-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfIaDQnYL5PnCXCmwBBziGUkeGQ1uLwzONY12LpseRNpjKtKOTLIgrzLN/fcShaD VYcQRp1rNd52x619DzYizQ== 0000355199-96-000003.txt : 19960517 0000355199-96-000003.hdr.sgml : 19960517 ACCESSION NUMBER: 0000355199-96-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX CORPORATION CENTRAL INDEX KEY: 0000355199 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 540846569 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10772 FILM NUMBER: 96565305 BUSINESS ADDRESS: STREET 1: 9150 GILFORD ROAD CITY: COLUMBIA STATE: MD ZIP: 21046-1891 BUSINESS PHONE: 3019537797 MAIL ADDRESS: STREET 1: 9150 GUILFORD ROAD CITY: COLUMBIA STATE: MD ZIP: 21046-1891 10QSB 1 1ST QTR 10-QSB 1996 1 FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996. 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) 953-7797 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 March 31, 1996 ----- ----------------- Common Stock, par value $0.10 per share 3,624,073 2 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/A No. 1 for the fiscal year ended December 31, 1995. 3 ESSEX CORPORATION ----------------- BALANCE SHEETS --------------
March 31, December 31, 1996 1995 (unaudited) (audited) ------------ ------------ ASSETS Current Assets - -------------- Cash $ 3,758,044 $ 822,065 Accounts receivable, net 2,221,594 2,655,046 Inventory 270,615 183,421 Prepayments and other current assets 134,055 146,183 ------------ ------------ 6,384,308 3,806,715 ------------ ------------ Property and Equipment - ---------------------- Land 195,175 195,175 Buildings and improvements 1,627,679 1,622,255 Production and special equipment 1,987,454 1,908,586 Furniture and equipment 1,445,839 1,427,125 ------------ ------------ 5,256,147 5,153,141 Accumulated depreciation and amortization (3,203,849) (3,060,370) ------------ ------------ 2,052,298 2,092,771 Other Assets - ------------ Goodwill -- 204,299 Patents, net 154,109 175,226 Deferred debenture financing 121,733 21,470 Other 54,167 50,057 ------------ ------------ 330,009 451,052 ------------ ------------ TOTAL ASSETS $ 8,766,615 $ 6,350,538 - ------------ ============ ============ The accompanying notes are an integral part of these statements.
4 ESSEX CORPORATION ----------------- BALANCE SHEETS --------------
March 31, December 31, 1996 1995 (unaudited) (audited) ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities - ------------------- Current portion of Industrial Revenue Bond $ 80,001 $ 80,001 Current portion of capital leases 106,944 148,351 Bank line of credit 677,040 917,010 Accounts payable 886,697 770,614 Accrued wages and vacation 618,876 392,372 Accrued retirement contribution 191,455 144,500 Accrued lease settlement 598,941 378,941 Other accrued expenses 700,829 647,834 ------------ ------------ 3,860,783 3,479,623 Long-term Debt - -------------- Industrial Revenue Bond, net of current portion 213,320 233,320 10% Collateralized Convertible Debentures Due 2000 1,400,000 535,000 Capital leases, net of current portion 161,711 142,677 ------------ ------------ Total Liabilities 5,635,814 4,390,620 ------------ ------------ Commitments and Contingencies (Note 6) - -------------------------------------- Stockholders' Equity - -------------------- Common stock, $0.10 par value; 10 million shares authorized; 3,624,073 and 3,585,973 issued and outstanding for 1996 and 1995, respectively 362,407 358,597 Contributions in excess of par value 5,311,396 5,214,966 Retained deficit (2,543,002) (3,613,645) ------------ ------------ 3,130,801 1,959,918 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------- $ 8,766,615 $ 6,350,538 ============ ============ The accompanying notes are an integral part of these statements.
