FORM 10-KSB
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 27, 1998 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 X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is 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. $4,532,410
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. $1,533,642 as of March 2, 1999
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 MARCH 12, 1999
----- -----------------------------
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 appears on page 32.
Transitional Small Business Disclosure Format YES X NO
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Table of Contents
FORM 10-KSB
Essex Corporation
PART I
Item No. Page
-- INTRODUCTORY STATEMENT................................................ 3
1. DESCRIPTION OF BUSINESS............................................... 3
2. DESCRIPTION OF PROPERTIES..............................................12
3. LEGAL PROCEEDINGS......................................................12
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................12
PART II
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............14
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............14
7. FINANCIAL STATEMENTS...................................................21
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................21
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT......................22
10. EXECUTIVE COMPENSATION.................................................26
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........30
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................31
13. EXHIBITS AND REPORTS ON FORM 8-K.......................................32
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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"). In 1989, the Company acquired a
small, high-technology venture in Columbia, MD which added capabilities in
signal processing, systems engineering and the design of high-speed, relatively
low-cost optoelectronic processors.
The Company's acquired 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 association with Motorola as its first
Industrial Partner on the Iridium(R) global communications satellite system.
The Company's evolving optoelectronics team has designed, developed and
sold special purpose optoelectronic processors for over fifteen years. This
experience was gained in military research and development. The Company
performs, and seeks to expand, such work by designing "dual-use" commercial
products, such as its unique ImSyn(TM) Processor, that also fulfill military
needs.
In 1992, the Company embarked on a vigorous internal 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. Several patents have issued to the Company and
others are in prosecution. By 1997, the Company had to scale back its
development programs due to a lack of funds and limited sales to date of its
ImSyn(TM) processor units. The Company continues to make a limited number of
such optoelectronic processors available for sale to commercial and government
markets while seeking strategic partnerships or outside financing to further
develop these business applications into commercially viable operations.
In mid-1997, the Company's Board of Directors voted to discontinue the
legacy support business and to focus upon satellite communications systems and
software engineering and optoelectronic products and services. During late 1997,
the sale of the legacy support business operations was completed and the
proceeds were used in the Company's continuing operations.
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SATELLITE COMMUNICATIONS SYSTEMS AND SOFTWARE ENGINEERING
The Company provides systems engineering services in signal processing and
telecommunications to industrial, commercial and government customers. The
Company's engineering teams perform systems engineering, simulation, modeling
and software development for the Motorola satellite communications systems.
Experience includes low earth orbit, medium earth orbit, high earth orbit and
geosynchronous earth orbit constellations such as Iridium(R), Teledesic(sm),
MILSTAR, TDRSS, Intelsat and other systems.
In 1990, the Company became Motorola's first Industrial Partner on the
Iridium(R) satellite constellation that provides global wireless communications
to handheld telephones and pagers. The Company's employees have been named on
more than twenty Motorola patent disclosures. 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 modules hosted on a Silicon Graphics computer network. The satellite
orbital propagation and geometry software module 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. The geographical software module plots parameter versus parameter
outputs from other modules. The mapping module 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 Teledesic(sm) constellation, an "internet in the sky" design.
From time to time, the Company has provided software for Motorola systems. In
1998, the Company completed a competitively awarded effort to supply software
for a communications analysis console to be used in the Iridium(R)
constellation.
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OPTOELECTRONIC PRODUCTS AND SERVICES
BACKGROUND - The Company solves 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.
A 1997 U.S. Small Business Administration (SBA) Tibbetts Award for
Technical Excellence recognized the Company as "one of the best of the best" in
the context of the powerful, developing family of optoelectronic products. The
Company's patented solutions combine laser optics and digital electronics to
compute in faster, better ways, enabling entirely new levels of performance to
be achieved.
The Company has invested heavily in optoelectronic technology and products
since 1989. 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 for use
by the Intelligence Community before joining the Company. 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. Most of his career in NSA was
spent in leading the optoelectronic team in designing and fielding engines to
perform signal processing tasks well beyond the capabilities of conventional
computing 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 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, Boeing,
Litton, TRW, Harris, Raytheon, Pacific-Sierra
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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 sixteen years.
IMSYN(TM) PROCESSOR - The Company has pursued application of its optoelectronic
technologies in order to realize on the patented ImSyn(TM) processor. The name
"ImSyn," which stands for "image synthesis," was selected because the processor
is useful in many image processing 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(TM)
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 or underground.
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,
fast MRI and 3D imaging applications, 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(TM) 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(TM) 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(TM) Processor was completed in mid 1996. Three initial
units were assembled and two were delivered under government R&D contracts in
January 1997. Several additional units based on this initial design were
completed 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.
Progress in the ImSyn(TM) program has been delayed, principally by
deficiencies in commercial components discovered long after they had been
selected and incorporated into the initial processors. 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
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it is able to develop financial resources to do so and believes, in technical
terms, that it is 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 industrial and military imaging, medical,
microscopy and signal processing. Key product features are digital
compatibility, affordability, high-speed, simplified software, low power
consumption and compact packaging.
Ground-penetrating radar 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 a compact supercomputer
capability is needed. The ImSyn(TM) 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(TM) 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(TM) in less than
30 seconds, while the high end workstation used took about four hours.
In any given market niche, there are end-users with direct applications and
original equipment manufacturers (OEMs) that can incorporate ImSyn(TM)
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 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 was to finance development of new
application areas by the Radiology Department to determine the most effective
uses of the ImSyn(TM) processor in reconstructing MR images for functional MRI
and MRI fluoroscopy. A second medical imaging installation, since September
1998, is on-going at the University of Pennsylvania Medical Center (UPENN).
