FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 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 X NO
----- -----
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT SEPTEMBER 26, 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.
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 26, December 27,
1999 1998
------------- ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 476,516 $ 543,538
Accounts receivable, net 548,583 562,033
Inventory 322,598 344,175
Prepayments and other 43,896 54,596
------------- ------------
1,391,593 1,504,342
------------- ------------
PROPERTY AND EQUIPMENT
Production and special equipment 730,114 870,953
Furniture, equipment and other 253,623 427,618
------------- ------------
983,737 1,298,571
Accumulated depreciation and amortization (882,096) (1,211,910)
------------- ------------
101,641 86,661
------------- ------------
OTHER ASSETS
Patents, net 142,884 154,125
Other 33,874 39,417
------------- ------------
176,758 193,542
------------- ------------
TOTAL ASSETS $ 1,669,992 $ 1,784,545
- ------------ ============= ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 26, December 27,
1999 1998
------------- -------------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Advance from accounts receivable financing $ 43,839 $ 163,920
Accounts payable 108,810 159,811
Accrued wages and vacation 228,097 165,578
Accrued lease settlement 140,908 215,277
Capital leases 42,243 8,777
Other accrued expenses 170,072 130,346
------------- -------------
733,969 843,709
LONG-TERM DEBT
10% Convertible Collateralized Debentures 375,714 375,714
Capital leases, net of current portion 9,702 --
------------- -------------
Total Liabilities 1,119,385 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 (5,523,413) (5,508,898)
------------- -------------
550,607 565,122
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,669,992 $ 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 THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
<CAPTION>
1999 1998
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 3,522,602 $ 3,312,855
Costs of goods sold and services provided (1,826,832) (1,848,903)
Selling, general and administrative expenses (1,666,844) (1,637,088)
-------------- --------------
Operating Income (Loss) 28,926 (173,136)
Interest expense, net and debenture financing
amortization
(43,441) (99,441)
-------------- --------------
Loss Before Income Taxes (14,515) (272,577)
Benefit from income taxes -- --
-------------- --------------
Net Loss $ (14,515) $ (272,577)
============== ==============
Weighted Average Number of Shares Outstanding 4,397,861 4,250,519
============== ==============
Basic and Diluted Earnings (Loss) Per Share $ (0.00) $ (0.06)
============== ==============
<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 SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
<CAPTION>
1999 1998
-------------- --------------
unaudited) (unaudited)
<S> <C> <C>
Revenues $ 1,313,020 $ 1,269,691
Costs of goods sold and services provided (682,851) (701,409)
Selling, general and administrative expenses (499,146) (482,784)
-------------- --------------
Operating Income 131,023 85,498
Interest expense, net and debenture financing
amortization
(15,464) (18,963)
-------------- --------------
Income Before Income Taxes 115,559 66,535
Provision for income taxes -- --
-------------- --------------
Net Income $ 115,559 $ 66,535
============== ==============
Weighted Average Number of Shares Outstanding 4,397,861 4,397,861
============== ==============
Basic and Diluted Earnings Per Share $ 0.03 $ 0.02
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 26, 1999 AND SEPTEMBER 27, 1998
<CAPTION>
1999 1998
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (14,515) $ (272,577)
Adjustments to reconcile Net Loss to Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization 140,914 157,667
Inventory valuation reserve 20,000 15,000
Other 2,793 17,414
Change in Assets and Liabilities:
Accounts receivable 13,450 (464,298)
Inventory (2,028) (16,906)
Prepayments and other assets 10,844 30,387
Accounts Payable (51,001) (70,062)
Accrued lease settlement (74,369) (32,511)
Other Liabilities 102,245 (56,423)
Non-cash charges and working capital changes
of discontinued operations -- 129,579
------------ ------------
Net Cash Provided By (Used In) Operating
Activities
148,333 (562,730)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (17,465) (734)
Proceeds from sale of fixed assets 1,625 2,795
Proceeds from sale of discontinued operations -- 1,290,517
------------ ------------
Net Cash (Used In) Provided By Investing
Activities (15,840) 1,292,578
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments), net (120,081) 35,066
Repayment of convertible debentures -- (857,386)
Payment of capital lease obligations (79,434) (43,122)
------------ ------------
Net Cash Used In Financing Activities (199,515) (865,442)
------------ ------------
CASH AND CASH EQUIVALENTS
Net decrease (67,022) (135,594)
Balance - beginning of period 543,538 367,136
------------ ------------
Balance - end of period $ 476,516 $ 231,542
============= ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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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. In recent years, the Company's business has been
principally commercial in the satellite communications (SatCom) business area.
