-----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, AzpoAQ2yDAs1KF08QyVAC8U6jBWmx0AoA2MEypIK7HCOnUNeFItWDN0zoFiCPbEL PfBOpB6CZBLj2pl06vGqFg== 0000355199-03-000058.txt : 20030808 0000355199-03-000058.hdr.sgml : 20030808 20030808112810 ACCESSION NUMBER: 0000355199-03-000058 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030629 FILED AS OF DATE: 20030808 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: 1230 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-31703 FILM NUMBER: 03830607 BUSINESS ADDRESS: STREET 1: 9150 GILFORD RD CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 3019397000 MAIL ADDRESS: STREET 1: 9150 GUILFORD ROAD CITY: COLUMBIA STATE: MD ZIP: 21046 10QSB 1 form10qsb2ndqtr.txt FORM 10-QSB 2ND QTR 2003 ESSEX CORPORATION 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 June 29, 2003 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 (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 AUGUST 8, 2003 ----- ----------------- Common Stock, no par value per share 8,932,542 Transitional Small Business Disclosure Format (Check One); YES NO X ----- ----- ESSEX CORPORATION PART I - FINANCIAL INFORMATION ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INDEX o CONSOLIDATED BALANCE SHEETS o CONSOLIDATED STATEMENTS OF OPERATIONS o CONSOLIDATED STATEMENTS OF CASH FLOWS o NOTES TO INTERIM FINANCIAL INFORMATION 2 ESSEX CORPORATION CONSOLIDATED BALANCE SHEETS
June 29, December 29, 2003 2002 ------------- ------------- ASSETS CURRENT ASSETS Cash $ 552,913 $ 1,030,247 Accounts receivable, net 3,024,062 565,626 Prepayments and other 197,793 106,987 Contract work in progress 175,795 -- ------------- ------------- Total Current Assets 3,950,563 1,702,860 ------------- ------------- PROPERTY AND EQUIPMENT Computers and special equipment 1,049,155 948,455 Furniture, equipment and other 356,647 219,112 ------------- ------------- 1,405,802 1,167,567 Accumulated depreciation and amortization (1,082,165) (845,360) ------------- ------------- 323,637 322,207 ------------- ------------- OTHER ASSETS Goodwill 3,019,000 -- Patents, net 333,639 296,407 Other intangibles, net 256,732 -- Other 27,441 21,725 ------------- ------------- 3,636,812 318,132 ------------- ------------- TOTAL ASSETS $ 7,911,012 $ 2,343,199 - ------------ ============= ============= The accompanying notes are an integral part of these statements.
3 ESSEX CORPORATION CONSOLIDATED BALANCE SHEETS
June 29, December 29, 2003 2002 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Advance from accounts receivable financing $ 471,661 $ 169,432 Accounts payable 654,749 659,977 Accrued wages and vacation 926,237 233,940 Accrued retirement plan contribution payable 218,821 65,000 Billings in excess of costs 173,000 135,000 Other accrued expenses 365,163 146,041 Capital leases 17,561 71,261 ------------- ------------- Total Current Liabilities 2,827,192 1,480,651 LONG-TERM DEBT Convertible note payable 500,000 500,000 Note payable 100,000 -- Capital leases, net of current portion -- 4,390 ------------- ------------- Total Liabilities 3,427,192 1,985,041 ------------- ------------- STOCKHOLDERS' EQUITY Common stock, no par value; 25 million shares authorized; 8,931,547 and 7,790,398 shares issued and outstanding, respectively 16,827,690 12,706,520 Additional paid-in capital 2,000,000 2,000,000 Prepaid warrant -- 50,000 Accumulated deficit (14,343,870) (14,398,362) ------------- ------------- 4,483,820 358,158 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,911,012 $ 2,343,199 ============= ============= The accompanying notes are an integral part of these statements.
