FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999.
Commission File Number 0-10772
ESSEX CORPORATION
(Exact name of small business issuer as specified in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046-1891
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 939-7000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES NO X
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT MARCH 28, 1999
----- -----------------
Common Stock, par value $0.10 per share 4,397,861
Transitional Small Business Disclosure Format (Check One);
YES NO X
<PAGE>
ESSEX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments for a fair presentation of results for such
period. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
27, 1998.
2
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
March 28, December 27,
1999 1998
(unaudited) (audited)
--------------- ---------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 345,498 $ 543,538
Accounts receivable, net 678,360 562,033
Inventory 344,472 344,175
Prepayments and other 77,855 54,596
--------------- ---------------
1,446,185 1,504,342
--------------- ---------------
PROPERTY AND EQUIPMENT
Production and special equipment 843,554 870,953
Furniture, equipment and other 309,887 427,618
--------------- ---------------
1,153,441 1,298,571
Accumulated depreciation and amortization (1,083,623) (1,211,910)
--------------- ---------------
69,818 86,661
--------------- ---------------
OTHER ASSETS
Patents, net 150,378 154,125
Other 35,290 39,417
--------------- ---------------
185,668 193,542
--------------- ---------------
TOTAL ASSETS $ 1,701,671 $ 1,784,545
- ------------ =============== ================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
March 28, December 27,
1999 1998
(unaudited) (audited)
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Advance from accounts receivable financing $ 177,936 $ 163,920
Accounts payable 185,765 159,811
Accrued wages and vacation 229,812 165,578
Accrued lease settlement 184,908 215,277
Other accrued expenses 131,741 139,123
------------- -------------
910,162 843,709
LONG-TERM DEBT
10% Convertible Collateralized Debentures 375,714 375,714
------------- -------------
Total Liabilities 1,285,876 1,219,423
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
Common stock, $0.10 par value; 25 million shares
authorized; 4,397,861 shares issued and outstanding
for 1999 and 1998, respectively 439,786 439,786
Redeemable preferred stock, $0.01 par value; 1 million
total shares authorized; 2,500 shares of Series A
authorized, $100 liquidation value,
-0- shares outstanding -- --
Contributions in excess of par value 5,634,234 5,634,234
Retained deficit (5,658,225) (5,508,898)
------------- -------------
415,795 565,122
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,701,671 $ 1,784,545
- --------------------- ============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 28, 1999 AND MARCH 29, 1998
<CAPTION>
1999 1998
(unaudited) (unaudited)
------------- -------------
<S> <C> <C>
Revenues $ 965,762 $ 803,511
Cost of goods sold and services provided (484,810) (408,329)
Engineering and product development expenses (110,277) (147,818)
Selling, general and administrative expenses (507,709) (462,814)
------------- -------------
Operating Loss (137,034) (215,450)
Interest expense, net and debenture financing amortization (12,293) (42,548)
------------- -------------
Loss Before Income Taxes (149,327) (257,998)
Benefit from income taxes -- --
------------- -------------
Net Loss $ (149,327) $ (257,998)
============= =============
Weighted Average Number of Shares
Outstanding 4,397,861 4,134,065
============= =============
Basic Earnings (Loss) Per Share $ (0.03) $ (0.06)
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 28, 1999 AND MARCH 29, 1998
<CAPTION>
1999 1998
(unaudited) (unaudited)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (149,327) $ (257,998)
Adjustments to reconcile Net Loss to Net Cash
Used In Operating Activities:
Depreciation and amortization 28,693 60,787
Loss on sale/retirement of fixed assets -- 1,306
Change in Assets and Liabilities:
Accounts receivable (116,327) (668)
Inventory (297) (13,780)
Prepayments and other assets (23,259) (53,195)
Accounts payable 25,954 (88,714)
Other liabilities 34,667 (2,496)
Non-cash charges and working capital
changes of discontinued operations -- 102,060
------------- -------------
Net Cash Used In Operating Activities (199,896) (252,698)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,103) --
Proceeds from sale of fixed assets -- 2,615
Proceeds from sale of discontinued operations -- 191,054
------------- -------------
Net Cash (Used In) Provided By Investing Activities (8,103) 193,669
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net 14,016 71,676
Payment of capital lease obligations (4,057) (16,062)
------------- -------------
Net Cash Provided By Financing Activities 9,959 55,614
------------- -------------
CASH AND CASH EQUIVALENTS
Net decrease (198,040) (3,415)
Balance - beginning of period 543,538 367,136
------------- -------------
Balance - end of period $ 345,498 $ 363,721
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
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ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: General
FISCAL YEAR AND PRESENTATION
Essex Corporation (the "Company") is on a 52-week fiscal year ending the last
Sunday in December. Certain amounts for 1998 have been reclassified to conform
to the 1999 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
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 $70,000 - $80,000 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 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
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ESSEX CORPORATION
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.
