore, while such contracts are fully funded by
appropriations, they may be subject to other risks inherent in government
contracts, such as termination for the convenience of the government.
Because of the inherent uncertainties in estimating costs and the
potential for audit adjustments by U.S. Government agencies, it is at
least reasonably possible that the estimates will change in the near term.
INCOME TAXES
Deferred income taxes are recorded under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future
tax consequences, measured by enacted tax rates, attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period the rate change
becomes effective. Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will
not be realized.
INVENTORY
Inventory costs include purchased parts, labor and manufacturing overhead.
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
43
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using straight-line methods based on useful lives as follows:
Buildings and improvements Life of lease or 40 years
Production and special equipment 3 to 10 years
Furniture and equipment 3 to 10 years
Repairs and maintenance are charged to expense as incurred. When assets
are retired or otherwise disposed of, the asset and related allowance for
depreciation are eliminated from the accounts and any resulting gain or
loss is reflected in income.
INTANGIBLE ASSETS
The excess of cost over the fair value of assets acquired (goodwill)
resulting from an acquisition in 1989 was being amortized on a
straight-line basis at $60,000 per year. In 1997, the Company determined
that the entire remaining amount of $144,000 should be immediately
amortized.
Patent costs include legal and filing fees covering the various patents
which have been issued to the Company. Patent costs are amortized over
their respective lives (15 - 20 years) and amortization was $17,000 in
1997 and $32,000 in 1996. The amortization in 1996 was higher due to the
write off of costs for a patent which is no longer being processed.
Deferred debenture financing costs ($21,000 at December 28, 1997) will be
amortized ratably over the remaining 3-year life of the debentures.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles (including goodwill) to be
held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount should be addressed.
Impairment is measured by comparing the carrying value to the estimated
undiscounted future cash flows expected to result from use of the assets
and their eventual disposition. During late 1996, the Company placed its
Huntsville, Alabama facility for sale. The facility is currently recorded
in the accompanying balance sheet at approximately $1,050,000 and is
included in "Noncurrent assets of discontinued operations, net". An
impairment charge of approximately $50,000 was recorded in 1996 and an
additional $150,000 was recorded in 1997 related to this facility and such
charges are recognized in the discontinued operations section of the
accompanying Statements of Operations.
BASIC EARNINGS (LOSS) PER SHARE
The financial statements are presented in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings (loss) per common share are computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per common share incorporate the incremental
shares issuable upon the assumed exercise of stock
44
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
options and warrants. Diluted earnings per share are not presented because
inclusion of common stock equivalents would result in anti-dilution.
STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -------------
A. Cash paid during the year for-
<S> <C> <C>
Interest $ 91,000 $ 109,600
Income taxes $ 4,000 $ 23,500
</TABLE>
B. Capital lease obligations of $143,000 (net present value) were
incurred during 1996, when the Company entered into various
leases for new equipment. There were no new capital leases in
1997.
C. Notes payable plus accrued interest in the amount of $256,504 were
converted into common stock in December 1997.
2. 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 discontinued operations
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. There was an additional
contingent cash payment of $73,000 which was received in early 1998.
Another portion of the operations of FSD which were performed primarily in
the Company's facility in Huntsville, Alabama were discontinued. The
Huntsville facility was placed for sale and is included in the net
noncurrent assets shown in the balance sheets.