4 ESSEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWENTY-SIX WEEK PERIODS ENDED JUNE 29, 2003 AND JUNE 30, 2002
2003 2002 ------------- -------------- Revenues $ 7,149,941 $ 1,492,709 Costs of goods sold and services provided (4,661,942) (747,772) ------------- ------------- Gross Margin 2,487,999 744,937 Selling, general and administrative expenses (1,990,251) (1,434,046) Research and development (226,040) (966,233) Amortization of other intangible assets (174,017) -- ------------- ------------- Operating Income (Loss) 97,691 (1,655,342) Interest expense, net (43,199) (10,019) ------------- ------------- Income (Loss) Before Income Taxes 54,492 (1,665,361) Provision for income taxes -- -- ------------- ------------- Net Income (Loss) $ 54,492 $ (1,665,361) ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES Basic 8,437,723 7,289,120 Effect of dilution - Stock options 1,128,075 -- ------------- ------------- Diluted 9,565,798 7,289,120 ============= ============= Basic Earnings (Loss) Per Common Share $ 0.01 $ (0.23) ============= ============= Diluted Earnings (Loss) Per Common Share $ 0.01 $ (0.23) ============= ============= The accompanying notes are an integral part of these statements.
5 ESSEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED JUNE 29, 2003 AND JUNE 30, 2002
2003 2002 ------------- ------------- Revenues $ 4,148,607 $ 729,433 Costs of goods sold and services provided (2,619,731) (359,033) ------------- ------------- Gross Margin 1,528,876 370,400 Selling, general and administrative expenses (1,204,377) (733,669) Research and development (94,094) (468,184) Amortization of other intangible assets (128,291) -- ------------- ------------- Operating Income (Loss) 102,114 (831,453) Interest expense, net (27,541) (3,877) ------------- ------------- Income (Loss) Before Income Taxes 74,573 (835,330) Provision for income taxes -- -- ------------- ------------- Net Income (Loss) $ 74,573 $ (835,330) ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES Basic 8,919,916 7,353,348 Effect of dilution - Stock options 1,128,075 -- ------------- ------------- Diluted 10,047,991 7,353,348 ============= ============= Basic Earnings (Loss) Per Common Share $ 0.01 $ (0.12) ============= ============= Diluted Earnings (Loss) Per Common Share $ 0.01 $ (0.12) ============= ============= The accompanying notes are an integral part of these statements.
6 ESSEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEK PERIODS ENDED JUNE 29, 2003 AND JUNE 30, 2002
2003 2002 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 54,492 $ (1,665,361) Adjustments to reconcile Net Income (Loss) to Net Cash Used In Operating Activities: Depreciation and amortization 84,299 73,258 Amortization of other intangible assets 174,017 -- Stock compensation expense 2,000 246,325 Loss (gain) on disposition of fixed assets 564 (91) Change in Assets and Liabilities: Accounts receivable (1,190,889) 109,214 Prepayments and other assets (13,448) 2,260 Contract work in progress (110,795) -- Accounts payable (106,300) 47,533 Accrued wages, vacation and retirement 593,728 (18,107) Other liabilities 10,681 (40,098) ------------ ------------ Net Cash Used In Operating Activities (501,651) (1,245,067) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of SDL (309,000) -- Purchases of property and equipment (60,338) (7,432) Proceeds from sale of fixed assets 707 91 ------------ ------------ Net Cash Used In Investing Activities (368,631) (7,341) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Sales of common stock -- 1,000,003 Proceeds of note payable 100,000 -- Exercise of stock options 48,809 93,528 Short-term borrowings/repayments, net 302,229 36,280 Payment of capital lease obligations (58,090) (83,406) ------------ ------------ Net Cash Provided By Financing Activities 392,948 1,046,405 ------------ ------------ CASH AND CASH EQUIVALENTS Net decrease (477,334) (206,003) Balance - beginning of period 1,030,247 568,178 ------------ ------------ Balance - end of period $ 552,913 $ 362,175 ============ ============ The accompanying notes are an integral part of these statements.
