-----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, QGJh2Dm/OtFZel5hkwt2NrPLJjgawLcXczGQ6JLnrvFXtclDcBMrauwxGbWva09u /vYmF28PsqxcWuXmgaYMBg== 0000355199-97-000004.txt : 19970813 0000355199-97-000004.hdr.sgml : 19970813 ACCESSION NUMBER: 0000355199-97-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970812 SROS: NONE 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: 97656939 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 2ND 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 June 29, 1997. Commission File Number 0-10772 ESSEX CORPORATION (Exact name of small business issuer as specified in its charter) Virginia 54-0846569 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9150 Guilford Road, Columbia, Maryland 21046-1891 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (301) 939-7000 Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO State the number of shares outstanding of each of the issuer's class of Common Stock as of the latest practicable date. Outstanding Class at June 29, 1997 Common Stock, par value $0.10 per share 3,626,098 Transitional Small Business Disclosure Format (Check One); YES NO X 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
June 29, December 29, 1997 1996 (unaudited) (unaudited) ASSETS Current Assets Cash $ 781,865 $ 1,507,603 Accounts receivable, net 417,763 431,870 Inventory 781,006 482,317 Prepayments and other 26,910 115,735 Net current assets of discontinued operations 42,797 60,777 2,050,341 2,598,302 Property and Equipment Production and special equipment 1,016,458 1,014,201 Furniture, equipment and other 849,660 831,740 1,866,118 1,845,941 Accumulated depreciation and amortization (1,530,442) (1,396,475) 335,676 449,466 Other Assets Net noncurrent assets of discontinued operations 1,176,833 1,196,111 Patents, net 176,625 169,657 Goodwill, net 114,579 144,486 Deferred debenture financing 91,863 104,880 Other 31,092 45,587 1,590,992 1,660,721 TOTAL ASSETS $ 3,977,009 $ 4,708,489 The accompanying notes are an integral part of these statements.
3 ESSEX CORPORATION BALANCE SHEETS
June 29, December 29, 1997 1996 (unaudited) (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Current portion of capital leases $ 82,285 $ 82,284 Bank line of credit 406,890 900,000 8% Convertible notes payable 230,000 -- Accounts payable 611,593 278,284 Accrued wages and vacation 172,615 156,064 Deferred revenues and loss reserves 20,000 265,000 Accrued lease settlement 299,551 308,237 Refundable deposit on sale of discontinued operations 200,000 -- Other accrued expenses 630,520 495,521 2,653,454 2,485,390 Long-term Debt 10% Collateralized Convertible Debentures Due 2000 1,400,000 1,400,000 Capital leases, net of current portion 57,534 94,030 Redeemable Preferred Stock - Series A 120,000 -- Total Liabilities 4,230,988 3,979,420 Commitments and Contingencies (Note 4) Stockholders' Equity (Deficit) 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 (5,932,897) (4,947,329) (253,979) 729,069 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,977,009 $ 4,708,489 The accompanying notes are an integral part of these statements.
4 ESSEX CORPORATION STATEMENTS OF OPERATIONS FOR THE TWENTY-SIX WEEK PERIODS ENDED JUNE 29, 1997 AND JUNE 30, 1996
1997 1996 (unaudited) (unaudited) Revenues $ 2,064,476 $ 2,134,280 Cost of goods sold and services provided (1,003,048) (1,416,872) Engineering and product development expenses (389,056) (341,255) Selling, general and administrative expenses (1,440,417) (1,836,481) Operating Loss (768,045) (1,460,328) Gain on settlement of lawsuit, net of related expenses of $1,773,578 in 1996 -- 2,226,422 Lease settlement -- (250,000) Interest expense (116,550) (85,129) Income (Loss) from Continuing Operations Before Income Taxes (884,595) 430,965 Provision for income taxes -- (254,300) Income (Loss) from Continuing Operations (884,595) 176,665 Income (Loss) from Discontinued Operations (Note 8) (100,973) 377,778 Net Income (Loss) $ (985,568) $ 554,443 Weighted Average Number of Shares Outstanding 3,626,005 3,608,628 Primary Earnings (Loss) Per Share Continuing Operations $ (0.24) $ 0.05 Discontinued Operations (0.03) 0.10 $ (0.27) $ 0.15 The accompanying notes are an integral part of these statements.
5 ESSEX CORPORATION STATEMENTS OF OPERATIONS FOR THE THIRTEEN WEEK PERIODS ENDED JUNE 29, 1997 AND JUNE 30, 1996
1997 1996 (unaudited) (unaudited) Revenues $ 890,797 $ 1,028,615 Cost of goods sold and services provided (429,184) (510,116) Engineering and product development expenses (174,102) (183,755) Selling, general and administrative expenses (615,938) (907,710) Operating Loss (328,427) (572,966) Interest expense (64,398) (39,577) Loss from Continuing Operations Before Income Taxes (392,825) (612,543) Provision for income taxes -- -- Loss from Continuing Operations (392,825) (612,543) Income (Loss) from Discontinued Operations (Note 8) (134,194) 96,343 Net Loss $ (527,019) $ (516,200) Weighted Average Number of Shares Outstanding 3,626,098 3,624,081 Primary Earnings (Loss) Per Share Continuing Operations $ (0.11) $ (0.17) Discontinued Operations (0.04) 0.03 $ (0.15) $ (0.14) The accompanying notes are an integral part of these statements.
6 ESSEX CORPORATION STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEK PERIODS ENDED JUNE 29, 1997 AND JUNE 30, 1996
1997 1996 (unaudited) (unaudited) Cash Flows From Operating Activities: Net Income (Loss) $ (985,568) $ 554,443 Adjustments to reconcile Net Income (Loss) to Net Cash (Used In) Provided By Operating Activities: Depreciation and amortization 139,558 255,751 Provision for contract reserves -- 250,000 Gain on sale/retirement of fixed assets (4,554) (850) Change in Assets and Liabilities: Accounts receivable 14,107 179,632 Inventory (298,689) (137,564) Prepayments and other assets 91,258 (5,224) Goodwill -- 204,299 Accounts payable 333,309 (207,640) Accrued lease settlement (8,686) (70,109) Other liabilities (93,450) 71,680 Non-cash charges and working capital changes of discontinued operations 44,661 229,023 Net Cash (Used In) Provided By Operating Activities (768,054) 1,323,441 Cash Flows From Investing Activities: Purchases of property and equipment (4,595) (81,770) Proceeds from sale of fixed assets 5,909 798 Net Cash Provided By (Used In) Investing Activities 1,314 (80,972) Cash Flows From Financing Activities: Short-term borrowings (repayments), net (493,110) (240,010) Issuance of convertible notes payable 230,000 -- Issuance of preferred stock 120,000 -- Deposit on sale of operations 200,000 -- Issuance of convertible debentures, net of financing costs 26,134 756,614 Proceeds from exercises of stock options 2,520 100,315 Payment of capital lease obligations (44,542) (131,352) Net Cash Provided By Financing Activities 41,002 485,567 Cash and Cash Equivalents Net increase (decrease) (725,738) 1,728,036 Balance - beginning of period 1,507,603 822,065 Balance - end of period $ 781,865 $ 2,550,101 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 Essex Corporation (the "Company") is on a 52-week fiscal year ending the last Sunday in December. Certain amounts for 1996 have been reclassified to conform to the 1997 presentation. New Accounting Pronouncements Statements of Financial Accounting Standards No. 128, "Earnings Per Share" and No. 129 "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 funds to transition into the commercial marketplace, particularly the productization of its proprietary technologies in optoelectronic processors. The long-term success of the Company in this area is dependent on its ability to successfully develop and market products related to its optoelectronic processors. The success of these efforts is subject to changing technologies, availability of financing, competition, and ultimately market acceptance. The Company has incurred significant losses since 1989, 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 business. The optoelectronics products and services business is currently experiencing net cash expenditures (including all general and administrative expenses) over receipts of approximately $100,000 per month. The Company has taken steps to increase revenue volume and reduce expenditures. If current conditions remain unchanged, the Company would not be able to sustain its business without additional working capital or further cost reductions. 8 ESSEX CORPORATION The Company has addressed the current working capital shortfall by selling the majority of its technical services operations. In addition, 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. One arrangement for the sale of certain operations was closed in early August and another arrangement is in the process of being definitized. The Company continues to seek 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 further delays in the commercialization of the Company's optoelectronic products or failure to raise substantial additional working capital and to commercialize such optoelectronic products would have a significant adverse effect on the Company's future operating results and future financial position. The current receivable financing arrangement expires August 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 or immaterial. NOTE 3: Accounts Receivable Financing The Company has a receivables financing arrangement with Signet Bank. This arrangement is evidenced by a Loan Agreement, $1.0 million Promissory Note and Commercial Security Agreement ("Agreements"). Under the Agreements, the Bank will advance funds against certain accounts receivable. The funds advanced ($406,890 at June 29, 1997 and $900,000 at December 29, 1996) constitute proceeds under the note which currently bears interest at an annual rate of prime plus 4.0% (previously 1.5% over prime through May 30, 1997; total rate approximately 12.50% at June 29, 1997 and 9.75% at December 29, 1996). The maximum borrowings available based upon the level of accounts receivable were approximately $412,000 at June 29, 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 August 31, 1997. This $1.0 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, preferred stock, 8% notes payable and divestiture of operations. 9 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 June 29, 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 Outstanding; Preferred Stock; Convertible Notes Payable and Debentures 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 10 ESSEX CORPORATION 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. In connection with the issuance of 8% Convertible notes payable, the Company has reserved 460,000 shares of common stock for conversion. 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. In June 1997, the Board designated 2,500 shares of such preferred stock as Series A with a $100 par value and an 8% annual dividend. Such shares are redeemable after 90 days and before 1 year from date of issuance at the option of the holder. These preferred shares are convertible into shares of Essex common stock at $0.50 per share and have certain other conversion protection features. There were 1,200 shares of preferred stock issued and outstanding at June 29, 1997. The Company has reserved 240,000 shares of common stock for conversion. The Company has reserved approximately 2,007,000 shares of common stock in connection with the convertible debentures, notes and preferred stock and the possible exercise of all such warrants. NOTE 6: Income Taxes The Company is 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 half of 1996 to $254,300. However, as no book or taxable income was ultimately realized in fiscal 1996, this provision was reversed in subsequent quarters of 1996. NOTE 7: Statements of Cash Flows Supplemental disclosures of cash flow information are as follows: Capital lease obligations of $115,722 were incurred during the first half of 1996, when the Company entered into various leases for new equipment. There were no new capital leases entered into in the first half of 1997. 11 ESSEX CORPORATION NOTE 8: Discontinued Operations In June 1997, the Board of Directors unanimously approved, effective June 29, 1997, the disposition of the Systems Effectiveness Division ("SED") and operations of the Federal Systems Division ("FSD") except for the telecommunications and government-related optoelectronics businesses which are comprised of different customers, a separate location in Columbia, Maryland and distinguishable operations. The operations to be discontinued comprised the majority of the Company's Technical Services and Products business operations. On August 4, 1997, the Company completed the sale of certain of the assets and operations of FSD for approximately $225,000 in cash and assumption of certain liabilities of approximately $60,000. The estimated net gain of approximately $175,000 will be recognized in the third quarter of 1997. There is a contingent payment of $75,000 due upon award of certain new business expected during the 1997 third quarter which could increase the net gain. Another portion of the operations of FSD which were performed primarily in the Company's facility in Huntsville, Alabama are being discontinued. There is one remaining contract which is expected to be completed in August 1997. The Huntsville facility has been placed for sale and is included in the net noncurrent assets shown in the balance sheets. On July 8, 1997, the Company entered into a Letter of Intent to sell SED. Negotiations are in process to finalize the sale and are expected to conclude during the third quarter of 1997. Summarized results of operations for the discontinued operations are as follows: Six months ended June 29, 1997 ------------------------------
