FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 2000
Commission File Number 0-10772
ESSEX CORPORATION
(Exact name of small business issuer as specified in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046-1891
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 939-7000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
Outstanding
Class at September 24, 2000
----- ---------------------
Common Stock, no par value per share 4,399,361
Transitional Small Business Disclosure Format (Check One);
YES NO X
----- -----
<PAGE>
ESSEX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments for a fair presentation of results for such
period. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
26, 1999.
2
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 24, December 26,
2000 1999
-------------- --------------
(unaudited) (audited)
ASSETS
Current Assets
<S> <C> <C>
Cash $ 1,334,124 $ 502,663
Accounts receivable, net 317,355 645,564
Inventory 49,857 180,178
Prepayments and other 38,468 46,795
-------------- -------------
1,739,804 1,375,200
-------------- -------------
Property and Equipment
Production and special equipment 728,698 729,974
Furniture, equipment and other 243,381 240,095
-------------- -------------
972,079 970,069
Accumulated depreciation and amortization (915,603) (905,185)
-------------- -------------
56,476 64,884
-------------- -------------
Other Assets
Patents, net 135,290 137,658
Other 119,969 31,549
-------------- -------------
255,259 169,207
-------------- -------------
TOTAL ASSETS $ 2,051,539 $ 1,609,291
------------
============== =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
ESSEX CORPORATION
<TABLE>
BALANCE SHEETS
<CAPTION>
September 24, December 26,
2000 1999
-------------- ----------------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
<S> <C> <C>
Advance from accounts receivable financing $ -- $ 59,470
Advances from customer 124,000 --
Accounts payable 78,881 78,339
Accrued wages and vacation 175,391 160,932
Accrued lease settlement 107,766 123,448
10% convertible collateralized debentures 375,714 375,714
Other accrued expenses 110,889 193,182
-------------- ---------------
972,641 991,085
Long-term Debt
Capital leases, net of current portion 4,158 8,316
-------------- ---------------
Total Liabilities 976,799 999,401
-------------- ---------------
Stockholders' Equity
Common stock, no par value; 25 million
shares authorized; 4,399,361 and
4,397,861 shares issued and outstanding
for 2000 and 1999, respectively 6,075,520 6,074,020
Preferred stock, $0.01 par value; 1 million
total shares authorized; 500,000 shares of
Series B authorized, 250,000 shares
outstanding 1,000,000 --
Accumulated deficit (6,000,780) (5,464,130)
-------------- ---------------
1,074,740 609,890
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,051,539 $ 1,609,291
============== ===============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999
<CAPTION>
2000 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 2,533,085 $ 3,522,602
Costs of goods sold and services provided (1,344,867) (1,846,832)
Selling, general and administrative expenses (1,703,840) (1,646,844)
-------------- --------------
Operating (Loss) Income (515,622) 28,926
Interest expense, net and debenture financing
amortization
(21,028) (43,441)
-------------- --------------
Loss Before Income Taxes (536,650) (14,515)
Provision for income taxes -- --
-------------- --------------
Net Loss $ (536,650) $ (14,515)
============== ==============
Weighted Average Number of Shares Outstanding 4,443,682 4,397,861
============== ==============
Basic Loss Per Share $ (0.12) $ (0.00)
============== ==============
Diluted Loss Per Share $ (0.12) $ (0.00)
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999
<CAPTION>
2000 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 759,939 $ 1,313,020
Costs of goods sold and services provided (431,026) (702,851)
Selling, general and administrative expenses (674,674) (479,146)
-------------- --------------
Operating (Loss) Income (345,761) 131,023
Interest expense, net and debenture financing
amortization
(6,619) (15,464)
-------------- --------------
Income (Loss) Before Income Taxes (352,380 115,559
Provision for income taxes -- --
-------------- --------------
Net Income (Loss) $ (352,380) $ 115,559
============== ==============
Weighted Average Number of Shares Outstanding 4,535,323 4,397,861
============== ==============
Basic Earnings (Loss) Per Share $ (0.08) $ 0.03
============== ==============
Diluted Earnings (Loss) Per Share $ (0.08) $ 0.03