7 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION NOTE 1: General FISCAL YEAR AND PRESENTATION These statements cover Essex Corporation and its wholly-owned subsidiary, Sensys Development Laboratories, Inc. (the "Company"). The Company is on a 52/53-week fiscal year ending the last Sunday in December. Years 2003 and 2002 are 52-week fiscal years. Certain amounts for 2002 have been reclassified to conform to the 2003 presentation. The information furnished in the accompanying Unaudited Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, such information contains all adjustments considered necessary for a fair presentation of such information. The operating results for the thirteen and twenty-six week periods ended June 29, 2003 may not be indicative of the results of operations for the year ending December 28, 2003, or any future period. This financial information should be read in conjunction with the Company's 2002 audited consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-KSB/A No. 1 filed with the Securities and Exchange Commission. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The Company's revenues have been and continue to come from such programs. The Company is focusing on and expanding in this business area. See Note 9 - Acquisition of Sensys Development Laboratories, Inc. In recent years, the Company has expended significant funds to transition into the commercial marketplace, particularly the productization of its proprietary technologies in telecommunications and 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 WDM (wavelength division multiplexing) devices and wireless optical processor enhanced receiver architecture. The Company received a Notice of Allowance for the first HYPERFINE WDM patent in June 2003. Since September 2000, 8 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION the Company has received over $6 million in financing from its Private Investors or affiliates 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 market acceptance. Primarily due to the expenditures for development and marketing of its optoelectronics products and services, particularly the optical telecommunications device technologies, the Company incurred significant losses in 2002 and 2001. To the extent funds are available, the Company plans to continue research and development spending in 2003 in the optoelectronics operations. The Company is seeking to establish joint ventures or strategic partnerships including licensing of its technologies with major industrial concerns to facilitate these goals. The Company will also seek additional funds under appropriate terms from private sources to continue to finance development and to achieve initial market penetration. Significant delays in the commercialization of the Company's optoelectronic products, failure to market such products or failure to raise substantial additional working capital for such commercial products could have a significant adverse effect on the Company's future operating results and future financial position. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Such costs include direct labor and materials as well as a reasonable allocation of indirect costs. However, no general and administrative costs are included. Equipment which has alternative future uses is capitalized and charged to expense over its estimated useful life. NOTE 2: 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 and, in 2002, common shares issuable upon the required conversion of preferred stock. Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options and warrants. Such incremental shares were anti dilutive for the 2002 periods presented. NOTE 3: Accounts Receivable Financing The Company has a working capital financing agreement with an accounts receivable factoring organization. Under the 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 $472,000 of funds advanced as of June 29, 2003 and $169,000 of funds advanced as of December 29, 2002. 9 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION NOTE 4: Common Stock; Warrants; Preferred Stock 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 which were issued to Private Investors for $2,000,000. The 500,000 Series B shares were converted as required into 2,000,000 shares of common stock in September 2002. No Series A or Series B preferred shares are currently outstanding. In connection with the issuance of Series B 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 expire in September 2005 and can be exercised at a nominal price of $2,000. 