Revenues Net Income (Loss) -------- ----------------- SED $ 2,782,000 $ 245,000 FSD $ 1,625,000 $ (346,000)
Six months ended June 30, 1996 ------------------------------
Revenues Net Income -------- ---------- SED $ 2,550,000 $ 293,000 FSD $ 2,960,000 $ 85,000
12 ESSEX CORPORATION Net current and noncurrent assets are comprised of the following:
Net Current As of As of June 29, 1997 December 29, 1996 Receivables, net $ 896,588 $ 1,002,676 Other assets 53,451 53,415 Accounts payable (456,155) (181,145) Accrued wages and vacation (212,507) (194,035) Other accrued liabilities (238,580) (245,134) Deferred revenues and loss reserves -- (375,000) $ 42,797 $ 60,777 Net Noncurrent Property, plant and equipment, net of accumulated depreciation $ 1,316,822 $ 1,384,250 Industrial Revenue Bond (113,318) (153,319) Other long-term liabilities (26,671) (34,820) $ 1,176,833 $ 1,196,111
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", 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. Historically, Essex Corporation has been a diversified, technology-based company providing quality products and professional services to government and industry. Essex previously determined that it operated in two business segments: Technical Services and Products; and Optoelectronic Products and Services. The Company allocated its operations to the following business units: o Systems Effectiveness Division (SED) o Federal Systems Division (FSD) o Commercial Products Division (CPD) SED operated in the Technical Services and Products segment; CPD operated in the Optoelectronics Products and Services segment; and FSD operated in both segments. In June 1997, the Board of Directors unanimously authorized the sale of the SED and the FSD operations (except for the telecommunications and government-related optoelectronics businesses). The historical technical services business areas were too diverse relative to the size of the Company. The Company intends to concentrate all its efforts and resources in commercializing its optoelectronics and telecommunications products and services. On August 4, 1997, the Company sold the FSD operations (except for the telecommunications and government-related optoelectronics businesses) for approximately $225,000 in cash and assumption of certain liabilities of approximately $60,000. The Company has signed a Letter of Intent to sell the SED operations and is currently negotiating the final terms of the proposed transaction. Effective June 29, 1997, the Company has presented the results of these SED and FSD operations as "discontinued operations". Prior years' figures have been restated to reflect the amounts of such discontinued operations. Continuing operations reflect the results of the Commercial Products Division which provides optoelectronic products and services, as well as telecommunications engineering services. Continuing operations also include related optoelectronic products and services revenues provided to ongoing U.S. Government customers which were previously provided through the Federal Systems Division. 14 ESSEX CORPORATION CONTINUING OPERATIONS Revenues were $891,000 and $1,029,000 for the second quarters of 1997 and 1996, respectively, a decline of 13%. Revenues were $2,065,000 and $2,134,000 for the first half periods of 1997 and 1996, respectively, a decline of 3%. The Company's work for Motorola on its Iridium cellular satellite communication system accounted for revenues of $914,000 and $1,196,000 of the first half revenues for 1997 and 1996, respectively. This represented 44% and 56% of total revenues for the first half periods of 1997 and 1996, respectively. There was a decline in revenues from this program between the first half periods as tasks were completed for the initial satellite system. The Company continues to perform work on the current and successor satellite systems and has a backlog on the Motorola program of over $950,000. The Company has a backlog of approximately $700,000 on programs related to optoelectronic devices and services. The decline in revenues on the Motorola contract were partially offset by the sale of one Imsyn(TM) unit for $250,000 during the first quarter of 1997 for U.S. Government end use under a development and applications contract. The Company does not have any firm orders for ImSyn(TM) units as of August 11, 1997. There were losses from continuing operations of $328,000 and $573,000 in the second quarters of 1997 and 1996, respectively. There were losses of $768,000 and $1,460,000 in the first half periods of 1997 and 1996, respectively. Cost of goods sold and services provided for the first half of 1996 was 66.4% as compared to 48.6% in 1997. In 1996, significant additional costs in excess of amounts which could be recovered were incurred on two contracts for delivery of initial optoelectronic processor devices. Selling, general and administrative expenses ("SG&A") were $1.8 million in the first half of 1996 compared to $1.4 million in the first half of 1997 on approximately the same overall revenue volume. The $400,000 of such higher SG&A expenses contributed to the larger loss in 1996. Overall, SG&A expenses remain high relative to the revenue volume as the Company seeks to commercialize its optoelectronic products and services. The Company has reduced expenses between the 1996 and 1997 periods and expects to curtail expenditures where possible while retaining essential technical capabilities and personnel in the optoelectronics and telecommunications businesses. DISCONTINUED OPERATIONS There was a loss from discontinued operations of $134,000 and $101,000 in the second quarter and first half periods of 1997, respectively. There was income from such discontinued operations of $96,000 and $378,000 in the second quarter and first half periods in 1996, respectively. Discontinued operations are comprised of the results of the Systems Effectiveness Division and the operations of the Federal Systems Division except for the telecommunications and government-related optoelectronics businesses. During 1997 and 1996, the SED operations had first half sales of approximately $2.8 million and $2.6 million, respectively, and produced 15 ESSEX CORPORATION income of approximately $250,000 during each first half period. A Letter of Intent has been signed to sell the SED operations. Negotiations are in process to definitize the terms of the sale and are expected to be concluded during the third quarter of 1997. The FSD discontinued operations saw revenues decline from $3 million in the first half of 1996 to $1.6 million in the first half of 1997. There was a loss from operations of approximately $350,000 in the first half of 1997 compared to income of approximately $90,000 during the first half of 1996. During the first half of 1996, FSD was working on several programs, including a program to produce aviation maintenance trainers (the "Trainers Program"), which were estimated to be on budget and provided volume to recover indirect expenses. In late 1996, the Trainers Program incurred performance difficulties which produced losses on this program in the last quarter of 1996. Additional significant completion problems were encountered in the first half of 1997 which produced additional losses. FSD was unable to secure additional new business on a timely basis resulting in the decision to close the Huntsville, Alabama production facility concurrent with the end of the Trainers Program (rescheduled for late August 1997). The sale of certain other FSD technical service operations located elsewhere was completed in early August 1997 and the net gain will be reported in the third quarter of 1997. CORPORATE MATTERS There was a gain in 1996 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). The income (loss) per share results are computed on weighted average shares outstanding of 3,609,000 in 1996. 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 1997, the Company's interest costs increased due to the increased borrowings under its line of credit. Total interest costs were $117,000 in the first half of 1997 compared to $85,000 in the same period of 1996. The Company recognized the majority of its remaining tax benefit amount recoverable from the carryback of net operating losses prior to 1994. The Company is in a net operating loss (NOL) carryforward position. No provision or benefit from income taxes was recognized in the first half of 1997. In the first half of 1996, the Company recorded a book income tax expense, although lower than at statutory rates. However, as no book or taxable income was ultimately realized in fiscal year 1996, this provision was reversed in subsequent quarters of 1996. 16 ESSEX CORPORATION FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES The Company evaluates its liquidity position using various factors. The following represents some of the more important factors: SELECTED FINANCIAL DATA ($ Thousands) -------------------------------------
AS OF June 29, December 29, June 30, 1997 1996 1996 ---- ---- ---- Total Assets $ 3,977 $ 4,708 $ 6,237 Working Capital (Deficit) $ (603) $ 113 $ 2,037 Current Ratio 0.77:1 1.05:1 1.97:1 Current and Long-Term Capital Leases $ 140 $ 176 $ 189 Bank Line of Credit 407 900 677 Convertible Notes Payable 230 -- -- Convertible Debentures 1,400 1,400 1,400 Total Debt/Financing $ 2,177 $ 2,476 $ 2,266 Stockholders' Equity (Deficit) $ (254) $ 729 $ 2,615
The Company experienced a substantial decrease in its working capital and ratio due primarily to the net loss of $986,000 in the first half of 1997. The net loss was the primary factor in the $768,000 of net cash used in operations in the first half of 1997. At June 29, 1997, Company has negative working capital of approximately $600,000 and a stockholders' deficit of approximately $250,000. During June 1997, certain insiders and directors invested $350,000 in convertible unsecured notes payable and redeemable preferred stock. Such amounts are not considered equity since they are primarily considered debt instruments. The Company should have a positive equity after the conclusion of the sales of all discontinued operations as discussed below. The Company has incurred significant losses over recent 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. The optoelectronics products and services business is currently experiencing net cash expenditures (including all general and administrative expenses) over receipts of approximately $100,000 per month. The Company has taken steps to increase revenue volume and reduce expenditures. If current conditions remain unchanged, the Company would not be able to sustain its business without additional working capital or further cost reductions. As previously discussed in the Company's 1996 Form 10-KSB, the Company has addressed the current working capital shortfall by selling the majority of its technical services operations. One arrangement for the sale of certain FSD operations was closed in early August and another 17 ESSEX CORPORATION arrangement for the sale of SED operations is in the process of being definitized. The Company has also 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. The Company continues to seek 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 such products 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 Company has approximately $780,000 of inventory in current assets. This inventory is comprised of ImSyn(TM) optoelectronic processors and consists of finished goods and work-in-process. Sales of such units will be necessary in order to maintain working capital liquidity. There are no firm orders for sales of such units as of August 11, 1997. The current receivable financing arrangement expires August 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 sales of the discontinued operations of the Company will require that a portion of the remaining $300,000 be paid from the proceeds from such sales. 