NOTE 2: Basic Loss Per Share
Basic loss per share has been calculated by dividing the loss by the weighted
average number of common shares outstanding during each of the periods
presented. Common stock equivalents were anti-dilutive in both periods.
NOTE 3: Accounts Receivable Financing
The Company has a working capital financing agreement 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 $178,000 as of March 28, 1999 and $164,000 as of
December 27, 1998.
NOTE 4: Commitments and Contingencies
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 $185,000
accrual as of March 28, 1999 represents the remaining contingent portion which
is to be paid over the applicable consideration period. Of this amount, $33,000
was paid in April and $10,000 in May 1999. The remaining balance is payable upon
satisfaction of the contingencies as set forth in the Agreement.
NOTE 5: Warrants Outstanding; Preferred Stock and Convertible Debentures
In connection with a 1994 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.
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ESSEX CORPORATION
In connection with the outstanding 10% Convertible Collateralized Debentures Due
2000, the Company has reserved approximately 107,000 shares of common stock for
conversion at $3.50 per share. 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.
NOTE 6: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. No tax benefit will be recognized until taxable income is
realized.
NOTE 7: Statements of Cash Flows - Supplemental Disclosure
There were no new capital leases entered into in the first quarter of 1999 or
1998.
NOTE 8: 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.
9
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ESSEX CORPORATION
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 certain indemnifications and warranties by the
Company which could affect the ultimate amount of proceeds received.
The proceeds from the sale of discontinued operations and non-cash charges and
changes in working capital are shown in the statements of cash flows. There were
no revenues from discontinued operations in 1999 or 1998.
10
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ESSEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER SECTIONS
CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS,
ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS", "ANTICIPATES",
"PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT
INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT
PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
FORECAST IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS.
STATUS
The Company's principal focus is in the telecommunications and optoelectronics
business areas. Work backlog has been funded incrementally in both. Since the
end of the Cold War, telecommunications work has been concentrated with one
major customer, Motorola. The Company is Motorola's first industrial partner on
the Iridium(R) cellular satellite communications program and gains approximately
seventy percent of its revenues from that activity. This modeling, simulation
and software development work has continued for nearly a decade and is presently
increasing in volume.
The Company has invested substantial sums in developing its line of patented
optoelectronic processors. These exceedingly high-speed computational engines
combine the power of laser optics and semiconductor chips. They reconstruct
("develop") images from radar signals, medical magnetic resonance (MRI)
equipment, ultrasound equipment and the Company's laser holographic Virtual Lens
Microscope(TM). Although the Company has sold a few pre-production units to the
U.S. Defense community, it has not yet succeeded in commercializing these unique
products.
Recently, the Company began work utilizing its optoelectronic technology on a
subcontract with a prime U.S. Government contractor. While this business has not
been added to backlog because the terms and conditions have not yet been
finalized, the Company is collecting these receivables and believes that it has
the potential to add significantly to long-term backlog in the second quarter of
1999 and following periods. The Company has also recently begun work on an
initially small subcontract with another prime U.S. Government contractor in
connection with its shipboard missile defense radar. This program builds upon
the Company's optoelectronic radar data processor breadboard previously
constructed for the U.S. Government. Should this program proceed to fruition, it
has potential to add significantly to long-term backlog.
