-----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, N9ivgZnLv7/nlGulcLHXYxO4nUNg2yJ60Yh6VHaJWbh4Wn9eksJE/b+jBzVdCAtY Q+9LgBE5Co9IR3xzqQgKug== 0000355199-97-000003.txt : 19970521 0000355199-97-000003.hdr.sgml : 19970521 ACCESSION NUMBER: 0000355199-97-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970330 FILED AS OF DATE: 19970520 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: 97611791 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 1997 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 30, 1997. OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period to --------- --------- 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) 959-7000 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 MARCH 30, 1997 ----- ----------------- Common Stock, par value $0.10 per share 3,626,098 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 29, 1996. 2 ESSEX CORPORATION BALANCE SHEETS
March 30, December 29, 1997 1996 (unaudited) (audited) ASSETS CURRENT ASSETS Cash $ 856,200 $ 1,507,603 Accounts receivable, net 1,668,224 1,482,118 Inventory 673,856 482,317 Prepayments and other 149,945 156,041 -------------------- -------------------- 3,348,225 3,628,079 -------------------- -------------------- PROPERTY AND EQUIPMENT Production and special equipment 1,597,405 1,596,491 Furniture, equipment and other 1,537,773 1,533,467 -------------------- -------------------- 3,135,178 3,129,958 Accumulated depreciation and amortization (2,585,683) (2,501,651) -------------------- -------------------- 549,495 628,307 -------------------- -------------------- OTHER ASSETS Assets held for sale, net 1,205,409 1,205,409 Patents, net 177,916 169,657 Goodwill, net 129,533 144,486 Deferred debenture financing 98,325 104,880 Other 44,505 58,696 -------------------- -------------------- 1,655,688 1,683,128 -------------------- -------------------- TOTAL ASSETS $ 5,553,408 $ 5,939,514 - ------------ ==================== ==================== The accompanying notes are an integral part of these statements.
3 ESSEX CORPORATION BALANCE SHEETS
March 30, December 29, 1997 1996 (unaudited) (audited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of Industrial Revenue Bond $ 80,001 $ 80,001 Current portion of capital leases 105,806 111,895 Bank line of credit 758,469 900,000 Accounts payable 1,012,082 506,999 Accrued wages and vacation 533,242 350,099 Deferred revenues and loss reserves 240,000 640,000 Accrued lease settlement 299,551 308,237 Other accrued expenses 611,742 631,045 -------------------- -------------------- 3,640,893 3,528,276 LONG-TERM DEBT Industrial Revenue Bond, net of current portion 133,318 153,319 10% Collateralized Convertible Debentures Due 2000 1,400,000 1,400,000 Capital leases, net of current portion 106,157 128,850 -------------------- -------------------- Total Liabilities 5,280,368 5,210,445 -------------------- -------------------- COMMITMENTS AND CONTINGENCIES (NOTE 4) STOCKHOLDERS' EQUITY Common stock, $0.10 par value; 25 million shares authorized; 3,626,098 and 3,625,098 shares issued and outstanding for 1997 and 1996, respectively 362,610 362,510 Contributions in excess of par value 5,316,308 5,313,888 Retained deficit (5,405,878) (4,947,329) -------------------- -------------------- 273,040 729,069 -------------------- -------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,553,408 $ 5,939,514 - -------------------- ==================== ==================== The accompanying notes are an integral part of these statements.
