FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 26, 1999 Commission File No. 0-10772
ESSEX CORPORATION
(Name of small business issuer in its charter)
Virginia 54-0846569
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
9150 Guilford Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (301) 939-7000
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of Each Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
---
State issuer's revenues for its most recent fiscal year. $4,813,228
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $4,340,498 as of March 13, 2000
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 17, 2000
----- -----------------------------
Common Stock, par value $0.10 per share 4,397,861
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
A list of the Exhibits and Financial Statement Schedules in this Report on Form
10-KSB appears on page 30.
Transitional Small Business Disclosure Format YES X NO
--- ---
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Table of Contents
FORM 10-KSB
Essex Corporation
PART I
Item No. Page
-- INTRODUCTORY STATEMENT............................................. 3
1. DESCRIPTION OF BUSINESS............................................ 3
2. DESCRIPTION OF PROPERTIES...........................................11
3. LEGAL PROCEEDINGS...................................................12
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................12
PART II
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............13
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........13
7. FINANCIAL STATEMENTS................................................18
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................18
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...................19
10. EXECUTIVE COMPENSATION..............................................23
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......28
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................29
13. EXHIBITS AND REPORTS ON FORM 8-K....................................30
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PART I
INTRODUCTORY STATEMENT
The information contained in this report pertains to the registrant, Essex
Corporation (the "Company").
1. DESCRIPTION OF BUSINESS
The Company was incorporated in Virginia in 1969 to provide professional
engineering and scientific services to support U.S. Government defense, space
and energy programs ("legacy support business"). In 1989, the Company acquired a
small, high-technology venture in Columbia, MD which added capabilities in
signal processing, systems engineering and the design of high-speed, relatively
low-cost optoelectronic processors.
The Company's acquired signal processing engineering team had been heavily
committed to performing systems engineering and signal processing activities for
reconnaissance systems under contract to the U.S. Government and its prime
contractors. High skills in mathematics and engineering enabled the team to
produce creative solutions to daunting problems. This capability led in 1990 to
initiation of the Company's continuing association with Motorola as its first
Industrial Partner on the Iridium(R) global communications satellite system.
The Company's evolving optoelectronics team has designed, developed and
sold special purpose optoelectronic processors for over fifteen years. This
experience was gained in military research and development. The Company
performs, and seeks to expand, such work by designing "dual-use" commercial
products, such as its unique ImSyn(TM) Processor, that also fulfill military
needs.
In 1992, the Company embarked on a vigorous internal program to develop
proprietary optoelectronic processors with significant performance advantages
over conventional computers and specialized image processing devices in such
applications as radar imaging, magnetic resonance imaging (MRI), microscopy and
ultrawideband signal processing. Several patents have been issued to the Company
and others are in prosecution. By 1997, the Company had to scale back its
development programs due to a lack of funds and limited sales of its ImSyn(TM)
processor units. The Company continues to make a limited number of such
optoelectronic processors available for sale to commercial and government
markets while seeking strategic partnerships or outside financing to further
develop these business applications into commercially viable operations.
In mid-1997, the Company's Board of Directors voted to discontinue the
legacy support business and to focus upon satellite communications systems and
software engineering and optoelectronic products and services. During late 1997,
the sale of the legacy support business operations was completed and the
proceeds were used in the Company's continuing operations.
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SATELLITE COMMUNICATIONS SYSTEMS AND SOFTWARE ENGINEERING
The Company provides systems engineering services in signal processing and
telecommunications to industrial, commercial and government customers. The
Company's engineering teams perform systems engineering, simulation, modeling
and software development for the Motorola satellite communications systems.
Experience includes low earth orbit, medium earth orbit, high earth orbit and
geosynchronous earth orbit constellations such as Iridium(R), Teledesic(SM),
MILSTAR, TDRSS, Intelsat and other systems.
In 1990, the Company became Motorola's first Industrial Partner on the
Iridium(TM) satellite constellation that provides global wireless communications
to handheld telephones and pagers. The Company's employees have been named on
more than twenty Motorola patent disclosures. This activity included performance
of systems analysis and development of computer software to model performance
and plan the operation of the satellite constellation.
The Company has developed software for mission planning, payload data
processing, geolocation, payload test and evaluation, on-board channel
management and data routing. System modeling and simulation supports the entire
system life-cycle, including system definition, performance analysis, space
segment definition and ground segment design. The Company has developed custom
models for the design and analysis of mobile voice and wideband data systems,
and has developed algorithms for communications system operations.
The Company's satellite system models consist of several integrated
software modules hosted on a Silicon Graphics computer network. The satellite
orbital propagation and geometry software module models the coverage and
performance aspects of multiple vehicle constellations, including single or
statistical events, motion and pointing effects and comparisons of
constellations. It deals with passive geolocation, time difference of arrival,
frequency difference of arrival, time of arrival, frequency of arrival, angle of
arrival and numerous error sources, and provides automated link budget
computation. The geographical software module plots parameter versus parameter
outputs from other modules. The mapping module plots data and contours from
other computational modules on map backgrounds. It provides selectable
projections, user-specified levels of detail and various antenna patterns.
The Company has also performed tasks for Motorola to perform engineering
design services for the Teledesic(sm) constellation, an "internet in the sky"
design. From time to time, the Company has provided software for Motorola
systems. In 1998, the Company completed a competitively awarded effort to supply
software for a communications analysis console to be used in the Iridium(R)
constellation.
The Company's work for Motorola on its Iridium cellular satellite
communications system accounted for revenues of $2.2 million (45%) in 1999 and
$3.2 million (70%) in 1998. There was a decrease in revenues from this program
between 1998 and 1999 as the initial satellite system was completed. This work
substantially ended in December 1999. The Company is continuing its efforts to
rebuild satellite communications engineering backlog, which was $64,000 at year
end 1999.
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OPTOELECTRONIC PRODUCTS AND SERVICES
BACKGROUND - The Company solves problems by creating algorithms (computer
programs) that can be performed with great efficiency by optoelectronic
processors. The Company designs optoelectronic architectures optimized for
executing such algorithms. They are constructed by use of proven optical and
electronic components.
A 1997 U.S. Small Business Administration (SBA) Tibbetts Award for
Technical Excellence recognized the Company as "one of the best of the best" in
the context of the powerful, developing family of optoelectronic products. The
Company's patented solutions combine laser optics and digital electronics to
compute in faster, better ways, enabling entirely new levels of performance to
be achieved.
The Company has invested heavily in optoelectronic technology and products
since 1989. The Company has also benefitted from substantial product development
funding by agencies of the U.S. Government. The leaders and key members of the
Company's optoelectronic team invented and fielded successful products for use
by the Intelligence Community before joining the Company. The Company's
innovative and productive optoelectronic team is led by Chief Technical Officer,
Terry Turpin. Mr. Turpin spent the first two decades of his career in the
National Security Agency (NSA). His assignments included developing cryptologic
and computing engines of the highest capability. Most of his career in NSA was
spent in leading the optoelectronic team in designing and fielding engines to
perform signal processing tasks well beyond the capabilities of conventional
computing technology.
The fields of Electronics and Optics are complementary. The Company's
special-purpose optoelectronic processors make use of the best of proven
technology in both fields. Algorithms developed for carefully selected problems
are designed to run optimally in state-of-the-art optical architectures. The
Company's design strategy assures processors that are optimized for ease of use,
speed and low power consumption. Practical solutions of many commercially
valuable processing problems demand economical computing power provided only by
this technology, either in stand-alone products or as fully compatible elements
of digital systems.
Optoelectronic processors are compact, integrated systems of optical and
electronic devices that perform specific, commercially-valuable mathematical
calculations at very high speeds. This technology has many advantages,
including: (1) use of simple, rugged, hardware incorporating proven, mature,
reliable components; (2) high-performance implementation of demanding signal and
image processing computations; and (3) providing such desirable characteristics
in economical, compact, low power-consuming packages. New products are
considered for markets to which they bring a 10- to 100-fold performance
advantage over conventional technologies in either throughput or throughput per
watt of power used. Although quite flexible in application, processors require
relatively little costly software and software maintenance. In the opinion of
the Company, this technology provides strong, well-discriminated proprietary
capabilities to supply state-of-the-art products in such important fields as
imaging, holography, pattern recognition, communications and signal processing.
The optoelectronics industry is huge, with revenues exceeding $100 billion
per year. A substantial number of institutions and companies are active in
optoelectronic signal processing. Among them are Lockheed Martin, Boeing,
Litton, TRW, Harris, Raytheon and several universities, all far larger than the
Company. The Company focuses upon a corner of the business,
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computing engines for processing signals. The Company has built a limited number
of powerful, high-speed signal and image processors for nearly two decades.
IMSYN(TM) PROCESSOR - The Company has pursued application of its optoelectronic
technologies that utilize the patented ImSyn(TM) processor. The name "ImSyn,"
which stands for "image synthesis," was selected because the processor is useful
in many image processing applications, although its utility extends beyond such
applications. The processor implements the well-known DISCRETE Fourier transform
(DFT) that is basic to many image and signal processing applications.
Furthermore, its performance often far exceeds that of conventional technology
which must rely upon the FAST Fourier transform (FFT) algorithm (computer
program) to maximize performance. This technology is making holography into a
digital science, a capability that enables the ImSyn(TM) processor to
reconstruct images from nonlinear data sets at supercomputing speeds. Such data
sets occur in key applications such as high-speed MRI, forward-squinting
synthetic aperture radar (SAR) systems and in SAR radars for imaging objects
through foliage or underground.
Image processing can be grouped into two categories: (1) image
reconstruction (or synthesis), and (2) post-processing image enhancement (or
analysis). The first refers to the computation of an image from data measured by
a particular sensor such as a radar or MRI (magnetic resonance imaging) device.
The second involves improving the image, identifying important features and
otherwise exploiting the picture.
For certain image reconstruction applications, particularly non-linear SAR,
fast MRI and 3D imaging applications, conventional technology is often too slow,
expensive, bulky and energy inefficient. This problem limits the utility of
all-electronic systems in such applications. The high throughput, flexibility,
compact size and low power requirements of the ImSyn(TM) processor allow its use
in fast MRI and non-linear SAR. The SAR market niches include aerospace
platforms and transportable ground systems where size, weight, power and
processing complexity are most critical, as well as in accelerating
workstations. In addition, ImSyn(TM) technology enables new applications in
digital holography, as in the patented Virtual Lens Microscope(TM) (VLM),
invented by the Company, ultrasound and sonar, that are not otherwise practical.
A prototype ImSyn(TM) Processor was completed in mid-1996. Three initial
units were assembled and two were delivered under government R&D contracts in
January 1997. Several additional units based on this initial design were
completed by the end of 1997. Key optical components are lasers, lenses, CCD
cameras and Bragg cells. Of these items, the Bragg cells are designed by the
Company in accordance with commercial practice. They are, therefore, special
order items for which there are 2-3 suppliers (one national supplier) which the
Company has used for the initial build of the specified cells. Digital circuit
boards include both off-the-shelf and company-designed units fabricated by
several different local circuit board manufacturers.
Progress in the ImSyn(TM) program has been delayed, principally by
deficiencies in commercial components discovered long after they had been
selected and incorporated into the initial processors. The known component
deficiencies slow its operations in some applications and reduce the reliability
of the initial units. The Company expects to deal with these problems to the
extent it is able to develop financial resources to do so and believes, in
technical terms, that it is fully capable of resolving these electronic circuit
problems.