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 determined that the warrants had a nominal fair value at issuance due to the restrictive covenants. The Company has reserved 2 million shares of common stock in connection with the possible exercise of the related common stock warrants. As of June 29, 2003, these warrants were not exercisable. In March 2002, the Company amended existing private placement agreements for its common stock with its Private Investors or their affiliates. The agreements were increased from $500,000 to $1.5 million, of which $250,000 was received in December 2001, $500,000 was received in the first quarter of 2002, $500,000 was received in second quarter of 2002 and $250,000 was received in the third quarter of 2002. Under the agreements, the Company issued 500,000 shares of common stock. NOTE 5: Stock-Based Compensation The Company accounts for stock options granted to employees and directors using the intrinsic value based method of accounting. Under this method, the Company does not recognize compensation expenses for the stock options because the exercise price is equal to the market price of the underlying stock on the date of the grant. If the Company had used the fair value based method of accounting, net earnings and earnings per share would have been reduced to the pro forma amounts listed in the table below. The Black-Scholes option pricing model was used to calculate the pro forma stock-based compensation costs. For purposes of the pro forma disclosures, the assumed compensation expense is amortized over the option's vesting periods. The pro forma information is consistent with assumptions used in the year end calculations. Accordingly, net income (loss) and earnings (loss) per share would be as follows: 10 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION
June 29, 2003 June 30, 2002 ------------- ------------- Net income (loss), as reported $ 54,492 $ (1,665,361) Less: Total stock-based employee compensation expense determined under fair value based method for all awards 392,570 410,725 ------------- ------------- Pro forma loss attributable to common stockholders $ (338,078) $ (2,076,086) ============= ============= Loss per share: Basic-as reported $ 0.01 $ (0.23) Basic-pro forma $ (0.04) $ (0.28) Diluted-as reported $ 0.01 $ (0.23) Diluted-pro forma $ (0.04) $ (0.28)
NOTE 6: Amortization of Other Intangible Assets In connection with the March 1, 2003 acquisition of Sensys Development Laboratories, Inc. (See Note 9), there was $431,000 of value assigned primarily to contracts backlog. The overall amortization life is expected to be less than one year and $46,000 of amortization was recognized in March 2003 and $128,000 in the quarter ended June 29, 2003. NOTE 7: Income Taxes The Company is in a net operating loss (NOL) carryforward position for book and tax purposes. Income tax expense reconciled to the tax computed at statutory rates is as follows:
2003 2002 ----------------------------------------- ----------------------------------------- Second Quarter Second Quarter Year-To-Date Year-To-Date ------------------- ------------------ ------------------ ------------------- Federal taxes at statutory rates $ 25,000 $ 18,000 $ (284,000) $ (566,000) State income taxes, net of federal benefit 4,000 3,000 (43,000) (87,000) Change in valuation allowance (29,000) (21,000) 327,000 653,000 ------------------- ------------------ ------------------ ------------------- Provision for income taxes $ -- $ -- $ -- $ -- =================== ================== ================== ===================
11 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION NOTE 8: Statements of Cash Flows - Supplemental Disclosure There were no new capital leases entered into in the first quarters of 2003 or 2002. NOTE 9: Acquisition of Sensys Development Laboratories, Inc. As of March 1, 2003, the Company acquired 100% of the common stock of Sensys Development Laboratories, Inc. ("SDL"). The assigned value of the consideration and related expenses was approximately $4,405,000. Under the terms of the agreement, the Company paid $309,000 in cash and issued approximately 683,000 shares of common stock. The agreement further provides that an additional number of shares up to 422,000 may be released from escrow on the first anniversary of closing based upon certain factors. The Company also issued approximately 195,000 non-qualified fully vested options for its common stock at below market exercise prices in exchange for SDL fully vested outstanding options. In accordance with Emerging Issues Task Force 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination, the value of the stock consideration was based upon the weighted average market price of the Company's common stock a few days before and after February 28, 2003, the date the deal terms were agreed to and announced. SDL provides both system and software engineering technical support to U.S. Government customers and prime contractors supporting government programs. SDL has an established workforce with specialized experience and credentials. For its most recent fiscal year ended September 30, 2002, SDL had revenues of over $3 million. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Current assets $ 1,447,000 Equipment and other 33,000 Goodwill 3,019,000 Intangible assets 431,000 -------------- Total assets acquired 4,930,000 Current liabilities (525,000) -------------- Net assets acquired $ 4,405,000 ============== The intangible assets of $431,000 are primarily assigned to contract backlog which has an estimated overall amortization life of less than one year. 12 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION The following information is presented on a pro forma basis as though the business combination had been completed as of the beginning of fiscal 2003.
