FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998.
Commission File Number 0-10772
ESSEX CORPORATION
(Exact name of small business issuer as specified in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046-1891
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 939-7000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT SEPTEMBER 27, 1998
----- ---------------------
Common Stock, par value $0.10 per share 4,397,861
Transitional Small Business Disclosure Format (Check One);
YES X NO
<PAGE>
ESSEX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments for a fair presentation of results for such
period. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-KSB/A No. 1 for the fiscal year ended
December 28, 1997.
2
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 27, December 28,
1998 1997
(unaudited) (audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 231,542 $ 367,136
Accounts receivable, net 933,725 469,427
Inventory 401,394 399,488
Prepayments and other 44,286 65,483
Note receivable and other -- 411,742
Net current assets of discontinued operations -- 31,098
-------------- --------------
1,610,947 1,744,374
-------------- --------------
PROPERTY AND EQUIPMENT
Production and special equipment 909,137 875,983
Furniture, equipment and other 510,116 592,428
-------------- --------------
1,419,253 1,468,411
Accumulated depreciation and amortization (1,317,405) (1,227,806)
-------------- --------------
101,848 240,605
-------------- --------------
OTHER ASSETS
Patents, net 157,872 175,374
Deferred debenture financing 9,992 20,928
Other 29,426 32,445
Net noncurrent assets of discontinued operations -- 977,256
-------------- --------------
197,290 1,206,003
-------------- --------------
TOTAL ASSETS $ 1,910,085 $ 3,190,982
- ------------ ============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 27, December 28,
1998 1997
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Current portion of capital leases $ 21,853 $ 51,835
Advance from accounts receivable financing 198,940 --
Bank line of credit -- 163,874
Accounts payable 231,133 301,195
Accrued wages and vacation 206,352 151,887
Accrued lease settlement 249,020 281,531
Other accrued expenses 212,554 328,442
-------------- ---------------
1,119,852 1,278,764
LONG-TERM DEBT
10% Convertible Collateralized Debentures 375,714 1,233,100
Capital leases, net of current portion -- 13,140
-------------- ---------------
Total Liabilities 1,495,566 2,525,004
-------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value; 25 million shares
authorized; 4,397,861 and 4,134,065 shares issued
and outstanding for 1998 and 1997, respectively 439,786 413,406
Redeemable preferred stock, $0.01 par value; 1 million
total shares authorized; 2,500 shares of Series A
authorized; -0- and 1,200 shares issued and
outstanding for 1998 and 1997, respectively -- 120,000
Contributions in excess of par value 5,634,234 5,519,496
Retained deficit (5,659,501) (5,386,924)
-------------- ---------------
414,519 665,978
-------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,910,085 $ 3,190,982
-------------------- ============== ===============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
<CAPTION>
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 3,312,855 $ 2,998,648
Cost of goods sold and services provided (1,770,145) (1,474,583)
Engineering and product development expenses (344,889) (471,990)
Selling, general and administrative expenses (1,370,957) (1,940,258)
------------ ------------
Operating Loss (173,136) (888,183)
Interest expense, net and debenture financing amortization (99,441) (192,462)
------------ ------------
Loss from Continuing Operations
Before Income Taxes (272,577) (1,080,645)
Benefit from income taxes -- --
------------ ------------
Loss from Continuing Operations (272,577) (1,080,645)
------------ ------------
Discontinued Operations (Note 8):
Loss from operations -- (100,973)
Gain on disposal -- 266,698
------------ ------------
Income from Discontinued Operations -- 165,725
------------ ------------
Net Loss $ (272,577) $ (914,920)
============ ============
Weighted Average Number of Shares
Outstanding 4,250,519 3,626,036
============ ============
Basic Earnings (Loss) Per Share:
Continuing Operations $ (0.06) $ (0.30)
Discontinued Operations -- 0.05
------------ ------------
$ (0.06) $ (0.25)
============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
<CAPTION>
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 1,269,691 $ 934,172
Cost of goods sold and services provided (663,814) (471,535)
Engineering and product development expenses (73,379) (82,934)
Selling, general and administrative expenses (447,000) (499,841)
------------- -------------
Operating Income (Loss) 85,498 (120,138)
Interest expense, net and debenture financing amortization (18,963) (75,912)
------------- -------------
Income (Loss) from Continuing Operations
Before Income Taxes 66,535 (196,050)
Benefit from income taxes -- --
------------- -------------
Income (Loss) from Continuing Operations 66,535 (196,050)
Discontinued Operations (Note 8): Gain on disposal -- 266,698
------------- -------------
Net Income $ 66,535 $ 70,648
============= =============
Weighted Average Number of Shares