UPENN is developing new high-speed imaging techniques that take advantage of the
ImSyn(TM) processor's optical architecture. 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 an upgraded ImSyn(TM) Processor becomes available, it will further improve
the capabilities of such modalities.
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Since 1989, one of the principal objectives of the Company's ImSyn(TM)
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 visible light. Because of its great computational
power, the ImSyn(TM) Processor was able to reconstruct SAR images of moving
targets on a U.S. Navy development program. It also reconstructs images from
foliage- penetrating radars. An ImSyn(TM) 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.
The Company's marketing strategy is constrained by limited financial
resources to the use of internal staff. Military end-use marketing continues to
be carried out by key employees, 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(TM) (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(TM) 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. Possible applications include device inspection, biomedical and
structural identification and changes. Government contracts and strategic
partnerships with companies active in applicable markets are being sought.
OTHER OPTOELECTRONIC ENGINES - In addition to the ImSyn(TM) 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.
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
CONTRACT MIX
Services of the Company are performed under time and material (80% and 58%
of revenues in 1998 and 1997), cost-reimbursement (11% and 26% in 1998 and 1997)
or fixed-price (9% and 16% in 1998 and 1997) 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.
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GOVERNMENT PROGRAMS
Until 1998, the major portion of the Company's revenues had been derived
from contracts, or subcontracts thereunder, with departments or agencies of the
U.S. Government, primarily the military services and other departments and
agencies of the Department of Defense (DoD). In 1998 and 1997, approximately 27%
and 51%, respectively, of the Company's total revenues were derived from
government contracts or subcontracts. Revenues from contracts or subcontracts
from DoD programs were 27% and 43% of total revenues in 1998 and 1997,
respectively. Government military programs include work principally with both
the Navy and Army in 1998, and to a lesser extent with the Air Force and other
DoD entities. The Company 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's efforts to date have been focused in support of Motorola
communications satellite programs. The Company continues work which began in
1990 with Motorola, Inc., assisting initially in the design and currently in the
operational improvement of the Iridium(R) satellite constellation that provides
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 Motorola patents which are integral to
Iridium(R) system performance. The Company is also involved in modeling and
simulation support in the design of the Teledesic(sm) "internet in the sky"
satellite data communications systems for Motorola. The Company's contract to
perform such work generated over 70% ($3.2 million) of revenues in 1998 and 48%
($1.9 million) in 1997.
The Company is endeavoring to expand the products portion of its commercial
business. 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 personnel to make OEM and other
customer contacts. 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. The
Company expects that personnel and financial resources as available 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.
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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 the application
of the Virtual Lens Microscope(TM) (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. A request for examination of a Japanese version of this
patent was processed in 1998.
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 the examination stage.
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 and commercial 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, particularly for the
commercial market. 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.
Market penetration using Essex products and technology has been difficult.
When performing desired functions using conventional technology (e.g. high end
workstations, array processors, digital signal processors boards) takes too long
or costs too much, designers do not specify those functions. When Essex offers
cost-effective means of providing such functions,
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system integrators can state, correctly, that there is "no requirement" for them
within the design specifications. That means that no expenditure is justified,
no matter what the gain in system effectiveness may be. Such design limitations
are a key obstacle to market penetration by the Company's products. Large
electronic systems integrators 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 known or available. When Essex products become readily available and well
known, integrators will have an opportunity to consider specifying them.
There are many manufacturers of digital signal processor (DSP) boards that
are broadly used in many applications. Mercury Computer Systems is a principal
supplier of such hardware for radar imaging. The Company is desirous of entering
this market in the future. 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
fiberoptic 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 27, 1998, the Company had a total backlog (funded and
unfunded) of approximately $1.6 million as compared with $2 million at December
28, 1997. Of these amounts, backlog was $.5 million funded and $1.1 million
unfunded at yearend 1998 as compared to $1.9 million funded and $.1 million
unfunded at yearend 1997. 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 February 28, 1999, the Company had approximately 44 employees, of
whom 33 were full-time employees.
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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 where the Company occupies approximately 18,000 square feet. The
headquarters and offices for its Commercial Products Division (CPD) are located
in an adjacent one-story building at 9130 Guilford Road, Columbia, Maryland
where CPD occupies approximately 7,000 square feet. Both leases are currently
extended on a month-to-month basis. The Company is negotiating the renewal of
the leases for a longer period under similar terms and conditions. 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.
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 hardware and
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
None.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 1998, the Company held its 1997 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>
Harold P. Hanson 4,029,261 57,393
Robert W. Hicks 4,068,459 18,195
Ray M. Keeler 4,068,459 18,195
Harry Letaw, Jr. 4,063,723 22,931
Frank E. Manning 4,068,459 18,195
Leonard E. Moodispaw 4,064,643 22,011
Terry M. Turpin 4,068,459 18,195
</TABLE>
12
<PAGE>
In addition, the Company's shareholders approved the following
proposals:
The ratification of the Essex Corporation 1998 Stock Option and
Appreciation Rights Plan, as follows:
FOR 2,554,603 AGAINST 105,896ABSTAIN 23,552
--------- ------- ------
The ratification of the appointment of Stegman & Company as
independent accountants, as follows:
FOR 4,044,466 AGAINST 30,436 ABSTAIN 11,752
--------- ------ ------
13
<PAGE>
PART II
5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is quoted and trades executed through the OTC
Bulletin Board under the symbol "ESEX".