5 ESSEX CORPORATION ----------------- STATEMENTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED MARCH 31, 1996 AND MARCH 26, 1995 ---------------------------------------
1996 1995 ------------ ------------ (unaudited) (unaudited) REVENUES $ 4,245,290 $ 3,027,225 - -------- COSTS AND EXPENSES - ------------------ Direct Costs: Direct labor and related expenses 1,944,113 1,486,484 Other direct costs 948,677 502,709 ------------ ------------ Total Direct Costs 2,892,790 1,989,193 ------------ ------------ Indirect Expenses: Operating expenses 1,384,614 953,294 Depreciation and amortization 166,313 80,689 ------------ ------------ Total Indirect Expenses 1,550,927 1,033,983 ImSyn(Trade Mark) prototype development expenses 157,500 204,601 Provision for contract reserves 250,000 -- ------------ ------------ Operating Loss (605,927) (200,552) Gain on settlement of lawsuit/ (expenses), net of related expenses of $1,773,578 in 1996 2,226,422 (93,767) Lease settlement (250,000) -- Interest expense (45,552) (23,409) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 1,324,943 (317,728) - --------------------------------- Provision for income taxes 254,300 -- ------------ ------------ NET INCOME (LOSS) $ 1,070,643 $ (317,728) - ----------------- ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,593,183 2,060,511 - -------------------------- ============ ============ NET INCOME (LOSS) PER SHARE - --------------------------- Primary $ 0.30 $ (0.15) ============ ============ Fully Diluted $ 0.28 $ (0.15) ============ ============ The accompanying notes are an integral part of these statements.
6 ESSEX CORPORATION ----------------- STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEK PERIODS ENDED MARCH 31, 1996 AND MARCH 26, 1995 ---------------------------------------
1996 1995 ------------ ------------ (unaudited) (unaudited) Cash Flows From Operating Activities: - ------------------------------------ Net Income (Loss) $ 1,070,643 $ (317,728) Adjustments to reconcile Net Income (Loss) to Net Cash Provided By (Used In) Operating Activities: Depreciation and amortization 166,313 80,688 Provision for contract reserves 250,000 -- Gain on sale/retirement of fixed assets (850) (69) Change in Assets and Liabilities: Accounts receivable 183,452 (488,319) Inventory (87,194) -- Refundable income taxes -- 18,600 Prepayments and other assets 6,303 (81,561) Goodwill 204,299 -- Accounts payable 116,083 50,838 Accrued lease settlement 220,000 (30,000) Other liabilities 326,454 (14,699) ------------ ------------ Net Cash Provided By (Used In) Operating Activities 2,455,503 (782,250) ------------ ------------ Cash Flows From Investing Activities: - ------------------------------------ Purchases of property and equipment (43,367) (105,602) Proceeds from sale of fixed assets 850 69 ------------ ------------ Net Cash Used In Investing Activities (42,517) (105,533) ------------ ------------ Cash Flows From Financing Activities: - ------------------------------------ Short-term borrowings (repayments), net (239,970) -- Repayment of long-term debt (20,000) (20,001) Sale of common stock -- 750,000 Stock offering costs -- (103,497) Proceeds from exercises of stock options 100,240 -- Issuance of convertible debentures, net of financing costs 764,737 -- Payment of capital lease obligations (82,014) -- ------------ ------------ Net Cash Provided By Financing Activities 522,993 626,502 ------------ ------------ Cash and Cash Equivalents - ------------------------- Net increase (decrease) 2,935,979 (261,281) Balance - beginning of period 822,065 502,800 ------------ ------------ Balance - end of period $ 3,758,044 $ 241,519 The accompanying notes are an integral part of these statements.