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 has recently experienced difficulty in sustaining revenue volume in the
satellite communications (SatCom) systems business area. While these operations
were profitable in the third quarter of 1999, the Company needs to increase its
backlog in order to maintain and sustain such profitability. The Company's
recent business growth has resulted from U.S. Government contracts to apply such
optoelectronic processors to various military requirements.
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 significant delays in the commercialization
of the
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ESSEX CORPORATION
Company's optoelectronic products may 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, although there can be no
assurances in this regard.
NOTE 2: Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share have been calculated by dividing the earnings
(loss) by the weighted average number of common shares outstanding during each
of the periods presented. As common stock equivalents were anti-dilutive or
immaterial in the periods presented, the diluted and basic per share results are
the same.
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 $44,000 as of September 26, 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 $141,000
accrual as of September 26, 1999 represents the remaining contingent portion
which is to be paid over the applicable consideration period.
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.
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
9
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ESSEX CORPORATION
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 plus accrued
dividends were 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
In 1999, the Company entered into capital leases for new equipment for $127,000.
There were no new capital leases entered into in the first nine months of 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.
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. The Company
10
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ESSEX CORPORATION
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 acquirer.
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.
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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
INDICATED 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.
Telecommunications work has been concentrated with one major customer, Motorola.
The Company is Motorola's first industrial partner on the Iridium7 cellular
satellite communications program and in the three quarters of 1999 has obtained
approximately fifty percent of its revenues from that activity. This modeling,
simulation and software development work has continued for nearly a decade, but
is presently decreasing 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
added substantially to backlog because all 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 by yearend 1999 and
subsequent 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.
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
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ESSEX CORPORATION
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 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 have
moderated substantially. Net cash used in operating activities was $1.6 million
in fiscal 1997 and declined to under $200,000 in fiscal 1998. For the first
thirty-nine week period of 1999, cashflows from operating activities turned
positive and were approximately $148,000.
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. Management is cautiously optimistic
but recognizes that we continue to face significant challenges.
REVENUES
Revenues were $1,313,000 and $1,270,000 for the third quarters of 1999 and 1998,
respectively. Revenues for the first thirty-nine week period of 1999 were
$3,523,000, an increase of 6% over the $3,313,000 in revenues for the first
thirty-nine week period of 1998. The Company's work for Motorola for the Iridium
and other cellular satellite communication systems accounted for revenues of
$1,912,000 and $2,399,000 in the first three quarters of 1999 and 1998,
respectively. This represented 54% and 72% of total revenues for the first three
quarters of 1999 and 1998, respectively. Revenues from this program decreased
between the first three quarters of 1998 and 1999 as tasks have been completed
for the initial systems and new tasks for follow-on satellite systems have been
deferred by the customer. The Company's revenues have been impacted by
well-reported difficulties and schedule delays in the satellite communications
industry, notably the Iridium(R) and Teledesic(SM) programs. The Company is
unsure of the duration of the delays surrounding this work. The Company has a
backlog on the Motorola programs of approximately $200,000, down from $398,000
at June 27, 1999.
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ESSEX CORPORATION
Increased work in the optoelectronics computer systems area more than offset the
decline in SatCom revenues during the 1999 third quarter. As of September 26,
1999, the Company had a backlog on programs related to services and applications
of optoelectronic computers of approximately $1,246,000, up from $433,000 at
June 27, 1999. The Company had no firm orders for ImSyn(TM) units as of the date
of this report.
INCOME (LOSS)
Operating income was $116,000 and $67,000 in the third quarters of 1999 and
1998, respectively. Net loss was $15,000 and $273,000 in the first thirty-nine
week periods of 1999 and 1998, respectively. Cost of goods sold and services
provided as a percentage of revenues for the first thirty-nine week period of
1999 were 51.9%, which was lower than the 55.8% in 1998. This reduction was
primarily due to the Company performing a larger amount of direct work in-house
in 1999 compared to 1998 when more work had to be subcontracted. The Company
receives a larger margin on work performed in-house. The Company has curtailed
selling, general and administrative expenses ("SG&A") where possible while
retaining essential technical capabilities and personnel in the optoelectronics
and telecommunications businesses. Overall, SG&A expenses remain high relative
to the revenue volume as the Company seeks to commercialize its optoelectronic
products and services. The high SG&A expenses contributed to the operating loss
in the first nine months of 1998 and reduced operating income in the first nine
months of 1999.