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. 18 PART II - OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K. (a) Exhibits (i) Exhibit 4 - Instruments defining the Rights of Holders 4.8 Specimen of Preferred Stock - Series A (ii) Exhibit 10 - Material Contracts 10.16 Subscription Agreement Between the Company and Harry Letaw, Jr. and Joyce Letaw 10.17 Subscription Agreement Between the Company and Samuel Hopkins 10.18 Subscription Agreement Between the Company and Harold P. Hanson 10.19 8% Convertible Note Payable - Harry Letaw, Jr. and Joyce Letaw 10.20 8% Convertible Note Payable - Samuel Hopkins 10.21 8% Convertible Note Payable - Harold P. Hanson (iii) 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: 11 August 1997 ----------------------- 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-4 2 EXHIBIT 4.8 EXHIBIT 4.8 Specimen of Preferred Stock - Series A SPECIMEN INCORPORATED UNDER THE LAWS OF VIRGINIA NUMBER SHARES -1 --------- ------------ ESSEX CORPORATION AUTHORIZED CAPITAL STOCK: 2,500 Shares of Class A Preferred Stock, par value $100.00 THIS CERTIFIES THAT, -------------- is the registered holder of (N A M E) ------------------- Shares of Class A Preferred Stock, par value (NUMBER IN WORDS) $100.00 per Share transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ---- day of A.D 1997. (CORPORATE SEAL) -------------------- --------------------------------- Assistant Secretary Chief Financial Officer/Treasurer SEE LEGEND ON REVERSE OF CERTIFICATE THIS SECURITIES REPRESENTED HEREBY HAVE NOT BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER THE FOREGOING ACT OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF (INCLUDING RULE 144), AS EVIDENCED BY AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED ------------------ hereby sell, assign and transfer unto ----------------------------------------------------------------- --------------------------------------------------------------- Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint----------------------- Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated ---------------------- 19----- In presence of---------------------------------- EX-10 3 EXHIBIT 10.16 EXHIBIT 10.16 Subscription Agreement Between the Company and Harry Letaw, Jr. and Joyce Letaw ESSEX CORPORATION PROMISSORY NOTE SUBSCRIPTION AGREEMENT THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THIS SUBSCRIPTION AGREEMENT BEEN REVIEWED, APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION SET FORTH HEREIN. NO STATE SECURITIES LAW ADMINISTRATOR OR OTHER JURISDICTIONAL AUTHORITY HAS PASSED UPON OR ENDORSED THE MERITS HEREOF OR THE ACCURACY OR THE ADEQUACY OF THE INFORMATION SET FORTH HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SECURITIES DESCRIBED HEREIN HAVE BEEN OFFERED AND MADE AVAILABLE ONLY TO INVESTORS WHO QUALIFY AS "ACCREDITED INVESTORS," AS DEFINED IN REGULATION D AND RULE 501 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES DESCRIBED HEREIN WERE OFFERED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS FOR NON-PUBLIC OFFERINGS. SUCH EXEMPTIONS LIMIT THE NUMBER AND TYPES OF SUBSCRIBERS TO WHICH THE OFFERING HAS BEEN MADE AND RESTRICT SUBSEQUENT TRANSFER OF THE SECURITIES DESCRIBED HEREIN. THE SECURITIES DESCRIBED HEREIN SHOULD BE CONSIDERED ONLY BY A PERSON WHO OR ENTITY THAT CAN AFFORD TO SUSTAIN THE LOSS OF ITS ENTIRE INVESTMENT. A SUBSCRIBER WHO SUBSCRIBES TO MAKE AN INVESTMENT IN SUCH SECURITIES IS REQUIRED TO REPRESENT THAT IT IS ABLE TO SUSTAIN SUCH A LOSS AND IS FAMILIAR WITH AND UNDERSTANDS THE TERMS OF THE OFFERING OF THE SECURITIES DESCRIBED HEREIN. THE SECURITIES DESCRIBED HEREIN ARE RESTRICTED WITH RESPECT TO TRANSFERABILITY AND RESALE. THE SECURITIES MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF BY THE SUBSCRIBER UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION REQUIREMENTS. THE SUBSCRIBER, BY HAVING ACCEPTED DELIVERY OF THE INFORMATIONAL MATERIALS PROVIDED BY THE COMPANY AND ALL ACCOMPANYING OR RELATED DOCUMENTS, AGREES TO RETURN SUCH MATERIALS TO THE COMPANY UPON REQUEST IF THE SUBSCRIBER DETERMINES NOT TO MAKE AN INVESTMENT IN ANY OF THE SECURITIES DESCRIBED HEREIN. i THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED. FOR FLORIDA RESIDENTS: THE SECURITIES OFFERED HEREBY WILL BE SOLD, AND ACQUIRED, IN A TRANSACTION EXEMPT UNDER SECTION 517.061(11) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SAID ACT IN THE STATE OF FLORIDA. PURSUANT TO SECTION 517.061(11) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, WHEN SALES ARE MADE TO FIVE (5) OR MORE PERSONS (EXCLUDING ACCREDITED INVESTORS) IN THE STATE OF FLORIDA, ANY SALE IN THE STATE OF FLORIDA MADE PURSUANT TO SECTION 517.061(11) OF SUCH ACT IS VOIDABLE BY THE PURCHASER IN SUCH SALE (WITHOUT INCURRING ANY LIABILITY TO THE COMPANY OR TO ANY OTHER PERSON OR ENTITY) EITHER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER, OR AN ESCROW AGENT OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER. TO VOID HIS PURCHASE, THE PURCHASER NEED ONLY SEND A LETTER OR TELEGRAM TO THE COMPANY AT THE ADDRESS INDICATED HEREIN. ANY SUCH LETTER OR TELEGRAM SHOULD BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED THREE (3) DAY PERIOD. IT IS PRUDENT TO SEND ANY SUCH LETTER BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ASSURE THAT IT IS RECEIVED AND ALSO TO HAVE EVIDENCE OF THE TIME THAT IT WAS MAILED. SHOULD A PURCHASER MAKE THIS REQUEST ORALLY, THAT PURCHASER MUST ASK FOR WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED. IF NOTICE IS NOT RECEIVED WITHIN THE TIME LIMIT SPECIFIED HEREIN, THE FOREGOING RIGHT TO VOID THE PURCHASE SHALL BE NULL AND VOID. ii FOR MARYLAND RESIDENTS: IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FOR VIRGINIA RESIDENTS: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE VIRGINIA SECURITIES ACT, BY REASON OF SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES ACT OF THIS STATE, IF SUCH REGISTRATION IS REQUIRED, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. iii ESSEX CORPORATION PROMISSORY NOTE SUBSCRIPTION AGREEMENT The undersigned, (the "Subscriber") hereby subscribes to acquire a Non-Negotiable 8% Convertible Promissory Note (the "Note") issued by Essex Corporation, a Virginia corporation (the "Company"), in the principal amount of Two Hundred Thousand Dollars ($200,000.00) substantially in the form attached hereto as Exhibit A. The unpaid principal amount of this Note and the interest thereon, shall be convertible at the option of the Subscriber (the "Conversion Right") prior to the Maturity Date, in the manner and on the terms hereinafter set forth, into shares of common stock of the Company, par value ($.10) at any time prior to the Maturity Date at a conversion price equal to the greater of market value on the date that the election to convert is made or fifty cents ($.50) per shares, subject to adjustment pursuant to Section 4 of the Note; provided however, that in the event the assets of the optoelectronics division of the Company have been transferred to another business enterprise in which the Company has a controlling shareholder interest ("Transferee"), and at the election of the Subscriber, the unpaid principal amount of this Note and the accrued interest thereon, shall be convertible into a percentage equity interest of the Transferee determined pursuant to the following formula: x/y where x is the dollar amount converted and y is the fair market value (or mean fair market value, if more than one valuation methodology is utilized) as determined by a third party expert in providing such valuations retained by the Company. The Subscriber represents and warrants that it qualifies as an "accredited investor" under Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). The Subscriber hereby agrees to pay an aggregate of Two Hundred Thousand Dollars ($200,000.00) as subscription for and in consideration of the issuance of the Note being acquired pursuant hereto. The Subscriber hereby acknowledges that it has retained its own counsel and/or other professional advisors to review and evaluate the economic, tax and other consequences of an investment in the Company, to the extent the Subscriber has deemed necessary. The Subscriber acknowledges that: (i) neither the Note nor the securities issuable upon conversion thereof and default thereunder have been the subject of registration under the Securities Act, the federal securities laws or the laws of any state; (ii) absent an exemption from registration under such laws, the issuance and sale of the Note (and the securities issuable upon conversion thereof and default thereunder) would require registration; (iii) the Company and NEWCO-OPTO are and will be issuing such securities in reliance upon exemption from the registration requirements of the Securities Act; and (iv) reliance by the Company and NEWCO-OPTO upon such exemption is based upon the Subscriber's representation, warranties, and agreements contained in this Subscription Agreement. 1 SECTION 1. The Subscriber represents, warrants, acknowledges and agrees as follows: A. Subject to applicable laws, rules and regulations, the Subscriber agrees that the subscription evidenced by this Subscription Agreement is and shall be irrevocable. B. The Subscriber has received and carefully read the following: (i) certain general business information about the Company; (ii) any and all other information deemed by the Subscriber to be necessary to verify the accuracy and completeness of the representations, warranties and covenants made herein; and (iii) written or verbal responses for all questions that the Subscriber has submitted to the Company regarding an investment in the securities described herein, all of which the Subscriber acknowledges have been provided to the Subscriber (the "Corporate Materials"). The Subscriber has not been furnished with any other materials or literature relating to the offer and sale of the securities described herein, other than the Corporate Materials. The Subscriber is fully aware of the financial condition of the Company, in particular the lack of working capital and other financial distress being experienced by the Company. The Subscriber has been given the opportunity to ask questions of and to receive answers from the Company concerning the terms and conditions of the offer and sale of the securities described herein and the Corporate Materials, and to obtain such additional written information necessary to verify the accuracy of same as the Subscriber desires in order to evaluate an investment in the securities described herein. The Subscriber acknowledges and confirms that the written and/or verbal responses provided to the Subscriber by the Company in response to the Subscriber's questions are not contrary to or inconsistent with, nor do they in any way conflict with the information set forth in the Corporate Materials. The Subscriber further acknowledges that it fully understands the information contained in Corporate Materials and has had the opportunity to discuss any questions regarding the Corporate Materials with its counsel or other advisor. Notwithstanding the foregoing, the only information upon which the Subscriber has relied is that set forth in the Corporate Materials and its own independent investigation. The Subscriber acknowledges that the Subscriber has received no representations or warranties from the Company, or any of its employees or agents in making an investment decision related to the acquisition of the securities described herein, other than as set forth herein. C. The Subscriber is aware that the acquisition of the securities described herein is a speculative investment involving a high degree of risk and that there is no guarantee that the Subscriber will realize any gain from an investment in such securities. The Subscriber further understands that the Subscriber could lose the entire amount of the Subscriber's investment in such securities. The Subscriber acknowledges that the Subscriber has specifically reviewed the Corporate Materials with a view toward subscribing for the securities described herein. D. The Subscriber understands that no federal or state agency or other authority (within or outside of the United States) has made any finding or determination regarding the fairness of the offer, sale and/or issuance of the securities described herein, has made any recommendation or endorsement of the offer and sale of the securities described herein or has passed in any way upon this Subscription Agreement or the other Corporate Materials. 