7 ESSEX CORPORATION ----------------- NOTES TO INTERIM FINANCIAL INFORMATION NOTE 1: Fiscal Year Essex Corporation (the "Company") is on a 52/53-week fiscal year ending the last Sunday in December. 1996 will be a 52-week fiscal year. NOTE 2: Net Income (Loss) Per Share Net income (loss) per share has been calculated by dividing net income (loss) by the weighted average number of shares outstanding during each period. Common stock equivalents were excluded from the computation of primary earnings per share because their effect was immaterial. Fully diluted earnings per share were different from primary earnings per share in the first quarter of 1996 due to the consideration of the dilutive effect of the convertible debentures. NOTE 3: Accounts Receivable Financing The Company has a receivables financing arrangement with Signet Bank. This arrangement is evidenced by a Loan Agreement, $1.5 million Promissory Note and Commercial Security Agreement ("Agreements"). Under the Agreements, the Bank will advance funds against certain accounts receivable. The funds advanced ($677,000 at March 31, 1996 and $917,000 at December 31, 1995, approximately the maximum available based upon the eligible accounts receivable) constitute proceeds under the note which bears interest at an annual rate of prime plus 3% (total rate approximately 11.25% at March 31, 1996 and 11.50% at December 31, 1995). The Company must also pay certain administrative and commitment fees which are expected to be less than $1,000/month. This agreement expires November 1996. This $1.5 million line of credit is secured by all accounts receivables and certain general intangibles (excluding patents). The Company is subject to certain restrictions, such as acquisitions or mergers; or creation or incurrence of new debt. Such restrictions have been waived by the Bank in connection with the issuance of the Company's convertible debentures. During the first quarter of 1995, the Company had a Purchase and Assignment Agreement (Agreement) regarding its accounts receivable with Capitol Resource Funding, Inc. (Capitol). Under the Agreement, Capitol would purchase certain of the Company's accounts receivable. The Company generally received 80% of the invoice amount at the time of purchase and the balance when the invoice was paid. The Company was charged an interest fee on the funded amount at an annualized rate of 20%, payable at the time each invoice was paid. NOTE 4: Commitments and Contingencies Lease Settlement - ---------------- The Company was in a legal dispute with the landlord of its former corporation headquarters and Information Systems Division facility. Effective July 1994, the parties entered into a Settlement Agreement ("Agreement"). Under the Agreement, the Company agreed to make deferred rent cash payments of $250,000; contingent rent payments up to $550,000 from future earnings 8 ESSEX CORPORATION ----------------- and/or proceeds from common stock sales or asset sales; an additional contingent payment up to $250,000 from any net proceeds awarded from settlement of an outstanding lawsuit; and issued an option to purchase up to 125,000 shares of the Company's stock at an exercise price (subject to adjustment) of $2 per share. The landlord released the Company from outstanding and future rent or other obligations arising from the leases. Starting July 1994, the Company began to make the deferred cash rent payments over 25 months at $10,000/month. As additional rent, the Company is obligated to make contingent cash payments of 25% of future earnings (as defined) or 10-15% of the net proceeds from the sale of common stock or operating assets, the total of such payments not to exceed $550,000. The Company issued an option for the landlord to purchase up to 125,000 shares of the Company's unregistered common stock at an option price of $2 per share. The option is exercisable through December 31, 2004 and has certain registration rights upon exercise of the option. Prior to 1995, the Company expensed $800,000 toward amounts potentially due under the above terms of this Agreement and recognized a $35,000 expense for the estimated value of the option. Also under the Agreement, the Company agreed to pay 20% not to exceed $250,000 from the net award or settlement from the lawsuit against a competitor described below. As this legal proceeding was concluded in the first quarter of 1996, the amount payable of $250,000 to the former landlord was expensed in this period and paid in April 1996. Contingent amounts due, if any, are to be paid quarterly. The period for computation of such contingent payments ends December 2004. Through March 31, 1996, contingent amounts totalling approximately $241,000 have been earned, paid and charged against the accrual. The $599,000 total