IMSYN(TM) PROCESSOR COMMERCIALIZATION - The Company has identified several
potential markets and market niches for image processing applications. Markets
for these patented products include
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industrial and military imaging, medical, microscopy and signal processing. Key
product features are digital compatibility, affordability, high-speed,
simplified software, low power consumption and compact packaging.
Ground-penetrating radar systems can be used to inspect roads, bridge
decks, tunnels and runways. They can help prevent excavation cuts of PVC gas
pipe, fiberoptic cable and other utilities. Such radar tools are also efficient
sensors for detecting land mines, explosive ordnance and hazardous materials.
Until now, processing ground-penetrating radar signals has been expensive
and time-consuming because it is a highly computationally intensive task. An
engineer at a national laboratory observed that the use of this modality to
inspect roads and bridge decks is feasible except that a compact supercomputer
capability is needed. The ImSyn(TM) Processor is a supercomputer in this
context, although far less costly, and its low weight, size and power
consumption enable it to be mounted in a stepvan. The ImSyn(TM) can also provide
high-speed pattern matching capability for automatic fault identification. It
reconstructs ground-penetrating radar images in near real time. For example,
radar images of buried land mines were reconstructed by ImSyn(TM) in less than
30 seconds, while the high end workstation used took about four hours.
In any given market niche, there are end-users with direct applications and
original equipment manufacturers (OEMs) that can incorporate ImSyn(TM)
processors in their products to improve performance or reduce cost. In the case
of MRI, market entry is controlled by the prominent MRI research institutions
upon which OEMs depend for new product and applications information.
Accordingly, the Company is keeping the OEM community informed on its progress
while actively contacting "luminary" researchers. Contacts have been made with
both to inform potential users and begin generation of sales leads.
In this connection, the State of Maryland joined the Company in making
several cooperative grants to the Radiology Department of the University of
Maryland Medical School under the Maryland Industrial Partnerships (MIPS)
program. The purpose of these grants was to finance development of new
application areas by the Radiology Department to determine the most effective
uses of the ImSyn(TM) processor in reconstructing MR images for functional MRI
and MRI fluoroscopy. A second medical imaging installation, since September
1998, is on-going at the University of Pennsylvania Medical Center (UPENN).
UPENN is developing new high-speed imaging techniques that take advantage of the
ImSyn(TM) processor's optical architecture. The principal direction of the work
in process is toward real-time processing of very fast MRI to permit doctors to
evaluate dynamic parts of the body such as the beating heart and thinking brain.
Increasingly fast MRI techniques are now being offered by major OEMs such as GE
Medical Systems, Siemens Medical Systems and Picker. The Company believes that
when an upgraded ImSyn(TM) Processor becomes available, it will further improve
the capabilities of such modalities.
Since 1989, one of the principal objectives of the Company's ImSyn(TM)
Processor development has been to support synthetic aperture radar (SAR)
imaging. This is a means of producing nearly photographic quality images using
radar signals instead of visible light. Because of its great computational
power, the ImSyn(TM) Processor was able to reconstruct SAR images of moving
targets on a U.S. Navy development program. It also reconstructs images from
foliage-penetrating radars. An ImSyn(TM) Processor, initially purchased by the
U.S. Army for use in a developmental mobile ground-based SAR processing system,
is now in use by the Department of Defense as an element of a hybrid
optical-digital SAR equipment system development.
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The Company's marketing strategy is constrained by limited financial
resources to the use of internal staff. Military end-use marketing continues to
be carried out by key employees, both directly to government agencies and
indirectly through prime contractors, through the submissions of proposals. Such
proposals may be in response to customer requests while others are unsolicited
proposals by the Company to potential customers to solicit new work.
VIRTUAL LENS MICROSCOPE(TM) - The Virtual Lens Microscope(TM) (VLM) is a
completely new kind of microscope, invented and patented by the Company. The VLM
is a coherent imaging device that produces high resolution, high dynamic range,
fully complex 3D imagery. In essence, the VLM is an engine that converts
holograms to digital signals. It originates from the principles of SAR. A large
virtual lens is synthesized by combining Fourier information gathered by many
small lenses. The complex-valued image is reconstructed by an inverse Fourier
transform using the ImSyn(TM) Processor. The proof-of-principal instrument
allows a high resolution, submicron image to be obtained at a large working
distance, the order of centimeters, using visible light lasers, with a large
field of view. Possible applications include device inspection, biomedical and
structural identification and changes. Government contracts and strategic
partnerships with companies active in applicable markets are being sought.
OTHER OPTOELECTRONIC ENGINES - In addition to the ImSyn(TM) processor, the
Company's other work in process includes Ultrawideband Signal Processors,
Telecommunications Channelizer-Switches and True Time Delay Antenna Array
steering networks. Each of these computing engines can be used in a variety of
applications, for example, the signal processors can be used either as radar
processors or stand-alone signal processors. In contrast to general purpose
computers, however, they are special purpose, albeit very flexible units.
The above applications and exploratory development activities are limited
by lack of funding. Additional government contracts and strategic partnerships
with companies active in applicable markets are being sought.
CONTRACT MIX
Services of the Company are performed under time and material (57% and 76%
of revenues in 1999 and 1998, respectively), cost-reimbursement (39% and 12% in
1999 and 1998, respectively) or fixed-price (4% and 12% in 1999 and 1998,
respectively) contracts and subcontracts. Fixed-price contracts have a greater
degree of risk and higher potential reward than cost-type contracts since the
Company is obligated to provide specific deliverables within the confines of the
contracted price.
GOVERNMENT PROGRAMS
Historically, a significant portion of the Company's revenues have been
derived from contracts, or subcontracts thereunder, with departments or agencies
of the U.S. Government, primarily the military services and other departments
and agencies of the Department of Defense (DoD). In 1999 and 1998, approximately
49% and 27%, respectively, of the Company's total revenues were derived from
government DoD contracts or subcontracts. Government military programs include
work principally with the Army in 1999, and to a lesser extent with the Air
Force, Navy and other DoD entities. The Company also works with industrial
companies, engineering firms, equipment manufacturers and research institutions.
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The Company's business is focused increasingly upon applications of its
proprietary optoelectronics technology and products. Work based on the patented
ImSyn(TM) Processor has increased with the award of a key DoD program and an
application contract by the Defense Advanced Research Projects Agency (DARPA)
for the development of advanced synthetic aperture radar (SAR) techniques. This
effort is a Phase 2 Small Business Innovation Research Program (SBIR). The
approximate value of the contract is $730,000, incrementally funded over 2
years.
During January 2000, based upon proposals submitted in 1999, the Company
was awarded two contracts for Small Business Innovation Research and a similar
program that deal with ImSyn(TM) Processor applications. The first award is to
develop a proof-of-concept electro-optic channelizer for the DoD. It has
applications in radar processing and wideband signal processing. This program is
a 9-month, $350,000 effort. Naval Air Warfare Center, Patuxent Naval Air Station
awarded Essex a contract to install certain performance upgrades in its
ImSyn(TM) Processor. This second award is in support of the Naval Air Warfare
Center Advanced Development NP-3 Synthetic Aperture Radar (SAR) program. This
18-month program is a $600,000 Phase 2 SBIR effort.
COMMERCIAL PROGRAMS AND PRODUCTS
A significant portion of the Company's efforts to date have been focused in
support of Motorola communications satellite programs. The Company continues
work which began in 1990 with Motorola, Inc., assisting initially in the design
and then in the operational improvement of the Iridium(R) satellite
constellation that provides global wireless communications to handheld
telephones and pagers. The Company's engineers developed and used software to
model satellite and intersatellite communications links to assess system
capacity and availability, and helped develop channel-assignment algorithms for
maximizing system capacity. The Company has also been involved in modeling and
simulation support in the design of the Teledesic(sm) "internet in the sky"
satellite data communications systems for Motorola. The Company's contract to
perform such work generated over 45% ($2.2 million) of revenues in 1999 and 70%
($3.2 million) in 1998. Other commercial work accounted for 6% and 3% of
revenues in 1999 and 1998, respectively.
The Company is endeavoring to expand the products portion of its commercial
business. The Company is developing acousto-optic hardware utilizing its
proprietary ImSyn(TM) processor and other units. These products are both
stand-alone commercial items for end users, and units to be sold to original
equipment manufacturers (OEMs) for inclusion in their products. The Company is
directly marketing such products using employee personnel to make OEM and other
customer contacts. As such products are generally compact in size and weight,
distribution to customers would be through normal third-party shipping means
from the Company's facilities. The Company's products are offered not only to
improve capability but also to improve size, cost and power consumption. The
Company expects that personnel and financial resources as available will
continue to be applied to the targeted commercial product and service sectors.
The application of personnel and financial resources is greatly constrained by
the Company's limited liquidity and capital.
The Company continues to work with investment groups that have expressed
interest in an international venture to pursue commercial applications of 3D
ground penetrating radar. The proposed project would apply the patented
ImSyn(TM) Processor and the Company's proprietary holographic Virtual Lens
Sensor Technology(TM). Data on the location and condition of
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underground utilities, transportation subgrades and construction sites would be
collected, processed, interpreted and archived in its data warehouse.
Infrastructure and natural resources business subscribers would access it
through the enterprise's broadband business-to-business network. Efforts to
finance and launch the enterprise are in progress.
PATENTS
The Company has established a patent portfolio to cover the optoelectronic
processing techniques employed in its products. There is an ImSyn(TM) group of
patents and a set of patents covering an optoelectronic True Time Delay
Beamformer. The majority of the current products are governed by the claims in
the ImSyn(TM) set of patents.
There are currently four ImSyn(TM) patents which have issued in the U.S.
The first three patents cover the optoelectronic architecture and application of
the product ImSyn(TM) including accelerating image reconstructions for synthetic
aperture radar and magnetic resonance imaging. The claims in the fourth patent
cover the sensing and reconstruction techniques of the Virtual Lens
Microscope(TM) (VLM) product. The VLM has application for semiconductor
inspection, biomedical microscopy, and non-destructive testing.
The first ImSyn(TM)U.S. Patent No. 5,079,555, "Sequential Image
Synthesizer", includes 20 claims and expires January 7, 2009. The corresponding
patent, No. 2,058,209, issued in Canada, expires November 25, 2011. The
corresponding European patent, No. 0543064, is in force in Great Britain and
Germany, and will expire November 21, 2011. A request for examination of a
Japanese version of this patent was processed in 1998.
The second ImSyn(TM)patent, U.S. Patent No. 5,384,573, "Image Synthesis
Using Time Sequential Holography" includes 157 claims and expires on January 24,
2012. The European, Japanese and Canadian versions are in the examination stage.
The third ImSyn(TM)U.S. Patent No. 5,736,958 with 8 claims expires April 7,
2015. The fourth ImSyn(TM)U.S. Patent No. 5,751,243 with 21 claims expires May
11, 2015. The title of these patents is "Image Synthesis Using Time Sequential
Holography".
Three U.S. patents for the invention of the True Time Delay Beamformer
(TTD) have been issued to the Company. U.S. Patent No. 5,202,776 expires on
April 13, 2010. U.S. Patent No. 5,390,046 expires on February 14, 2012. U.S.
Patent No. 5,623,620 expires on April 22, 2014. TTD enables accurate electronic
steering of exceedingly broadband array antennas for aircraft, space, maritime
and ground systems.