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>
1998 1997
------------------ --------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First quarter.................. $ 1.00 $ 0.44 $ 1.88 $ 0.59
Second quarter................. 0.81 0.34 1.06 0.25
Third quarter ................. 0.84 0.50 0.81 0.41
Fourth quarter................. 0.81 0.41 1.06 0.50
</TABLE>
At March 1, 1999, there were approximately 1,350 beneficial owners of the
Company's Common Stock which includes 365 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 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.
14
<PAGE>
Historically, Essex Corporation has been a diversified, technology-based
company providing quality products and professional services to government and
industry. Essex operated in two business segments: Technical Services and
Products; and Optoelectronic Products and Services.
The Company allocated its operations to the following business units:
o Systems Effectiveness Division (SED)
o Federal Systems Division (FSD)
o Commercial Products Division (CPD)
SED operated in the Technical Services and Products segment; CPD operated
in the Optoelectronics Products and Services segment; and FSD operated in both
segments.
In June 1997, the Board of Directors unanimously authorized the sale of the
SED and the FSD operations (except for the telecommunications and
government-related optoelectronics programs). 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 programs) 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".
Continuing operations reflect the results of the Commercial Products
Division which provides optoelectronic products and services, as well as
commercial 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 telecommunications and commercializing its optoelectronics products
and services.
STATUS
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 70% of
the Company's revenues from continuing operations for 1998.
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. While the
Company was able to operate profitably in the last half of 1998, the Company's
backlog of work going into 1999 is not yet sufficient to maintain a breakeven or
better level of operations. Since early 1997, the Company has continued
development and initial product improvement of its ImSyn(TM) optoelectronic
processor to the extent
15
<PAGE>
possible. The processor is a combination 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, and four units were completed and available in 1998. The
first-designed units need to be 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 1997, but has moderated somewhat during 1998. Net cash used in
operating activities was $1.6 million in 1997 but has declined to under $200,000
in 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 since mid-1998 on a trial basis with the intention
of turning such use into revenues 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. Backlog and order issues will continue to be major
concerns until substantial improvements have been achieved.
1998 COMPARED TO 1997
CONTINUING OPERATIONS
Revenues from continuing operations were $4,532,000 and $4,012,000 for 1998
and 1997, respectively, an increase of 13%. The Company's work for Motorola on
its Iridium(R) cellular satellite communication system accounted for revenues of
$3.2 million and $1.9 million in 1998 and 1997, respectively. This represented
approximately 70% and 48% of revenues for 1998 and 1997, respectively. There was
an increase in revenues from this program between 1997 and 1998 as the initial
satellite system neared completion. The Company continues to perform work on the
current and successor satellite systems and has a yearend 1998 backlog on the
Motorola program of approximately $1.3 million. The Company has a backlog of
approximately $300,000 on programs related to optoelectronic devices and
services.
The Company had no firm orders for ImSyn(TM) units as of the date of this
report.
There were operating losses from continuing operations of $4,000 and
$1,264,000 in 1998 and 1997, respectively. Cost of goods sold and services
provided for 1998 was 51.4% as compared to 58.2% in 1997. In 1997, cost of goods
sold included a charge of $400,000 to establish a reserve against ImSyn(TM)
processor inventory to provide for design changes and the delay in the
introduction of these first units.
16
<PAGE>
Selling, general and administrative expenses ("SG&A") were $1.7 million in
1998 compared to $2.3 million in 1997 on a slightly higher revenue volume in
1998. The $600,000 of such 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.
DISCONTINUED OPERATIONS
There was a loss from discontinued operations of $101,000 in 1997. 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 programs). During 1997, the SED operations
had sales of approximately $4.8 million and produced income of approximately
$503,000 during the applicable periods of 1997. As of October 1, 1997, the SED
operations were sold.
The FSD discontinued operation's revenues were $2.3 million in 1997 and
there was a loss from operations of approximately $493,000. During 1996-1997,
FSD was working on a program to produce aviation maintenance trainers (the
"Trainers Program"). 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 yearend 1997, there
were net current assets of discontinued operations of $31,000 and net noncurrent
assets of $977,000 which were sold and proceeds received in 1998.
CORPORATE MATTERS
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 $114,000 in 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 provision or
benefit from income taxes was recognized in 1998 or 1997.
17
<PAGE>
YEAR 2000
STATE OF READINESS
The overwhelming majority of the Company's computer systems consist of
desktop computers running popular software programs which purport to be Year
2000 compliant. The Company has not requested Year 2000 compliance statements
from major vendors based on its belief that the time and costs involved in such
a process would not make economic sense given the Company's limited personnel
and financial resources. There have been no indications, however, that major
vendors will not be Year 2000 compliant. If vendors are not Year 2000 compliant,
the Company believes that it will be able to find suitable alternate suppliers
and contract with them on reasonable terms.
A significant portion of the Company's revenues are derived from consulting
services that do not implicate date recognition concerns, such as the work as a
subcontractor for Motorola on its Iridium(R) cellular satellite communication
system. Based on its contacts and experience with Motorola on the Iridium(R)
project, the Company does not expect Year 2000 compliance issues to materially
impact its Iridium(R) revenues or costs.
COSTS TO ADDRESS THE YEAR 2000 ISSUES
Management of the Company believes that the impact of the Year 2000 on the
Company's internal systems will not result in material costs to the Company or
have a material adverse impact on future results.