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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<PAGE>
ESSEX CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 24, 2000 AND SEPTEMBER 26, 1999
<CAPTION>
2000 1999
-------------- --------------
(unaudited) (unaudited)
Cash Flows From Operating Activities:
<S> <C> <C>
Net Loss $ (536,650) $ (14,515)
Adjustments to reconcile Net Loss to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization 40,238 140,914
Inventory valuation reserve 115,000 20,000
Other 7,529 2,793
Change in Assets and Liabilities:
Accounts receivable 328,209 13,450
Inventory 15,321 (2,028)
Prepayments 8,327 10,700
Accounts Payable 542 (51,001)
Other Assets and Liabilities (50,103) 102,245
Accrued lease settlement expense (15,682) (74,225)
-------------- --------------
Net Cash (Used In) Provided By Operating Activities
(87,269) 148,333
-------------- --------------
Cash Flows From Investing Activities:
Purchases of property and equipment (15,438) (17,465)
Proceeds from sale of fixed assets 5,471 1,625
-------------- --------------
Net Cash Used In Investing Activities (9,967) (15,840)
-------------- --------------
Cash Flows From Financing Activities:
Sale of preferred stock 1,000,000 --
Sale of common stock 1,500 --
Short-term borrowings (repayments), net (59,470) (120,081)
Payment of capital lease obligations (13,333) (79,434)
-------------- --------------
Net Cash Provided By (Used In) Financing Activities
928,697 (199,515)
-------------- --------------
Cash and Cash Equivalents
Net increase (decrease) 831,461 (67,022)
Balance - beginning of period 502,663 543,538
-------------- --------------
Balance - end of period $ 1,334,124 $ 476,516
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
7
<PAGE>
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: General
Fiscal Year and Presentation
Essex Corporation (the "Company") is on a 52/53-week fiscal year ending the last
Sunday in December. Year 2000 is a 53-week fiscal year. Year 1999 was a 52-week
fiscal year. Certain amounts for 1999 have been reclassified to conform to the
2000 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Estimates are used when accounting for uncollectible accounts receivable,
inventory obsolescence and valuation, depreciation and amortization, intangible
assets, employee benefit plans and contingencies, among others. Actual results
could differ from those estimates.
Important Business Risk Factors
The Company has historically been principally a supplier of technical services
under contracts or subcontracts with departments or agencies of the U.S.
Government, primarily the military services and other departments and agencies
of the Department of Defense. In recent years, the Company's revenues had been
principally from a commercial customer in the satellite communications (SatCom)
business area. This work substantially ended in December 1999.
The Company has expended significant funds to transition into the commercial
marketplace, particularly the productization of its proprietary technologies in
optoelectronic processors. In June 2000, the Company announced that it had filed
applications to secure patent protection for innovative technologies in two
communications device families: Fiberoptic Hyperfine Wave Division Multiplex
channelizers (HWDM) and Wireless Optical Code Division Multiple Access Receivers
(OCDMAR). In September 2000, the Company obtained $2 million in financing to
advance its programs to capitalize upon these inventions. The long-term success
of the Company in these areas is dependent on its ability to successfully
develop and market products related to its communications devices and
optoelectronic processors. The success of these efforts is subject to changing
technologies, availability of additional financing, competition, and ultimately
market acceptance.
NOTE 2: Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share are computed using the weighted average number
of common shares outstanding during the period and common stock shares issuable
upon required conversion of preferred stock. Common stock equivalents were
anti-dilutive or immaterial in all periods for purposes of computing diluted
earnings (loss) per share.
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<PAGE>
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 3: Accounts Receivable Financing
The Company has a working capital financing agreement with an accounts
receivable factoring organization. Under such an agreement, the factoring
organization may purchase certain of the Company's accounts receivable subject
to full recourse against the Company in the case of nonpayment by the customers.
