FORM 10-QSB/A No. 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998.
Commission File Number 0-10772
ESSEX CORPORATION
(Exact name of small business issuer as specified in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046-1891
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 939-7000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT SEPTEMBER 27, 1998
----- ---------------------
Common Stock, par value $0.10 per share 4,397,861
Transitional Small Business Disclosure Format (Check One);
YES X NO
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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. CERTAIN RISK
FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS FORM 10-QSB AND IN THE
1997 FORM 10-KSB/A NO. 1 INCLUDE BUT ARE NOT LIMITED TO: CONCENTRATION OF
CURRENT SALES WITH ONE COMPANY, LACK OF CONTRACT BACKLOG, DELAYS IN
COMMERCIALIZATION AND SALES OF IMSYN(TM) OPTICAL PROCESSOR UNITS AND ASSOCIATED
INVENTORY REALIZABILITY ISSUES, LACK OF WORKING CAPITAL, IMPORTANCE OF PATENT
PROTECTION AND ENFORCEMENT, AND FUTURE CASH PAYMENT OBLIGATIONS TO A FORMER
LANDLORD.
The Company was incorporated in Virginia in 1969 to provide professional
engineering and scientific services to support U.S. Government defense, space
and energy programs ("legacy support business"). Since 1988, Company management
has recognized that its (former) heavy dependence upon such program areas had
become vulnerable to declining government budgets increasing competition from
entities far larger than itself.
In 1989, the Company determined that growth, positional advantage and relative
ease of market discrimination were forwarded by acquiring a small,
high-technology venture in Columbia, MD with capabilities in systems
engineering, signal processing and the design of high-speed, relatively low-cost
optoelectronic processors. The Company had been heavily committed to performing
systems engineering and signal processing activities for reconnaissance systems
under contract to the U.S. Government and its prime contractors. This capability
led in 1990 to initiation of the Company's continuing eight-year association
with Motorola as its first Industrial Partner on the Iridium(R) global
communications satellite system.
The Company's optoelectronics team has designed, developed and sold special
purpose optoelectronic processors for fifteen years. This experience was gained
in military research and development. In 1989, the Company embarked on a program
to develop proprietary optoelectronic processors with significant performance
advantages over conventional computers and specialized image processing devices
in such applications as radar imaging, magnetic resonance imaging (MRI),
microscopy and ultrawideband signal processing. A number of patents have issued
to the Company and others are in prosecution. The Company is now applying its
internal resources to designing "dual-use" commercial and military products,
such as its unique ImSyn(TM) Processor.
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ESSEX CORPORATION
In mid-1997, the Company's Board of Directors voted to restructure by
discontinuing the legacy support business and focusing upon optoelectronic
equipment and services and systems and software engineering. The combination of
optoelectronics and systems engineering is a powerful discriminator in both
military and commercial markets. Late in 1997, the sale of the legacy support
business operations was completed. The proceeds are being used in the continuing
operations. Continuing operations reflect the results of optoelectronic products
and services, as well as telecommunications engineering services to commercial
and military customers.
CONTINUING OPERATIONS
Revenues were $1,270,000 and $934,000 for the third quarters of 1998 and 1997,
respectively. Revenues were $3,313,000 and $2,999,000 for the first thirty-nine
week periods of 1998 and 1997, respectively. The Company's work for Motorola on
its Iridium cellular satellite communication system accounted for revenues of
$2,399,000 and $1,358,000 in the first three quarters of 1998 and 1997,
respectively. This represented 72% and 45% of total revenues for the first three
quarters of 1998 and 1997, respectively. There was an increase in revenues from
this program between the first three quarters of 1997 and 1998 as more tasks for
Company personnel were received for the initial and follow-on satellite systems.
There was also $257,000 of work performed by an outside subcontractor in the
1998 third quarter. The Company continues to perform work on the current and
successor satellite systems and has a backlog on the Motorola programs of
approximately $906,000. As of September 27, 1998, the Company had a funded
backlog of approximately $255,000 and unfunded backlog of $537,000 on programs
related to optoelectronic devices and services.