2 E. The Subscriber: (i) is acquiring the securities described herein solely for the Subscriber's own account for investment purposes only and not with a view toward resale or distribution thereof, either in whole or in part; (ii) has no contract, undertaking, agreement or other arrangement, in existence or contemplated, to sell, pledge, assign or otherwise transfer the securities to any other person or entity; and (iii) agrees not to sell or otherwise transfer such securities unless and until they are subsequently registered under the Securities Act and any applicable state securities laws, or unless an exemption from any such requirement is available. F. The Subscriber has read, is familiar with and understands Rule 501 of Regulation D and represents that the Subscriber is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act. G. The Subscriber is financially able to bear the economic risk of an investment in the securities described herein, including the ability to hold such securities indefinitely and to afford a complete loss of the Subscriber's investment in such securities. H. The Subscriber's overall commitment to investments which are not readily marketable is not disproportionate to the Subscriber's net worth, and the Subscriber's investment in the securities described herein will not cause such overall commitment to become excessive. The Subscriber understands that the statutory basis on which such securities are being offered, sold and/or issued to the Subscriber would not be available if the Subscriber's present intention were to hold such securities for a fixed period of time or until the occurrence of a certain event. The Subscriber realizes that, in view of the Securities and Exchange Commission (the "Commission"), a purchase of such securities now, with a present intention to resell by reason of a foreseeable specific contingency or any anticipated change in the market value of such securities, or in the condition of the Company or that of the industry in which the business of the Company is engaged or in connection with a contemplated liquidation, or settlement of any loan obtained by the Subscriber for the acquisition of such securities, and for which such securities may be pledged as a security or as donations to religious or charitable institutions for the purpose of securing a deduction on an income tax return, would, in fact, constitute a purchase with an intention inconsistent with the Subscriber's representations to the Company and the Commission would then regard such purchase as a purchase for which the exemption from registration under the Securities Act relied upon by the Company in connection herewith is not available. I. The funds provided for the Subscriber's investment in the securities described herein are either the separate property of the Subscriber, community property over which the Subscriber has the right of control, or are funds as to which the Subscriber otherwise has the sole right of control, or are funds as to which the Subscriber otherwise has the sole right of management. J. The Subscriber was not organized or reorganized for the specific purposes of acquiring the securities described herein; the Subscriber has the full power and authority to execute this Subscription Agreement on behalf of such entity and to make the representations and warranties made herein on its behalf; and an investment in the securities described herein has 3 been affirmatively authorized, if required, by the governing body of such entity and is not prohibited by the governing documents of the entity. K. The following address is the Subscriber's principal business address: c/o Essex Corporation, 9150 Guilford Road, Columbia, MD 21046. L. The Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the securities described herein. M. The Note and the certificates evidencing the shares of Common Stock described herein will contain a legend substantially as follows: THE SECURITIES WHICH ARE REPRESENTED HEREBY HAVE NOT BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED AND REMAINS EFFECTIVE UNDER SUCH ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE COMPANY THAT AN EXEMPTION FROM REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE. The Subscriber further acknowledges that: (i) any necessary stop transfer orders will be placed upon the certificates for the securities described herein in accordance with Securities Act; and (ii) the Company is under no obligation to aid the Subscriber in obtaining any exemption from the registration requirements of the Securities Act or any jurisdiction. N. In no event will the Subscriber sell or otherwise transfer any of the securities described herein other than in accordance with the terms thereof and applicable law. O. All information which the Subscriber has provided concerning the Subscriber, the Subscriber's financial position and the Subscriber's knowledge of financial and business matters is correct and complete as of the date hereof, and if there should be any change in such information, the Subscriber will immediately provide such new information. P. In connection with the offer and sale of the securities described herein to the Subscriber, the Company is and will be relying upon the Subscriber's representations and warranties as contained in this Subscription Agreement. Q. The Subscriber acknowledges that the Subscriber understands the meaning and legal consequences of the representations and warranties which are contained herein and hereby agrees to indemnify, save and hold the Company and the its officers, directors, employees, agents and affiliates harmless from and against any and all claims or actions arising out of a breach by the Subscriber of any representation, warranty, acknowledgment, term or condition contained in this Subscription Agreement. Such indemnification shall be deemed to include not only the specific liabilities or obligations with respect to which such indemnity is provided, but 4 also all reasonable costs, expenses, counsel fees and expenses of settlement relating thereto, whether or not any such liability or obligation shall have been reduced to judgment. THE PARTIES HERETO HAVE EACH BEEN ADVISED THAT THE INDEMNIFICATION DESCRIBED HEREIN MAY BE VOID AS AGAINST PUBLIC POLICY AND UNENFORCEABLE IN SOME JURISDICTIONS. SECTION 2. The Company represents, warrants, acknowledges and agrees as follows: A. The execution, delivery and performance of this Subscription Agreement and consummation of the transactions contemplated hereby have been duly authorized, adopted and approved by its board of directors. It has taken all necessary corporate action and has all the necessary corporate power to enter into this Subscription Agreement and to consummate the transactions contemplated hereby. This Subscription Agreement has been duly and validly executed and delivered by its officers on its behalf, and assuming that this Subscription Agreement is the valid and binding obligation of the Subscriber, is the valid and binding obligation of the Company enforceable against each in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect, or by legal or equitable principles, relating to or limiting creditors' rights generally and except that the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. B. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation. It has the corporate power and authority to own and lease its properties and assets and to carry on its business as it is now being conducted. C. There is no action, suit, proceeding or investigation pending against or related to it, to the best of its knowledge, nor has it been threatened with any such action, suit, proceeding or investigation, which would restrict its ability to perform its obligations hereunder or which would have a material adverse effect on its business, assets, operations, earnings, prospects or condition (financial or otherwise). To the best of its knowledge, there are no grounds for or facts, events or circumstances which would form the basis of any such action that would cause or result in any such action, suit, proceeding or investigation or which is probable of assertion. It is not in default in respect of any judgment, order, writ, injunction or decree of any court or any national, federal, provincial, state, local or other governmental agency, authority, body, board, bureau, commission, department or instrumentality which could have a material adverse effect on its business, assets, operations, earnings, prospects or condition (financial or otherwise). D. No statement by it as set forth herein and no statement set forth in any certificate or other instrument or document required to be delivered by or on behalf of it pursuant hereto or in connection with consummation of the transactions contemplated hereby, contained, contains or will contain any untrue statement of a material fact, or omitted, omits or will omit to state any material fact which is necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. 5 E. The execution, delivery and performance by the Company of this Subscription Agreement and the Note and the consummation by them of the transactions contemplated hereby and thereby, including, without limitation, the issuance, sale and delivery of the Note, do not require the consent, waiver, approval, license or authorization of or filing of any notice or report with any person, entity or public authority and will not violate, result in a breach of or the acceleration of any obligation under, or constitute a default under, any provision of their respective organizational documents or any material indenture, mortgage, lien, lease, agreement, contract, instrument, order, judgment, decree, law, ordinance or regulation to which any property of the Company is subject or by which either such party is bound or result in the creation or imposition of any lien, claim, charge, restriction, equity or encumbrance of any kind whatsoever upon, or give to any other person any interest or right in or with respect to, any of the properties, assets, business, agreements or contracts of the Company. SECTION 3. Except as otherwise specifically provided for hereunder, no party shall be deemed to have waived any of his, her or its rights hereunder unless such waiver is in writing and signed by the party waiving said right. Except as otherwise specifically provided for hereunder, no delay or omission by any party in exercising any right with respect to the subject matter hereof shall operate as a waiver of such right or of any such other right. A waiver on any one occasion with respect to the subject matter hereof shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies with respect to the subject matter hereof be cumulative and may be exercised separately or concurrently. SECTION 4. None of the parties hereto has made any representations or warranties with respect to the subject matter hereof not set forth herein or in the Note. This Subscription Agreement and the Note constitute the entire agreement between the parties hereto with respect to the subject matter hereof. All understandings and agreements which heretofore may have existed or did exist between the parties hereto with respect to the subject matter hereof are superseded by this Subscription Agreement and the Note. SECTION 5. This Subscription Agreement may not be changed, modified, extended or terminated other than by an agreement in writing, signed by the parties hereto. SECTION 6. The parties hereto agree to execute any and all such other documents and to take any and all such further actions reasonably required to effectuate the agreement evidenced by this Subscription Agreement and the intent and purposes hereof. SECTION 7. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of Maryland without regard to the principles of conflicts of laws thereof. The Subscriber hereby consents to the jurisdiction of the state courts of and federal courts located in the State of Maryland. SECTION 8. This Subscription Agreement, including the representations and warranties contained herein, shall be binding upon the Subscriber's heirs, executors, administrators, representatives, successors and assigns (to the extent assignment may be permitted hereunder). * * * * * 6 IN WITNESS WHEREOF, the Subscriber has executed this Subscription Agreement this 24th day of June, 1997. NAME OF SUBSCRIBER Harry Letaw Jr. and Joyce W. Letaw Ten Ent. ------------------------------------------- In consideration of and in reliance upon the foregoing, the subscription and purchase described herein is hereby accepted this 24th day of June, 1997 by the undersigned. ESSEX CORPORATION By: Joseph R. Kurry, Jr. -------------------- Joseph R. Kurry, Jr., Chief Financial Officer 7 EX-10 4 EXHIBIT 10.17 EXHIBIT 10.17 Subscription Agreement Between the Company and Samuel Hopkins ESSEX CORPORATION PROMISSORY NOTE SUBSCRIPTION AGREEMENT THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THIS SUBSCRIPTION AGREEMENT BEEN REVIEWED, APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION SET FORTH HEREIN. NO STATE SECURITIES LAW ADMINISTRATOR OR OTHER JURISDICTIONAL AUTHORITY HAS PASSED UPON OR ENDORSED THE MERITS HEREOF OR THE ACCURACY OR THE ADEQUACY OF THE INFORMATION SET FORTH HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SECURITIES DESCRIBED HEREIN HAVE BEEN OFFERED AND MADE AVAILABLE ONLY TO INVESTORS WHO QUALIFY AS "ACCREDITED INVESTORS," AS DEFINED IN REGULATION D AND RULE 501 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES DESCRIBED HEREIN WERE OFFERED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS FOR NON-PUBLIC OFFERINGS. SUCH EXEMPTIONS LIMIT THE NUMBER AND TYPES OF SUBSCRIBERS TO WHICH THE OFFERING HAS BEEN MADE AND RESTRICT SUBSEQUENT TRANSFER OF THE SECURITIES DESCRIBED HEREIN. THE SECURITIES DESCRIBED HEREIN SHOULD BE CONSIDERED ONLY BY A PERSON WHO OR ENTITY THAT CAN AFFORD TO SUSTAIN THE LOSS OF ITS ENTIRE INVESTMENT. A SUBSCRIBER WHO SUBSCRIBES TO MAKE AN INVESTMENT IN SUCH SECURITIES IS REQUIRED TO REPRESENT THAT IT IS ABLE TO SUSTAIN SUCH A LOSS AND IS FAMILIAR WITH AND UNDERSTANDS THE TERMS OF THE OFFERING OF THE SECURITIES DESCRIBED HEREIN. THE SECURITIES DESCRIBED HEREIN ARE RESTRICTED WITH RESPECT TO TRANSFERABILITY AND RESALE. THE SECURITIES MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF BY THE SUBSCRIBER UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION REQUIREMENTS. THE SUBSCRIBER, BY HAVING ACCEPTED DELIVERY OF THE INFORMATIONAL MATERIALS PROVIDED BY THE COMPANY AND ALL ACCOMPANYING OR RELATED DOCUMENTS, AGREES TO RETURN SUCH MATERIALS TO THE COMPANY UPON REQUEST IF THE SUBSCRIBER DETERMINES NOT TO MAKE AN INVESTMENT IN ANY OF THE SECURITIES DESCRIBED HEREIN. i THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED. FOR FLORIDA RESIDENTS: THE SECURITIES OFFERED HEREBY WILL BE SOLD, AND ACQUIRED, IN A TRANSACTION EXEMPT UNDER SECTION 517.061(11) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SAID ACT IN THE STATE OF FLORIDA. PURSUANT TO SECTION 517.061(11) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, WHEN SALES ARE MADE TO FIVE (5) OR MORE PERSONS (EXCLUDING ACCREDITED INVESTORS) IN THE STATE OF FLORIDA, ANY SALE IN THE STATE OF FLORIDA MADE PURSUANT TO SECTION 517.061(11) OF SUCH ACT IS VOIDABLE BY THE PURCHASER IN SUCH SALE (WITHOUT INCURRING ANY LIABILITY TO THE COMPANY OR TO ANY OTHER PERSON OR ENTITY) EITHER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER, OR AN ESCROW AGENT OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER. TO VOID HIS PURCHASE, THE PURCHASER NEED ONLY SEND A LETTER OR TELEGRAM TO THE COMPANY AT THE ADDRESS INDICATED HEREIN. ANY SUCH LETTER OR TELEGRAM SHOULD BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED THREE (3) DAY PERIOD. IT IS PRUDENT TO SEND ANY SUCH LETTER BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ASSURE THAT IT IS RECEIVED AND ALSO TO HAVE EVIDENCE OF THE TIME THAT IT WAS MAILED. SHOULD A PURCHASER MAKE THIS REQUEST ORALLY, THAT PURCHASER MUST ASK FOR WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED. IF NOTICE IS NOT RECEIVED WITHIN THE TIME LIMIT SPECIFIED HEREIN, THE FOREGOING RIGHT TO VOID THE PURCHASE SHALL BE NULL AND VOID. ii FOR MARYLAND RESIDENTS: IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FOR VIRGINIA RESIDENTS: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE VIRGINIA SECURITIES ACT, BY REASON OF SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES ACT OF THIS STATE, IF SUCH REGISTRATION IS REQUIRED, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. iii ESSEX CORPORATION PROMISSORY NOTE SUBSCRIPTION AGREEMENT The undersigned, (the "Subscriber") hereby subscribes to acquire a Non-Negotiable 8% Convertible Promissory Note (the "Note") issued by Essex Corporation, a Virginia corporation (the "Company"), in the principal amount of Twenty Thousand Dollars ($20,000.00) substantially in the form attached hereto as Exhibit A. The unpaid principal amount of this Note and the interest thereon, shall be convertible at the option of the Subscriber (the "Conversion Right") prior to the Maturity Date, in the manner and on the terms hereinafter set forth, into shares of common stock of the Company, par value ($.10) at any time prior to the Maturity Date at a conversion price equal to the greater of market value on the date that the election to convert is made or fifty cents ($.50) per shares, subject to adjustment pursuant to Section 4 of the Note; provided however, that in the event the assets of the optoelectronics division of the Company have been transferred to another business enterprise in which the Company has a controlling shareholder interest ("Transferee"), and at the election of the Subscriber, the unpaid principal amount of this Note and the accrued interest thereon, shall be convertible into a percentage equity interest of the Transferee determined pursuant to the following formula: x/y where x is the dollar amount converted and y is the fair market value (or mean fair market value, if more than one valuation methodology is utilized) as determined by a third party expert in providing such valuations retained by the Company. The Subscriber represents and warrants that it qualifies as an "accredited investor" under Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). The Subscriber hereby agrees to pay an aggregate of Twenty Thousand ($20,000.00) as subscription for and in consideration of the issuance of the Note being acquired pursuant hereto. The Subscriber hereby acknowledges that it has retained its own counsel and/or other professional advisors to review and evaluate the economic, tax and other consequences of an investment in the Company, to the extent the Subscriber has deemed necessary. The Subscriber acknowledges that: (i) neither the Note nor the securities issuable upon conversion thereof and default thereunder have been the subject of registration under the Securities Act, the federal securities laws or the laws of any state; (ii) absent an exemption from registration under such laws, the issuance and sale of the Note (and the securities issuable upon conversion thereof and default thereunder) would require registration; (iii) the Company and NEWCO-OPTO are and will be issuing such securities in reliance upon exemption from the registration requirements of the Securities Act; and (iv) reliance by the Company and NEWCO-OPTO upon such exemption is based upon the Subscriber's representation, warranties, and agreements contained in this Subscription Agreement. SECTION 1. The Subscriber represents, warrants, acknowledges and agrees as follows: 1 A. Subject to applicable laws, rules and regulations, the Subscriber agrees that the subscription evidenced by this Subscription Agreement is and shall be irrevocable. B. The Subscriber has received and carefully read the following: (i) certain general business information about the Company; (ii) any and all other information deemed by the Subscriber to be necessary to verify the accuracy and completeness of the representations, warranties and covenants made herein; and (iii) written or verbal responses for all questions that the Subscriber has submitted to the Company regarding an investment in the securities described herein, all of which the Subscriber acknowledges have been provided to the Subscriber (the "Corporate Materials"). The Subscriber has not been furnished with any other materials or literature relating to the offer and sale of the securities described herein, other than the Corporate Materials. The Subscriber is fully aware of the financial condition of the Company, in particular the lack of working capital and other financial distress being experienced by the Company. The Subscriber has been given the opportunity to ask questions of and to receive answers from the Company concerning the terms and conditions of the offer and sale of the securities described herein and the Corporate Materials, and to obtain such additional written information necessary to verify the accuracy of same as the Subscriber desires in order to evaluate an investment in the securities described herein. The Subscriber acknowledges and confirms that the written and/or verbal responses provided to the Subscriber by the Company in response to the Subscriber's questions are not contrary to or inconsistent with, nor do they in any way conflict with the information set forth in the Corporate Materials. The Subscriber further acknowledges that it fully understands the information contained in Corporate Materials and has had the opportunity to discuss any questions regarding the Corporate Materials with its counsel or other advisor. Notwithstanding the foregoing, the only information upon which the Subscriber has relied is that set forth in the Corporate Materials and its own independent investigation. The Subscriber acknowledges that the Subscriber has received no representations or warranties from the Company, or any of its employees or agents in making an investment decision related to the acquisition of the securities described herein, other than as set forth herein. C. The Subscriber is aware that the acquisition of the securities described herein is a speculative investment involving a high degree of risk and that there is no guarantee that the Subscriber will realize any gain from an investment in such securities. The Subscriber further understands that the Subscriber could lose the entire amount of the Subscriber's investment in such securities. The Subscriber acknowledges that the Subscriber has specifically reviewed the Corporate Materials with a view toward subscribing for the securities described herein. D. The Subscriber understands that no federal or state agency or other authority (within or outside of the United States) has made any finding or determination regarding the fairness of the offer, sale and/or issuance of the securities described herein, has made any recommendation or endorsement of the offer and sale of the securities described herein or has passed in any way upon this Subscription Agreement or the other Corporate Materials. E. The Subscriber: (i) is acquiring the securities described herein solely for the Subscriber's own account for investment purposes only and not with a view toward resale or distribution thereof, either in whole or in part; (ii) has no contract, undertaking, agreement or 2 other arrangement, in existence or contemplated, to sell, pledge, assign or otherwise transfer the securities to any other person or entity; and (iii) agrees not to sell or otherwise transfer such securities unless and until they are subsequently registered under the Securities Act and any applicable state securities laws, or unless an exemption from any such requirement is available. F. The Subscriber has read, is familiar with and understands Rule 501 of Regulation D and represents that the Subscriber is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act. G. The Subscriber is financially able to bear the economic risk of an investment in the securities described herein, including the ability to hold such securities indefinitely and to afford a complete loss of the Subscriber's investment in such securities. H. The Subscriber's overall commitment to investments which are not readily marketable is not disproportionate to the Subscriber's net worth, and the Subscriber's investment in the securities described herein will not cause such overall commitment to become excessive. The Subscriber understands that the statutory basis on which such securities are being offered, sold and/or issued to the Subscriber would not be available if the Subscriber's present intention were to hold such securities for a fixed period of time or until the occurrence of a certain event. The Subscriber realizes that, in view of the Securities and Exchange Commission (the "Commission"), a purchase of such securities now, with a present intention to resell by reason of a foreseeable specific contingency or any anticipated change in the market value of such securities, or in the condition of the Company or that of the industry in which the business of the Company is engaged or in connection with a contemplated liquidation, or settlement of any loan obtained by the Subscriber for the acquisition of such securities, and for which such securities may be pledged as a security or as donations to religious or charitable institutions for the purpose of securing a deduction on an income tax return, would, in fact, constitute a purchase with an intention inconsistent with the Subscriber's representations to the Company and the Commission would then regard such purchase as a purchase for which the exemption from registration under the Securities Act relied upon by the Company in connection herewith is not available. I. The funds provided for the Subscriber's investment in the securities described herein are either the separate property of the Subscriber, community property over which the Subscriber has the right of control, or are funds as to which the Subscriber otherwise has the sole right of control, or are funds as to which the Subscriber otherwise has the sole right of management. J. The Subscriber was not organized or reorganized for the specific purposes of acquiring the securities described herein; the Subscriber has the full power and authority to execute this Subscription Agreement on behalf of such entity and to make the representations and warranties made herein on its behalf; and an investment in the securities described herein has been affirmatively authorized, if required, by the governing body of such entity and is not prohibited by the governing documents of the entity. 