Outstanding 4,397,861 3,626,098
============= =============
Basic Earnings (Loss) Per Share:
Continuing Operations $ 0.02 $ (0.05)
Discontinued Operations -- 0.07
------------- -------------
$ 0.02 $ 0.02
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
<CAPTION>
1998 1997
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (272,577) $ (914,920)
Adjustments to reconcile Net Loss to Net Cash
Used In Operating Activities:
Depreciation and amortization 157,667 305,951
Inventory valuation reserve 15,000 --
Gain on sale of discontinued operations -- (239,345)
Other 17,414 (2,331)
Change in Assets and Liabilities:
Accounts receivable (464,298) (49,122)
Inventory (16,906) (341,496)
Prepayments and other assets 30,387 94,670
Accounts payable (70,062) 20,828
Accrued lease settlement (32,511) (8,686)
Other liabilities (56,423) (172,906)
Non-cash charges and working capital
changes of discontinued operations 129,579 (272,182)
------------ -----------
Net Cash Used In Operating Activities (562,730) (1,579,539)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (734) (7,437)
Proceeds from sale of fixed assets 2,795 2,594
Proceeds from sale of fixed assets of discontinued operations 878,775 --
Proceeds from sale of discontinued operations 411,742 425,000
------------ -----------
Net Cash Provided By Investing Activities 1,292,578 420,157
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments) on line of
credit or receivables financing, net 35,066 (150,000)
Issuance of convertible notes payable -- 245,000
Issuance of preferred stock -- 120,000
Proceeds from exercises of stock options -- 2,520
Repayment of convertible debentures (857,386) --
Payment of capital lease obligations (43,122) (70,013)
------------ -----------
Net Cash (Used In) Provided By Financing Activities (865,442) 147,507
------------ -----------
CASH AND CASH EQUIVALENTS
Net decrease (135,594) (1,011,875)
Balance - beginning of period 367,136 1,507,603
------------ -----------
Balance - end of period $ 231,542 $ 495,728
============ ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
7
<PAGE>
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: General
FISCAL YEAR AND PRESENTATION
Essex Corporation (the "Company") is on a 52-week fiscal year ending the last
Sunday in December. Certain amounts for 1997 have been reclassified to conform
to the 1998 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
IMPORTANT BUSINESS RISK FACTORS
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 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 since 1989, 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 segment
is experiencing net cash expenditures (including respective general and
administrative expenses) over receipts in the range of approximately
$25,000-$50,000 per month.
The Company is seeking additional funds 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. Failure to commercialize or
significant further delays in the commercialization of the Company's
optoelectronic products would have a material 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. The Company believes that it will be able to
meet its 1998
8
<PAGE>
ESSEX CORPORATION
funding requirements from current operations and from the aforementioned
sources, although there can be no assurances in this regard.
NOTE 2: Basic Earnings (Loss) Per Share
Basic earnings (loss) per share has been calculated by dividing the earnings
(loss) by the weighted average number of common shares outstanding during each
of the periods presented.
Common stock equivalents were anti-dilutive.
NOTE 3: Accounts Receivable Financing
The Company had a receivables financing arrangement with a bank which expired
May 31, 1998. The funds advanced ($163,874 at December 28, 1997) constituted
proceeds under the note which was at an interest rate of prime plus 4.0%; total
rate approximately 12.50%. The Company also paid certain administrative and
commitment fees which were less than $1,000/month.
The Company negotiated a replacement working capital financing arrangement
effective August 1998 with an accounts receivable factoring organization. Under
such an agreement, the factoring organization may purchase certain of the
Company's accounts receivable subject to full recourse against the Company in
the case of nonpayment by the customers. The Company generally receives 85%-90%
of the invoice amount at the time of purchase and the balance when the invoice
is paid. The Company is charged an interest fee and other processing charges on
the funded amount, payable at the time each invoice is paid. Funds advanced were
$198,940 as of September 27, 1998.
NOTE 4: Commitments and Contingencies
LEASE SETTLEMENT
Effective July 1994, the Company settled a legal dispute with a former landlord.
Under the remaining terms of the Settlement Agreement ("Agreement"), the Company
agreed to make contingent cash payments of 25% of future earnings (as defined)
and 10-15% of the net proceeds from the sale of common stock or operating
assets. The Company also issued an option to purchase up to 125,000 shares of
the Company's stock at an exercise price (subject to adjustment) of $2 per
share. The option is exercisable through December 31, 2004 and has certain
registration rights upon exercise of the option.