The Company generally receives 85%-90% of the invoice amount at the time of
purchase and the balance when the invoice is paid. The Company is charged an
interest fee and other processing charges, payable at the time each invoice is
paid. There were no funds advanced as of September 24, 2000. There was $59,000
advanced as of December 26, 1999.
NOTE 4: Common Stock; Warrants; Preferred Stock
In connection with the outstanding 10% Convertible Collateralized Debentures due
November 30, 2000, the Company has reserved approximately 107,000 shares of
common stock for conversion at $3.50 per share. In addition, the Company has
issued warrants to the broker/dealer for 28,571 shares of common stock. The
warrants are exercisable through December 1, 2000 at a price of $3.50 per share,
subject to adjustment under anti-dilution provisions of the Warrant Agreement.
The warrant holders have certain registration rights for these shares of common
stock. The Company has also issued warrants for 78,400 shares to the purchasers
of the Debentures under essentially the same terms and conditions as the
warrants issued to the broker/dealer. 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.
The Company's Articles of Incorporation authorize 1 million shares of preferred
stock, 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 September 2000, the Board designated 500,000 shares of such
preferred stock as Series B. There were 250,000 shares of Series B issued in
September 2000 for $1 million. The remaining 250,000 are subscribed for at $1
million which will be paid in quarterly installments beginning December 2000.
Each Series B share must be converted into 4 shares of common stock before
September 12, 2002. The Series B has 51% voting rights, subject to certain terms
and conditions, on all stockholder matters. No Series A preferred shares are
currently outstanding.
In connection with the issuance of the preferred stock, the Company also issued
common stock warrants to the preferred stock holders. These warrants are for an
additional 2 million shares of common stock. The warrants have a term of 5 years
and can be exercised at a nominal price. The warrants become exercisable under
certain terms and conditions, such as the market price of the common stock
exceeding $10 through $20 per share for 5 consecutive days, or the occurrence of
an additional private placement of $10 million where the valuation of the
Company exceeds $50 million. The warrants would also become exercisable upon a
sale of all or substantially all of the assets of the Company or a merger or
acquisition of the Company. The Company has reserved 4 million shares of common
stock in connection with the convertible preferred stock and the possible
exercise of the related common stock warrants.
9
<PAGE>
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 5: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. No tax benefit will be recognized until taxable income is
realized.
NOTE 6: Statements of Cash Flows - Supplemental Disclosure
In 1999, the Company entered into a capital lease for new equipment for
$127,000. There were no new capital leases entered into in the first nine months
of 2000.
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<PAGE>
ESSEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis or Plan of Operation and other sections
contain forward-looking statements that are based on management's expectations,
estimates, projections and assumptions. Words such as "expects", "anticipates",
"plans", "believes", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements that
include, but are not limited to, projections of revenues, earnings, segment
performance, cash flows and contract awards. Such forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and involve certain risks and uncertainties that are difficult to predict.
Therefore, actual future results and trends may differ materially from what is
indicated in forward-looking statements due to a variety of factors.
STATUS
In September 2000 the Company closed on a private placement funding transaction.
Under the terms of the funding, the Company received $1 million immediately and
will receive another $1 million over the next 12 months. The investors received
preferred stock that is initially convertible into 1 million shares of common
stock. Additional preferred stock convertible into another 1 million common
shares will be issued as payments are made. The investor group was also issued
warrants for an additional 2 million shares of common stock. The warrants can be
exercised for a nominal price under certain terms and conditions. See Notes to
Interim Financial Statements for further details.
The Company will use the funds substantially to patent, develop and
commercialize its key leading-edge optical technologies, principally the
fiberoptic Hyperfine Wave Division Multiplex channelizers (HWDM) and wireless
Optical Code Division Multiple Access Receivers (OCDMAR). The Company began the
internal work to support patent filings and the related development work on the
technology devices during the third quarter of 2000. The purpose of the HWDM is
to increase the number of usable communications channels within a single optical
fiber. The purpose of the OCDMAR is to increase capacity and improve voice and
data quality of wireless systems. These inventions arose from the Company's work
and expertise in the optical devices and communications fields.