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 at closing and took a note
receivable for $325,000 which was paid off in June 1998. The balance of
$625,000 was placed in escrow and was received through February 1998 as
the respective contracts of SED were novated to the
45
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
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>
<CAPTION>
FISCAL YEAR DECEMBER 28, 1997
REVENUES NET INCOME (LOSS)
<S> <C> <C>
SED $ 4,811,000 $ 503,000
FSD $ 2,313,000 $ (493,000)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR DECEMBER 29, 1996
REVENUES NET INCOME (LOSS)
<S> <C> <C>
SED $ 5,162,000 $ 577,000
FSD $ 4,086,000 $ (819,000)
</TABLE>
Net current assets and noncurrent assets of discontinued operations are
comprised of the following:
<TABLE>
<CAPTION>
NET CURRENT ASSETS As of
DECEMBER 28, 1997
<S> <C>
Receivables, net $ 183,399
Industrial Revenue Bond - current (80,001)
Other accrued liabilities (72,300)
-----------------------
$ 31,098
=======================
NET NONCURRENT ASSETS
Property, plant and equipment, net $ 1,050,574
Industrial Revenue Bond (73,318)
-----------------------
$ 977,256
=======================
</TABLE>
The noncurrent assets of discontinued operations consists of the
Huntsville, Alabama facility stated at estimated net realizable value,
less the associated long-term liabilities as described below.
<TABLE>
<CAPTION>
1997
Industrial Development First
<S> <C>
Mortgage Revenue Bond $ 153,319
Less: Current portion 80,001
-------------
Long-term portion $ 73,318
=============
</TABLE>
46
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
In 1984, in connection with the construction of the facility in
Huntsville, Alabama, the Company entered into a financing agreement with
the Industrial Development Board ("Board") of the City of Huntsville and
AmSouth Bank, N.A. Under the terms of the agreement, an Industrial
Development First Mortgage Revenue Bond-Series 1984 in the amount of
$1,200,000, with interest at a floating rate of 75% of the bank's prime
rate, was issued by the Board to AmSouth Bank, N.A. and guaranteed by the
Company.
Until the facility was sold in June 1998, monthly repayments of principal
were approximately $6,667 ($80,001 per annum) plus interest. The interest
rate at December 28, 1997 was 6.375%. (See Note 8).
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1997
------------
U.S. Government:
<S> <C>
Amounts billed, excluding retainages $ 122,116
Recoverable costs and accrued profits not yet billed,
including retainages 66,028
------------
188,144
Commercial and other 379,809
Contract reserves and allowances for doubtful accounts (98,526)
------------
$ 469,427
============
</TABLE>
U.S. Government receivables arise from U.S. Government prime contracts and
subcontracts. Unbilled receivables represent revenue recognized for work
performed prior to year-end, which had not been billed. The government
unbilled receivables can be invoiced in accordance with funding on
cost-type contracts or upon attaining certain milestones under fixed-price
contracts.
Retainages, of approximately $63,000 at December 28, 1997, will be
collected upon job completion or settlement of audits performed by
cognizant U.S. Government audit agencies. Company cost records have been
audited through 1993. In the year an audit is settled, the difference
between audit adjustments and previously established reserves is reflected
in income.
Contract reserves and allowances for doubtful accounts have been provided
where less than full recovery under the contract is expected.
4. ACCOUNTS RECEIVABLE FINANCING
In 1997, the Company had a receivables financing arrangement with a bank.
This arrangement was evidenced by a Loan Agreement, Promissory Note and
Commercial Security Agreement ("Agreements"). Under the Agreements, the
Bank advanced funds against certain accounts receivable. The funds advanced
($164,000 at December 28, 1997
47
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
and $900,000 at December 29, 1996) constituted proceeds under the note
which bears interest at an annual rate of prime plus 4.0% for 1997 (total
rate approximately 12.50%) and prime plus 1.50% for 1996 (total rate
approximately 9.75%). The maximum borrowings available based upon the level
of accounts receivable were $184,000 and $1,308,000 at year-end 1997 and
1996, respectively. The Company also paid certain administrative and
commitment fees which were less than $1,000/month. This agreement ended May
31, 1998.
The Company is negotiating a replacement working capital financing
arrangement with an accounts receivable factoring organization. The Company
expects to have such an agreement in place under terms which are slightly
more costly but otherwise comparable.