4 ESSEX CORPORATION STATEMENTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED MARCH 30, 1997 AND MARCH 31, 1996
1997 1996 (unaudited) (unaudited) Technical Services and Products: Revenues $ 2,868,503 $ 3,774,279 Direct costs (2,190,618) (2,549,979) Indirect costs (722,034) (1,073,755) ------------------ ------------------ Operating Income (Loss) - Technical Services and Products (44,149) 150,545 ------------------ ------------------ Optoelectronic Products and Services: Revenues 678,651 471,011 Cost of goods sold and services provided (436,515) (754,995) Engineering and product development expenses (214,954) (157,500) Selling, general and administrative expenses (389,430) (314,988) ------------------ ------------------ Operating Loss - Optoelectronics Products and Services (362,248) (756,472) ------------------ ------------------ Total Operating Loss (406,397) (605,927) Gain on settlement of lawsuit, net of related expenses of $1,773,578 in 1996 -- 2,226,422 Lease settlement -- (250,000) Interest expense (52,152) (45,552) ------------------ ------------------ Income (Loss) Before Income Taxes (458,549) 1,324,943 Provision for income taxes -- 254,300 ------------------ ------------------ Net Income (Loss) $ (458,549) $ 1,070,643 ================== ================== Weighted Average Number of Shares Outstanding 3,625,911 3,593,183 ================== ================== Earnings (Loss) Per Share Primary $ (0.13) $ 0.30 ================== ================== Fully Diluted $ (0.13) $ 0.28 ================== ================== The accompanying notes are an integral part of these statements.
5 ESSEX CORPORATION STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEK PERIODS ENDED MARCH 30, 1997 AND MARCH 31, 1996
1997 1996 (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (458,549) $ 1,070,643 Adjustments to reconcile Net Income (Loss) to Net Cash (Used In) Provided By Operating Activities: Depreciation and amortization 108,088 166,313 Provision for contract reserves -- 250,000 Gain on sale/retirement of fixed assets (1,780) (850) Change in Assets and Liabilities: Accounts receivable (186,106) 183,452 Inventory (191,539) (87,194) Prepayments and other assets 9,481 6,303 Goodwill -- 204,299 Accounts payable 505,083 116,083 Accrued lease settlement (8,686) 220,000 Other liabilities (236,160) 326,454 -------------- -------------- Net Cash (Used In) Provided By Operating Activities (460,168) 2,455,503 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (5,221) (43,367) Proceeds from sale of fixed assets 1,780 850 -------------- -------------- Net Cash Used In Investing Activities (3,441) (42,517) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings (repayments), net (141,531) (239,970) Repayment of long-term debt (20,001) (20,000) Proceeds from exercises of stock options 2,520 100,240 Issuance of convertible debentures, net of financing costs -- 764,737 Payment of capital lease obligations (28,782) (82,014) -------------- -------------- Net Cash (Used In) Provided By Financing Activities (187,794) 522,993 -------------- -------------- CASH AND CASH EQUIVALENTS Net increase (decrease) (651,403) 2,935,979 Balance - beginning of period 1,507,603 822,065 -------------- -------------- Balance - end of period $ 856,200 $ 3,758,044 ============== ============== The accompanying notes are an integral part of these statements.
6 ESSEX CORPORATION NOTES TO INTERIM FINANCIAL INFORMATION NOTE 1: General FISCAL YEAR Essex Corporation (the "Company") is on a 52-week fiscal year ending the last Sunday in December. NEW ACCOUNTING PRONOUNCEMENTS Statements of Financial Accounting Standards No. 128, "Earnings Per Share" and No. 125 "Disclosure of Information about Capital Structure" are effective for periods ending after December 15, 1997. The information required will be provided in the Company's 1997 year end financial statements. 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. Actual results could differ from those estimates. IMPORTANT BUSINESS RISK FACTORS Historically the Company has 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. Beginning in 1989, the Company has expended significant internal funds to transition into the commercial marketplace, particularly the productization of its proprietary technologies in optoelectronic processors, testing and evaluation. The long-term success of the Company in this area is dependent on its ability to successfully develop and market products related to its optoelectronic processors. The success of these efforts is subject to changing technologies, availability of financing, competition, and ultimately market acceptance. The Company has incurred losses over the past three years, primarily due to the development and marketing of its optoelectronics products and services. The Company has also experienced difficulty in sustaining and expanding revenue volume in certain areas of the Technical Services and Products business segment. The Optoelectronics Products and Services business segment is currently experiencing net cash expenditures (including all general and administrative expenses) over receipts of approximately $150,000 per month. If current conditions remain unchanged, the Company would not be able to sustain its business without additional working capital. 