RISKS OF THE YEAR 2000 ISSUES
The main risk to the Company with respect to Year 2000 is the failure of
major vendors and infrastructure providers, such as utility and telephone
companies, to be Year 2000 compliant. Failure on their part could result in
delays or inability to communicate with customers or obtain components and
supplies, increased costs of components, supplies and services, and an overall
inability to conduct business in the event of a shutdown of major utility or
telecommunications providers. The Company cannot estimate the financial impact
of any failure to be Year 2000 compliant by such third party vendors and service
providers.
CONTINGENCY PLANS
The Company does not have a contingency plan for Year 2000 compliance
because it does not anticipate that it will fail to be Year 2000 compliant,
particularly in relation to those systems, software programs, and hardware that
are under its control. However, there can be no assurances that all measures
being taken to avoid Year 2000 problems will be effective and as such,
unforeseen issues could arise that could lead to a material adverse effect upon
the Company's business, operating results and financial condition.
18
<PAGE>
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 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Total Assets $ 1,785 $ 3,191
============ ============
Working Capital $ 661 $ 466
============ ============
Current Ratio 1.78:1 1.36:1
============ ============
Note Payable/Bank Line of Credit $ 164 $ 164
Convertible Debentures 376 1,233
Current and Long-Term Capital Leases 9 65
------------- ------------
Total Debt/Financing $ 549 $ 1,462
============= ============
Stockholders' Equity $ 565 $ 666
============= ============
</TABLE>
The Company's working capital and ratio increased primarily as a result of
the proceeds received in 1998 from the sale of the net assets of discontinued
operations. At yearend 1998, the Company has working capital of approximately
$661,000 and a stockholders' equity of approximately $565,000. 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 and the preferred stock was converted into
common stock in 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 operations continue to
experience net cash expenditures (including all general and administrative
expenses) over receipts in the range of $60,000 - $70,000 per month. The Company
has taken steps to increase revenue volume and reduce expenditures. The Company
cut back on research and development for 1998 where possible while retaining
essential staff and other capabilities in the optoelectronics operations. While
such actions produced improvement in results in 1998, if a significant decline
in such results occurred, then 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 net proceeds from the sale were therefore restricted and used to
partially pay down the 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
19
<PAGE>
partnerships with major industrial concerns to facilitate these goals. Further
significant delays in the commercialization of the Company's optoelectronic
products, failure to market 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 $345,000 of inventory in current assets. This
inventory is comprised of ImSyn(TM) optoelectronic processors and primarily
consists of finished goods and purchased parts. Sales of such units will be
necessary in order to maintain working capital liquidity. There are no firm
orders for such units as of the date of this report.
The Company had a receivables financing arrangement with a bank which
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, payable at the time each invoice is paid. Funds
advanced were $164,000 as of December 27, 1998.
Under the settlement agreement reached with the former landlord, certain
payments are triggered only by other future cash inflows. The remaining $215,000
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 $50,000 of the remaining $215,000 be paid ratably over the next 5
months.
The Company believes that it will be able to meet its 1999 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, ALL OF WHICH INVOLVE RISKS AND
UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
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 presented is minimal.
20
<PAGE>
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 operations in 1997 but suspended such
efforts in 1998. When the Company restarts 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.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
21
<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. 72 Chairman and Chief Executive Officer
Leonard E. Moodispaw 56 President; Chief Operating Officer and
Director (3)
Terry M. Turpin 56 Senior Vice President; Chief Technical
Officer and Director
Joseph R. Kurry, Jr. 48 Senior Vice President; Treasurer and Chief
Financial Officer
Matthew S. Bechta 45 Vice President
Craig H. Price 49 Vice President
Gerald J. Davieau 42 Vice President
Kimberly J. DeChello 38 Chief Administrative Officer and Secretary
Frank E. Manning 79 Chairman Emeritus; Director (2)
Harold P. Hanson 77 Director (3)
Robert W. Hicks 61 Director (1)
Ray M. Keeler 67 Director (1)(2)
* 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 General Counsel
22
<PAGE>
and continues in the capacity as 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
continues his relationship with ManTech as a member of its Advisory Board and
serves as a consultant to MASI and to MASI UK Limited where he is a member of
the board of directors of its joint venture with Vosper-Thornycroft. Early in
his career, Mr. Moodispaw was engaged in the 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 the Optoelectronics and Signal
Processing business area. 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 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.
23
<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 from 1978 to 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. In 1998 he formed Hicks Little
Company, LLC for the purpose of conducting consulting activity.
24
<PAGE>
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 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 27, 1998.
25
<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. 1998 135,200 0 0 0 0 0 0
Chairman and CEO 1997 135,200 0 0 0 0 0 0
1996 135,200 35,000 0 0 0 0 0
Terry M. Turpin 1998 122,720 0 3,682 0 0 0 0
Senior Vice President 1997 122,720 0 3,540 0 35,000 0 0
and Director 1996 115,120 15,000 3,465 0 8,000 0 0
Joseph R. Kurry, Jr. 1998 114,400 0 3,432 0 0 0 0
Treasurer, Senior Vice 1997 114,400 0 3,300 0 30,000 0 0
President and CFO 1996 114,400 25,000 3,439 0 23,500 0 0
Craig H. Price 1998 102,960 0 3,089 0 0 0 0
Vice President 1997 102,960 0 2,970 0 29,000 0 0
1996 102,960 15,000 3,094 0 8,500 0 0
Matthew S. Bechta 1998 102,960 0 3,089 0 0 0 0
Vice President 1997 102,960 0 2,970 0 25,500 0 0
1996 102,960 15,000 3,089 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 1998 fiscal year, based on the closing
bid price of the Common Stock on OTC Bulletin Board on December 23, 1998,
without giving effect to the consideration paid by the named executive
officer, were as follows: Dr. Letaw, 673,559 shares, $315,764 value; Mr.