This line of credit was secured by all accounts receivables and certain
general intangibles (excluding patents). The Company was subject to certain
restrictions, such as acquisitions or mergers; or creation or incurrence of
new debt.
5. INVENTORY
Inventory costs are all related to the Company's ImSyn(TM) optoelectronic
processor.
<TABLE>
1997
------------
<CAPTION>
<S> <C>
Purchased Parts $ 218,732
Systems In-Process 183,696
Finished Goods 397,060
------------
799,488
Valuation Reserve (400,000)
------------
$ 399,488
============
</TABLE>
Due to the use of estimates in calculating the value of the inventory, it
is at least reasonably possible that management's view of the ultimate
realizable value of inventory will change in the near term.
6. LONG-TERM DEBT
Long-term debt consists of the following:
A) 10% CONVERTIBLE COLLATERALIZED DEBENTURES
In December 1995, the Company effected a private placement of $535,000 of
10% Convertible Collateralized Debentures ("Debentures"). An additional
$865,000 of these Debentures were sold in 1996. The Debentures pay
interest quarterly at 10% per year and are convertible into a share of
common stock at a conversion price of $3.50 per share. The Debentures may
be called for redemption by the Company at premiums ranging from 103% to
105% of face value. The Company can require conversion if the Company's
common stock trades at or above $5.50 (subject to future adjustment) for
10 consecutive trading days. Other restrictions or requirements for
conversion, such as an effective registration statement, also apply. The
holders of the Debentures have certain demand and other registration
rights upon conversion.
48
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Debentures are collateralized with certain current assets (except
accounts receivable) and certain fixed assets, subject to existing
mortgage and lease obligations. As of the last day of each fiscal quarter
the collateral shall have a value of at least 150% of the amount of the
outstanding obligations and meet certain other requirements. The Company
is subject to default provisions for not meeting collateral requirements,
failure to make timely interest payments and other standard
representations and covenants. As of December 28, 1997, the Company was in
compliance with such terms and conditions.
The Company offered and the holders agreed in 1997 to a repayment of
$167,000 of principal plus accrued interest as collateral was liquidated
in connection with the sale of discontinued operations. The Company
offered and the holders agreed in the second quarter of 1998 to a
repayment of $857,000 of principal plus accrued interest as collateral was
liquidated in connection with the additional sale of assets of
discontinued operations. The remaining Debentures are due November 30,
2000 if not converted or called prior to maturity.
B) CAPITAL LEASES
The Company leases a variety of computer hardware and software and special
equipment for its Image Synthesis laboratory, and other office equipment
under capital leases. The fixed assets under capital leases are shown in
Note 8.
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments
as of December 28, 1997:
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998 $ 75,000
1999 5,000
------------
Total minimum lease payments 80,000
Less: Amount representing interest 15,000
------------
Present value of net minimum lease payments $ 65,000
============
</TABLE>
7. MAJOR CUSTOMER INFORMATION
The Company's largest customer is Motorola, Inc. for whom the Company
performs work on the design and other aspects of the Iridium(R) satellite
constellation that will provide global wireless communications to handheld
telephones and pagers. This work was begun in 1990. The Company's
contracts to perform such work amounted to 48% ($1.9 million) of revenues
in 1997 and 56% ($2.1 million) in 1996.
8. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
Leases that meet the criteria requiring capitalization as specified in
Statement of Financial Accounting Standards No. 13 "Accounting for Leases"
are capitalized. Such assets and the related liabilities (See Note 6) are
included in the accompanying balance sheet. The balance sheet includes the
following amounts for capitalized leases.
49
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997
----------------
<S> <C>
Noncurrent assets of discontinued operations $ 1,254,800
Production and special equipment 134,890
Furniture, equipment and other 33,477
----------------
1,423,167
Less-depreciation taken (404,499)
----------------
$ 1,018,668
================
</TABLE>
The Company leases equipment and certain office facilities under operating
leases generally ranging from one to five years with options to renew. The
leases contain provisions to pay for proportionate increases in operating
costs and property taxes. The Company is committed to pay aggregate
rentals under these leases as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 236,000
1999 44,000
--------------
$ 280,000
</TABLE>
Rental expense charged to continuing operations, including payments made
under short-term leases, amounted to $374,000 and $359,000 in 1997 and
1996, respectively.
