FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 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 NO X
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT MARCH 29, 1998
----- -----------------
Common Stock, par value $0.10 per share 4,134,065
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 for the fiscal year ended December
28, 1997.
2
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
March 29, December 28,
1998 1997
-------------------- --------------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 363,721 $ 367,136
Accounts receivable, net 543,095 469,427
Inventory 413,268 399,488
Note receivable and other 222,673 411,742
Prepayments and other 50,222 65,483
Net current assets of discontinued operations -- 31,098
-------------------- --------------------
1,592,979 1,744,374
-------------------- --------------------
PROPERTY AND EQUIPMENT
Production and special equipment 917,808 875,983
Furniture, equipment and other 523,150 592,428
-------------------- --------------------
1,440,958 1,468,411
Accumulated depreciation and amortization (1,254,658) (1,227,806)
-------------------- --------------------
186,300 240,605
-------------------- --------------------
OTHER ASSETS
Net noncurrent assets of discontinued operations 997,257 977,256
Patents, net 165,003 175,374
Deferred debenture financing 14,366 20,928
Other 32,446 32,445
-------------------- --------------------
1,209,072 1,206,003
-------------------- --------------------
TOTAL ASSETS $ 2,988,351 $ 3,190,982
- ------------ ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
March 29, December 28,
1998 1997
-------------------- --------------------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Current portion of capital leases $ 40,423 $ 51,835
Bank line of credit 235,550 163,874
Accounts payable 212,481 301,195
Accrued wages and vacation 208,641 151,887
Accrued lease settlement 281,531 281,531
Net current liabilities of discontinued operations 90,963 --
Other accrued expenses 269,192 328,442
-------------------- --------------------
1,338,781 1,278,764
LONG-TERM DEBT
10% Convertible Collateralized Debentures 1,233,100 1,233,100
Capital leases, net of current portion 8,490 13,140
-------------------- --------------------
Total Liabilities 2,580,371 2,525,004
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value; 25 million shares
authorized; 4,134,065 shares issued and outstanding
for 1998 and 1997, respectively 413,406 413,406
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 120,000 120,000
Contributions in excess of par value 5,519,496 5,519,496
Retained deficit (5,644,922) (5,386,924)
-------------------- --------------------
407,980 665,978
-------------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,988,351 $ 3,190,982
- -------------------- ==================== ====================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
4
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 29, 1998 AND MARCH 30, 1997
<CAPTION>
1998 1997
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 803,511 $ 1,173,679
Cost of goods sold and services provided (408,329) (573,864)
Engineering and product development expenses (147,818) (214,954)
Selling, general and administrative expenses (462,814) (824,479)
------------------ ------------------
Operating Loss (215,450) (439,618)
Interest expense, net and debenture financing amortization (42,548) (52,152)
------------------ ------------------
Loss from Continuing Operations
Before Income Taxes (257,998) (491,770)
Benefit from income taxes -- --
------------------ ------------------
Loss from Continuing Operations (257,998) (491,770)
Income from Discontinued Operations (Note 8) -- 33,221
------------------ ------------------
Net Loss $ (257,998) $ (458,549)
================== ==================
Weighted Average Number of Shares
Outstanding 4,134,065 3,626,005
================== ==================
Basic Earnings (Loss) Per Share:
Continuing Operations $ (0.06) $ (0.13)
Discontinued Operations -- 0.01
------------------ ------------------
$ (0.06) $ (0.12)
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 29, 1998 AND MARCH 30, 1997
<CAPTION>
1998 1997
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (257,998) $ (458,549)
Adjustments to reconcile Net Loss to Net Cash
Used In Operating Activities:
Depreciation and amortization 60,787 85,711
Loss (Gain) on sale/retirement of fixed assets 1,306 (20)
Change in Assets and Liabilities:
Accounts receivable (668) (201,997)
Inventory (13,780) (191,539)
Prepayments and other assets (53,195) 25,402
Accounts payable (88,714) 228,030
Other liabilities (2,496) (120,587)
Non-cash charges and working capital
changes of discontinued operations 102,060 148,458
-------------- --------------
Net Cash Used In Operating Activities (252,698) (485,091)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (2,542)
Proceeds from sale of fixed assets 2,615 20
Proceeds from sale of discontinued operations 191,054 --
-------------- --------------
Net Cash Provided By (Used In) Investing Activities 193,669 (2,522)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net 71,676 (141,531)
Proceeds from exercises of stock options -- 2,520
Payment of capital lease obligations (16,062) (24,779)
-------------- --------------
Net Cash Provided By (Used In) Financing Activities 55,614 (163,790)
-------------- --------------
CASH AND CASH EQUIVALENTS
Net decrease (3,415) (651,403)
Balance - beginning of period 367,136 1,507,603
-------------- --------------
Balance - end of period $ 363,721 $ 856,200
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
<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 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 six 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
segment is experiencing net cash expenditures (including all general and
administrative expenses) over receipts in the range of approximately
$75,000-$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
significant adverse effect on the Company's future operating results and future
financial position; however, the Company believes that in
7
<PAGE>
ESSEX CORPORATION
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.