Turpin, 278,693 shares, $130,651 value; Mr. Kurry, 38,359 shares, $17,983
value; Dr. Price, 14,342 shares, $6,724 value; and Mr. Bechta, 39,198
shares, $18,376 value.
</FN>
</TABLE>
26
<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 an employer matching contribution
of up to 3% of eligible employee compensation under the salary reduction feature
and a discretionary contribution as determined by the Board of Directors. No
discretionary contribution was made by the Company to the Retirement Plan for
1996 - 1998. The total authorized contribution under the matching contribution
feature of the Plan was approximately $62,000 in 1998. 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. No awards were made in 1997 or
1998. 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 1998, the Board awarded a total of 18,000 shares to four directors.
There were no awards in 1997 or 1996. There were approximately 4,000 shares
remaining in the plan as of December 27, 1998.
27
<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 established an Essex Corporation 1998 Stock Option and
Appreciation Rights Plan (the "1998 Plan"). The 1998 Plan provides for the grant
of options to purchase shares of common stock of the Company, par value $.10 per
share (the "Common Stock") which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), to persons who are employees, as well as options which do not so
qualify ("Non-Qualified Options") to be issued to persons or consultants,
including those who are not employees. The 1998 Plan also provides for grants of
stock appreciation rights ("SARs") in connection with the grant of options under
this 1998 Plan. The exercise price of an Incentive Option under the 1998 Plan
may not be less than the "fair market value" of the shares of Common Stock at
the time of grant; the exercise price of Non-Qualified Options 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
1998 Plan reserves 300,000 shares of Common Stock for issuance. As of February
28, 1999, no options and SARs have been granted.
The Company also has a 1996 Stock Option and Appreciation Rights Plan (the
"1996 Plan"). The 1996 Plan as presently in effect is similar to the 1998 Plan
described above. The 1996 Plan reserves 300,000 shares of the Company's Common
Stock for issuance. There are options for 256,300 shares outstanding at prices
ranging from $1.00 - $3.00, including options for 112,000 shares held by
officers or directors (options for 201,350 shares are exercisable, including
exercisable options held by officers and directors of 82,800). As of February
28, 1999, there remain 43,700 shares available for future grants of options or
SARs.
The Company had an Option and Stock Appreciation Rights Plan which expired
on January 31, 1997. As of February 28, 1999, options for 651,250 shares of the
Company's Common Stock remain outstanding under this Plan. Of this amount,
options for 617,400 shares are exercisable at prices ranging from $2.52 - $3.08
including options held by officers and directors to purchase 545,000 shares (of
which options for 516,900 shares are exercisable).
28
<PAGE>
The following Table shows for the fiscal year ended December 27, 1998 for
the persons named in the Summary Compensation Table, information with respect to
option/SAR exercises and fiscal yearend values for unexercised options/SARs.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FY-END OPTION/SAR VALUES TABLE
FOR FISCAL YEAR ENDED DECEMBER 27, 1998
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End($)
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 --- --- 40,000/11,000 0/0
Joseph R. Kurry, Jr. --- --- 41,400/17,100 0/0
Craig H. Price --- --- 30,000/12,500 0/0
Matthew S. Bechta --- --- 31,500/11,000 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 1998. In 1998 the Board held five meetings; the entire membership
of the Board was present at all of the meetings except one where one director
was absent.
29
<PAGE>
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table and accompanying notes set forth as of February 28,
1999, 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>
Harry Letaw, Jr. (2) 994,809 21.08
Terry M. Turpin (3) 321,193 7.23
Leonard E. Moodispaw (4) 182,650 4.04
Frank E. Manning (5) 129,275 2.92
Joseph R. Kurry, Jr. (6) 88,809 2.00
Matthew S. Bechta (7) 78,198 1.76
Harold P. Hanson (8) 69,344 1.57
Robert W. Hicks (9) 59,200 1.34
Craig H. Price (10) 47,342 1.07
Ray M. Keeler (11) 33,250 **
All Directors and Executive Officers
as a Group (12 persons) (12) 2,030,696 39.65
- ------------------------------------
<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 994,809 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, 42,500 represent presently
exercisable rights to acquire common stock through stock options and
warrants.
(4) Leonard E. Moodispaw is President, Chief Operating Officer and a
Director of the Company. Of the shares shown as beneficially owned,
125,500 represent presently exercisable rights to acquire common stock
through stock options.
(5) Mr. Frank E. Manning is the record and beneficial owner of
approximately 2.92% 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. His shares do 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.
30
<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, 50,450 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, 39,000 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, 33,000 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, 724,000 represent presently
exercisable rights to acquire common stock through stock options and
warrants.
</FN>
</TABLE>
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
31
<PAGE>
<TABLE>
<CAPTION>
13. EXHIBITS AND REPORTS ON FORM 8-K
<S> <C>
(a) (1) Financial Statements
Report of Independent Auditors 34
Balance Sheet 35
Statements of Operations 36
Statements of Changes in Stockholders' Equity 37
Statements of Cash Flows 38
Notes to Financial Statements 39 - 49
(2) Exhibits
(i) None.