The development of these devices will require a diversion of labor resources
from revenue generation over the next several quarters. The Company has begun to
hire additional personnel to augment existing technical staff. Since the new
capital will be invested in such research and development, the financial
statements will reflect higher than normal expenses which will increase the
Company's reported losses.
REVENUES
Revenues were $760,000 and $1,313,000 for the third quarters of 2000 and 1999,
respectively. Revenues for the first thirty-nine week period of 2000 were
$2,533,000, a decrease of 28% from the $3,523,000 in revenues for the first
thirty-nine week period of 1999. The first thirty-nine week period of 2000
revenues include approximately $217,000 for recovery of excess indirect costs on
11
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ESSEX CORPORATION
government contracts completed in prior years. There was no such transaction in
the first thirty-nine week period of 1999. The Company's work for Motorola for
the Iridium and other cellular communication systems accounted for revenues of
$441,000 and $1,912,000 in the first three quarters of 2000 and 1999,
respectively. This represented 17% and 54% of total revenues for the first three
quarters of 2000 and 1999, respectively. This SatCom work substantially ended in
December 1999. At September 24, 2000, the Company had a backlog of $532,000 in
the communications area, up from $333,000 at June 25, 2000 as some new work was
received.
Work in the optoelectronics computer systems area for U.S. Government customers
declined from $875,000 in the third quarter of 1999 to $460,000 in the same
period in 2000. Funding to continue a major optoelectronic program begun in
early 1999 for a government customer has been delayed since March 2000. As
previously discussed, there has also been a diversion of labor resources from
revenue generation as personnel are being applied to internal telecommunications
patent and development work. Overall, such optoelectronic program revenues were
$1,729,000 in the first three quarters of 2000 compared to $1,610,000 in the
first three quarters of 1999. As of September 24, 2000, the Company had a
backlog on programs related to optoelectronic services and applications of
approximately $1,182,000, down from $1,620,000 at June 25, 2000.
INCOME (LOSS)
There was an operating loss of $346,000 in the third quarter of 2000 as compared
to operating income of $131,000 in the same period in 1999. There was an
operating loss of $516,000 in the first thirty-nine week period of 2000 as
compared to operating income of $29,000 in the same period of 1999. Cost of
goods sold and services provided ("COGS") as a percentage of revenues (excluding
revenue from recovery of prior year excess costs) for the first thirty-nine week
period of 2000 were 58.1% as compared to 52.4% in 1999. COGS in 2000 reflects
increased inventory valuation reserve costs and higher costs from precontract
spending on anticipated new programs. COGS is generally higher on government
work and profit margins are lower relative to commercial work. The contract mix
shift from commercial to government work from 1999 to 2000 has had an adverse
impact upon COGS.
Selling, general and administrative expenses ("SG&A") include the cost of
retaining essential technical capabilities and personnel in the optoelectronics
and telecommunications businesses. In 2000, SG&A expenses remain high relative
to the current revenue volume as the Company performs internal work on
telecommunications patent filings and the related technology device development
and seeks to commercialize its optoelectronic products and services. SG&A
expenses contributed to the operating loss in the first thirty-nine week period
of 2000 and reduced operating results in 1999. The 2000 SG&A expenses also
include approximately $220,000 of expenses related to the September private
placement.
CORPORATE MATTERS
In 2000, the Company's interest expense declined due to lower average accounts
receivable financings under its working capital borrowing agreement. Total
interest expense and debenture financing amortization costs were $21,000 in the
first thirty-nine week period of 2000 compared to $43,000 in the same period of
1999.