7 ESSEX CORPORATION The Company is attempting to address the working capital shortfall, principally by seeking additional funds from private financing sources. If necessary, the Company may sell certain operations or may sell other assets which are underutilized or deemed not to be a part of its ongoing operations. The Company has placed its Huntsville, Alabama facility for sale. However, the proceeds from the sale of the Huntsville facility would be restricted as to the use of the funds as the facility currently serves as a portion of the collateral on the convertible debentures. There are no definitive arrangements for sales for any such assets at this time. The Company is seeking additional funds from private financing sources to finance operations and to achieve desired product inventory levels and initial market penetration. The Company is also seeking to establish joint ventures or strategic partnerships with major industrial concerns to facilitate these goals. Significant delays in the commercialization of the Company's optoelectronic products or failure to raise substantial additional working capital and to commercialize would have a significant adverse effect on the Company's future operating results and future financial position. The current receivable financing arrangement expires May 31, 1997 (see Note 3). While the Company believes the financing arrangement should be renewed, terms and conditions of succeeding agreements may change. If the current arrangement is not renewed, the Company will need to obtain financing from other sources to finance its operations. 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 for 1997 because their effect was antidilutive. 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 ($758,469 at March 30, 1997 and $900,000 at December 29, 1996) constitute proceeds under the note which bears interest at an annual rate of prime plus 1.5% (total rate approximately 10.00% at March 30, 1997 and 9.75% at December 29, 1996). The maximum borrowings available based upon the level of accounts receivable were $758,469 at March 30, 1997 and $1,308,000 at December 29, 1996. The Company must also pay certain administrative and commitment fees which are expected to be less than $1,000/month. This agreement expires May 31, 1997. 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 were waived by the Bank in connection with the issuance of the Company's convertible debentures. 8 ESSEX CORPORATION NOTE 4: Commitments and Contingencies LEASE SETTLEMENT Effective July 1994, the Company settled a legal dispute with a former landlord. Under the remaining terms of the Settlement Agreement ("Agreement"), the Company agreed to make contingent cash payments of 25% of future earnings (as defined) and 10-15% of the net proceeds from the sale of common stock or operating assets, the total of such payments not to exceed $550,000. The Company also 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 option is exercisable through December 31, 2004 and has certain registration rights upon exercise of the option. The contingent amounts due are to be paid quarterly. The period for computation of such contingent payments ends December 2004. The $300,000 accrual as of March 30, 1997 represents the remaining contingent portion which is probable to be paid over the applicable consideration period. In accordance with the Agreement, the Company agreed to pay 20% (not to exceed $250,000) from the settlement from the lawsuit described below. As this legal proceeding was favorably concluded in 1996, the amount payable of $250,000 to the former landlord was expensed in the first quarter of 1996 and paid in April 1996. LEGAL PROCEEDING In 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 and full payment was received by the Company in 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 incurred in 1996 of $249,000. The Company had expensed approximately $384,000 in legal fees and related expenses in prior years. NOTE 5: Common Stock Offering; Warrants; Preferred Stock In July 1995, the Company successfully completed a $2.5 million Stock Offering ("Offering"). 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. 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. 