CORPORATE MATTERS
The Company's interest costs were higher during the first thirty-nine week
period of 1998 due to the larger amount of outstanding debentures during that
period. Total interest costs, net and debenture financing amortization were
$43,000 in the first thirty-nine week period of 1999 compared to $99,000 in the
same period of 1998.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No benefit from
income taxes was recognized in the first thirty-nine week period of 1999 or
1998.
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ESSEX CORPORATION
YEAR 2000 READINESS DISCLOSURE
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 Iridium7 cellular satellite communication
system. Based on its contracts and experience with Motorola on the Iridium7
project, the Company does not expect Year 2000 compliance issues to materially
impact its Iridium7 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 liguidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
-------------------------------------------------
September 26, December 27, September 27,
1999 1998 1998
------------- ------------- -------------
(unaudited) (audited) (unaudited)
<S> <C> <C> <C>
Total Assets $ 1,670 $ 1,785 $ 1,910
============= ============= =============
Working Capital $ 658 $ 661 $ 491
============= ============= =============
Current Ratio 1.90:1 1.78:1 1.44:1
============== ============= =============
Receivables Financing $ 44 $ 164 $ 199
Convertible Debentures 376 376 376
Current and Long-Term Capital Leases 52 9 22
------------ ------------- -------------
Total Debt/Financing $ 472 $ 549 $ 597
============== ============= =============
Stockholders' Equity $ 551 $ 565 $ 415
============== ============= =============
</TABLE>
The Company experienced an increase in its working capital and current ratio at
September 26, 1999 as compared to September 27, 1998. The increase was due
primarily to the declining net loss of $15,000 in the first thirty-nine weeks of
1999 from a net loss of $273,000 in the comparable period in 1998. The smaller
net loss and accelerated collections in accounts receivable were the primary
factors in the $148,000 of net cash provided by operations in the first
thirty-nine weeks of 1999. During the first thirty-nine weeks of 1998, the
Company received approximately $1.3 million in cash related to the sales of
discontinued operations. Most of these proceeds were used to reduce outstanding
indebtedness. See Note 8 to the Financial Statements included in Part I. No
proceeds were received from sales of discontinued operations in 1999.
The Company has incurred losses over the last decade, primarily due to the
development and marketing of its optoelectronics products and services. The
Company has recently experienced difficulty in sustaining revenue volume in the
satellite communications (SatCom) systems business area. While both operations
were profitable in the third quarter of 1999, the Company needs to increase its
backlog in order to maintain and sustain such profitability and positive
cashflows.
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
16
<PAGE>
ESSEX CORPORATION
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 may
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, although there can be no assurances in this regard.
The Company has approximately $323,000 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 $44,000 as of September 26, 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 $141,000
accrual as of September 26, 1999 represents the remaining contingent portion
which is to be paid over the applicable consideration period.
THE PRECEDING PARAGRAPHS DISCUSSING THE COMPANY'S FINANCIAL CONDITION CONTAIN
FORWARD-LOOKING STATEMENTS. THE FACTORS AFFECTING THE ABILITY OF THE COMPANY TO
MEET ITS FUNDING REQUIREMENTS AND MANAGE ITS CASH RESOURCES INCLUDE, AMONG OTHER
THINGS, THE AMOUNT AND TIMING OF PRODUCT SALES, INVENTORY TURNOVER, THE
MAGNITUDE OF FIXED COSTS AND THE ABILITY TO OBTAIN WORKING CAPITAL, ALL OF WHICH
INVOLVE RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
17
<PAGE>
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
Date: October 14, 1999
/s/ Joseph R. Kurry, Jr.
-------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President
Treasurer and Chief Financial Officer
(Mr. Kurry is the Principal Financial and Accounting Officer and has been duly
authorized to sign on behalf of the Registrant.)
18
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-26-1999
<PERIOD-START> Dec-28-1998
<PERIOD-END> Sep-26-1999
<CASH> 477
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<ALLOWANCES> (50)
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<PP&E> 984
<DEPRECIATION> (882)
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0
0
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<INCOME-PRETAX> (15)
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