accrual as of March 31, 1996 is comprised of $40,000 to be paid ratably over the next 4 months, the $250,000 described above and the remaining contingent portion of $309,000 which is probable to be paid over the applicable consideration period. Legal Proceeding - ---------------- On March 28, 1996, the Company and a corporate defendant reached an out-of-court settlement of the Company's previously reported 1994 lawsuit pending in the United States District Court in Albuquerque, New Mexico. The express terms of the settlement, including terms regarding the confidentiality of the settlement, were definitized. Full payment was received by the Company on March 29, 1996. Under the terms of the settlement, the Company netted in 1996 approximately $2.2 million from this legal settlement after payment of contingent attorney's fees of $1,525,000 and related expenses in 1996 of $249,000. The Company had previously expensed approximately $384,000 in legal fees and related expenses in prior years. NOTE 5: Common Stock Offering; Warrants In July 1995, the Company successfully completed a $2.5 million Stock Offering ("Offering"). The Company sold 25,000 Units for $2,500,000 and received such proceeds less offering costs. The net proceeds of approximately $2 million were recognized as increases to the common stock and contributions in excess of par value accounts. Through the Offering, the Company sold 25,000 Units consisting of 1,750,000 newly issued shares of common stock and warrants (expiring June 30, 1998 and exercisable at $75.00 for 25 shares) to obtain an additional 625,000 new shares. Proceeds from the Offering have been used for general business purposes including, 9 ESSEX CORPORATION ----------------- principally, development of commercial products. During the fiscal year ended December 31, 1995, approximately $1,254,000 ($204,601 in the first quarter of 1995 as shown in the statement of operations), was expended for ImSyn(Trade Mark) prototype development and $183,000 for parts inventory. A portion of the net proceeds ($241,000) was used to partially satisfy the contingent obligation to the landlord. In connection with the Offering, the Company entered into a Placement Agency Agreement with a registered broker/dealer. In addition to cash compensation, the broker/dealer received warrants for 175,000 shares of common stock. The warrants are exercisable through December 1, 1999 at a price of $2.30 per share, subject to adjustment under anti-dilution provisions of the Warrant Agreement. The warrant holders have certain registration rights for these shares of common stock. In connection with the issuance of the 10% Convertible Collateralized Debentures Due 2000, the Company has reserved approximately 400,000 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 1,307,000 shares of common stock in connection with the convertible debentures and the possible exercise of all such warrants. NOTE 6: Income Taxes The Company was in a net operating loss (NOL) carryforward position for book and tax purposes through December 31, 1995. The Company expects to have book and taxable income in 1996. For book purposes, the Company has utilized available NOLs, principally those obtained in connection with a prior acquisition. The benefits obtained from the utilization of this acquisition-related NOL resulted in the elimination of all remaining acquisition-related goodwill ($204,000). For income tax purposes, the Company expects to utilize available NOLs to reduce its 1996 liability to the minimum per alternative minimum tax regulations. The components of the Company's provision for income taxes as of March 31, 1996 are as follows:
Current Tax Provision --------------------- Federal $ 239,300 State 15,000 ----------- $ 254,300 ===========
The Company expects to have taxable income in 1996 and will utilize its NOL carryforwards to reduce the amounts payable to approximately $50,000. The balance of the provision for income taxes is attributable to the elimination of previously recorded goodwill ($204,000) from an earlier acquisition. 10 ESSEX CORPORATION ----------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Essex Corporation is a diversified, technology-based company providing quality products and professional services to government and industry. Essex specializes in Human-Centered Systems Engineering(Service Mark) and Optoelectronic Engineering. The Company allocates its operations to the following business units. o Systems Effectiveness Division (SED) o Federal Systems Division (FSD) o Commercial Products Division (CPD) The discussion that follows speaks to the changes, where significant, that occurred in the business operations of the Company. STATUS - ------ The Company continues its efforts to complete development of its first