The contingent amounts due are to be paid quarterly. The period for computation
of such contingent payments ends December 2004. The $249,000 accrual as of
September 27, 1998 represents the remaining portion which is probable to be paid
over the applicable consideration period. Of this amount, $80,000 is being paid
at $10,000 per month. The balance is payable upon satisfaction of the
contingencies as set forth in the Agreement.
9
<PAGE>
ESSEX CORPORATION
NOTE 5: Common Stock Offering; Warrants Outstanding; Preferred Stock;
Convertible Notes Payable and Debentures
In July 1995, the Company completed a $2.5 million Stock Offering ("Offering").
Through the Offering, the Company sold 25,000 Units consisting of 1,750,000
newly issued shares of common stock and warrants (expiring December 31, 1999 and
exercisable at $75.00 for 25 shares) to obtain an additional 625,000 new shares.
In connection with the Offering, the Company entered into a Placement Agency
Agreement with a registered broker/dealer. In addition to cash compensation, the
broker/dealer received warrants for 175,000 shares of common stock. The warrants
are exercisable through December 1, 1999 at a price of $2.30 per share, subject
to adjustment under anti-dilution provisions of the Warrant Agreement. The
warrant holders have certain registration rights for these shares of common
stock.
In connection with the remaining outstanding 10% Convertible Collateralized
Debentures Due 2000, the Company has reserved approximately 107,000 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 1 million
shares of preferred stock, 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 June
1997, the Board designated 2,500 shares of such preferred stock as Series A with
a $100 par value and an 8% annual dividend. Such shares are redeemable before 1
year from date of issuance at the option of the holder. These preferred shares
are convertible into shares of Essex common stock at $0.50 per share or market
price, whichever is higher, and have certain other conversion protection
features. There were 1,200 shares of preferred stock issued and outstanding. The
preferred stock plus accrued dividends were converted into 245,796 shares of
common stock in the second quarter of 1998.
The Company has reserved approximately 1,014,000 shares of common stock in
connection with the convertible debentures and the possible exercise of all such
warrants.
NOTE 6: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. No tax benefit will be recognized until taxable income is
realized.
NOTE 7: Statements of Cash Flows - Supplemental Disclosure
A. There were no new capital leases entered into in the first
thirty-nine weeks of 1998 or 1997.
10
<PAGE>
ESSEX CORPORATION
B. In 1998, the Company issued 18,000 shares of common stock with a
market value of $11,880 under its Restricted Stock Bonus Plan.
C. In the second quarter of 1998, convertible preferred stock of
$120,000 plus accrued dividends was exchanged for common stock.
NOTE 8: Discontinued Operations
DISCONTINUED OPERATIONS
Effective June 29, 1997, the Board of Directors unanimously approved 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 $300,000 in cash and assumption of certain
liabilities of approximately $60,000. There was a contingent 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 and the facility
closed. The Company settled on the sale of the Huntsville facility in June 1998.
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 acquiror. The sale price is subject to retroactive
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.
There were no revenues from discontinued operations in 1998. Summarized results
of operations for 1997 for the discontinued operations are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 28, 1997
------------------------------------
REVENUES NET INCOME (LOSS)
-------- -----------------
<S> <C> <C>
SED $ 4,201,000 $ 385,000
FSD $ 1,913,000 $ (412,000)
</TABLE>
11
<PAGE>
ESSEX CORPORATION
Net current and noncurrent assets of discontinued operations were comprised of
the following:
<TABLE>
<CAPTION>
NET CURRENT ASSETS (LIABILITIES) 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>
12
<PAGE>
ESSEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER SECTIONS
CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS,
ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS", "ANTICIPATES",
"PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT
INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT
PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
FORECAST IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. CERTAIN RISK
FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS FORM 10-QSB AND IN THE
1997 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(TM) 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.
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 declining government budgets increasing competition from
entities far larger than itself.
In 1989, the Company determined that growth, positional advantage and relative
ease of market discrimination were forwarded by acquiring a small,
high-technology venture in Columbia, MD with capabilities in systems
engineering, signal processing and the design of high-speed, relatively low-cost
optoelectronic processors. The Company 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. 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. In 1989, the Company embarked on a 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 applying its
internal resources to designing "dual-use" commercial and military products,
such as its unique ImSyn(TM) Processor.