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 in both periods.
NOTE 3: Accounts Receivable Financing
The Company had a receivables financing arrangement with a bank which expired
May 31, 1998. The funds advanced ($235,550 at March 29, 1998 and $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.
NOTE 4: Commitments and Contingencies
LEASE SETTLEMENT
Effective July 1994, the Company settled a legal dispute with a former landlord.
Under the remaining terms of the Settlement Agreement ("Agreement"), the Company
agreed to make contingent cash payments of 25% of future earnings (as defined)
and 10-15% of the net proceeds from the sale of common stock or operating
assets, the total of such payments not to exceed $550,000. The Company also
issued an option to purchase up to 125,000 shares of the Company's stock at an
exercise price (subject to adjustment) of $2 per share. The option is
exercisable through December 31, 2004 and has certain registration rights upon
exercise of the option.
The contingent amounts due are to be paid quarterly. The period for computation
of such contingent payments ends December 2004. The $282,000 accrual as of March
29, 1998 represents the remaining contingent portion which is probable to be
paid over the applicable consideration period, of which $100,000 became payable
beginning in July 1998.
8
<PAGE>
ESSEX CORPORATION
NOTE 5: Common Stock Offering; Warrants Outstanding; Preferred Stock;
Convertible Notes Payable and Debentures
In July 1995, the Company successfully completed a $2.5 million Stock Offering
("Offering"). Through the Offering, the Company sold 25,000 Units consisting of
1,750,000 newly issued shares of common stock and warrants (expiring 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 issuance of the 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 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 and have
certain other conversion protection features. There were 1,200 shares of
preferred stock issued and outstanding at March 29, 1998. 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, preferred stock and the possible
exercise of all such warrants.
NOTE 6: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. No tax benefit will be recognized until taxable income is
realized.
NOTE 7: Statements of Cash Flows - Supplemental Disclosure
There were no new capital leases entered into in the first quarter of 1998 or
1997.
9
<PAGE>
ESSEX CORPORATION
NOTE 8: Discontinued Operations
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 $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. The Huntsville
facility has been 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 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 in discontinued operations in 1998. Summarized results of
operations for 1997 for the discontinued operations are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED YEAR MARCH 30, 1997
----------------------------------------------
REVENUES NET INCOME (LOSS)
------------------ --------------------
<S> <C> <C>
SED $ 1,411,000 $ 123,000
FSD $ 963,000 $ (90,000)
</TABLE>
10
<PAGE>
ESSEX CORPORATION
Net current and noncurrent assets and liabilities of discontinued operations are
comprised of the following:
<TABLE>
<CAPTION>
NET CURRENT ASSETS (LIABILITIES) As of As of
MARCH 29, 1998 DECEMBER 28, 1997
----------------- ------------------
<S> <C> <C>
Receivables, net $ 42,038 $ 183,399
Industrial Revenue Bond - current (80,001) (80,001)
Other accrued liabilities (53,000) (72,300)
----------------- ------------------
$ (90,963) $ 31,098
================= ==================
NET NONCURRENT
Property, plant and equipment, net $ 1,050,574 $ 1,050,574
Industrial Revenue Bond (53,317) (73,318)
----------------- ------------------
$ 997,257 $ 977,256
================= ==================
</TABLE>
11
<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.
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 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.