ImSyn(Trade Mark) processor prototype. The Company began modest efforts on development of its first ImSyn(Trade Mark) processor prototype in late 1994 and full fledged work on such development in 1995. In accordance with generally accepted accounting principles governing such development expenses, costs of approximately $157,500 have been recognized through the Company's 1996 first quarter statement of operations as 1996 period expenses. Such expenses were $1,254,000 and $102,000 in fiscal years 1995 and 1994, respectively. Additional funding is necessary for commercial products' inventory buildup, marketing and further development of commercial applications and products. As the Company works towards completion of the initial ImSyn(Trade Mark) prototype unit, it has begun work on initial units for inventory in anticipation of sales orders. Selling and marketing efforts are continuing as are product refinements and further product development. The Company also continues to work with its patent attorneys in obtaining domestic and international patents on proprietary technology. The Company initially plans to sell in magnetic resonance imaging (MRI) and advanced radar imaging markets. The Company issued $865,000 in the first quarter of 1996, and $535,000 in December 1995 (totalling $1.4 million) of 10% Convertible Collateralized Debentures. The net proceeds are being used for commercial product development, commercial inventory production and marketing. On March 28, 1996, the Company and a corporate defendant reached an out-of-court settlement of the Company's previously reported 1994 lawsuit. Under the terms of the settlement, the Company netted in 1996 approximately $2.2 million from this legal settlement after payment of contingent attorney's fees $1,525,000 and related expenses in 1996 of $249,000. The Company had previously expensed approximately $384,000 in legal fees and related expenses in prior years. As 1996 began, the Company continued to have a relatively high backlog of approximately $41.4 million. In the first quarter of 1996, the Company won or added approximately $2.8 million in new contract business. At March 31, 1996, the Company's contract backlog was $40.0 million ($6.7 million funded and $33.3 million unfunded). Included in this backlog are 11 ESSEX CORPORATION ----------------- two contracts with remaining values of $470,000 for delivery of optoelectronic processors utilizing ImSyn(Trade Mark) technology and related services to U.S. Government end users and one contract with a remaining value of $480,000 for government-sponsored research utilizing an ImSyn(Trade Mark) unit in synthetic aperture microscope applications. Funded contract backlog generally consists of the sum of all contract amounts for which funding has been approved and contracts signed, less the value of work performed under such contracts. Unfunded contract backlog generally is the amount of work on contracts which has not yet been funded (such as for option years, open purchase orders and indefinite quantity contracts). The costs of completing such contracts in backlog are estimated to be 92-94% of such backlog and generally result in gross profit margins of 6-8% before such costs as interest expense, amortization of intangibles, volume variance and income taxes. However, there can be no assurances that revenues from this contract backlog or the gross margins therefrom will ultimately be realized. The mix of contracts in this total backlog of approximately $40 million is approximately: $35 million (88%) in cost-plus-fee type contracts; $3 million (7%) in time and material and $2 million (5%) in fixed-price type contracts. Costs are charged to contracts as incurred as the Company is generally providing labor-based services and therefore does not normally accumulate or stock inventory. The Company utilizes the percentage-of-completion method of accounting for revenue recognition. Anticipated losses, if any, are recognized as soon as they become known. A. REVENUE ------- The Company's revenues for the first thirteen weeks of 1996 totaled $4,245,000, which was $1,218,000 or 40% higher than the $3,027,000 reported during the same period in 1995. FSD revenues were higher by approximately $1.2 million (73%) in the first quarter of 1996 as compared to 1995. In FSD, revenues on the new U.S. Navy contract to provide manufacturing and technical support for weapons systems and associated materials were $583,000 in the first quarter of 1996. There were also revenues in the first quarter of 1996 of approximately $350,000 in FSD on new optoelectronic processor programs for government customers. There was also an expanded level of activity in the Company's work for Motorola, Inc. which produced revenues of approximately $630,000 in the 1996 first