For The Six Months Ended June 29, 2003 (in Thousands) (Unaudited) ------------------------------------------ As Reported Pro Forma ------------------ ------------------ Revenues $ 7,150,000 $ 8,415,000 ================== ================== Net Income $ 54,000 $ 316,000 ================== ================== WEIGHTED AVERAGE NUMBER OF SHARES Basic 8,437,723 8,914,090 Effect of Dilution - Stock Options 1,128,075 1,128,075 ------------------ ------------------ Diluted 9,565,798 10,042,165 ================== ================== Earnings Per Share: Basic $ 0.01 $ 0.04 ================== ================== Fully diluted $ 0.01 $ 0.03 ================== ==================
Included in the pro forma revenues and net income are $420,000 and $155,000, respectively, from a product sale by SDL which is not expected to occur in future periods. NOTE 10: Recent Accounting Pronouncements In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123", which is effective for financial statements for fiscal years ending after December 15, 2002, with early adoption permitted. SFAS No. 148 enables companies that choose to adopt the fair value based method to report the full effect of employee stock options in their financial statements immediately upon adoption, and to make available to investors better and more frequent disclosure about the cost of employee stock options. As further discussed within Note 5, the Company will continue to apply the disclosure-only provisions of both SFAS No. 123 and SFAS No. 148. 13 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" AND VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS INDICATED IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. STATUS The Company's business is focused upon applications of its proprietary optoelectronics technology and products for commercial and U.S. Government customers and signal and image processing technology for U.S. Government customers. The Company has experienced growth in its government business and has been actively pursuing growth strategies from internal efforts and external merger sources. These efforts have resulted in profitable operations for the first half of 2003. In 2002, under a 5-year $25 million Indefinite Delivery Indefinite Quantity contract, the Company received an initial funding of $2.4 million to develop a next generation optoelectronic radar processor. This initial phase was substantially completed in 2002, and in January 2003 the Company received a $3.7 million follow-on award to complete the design and deliver a prototype processor before the end of 2003. The Company received a new subcontract in November 2002 to provide at least $3 million annually in telecommunications systems support in the area of modernization, project management, integration and engineering analysis. This work began in January 2003 and is part of the multi-year $30 million award to provide such services. The Company completed, effective March 1, 2003, the merger with Sensys Development Laboratories, Inc. (SDL), a Maryland-based provider of technical engineering and software support services. (See Note 9 in Notes to Interim Financial Information.) This merger added over 25 highly skilled professionals to the Essex staff and an expected $4 million of annual revenue in 2003. Since September 2000, the Company has closed on several equity private placement funding transactions with the Private Investors. Under the terms of the equity funding, the Company has received over $6.1 million and the Private Investors and their affiliates received approximately 3.2 million shares of common stock. The Private Investors were also issued warrants for an additional two million shares of common stock. The warrants can be exercised for a nominal price under certain conditions. See Note 4 of Notes to Interim Financial Information for further details. The Company has also received proceeds of $600,000 from the private placement of outstanding convertible and other debt. 14 ESSEX CORPORATION The Company's primary use of the private placement funds has been to patent, develop and commercialize its key leading-edge optical technologies, principally the fiberoptic HYPERFINE WDM devices and wireless OPERA(TM) technology. The purpose of the HYPERFINE WDM device is to increase the number of usable communications channels within a single optical fiber. The purpose of OPERA(TM) 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 device and communications fields. The Company has prototypes of the HYPERFINE WDM technology which are being demonstrated to prospective strategic partners and investors. In the first half of 2003, the Company has sold several prototypes of its initial HYPERFINE WDM devices. The Company is also developing applications for using HYPERFINE WDM to achieve privacy in an all optical network. The Company is developing simulations of its OPERA(TM) wireless receiver device technology and is undertaking to determine the various market entry points fOR such device technology. The Company is also holding discussions with various established commercial entities that are in the wireless communications market in order to determine the best commercial applications of such technology. The development of the commercial HYPERFINE WDM devices required a diversion of labor resources from revenue generation in 2002 and 2001. Because of the emphasis on development, the Company was unable in 2002 and 2001 to maintain customer programs of sufficient volume and to expand