(ii) Exhibit 3(i) - Articles of Incorporation and Amendments
thereto B 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
10.10 Settlement Agreement between the Company and Rumsey Associates C
Limited Partnership
10.11 Option Agreement between the Company and Rumsey Associates C
Limited Partnership
10.13 Registration Rights Agreement C
10.15 1996 Stock Option and Appreciation Rights Plan F
10.22 1998 Stock Option and Appreciation Rights Plan G
(iv) Exhibit 23 - Consent of Experts and Counsel
23.1 Consent of Independent Auditors 50
(v) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule A
(b) Reports on Form 8-K
None.
- -----------------------
<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 Def
14a - Definitive Proxy Statement dated October 12, 1998
</FN>
</TABLE>
32
<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)
By: /S/ HARRY LETAW, JR.
--------------------------------------------------
Harry Letaw, Jr.
Chairman of the Board and Chief Executive Officer;
Principal Executive Officer
March 25, 1999
By: /S/ JOSEPH R. KURRY, JR.
-------------------------------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President, Treasurer and Chief Financial Officer;
Principal Financial and Accounting Officer
March 25, 1999
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
March 25, 1999 March 25, 1999
/S/ ROBERT W. HICKS /S/ LEONARD E. MOODISPAW
------------------------- ------------------------------
Robert W. Hicks, Director Leonard E. Moodispaw, Director
March 25, 1999 March 25, 1999
/S/ RAY M. KEELER /S/ TERRY M. TURPIN
----------------------- -------------------------
Ray M. Keeler, Director Terry M. Turpin, Director
March 25, 1999 March 25, 1999
/S/ HARRY LETAW, JR.
--------------------------
Harry Letaw, Jr., Director
March 25, 1999
33
<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 27, 1998 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 27, 1998 and
December 28, 1997. 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 audits 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 audits provide 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 27, 1998 and the results of its operations and its cash flows for the
years ended December 27, 1998 and December 28, 1997 in conformity with generally
accepted accounting principles.
Stegman & Company
Baltimore, Maryland
March 12, 1999
34
<PAGE>
<TABLE>
ESSEX CORPORATION
BALANCE SHEET
AS OF DECEMBER 27, 1998
ASSETS
CURRENT ASSETS
<CAPTION>
<S> <C>
Cash $ 543,538
Accounts receivable, net 562,033
Inventory 344,175
Prepayments and other 54,596
--------------
1,504,342
--------------
PROPERTY AND EQUIPMENT
Production and special equipment 870,953
Furniture, equipment and other 427,618
--------------
1,298,571
Accumulated depreciation and amortization (1,211,910)
--------------
86,661
--------------
OTHER ASSETS
Patents, net 154,125
Other 39,417
--------------
193,542
--------------
TOTAL ASSETS $ 1,784,545
- ------------ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Advance from accounts receivable financing $ 163,920
Accounts payable 159,811
Accrued wages and vacation 165,578
Accrued lease settlement 215,277
Other accrued expenses 139,123
--------------
843,709
LONG-TERM DEBT
10% Convertible Collateralized Debentures 375,714
--------------
Total Liabilities 1,219,423
--------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY
Common stock $0.10 par value; 25 million shares
authorized; 4,397,861 shares issued and outstanding 439,786
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;
-0- shares outstanding --
Contributions in excess of par 5,634,234
Retained deficit (5,508,898)
--------------
Total Stockholders' Equity 565,122
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,784,545
- ------------------------------------------ ==============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEK FISCAL YEARS
ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Revenues $ 4,532,410 $ 4,011,589
Cost of goods sold and services provided (2,330,343) (2,332,956)
Engineering and product development expenses (474,173) (582,400)
Selling, general and administrative expenses (1,731,863) (2,360,107)
------------------ -----------------
Operating Loss (3,969) (1,263,874)
Interest expense, net and debenture financing
amortization (113,763) (310,566)
------------------ -----------------
Loss from Continuing Operations
Before Income Taxes (117,732) (1,574,440)
Benefit from income taxes -- --
------------------ -----------------
Loss from Continuing Operations (117,732) (1,574,440)
------------------ -----------------
Discontinued Operations (Note 2):
Loss from operations -- (100,973)
Gain on disposal -- 1,235,818
------------------ -----------------
Income from Discontinued Operations -- 1,134,845
------------------ -----------------
Net Loss $ (117,732) $ (439,595)
================== =================
Weighted Average Number of Shares
Outstanding 4,287,354 3,649,775
================== =================
Basic Earnings (Loss) Per Share:
Continuing Operations $ (0.03) $ (0.43)
Discontinued Operations -- 0.31
------------------ -----------------
$ (0.03) $ (0.12)
================== =================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
ESSEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<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 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
Common stock issued upon conversion
of preferred stock 245,796 24,580 (1,200) (120,000) 104,658 -- 9,238
Preferred stock dividend -- -- -- -- -- (4,242) (4,242)
Common stock bonus 18,000 1,800 -- -- 10,080 -- 11,880
Net loss -- -- -- -- -- (117,732) (117,732)
--------- ---------- ------ -------- ----------- ----------- ---------
BALANCE, DECEMBER 27, 1998 4,397,861 $ 439,786 -- $ -- $ 5,634,234 $(5,508,898) $ 565,122
========= ========== ====== ======== =========== =========== =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
37
<PAGE>
<TABLE>
ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<CAPTION>
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (117,732) $ (439,595)
Adjustments to reconcile Net Loss to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization 197,303 476,427
Gain on sale/retirement of fixed assets (662) (1,555)
Gain on sale of discontinued operations -- (1,235,818)
Allowance for bad debts (48,526) (82,000)
Inventory valuation reserve 48,526 400,000
Common stock issued as compensation 11,880 --
Change in Assets and Liabilities:
Accounts receivable (92,606) 44,443
Inventory 55,313 (317,171)
Prepayments and other 20,078 40,725
Accounts payable (141,384) 22,911
Accrued lease settlement (66,254) (26,706)
Other liabilities (179,409) (436,256)
Non-cash charges and working capital changes of
discontinued operations 129,579 (52,121)
-------------- --------------
Net Cash Used In Operating Activities (183,894) (1,606,716)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,435) (21,511)
Proceeds from sale of fixed assets 4,752 23,279
Proceeds from sales of discontinued operations 1,290,517 1,088,258
-------------- --------------
Net Cash Provided By Investing Activities 1,273,834 1,090,026
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term repayments of line of credit or receivable
financing, net 46 (736,126)
Issuance of preferred stock -- 120,000
Proceeds from issuance of convertible notes -- 256,504
Repayment of convertible debentures principal (857,386) (166,900)
Payment of capital lease obligations (56,198) (97,255)
-------------- --------------
Net Cash Used In Financing Activities (913,538) (623,777)
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) 176,402 (1,140,467)
Balance - beginning of year 367,136 1,507,603
-------------- --------------
Balance - end of year $ 543,538 $ 367,136
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
38
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
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
1998 presentation.