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 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
December 28, 1997, contingent amounts totaling approximately $268,000 have
been earned, paid and charged against the accrual. The $282,000 accrual as
of December 28, 1997 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 1996, the amount payable of $250,000
to the former landlord was expensed in this period and paid in 1996.
50
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 $234,000. The Company had expensed approximately $384,000 in legal
fees and related expenses in prior years.
9. RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan, the Essex
Corporation Retirement Plan and Trust, which includes a salary reduction
401(k) feature for its employees. The Plan calls for an employer matching
contribution of up to 3% of eligible employee compensation under the salary
reduction feature and allows for a discretionary contribution.
Discretionary contributions are determined annually by the Board of
Directors. Total authorized contributions under the matching contribution
feature of the Plan were approximately $125,000 in 1997 and $163,000 in
1996. There were no discretionary contributions in these years.
In accordance with the retirement plan and trust, as amended, such
authorized contributions and the resulting annual expense can be reduced by
forfeitures by terminated employees of unvested amounts of prior years'
contributions. Forfeitures of $13,000 and $20,000 were utilized to reduce
annual expenses in 1997 and 1996, respectively.
10. INCOME TAXES
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
The components of the Company's net deferred tax asset account are as
follows as of December 28, 1997 and December 29, 1996:
<TABLE>
1997 1996
-------------- -------------
<CAPTION>
<S> <C> <C>
Acquisition NOL and tax credit carryforward $ 317,100 $ 328,600
NOL carryforward 1,114,400 835,800
Tax credit carryforward 139,000 120,000
Allowance for doubtful accounts 34,500 82,600
Depreciation and amortization (156,000) (142,600)
Inventory valuation reserve 140,000 --
Accrued employee benefit costs 35,400 93,300
Lease settlement accrual 98,500 107,900
Other 18,300 109,100
Valuation Reserve (1,741,200) (1,534,700)
-------------- -------------
Net Deferred Tax Asset $ -0- $ -0-
============== =============
</TABLE>
51
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
As a result of an acquisition, the Company has net operating loss ("NOL")
and tax credit carryforwards of approximately $726,000 and $63,000,
respectively, that are available, subject to certain limitations, to offset
future book and taxable income and taxes payable. The net operating loss
begins to expire in 2001 and the tax credits expire through 2009. These
carryforwards, when utilized, will be used partially to offset previously
recorded goodwill.
The Company also has a regular NOL of $3,184,000 and tax credit
carryforwards of $139,000 that are available, subject to certain
limitations, to offset book income and future taxes payable. The NOL and
tax credit and carryforwards expire through 2012 and 2011, respectively.
The evaluation of the realizability of such deferred tax assets in future
periods is made based upon a variety of factors for generating future
taxable income, such as intent and ability to sell assets and historical
and projected operating performance. At this time, the Company has
established a valuation reserve for all of its deferred tax assets. Such
tax assets are available to be recognized and benefit future periods.
The Company recorded no benefit or provision for income taxes in 1997 or
1996.
11. STOCK OPTION AND STOCK BONUS PLANS; OTHER STOCK OPTIONS
The 1996 Stock Option and Appreciation Rights Plan ("1996 Plan") was
adopted in August 1996 and approved by the shareholders in November 1996.