COMPETITION
Competition for U.S. Government and commercial professional and technical
services contracts has grown in intensity and proposals have become increasingly
costly. This stimulated the Company to initiate its program to develop
proprietary products and services, particularly for the commercial market. As
such proprietary items are developed, the Company has relied increasingly upon
offers of its specialized capabilities, sharply reducing resources applied in
response to proposals for solely professional and technical services. Examples
of such proprietary items include ImSyn(TM) processor products.
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Growing market acceptance of Essex products and technology has been
difficult. When performing desired functions using conventional technology (e.g.
high-end workstations, array processors, digital signal processors boards) takes
too long or costs too much, designers do not specify those functions. When Essex
offers cost-effective means of providing such functions, system integrators can
state, correctly, that there is "no requirement" for them within the design
specifications. That means that no expenditure is justified, no matter what the
gain in system effectiveness may be. Such design limitations are a key obstacle
to market penetration by the Company's products. Large electronic systems
integrators such as Lockheed Martin, Boeing, Motorola, Raytheon, TRW, General
Electric, Siemens and Hughes Telecom control an immense portion of the markets
of interest to Essex. As systems integrators, they also specify the requirements
for commercial military and space products. These companies determine which
suppliers' products become a part of military and other systems. Essex is just
beginning to express itself outside the development laboratory and is not yet
firmly in the market. As far as the world of systems integration is concerned,
Essex products are not yet known or available. When Essex products become
readily available and well known, integrators will have an opportunity to
consider specifying them.
BACKLOG
As of December 26, 1999, the Company had a total backlog (funded and
unfunded) of approximately $787,000 as compared with $1.6 million at December
27, 1998. Of these amounts, backlog was $435,000 funded and $352,000 unfunded at
yearend 1999 as compared to $500,000 funded and $1.1 million unfunded at yearend
1998. Funded backlog generally consists of the sum of all contract amounts of
work for which funding has been approved and contracts signed, less the value of
work performed under such contracts. Even though such contracts are fully funded
by appropriations, they are subject to other risks inherent in government and
commercial contracts, such as termination for the convenience of the customer.
EMPLOYEES
As of February 29, 2000, the Company had approximately 40 employees, of
whom 27 were full-time employees.
2. DESCRIPTION OF PROPERTIES
OFFICE FACILITIES
The Company leases its offices. The Company's corporate headquarters and
offices are located in a one-story building at 9150 Guilford Road, Columbia,
Maryland where the Company occupies approximately 18,000 square feet. The lease
is currently extended on a month-to-month basis. The Company is negotiating the
renewal of the lease for a longer period under similar terms and conditions. The
Company believes that its present facility is adequate for its current business
needs. The Company has also begun, where applicable, to use a home-based
telecommuting arrangement for certain employees.
EQUIPMENT
The Company owns a variety of computer workstations, test equipment,
microcomputers, printers and reproduction equipment. The Company leases computer
workstations in support of
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customer work. Other computer hardware and software, test equipment, word
processing and reproduction equipment used by the Company are leased.
IMAGE SYNTHESIS LABORATORY
The laboratory consists of optical hardware and computer hardware and
software, optical benches and test equipment. The laboratory includes the
physical property which demonstrates and tests the capabilities of the Company's
patented Image Synthesizer (ImSyn(TM)) technology as well as other
optoelectronic devices and applications such as the Virtual Lens Microscope(TM).
3. LEGAL PROCEEDINGS
None.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 15, 1999, the Company held its 1998 Annual Meeting of
Shareholders. At the meeting, each member of the Board of Directors was elected
to serve until the next annual meeting or until their successors are duly
elected and qualified. The votes cast and withheld for each such director were
as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ----------
<S> <C> <C>
Harold P. Hanson 4,009,084 182,035
Robert W. Hicks 4,048,482 142,637
Ray M. Keeler 4,048,282 142,837
Harry Letaw, Jr. 4,003,789 187,330
Frank E. Manning 4,049,457 141,662
Leonard E. Moodispaw 4,048,107 143,037
Terry M. Turpin 4,048,082 143,037
</TABLE>
In addition, the Company's shareholders approved the following
proposals:
The ratification of the Essex Corporation 1999 Stock Option and
Appreciation Rights Plan, as follows:
FOR 2,733,979 AGAINST 111,952ABSTAIN 128,452
--------- ------- -------
The ratification of the appointment of Stegman & Company as
independent accountants, as follows:
FOR 4,021,069 AGAINST 35,900ABSTAIN 134,150
--------- ------ -------
12
<PAGE>
PART II
5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is quoted and trades are executed through the
OTC Bulletin Board under the symbol "ESEX".
The following table sets forth the range of high and low actual sales
prices of the Common Stock for the periods indicated. Sales prices include
prices between dealers, may not reflect mark-ups, mark-downs or commissions and
may not represent final actual transactions.
<TABLE>
<CAPTION>
1999 1998
---------------------- ---------------------
High Low High Low
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
First Quarter................ $ 0.72 $ 0.41 $ 1.00 $ 0.44
Second Quarter............... 0.72 0.38 0.81 0.34
Third Quarter................ 1.28 0.44 0.84 0.50
Fourth Quarter............... 1.50 0.56 0.81 0.41
</TABLE>
At March 1, 2000, there were approximately 1,700 beneficial owners of the
Company's Common Stock which includes 350 holders of record.
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER
SECTIONS CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S
EXPECTATIONS, ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS",
"ANTICIPATES", "PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS
THAT INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT
PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
FORECAST IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. CERTAIN RISK
FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS FORM 10-KSB INCLUDE BUT
ARE NOT LIMITED TO: CONCENTRATION OF CURRENT SALES WITH ONE COMPANY, LACK OF
CONTRACT BACKLOG, DELAYS IN COMMERCIALIZATION AND SALES OF IMSYN(TM) OPTICAL
PROCESSOR UNITS AND ASSOCIATED INVENTORY REALIZABILITY ISSUES, LACK OF WORKING
CAPITAL, IMPORTANCE OF PATENT PROTECTION AND ENFORCEMENT AND FUTURE CASH PAYMENT
OBLIGATIONS TO A FORMER LANDLORD.
Operations reflect the results of the Commercial Products Division which
provides optoelectronic products and services as well as commercial
telecommunications engineering services. Operations also include related
optoelectronic products and services revenues provided to U.S. Government
customers.
13
<PAGE>
STATUS
The Company's backlog of work in the telecommunications and optoelectronics
business areas has always been funded incrementally. The telecommunications work
was principally with one major customer, Motorola, and was approximately 45% of
the Company's revenues for 1999.
The telecommunications work declined considerably in 1999. The Company has
been unable to maintain other programs of sufficient volume and to expand such
work to consistently achieve a breakeven or better level of operations on such
revenues. While the Company was able to operate profitably in the last three
quarters of 1999, the Company's backlog of work going into 2000 is not yet
sufficient to maintain a breakeven or better level of operations. Since early
1997, the Company has continued development and initial product improvement of
its ImSyn(TM) optoelectronic processor to the extent possible. The processor is
a combination of digitAL and optical componentry. Problems in the reliability
and performance of certain digital components as well as the combination of such
state-of-the-art subassemblies have caused delays in the availability of the
ImSyn(TM) processor to potential initial users aND customers. Such initially
produced processors were expected to be available in early 1997, and four units
were completed and available in 1998. The first-designed units need to be
upgraded with more effective electronic componentry, requiring hardware and
software changes and retesting and recalibrating of unit performance. The lack
of available units for initial user testing and evaluation has hindered
potential sales and revenues, and delayed inventory turnover. The Company is
working to reduce the deficit from optoelectronic operations and to improve its
cash flows. Backlog and order issues will continue to be major concerns until
substantial improvements have been achieved. The Company has established
significant reserves against its ImSyn(TM) inventory for suCH changes and delays
in the introduction of these first units.
The Company's business is focused increasingly upon applications of its
proprietary optoelectronics technology and products. Work based on the patented
ImSyn(TM) Processor has increased with the award of a key DoD program and an
application contract by the DefenSE Advanced Research Projects Agency (DARPA)
for the development of advanced synthetic aperture radar (SAR) techniques. This
effort is a Phase 2 Small Business Innovation Research Program (SBIR). The
approximate value of the contract is $730,000, incrementally funded over 2
years.
The Company continues to work with investment groups that have expressed
interest in an international venture to pursue commercial applications of 3D
ground penetrating radar. The proposed project would apply the patented
ImSyn(TM) Processor and tHE Company's proprietary holographic Virtual Lens
Sensor Technology(TM). Data on the location and condition of underground
utilitieS, transportation subgrades and construction sites would be collected,
processed, interpreted and archived in its data warehouse. Infrastructure and
natural resources business subscribers would access it through the enterprise's
broadband business-to-business network. Success in financing and launching the
enterprise is not assured.
1999 COMPARED TO 1998
Revenues were $4,813,000 and $4,532,000 for 1999 and 1998, respectively, an
increase of 6%. The Company's work for Motorola on its Iridium(R) cellular
satellite communication system accounted for revenues of $2.2 million and $3.2
million in 1999 and 1998, respectively. This represented approximately 45% and
70% of revenues for 1999 and 1998, respectively. There was a
14
<PAGE>
decrease in revenues from this program between 1998 and 1999, as the
company's involvement on the initial satellite system was essentially completed
in December 1999. The Company continues to bid on new work for the current and
successor satellite systems.
The Company's work in 1999 on U.S. Government programs for research on the
use of the Company's optoelectronics products increased to over $2.4 million
(50%) and was principally with one customer. The balance of the Company's
revenues came from providing software and engineering services primarily to
other government prime contractors.
The Company has a backlog of approximately $723,000 on programs related to
optoelectronic devices and services.
The Company had no firm orders for ImSyn(TM) units as of the date of this
report.
There was an operating profit of $101,000 in 1999 compared to an operating
loss of $4,000 in 1998. In 1999, more revenues were generated from internal
direct labor than from use of outside subcontractors. The Company generally
receives a higher return on revenues from direct labor. Cost of goods sold and
services provided for 1999 was 53.2% of revenues as compared to 53.5% in 1998.
In 1999, cost of goods sold includes a charge of $146,000 to establish
additional reserves against ImSyn(TM) processor inventory TO provide for design
changes and the delay in the introduction of these first units. There was no
such charge in 1998.
Selling, general and administrative expenses ("SG&A") were approximately
$2.1 million in 1999 and 1998. 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 1999, the Company's interest expense and debenture financing
amortization costs declined due to lower average accounts receivable financings
under its working capital financing agreement. Total interest expense and
debenture financing amortization costs were $56,000 in 1999 compared to $114,000
in 1998.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No provision or
benefit from income taxes was recognized in 1999 or 1998.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
SELECTED FINANCIAL DATA
($ Thousands)
AS OF
<CAPTION>
----------------------------------
December 26, December 27,
1999 1998
---------------- --------------
<S> <C> <C>
Total Assets $ 1,609 $ 1,785
=============== ===============
=============== ===============
Working Capital $ 384 $ 661
=============== ===============
=============== ===============
Current Ratio 1.39:1 1.78:1
=============== ===============
=============== ===============
Note Payable/Bank Line of Credit $ 59 $ 164
Convertible Debentures 376 376
Current and Long-Term Capital Leases 23 9
--------------- ---------------
Total Debt/Financing $ 458 $ 549
=============== ===============
=============== ===============
Stockholders' Equity $ 610 $ 565
=============== ===============
=============== ===============
</TABLE>
The Company's working capital and ratio decreased primarily due to the
reclassification of the convertible debentures to a current liability as the
debentures are due in November 2000. At yearend 1999, the Company has working
capital of approximately $384,000 and a stockholders' equity of approximately
$610,000.