such work to consistently achieve an overall breakeven or better level of operations on such revenues. In light of the continued unfavorable conditions in the telecommunications markets, the commercial market for the Company's optical technologies and products has been slow in developing. As a consequence, the Company has opted to significantly expand the government business base creating a Company which provides total solutions to customer problems. The expansion has enabled the Company to record a small profit for the first half of fiscal 2003 while continuing commercial product development and marketing, although at reduced levels to the extent funds are available. The Company is also pursuing sales of its commercial HYPERFINE WDM and other optical technologies in the government marketplace. The Company plans to continue to expand its government programs while pursuing research and development (R&D) and marketing activities in the commercial products area to the extent funds are available. See "FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES". CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company re-evaluates its estimates, including those related to revenue recognition, R&D, inventories, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements. 15 ESSEX CORPORATION REVENUE RECOGNITION For U.S. Government customers, the Company provides services and products under a variety of contract types, namely cost plus fixed fee (CPFF), fixed price (FP) and time & material (T&M). The Company recognizes revenue on CPFF contracts to the extent costs are incurred plus a proportionate amount of fee earned. The Company must determine that the costs incurred are proper and that the ultimate costs incurred will not overrun the expected funding on the contract and still deliver the scope of work proposed. Even though CPFF contracts generally do not require that the Company expend costs in excess of the contract value, such expenditures may be required in order to achieve customer satisfaction and receive additional work. In addition, since the reimbursable costs include both direct and indirect costs, the Company must determine that the indirect costs are properly accounted for and allocated in accordance with government cost accounting requirements. On FP level-of-effort service contracts, the Company must determine that the costs incurred provide a proportionate amount of progress on the work and that the ultimate costs incurred will not overrun the funding on the contract and the required hours will be delivered. On FP product orders, revenue is not recorded until the Company determines that the goods have been delivered and accepted by the customer. On T&M contracts, revenue is recognized to the extent of billable rates multiplied by hours delivered, plus other direct costs. This is generally the most straightforward revenue computation. The Company uses historical technical performance experience where applicable to evaluate progress on FP and CPFF jobs. The Company uses historical government audit experience in the indirect cost area to evaluate the propriety and expected recovery of its indirect costs on CPFF contracts. RESEARCH AND DEVELOPMENT The Company has expended significant amounts for research and development for new products. In accordance with generally accepted accounting principles, the Company expenses and does not capitalize and add to inventory such expenditures. When product design and prototypes are finalized and product marketability and viability have been established, expenditures for inventory are treated accordingly. There is a judgmental aspect to this decision which could result in the over expensing in some cases or the early capitalization in other cases of such expenditures. REVENUES Revenues were $7,150,000 and $1,493,000 in the first halves of fiscal 2003 and 2002, respectively. Revenues were $4,149,000 and $729,000 for the second quarters of fiscal 2003 and 2002, respectively. Revenues in the first half of 2003 include $1,886,000 for four months of operations from recently acquired SDL. Excluding SDL, revenues in the first half of 2003 were $5,264,000 or $3,771,000 higher than the first half of 2002 due to several factors. A major factor was the increased activity on the U.S. Government Missile Defense Agency program for design of a next generation advanced optoelectronics radar processor (AOP) demonstration unit. This program had revenues of $2,172,000 in the first half of 2003 compared to revenues of $162,000 in the first half of 2002 as the Company did not begin this program until May 2002. The Company also had $1,545,000 of revenues on contracts in its Communications Services Division which was formed in late 2002. Additionally, the Company sold $723,000 of commercial equipment, including the sale of five prototype HYPERFINE WDM demonstration units for $210,000 to several government and intermediate customers. There were no such sales in 2002. 