The increase in revenues in 1998 on the Motorola contract was offset by the lack
of ImSyn(TM) unit sales and lower revenues from contracts for other
optoelectronic products and services. There was a sale of one Imsyn(TM) unit for
$250,000 during the first quarter of 1997 for U.S. Government end use under a
development and applications contract. The Company does not have any firm orders
for ImSyn(TM) units as of the date of this report.
There was operating income from continuing operations of $67,000 in the third
quarter of 1998 compared to an operating loss of $196,000 in the third quarter
1997. There were losses of $273,000 and $1,081,000 in the first thirty-nine week
periods of 1998 and 1997, respectively. Cost of goods sold and services provided
for the first thirty-nine weeks of 1998 was 53.4%, higher than the 49.2% in
1997. The 1998 first thirty-nine week period includes a higher amount of outside
subcontractor costs on which the Company receives a smaller profit than on the
work performed by Company personnel. Selling, general and administrative
expenses ("SG&A") were $1.4 million in the first thirty-nine weeks of 1998
compared to $1.9 million in the first thirty-nine weeks of 1997. The 1997 higher
SG&A expenses contributed to the larger loss in 1997. Overall, SG&A expenses
remain high relative to the revenue volume as the Company seeks to commercialize
its optoelectronic products and services. The Company has reduced SG&A expenses
between the 1997 and 1998 periods and has curtailed expenditures where possible
while retaining essential technical capabilities and personnel in the
optoelectronics and telecommunications businesses.
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ESSEX CORPORATION
DISCONTINUED OPERATIONS
There was income from discontinued operations of $267,000 and $166,000 in the
third quarter and first thirty-nine week periods of 1997, respectively. Results
from discontinued operations are only applicable to 1997.
Discontinued operations are comprised of the results of the Systems
Effectiveness Division and the operations of the Federal Systems Division
(except for the telecommunications and government-related optoelectronics
businesses). During 1997, the SED operations had first thirty-nine week sales of
approximately $4.2 million and produced income of approximately $385,000. The
SED operations were sold as of October 1, 1997.
The FSD discontinued operation's revenues were $1.9 million in the first
thirty-nine weeks of 1997 and there was a loss from operations of approximately
$412,000. During the first thirty-nine weeks of 1997, FSD was working on
completing a program to produce aviation maintenance trainers. Additional
significant completion problems were encountered in early 1997 which produced
additional losses. FSD was unable to secure additional new business on a timely
basis resulting in the decision to close the Huntsville, Alabama production
facility in September 1997 concurrent with the substantial completion of the
Trainers Program. The sale of certain other FSD technical service operations
located elsewhere was completed in early August 1997 and the net gain was
reported in the third quarter of 1997.
CORPORATE MATTERS
In 1997, the Company's interest costs were higher due to the financing
associated with its larger volume of operations. Total interest expense and
debenture financing amortization costs were $192,000 in the first thirty-nine
week period of 1997 compared to $99,000 in the same period of 1998.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No benefit from
income taxes was recognized in the first thirty-nine weeks of 1998 or 1997.
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ESSEX CORPORATION
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
--------------------------------------------------------
September 27, December 28, September 28,
1998 1997 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Total Assets $ 1,910 $ 3,191 $ 3,967
================ =============== ==============
Working Capital (Deficit) $ 491 $ 466 $ (470)
================ =============== ==============
Current Ratio 1.44:1 1.36:1 0.82:1
Current and Long-Term
Capital Leases $ 22 $ 65 $ 98
Bank Line of Credit/Accounts
Receivable Financing 199 164 750
Convertible Debentures 376 1,233 1,400
Convertible Notes Payable -- -- 245
Redeemable Preferred Stock -- -- 120
---------------- --------------- --------------
Total Debt/Financing $ 597 $ 1,462 $ 2,613
================ =============== ==============
Stockholders' Equity (Deficit) $ 415 $ 666 $ (183)
================ =============== ==============
</TABLE>
The Company experienced a slight increase in its working capital and ratio in
the first thirty-nine weeks of 1998. The net loss and the increase in accounts
receivable were the primary items of net cash used in operations in the first
thirty-nine weeks of 1998. The 1998 net cash used in operations was partially
funded by the collection of remaining receivables of discontinued operations of
$130,000. The proceeds from the collection of the $411,000 note receivable from
the sale of the discontinued operations was also used to finance operations.