REPORTING YEAR
The Company is on a 52-week fiscal year ending the last Sunday in December
for 1998 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.
Since 1989, the Company has expended significant funds to transition into
the commercial marketplace, particularly the productization of its
proprietary technologies in optoelectronic processors. The long-term
success of the Company in this area is dependent on its ability to
successfully develop and market products related to its optoelectronic
processors. The success of these efforts is subject to changing
technologies, availability of financing, competition, and ultimately
market acceptance.
The Company has incurred losses over the last decade, 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, is currently experiencing net cash expenditures (including all
general and administrative expenses) over receipts of approximately
$60,000 - $70,000 per month.
The Company is seeking additional funds from 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
39
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
industrial concerns to facilitate these goals. The Company believes that
it will be able to meet its 1999 funding requirements from the
aforementioned sources, although there can be no assurances in this
regard. Failure to commercialize or further 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 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 time and materials, fixed-price
and cost-plus- fixed-fee contracts. Revenue on time and materials
contracts (approximately 80% and 58% of total revenues in 1998 and 1997,
respectively) is recognized to the extent of billable rates multiplied by
hours delivered, plus other direct costs. Revenue on fixed-price contracts
(approximately 9% and 16% of total revenues in 1998 and 1997,
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 11% and 26%
of total revenues in 1998 and 1997, 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. A 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.
40
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using straight-line methods based on useful lives as follows:
Leasehold improvements Life of lease
Production and special equipment 3 to 5 years
Furniture and equipment 3 to 5 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
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 $15,000 in
1998 and $17,000 in 1997.
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.
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. An impairment charge of
approximately $150,000 was recorded in 1997 related to this facility and
such charge is recognized in the discontinued operations section of the
accompanying Statements of Operations.
BASIC EARNINGS (LOSS) 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 options and warrants. Diluted earnings per
share are not presented because inclusion of common stock equivalents
would result in anti-dilution.
41
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
A. Cash paid during the year for-
<S> <C> <C>
Interest $ 121,000 $ 91,000
Income taxes $ 900 $ 4,000
</TABLE>
B. There were no new capital leases in 1998 or 1997.
C. Preferred stock plus accrued dividend payable in the amount of
$129,238 were converted into common stock in 1998.
D. In 1998, the Company issued 18,000 shares of common stock with a
market value of $11,880 under its Restricted Stock Bonus Plan.
2. DISCONTINUED OPERATIONS
In June 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 programs 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 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 adjustment for any change in the net assets and to
42
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
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 discontinued operations for 1997 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>
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Commercial and other $ 432,586
U.S. Government:
Amounts billed, excluding retainages 108,850
Recoverable costs and accrued profits not yet billed,
including retainages 70,597
612,033
Contract reserves and allowances for doubtful accounts (50,000)
------------
$ 562,033
</TABLE>
U.S. Government receivables arise from U.S. Government prime contracts and
subcontracts. Unbilled receivables represent revenue recognized for work
performed prior to yearend, 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 (which are not material) 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 1996. 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
The Company has a working capital financing agreement with an accounts
receivable factoring organization. Under such an agreement, the factoring
organization may purchase
43
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
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, payable at the time each invoice
is paid. Funds advanced were $164,000 as of December 27, 1998.
5. INVENTORY
Inventory costs are all related to the Company's ImSyn(TM) optoelectronic
processor.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Purchased Parts $ 206,393
Systems In-Process 24,832
Finished Goods 512,950
------------
744,175
Valuation Reserve (400,000)
$ 344,175
</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
The Company had $1,400,000 of 10% Convertible Collateralized Debentures
("Debentures"). 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 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 Debentures pay interest quarterly at 10% per year and are convertible
into 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. The remaining Debentures are due November 30, 2000
if not converted or called prior to maturity.
The Debentures are primarily collateralized with inventory and certain
fixed assets subject to existing 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
44
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
requirements, failure to make timely interest payments and other standard
representations and covenants. As of December 27, 1998, the Company was in
compliance with such terms and conditions.
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 70% ($3.2 million) of revenues
in 1998 and 48% ($1.9 million) in 1997.
8. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
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>
1999 $ 129,000
2000 $ 10,000
</TABLE>
Rental expense charged to continuing operations, including payments made
under short-term leases, amounted to $365,000 and $374,000 in 1998 and
1997, respectively.