16 ESSEX CORPORATION As of June 29, 2003, the Company had funded backlog of approximately $5.9 million, unfunded backlog of $47.9 million and total backlog of $53.8 million compared to total backlog of $55.8 million at December 29, 2002. EXPENSES AND NET INCOME (LOSS) The Company recorded net income of $74,000 and a net loss $835,000 in the second quarters of 2003 and 2002, respectively. Net income was $54,000 and net loss was $1,665,000 in the first half periods of 2003 and 2002, respectively. During the first half of fiscal 2003 amortization of other intangibles was $174,000, all of which was related to the SDL acquisition. The remaining balance of $257,000 of other intangibles will be substantially amortized within approximately one year. There was no comparable amortization cost in the same period in 2002. Cost of goods sold and services (COGS) provided as a percentage of revenues for the first half of 2003 was 65%, which was significantly higher than the 50% in 2002. In 2002, the major component of COGS was direct labor and associated costs. In 2003, due to the AOP program referenced above, there was a significant increase in the direct materials and equipment component of COGS. The Company receives a higher markup on direct labor than direct material and equipment costs. Overall, the higher volume in 2003 contributed a larger amount of gross profit, though at a lower gross profit percentage. The net income improved as a larger amount of fixed expenses were covered by the higher revenue volume. Research and development (R&D) declined between the first half periods, amounting to approximately $226,000 in 2003 compared to $966,000 in 2002. The majority of the R&D costs were incurred on efforts related to optical telecommunications technology. The Company expects, subject to the availability of funds, to continue its R&D spending in the optical and telecommunications areas during the remainder of 2003. During the first half of 2003, the Company had higher selling, general and administrative expenses ("SG&A"), partially due to increased business development and higher management costs in the government contracts area as well as continuing costs in the optoelectronics and telecommunications new device business areas as the Company seeks to commercialize its optoelectronic telecommunications products and services. Overall, SG&A expenses have become proportionally lower relative to the higher 2003 revenue volume. High SG&A expenses contributed to the operating loss in the first half of 2002. CORPORATE MATTERS Total interest expense was $43,000 and $10,000 in the first half periods of 2003 and 2002, respectively. The Company has increased its borrowing to finance the growth in its business as reflected in the higher accounts receivable balance. The Company is in a net operating loss (NOL) carryforward position for book and tax purposes. No provision from income taxes was recognized in the first half of 2003 due to the NOL. 17 ESSEX CORPORATION FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES The Company evaluates its liquidity position using various factors. The following represents some of the more important factors:
=========================================== SELECTED FINANCIAL DATA ($ Thousands) AS OF ------------------------------------------- June 29, December 29, June 30, 2003 2002 2002 ------------- ------------ ------------ Total Assets $ 7,911 $ 2,343 $ 1,302 ============ ============ ============ Working Capital (Deficit) $ 1,123 $ 222 $ (323) ============ ============ ============ Current Ratio 1.40:1 1.15:1 0.67:1 ============ ============ ============ Advance from Accounts Receivable Financing $ 472 $ 169 $ 36 Capital Leases 18 76 170 Convertible Debt 500 500 -- Other Debt 100 -- -- ------------ ------------ ------------ Total Debt/Financing $ 1,090 $ 745 $ 206 ============ ============ ============ Stockholders' Equity $ 4,484 $ 358 $ 320 ============ ============ ============
As a result of the acquisition of SDL for predominately common stock, the Company's working capital increased by approximately $613,000 after deducting the $309,000 of cash consideration paid. The consideration amount paid is shown as a cash outflow from investing activities in the consolidated statements of cash flows. In 2003, net cash provided by financing activities of $393,000 resulted from the increased borrowings on accounts receivable and the private placement of $100,000 in debt to a member of its Private Investors. In 2002, the net cash provided by financing activities is primarily from the Company completing several private placements of equity or debt securities to its Private Investors or their affiliates. The Company received $2,000,000 and $3,000,000 in fiscal 2002 and fiscal 2001, respectively, including the $1,000,000 in the first half of 2002 from these private placements. The funds have been and are to be used primarily for the development of the optical telecommunications device technologies. In 2003, net cash used in operating activities of $502,000 was due to the increase in accounts receivable, partially offset by non cash depreciation and amortization charges. The increase in accounts receivable is due to increased volume and a slightly longer payment cycle on certain new contracts. This increase was also offset by the increase in accrued wages, vacation and other liabilities due to growth in personnel operating costs. In 2002, the net cash used in operating 18 ESSEX CORPORATION activities resulted from the losses incurred by the Company primarily due to the expenditures for development of its optoelectronics products and services. The Company has several device families under development, with development of HYPERFINE WDM fiber optic communications technology being the most advanced. In particular, the Company has completed development on an alpha version of the HYPERFINE multiplexer-demultiplexer and has received orders for HYPERFINE WDM from government customers and will continue to seek orders from