The Company has incurred significant losses over recent years, primarily
due to the development and marketing of its optoelectronics products and
services. The Company cut back on research and development for 1999 where
possible while retaining essential staff and other capabilities in the
optoelectronics operations. While such actions produced improvement in results
in 1999, if a significant decline in such results occurred, then the Company
would not be able to sustain its overall business operations without additional
working capital or further cost reductions. In 1999, the Chairman and CEO, Dr.
Letaw, and the President and COO, Mr. Moodispaw, voluntarily received portions
of their salary on a delayed basis from normal payroll processing in order to
preserve liquidity. Such measures have also been instituted in 2000.
The Company continues to seek additional funds under appropriate terms from
private financing sources to finance development and to achieve desired product
inventory levels and initial market penetration. The Company is also seeking to
establish joint ventures or strategic partnerships with major industrial
concerns to facilitate these goals. Further significant delays in the
commercialization of the Company's optoelectronic products, failure to market
such products or
16
<PAGE>
failure to raise substantial additional working capital would have a significant
adverse effect on the Company's future operating results and future financial
position.
The Company has approximately $180,000 of inventory in current assets. This
inventory is comprised of ImSyn(TM) optoelectronIC processors and primarily
consists of finished goods and purchased parts. Sales of such units will be
necessary in order to maintain working capital liquidity. There are no firm
orders for such units as of the date of this report.
The Company has a working capital financing arrangement 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 $59,000 as of December 26, 1999.
There are $376,000 of Convertible Debentures that are due November 30, 2000
for which no funds have been identified or set aside for payment. The Company
may have to use all or a significant portion of its cash at that time to make
the payoff of the debentures. The use of the Company's cash resources without
securing alternative sources of liquidity would likely have a material adverse
impact on the Company's liquidity. The Company is exploring various financing
options including renegotiating an extension of the final payoff date or
restructuring of the debt, but is unable to predict the likelihood of success of
such a negotiation or the terms of such an extension.
Under the settlement agreement reached with the former landlord, certain
payments are triggered only by other future cash inflows. The remaining $123,000
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.
Of this amount, $29,000 was payable in the first quarter of 2000.
The Company settled on the sale of a discontinued operation's facility in
June 1998. The facility served as a portion of the collateral on the convertible
debentures. The net proceeds from the sale were therefore restricted and used to
partially pay down the debentures.
The Company believes that it will be able to meet its 2000 funding
requirements and obligations from the aforementioned sources of revenue and
capital, and if necessary, by further cost reductions. However, there can be no
assurances in this regard and the Company expects that it will need significant
additional financing in the future.
THE PRECEDING PARAGRAPHS CONTAIN FORWARD-LOOKING STATEMENTS AND THE FACTORS
AFFECTING THE ABILITY OF THE COMPANY TO MEET ITS FUNDING REQUIREMENTS AND MANAGE
ITS CASH RESOURCES INCLUDE, AMONG OTHER THINGS, THE MAGNITUDE AND TIMING OF
PRODUCT SALES AND THE MAGNITUDE OF FIXED COSTS, ALL OF WHICH INVOLVE RISKS AND
UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
INFLATION
The Company, because of its substantial activities in professional services
and product development, is more labor intensive than firms involved primarily
in industrial activities. To
17
<PAGE>
attract and maintain higher caliber professional staff, the Company must
structure its compensation programs competitively. The wage demand effect of
inflation is felt almost immediately in its costs; however, the net effect
during the years presented is minimal.
The inflation rate in the United States generally has little impact on the
Company's cost-reimbursable type contracts and other short-term contracts. For
longer-term, fixed-price type contracts, the Company endeavors to protect its
margins by including cost escalation provisions or other specific inflation
protective terms in its contracts.
7. FINANCIAL STATEMENTS
See Item 13(a)(1) in Part III of this Form 10-KSB.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
18
<PAGE>
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Directors* and executive officers elected by the Board are:
NAME AGE POSITION
---- --- --------
Harry Letaw, Jr. 73 Chairman and Chief Executive Officer
Leonard E. Moodispaw 57 President; Chief Operating Officer and
Director (3)
Terry M. Turpin 57 Senior Vice President; Chief Technical
Officer and Director
Joseph R. Kurry, Jr. 49 Senior Vice President; Treasurer and
Chief Financial Officer
Matthew S. Bechta 46 Vice President
Craig H. Price 50 Vice President
Gerald J. Davieau 43 Vice President
Kimberly J. DeChello 39 Chief Administrative Officer and Secretary
Frank E. Manning 80 Chairman Emeritus; Director (2)
Harold P. Hanson 78 Director (3)
Robert W. Hicks 62 Director (1)
Ray M. Keeler 68 Director (1)(2)
* Directors are elected annually at the Company's Annual Meeting of
Stockholders.
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Ethics Committee of the Board of Directors.
Harry Letaw, Jr. was elected a Director of the Company in June 1988. He is
Chairman of the Board and Chief Executive Officer. Dr. Letaw is President and
founder of Intellinet Corporation, a motor control system manufacturer, based in
Maryland. He previously served in senior management and marketing positions with
Raytheon, Martin Marietta and Bunker Ramo. Dr. Letaw performed military service
during World War II, received a Bachelor of Science degree in Chemistry in 1949,
a Master of Science degree in Chemistry in 1951 and a Doctor of Philosophy
degree in Physical Chemistry in 1952, all from the University of Florida. He was
Research Assistant Professor of Electrical Engineering at the University of
Illinois, 1952 to 1955. Dr. Letaw devotes his full business time to the business
of the Company and his affiliations with other corporations do not involve any
substantial expenditures of time nor do these positions involve any real or
potential conflicts of interest.
Leonard E. Moodispaw, President, Chief Operating Officer and Director of
the Company, rejoined Essex in 1998. Mr. Moodispaw was an employee and
consultant with Essex during 1988 to 1993. From 1988 to 1993, he was President
of the former Essex subsidiary, System Engineering and Development Corporation
(SEDC), and later served as Essex Chief Administrative Officer. Mr. Moodispaw
was Secretary of the Company and General Counsel and continues in the capacity
as Corporate Counsel. From April 1994 to April 1998, Mr. Moodispaw was President
of ManTech
19
<PAGE>
Advanced Systems International, Inc. (MASI), a subsidiary of ManTech
International Corporation. Mr. Moodispaw continues his relationship with ManTech
as a member of its Advisory Board and serves as a consultant to MASI and to MASI
UK Limited where he is a member of the board of directors of its joint venture
with Vosper-Thornycroft. Early in his career, Mr. Moodispaw was engaged in the
private practice of law, and from 1965 to 1978 was a senior manager in the
National Security Agency (NSA). He is the Founder of the Security Affairs
Support Association (SASA) that brings government and industry together to solve
problems of mutual interest.
Terry M. Turpin was elected a Director of the Company in January 1997. He
is Senior Vice President and Chief Technical Officer for the Company. He joined
Essex through merger with SEDC where he was Vice President and Chief Scientist
from September 1984 through June 1989. From December 1983 to September 1984 he
was an independent consultant. From 1963 through December 1983, Mr. Turpin was
employed by the NSA. He was Chief of the Advanced Processing Technologies
Division for ten years. He holds patents for optical computers and adaptive
optical components. Mr. Turpin represented NSA on the Tri-Service Optical
Processing Committee organized by the Under Secretary of Defense for Research
and Engineering. He received a Bachelor of Science degree in Electrical
Engineering from the University of Akron in 1966 and a Master of Science degree
in Electrical Engineering from Catholic University in Washington, D.C. in 1970.
Joseph R. Kurry, Jr. joined Essex Corporation in March 1985. He is
Treasurer, Chief Financial Officer and Senior Vice President. Mr. Kurry was
controller of ManTech International Corporation from December 1979 to March
1985. Mr. Kurry received a Bachelor of Science degree in Business Administration
in 1972 from Georgetown University, in Washington, D.C. and is a Certified
Public Accountant.
Matthew S. Bechta was elected Vice President in October 1993. As Director
of Programs, Mr. Bechta is responsible for the Optoelectronics and Radar Signal
Processing business area. Mr. Bechta joined Essex in 1989 with the merger of
Essex and SEDC. As one of the founders of SEDC, he served in various technical
and management capacities since incorporation in 1980. From 1975-1980, Mr.
Bechta was employed by NSA as a systems engineer. Mr. Bechta holds a Bachelor of
Science degree in Electrical Engineering from Spring Garden College,
Pennsylvania and a Master of Science degree in Computer Science from the Johns
Hopkins University.
Craig H. Price was elected Vice President in October 1993. Dr. Price,
Director of Engineering, is responsible for the engineering content of all Essex
activities. Dr. Price joined Essex in 1989 as a result of the merger of Essex
and SEDC. Dr. Price had joined SEDC in 1985, with varied assignments in
engineering, analysis and advanced technologies. Previously, he served in
numerous technical and project positions in the U.S. Air Force during the period
1974 - 1985, and he was awarded the Distinguished Service Medal. Dr. Price holds
a Bachelor of Science degree in Electrical Engineering from Kansas State
University, a Master of Science degree in Electrical Engineering from Purdue
University and a Doctor of Philosophy degree in Electrical Engineering from
Stanford University.
Gerald J. Davieau joined Essex as a result of the merger of Essex with
SEDC, which he joined in 1987, and was elected Vice President in November 1997.
As technical director of satellite systems engineering operations, Mr. Davieau
is responsible for design and analysis of wireless satellite applications. He is
listed on more than 20 Motorola patent disclosures from work on Iridium(R) anD
Teledesic(sm) satellite programs. Mr. Davieau was employed by SPACECOM in
20
<PAGE>
Gaithersburg, Maryland, 1982-1987. He served in the U.S. Army from 1978 to 1982.
Mr. Davieau holds a Bachelor of Science degree in Electrical Engineering from
Lehigh University and a Master of Science degree in Electrical Engineering from
the University of Maryland.
Kimberly J. DeChello joined Essex in May 1987 and has served in various
administrative and management capacities. She was appointed Chief Administrative
Officer in November 1997 and Corporate Secretary in January 1998. Ms. DeChello
is responsible for administration, human resources, investor relations and
industrial insurance. Ms. DeChello holds an Associate of Arts degree in
Accounting and a Bachelor of Science degree in Criminal Justice/Criminology. She
is currently a Master of Science Degree Candidate at the University of Maryland.
Frank E. Manning, Chairman Emeritus, is the founder of the Company. Mr.
Manning has served as a Director of the Company since its organization in 1969.
Mr. Manning received a Bachelor of Science degree in Economics from Franklin and
Marshall College in 1942, and a Masters of Letters degree in Industrial
Relations from the University of Pittsburgh in 1946.
Harold P. Hanson, formerly executive director of the Committee on Science,
Space and Technology of the U.S. House of Representatives from 1980-1982 and
1984-1990, was elected a Director of the Company in June 1990. Dr. Hanson is now
adjunct professor of physics, University of Florida, Gainesville and the editor
and publisher of DELOS, a non-profit journal of translation. He is a member of
the Essex Scientific Advisory Board, and a Fellow of the American Physical
Society and a National Science Foundation Franklin medalist. Dr. Hanson was
previously provost of Wayne State University and Boston University. He was an
executive vice president, vice president for academic affairs, dean of the
Graduate School and professor of physics of the University of Florida,
Gainesville. He was also chairman of the Department of Physics and director,
Center for Structural Studies, University of Texas, Austin. A naval officer
during World War II, Dr. Hanson served as research physicist at the Naval
Ordnance Laboratory and was later a Fulbright research fellow in 1961-1962. Dr.