The Company sold its Huntsville, Alabama facility in the third quarter of 1998.
The facility served as a portion of the collateral on the convertible
debentures. The net proceeds of $875,000 from the sale of the Huntsville
facility were used to partially pay down the debentures.
During mid 1997, certain insiders and directors invested $120,000 in redeemable
preferred stock. The preferred stock was converted into common stock in the
second quarter of 1998.
The Company has incurred significant losses over recent years, primarily due to
the development and marketing of its optoelectronics products and services. The
optoelectronics products and services business is currently experiencing net
cash expenditures (including its respective general and administrative expenses)
over receipts in the range of approximately $25,000-$50,000 per month. The
Company has taken steps to increase revenue volume and reduce expenditures.
While such actions produced a modest improvement in results in the 1998 third
quarter, if a
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ESSEX CORPORATION
significant decline in such results occurred, then the Company would not be able
to sustain its business without additional working capital or further cost
reductions.
The Company continues to seek additional funds from financing sources for
operations and to achieve desired product inventory levels and initial market
penetration. The Company is also seeking to establish joint ventures or
strategic partnerships with major industrial concerns to facilitate these goals.
Significant further delays in the commercialization of the Company's
optoelectronic products, failure to commercialize such products or failure to
raise substantial additional working capital would have a material adverse
effect on the Company's future operating results and future financial position.
The Company has approximately $400,000 of inventory in current assets. This
inventory is comprised of ImSyn(TM) optoelectronic processors and consists of
finished goods and work-in-process. Sales of such units will be necessary in
order to maintain working capital liquidity. There are no firm orders for sales
of such units as of the date of this report.
The receivable financing arrangement for a line of credit up to $500,000 expired
May 31, 1998. The Company negotiated a replacement working capital financing
arrangement effective August 1998 with an accounts receivable factoring
organization. Under such an agreement, the factoring organization may purchase
certain of the Company's accounts receivable subject to full recourse against
the Company in the case of nonpayment by the customers. The Company generally
receives 85%-90% of the invoice amount at the time of purchase and the balance
when the invoice is paid. The Company is charged an interest fee and other
processing charges on the funded amount, payable at the time each invoice is
paid. As of September 27, 1998, the Company received advances of $199,000 from
the accounts receivable factoring organization.
Under the settlement agreement reached with the former landlord, certain
payments are triggered only by other future cash inflows. The remaining $249,000
portion of the landlord settlement obligation (which has been accrued and
expensed in prior years), is not payable until future earnings (as defined),
operating asset sales or equity capital funding occur. When such future events
transpire, only a portion of the cash flows or proceeds generated are payable.
The sales of the discontinued operations of the Company requires that
approximately $80,000 of the remaining $249,000 be paid ratably over the next 8
months.
The preceding paragraphs discussing the Company's financial condition contain
forward-looking statements. The factors affecting the ability of the Company to
meet its funding requirements and manage its cash resources include, among other
things, the amount and timing of product sales, inventory turnover, the
magnitude of fixed costs and the ability to obtain working capital, all of which
involve risks and uncertainties that are difficult to predict.
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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
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 23, 1998 and a Form 8-K/A No.
1 on July 6, 1998 which reported a change in certified public
accountants.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
/s/ Joseph R., Kurry, Jr.
Date: January 15, 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.)
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