9 ESSEX CORPORATION 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. In January 1997, a class of preferred stock was approved by the shareholders. The Company's Articles of Incorporation were amended to authorize a class of preferred stock, 1 million shares, par value $0.01 per share, the series and rights of which may be designated from time-to-time by the Board of Directors in accordance with applicable state and federal law. NOTE 6: Income Taxes The Company was in a net operating loss (NOL) carryforward position for book and tax purposes; such NOL was utilized to reduce the provision for income taxes in the first quarter of 1996. NOTE 7: Statements of Cash Flows Supplemental disclosures of cash flow information are as follows: Capital lease obligations of $59,642 were incurred during the first quarter of 1996, when the Company entered into various leases for new equipment. There were no new leases entered into in the first quarter of 1997. 10 ESSEX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER SECTIONS CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS, ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS", "ANTICIPATES", "PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS FORECAST IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. Essex Corporation is a diversified, technology-based company providing quality products and professional services to government and industry. Essex has determined that it operates in two business segments: Technical Services and Products; and Optoelectronic Products and Services. 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) SED operates in the Technical Services and Products segment; CPD operates in the Optoelectronics Products and Services segment; and FSD operates in both segments. GENERAL TECHNICAL SERVICES AND PRODUCTS At March 30, 1997, the Technical Services and Products contract backlog was $14.9 million ($4.8 million funded and $10.1 million unfunded). 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 $14.9 million is approximately: $12.0 million (81%) in cost-plus-fee type contracts; $2.0 million (13%) in time and material and $0.9 million (6%) in fixed-price type contracts. Costs are charged to contracts as incurred as the Technical Services and Products segment is generally providing labor-based services and therefore does not normally accumulate or stock inventory. The 11 ESSEX CORPORATION percentage-of-completion method of accounting is utilized for revenue recognition. Anticipated losses, if any, are recognized as soon as they become known. OPTOELECTRONIC PRODUCTS AND SERVICES In mid-1996, the Company completed initial development of its first ImSyn(TM) processor prototype. The Company has entered the synthetic aperture radar (SAR) imaging and magnetic resonance imaging (MRI) markets. During late 1996, the Company initiated production plans to build ten additional ImSyn(TM) Processors which were released to manufacture in early 1997. The SAR market consists of aerospace prime contractors, subcontractors and government laboratories, while the initial MRI market consists of luminary medical research centers. In addition, the Company is continuing to present both its ImSyn(TM) Processor and its Synthetic Aperture Microscope ("SAM") design model to original equipment manufacturers for their consideration. The SAM is sponsored in part by a U.S. Government development contract. The Company has ongoing efforts for further product development and applications engineering. In accordance with generally accepted accounting principles governing such engineering and development expenses, costs of approximately $215,000 and $158,000 have been recognized through the Company's statements of operations as first quarter 1997 and 1996 period expenses, respectively. Additional funding is necessary for commercial products' inventory buildup, marketing and further development of commercial applications and products. At March 30, 1997, the Optoelectronic Products and Services segment has a backlog of approximately $950,000 ($400,000 funded and $550,000 unfunded) which is comprised of cost- plus-fixed-fee (84%) and fixed-price (16%) contracts from the U.S. Government. There is a contract which was received in July 1996 included in this backlog with a remaining value of approximately $280,000 (funded value of $30,000) for delivery of an optoelectronic processor utilizing ImSyn(TM) technology and related services to U.S. Government end-users. Another contract with a remaining funded value of $157,000 is for government-sponsored research utilizing an ImSyn(TM) unit in synthetic aperture microscope applications. Additional backlog of approximately $350,000 (funded value of $50,000) is included from another U.S. Government customer to complete the prototype optoelectronic range-doppler imager and demonstrate new radar techniques to combat ballistic missile threats. OPERATING RESULTS TECHNICAL SERVICES AND PRODUCTS: REVENUES This segment's revenues for the first thirteen weeks of 1997 totaled $2,869,000, which was $905,000 (24%) less than the $3,774,000 reported during the same period in 1996. Revenues for the 1997 first quarter were approximately $1.4 million in SED and $1.5 million in FSD as compared to $1.2 million in SED and $2.6 million in FSD in the 1996 first quarter. FSD continues to experience a slowdown in receipt of new awards and funding on existing contracts with U.S. Government customers. 