Hanson earned graduate degrees at the University of Wisconsin.
Robert W. Hicks was elected a Director of the Company in August 1988. He
has been an independent consultant since 1986. During this period he was engaged
for three and one-half years by the State of Maryland Deposit Insurance Fund
Corporation, Receiver of several savings and loan associations, first as an
Agent and then as a Special Representative (both court-approved positions). He
was a principal officer and stockholder in Asset Management & Recovery, Inc., a
consulting firm which primarily provided services, directly and as a
subcontractor, to the Resolution Trust Corporation and law firms engaged by the
Resolution Trust Corporation. Mr. Hicks is also a Director and the Corporate
Secretary of the Kirby Lithographic Company, Inc. In 1998 he formed Hicks Little
Company, LLC for the purpose of conducting consulting activity.
Ray M. Keeler was elected a Director of the Company in July 1989. Since
1986, he has been an independent consultant to both industry and government
organizations in areas related to national and tactical intelligence programs.
Mr. Keeler served on the Board of Directors of SEDC from December 1987 through
April 1989. From 1988 to November 1995, he was President of CRYTEC, Inc., a
service company providing management, business development and technical support
to companies involved in classified cryptologic projects. Since December 1995,
he has been a consultant to companies involved in national technical
intelligence programs. From 1982 to 1986, Mr. Keeler was Director of Program and
Budget for the NSA. He received a Bachelor of Arts degree from the University of
Wisconsin-Madison in 1957.
21
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the Company
pursuant to Rule 16(a)-3 under the Exchange Act during its most recent fiscal
year and Forms 5 with respect to its most recent fiscal year, the Company
believes that all such forms required to be filed pursuant to Section 16(a) of
the Exchange Act were timely filed, as necessary, by the officers, directors,
and security holders required to file the same during the fiscal year ended
December 26, 1999.
22
<PAGE>
10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers who served as such at the end of the last fiscal
year and whose total compensation exceeds $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- --------------------------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Compensation Award(s) Options/SARs (#) Payouts Compen-
Principal Position Year Salary($)(1)(4) Bonus ($) ($)(2) ($)(3) (#) sation
($)
- ---------------------------- -------- -------------- ----------- ------------ ---------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harry Letaw, Jr. 1999 135,200 0 0 0 0 0 0
Chairman and CEO 1998 135,200 0 0 0 0 0 0
1997 135,200 0 0 0 0 0 0
Leonard E. Moodispaw 1999 124,800 0 0 0 45,000 0 0
President and COO 1998 60,240 0 0 0 75,000 0 0
1997 0 0 0 0 0 0 0
Terry M. Turpin 1999 122,720 0 3,682 0 15,000 0 0
Senior Vice President and 1998 122,720 0 3,682 0 0 0 0
Director 1997 122,720 0 3,540 0 35,000 0 0
Joseph R. Kurry, Jr. 1999 114,400 0 3,432 0 15,000 0 0
Treasurer, Senior Vice 1998 114,400 0 3,432 0 0 0 0
President and CFO 1997 114,400 0 3,300 0 30,000 0 0
Craig Price 1999 103,260 0 3,098 0 10,000 0 0
Vice President 1998 102,960 0 3,089 0 0 0 0
1997 102,960 0 2,970 0 29,000 0 0
- ---------------------------------------
<FN>
(1) Includes amounts deferred at the election of the named executive officer
pursuant to Section 401(k) of the Internal Revenue Code ("401(k)").
(2) Represents matching 401(k) contributions made on behalf of the respective
named executive officer pursuant to the Company's Retirement Plan and Trust.
Excludes other perquisites and benefits not exceeding the lesser of $50,000 or
10% of the named executive officer's total annual salary and bonus.
(3) No restricted stock awards were made for the periods indicated. The number
and value of the aggregate restricted stock holdings for the named executive
officers at the end of the 1999 fiscal year, based on the closing bid price of
the Common Stock on OTC Bulletin Board on December 23, 1999, without giving
effect to the consideration paid by the named executive officer, were as
follows: Dr. Letaw, 673,559 shares, $841,949 value; Mr. Moodispaw, 57,150
shares, $71,438 value; Mr. Turpin, 278,693 shares, $348,366 value; Mr. Kurry,
38,359 shares, $47,949 value; and Dr. Price, 14,342 shares, $17,928 value.
(4) In 1999, Dr. Letaw and Mr. Moodispaw voluntarily received portions of their
salary on a delayed basis from normal payroll processing in order to preserve
liquidity. Such measures have also been instituted in 2000.
</FN>
</TABLE>
23
<PAGE>
DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan, the Essex
Corporation Retirement Plan and Trust, which includes a 401(k) salary reduction
feature for its employees. The Plan calls for an employer matching contribution
of up to 3% of eligible employee compensation under the salary reduction feature
and a discretionary contribution as determined by the Board of Directors. No
discretionary contribution was made by the Company to the Retirement Plan for
1997 - 1999. The total authorized contribution under the matching contribution
feature of the Plan was approximately $58,000 in 1999. All employee
contributions are 100% vested at all times and Company contributions vest based
on length of service. Vested contributions are distributable and benefits are
payable only upon death, disability, retirement or break in service.
Participants may request that their accrued benefits under the Section 401(k)
portion of the Plan be allocated among various investment options established by
the Plan administrator.
The Company contributions under the Retirement Plan for the persons referred
to in the Summary Compensation Table are included in that Table.
EMPLOYEE INCENTIVE PERFORMANCE AWARD PLAN
The Company has an Employee Incentive Performance Award Plan under which
bonuses are distributed to employees. All employees are eligible to receive such
awards under flexible criteria designed to compensate for superior division and
individual performance during each fiscal year. Awards are generally recommended
annually by management and approved by the Board of Directors. Such awards may
be constrained by overall Company performances. No awards were made in 1997
through 1999.
RESTRICTED STOCK BONUS PLAN
Essex Corporation has a Restricted Stock Bonus Plan under which up to 50,000
shares of the Company's common stock may be reserved for issuance to
non-employee members of the Board of Directors and key employees of the Company
selected by the Board of Directors. Shares of restricted stock may be issued
under the Plan subject to forfeiture during a restriction period, fixed in each
instance by the Board of Directors, whereby all rights of the grantee to the
stock terminate upon certain conditions such as cessation of continuous
employment during the restriction period. Upon expiration of the restriction
period, or earlier upon the death or substantial disability of the grantee, the
restrictions applicable to all shares of restricted stock of the grantee expire.
The Plan also provides that loans may be advanced by the Company to a grantee to
pay income taxes due on the taxable value of shares granted under the Plan. Such
loans must be evidenced by an interest bearing promissory note payable five (5)
years after the date of the loan, and be secured by shares of stock of the
Company (which may be restricted stock) having a fair market value equal to 200
percent of the loan.
During 1999 there were no awards. During 1998, the Board awarded a total of
18,000 shares to four directors. There were no awards in 1997. There were
approximately 4,000 shares remaining in the plan as of December 26, 1999.
24
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has an Agreement of Employment with Harry Letaw, Jr., Chairman
of the Board and Chief Executive Officer. Dr. Letaw's annual compensation was
increased to $135,200 effective October 2, 1995. The term of this Agreement is
extended on a month-to-month basis by mutual agreement. The Agreement restricts
the individual's rights to compete with the Company and prohibits
misappropriation of proprietary rights of the Company, both during and after the
term of employment.
OPTIONS TO PURCHASE SECURITIES
The Company established an Essex Corporation 1999 Stock Option and
Appreciation Rights Plan (the "1999 Plan"). The 1999 Plan provides for the grant
of options to purchase shares of common stock of the Company, par value $.10 per
share (the "Common Stock") which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), to persons who are employees, as well as options which do not so
qualify ("Non-Qualified Options") to be issued to persons or consultants,
including those who are not employees. The 1999 Plan also provides for grants of
stock appreciation rights ("SARs") in connection with the grant of options under
this 1999 Plan. The exercise price of an Incentive Option under the 1999 Plan
may not be less than the "fair market value" of the shares of Common Stock at
the time of grant; the exercise price of Non-Qualified Options and the
appreciation base price of SARs are determined in the discretion of the Board of
Directors except that the SAR appreciation base price may not be less than 50%
of the fair market value of a share of Common Stock on the grant date with
respect to awards to persons who are officers or directors of the Company. The
1999 Plan reserves 300,000 shares of Common Stock for issuance. As of February
29, 2000 there have been no options or rights granted under the 1999 Plan.
The Company established a 1998 Stock Option and Appreciation Rights Plan
(the "1998 Plan"). The 1998 Plan as presently in effect is similar to the 1999
Plan described above. The 1998 Plan reserves 300,000 shares of Common Stock for
issuance. As of February 29, 2000, options for 132,500 shares of the Company's
Common Stock are outstanding at a price of $1.00, including options for 120,000
shares held by officers and directors (options for 107,500 shares are
exercisable, including exercisable options held by officers and directors of
97,500).
The Company also has a 1996 Stock Option and Appreciation Rights Plan (the
"1996 Plan"). The 1996 Plan as presently in effect is similar to the 1998 and
1999 Plans described above. The 1996 Plan reserves 300,000 shares of the
Company's Common Stock for issuance. As of February 29, 2000, there are options
for 286,250 shares outstanding at prices ranging from $1.00 - $3.00, including
options for 124,500 shares held by officers or directors (options for 285,150
shares are exercisable, including exercisable options held by officers and
directors of 124,500). As of February 29, 2000, there remain 13,750 shares
available for future grants of options or SARs.
The Company had an Option and Stock Appreciation Rights Plan which expired
on January 31, 1997. As of February 29, 2000, options for 549,650 shares of the
Company's Common Stock remain outstanding and exercisable under this Plan at
prices ranging from $2.94 - $3.00 including options held by officers and
directors to purchase 493,000 shares.
25
<PAGE>
The following Table shows for the fiscal year ended December 26, 1999
for the persons named in the Summary Compensation Table, information with
respect to options to purchase Common Stock granted during 1999. No options
granted under the stock plans or otherwise were exercised by the persons listed
below in 1999.
<TABLE>
STOCK OPTIONS GRANTS TABLE
FOR FISCAL YEAR ENDED DECEMBER 26, 1999
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL OPTIONS/
OPTIONS SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH) DATE
==========================================================================================
<S> <C> <C> <C> <C>
Harry Letaw, Jr. --- --- --- ---
Leonard E. Moodispaw 45,000 33.6 1.00 04/13/09
Terry M. Turpin 15,000 11.2 1.00 04/13/09
Joseph R. Kurry, Jr. 15,000 11.2 1.00 04/13/09
Craig H. Price 10,000 7.5 1.00 04/13/09
- -------------------------------
<FN>
(1) Such options became exercisable beginning April 13, 1999.