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ESSEX CORPORATION
The Company is in a net operating loss (NOL) carryforward position. No provision
or benefit from income taxes was recognized in the first thirty-nine week period
of 2000 or 1999.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
<TABLE>
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
-------------------------------------------------
<CAPTION>
September 24, December 26, September 26,
2000 1999 1999
------------- ------------- -------------
(unaudited) (audited) (unaudited)
<S> <C> <C> <C>
Total Assets $ 2,052 $ 1,609 $ 1,670
============= ============= =============
Working Capital $ 767 $ 384 $ 658
============= ============= =============
Current Ratio 1.79:1 1.39:1 1.90:1
============= ============= =============
Advance from Accounts Receivables
Financing $ -- $ 59 $ 44
Convertible Debentures 376 376 376
Current and Long-Term Capital Leases 10 23 52
------------- ------------- -------------
Total Debt/Financing $ 386 $ 458 $ 472
============= ============= =============
Stockholders' Equity $ 1,075 $ 610 $ 551
============= ============= =============
</TABLE>
In September 2000, the Company received $1 million in funds from the sale of
250,000 shares of Series B Preferred Stock. The Company will receive another $1
million from 4 quarterly payments beginning December 2000 in exchange for an
additional 250,000 shares of Series B Preferred Stock. The funds are to be used
primarily for the development of the optical telecommunications device
technologies.
The Company experienced a significant increase in its working capital and
current ratio at September 24, 2000 as compared to December 26, 1999. The
improvement was primarily due to the net proceeds from the sale of the preferred
stock. Such working capital and current ratios at September 24, 2000 were
reduced by the net loss experienced in the first thirty-nine week period of
2000. Working capital and current ratios from December 1999 have also been
negatively impacted by the reclassification of the convertible debentures to a
current liability as the debentures are due November 30, 2000.
With regard to the $376,000 of convertible debentures, the Company is exploring
various refinancing options. The Company does have sufficient cash balances to
make the full payment, if necessary.
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ESSEX CORPORATION
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. There were no funds advanced as of September 24, 2000.
The Company believes that it will be able to meet its remaining 2000 funding
requirements and obligations from the aforementioned sources of revenue and
capital.
The preceding paragraphs discussing the Company's financial condition contain
forward-looking statements. The factors affecting the ability of the Company to
meet its funding requirements and manage its cash resources include, among other
things, the amount and timing of sales, inventory turnover, the magnitude of
fixed costs and the ability to obtain working capital, all of which involve
risks and uncertainties that are difficult to predict.
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ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) and (b) Not Applicable
(c) As reported in the Company's Form 8-K filed on September 20, 2000, the
Company issued 250,000 shares of Series B Preferred Stock to private
investors on September 8, 2000 for $1 million. The remaining 250,000
shares are subscribed for at $1 million which will be paid in
quarterly installments beginning December 2000. Each share of Series B
Preferred is immediately convertible into 4 shares of common stock.
The Series B Preferred will be automatically converted into common
stock on September 12, 2002. The Series B Preferred has 51% voting
rights, subject to certain terms and conditions, on all stockholder
matters. In connection with the issuance of the preferred stock, the
Company also issued common stock warrants to the investors exercisable
for an additional 2 million shares of common stock. The warrants have
a term of 5 years and can be exercised at a nominal price. The
warrants become exercisable as described in Note 4 of the Notes to
Interim Financial Statements included in Part I of this Form 10-QSB,
which description is incorporated herein by reference. The offer and
sale of the Series B Preferred and the warrants was made by the
Company in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder. No placement agent or underwriter was involved in the sale
of the Series B Preferred and the Company did not pay any commissions.
(d) Not Applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
(i) Exhibit 27 - Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed an 8-K on September 20, 2000 reporting a change in
control financing transaction whereby the Company would receive $2
million in exchange for convertible preferred stock and common stock
warrants. The preferred stock has voting rights, subject to certain
terms and conditions, equivalent to 51% of all common shares voting
on all stockholder matters through September 12, 2002.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
Date: October 27, 2000 /s/ Joseph R. Kurry, Jr.
---------------------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President, Treasurer and Chief Financial Officer
(Mr. Kurry is the Principal Financial and Accounting Officer and has been duly
authorized to sign on behalf of the Registrant.)
15