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.
12
<PAGE>
ESSEX CORPORATION
CONTINUING OPERATIONS
Revenues were $804,000 and $1,174,000 for the first quarters of 1998 and 1997,
respectively, a decrease of 32%. The Company's work for Motorola on its Iridium
cellular satellite communication system accounted for revenues of $586,000 and
$495,000 in the first quarters of 1998 and 1997, respectively. This represented
73% and 42% of total revenues for the first quarters of 1998 and 1997,
respectively. There was an increase in revenues from this program between the
first quarters of 1997 and 1998 as increased tasks were received for the initial
and follow-on satellite systems. The Company continues to perform work on the
current and successor satellite systems and has a backlog on the Motorola
programs of approximately $1,230,000. As of March 29, 1998, the Company had a
backlog of approximately $200,000 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. 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 did not have any firm orders for
ImSyn(TM) units as of August 12, 1998.
There were operating losses from continuing operations of $215,000 and $440,000
in the first quarters of 1998 and 1997, respectively. Cost of goods sold and
services provided for the first quarter of 1998 was 50.8%, which was comparable
to the 48.9% in 1997. Selling, general and administrative expenses ("SG&A") were
$463,000 in the first quarter of 1998 compared to $824,000 in the first quarter
of 1997 on lower overall revenue volume. 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 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.
DISCONTINUED OPERATIONS
There was income from discontinued operations of $33,000 in the first quarter of
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 quarter sales of
approximately $1.4 million and produced income of approximately $123,000.
The SED operations were sold as of October 1, 1997.
The FSD discontinued operation's revenues were $963,000 in the first quarter of
1997 and there was a loss from operations of approximately $90,000. During the
first quarter 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
13
<PAGE>
ESSEX CORPORATION
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 costs, net and
debenture financing amortization were $52,000 in the first quarter of 1997
compared to $42,000 in the same period of 1998.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No benefit from
income taxes was recognized in the first quarter of 1998 or 1997.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
--------------------------------------------------------
March 29, December 28, March 30,
1998 1997 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Total Assets $ 2,988 $ 3,191 $ 5,553
================ =============== ==============
Working Capital (Deficit) $ 254 $ 466 $ (293)
================ =============== ==============
Current Ratio 1.19:1 1.36:1 0.92:1
---------------- --------------- --------------
Current and Long-Term
Capital Leases $ 49 $ 65 $ 212
Bank Line of Credit 236 164 758
Convertible Debentures 1,233 1,233 1,400
---------------- --------------- --------------
Total Debt/Financing $ 1,518 $ 1,462 $ 2,370
================ =============== ==============
Stockholders' Equity $ 408 $ 666 $ 273
================ =============== ==============
</TABLE>
The Company experienced a decrease in its working capital and ratio due
primarily to the net loss of $258,000 in the first quarter of 1998. The net loss
was the primary factor in the $253,000 of net cash used in operations in the
first quarter of 1998. The 1998 first quarter net loss was partially funded by
the collection of remaining receivables of discontinued operations of $140,000
and the proceeds from the sale of discontinued operations.
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.
14
<PAGE>
ESSEX CORPORATION
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 approximately $75,000-$100,000 per month. The Company
has taken steps to increase revenue volume and reduce expenditures. If current
conditions remain unchanged, the Company would not be able to sustain its
business without additional working capital or further cost reductions.
The Company sold its Huntsville, Alabama facility in the second 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 pay down the debentures.
The Company continues to seek additional funds from private financing sources to
finance operations and to achieve desired product inventory levels and initial
market penetration. The Company is also seeking to establish joint ventures or
strategic partnerships with major industrial concerns to facilitate these goals.
Significant delays in the commercialization of the Company's optoelectronic
products, failure to commercialize such products or failure to raise substantial
additional working capital would have a significant adverse effect on the
Company's future operating results and future financial position.
The Company has approximately $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 August 12, 1998.
The current 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.
Under the settlement agreement reached with the former 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 ratably over 10 months
beginning in July 1998.
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.
15
<PAGE>
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
Date: August 12, 1998 Joseph R. Kurry, Jr.
-------------------------------------
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 tosign on behalf of the Registrant.)
16
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<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-28-1998
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120
0
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