</FN>
</TABLE>
26
<PAGE>
The following Table shows for the fiscal year ended December 26, 1999 for
the persons named in the Summary Compensation Table, information with respect to
option/SAR exercises and fiscal year end values for unexercised options/SARs.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FY-END OPTION/SAR VALUES
TABLE FOR FISCAL YEAR ENDED DECEMBER 26, 1999
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
OPTIONS/SARS AT UNEXERCISED
FY-END (#) IN-THE-MONEY
OPTIONS/SARS AT
EXERCISABLE/ FY-END($)(1)
SHARES UNEXERCISABLE
ACQUIRED ON VALUE EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE
================================================================================================
<S> <C> <C> <C> <C> <C><C>
Harry Letaw, Jr. --- --- 290,000/0 0/0
Leonard E. Moodispaw --- --- 135,500/25,000 $23,750/$6,250
Terry M. Turpin --- --- 53,000/5,000 $6,250/$1,250
Joseph R. Kurry, Jr. --- --- 63,500/5,000 $4,500/$1,250
Craig H. Price --- --- 42,500/5,000 $3,125/$1,250
- --------------------------------
<FN>
(1) Market value of underlying securities based on the closing price of the
Company's Common Stock on December 23, 1999 (last trading day prior to
December 26, 1999) on the OTC Bulletin Board system of $1.25 minus the
exercise price.
</FN>
</TABLE>
REMUNERATION OF DIRECTORS
The Company's Directors generally meet quarterly. Additionally, the By-Laws
provide for special meetings and, as also permitted by Virginia law, Board
action may be taken without a meeting upon unanimous written consent of all
Directors. Board members not employed by the Company receive a maximum of $1,500
for each Board or Board Committee Meeting attended. In 1999 the Board held two
meetings; the entire membership of the Board was present at both of the
meetings. The Board members waived the fee for one of the meetings.
27
<PAGE>
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table and accompanying notes set forth as of February 29,
2000, information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person or group who beneficially own more than 5% of
the Common Stock, (ii) each of the directors of the Company, (iii) each of the
officers of the Company named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Shares of Common Stock
OF BENEFICIAL OWNER* OWNERSHIP (1) BENEFICIALLY OWNED
----------------------------- ----------------- --------------------------
<S> <C> <C>
Harry Letaw, Jr. (2) 963,559 20.55
Terry M. Turpin (3) 334,193 7.50
Leonard E. Moodispaw (4) 207,650 4.57
Frank E. Manning (5) 122,775 2.77
Joseph R. Kurry, Jr. (6) 104,359 2.34
Harold P. Hanson (7) 69,344 1.57
Robert W. Hicks (8) 64,200 1.45
Craig H. Price (9) 59,342 1.34
Ray M. Keeler (10) 40,000 **
All Directors and Executive Officers
as a Group (12 persons) (11) 2,294,196 44.22
- ---------------------------------
<FN>
* All beneficial owners are directors and/or officers of the Company and
can be reached c/o Essex Corporation, 9150 Guilford Road, Columbia, MD
21046.
** Less than 1%
(1) Under the rules of the Commission, a person is deemed to be a
"beneficial owner" of a security if that person has or shares the power
to vote or to direct the voting of such security, or the power to
dispose or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person
has the right to acquire beneficial ownership within sixty (60) days.
Under these rules, more than one person may be deemed to be a
beneficial owner of the same securities and a person may be deemed to
be a beneficial owner of securities as to which he has no record
ownership interest. The shares listed above include options and rights
to acquire shares within sixty (60) days and shares held of record by
the Essex Corporation Retirement Trust as to which shares the
respective participant has disposition and voting rights. The
percentage ownership is computed based upon the number of shares which
would be outstanding if such options and rights were exercised.
(2) Dr. Harry Letaw, Jr. is Chairman of the Board and Chief Executive
Officer of the Company. Of the 963,559 shares beneficially shown as
owned by Dr. Letaw, 290,000 shares represent presently exercisable
rights to acquire Common Stock through stock options. Such options
expire on March 25, 2000.
(3) Terry M. Turpin is a Director and Senior Vice President of the Company.
Of the shares shown as beneficially owned, 55,500 represent presently
exercisable rights to acquire common stock through stock options.
(4) Leonard E. Moodispaw is President, Chief Operating Officer and a
Director of the Company. Of the shares shown as beneficially owned,
150,500 represent presently exercisable rights to acquire common stock
through stock options.
28
<PAGE>
(5) Mr. Frank E. Manning is the record and beneficial owner of
approximately 2.77% of the outstanding shares of the Company (122,775
shares), including presently exercisable options to purchase 36,500
shares. Mr. Manning is the Chairman Emeritus and a Director of the
Company. His shares do not include 40,000 shares of the Company's
Common Stock owned of record and beneficially by Mrs. Eva L. Manning,
wife of Mr. Frank E. Manning. Also does not include 169,000 shares
beneficially owned by six separate family trusts of which Mrs. Manning
is the sole trustee and over which trusts she has exclusive voting and
dispositive power.
(6) Joseph R. Kurry, Jr. is Senior Vice President, Treasurer and Chief
Financial Officer of the Company. Of the shares shown as beneficially
owned, 66,000 represent presently exercisable rights to acquire common
stock through stock options.
(7) Harold P. Hanson is a Director of the Company. Of the shares shown as
beneficially owned, 20,500 represent presently exercisable rights to
acquire common stock through stock options.
(8) Robert W. Hicks is a Director of the Company. Of the shares shown as
beneficially owned, 24,000 represent presently exercisable rights to
acquire common stock through stock options.
(9) Craig H. Price is Vice President of the Company. Of the shares shown
as beneficially owned, 45,000 represent presently exercisable rights
to acquire common stock through stock options.
(10)Ray M. Keeler is a Director of the Company. Of the shares shown as
beneficially owned, 25,000 represent presently exercisable rights to
acquire common stock through stock options.
(11)Of the shares shown as beneficially owned, 790,000 represent presently
exercisable rights to acquire common stock through stock options.
</FN>
</TABLE>
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, Essex completed $105,000 of work for VeriTerre Corporation
relating to the potential use of the ImSyn(TM) Processor to produce images of
underground objects. Dr. Harry Letaw, Chairman and CEO of Essex, is the Chairman
and Founder of VeriTerre. The work was charged to VeriTerre at prevailing Essex
commercial rates. Dr. Letaw is leading Essex's efforts to obtain financing for
the 3D ground penetrating radar project.
29
<PAGE>
13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) (1) Financial Statements
Report of Independent Auditors 32
Balance Sheet 33
Statements of Operations 34
Statements of Changes in Stockholders' Equity 35
Statements of Cash Flows 36
Notes to Financial Statements 37 - 47
(2) Exhibits
(i) None.
(ii) Exhibit 3(i) - Articles of Incorporation and Amendments
thereto B Exhibit 3(ii) -By-Laws, as amended Filed as
Exhibits 3(i) and 3(ii) to Registrant's Registration
Statement on Form SB-2 filed October 17, 1994, Registration
No. 33-82920
(iii) Exhibit 4 - Instruments defining the Rights of Holders
4.3 Specimen of Common Stock Certificate C
4.5 Specimen of Placement Agent's Warrant Certificate D
4.6 Form of 10% Convertible Collateralized Debenture E
4.7 Form of Series B Warrant E
(iii) Exhibit 10 - Material Contracts
10.1 Employment Agreement dated April 8, 1988, between C
Dr. Harry Letaw, Jr. and Registrant
10.3 Restricted Stock Bonus Plan C
10.4 Option and Stock Appreciation Rights Plan C
10.6 Pension Plan and Trust Agreement C
10.7 Defined Contribution Retirement Plan C
10.8 Incentive Performance Award Plan C
10.10 Settlement Agreement between the Company and Rumsey Associates C
Limited Partnership
10.11 Option Agreement between the Company and Rumsey Associates C
Limited Partnership
10.13 Registration Rights Agreement C
10.15 1996 Stock Option and Appreciation Rights Plan F
10.22 1998 Stock Option and Appreciation Rights Plan G
10.23 1999 Stock Option and Appreciation Rights Plan H
(iv) Exhibit 23 - Consent of Experts and Counsel
23.1 Consent of Independent Auditors 48
(v) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule A
(b) Reports on Form 8-K
None.
- -----------------------
<FN>
A Filed herewith
B Incorporated by reference as indicated
C Filed as Exhibit to Registrant's Registration Statement on Form SB-2 filed
October 17, 1994, Registration No. 33-82920
D Filed as Exhibit to Registrant's Registration Statement on Form SB-2 filed
February 17, 1995, Registration No. 33-82920
E Filed as Exhibit to Registrant's 1995 Form 10-KSB
F Filed as Exhibit to Registrant's Form 8-K dated November 13, 1996
G Filed as Exhibit to Form Def 14a - Definitive Proxy Statement dated October 12, 1998
H Filed as Exhibit to Form Def 14a - Definitive Proxy Statement dated October 11, 1999
</FN>
</TABLE>
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ESSEX CORPORATION
(Registrant)
By: /S/ HARRY LETAW, JR.
--------------------------------------------------
Harry Letaw, Jr.
Chairman of the Board and Chief Executive Officer;
Principal Executive Officer
March 17, 2000
By: /S/ JOSEPH R. KURRY, JR.
-------------------------------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President, Treasurer and Chief Financial Officer;
Principal Financial and Accounting Officer
March 17, 2000
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/S/ HAROLD P. HANSON /S/ FRANK E. MANNING
-------------------------- --------------------------
Harold P. Hanson, Director Frank E. Manning, Director
March 17, 2000 May 17, 2000
/S/ ROBERT W. HICKS /S/ LEONARD E. MOODISPAW
------------------------- ------------------------------
Robert W. Hicks, Director Leonard E. Moodispaw, Director
March 17, 2000 May 17, 20000
/S/ RAY M. KEELER /S/ TERRY M. TURPIN
----------------------- -------------------------
Ray M. Keeler, Director Terry M. Turpin, Director
March 17, 2000 May 17, 2000
/S/ HARRY LETAW, JR.
--------------------------
Harry Letaw, Jr., Director
March 17, 2000
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Essex Corporation:
We have audited the accompanying balance sheet of Essex Corporation as of
December 26, 1999 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 26, 1999 and
December 27, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Essex Corporation as of
December 26, 1999 and the results of its operations and its cash flows for the
years ended December 26, 1999 and December 27, 1998 in conformity with generally
accepted accounting principles.