The ImSyn(TM) Processors loaned by the Company to the University of Maryland
Medical School and to the Hospital of the University of Pennsylvania are being
used to develop innovative magnetic resonance imaging (MRI) procedures. Under
terms of a Maryland Industrial Partnerships grant, the Company is collaborating
in a program to capitalize on the high speed of its equipment to enable
functional and fluoroscopic MRI. In the University of Pennsylvania,
11
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ESSEX CORPORATION
different objectives are being pursued, but the program is based upon
demonstrated computing speed. It should be noted that these programs are not
expected to develop significant revenues in the near term.
Military and commercial radar imaging applications are among the important
initiatives of the Company. Small prime contracts and substantial Company
expenditures have financed progress in this field that has resulted in
performance commendations by customers. The U.S. Air Force nomination of the
Company for excellence in producing an optoelectronic processor survived a
searching competition leading to the award of a prestigious prize in 1997. The
U.S. Small Business Administration recognized that important achievement with
the presentation of a Tibbetts Award to the Company in a White House ceremony.
Building upon its military and intelligence experience as well as its
considerable investment, the Company now has several active initiatives that
could lead to substantial commercial business programs. One of these is based
upon the extraordinary capability of the ImSyn(TM) Processor to enable the
Company's proprietary Holographic Ground Penetrating Imaging Radar. The Company
is seeking to organize a joint venture to capitalize upon this capability. The
Company envisions powerful systems to produce 3-D images of buried
infrastructure such as utility lines, highway subgrades and hazardous materials
buried under Brownfields, former industrial sites that developers wish to bring
back to economic utility.
The financial performance of the Company has been adversely impacted during the
past several years as a result of its continued expenditures to maintain its
skilled team and develop its optoelectronic products. The Company has had
difficulty bringing these products to market, in part, because it has been
financially unable to timely perform both the required development work and the
extensive sales and marketing effort required. Those large outflows of cash are
moderating substantially. Net cash used in operating activities was $1.6 million
in 1997, declining to under $200,000 in 1998. In the first quarter of 1999, net
cash used was approximately $200,000, primarily from costs incurred in retaining
essential staff pending award of anticipated new business.
The Company believes that its active pursuit of new business will be rewarded.
Some new business has been booked and some is in the process of finalizing
contract terms and conditions. It is important to note however, that the Company
may not achieve the anticipated new business due to technical problems or
economic or other developments beyond the Company's control. In addition,
negotiation of joint ventures or other strategic relationships involve complex
legal and business issues, which may put severe strain on the Company's
financial and operational resources. Moreover, the targeted customers and joint
venture participants are all significantly larger and have more financial and
other resources than the Company. This imbalance of resources may cause the
terms of any sale or joint venture involving ImSyn(TM) to be less favorable to
the Company than they otherwise would be. In sum, we are cautiously optimistic
but recognize that we continue to face significant challenges.
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ESSEX CORPORATION
REVENUES
Revenues were $966,000 and $804,000 for the first quarters of 1999 and 1998,
respectively, an increase of 20%. The Company's work for Motorola on its Iridium
cellular satellite communication system accounted for revenues of $699,000 and
$586,000 in the first quarters of 1999 and 1998, respectively. This represented
72% and 73% of total revenues for the first quarters of 1999 and 1998,
respectively. There was an increase in revenues from this program between the
first quarters of 1998 and 1999 as increased tasks were received for the initial
and follow-on satellite systems. The Company continues to perform work on the
current and successor satellite systems and has a backlog on the Motorola
programs of approximately $996,000. As of March 28, 1999, the Company had a
backlog of approximately $294,000 on programs related to optoelectronic devices
and services. The Company did not have any firm orders for ImSyn(TM) units as of
the date of this report.
INCOME (LOSS)
There were operating losses of $137,000 and $215,000 in the first quarters of
1999 and 1998, respectively. Cost of goods sold and services provided for the
first quarter of 1999 was 50.2%, which was comparable to the 50.8% in 1998. The
Company has reduced engineering and development expenses between the 1998 and
1999 periods and has curtailed expenditures where possible while retaining
essential technical capabilities and personnel in the optoelectronics and
telecommunications businesses. Selling, general and administrative expenses
("SG&A") were $508,000 in the first quarter of 1999 compared to $463,000 in the
first quarter of 1998 on higher overall revenue volume. The higher SG&A expenses
in 1999 contributed to the operating loss. Overall, SG&A expenses remain high
relative to the revenue volume as the Company seeks to commercialize its
optoelectronic products and services.