This plan reserves 300,000 shares of the Company's unissued shares for
option and SAR grants. This plan expires in 2006. Options, which may be tax
qualified ("ISOs") and non-qualified ("NSOs"), are exercisable for a period
of up to 10 years at prices at or above market price as established on the
date of grant. Upon the exercise of a stock appreciation right, the
recipient will receive payment in the form of stock, cash, or both, as
determined by the Company, equal to the appreciation in value of the shares
to which the rights were awarded. Increases and decreases in the market
price of the stock also cause an increase in or reduction to plan expense
to record the impact of the SARs outstanding. There are no SARs
outstanding.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
<S> <C> <C> <C>
Outstanding, 12/29/96 0 $ -
Granted 265,000 $ 1.00 - $ 3.00
Canceled (20,000) $ 1.00 - $ 3.00
-------------
Outstanding, 12/28/97 245,000 $ 1.00 - $ 3.00
=============
Exercisable, 12/28/97 134,975 $ 1.00 - $ 3.00
=============
</TABLE>
The weighted average price for options outstanding and exercisable was
$1.41 and $1.35, respectively. The weighted average life for options
outstanding and exercisable was 8.6 years and 7.7 years, respectively.
52
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
An Option and Stock Appreciation Rights Plan, which was adopted in March
1988, expired in January 1997. ISO or NSO options are exercisable for a
period up to 10 years at prices at or above market as established on the
date of the grant. The activity in this plan for the last two years is as
follows.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
<S> <C> <C> <C>
Outstanding, 12/31/95 672,861 $ 2.50 - $ 3.50
Granted 259,500 $ 3.00
Canceled/Expired (89,750) $ 2.50 - $ 3.50
Exercised (12,000) $ 2.50 - $ 2.94
-------------
Outstanding, 12/29/96 830,611 $ 2.50 - $ 3.08
Granted 130,100 $ 3.00
Canceled/Expired (282,861) $ 2.50 - $ 3.50
Exercised (1,000) $ 2.52
-------------
Outstanding, 12/28/97 676,850 $ 2.50 - $ 3.08
=============
Exercisable, 12/28/97 529,325 $ 2.50 - $ 3.08
=============
</TABLE>
The weighted average price for options outstanding and exercisable was
$2.98 and $2.97, respectively. The weighted average life for options
outstanding and exercisable was 3.6 years and 3.5 years, respectively.
Since this Plan expired in January 1997, there are no shares available for
future grants of options or SARs. There are no SARs outstanding.
There was an Incentive Stock Option Plan which expired in March 1992. The
remaining activity for the plan is shown below.
<TABLE>
<CAPTION>
SHARES OPTION PRICE
------ ------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 154,900 $ 2.52 - 3.25
Canceled/Expired (125,900) $ 2.52 - 3.25
Exercised (27,000) $ 2.52
------------
Outstanding at December 29, 1996 2,000 $ 3.00
Canceled/Expired (2,000) $ 3.00
------------
Outstanding and exercisable
at December 28, 1997 0 $ -
============
</TABLE>
The Company has a Restricted Stock Bonus Plan covering key employees and
directors of the Company. The Plan can reserve up to 50,000 of the
Company's unissued shares for awards. No shares were awarded in 1996 or
1997. As of December 28, 1997, there were 22,050 shares available for award
under the Plan.
In July 1994, the Company issued an option for 125,000 shares of
unregistered common stock under a lease settlement (see Note 8). The option
is exercisable through December 31, 2004 at an exercise price of $2.00 per
share. The option price is subject to adjustment under anti-dilution
provisions of the option agreement. The optionholders have certain
registration rights for these shares of common stock.