Stegman & Company
Baltimore, Maryland
March 16, 2000
32
<PAGE>
ESSEX CORPORATION
BALANCE SHEET
AS OF DECEMBER 26, 1999
<TABLE>
<CAPTION>
ASSETS
------
CURRENT ASSETS
- --------------
<S> <C>
Cash $ 502,663
Accounts receivable, net 645,564
Inventory 180,178
Prepayments and other 46,795
--------------
1,375,200
PROPERTY AND EQUIPMENT
- ----------------------
Production and special equipment 729,974
Furniture, equipment and other 240,095
--------------
970,069
Accumulated depreciation and amortization (905,185)
--------------
64,884
OTHER ASSETS
- ------------
Patents, net 137,658
Other 31,549
--------------
169,207
TOTAL ASSETS $ 1,609,291
- ------------ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Advance from accounts receivable financing $ 59,470
Accounts payable 78,339
Accrued wages and vacation 160,932
Accrued lease settlement 123,448
10% convertible collateralized debentures 375,714
Other accrued expenses 193,182
--------------
991,085
LONG-TERM DEBT
- --------------
Capital leases, net of current portion 8,316
--------------
Total Liabilities 999,401
--------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
- --------------------------------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock $0.10 par value; 25 million shares
authorized; 4,397,861 shares issued and outstanding 439,786
Redeemable Preferred stock $0.01 par value; 1 million total shares
authorized; 2,500 shares of Series A authorized, $100 liquidation
value, 8% dividend rate; -0- shares outstanding --
Additional paid-in capital 5,634,234
Accumulated deficit (5,464,130)
---------------
Total Stockholders' Equity 609,890
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,609,291
- ------------------------------------------ ==============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
33
<PAGE>
ESSEX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE FIFTY-TWO WEEK FISCAL YEARS
ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Revenues $ 4,813,228 4,532,410
Cost of goods sold and services provided (2,560,996) (2,423,769)
Selling, general and administrative expenses (2,151,654) (2,112,610)
------------------ -----------------
Operating Income (Loss) 100,578 (3,969)
Interest expense, net and debenture financing
amortization (55,810) (113,763)
------------------ -----------------
Income (Loss) Before Income Taxes 44,768 (117,732)
Provision for income taxes -- --
------------------ -----------------
Net Income (Loss) $ 44,768 $ (117,732)
================== =================
Weighted Average Number of Shares
Outstanding 4,397,861 4,287,354
================== =================
Basic Earnings (Loss) Per Share $ 0.01 $ (0.03)
================== =================
Diluted Earnings (Loss) Per Share $ 0.01 $ (0.03)
================== =================
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
34
<PAGE>
ESSEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ --------------- TOTAL
ADDITIONAL STOCK-
SHARES SHARES PAID-IN ACCUMULATED HOLDERS'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT EQUITY
---------- ---------- -------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 28, 1997 4,134,065 $ 413,406 1,200 $ 120,000 $ 5,519,496 $ (5,386,924) $ 665,978
Common stock issued upon conversion
of preferred stock 245,796 24,580 (1,200) (120,000) 104,658 -- 9,238
Preferred stock dividend -- -- -- -- -- (4,242) (4,242)
Common stock bonus 18,000 1,800 -- -- 10,080 -- 11,880
Net loss -- -- -- -- -- (117,732) 117,732)
---------- --------- -------- ---------- ------------ ------------ ---------
BALANCE, DECEMBER 27, 1998 4,397,861 439,786 -- -- 5,634,234 (5,508,898) 565,122
Net income -- -- -- -- -- 44,768 44,768
---------- --------- -------- ---------- ------------ ------------ ---------
BALANCE, DECEMBER 26, 1999 4,397,861 $ 439,786 -- $ -- $ 5,634,234 $ (5,464,130) $ 609,890
========== ========= ======== ========== ============ ============ =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
35
<PAGE>
ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
<S> <C> <C>
Net Income (Loss) $ 44,768 $ (117,732)
Adjustments to reconcile Net Income (Loss) to Net Cash
Provided By (Used In) Operating Activities:
Depreciation and amortization 191,988 197,303
Gain on sale/retirement of fixed assets (912) (662)
Allowance for bad debts -- (48,526)
Inventory valuation reserve 146,000 48,526
Common stock issued as compensation -- 11,880
Change in Assets and Liabilities:
Accounts receivable (83,531) (92,606)
Inventory 11,997 55,313
Prepayments and other 9,451 20,078
Accounts payable (81,472) (141,384)
Accrued lease settlement (91,829) (66,254)
Other liabilities 49,471 (179,409)
Non-cash charges and working capital changes of
discontinued operations -- 129,579
-------------- --------------
Net Cash Provided By (Used In) Operating Activities 195,931 (183,894)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
Purchases of property and equipment (25,736) (21,435)
Proceeds from sale of fixed assets 1,725 4,752
Proceeds from sales of discontinued operations -- 1,290,517
-------------- --------------
Net Cash (Used In) Provided By Investing Activities (24,011) 1,273,834
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Short-term repayments of receivables financing, net (104,450) 46
Repayment of convertible debentures principal -- (857,386)
Payment of capital lease obligations (108,345) (56,198)
-------------- --------------
Net Cash Used In Financing Activities (212,795) (913,538)
-------------- --------------
CASH AND CASH EQUIVALENTS
Net (decrease) increase (40,875) 176,402
Balance - beginning of year 543,538 367,136
-------------- --------------
Balance - end of year $ 502,663 $ 543,538
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
36
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER IMPORTANT FACTORS
These statements cover Essex Corporation (the "Company"). Certain amounts
for prior years have been reclassified or recalculated to conform to the
1999 presentation.
REPORTING YEAR
The Company is on a 52-week fiscal year ending the last Sunday in December
for 1999 and 1998.
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 1999 in the satellite communications systems and
software engineering business area.
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
37
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
the Company's optoelectronic products would have a significant adverse
effect on the Company's future operating results and future financial
position; however, the Company believes that in such event it could
successfully manage and reduce cash requirements for operations by
curtailing expenditures in optoelectronics operations (including general
and administrative expenses), although there can be no assurances in this
regard. In 1999, the Chairman and CEO, Dr. Letaw, and the President and
COO, Mr. Moodispaw, voluntarily received portions of their salary on a
delayed basis from normal payroll processing in order to preserve
liquidity. Such measures have also been instituted in 2000.
CONTRACT ACCOUNTING
Revenues consist of services rendered on time and materials, fixed-price
and cost-plus-fixed-fee contracts. Revenue on time and materials contracts
(approximately 57% and 76% of total revenues in 1999 and 1998,
respectively) is recognized to the extent of billable rates multiplied by
hours delivered, plus other direct costs. Revenue on cost-plus-fixed-fee
contracts (approximately 39% and 12% of total revenues in 1999 and 1998,
respectively) is recognized to the extent of costs incurred plus a
proportionate amount of fee earned. Revenue on fixed-price contracts
(approximately 4% and 12% of total revenues in 1999 and 1998,
respectively) is recognized on the percentage-of-completion method of
accounting based on costs incurred in relation to the total estimated
costs. Anticipated losses are recognized as soon as they become known. A
portion of the Company's business is with agencies of the U.S. Government
and such contracts are subject to audit by cognizant government audit
agencies. Furthermore, while such contracts are fully funded by
appropriations, they may be subject to other risks inherent in government
contracts, such as termination for the convenience of the government.
Because of the inherent uncertainties in estimating costs and the
potential for audit adjustments by U.S. Government agencies, it is at
least reasonably possible that the estimates will change in the near term.
INCOME TAXES
Deferred income taxes are recorded under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future
tax consequences, measured by enacted tax rates, attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period the rate change
becomes effective. Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will
not be realized.
INVENTORY
Inventory costs include purchased parts, labor and manufacturing overhead.
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Management continually
monitors the market value of its inventory and records valuation
allowances when deemed necessary.
38
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using straight-line methods based on useful lives as follows:
Leasehold improvements Life of lease
Production and special equipment 3 to 5 years
Furniture and equipment 3 to 5 years
Repairs and maintenance are charged to expense as incurred. When assets
are retired or otherwise disposed of, the asset and related allowance for
depreciation are eliminated from the accounts and any resulting gain or
loss is reflected in income.
INTANGIBLE ASSETS
Patent costs include legal and filing fees covering the various patents
which have been issued to the Company. Patent costs are amortized over
their respective lives (15 - 20 years) and amortization was $15,000 in
both 1999 and 1998.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles (including goodwill) to be
held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount should be addressed.
Impairment is measured by comparing the carrying value to the estimated
undiscounted future cash flows expected to result from use of the assets
and their eventual disposition.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are computed using the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share incorporates the incremental shares issuable
upon the assumed exercise of stock options, warrants and convertible
debentures. Such incremental shares were anti dilutive for the periods
presented.
STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
A. Cash paid during the year for-
<S> <C> <C>
Interest $ 59,000 $ 121,000
Income taxes $ 500 $ 900
</TABLE>
39
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
B. In 1999, there was a new capital lease in the amount of $127,000.
There were no new capital leases in 1998.
C. Preferred stock plus accrued dividends payable in the amount of
$129,238 were converted into common stock in 1998.
D. In 1998, the Company issued 18,000 shares of common stock with a
market value of $11,880 under its Restricted Stock Bonus Plan.
2. DISCONTINUED OPERATIONS
In June 1997, the Board of Directors unanimously approved the disposition
of the Systems Effectiveness Division ("SED") and operations of the
Federal Systems Division ("FSD") except for the telecommunications and
government-related optoelectronics programs which are comprised of
different customers, a separate location in Columbia, Maryland and
distinguishable operations. The discontinued operations comprised the
majority of the Company's Technical Services and Products business
operations.
In August 1997, the Company completed the sale of certain of the assets
and operations of FSD. 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 Alabama were discontinued and the facility closed. The Company settled
on the sale of the Alabama facility in June 1998.
Effective October 1, 1997, the Company sold the business and net assets of
SED. The aggregate sale price was $1,475,000. The Company sold the
accounts receivable, contracts, fixed assets and certain other assets. The
acquiring company assumed certain liabilities, such as accounts payable,
accrued vacation and certain operating and capital lease obligations. The
Company received $525,000 in cash at closing and took a note receivable
for $325,000 which was paid off in June 1998. The balance of $625,000 was
received through February 1998 as the respective contracts of SED were
novated to the acquiror.
There were no revenues from discontinued operations in 1999 or 1998.
40
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Commercial and other $ 199,915
U.S. Government:
Amounts billed, excluding retainages 468,589
Recoverable costs and accrued profits not yet billed,
including retainages 27,060
----------
695,564
Contract reserves and allowances for doubtful accounts (50,000)
----------
$ 645,564
==========
</TABLE>
U.S. Government receivables arise from U.S. Government prime contracts and
subcontracts. Unbilled receivables represent revenue recognized for work
performed prior to yearend, which had not been billed. The government
unbilled receivables can be invoiced in accordance with funding on
cost-type contracts or upon attaining certain milestones under fixed-price
contracts.
Retainages (which are not material) will be collected upon job completion
or settlement of audits performed by cognizant U.S. Government audit
agencies. Company cost records have been audited through 1997. In the year
an audit is settled, the difference between audit adjustments and
previously established reserves is reflected in income.
Contract reserves and allowances for doubtful accounts have been provided
where less than full recovery under the contract is expected.
4. ACCOUNTS RECEIVABLE FINANCING
The Company has a working capital financing agreement with an accounts
receivable factoring organization. Under such an agreement, the factoring
organization may purchase 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 $59,000 as of December
26, 1999.
41
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
5. INVENTORY
Inventory costs are all related to the Company's ImSyn(TM) optoelectronic
processor.
<TABLE>
<CAPTION>
<S> <C>
Finished Goods $ 254,190
Systems In-Process 24,832
Purchased Parts 215,396
------------
494,418
Valuation Reserve (314,240)
------------
$ 180,178
============
</TABLE>
Due to the use of estimates in calculating the value of the inventory, it
is at least reasonably possible that management's view of the ultimate
realizable value of inventory will change in the near term.
6. CONVERTIBLE COLLATERALIZED DEBENTURES
The Company has $376,000 of 10% Convertible Collateralized Debentures
("Debentures"). The Debentures pay interest quarterly at 10% per year and
are convertible into common stock at a conversion price of $3.50 per
share. The Company can require conversion if the Company's common stock
trades at or above $5.50 (subject to future adjustment) for 10 consecutive
trading days. Other restrictions or requirements for conversion, such as
an effective registration statement, also apply. The holders of the
Debentures have certain demand and other registration rights upon
conversion. The Debentures are due November 30, 2000 if not converted or
called prior to maturity.