CORPORATE MATTERS
In 1998, the Company's interest costs were higher due to the financing
associated with the larger amount of outstanding debentures. Total interest
costs, net and debenture financing amortization were $12,000 in the first
quarter of 1999 compared to $43,000 in the same period of 1998.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No benefit from
income taxes was recognized in the first quarter of 1999 or 1998.
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ESSEX CORPORATION
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.
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ESSEX CORPORATION
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
-----------------------------------------
March 28, December 27, March 29,
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
Total Assets $ 1,702 $ 1,785 $ 2,988
========== ========== ==========
Working Capital $ 536 $ 661 $ 254
========== ========== ==========
Current Ratio 1.59:1 1.78:1 1.19:1
Receivables Financing/
Bank Line of Credit $ 178 $ 164 $ 236
Convertible Debentures 376 376 1,233
Current and Long-Term
Capital Leases 1 9 49
---------- ---------- ----------
Total Debt/Financing $ 555 $ 549 $ 1,518
========== ========== ==========
Stockholders' Equity $ 416 $ 565 $ 408
========== ========== ==========
</TABLE>
The Company experienced a decrease in its working capital and ratio due
primarily to the net loss of $149,000 in the first quarter of 1999. The net loss
was the primary factor in the $200,000 of net cash used in operations in the
first quarter of 1999. The 1999 first quarter net loss was funded from cash
balances provided by accounts receivable financing.
During mid 1997, certain insiders and directors invested $120,000 in redeemable
preferred stock. The preferred stock was converted into common stock in the
second quarter of 1998.
The Company has incurred 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 $70,000 - $80,000 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 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
15
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ESSEX CORPORATION
future operating results and future financial position; however, the Company
believes that in such event it could successfully manage and reduce cash
requirements for operations by curtailing expenditures in optoelectronics
operations (including general and administrative expenses), although there can
be no assurances in this regard.
The Company has approximately $345,000 of inventory in current assets. This
inventory is comprised of ImSyn(TM) optoelectronic processors and consists of
finished goods and work-in-process. Sales of such units will be necessary in
order to maintain working capital liquidity. There are no firm orders for sales
of such units as of the date of this report.
The Company has a working capital financing agreement 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 $178,000 as of March 28, 1999.
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 $185,000
accrual as of March 28, 1999 represents the remaining contingent portion which
is to be paid over the applicable consideration period. Of this amount, $33,000
was paid in April 1999 and $10,000 in May 1999. The remaining balance is payable
upon satisfaction of the contingencies as set forth in the Agreement.
The preceding paragraphs discussing the Company's financial condition contain
forward-looking statements. The factors affecting the ability of the Company to
meet its funding requirements and manage its cash resources include, among other
things, the amount and timing of product sales, inventory turnover, the
magnitude of fixed costs and the ability to obtain working capital, all of which
involve risks and uncertainties that are difficult to predict.
16
<PAGE>
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
/s/ Joseph R. Kurry, Jr.
Date: May 12, 1999 -----------------------------
Joseph R. Kurry, Jr.
Senior Vice President,
Treasurer and Chief Financial Officer
(Mr. Kurry is the Principal Financial and Accounting Officer and has been duly
authorized to sign on behalf of the Registrant.)
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-26-1999
<PERIOD-START> Dec-28-1998
<PERIOD-END> Mar-28-1999
<CASH> 345
<SECURITIES> 0
<RECEIVABLES> 678
<ALLOWANCES> (50)
<INVENTORY> 344
<CURRENT-ASSETS> 1,446
<PP&E> 1,153
<DEPRECIATION> (1,084)
<TOTAL-ASSETS> 1,702
<CURRENT-LIABILITIES> 910
<BONDS> 376
0
0
<COMMON> 440
<OTHER-SE> (24)
<TOTAL-LIABILITY-AND-EQUITY> 1,702
<SALES> 966
<TOTAL-REVENUES> 966
<CGS> (485)
<TOTAL-COSTS> 1,103
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12)
<INCOME-PRETAX> (149)
<INCOME-TAX> 0
<INCOME-CONTINUING> (149)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