53
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option or similar equity
instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. The Company has historically accounted
for employee stock options or similar equity instruments under the
"intrinsic value method" as defined by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount an employee must pay
to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value method
and Management has elected to do so. However, entities electing to remain
with the accounting in APB Opinion No. 25 must make pro forma disclosures
of net income and earnings per share, as if the fair value based method of
accounting had been applied. Because the SFAS No. 123 method of accounting
has not been applied to options granted prior to January 1, 1995, the
resulting proforma compensation costs may not be representative of the cost
to be expected in future years. Accordingly, net income (loss) and earnings
(loss) per share would be as follows:
<TABLE>
<CAPTION>
Year
ENDED AS REPORTED PRO FORMA
------- --------------------------- -------------------------
Per Per
NET LOSS SHARE NET LOSS SHARE
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1997 $ (439,515) $ (0.12) $ (773,026) $ (0.21)
1996 $ (1,333,684) $ (0.37) $ (1,446,101) $ (0.40)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1997 and 1996; no dividend yield, 70 percent volatility,
risk-free interest rates approximating 6 percent and expected lives of 10
years for 1997 calculation and 3 to 5 years for 1996 calculation. The
weighted average grant date fair value of the options issued in 1997 and
1996 was approximately $1.68 and $1.75, respectively.
11. COMMON STOCK OFFERING; WARRANTS; PREFERRED STOCK
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 December 31, 1999 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
54
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
products. A portion of the net proceeds ($241,000) was used to partially
satisfy the contingent obligation to the landlord.
In connection with the Offering, the Company entered into a Placement
Agency Agreement with a registered broker/dealer. In addition to cash
compensation, the broker/dealer received warrants for 175,000 shares of
common stock. The warrants are exercisable through December 1, 1999 at a
price of $2.30 per share, subject to adjustment under anti-dilution
provisions of the Warrant Agreement. The warrant holders have certain
registration rights for these shares of common stock.
In connection with the outstanding 10% Convertible Collateralized
Debentures Due 2000, the Company has reserved approximately 352,000 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 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 liquidation value and an 8% annual dividend.
Such shares were redeemable before 1 year from date of issuance at the
option of the holder. These preferred shares were convertible into shares
of Essex common stock at $0.50 per share or market value, whichever
greater, and have certain other conversion protection features. There were
1,200 shares of preferred stock issued and outstanding at December 28,
1997. The Company has reserved 240,000 shares of common stock for
conversion. The preferred stock was converted into common stock in the
second quarter of 1998.
The Company has reserved approximately 1,499,000 shares of common stock in
connection with the convertible debentures and preferred stock and the
possible exercise of all such warrants.
55
<PAGE>
ESSEX CORPORATION
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Essex Corporation:
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Essex Corporation for the year ended
December 29, 1996. These financial statements are the responsilibity of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statements of operations, changes in stockholders'
equity and cash flows referred to above present fairly, in all material
respects, the results of operations and cash flows of Essex Corporation for the
year ended December 29, 1996 in conformity with generally accepted accounting
principles.
Stegman & Company
Baltimore, Maryland
September 9, 1998
CONSENTS OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report dated July 23, 1998, included in this Form 10-KSB, into Essex
Corporation's previously filed Registration Statement on Form S-8, File No.
33-47900.
Stegman & Company
Baltimore, Maryland
July 23, 1998
As independent auditors, we hereby consent to the incorporation of our
report dated September 9, 1998, included in this Form 10-KSB/A No. 1, into Essex
Corporation's previously filed Registration Statement on Form S-8, File No.
33-47900.
Stegman & Company
Baltimore, Maryland
September 10, 1998
56
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 367
<SECURITIES> 0
<RECEIVABLES> 469
<ALLOWANCES> (99)
<INVENTORY> 399
<CURRENT-ASSETS> 1,744
<PP&E> 1,468
<DEPRECIATION> (1,228)
<TOTAL-ASSETS> 3,191
<CURRENT-LIABILITIES> 1,279
<BONDS> 1,246
120
0
<COMMON> 413
<OTHER-SE> 133
<TOTAL-LIABILITY-AND-EQUITY> 3,191
<SALES> 4,012
<TOTAL-REVENUES> 4,012
<CGS> 2,915
<TOTAL-COSTS> 5,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 112
<INTEREST-EXPENSE> 311
<INCOME-PRETAX> (440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,574)
<DISCONTINUED> 1,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (440)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