The Debentures are primarily collateralized with inventory and certain
fixed assets subject to existing lease obligations. As of the last day of
each fiscal quarter the collateral shall have a value of at least 150% of
the amount of the outstanding obligations and meet certain other
requirements. The Company is subject to default provisions for not meeting
collateral requirements, failure to make timely interest payments and
other standard representations and covenants. As of December 26, 1999, the
Company was in compliance with such terms and conditions.
7. MAJOR CUSTOMER INFORMATION
The Company's largest customer was Motorola, Inc. for whom the Company
performed work on the design and other aspects of the Iridium(R) satellite
constellation. The Company's contracts to perform such work amounted to
45% ($2.2 million) of revenues in 1999 and 70% ($3.2 million) in 1998.
This work substantially ended in December 1999.
The Company's second largest customer is for subcontract work to an
agency of the Department of Defense. In 1999, the Company began research
work on the use of its optoelectronics products in certain customer
systems and applications. Such work amounted to over $2.4 million (50%)
of 1999 revenues.
42
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
8. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases certain equipment. The Company is committed to pay
aggregate rentals under these leases as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 72,000
2001 $ 7,000
2002 $ 3,000
</TABLE>
Rental expense charged to continuing operations, including payments made
under short-term leases, amounted to $391,000 and $365,000 in 1999 and
1998, respectively.
The Company's office facility is currently under a month-to-month lease
term. The Company is seeking to renew or obtain a longer term lease for
office space. The lease contains provisions to pay for proportionate
increases in operating costs and property taxes.
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 $123,000 accrual as of December 26, 1999 represents the
remaining contingent portion which is to be paid over the applicable
consideration period. Of this amount, $29,000 was payable in the first
quarter of 2000.
9. RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan, the
Essex Corporation Retirement Plan and Trust, which includes a salary
reduction 401(k) feature for its employees. The Plan calls for an employer
matching contribution of up to 3% of eligible employee compensation under
the salary reduction feature and allows for a discretionary contribution.
Total authorized contributions under the matching contribution feature of
the Plan were approximately $58,000 in 1999 and $62,000 in 1998.There were
no discretionary contributions in these years.
In accordance with the retirement plan and trust, as amended, such
authorized contributions and the resulting annual expense can be reduced
by forfeitures by terminated employees of unvested amounts of prior years'
contributions. Forfeitures of $10,000 and $37,000 were utilized to reduce
annual expenses in 1999 and 1998, respectively.
43
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
10. INCOME TAXES
The components of the Company's net deferred tax asset account are as
follows as of December 26, 1999 and December 27, 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Acquisition NOL and tax credit carryforward $ 306,000 $ 317,100
NOL carryforward 1,300,000 1,225,000
Tax credit carryforward 189,000 190,000
Allowance for doubtful accounts 17,500 17,500
Depreciation and amortization 46,500 57,000
Inventory valuation reserve 110,000 140,000
Accrued employee benefit costs 40,000 40,000
Lease settlement accrual 43,000 75,000
Other (8,500) --
Valuation Reserve (2,043,500) (2,061,600)
-------------- -------------
Net Deferred Tax Asset $ -0- $ -0-
============== =============
</TABLE>
As a result of an acquisition, the Company has net operating loss ("NOL")
and tax credit carryforwards of approximately $726,000 and $52,000,
respectively, that are available, subject to certain limitations,to offset
future book and taxable income and taxes payable. The net operating loss
expires in 2001 and 2002 and the tax credits expire in 2000 and 2001.
The Company also has a regular NOL of $3,700,000 and tax credit
carryforwards of $189,000 that are available, subject to certain
limitations, to offset future book income and taxes payable.The NOL begins
to expire in 2008 and the tax credit carryforwards expire through 2018.
The evaluation of the realizability of such deferred tax assets in future
periods is made based upon a variety of factors for generating future
taxable income, such as intent and ability to sell assets and historical
and projected operating performance. At this time, the Company has
established a valuation reserve for all of its deferred tax assets. Such
tax assets are available to be recognized and benefit future periods.
The Company recorded no benefit or provision for income taxes in 1999 or
1998.
11. STOCK OPTION AND STOCK BONUS PLANS; OTHER STOCK OPTIONS
The Company adopted a 1999 Stock Option and Appreciation Rights Plan("1999
Plan")in November 1999. This plan reserves 300,000 shares of the Company's
unissued shares for option and SAR grants. This plan expires in 2009. No
options or SARs were granted in 1999. Options, which may be tax qualified
("ISOs") and non-qualified ("NSOs"),are exercisable for a period of up to
10 years at prices at or above market price as established on the date of
grant. Upon the exercise of a stock appreciation right, the recipient will
receive payment in the form of stock, cash, or both, as determined by the
Company, equal to the appreciation in value of the shares to which the
rights were awarded. Increases and decreases in the market price of the
44
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
stock also cause an increase in or reduction to plan expense to record the
impact of the SARs outstanding.
The Company has a 1998 Stock Option and Appreciation Rights Plan ("1998
Plan") which reserves 300,000 shares of the Company's unissued shares for
options and SAR grants. This plan is similar to the 1999 Plan. This plan
expires in 2008. There are no SARs outstanding.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
<S> <C> <C>
Outstanding, 12/27/98 0 $ -
Granted 132,500 $ 1.00
Canceled -- -
----------------
Outstanding, 12/26/99 132,500 $ 1.00
================
Exercisable, 12/26/99 80,000 $ 1.00
================
</TABLE>
The Company has a 1996 Stock Option and Appreciation Rights Plan ("1996
Plan") which reserves 300,000 shares of the Company's unissued shares for
option and SAR grants. This plan expires in 2006. This plan is similar to
the 1999 and 1998 plans. There are no SARs outstanding.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------------
<S> <C> <C> <C>
Outstanding, 12/28/97 245,000 $ 1.00 - $ 3.00
Granted 18,500 $ 1.00
Canceled (7,200) $ 1.00 - $ 3.00
----------------
Outstanding, 12/27/98 256,300 $ 1.00 - $ 3.00
Granted 46,350 $ 1.00
Canceled (14,200) $ 1.00 - $ 3.00
----------------
Outstanding, 12/26/99 288,450 $ 1.00 - $ 3.00
================
Exercisable, 12/26/99 282,350 $ 1.00 - $ 3.00
================
</TABLE>
The weighted average price for options outstanding and exercisable was
$1.29 and $1.30, respectively. The weighted average life for options
outstanding and exercisable was 6.9 years.
An earlier Option and Stock Appreciation Rights Plan expired in 1997.
Outstanding ISO or NSO options previously granted are exercisable through
January 30, 2007. The activity in this plan for the last two years is as
follows.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------------
<S> <C> <C> <C>
Outstanding, 12/28/97 676,850 $ 2.50 - $ 3.08
Canceled/Expired (25,600) $ 2.50 - $ 3.50
----------------
Outstanding, 12/27/98 651,250 $ 2.52 - $ 3.08
Canceled/Expired (101,600) $ 2.52 - $ 3.08
----------------
Outstanding, 12/26/99 549,650 $ 2.94 - $ 3.00
================
Exercisable, 12/26/99 549,650 $ 2.94 - $ 3.00
================
</TABLE>
45
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
The weighted average price for options outstanding and exercisable was
$3.00. The weighted average life for options outstanding and exercisable
was 2.3 years. Since this Plan expired in 1997, there are no shares
available for future grants. There are no SARs outstanding.
The Company has a Restricted Stock Bonus Plan covering key employees and
directors of the Company. The Plan can reserve up to 50,000 of the
Company's unissued shares for awards.There were no shares awarded in 1999.
There were 18,000 shares awarded to four directors of the Company in 1998.
As of December 26, 1999, there were 4,050 shares available for award under
the Plan.
In July 1994, the Company issued an option for 125,000 shares of
unregistered common stock under a lease settlement (see Note 8).The option
is exercisable through December 31, 2004 at an exercise price of $2.00 per
share. The option price is subject to adjustment under anti-dilution
provisions of the option agreement. The optionholders have certain
registration rights for these shares of common stock.
In 1998, the Company issued non-qualified options for 75,000 shares
directly to its President.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option or similar equity
instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. The Company has historically accounted
for employee stock options or similar equity instruments under the
"intrinsic value method" as defined by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price of the stock at
grant date or other measurement date over the amount an employee must pay
to acquire the stock.
SFAS No.123 allows an entity to continue to use the intrinsic value method
and management has elected to do so. However, entities electing to remain
with the accounting in APB Opinion No. 25 must make pro forma disclosures
of net income and earnings per share, as if the fair value based method of
accounting had been applied. Because the SFAS No. 123 method of accounting
has not been applied to options granted prior to January 1, 1995, the
resulting proforma compensation costs may not be representative of the
cost to be expected in future years. Accordingly, net income (loss) and
earnings (loss) per share would be as follows:
<TABLE>
<CAPTION>
YEAR
ENDED AS REPORTED PRO FORMA
--------- -------------------------- -------------------------
NET PER NET PER
INCOME (LOSS) SHARE INCOME (LOSS) SHARE
------------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
1999 $ 44,768 $ 0.01 $ (271,636) $ (0.06)
1998 $ (117,732) $ (0.03) $ (455,530) $ (0.11)
</TABLE>
46
<PAGE>
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants since 1997: no dividend yield, 70 percent volatility, risk-free
interest rates approximating 5.7 percent and expected lives of 3 years for
1998 calculation and 6 to 10 years for 1997 calculation. The weighted
average grant date fair value of the options issued in 1999 and 1998 was
approximately $0.50 and $0.71, respectively.
11. COMMON STOCK; WARRANTS; PREFERRED STOCK
In connection with the outstanding 10% Convertible Collateralized
Debentures Due 2000, the Company has reserved approximately 107,000 shares
of common stock for conversion. In addition, the Company has issued
warrants to the broker/dealer for 28,571 shares of common stock. The
warrants are exercisable through December 1, 2000 at a price of $3.50 per
share, subject to adjustment under anti-dilution provisions of the Warrant
Agreement. The warrant holders have certain registration rights for these
shares of common stock. The Company has also issued warrants for 78,400
shares to the purchasers of the Debentures under essentially the same
terms and conditions as the warrants issued to the broker/dealer.
The Company has reserved approximately 214,000 shares of common stock in
connection with the convertible debentures and the possible exercise of
all such warrants.
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 the greater
of $0.50 per share or market value. 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.
47
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report dated March 16, 2000, included in this Form 10-KSB, into Essex
Corporation's previously filed Registration Statement on Form S-8, File No.
33-47900.
Stegman & Company
Baltimore, Maryland
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 503
<SECURITIES> 0
<RECEIVABLES> 646
<ALLOWANCES> (50)
<INVENTORY> 180
<CURRENT-ASSETS> 1,375
<PP&E> 970
<DEPRECIATION> (905)
<TOTAL-ASSETS> 1,609
<CURRENT-LIABILITIES> 991
<BONDS> 0
0
0
<COMMON> 440
<OTHER-SE> 170
<TOTAL-LIABILITY-AND-EQUITY> 1,609
<SALES> 4,813
<TOTAL-REVENUES> 4,813
<CGS> 2,561
<TOTAL-COSTS> 4,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 45
<INCOME-TAX> 0
<INCOME-CONTINUING> 45
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