12 ESSEX CORPORATION INCOME This segment had an operating loss in the first quarter of 1997 of $44,000 compared with an operating profit of $151,000 (4.0% gross profit) in the same quarterly period of 1996. In this segment, the Company experienced in its Federal Systems Division additional unanticipated overruns in the final phase of a $3.6 million program ("Trainers program") which spanned three years to provide training devices to a U.S. Government customer. This segment recognized approximately $250,000 of loss on this Trainers program during the first quarter of 1997 as compared to a profit of $15,000 in the first quarter of 1996. During early 1996, the Company was not estimating that this contract would incur losses. This program is scheduled to be completed in mid 1997. Direct costs have increased as a percentage of revenues to 76.4% in the first thirteen weeks of 1997 and as compared to 67.6% for the same period in 1996. The direct costs necessary to complete the Trainers program exceed the revenue recognized on that program. OPTOELECTRONIC PRODUCTS AND SERVICES: REVENUES This segment's revenues for the first thirteen weeks of 1997 totaled $679,000 as compared to $471,000 in the same period of 1996. During the first quarter of 1997, an order from a government customer for an ImSyn(TM) unit was filled from inventory and recognized as a $250,000 product sale. The remaining revenues for the quarter of approximately $429,000 were from a mix of labor services and recoverable direct costs on government contracts. During the 1997 first quarter, work on two contracts was performed and components were being assembled for delivery of an optoelectronic processor on each contract using ImSyn(TM) technology together with related services. Work was also performed on another contract for government-sponsored research on the Company's proprietary synthetic aperture microscope technology. This technology will utilize the ImSyn(TM) unit. INCOME This segment had an operating loss of $362,000 in the first quarter of 1997 as compared to an operating loss of $756,000 in the same period of 1996. Initial revenues are comprised primarily of services provided. The cost of goods sold exceeded revenues in the first quarter of 1996 as cost overruns were incurred on two initial government contracts to provide optoelectronic processors. A contract reserve provision of $250,000 was made in the first quarter of 1996 for these two overrun contracts and is included in cost of goods sold. The completion status of these fixed-price contracts to deliver an optoelectronic correlator and to deliver the first optoelectronic processor were negatively impacted by design and specification changes which were not recoverable under the contracts. Beginning January 1, 1996, this segment began to establish a manufacturing operation for optoelectronic products. As the manufacturing operation is its initial phase, a portion of manufacturing overhead is underabsorbed. Such additional expense was $60,000 in the first 13 ESSEX CORPORATION quarter of 1997 and $56,000 in the same quarterly period of 1996 and such costs are included in cost of goods sold. The segment incurred expenses in connection with the development of the initial ImSyn(TM) prototype and further product development and applications engineering. Such expenses were $215,000 in the first thirteen weeks of 1997 and $158,000 in the same period of 1996. In addition to the engineering and product development expenditures, this segment is increasing expenditures for selling, general and administrative expenses in order to achieve initial market penetration. Such expenditures were $389,000 in the first thirteen weeks of 1997 and $315,000 in the same period of 1996. CORPORATE MATTERS Total revenues were $3,547,000 in the first thirteen weeks of 1997, a decrease of $698,000 or 16% over the $4,245,000 in the same period of 1996. There was a net loss of $459,000 or $0.13 per share (primary) for the first quarter 1997 compared to net income of $1,071,000 or $0.30 per share (primary). In 1996, there was the gain on settlement of a lawsuit (approximately $2,226,000, or $0.62 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 total operations would have produced a net loss of $651,000 or $0.18 per share in the first quarter of 1996. The primary income (loss) per share results are computed on weighted average shares outstanding of 3,626,000 in 1997 compared to 3,593,000 in 1996. The Company and a corporate defendant reached an out-of-court settlement in 1996. 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 lawsuit. Total interest costs were $52,000 in the first quarter of 1997 as compared to $46,000 in the same quarterly period of 1996. In 1997, the Company's interest costs increased due to higher average borrowings under its bank line of credit. The Company is in a net operating loss (NOL) carryforward position for book and income tax purposes. The provision for income taxes was reduced in the first quarter of 1996 by use of NOL carryforward amounts. No provision or benefit from income taxes was recognized in the first quarter of 1997. 14 ESSEX CORPORATION FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES The Company evaluates its liquidity position using various factors. The following represents some of the more important factors:
SELECTED FINANCIAL DATA ($ Thousands) AS OF March 30, December 29, March 31, 1997 1996 1996 Total Assets $ 5,553 $ 5,940 $ 8,767 Working Capital (Deficit) $ (293) $ 100 $ 2,524 Current Ratio 0.92:1 1.03:1 1.65:1 Current and Long-Term Debt $ 213 $ 233 $ 293 Current and Long-Term Capital Leases 212 241 269 Bank Line of Credit 758 900 677 10% Convertible Debentures Due 2000 1,400 1,400 1,400 ---------------- --------------- -------------- Total Debt/Financing $ 2,583 $ 2,774 $ 2,639 ================ =============== ============== Stockholders' Equity $ 273 $ 729 $ 3,131
The Company experienced a substantial decrease in its working capital and ratio due primarily to the net loss of $459,000 in the first quarter of 1997. The net loss was the primary factor in the $460,000 of net cash used in operations in the first quarter of 1997. The Company has incurred losses over the past three years, primarily due to the development and marketing of its optoelectronics products and services. The Company has also experienced difficulty in sustaining and expanding revenue volume in certain areas of the Technical Services and Products business segment. The Optoelectronics Products and Services business segment is currently experiencing net cash expenditures (including all general and administrative expenses) over receipts of approximately $150,000 per month. If current conditions remain unchanged, the Company would not be able to sustain its business without additional working capital. As previously disclosed in the Company's 1996 Form 10-KSB, the Company is attempting to address the working capital shortfall, principally by seeking additional funds from private financing sources. If necessary, the Company may sell certain operations or may sell other assets which are underutilized or deemed not to be a part of its ongoing operations. The Company has placed its Huntsville, Alabama facility for sale. However, the proceeds from the sale of the Huntsville facility would be restricted as to the use of the funds as the facility currently serves as a portion of the collateral on the convertible debentures. There are no 15 ESSEX CORPORATION definitive arrangements for sales for any such assets at this time. There can be no assurance that the Company's attempts to raise working capital will be successful. The Company is seeking additional funds from private financing sources to finance operations and to achieve desired product inventory levels and initial market penetration. The Company is also seeking to establish joint ventures or strategic partnerships with major industrial concerns to facilitate these goals. Significant delays in the commercialization of the Company's optoelectronic products, failure to commercialize or failure to raise substantial additional working capital would have a significant adverse effect on the Company's future operating results and future financial position. The current receivable financing arrangement expires May 31, 1997. While the Company believes the financing arrangement should be renewed, terms and conditions of succeeding agreements may change. In order to fund its operations, the Company will be required to replace or extend such arrangement and to raise additional working capital. There can be no assurance that the Company will be successful in doing so. Under the settlement agreement reached with the landlord, certain payments are triggered only by other future cash inflows. The remaining $300,000 contingent portion of the landlord settlement obligation (which has been accrued and expensed in prior years), is not payable until future earnings (as defined), operating asset sales or equity capital funding occur. When such future events transpire, only a portion of the cash flows or proceeds generated are payable. The preceding paragraphs contain forward-looking statements and the factors affecting the ability of the Company to meet its funding requirements and manage its cash resources include, among other things, the magnitude and timing of product sales and the magnitude of fixed costs. 16 ESSEX CORPORATION PART II - OTHER INFORMATION Item 5. Other Information Effective May 16, 1997, Mr. E. Ted Prince resigned from the Board of Directors for reasons related to other outside business commitments. 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: 20 May 1997 /s/ 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.) 17 EX-27 2 FDS 1ST QTR 10-QSB 1997
5 1,000 3-MOS DEC-28-1997 DEC-30-1996 MAR-30-1997 856 0 1,904 (236) 674 3,348 3,135 (2,586) 5,553 3,641 1,533 0 0 363 5,316 5,553 3,547 3,547 3,565 3,954 0 0 52 (459) 0 (459) 0 0 0 (459) (.13) (.13)
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