3 K. The following address is the Subscriber's principal business address: 45 Warrenton Road, Baltimore, Maryland, 21210. L. The Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the securities described herein. M. The Note and the certificates evidencing the shares of Common Stock described herein will contain a legend substantially as follows: THE SECURITIES WHICH ARE REPRESENTED HEREBY HAVE NOT BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED AND REMAINS EFFECTIVE UNDER SUCH ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE COMPANY THAT AN EXEMPTION FROM REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE. The Subscriber further acknowledges that: (i) any necessary stop transfer orders will be placed upon the certificates for the securities described herein in accordance with Securities Act; and (ii) the Company is under no obligation to aid the Subscriber in obtaining any exemption from the registration requirements of the Securities Act or any jurisdiction. N. In no event will the Subscriber sell or otherwise transfer any of the securities described herein other than in accordance with the terms thereof and applicable law. O. All information which the Subscriber has provided concerning the Subscriber, the Subscriber's financial position and the Subscriber's knowledge of financial and business matters is correct and complete as of the date hereof, and if there should be any change in such information, the Subscriber will immediately provide such new information. P. In connection with the offer and sale of the securities described herein to the Subscriber, the Company is and will be relying upon the Subscriber's representations and warranties as contained in this Subscription Agreement. Q. The Subscriber acknowledges that the Subscriber understands the meaning and legal consequences of the representations and warranties which are contained herein and hereby agrees to indemnify, save and hold the Company and the its officers, directors, employees, agents and affiliates harmless from and against any and all claims or actions arising out of a breach by the Subscriber of any representation, warranty, acknowledgment, term or condition contained in this Subscription Agreement. Such indemnification shall be deemed to include not only the specific liabilities or obligations with respect to which such indemnity is provided, but also all reasonable costs, expenses, counsel fees and expenses of settlement relating thereto, whether or not any such liability or obligation shall have been reduced to judgment. THE PARTIES HERETO HAVE EACH BEEN ADVISED THAT THE INDEMNIFICATION 4 DESCRIBED HEREIN MAY BE VOID AS AGAINST PUBLIC POLICY AND UNENFORCEABLE IN SOME JURISDICTIONS. SECTION 2. The Company represents, warrants, acknowledges and agrees as follows: A. The execution, delivery and performance of this Subscription Agreement and consummation of the transactions contemplated hereby have been duly authorized, adopted and approved by its board of directors. It has taken all necessary corporate action and has all the necessary corporate power to enter into this Subscription Agreement and to consummate the transactions contemplated hereby. This Subscription Agreement has been duly and validly executed and delivered by its officers on its behalf, and assuming that this Subscription Agreement is the valid and binding obligation of the Subscriber, is the valid and binding obligation of the Company enforceable against each in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect, or by legal or equitable principles, relating to or limiting creditors' rights generally and except that the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. B. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation. It has the corporate power and authority to own and lease its properties and assets and to carry on its business as it is now being conducted. C. There is no action, suit, proceeding or investigation pending against or related to it, to the best of its knowledge, nor has it been threatened with any such action, suit, proceeding or investigation, which would restrict its ability to perform its obligations hereunder or which would have a material adverse effect on its business, assets, operations, earnings, prospects or condition (financial or otherwise). To the best of its knowledge, there are no grounds for or facts, events or circumstances which would form the basis of any such action that would cause or result in any such action, suit, proceeding or investigation or which is probable of assertion. It is not in default in respect of any judgment, order, writ, injunction or decree of any court or any national, federal, provincial, state, local or other governmental agency, authority, body, board, bureau, commission, department or instrumentality which could have a material adverse effect on its business, assets, operations, earnings, prospects or condition (financial or otherwise). D. No statement by it as set forth herein and no statement set forth in any certificate or other instrument or document required to be delivered by or on behalf of it pursuant hereto or in connection with consummation of the transactions contemplated hereby, contained, contains or will contain any untrue statement of a material fact, or omitted, omits or will omit to state any material fact which is necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. E. The execution, delivery and performance by the Company of this Subscription Agreement and the Note and the consummation by them of the transactions contemplated hereby and thereby, including, without limitation, the issuance, sale and delivery of the Note, do not 5 require the consent, waiver, approval, license or authorization of or filing of any notice or report with any person, entity or public authority and will not violate, result in a breach of or the acceleration of any obligation under, or constitute a default under, any provision of their respective organizational documents or any material indenture, mortgage, lien, lease, agreement, contract, instrument, order, judgment, decree, law, ordinance or regulation to which any property of the Company is subject or by which either such party is bound or result in the creation or imposition of any lien, claim, charge, restriction, equity or encumbrance of any kind whatsoever upon, or give to any other person any interest or right in or with respect to, any of the properties, assets, business, agreements or contracts of the Company. SECTION 3. Except as otherwise specifically provided for hereunder, no party shall be deemed to have waived any of his, her or its rights hereunder unless such waiver is in writing and signed by the party waiving said right. Except as otherwise specifically provided for hereunder, no delay or omission by any party in exercising any right with respect to the subject matter hereof shall operate as a waiver of such right or of any such other right. A waiver on any one occasion with respect to the subject matter hereof shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies with respect to the subject matter hereof be cumulative and may be exercised separately or concurrently. SECTION 4. None of the parties hereto has made any representations or warranties with respect to the subject matter hereof not set forth herein or in the Note. This Subscription Agreement and the Note constitute the entire agreement between the parties hereto with respect to the subject matter hereof. All understandings and agreements which heretofore may have existed or did exist between the parties hereto with respect to the subject matter hereof are superseded by this Subscription Agreement and the Note. SECTION 5. This Subscription Agreement may not be changed, modified, extended or terminated other than by an agreement in writing, signed by the parties hereto. SECTION 6. The parties hereto agree to execute any and all such other documents and to take any and all such further actions reasonably required to effectuate the agreement evidenced by this Subscription Agreement and the intent and purposes hereof. SECTION 7. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of Maryland without regard to the principles of conflicts of laws thereof. The Subscriber hereby consents to the jurisdiction of the state courts of and federal courts located in the State of Maryland. SECTION 8. This Subscription Agreement, including the representations and warranties contained herein, shall be binding upon the Subscriber's heirs, executors, administrators, representatives, successors and assigns (to the extent assignment may be permitted hereunder). * * * * * 6 IN WITNESS WHEREOF, the Subscriber has executed this Subscription Agreement this 24th day of June, 1997. NAME OF SUBSCRIBER Samuel Hopkins -------------- In consideration of and in reliance upon the foregoing, the subscription and purchase described herein is hereby accepted this 24th day of June, 1997 by the undersigned. ESSEX CORPORATION By: Joseph R. Kurry, Jr. ----------------------------- Joseph R. Kurry, Jr., Chief Financial Officer 7 EX-10 5 EXHIBIT 10.18 EXHIBIT 10.18 Subscription Agreement Between the Company and Harold P. Hanson ESSEX CORPORATION PROMISSORY NOTE SUBSCRIPTION AGREEMENT THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAS THIS SUBSCRIPTION AGREEMENT BEEN REVIEWED, APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION SET FORTH HEREIN. NO STATE SECURITIES LAW ADMINISTRATOR OR OTHER JURISDICTIONAL AUTHORITY HAS PASSED UPON OR ENDORSED THE MERITS HEREOF OR THE ACCURACY OR THE ADEQUACY OF THE INFORMATION SET FORTH HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SECURITIES DESCRIBED HEREIN HAVE BEEN OFFERED AND MADE AVAILABLE ONLY TO INVESTORS WHO QUALIFY AS "ACCREDITED INVESTORS," AS DEFINED IN REGULATION D AND RULE 501 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES DESCRIBED HEREIN WERE OFFERED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS FOR NON-PUBLIC OFFERINGS. SUCH EXEMPTIONS LIMIT THE NUMBER AND TYPES OF SUBSCRIBERS TO WHICH THE OFFERING HAS BEEN MADE AND RESTRICT SUBSEQUENT TRANSFER OF THE SECURITIES DESCRIBED HEREIN. THE SECURITIES DESCRIBED HEREIN SHOULD BE CONSIDERED ONLY BY A PERSON WHO OR ENTITY THAT CAN AFFORD TO SUSTAIN THE LOSS OF ITS ENTIRE INVESTMENT. A SUBSCRIBER WHO SUBSCRIBES TO MAKE AN INVESTMENT IN SUCH SECURITIES IS REQUIRED TO REPRESENT THAT IT IS ABLE TO SUSTAIN SUCH A LOSS AND IS FAMILIAR WITH AND UNDERSTANDS THE TERMS OF THE OFFERING OF THE SECURITIES DESCRIBED HEREIN. THE SECURITIES DESCRIBED HEREIN ARE RESTRICTED WITH RESPECT TO TRANSFERABILITY AND RESALE. THE SECURITIES MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF BY THE SUBSCRIBER UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION REQUIREMENTS. THE SUBSCRIBER, BY HAVING ACCEPTED DELIVERY OF THE INFORMATIONAL MATERIALS PROVIDED BY THE COMPANY AND ALL ACCOMPANYING OR RELATED DOCUMENTS, AGREES