quarter compared to $450,000 in the same period in 1995. Revenues were comparable between the quarterly periods in the SED operation and no significant revenues were produced in the quarterly periods by the CPD operations. B. INCOME ------ The Company had net income in the first quarter of 1996 of $1,071,000 or $0.30 per share (primary) as compared to a net loss of $318,000 or $0.15 per share in the same quarterly period of 1995. The net income in 1996 resulted from the gain on settlement of lawsuit (approximately $1,972,000 net of $254,000 of income taxes, or $0.55 per share). This gain triggered a payment to the former landlord and expense of $250,000 ($0.07 per share). Excluding these items, results from operations would have produced a net loss of $651,000 or $0.18 per share in the first quarter of 1996 compared with a net loss of $318,000 or $0.15 per share in the same 12 ESSEX CORPORATION ----------------- period in 1995. The primary earnings (loss) per share results are computed on weighted average shares outstanding of 3,593,000 in 1996 compared to 2,061,000 in 1995. While total direct costs have remained fairly proportional as a percentage of revenues (68% in 1996 and 66% in 1995), there has been a significant increase in other direct costs as such costs rose as a percentage of revenue from 17% ($503,000) in 1995 to 22% ($949,000) in 1996 and a decrease in direct labor and related expenses as a percentage of revenues (from 49% in 1995 to 46% in 1996). The increase in other direct costs as a percentage of revenue is primarily due to increased material purchases on contract work that was scheduled for 1995 but was delayed into early 1996. The Company generally receives a smaller markup and profit recovery from revenues generated by other direct costs. The Company continues to incur expenses in connection with the development of the ImSyn(Trade Mark) prototype. Such expenses were $157,500 in the first quarter of 1996 and $204,601 in the first quarter of 1995. The Company expensed $1,254,000 and $102,000 in fiscal years 1995 and 1994, respectively. The Company expects that this initial development phase will be completed during 1996. In addition to the prototype development expenditures, the Commercial Products Division is incurring expenses for staffing and support costs for marketing, advertising, administrative and engineering. Such expenditures were approximately $300,000 greater in the first quarter of 1996 as compared to the same period in 1995. The Company made a contract reserve provision of $250,000 in the first quarter of 1996. The completion status of a fixed-price contract to deliver an optoelectronic correlator has been negatively impacted by design and specification changes which are not expected to be recoverable under the $729,000 Small Business Innovative Research contract. These matters primarily account for the increased operating loss between the quarterly periods. The Company and a corporate defendant reached an out-of-court settlement. Under the terms of the Settlement Agreement, the Company recognized a gain of approximately $2.2 million after payment of contingent attorney's fees of $1,525,000 and related expenses of $249,000. The Company had expensed in prior years approximately $385,000 in connection with this lawsuit. In addition, the Company recognized an expense of $250,000 as part of the previously concluded rent dispute with its former landlord. The Company was liable for such a payment upon successful conclusion of the previously described lawsuit. In 1996, the Company's interest costs increased due to the issuance of $1.4 million of 10% convertible debentures. Total interest costs were $46,000 in 1996 compared to $23,000 in 1995. 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 the first quarter of 1995. In the first quarter of 1996, the Company recorded a book income tax expense, although lower than at statutory rates. The Company expects to have taxable income in 1996 and will utilize its NOL carryforwards to reduce the amounts payable to approximately $50,000. The balance of the provision for income taxes is attributable to the elimination of previously recorded goodwill ($204,000) from an earlier acquisition. 13 ESSEX CORPORATION ----------------- C. FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES ----------------------------------------------------- The Company evaluates its liquidity position using various factors. The following represents some of the more important factors:
SELECTED FINANCIAL DATA ($ Thousands) AS OF March 31, December 31, March 26, 1996 1995 1995 ----------- ------------ ------------ Total Assets $ 8,767 $ 6,351 $ 4,332 Working Capital $ 2,524 $ 327 $ (155) Current Ratio 1.65:1 1.09:1 0.93:1 Current and Long-Term Debt $ 293 $ 313 $ 373 Current and Long-Term Capital Leases 269 291 -- Bank Note Payable/ 677 917 -- Accounts Receivable Financing -- -- 595 10% Convertible Debentures Due 2000 1,400 535 -- ----------- ------------ ------------ Total Debt/ Financing $ 2,639 $ 2,056 $ 968 =========== ============ ============ Stockholders' Equity $ 3,131 $ 1,960 $ 1,466
The Company experienced an improvement in its working capital dollars and ratio due to receipt of the net proceeds of $2.2 million from the lawsuit settlement. The stockholders' equity increased by approximately $1.1 million from the 1996 first quarter net income. The net cash provided by operations was approximately $2.5 million and primarily resulted from the $1.1 million net income (including the lawsuit gain) and collections of accounts receivables of approximately $183,000. Other significant first quarter 1996 non cash items were the $250,000 provision for contract reserves and the net increase in the accrued lease settlement of $220,000. Such items are expected to result in uses of cash in future quarters of 1996. Under the settlement agreement reached with the landlord, certain payments are to be spread over future periods or are triggered only by other future cash inflows. There is a $40,000 balance payable ratably through July 1996. The $250,000 payment generated by the gain from lawsuit settlement was made in April 1996. The remaining contingent portions of the landlord settlement obligation (which have been accrued and expensed in prior years), of which $309,000 exists after March 31, 1996, are 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. 14 ESSEX CORPORATION ----------------- The Company has an accounts receivable financing arrangement with a local bank. The current loan arrangement provides for a line of credit up to $1,500,000 for financing at the bank's prime rate plus 3%. The Company can utilize certain accounts receivable and obtain a percentage advance as a loan under the financing arrangement. At March 31, 1996, the funds advanced were $677,000, the maximum available based upon the eligible accounts receivable. The current arrangement extends through November 30, 1996. These borrowings were repaid on April 1, 1996 and there are no borrowings outstanding. The line of credit is secured by all accounts receivables and certain general intangibles (excluding patents). The Company is subject to certain operating restrictions, such as acquisitions or mergers; or creation or incurrence of new debt. Such restrictions have been waived by the Bank in connection with the issuance of the Company's convertible debentures. In 1996, the Company plans to make significant expenditures for commercial product inventory, commercial marketing and certain capital expenditures. The Company expended $87,000 for inventory in the first quarter of 1996. The Company purchased $43,000 of property and equipment, mostly computers and other special equipment, through direct cash purchase during the first quarter of 1996. The Company further acquired approximately $60,000 of similar equipment under capital leases having terms which generally spread out monthly payments from twelve to thirty-six months. The Company intends to utilize leasing arrangements to finance capital expenditures to the extent practical. The Company may sell certain assets which are underutilized or not part of its mainstream operations; there are, however, no definitive arrangements for any such sale. The Company has stock warrants outstanding with potential cash proceeds of $1.9 million which became callable for exercise beginning April 1, 1996 upon certain conditions, such as when the last price of the Company's common stock exceeds $5 per share for 10 consecutive trading days. The Company believes that its anticipated needs for working capital will be adequately met by the combination of its projected cash flow from its 1996 operations, utilization of available credit from its secured asset lending agreement and access to public and private financing markets. 15 ESSEX CORPORATION ----------------- PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Report on Form 8-K. (a) Exhibits (i) Exhibit 27 - Financial Data Schedule 27.1 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURE In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ESSEX CORPORATION (Registrant) Date: 14 May 1996 Joseph R. Kurry, Jr. ------------------------- Joseph R. Kurry, Jr. 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.) EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR 1ST QTR 10-QSB
5 1,000 Dec-31-1995 Jan-1-1996 Mar-31-1996 3-MOS 3,758 0 2,222 (456) 271 6,384 5,256 (3,204) 8,767 3,861 1,775 0 0 362 2,768 8,767 4,245 4,245 2,893 2,893 1,708 250 46 1,325 254 1,071 0 0 0 1,071 .30 .28
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