theses customers. However, the Company has not yet begun substantial further efforts for commercial applications due to the current depressed state of the industry. The Company is continuing to develop and refine the HYPERFINE devices and related technologies to the extent funding is available. The Company estimates that efforts related to a full rollout of the remainder of the HYPERFINE family of devices would require between five to ten million dollars depending on a number of variables, including the extent of reliance on manufacturing, distribution and channel partner relationships. For example, if Essex enters into a strategic partnership with a large commercial company, the working capital required would tend toward the lower amounts in the range. The Company is seeking to establish joint ventures or strategic partnerships, including the licensing of its technologies to major industrial concerns to facilitate these goals. The Company might also seek additional funds under appropriate terms from private sources to further finance development and to achieve initial market penetration. If the Company does not successfully commercialize its optoelectronic products or raise substantial additional working capital for such commercial products, then these events could have a significant adverse effect on the Company's future operating results and financial position. The Company has a working capital financing arrangement with an accounts receivable factoring organization. Under the 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 was $472,000 of funds advanced as of June 29, 2003 and $169,000 as of December 29, 2002. The Company expects to satisfy its operating cash requirements for the remainder of 2003 from existing cash flows or from borrowings under its current working capital accounts receivable financing arrangements. The timing and extent of the Company's working capital needs will be tied directly to the prospects for its commercial products under development. The Company does not anticipate incurring significant marketing, sales or distribution expenses in the commercial product area unless and until there is a significant increase in the level of capital spending on optical telecommunications equipment and infrastructure. However, the Company plans to continue R&D spending on optoelectronics in 2003 at a reduced level. The reduced R&D spending is intended to allow the Company to operate at an overall breakeven or better level. Such R&D would be financed with internally generated funds. If the Company decides to accelerate its commercial products R&D and/or marketing and distribution efforts beyond those which can be internally financed, then the Company would have to raise additional funds from outside sources. However, there can be no assurances in this regard and we expect that the Company will need significant financing in the future if we pursue acquisitions. 19 ESSEX CORPORATION THE PRECEDING PARAGRAPHS DISCUSSING THE COMPANY'S FINANCIAL CONDITION CONTAIN FORWARD-LOOKING STATEMENTS. THE FACTORS AFFECTING THE ABILITY OF THE COMPANY TO MEET ITS FUNDING REQUIREMENTS AND MANAGE ITS CASH RESOURCES INCLUDE, AMONG OTHER THINGS, THE AMOUNT AND TIMING OF PRODUCT SALES, INVENTORY TURNOVER, THE MAGNITUDE OF FIXED COSTS AND THE ABILITY TO OBTAIN WORKING CAPITAL, ALL OF WHICH INVOLVE RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT. 20 ESSEX CORPORATION ITEM 3. CONTROLS AND PROCEDURES Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-QSB, the Company's Chief Executive Officer and Chief Financial Officer believe the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses. 21 ESSEX CORPORATION PART II - OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K (a) Exhibits Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (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: August 8, 2003 /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.) 22 ESSEX CORPORATION SECTION 302 CERTIFICATION I, Leonard E. Moodispaw, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Essex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d -14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in the quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated August 8, 2003 /S/ LEONARD E. MOODISPAW ----------------------------------- Leonard E. Moodispaw President and Chief Executive Officer SECTION 302 CERTIFICATION I, Joseph R. Kurry, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Essex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d -14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in the quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated August 8, 2003 /S/ JOSEPH R. KURRY, JR. ----------------------------------- Joseph R. Kurry, Jr. Senior Vice President, Treasurer and Chief Financial Officer EX-99 4 ex991.txt EXHIBIT 99.1 CEO CFO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Essex Corporation (the "Company") on Form 10-QSB for the period ending June 29, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Joseph R. Kurry, Jr., Chief Financial Officer of the Company and Leonard E. Moodispaw, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated August 8, 2003 /S/ JOSEPH R. KURRY, JR. ----------------------------------- Joseph R. Kurry, Jr. Senior Vice President, Treasurer and Chief Financial Officer Dated August 8, 2003 /S/ LEONARD E. MOODISPAW ----------------------------------- Leonard E. Moodispaw President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----