LEASE SETTLEMENT
Effective July 1994, the Company settled a legal dispute with a former
landlord. Under the Settlement Agreement ("Agreement"), the Company remains
liable for 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 period for computation of such contingent payments ends
December 2004. The $215,000 accrual as of December 27, 1998 represents the
remaining contingent portion which is to be paid over the applicable
consideration period. Of this amount, $50,000 is being paid at $10,000 per
month. The balance is payable upon satisfaction of the contingencies as set
forth in the Agreement.
9. 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. Total
authorized contributions under the matching contribution feature of the
45
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
Plan were approximately $62,000 in 1998 and $125,000 in 1997. 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 $37,000 and $13,000 were utilized to reduce
annual expenses in 1998 and 1997, respectively.
10. INCOME TAXES
The components of the Company's net deferred tax asset account are as
follows as of December 27, 1998 and December 28, 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Acquisition NOL and tax credit carryforward $ 317,100 $ 317,100
NOL carryforward 1,225,000 1,114,400
Tax credit carryforward 190,000 139,000
Allowance for doubtful accounts 17,500 34,500
Depreciation and amortization 57,000 (156,000)
Inventory valuation reserve 140,000 140,000
Accrued employee benefit costs 40,000 35,400
Lease settlement accrual 75,000 98,500
Other -- 18,300
Valuation Reserve (2,061,600) (1,741,200)
-------------- -------------
Net Deferred Tax Asset $ -0- $ -0-
============== =============
</TABLE>
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 1999 - 2001.
The Company also has a regular NOL of $3,500,000 and tax credit
carryforwards of $190,000 that are available, subject to certain
limitations, to offset future book income and taxes payable. The NOL begins
to expire in 2008 and the tax credit carryforwards expire through 2017.
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 1998 or
1997.
46
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
11. STOCK OPTION AND STOCK BONUS PLANS; OTHER STOCK OPTIONS
The Company adopted a 1998 Stock Option and Appreciation Rights Plan ("1998
Plan") in November 1998. This plan reserves 300,000 shares for option and
SAR grants. No options or SARs were granted in 1998.
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
Granted 18,500 $ 1.00
Canceled (7,200) $ 1.00 - $ 3.00
-------------
Outstanding, 12/27/98 256,300 $ 1.00 - $ 3.00
=============
Exercisable, 12/27/98 199,650 $ 1.00 - $ 3.00
=============
</TABLE>
The weighted average price for options outstanding and exercisable was
$1.37 and $1.82, respectively. The weighted average life for options
outstanding and exercisable was 7.5 years and 3.2 years, respectively.
An earlier Option and Stock Appreciation Rights Plan expired in 1997. ISO
or NSO options granted are exercisable through January 30, 2007. 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, 12/29/96 830,611 $ 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
Canceled/Expired (25,600) $ 2.50 - $ 3.08
-------------
Outstanding, 12/27/98 651,250 $ 2.52 - $ 3.08
=============
Exercisable, 12/27/98 593,820 $ 2.52 - $ 3.08
=============
</TABLE>
47
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
The weighted average price for options outstanding and exercisable was
$2.99. The weighted average life for options outstanding and exercisable
was 2.6 years and 2.8 years, respectively. Since this Plan expired in
1997, there are no shares available for future grants. There are no SARs
outstanding.
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. There were 18,000 shares awarded to
four directors of the Company in 1998. No shares were awarded in 1997. As
of December 27, 1998, there were 4,050 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.
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>
1998 $ (117,732) $ (0.03) $ (455,530) $ (0.11)
1997 $ (439,595) $ (0.12) $ (773,026) $ (0.21)
</TABLE>
48
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
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 since 1997: no dividend yield, 70 percent volatility, risk-free
interest rates approximating 5.6 percent and expected lives of 3 years for
1998 calculation and 6 to 10 years for 1997 calculation. The weighted
average grant date fair value of the options issued in 1998 and 1997 was
approximately $0.71 and $1.68, respectively.
11. COMMON STOCK OFFERING; WARRANTS; PREFERRED STOCK
In connection with a Stock Offering ("Offering"), the Company has 25,000
warrants outstanding to obtain an additional 625,000 new shares. The
warrants expire on December 31, 1999 and are exercisable at $75.00 each in
exchange for 25 shares.
In connection with the Offering, the Company entered into a Placement
Agency Agreement with a registered broker/dealer. 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 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 a class of preferred stock, 1 million shares, par value $0.01 per
share, the series and rights of which may be designated 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. These preferred
shares were convertible into shares of Essex common stock at $0.50 per
share or market value, whichever greater. There were 1,200 shares of
preferred stock issued in 1997. The preferred stock was converted into
245,796 shares of common stock in 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.
49
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report dated March 12, 1999, 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
March 12, 1999
50
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> DEC-27-1998
<CASH> 544
<SECURITIES> 0
<RECEIVABLES> 562
<ALLOWANCES> (50)
<INVENTORY> 344
<CURRENT-ASSETS> 1,504
<PP&E> 1,299
<DEPRECIATION> (1,212)
<TOTAL-ASSETS> 1,785
<CURRENT-LIABILITIES> 844
<BONDS> 376
0
0
<COMMON> 440
<OTHER-SE> 125
<TOTAL-LIABILITY-AND-EQUITY> 1,785
<SALES> 4,532
<TOTAL-REVENUES> 4,532
<CGS> 2,804
<TOTAL-COSTS> 4,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> (118)
<INCOME-TAX> 0
<INCOME-CONTINUING> (118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