13
<PAGE>
ESSEX CORPORATION
In mid-1997, the Company's Board of Directors voted to restructure by
discontinuing the legacy support business and focusing upon optoelectronic
equipment and services and systems and software engineering. The combination of
optoelectronics and systems engineering is a powerful discriminator in both
military and commercial markets. Late in 1997, the sale of the legacy support
business operations was completed. The proceeds are being used in the continuing
operations. Continuing operations reflect the results of optoelectronic products
and services, as well as telecommunications engineering services to commercial
and military customers.
CONTINUING OPERATIONS
Revenues were $1,270,000 and $934,000 for the third quarters of 1998 and 1997,
respectively. Revenues were $3,313,000 and $2,999,000 for the first thirty-nine
week periods of 1998 and 1997, respectively. The Company's work for Motorola on
its Iridium cellular satellite communication system accounted for revenues of
$2,399,000 and $1,358,000 in the first three quarters of 1998 and 1997,
respectively. This represented 72% and 45% of total revenues for the first three
quarters of 1998 and 1997, respectively. There was an increase in revenues from
this program between the first three quarters of 1997 and 1998 as more tasks for
Company personnel were received for the initial and follow-on satellite systems.
There was also $257,000 of work performed by an outside subcontractor in the
1998 third quarter. The Company continues to perform work on the current and
successor satellite systems and has a backlog on the Motorola programs of
approximately $906,000. As of September 27, 1998, the Company had a funded
backlog of approximately $255,000 and unfunded backlog of $537,000 on programs
related to optoelectronic devices and services.
The increase in revenues in 1998 on the Motorola contract was offset by the lack
of ImSyn(TM) unit sales and lower revenues from contracts for other
optoelectronic products and services. There was a sale of one Imsyn(TM) unit for
$250,000 during the first quarter of 1997 for U.S. Government end use under a
development and applications contract. The Company does not have any firm orders
for ImSyn(TM) units as of the date of this report.
There was operating income from continuing operations of $67,000 in the third
quarter of 1998 compared to an operating loss of $196,000 in the third quarter
1997. There were losses of $273,000 and $1,081,000 in the first thirty-nine week
periods of 1998 and 1997, respectively. Cost of goods sold and services provided
for the first thirty-nine weeks of 1998 was 53.4%, higher than the 49.2% in
1997. The 1998 first thirty-nine week period includes a higher amount of outside
subcontractor costs on which the Company receives a smaller profit than on the
work performed by Company personnel. Selling, general and administrative
expenses ("SG&A") were $1.4 million in the first thirty-nine weeks of 1998
compared to $1.9 million in the first thirty-nine weeks of 1997. The 1997 higher
SG&A expenses contributed to the larger loss in 1997. 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 SG&A expenses
between the 1997 and 1998 periods and has curtailed expenditures where possible
while retaining essential technical capabilities and personnel in the
optoelectronics and telecommunications businesses.
14
<PAGE>
ESSEX CORPORATION
DISCONTINUED OPERATIONS
There was income from discontinued operations of $267,000 and $166,000 in the
third quarter and first thirty-nine week periods of 1997, respectively. Results
from discontinued operations are only applicable to 1997.
Discontinued operations are comprised of the results of the Systems
Effectiveness Division and the operations of the Federal Systems Division
(except for the telecommunications and government-related optoelectronics
businesses). During 1997, the SED operations had first thirty-nine week sales of
approximately $4.2 million and produced income of approximately $385,000. The
SED operations were sold as of October 1, 1997.
The FSD discontinued operation's revenues were $1.9 million in the first
thirty-nine weeks of 1997 and there was a loss from operations of approximately
$412,000. During the first thirty-nine weeks of 1997, FSD was working on
completing a program to produce aviation maintenance trainers. Additional
significant completion problems were encountered in early 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
reported in the third quarter of 1997.
CORPORATE MATTERS
In 1997, the Company's interest costs were higher due to the financing
associated with its larger volume of operations. Total interest expense and
debenture financing amortization costs were $192,000 in the first thirty-nine
week period of 1997 compared to $99,000 in the same period of 1998.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No benefit from
income taxes was recognized in the first thirty-nine weeks of 1998 or 1997.