TO RETURN SUCH MATERIALS TO THE COMPANY UPON REQUEST IF THE SUBSCRIBER DETERMINES NOT TO MAKE AN INVESTMENT IN ANY OF THE SECURITIES DESCRIBED HEREIN. i THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED. FOR FLORIDA RESIDENTS: THE SECURITIES OFFERED HEREBY WILL BE SOLD, AND ACQUIRED, IN A TRANSACTION EXEMPT UNDER SECTION 517.061(11) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SAID ACT IN THE STATE OF FLORIDA. PURSUANT TO SECTION 517.061(11) OF THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, WHEN SALES ARE MADE TO FIVE (5) OR MORE PERSONS (EXCLUDING ACCREDITED INVESTORS) IN THE STATE OF FLORIDA, ANY SALE IN THE STATE OF FLORIDA MADE PURSUANT TO SECTION 517.061(11) OF SUCH ACT IS VOIDABLE BY THE PURCHASER IN SUCH SALE (WITHOUT INCURRING ANY LIABILITY TO THE COMPANY OR TO ANY OTHER PERSON OR ENTITY) EITHER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER, OR AN ESCROW AGENT OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER. TO VOID HIS PURCHASE, THE PURCHASER NEED ONLY SEND A LETTER OR TELEGRAM TO THE COMPANY AT THE ADDRESS INDICATED HEREIN. ANY SUCH LETTER OR TELEGRAM SHOULD BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED THREE (3) DAY PERIOD. IT IS PRUDENT TO SEND ANY SUCH LETTER BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ASSURE THAT IT IS RECEIVED AND ALSO TO HAVE EVIDENCE OF THE TIME THAT IT WAS MAILED. SHOULD A PURCHASER MAKE THIS REQUEST ORALLY, THAT PURCHASER MUST ASK FOR WRITTEN CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED. IF NOTICE IS NOT RECEIVED WITHIN THE TIME LIMIT SPECIFIED HEREIN, THE FOREGOING RIGHT TO VOID THE PURCHASE SHALL BE NULL AND VOID. ii FOR MARYLAND RESIDENTS: IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FOR VIRGINIA RESIDENTS: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE VIRGINIA SECURITIES ACT, BY REASON OF SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES ACT OF THIS STATE, IF SUCH REGISTRATION IS REQUIRED, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. iii ESSEX CORPORATION PROMISSORY NOTE SUBSCRIPTION AGREEMENT The undersigned, (the "Subscriber") hereby subscribes to acquire a Non-Negotiable 8% Convertible Promissory Note (the "Note") issued by Essex Corporation, a Virginia corporation (the "Company"), in the principal amount of Ten Thousand Dollars ($10,000.00) substantially in the form attached hereto as Exhibit A. The unpaid principal amount of this Note and the interest thereon, shall be convertible at the option of the Subscriber (the "Conversion Right") prior to the Maturity Date, in the manner and on the terms hereinafter set forth, into shares of common stock of the Company, par value ($.10) at any time prior to the Maturity Date at a conversion price equal to the greater of market value on the date that the election to convert is made or fifty cents ($.50) per shares, subject to adjustment pursuant to Section 4 of the Note; provided however, that in the event the assets of the optoelectronics division of the Company have been transferred to another business enterprise in which the Company has a controlling shareholder interest ("Transferee"), and at the election of the Subscriber, the unpaid principal amount of this Note and the accrued interest thereon, shall be convertible into a percentage equity interest of the Transferee determined pursuant to the following formula: x/y where x is the dollar amount converted and y is the fair market value (or mean fair market value, if more than one valuation methodology is utilized) as determined by a third party expert in providing such valuations retained by the Company. The Subscriber represents and warrants that it qualifies as an "accredited investor" under Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). The Subscriber hereby agrees to pay an aggregate of Ten Thousand Dollars ($10,000.00) as subscription for and in consideration of the issuance of the Note being acquired pursuant hereto. The Subscriber hereby acknowledges that it has retained its own counsel and/or other professional advisors to review and evaluate the economic, tax and other consequences of an investment in the Company, to the extent the Subscriber has deemed necessary. The Subscriber acknowledges that: (i) neither the Note nor the securities issuable upon conversion thereof and default thereunder have been the subject of registration under the Securities Act, the federal securities laws or the laws of any state; (ii) absent an exemption from registration under such laws, the issuance and sale of the Note (and the securities issuable upon conversion thereof and default thereunder) would require registration; (iii) the Company and NEWCO-OPTO are and will be issuing such securities in reliance upon exemption from the registration requirements of the Securities Act; and (iv) reliance by the Company and NEWCO-OPTO upon such exemption is based upon the Subscriber's representation, warranties, and agreements contained in this Subscription Agreement. 1 SECTION 1. The Subscriber represents, warrants, acknowledges and agrees as follows: A. Subject to applicable laws, rules and regulations, the Subscriber agrees that the subscription evidenced by this Subscription Agreement is and shall be irrevocable. B. The Subscriber has received and carefully read the following: (i) certain general business information about the Company; (ii) any and all other information deemed by the Subscriber to be necessary to verify the accuracy and completeness of the representations, warranties and covenants made herein; and (iii) written or verbal responses for all questions that the Subscriber has submitted to the Company regarding an investment in the securities described herein, all of which the Subscriber acknowledges have been provided to the Subscriber (the "Corporate Materials"). The Subscriber has not been furnished with any other materials or literature relating to the offer and sale of the securities described herein, other than the Corporate Materials. The Subscriber is fully aware of the financial condition of the Company, in particular the lack of working capital and other financial distress being experienced by the Company. The Subscriber has been given the opportunity to ask questions of and to receive answers from the Company concerning the terms and conditions of the offer and sale of the securities described herein and the Corporate Materials, and to obtain such additional written information necessary to verify the accuracy of same as the Subscriber desires in order to evaluate an investment in the securities described herein. The Subscriber acknowledges and confirms that the written and/or verbal responses provided to the Subscriber by the Company in response to the Subscriber's questions are not contrary to or inconsistent with, nor do they in any way conflict with the information set forth in the Corporate Materials. The Subscriber further acknowledges that it fully understands the information contained in Corporate Materials and has had the opportunity to discuss any questions regarding the Corporate Materials with its counsel or other advisor. Notwithstanding the foregoing, the only information upon which the Subscriber has relied is that set forth in the Corporate Materials and its own independent investigation. The Subscriber acknowledges that the Subscriber has received no representations or warranties from the Company, or any of its employees or agents in making an investment decision related to the acquisition of the securities described herein, other than as set forth herein. C. The Subscriber is aware that the acquisition of the securities described herein is a speculative investment involving a high degree of risk and that there is no guarantee that the Subscriber will realize any gain from an investment in such securities. The Subscriber further understands that the Subscriber could lose the entire amount of the Subscriber's investment in such securities. The Subscriber acknowledges that the Subscriber has specifically reviewed the Corporate Materials with a view toward subscribing for the securities described herein. D. The Subscriber understands that no federal or state agency or other authority (within or outside of the United States) has made any finding or determination regarding the fairness of the offer, sale and/or issuance of the securities described herein, has made any recommendation or endorsement of the offer and sale of the securities described herein or has passed in any way upon this Subscription Agreement or the other Corporate Materials. 2 E. The Subscriber: (i) is acquiring the securities described herein solely for the Subscriber's own account for investment purposes only and not with a view toward resale or distribution thereof, either in whole or in part; (ii) has no contract, undertaking, agreement or other arrangement, in existence or contemplated, to sell, pledge, assign or otherwise transfer the securities to any other person or entity; and (iii) agrees not to sell or otherwise transfer such securities unless and until they are subsequently registered under the Securities Act and any applicable state securities laws, or unless an exemption from any such requirement is available. F. The Subscriber has read, is familiar with and understands Rule 501 of Regulation D and represents that the Subscriber is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act. G. The Subscriber is financially able to bear the economic risk of an investment in the securities described herein, including the ability to hold such securities indefinitely and to afford a complete loss of the Subscriber's investment in such securities. H. The Subscriber's overall commitment to investments which are not readily marketable is not disproportionate to the Subscriber's net worth, and the Subscriber's investment in the securities described herein will not cause such overall commitment to become excessive. The Subscriber understands that the statutory basis on which such securities are being offered, sold and/or issued to the Subscriber would not be available if the Subscriber's present intention were to hold such securities for a fixed period of time or until the occurrence of a certain event. The Subscriber realizes that, in view of the Securities and Exchange Commission (the "Commission"), a purchase of such securities now, with a present intention to resell by reason of a foreseeable specific contingency or any anticipated change in the market value of such securities, or in the condition of the Company or that of the industry in which the business of the Company is engaged or in connection with a contemplated liquidation, or settlement of any loan obtained by the Subscriber for the acquisition of such securities, and for which such securities may be pledged as a security or as donations to religious or charitable institutions for the purpose of securing a deduction on an income tax return, would, in fact, constitute a purchase with an intention inconsistent with the Subscriber's representations to the Company and the Commission would then regard such purchase as a purchase for which the exemption from registration under the Securities Act relied upon by the Company in connection herewith is not available. I. The funds provided for the Subscriber's investment in the securities described herein are either the separate property of the Subscriber, community property over which the Subscriber has the right of control, or are funds as to which the Subscriber otherwise has the sole right of control, or are funds as to which the Subscriber otherwise has the sole right of management. J. The Subscriber was not organized or reorganized for the specific purposes of acquiring the securities described herein; the Subscriber has the full power and authority to execute this Subscription Agreement on behalf of such entity and to make the representations and warranties made herein on its behalf; and an investment in the securities described herein has 3 been affirmatively authorized, if required, by the governing body of such entity and is not prohibited by the governing documents of the entity. K. The following address is the Subscriber's principal business address: 2385 N.W. 18th Place, Gainesville, Florida 32605. L. The Subscriber has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the securities described herein. M. The Note and the certificates evidencing the shares of Common Stock described herein will contain a legend substantially as follows: THE SECURITIES WHICH ARE REPRESENTED HEREBY HAVE NOT BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED AND REMAINS EFFECTIVE UNDER