15
<PAGE>
ESSEX CORPORATION
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
--------------------------------------------------------
September 27, December 28, September 28,
1998 1997 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Total Assets $ 1,910 $ 3,191 $ 3,967
================ =============== ==============
Working Capital (Deficit) $ 491 $ 466 $ (470)
================ =============== ==============
Current Ratio 1.44:1 1.36:1 0.82:1
Current and Long-Term
Capital Leases $ 22 $ 65 $ 98
Bank Line of Credit/Accounts
Receivable Financing 199 164 750
Convertible Debentures 376 1,233 1,400
Convertible Notes Payable -- -- 245
Redeemable Preferred Stock -- -- 120
---------------- --------------- --------------
Total Debt/Financing $ 597 $ 1,462 $ 2,613
================ =============== ==============
Stockholders' Equity (Deficit) $ 415 $ 666 $ (183)
================ =============== ==============
</TABLE>
The Company experienced a slight increase in its working capital and ratio in
the first thirty-nine weeks of 1998. The net loss and the increase in accounts
receivable were the primary items of net cash used in operations in the first
thirty-nine weeks of 1998. The 1998 net cash used in operations was partially
funded by the collection of remaining receivables of discontinued operations of
$130,000. The proceeds from the collection of the $411,000 note receivable from
the sale of the discontinued operations was also used to finance operations.
The Company sold its Huntsville, Alabama facility in the third quarter of 1998.
The facility served as a portion of the collateral on the convertible
debentures. The net proceeds of $875,000 from the sale of the Huntsville
facility were used to partially pay down the debentures.
During mid 1997, certain insiders and directors invested $120,000 in redeemable
preferred stock. The preferred stock 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 its respective general and administrative expenses)
over receipts in the range of approximately $25,000-$50,000 per month. The
Company has taken steps to increase revenue volume and reduce expenditures.
While such actions produced a modest improvement in results in the 1998 third
quarter, if a
16
<PAGE>
ESSEX CORPORATION
significant decline in such results occurred, then the Company would not be able
to sustain its business without additional working capital or further cost
reductions.
The Company continues to seek additional funds from financing sources for
operations and to achieve desired product inventory levels and initial market
penetration. The Company is also seeking to establish joint ventures or
strategic partnerships with major industrial concerns to facilitate these goals.
Significant further delays in the commercialization of the Company's
optoelectronic products, failure to commercialize such products or failure to
raise substantial additional working capital would have a material 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 the date of this report.
The receivable financing arrangement for a line of credit up to $500,000 expired
May 31, 1998. The Company negotiated a replacement working capital financing
arrangement effective August 1998 with an accounts receivable factoring
organization. Under such an agreement, the factoring organization may purchase
certain of the Company's accounts receivable subject to full recourse against
the Company in the case of nonpayment by the customers. The Company generally
receives 85%-90% of the invoice amount at the time of purchase and the balance
when the invoice is paid. The Company is charged an interest fee and other
processing charges on the funded amount, payable at the time each invoice is
paid. As of September 27, 1998, the Company received advances of $199,000 from
the accounts receivable factoring organization.
Under the settlement agreement reached with the former landlord, certain
payments are triggered only by other future cash inflows. The remaining $249,000
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 $80,000 of the remaining $249,000 be paid ratably over the next 8
months.
The preceding paragraphs discussing the Company's financial condition contain
forward-looking statements. The factors affecting the ability of the Company to
meet its funding requirements and manage its cash resources include, among other
things, the amount and timing of product sales, inventory turnover, the
magnitude of fixed costs and the ability to obtain working capital, all of which
involve risks and uncertainties that are difficult to predict.
17
<PAGE>
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 23, 1998 and a Form 8-K/A No.
1 on July 6, 1998 which reported a change in certified public
accountants.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
/s/ Joseph R., Kurry, Jr.
Date: October 21, 1998 -------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President,
Treasurer and Chief Financial Officer
(Mr. Kurry is the principal Financial and Accounting Officer and has been duly
authorized to sign on behalf of the Registrant.)
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-27-1998
<PERIOD-START> Dec-29-1997
<PERIOD-END> Sep-27-1998
<CASH> 232
<SECURITIES> 0
<RECEIVABLES> 934
<ALLOWANCES> (99)
<INVENTORY> 401
<CURRENT-ASSETS> 1,611
<PP&E> 1,419
<DEPRECIATION> (1,317)
<TOTAL-ASSETS> 1,910
<CURRENT-LIABILITIES> 1,120
<BONDS> 376
0
0
<COMMON> 440
<OTHER-SE> (26)
<TOTAL-LIABILITY-AND-EQUITY> 1,910
<SALES> 3,313
<TOTAL-REVENUES> 3,313
<CGS> (1,770)
<TOTAL-COSTS> (3,486)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (99)
<INCOME-PRETAX> (273)
<INCOME-TAX> 0
<INCOME-CONTINUING> (273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (273)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