SUCH ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE COMPANY THAT AN EXEMPTION FROM REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE. The Subscriber further acknowledges that: (i) any necessary stop transfer orders will be placed upon the certificates for the securities described herein in accordance with Securities Act; and (ii) the Company is under no obligation to aid the Subscriber in obtaining any exemption from the registration requirements of the Securities Act or any jurisdiction. N. In no event will the Subscriber sell or otherwise transfer any of the securities described herein other than in accordance with the terms thereof and applicable law. O. All information which the Subscriber has provided concerning the Subscriber, the Subscriber's financial position and the Subscriber's knowledge of financial and business matters is correct and complete as of the date hereof, and if there should be any change in such information, the Subscriber will immediately provide such new information. P. In connection with the offer and sale of the securities described herein to the Subscriber, the Company is and will be relying upon the Subscriber's representations and warranties as contained in this Subscription Agreement. Q. The Subscriber acknowledges that the Subscriber understands the meaning and legal consequences of the representations and warranties which are contained herein and hereby agrees to indemnify, save and hold the Company and the its officers, directors, employees, agents and affiliates harmless from and against any and all claims or actions arising out of a breach by the Subscriber of any representation, warranty, acknowledgment, term or condition contained in this Subscription Agreement. Such indemnification shall be deemed to include not only the specific liabilities or obligations with respect to which such indemnity is provided, but 4 also all reasonable costs, expenses, counsel fees and expenses of settlement relating thereto, whether or not any such liability or obligation shall have been reduced to judgment. THE PARTIES HERETO HAVE EACH BEEN ADVISED THAT THE INDEMNIFICATION DESCRIBED HEREIN MAY BE VOID AS AGAINST PUBLIC POLICY AND UNENFORCEABLE IN SOME JURISDICTIONS. SECTION 2. The Company represents, warrants, acknowledges and agrees as follows: A. The execution, delivery and performance of this Subscription Agreement and consummation of the transactions contemplated hereby have been duly authorized, adopted and approved by its board of directors. It has taken all necessary corporate action and has all the necessary corporate power to enter into this Subscription Agreement and to consummate the transactions contemplated hereby. This Subscription Agreement has been duly and validly executed and delivered by its officers on its behalf, and assuming that this Subscription Agreement is the valid and binding obligation of the Subscriber, is the valid and binding obligation of the Company enforceable against each in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect, or by legal or equitable principles, relating to or limiting creditors' rights generally and except that the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. B. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation. It has the corporate power and authority to own and lease its properties and assets and to carry on its business as it is now being conducted. C. There is no action, suit, proceeding or investigation pending against or related to it, to the best of its knowledge, nor has it been threatened with any such action, suit, proceeding or investigation, which would restrict its ability to perform its obligations hereunder or which would have a material adverse effect on its business, assets, operations, earnings, prospects or condition (financial or otherwise). To the best of its knowledge, there are no grounds for or facts, events or circumstances which would form the basis of any such action that would cause or result in any such action, suit, proceeding or investigation or which is probable of assertion. It is not in default in respect of any judgment, order, writ, injunction or decree of any court or any national, federal, provincial, state, local or other governmental agency, authority, body, board, bureau, commission, department or instrumentality which could have a material adverse effect on its business, assets, operations, earnings, prospects or condition (financial or otherwise). D. No statement by it as set forth herein and no statement set forth in any certificate or other instrument or document required to be delivered by or on behalf of it pursuant hereto or in connection with consummation of the transactions contemplated hereby, contained, contains or will contain any untrue statement of a material fact, or omitted, omits or will omit to state any material fact which is necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. 5 E. The execution, delivery and performance by the Company of this Subscription Agreement and the Note and the consummation by them of the transactions contemplated hereby and thereby, including, without limitation, the issuance, sale and delivery of the Note, do not require the consent, waiver, approval, license or authorization of or filing of any notice or report with any person, entity or public authority and will not violate, result in a breach of or the acceleration of any obligation under, or constitute a default under, any provision of their respective organizational documents or any material indenture, mortgage, lien, lease, agreement, contract, instrument, order, judgment, decree, law, ordinance or regulation to which any property of the Company is subject or by which either such party is bound or result in the creation or imposition of any lien, claim, charge, restriction, equity or encumbrance of any kind whatsoever upon, or give to any other person any interest or right in or with respect to, any of the properties, assets, business, agreements or contracts of the Company. SECTION 3. Except as otherwise specifically provided for hereunder, no party shall be deemed to have waived any of his, her or its rights hereunder unless such waiver is in writing and signed by the party waiving said right. Except as otherwise specifically provided for hereunder, no delay or omission by any party in exercising any right with respect to the subject matter hereof shall operate as a waiver of such right or of any such other right. A waiver on any one occasion with respect to the subject matter hereof shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies with respect to the subject matter hereof be cumulative and may be exercised separately or concurrently. SECTION 4. None of the parties hereto has made any representations or warranties with respect to the subject matter hereof not set forth herein or in the Note. This Subscription Agreement and the Note constitute the entire agreement between the parties hereto with respect to the subject matter hereof. All understandings and agreements which heretofore may have existed or did exist between the parties hereto with respect to the subject matter hereof are superseded by this Subscription Agreement and the Note. SECTION 5. This Subscription Agreement may not be changed, modified, extended or terminated other than by an agreement in writing, signed by the parties hereto. SECTION 6. The parties hereto agree to execute any and all such other documents and to take any and all such further actions reasonably required to effectuate the agreement evidenced by this Subscription Agreement and the intent and purposes hereof. SECTION 7. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of Maryland without regard to the principles of conflicts of laws thereof. The Subscriber hereby consents to the jurisdiction of the state courts of and federal courts located in the State of Maryland. SECTION 8. This Subscription Agreement, including the representations and warranties contained herein, shall be binding upon the Subscriber's heirs, executors, administrators, representatives, successors and assigns (to the extent assignment may be permitted hereunder). * * * * * 6 IN WITNESS WHEREOF, the Subscriber has executed this Subscription Agreement this 24th day of June, 1997. NAME OF SUBSCRIBER Harold P. Hanson Trust ---------------------- In consideration of and in reliance upon the foregoing, the subscription and purchase described herein is hereby accepted this 24th day of June, 1997 by the undersigned. ESSEX CORPORATION By: Harry Letaw, Jr. ------------------------- Harry Letaw, Jr., Chief Executive Officer 7 EX-10 6 EXHIBIT 10.19 EXHIBIT 10.19 8% Convertible Note Payable - Harry Letaw, Jr. and Joyce Letaw NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS PERMITTED UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. NON-NEGOTIABLE 8% CONVERTIBLE PROMISSORY NOTE $ 200,000 Columbia, Maryland June 24, 1997 FOR VALUE RECEIVED, the undersigned, Essex Corporation, a Virginia corporation (hereinafter referred to as the "Maker" or the "Company") hereby promises to pay Harry Letaw, Jr. and Joyce W. Letaw, Ten Ent. (the "Payee") at 440 Severnside Drive, S.W., Severna Park, MD 21146 or at such other place as the holder hereof may from time to time designate in writing, the principal sum of Two Hundred Thousand and 00/100 Dollars ($200,000) in one installment due upon the earlier of: (i) one (1) year from the date of issuance of the promissory note; or (ii) ten (10) business days after the date of consummation of stock acquisition/sale of substantially all of the assets or the merger of the Company by or with an unrelated entity or business enterprise (the "Acquisition"), which transaction requires shareholder approval. Interest shall be paid by Maker to the Payee on the Maturity Date at the simple rate of eight (8%) percent per annum computed on the unpaid principal balance. By acceptance of this Non-Negotiable 8% Convertible Promissory Note (the "Note"), the Payee represents, warrants, covenants and agrees that he, she or it will abide by and be bound by its terms. 1. Prepayment, Extension and Notices. The unpaid principal balance outstanding under this Note may be prepaid in part or in full by the Maker without penalty, upon fifteen (15) days notice to the Payee stating the repayment amount and repayment date (the "Repayment Date"). The Maker must provide notice of its intention to prepay amounts outstanding hereunder at least five (5) business days prior to the Maturity Date to the Payee. 2. Conversion. The unpaid principal amount of this Note and the interest thereon, shall be convertible at the option of the Payee (the "Conversion Right") prior to the Maturity Date, in the manner and on the terms hereinafter set forth, into shares of common stock of the Company, par value ($.10) at any time prior to the Maturity Date at a conversion price equal to the greater of market value on the date that the election to convert is made or fifty cents ($.50) per shares, subject to adjustment pursuant to Section 4 hereof; provided however, that in the event the assets of the optoelectronics division of the Company have been transferred to another business 1 enterprise [in which the Company has a controlling shareholder interest] ("Transferee"), and at the election of the Payee, the unpaid principal amount of this Note and the accrued interest thereon, shall be convertible into a percentage equity interest of the Transferee determined pursuant to the following formula: x/y where x is the dollar amount converted and y is the fair market value (or mean fair market value, if more than one valuation methodology is utilized) as determined by a third party expert in providing such valuations retained by the Company.. (b) Notice of the right to convert shall be given promptly after the date of Acquisition and Maker shall have the period of time between such Notice date and the Maturity Date (but in no event less than ten (10) business days) during which Payee shall have the opportunity to elect to convert the principal and interest into Newco Common Stock, or receive cash payment. (c) Notwithstanding any other provision of this Note to the contrary, upon receipt of notice of the Maker's intent to prepay part or all of the principal amount hereunder or of an Accelerated Maturity Date, the Payee may elect to exercise the Conversion Right and convert a portion (as set forth in subsection (a) hereof) of the amount of unpaid principal which the Maker intends to prepay, up to the close of business on the last business day before the stated Repayment Date. (d) Notwithstanding any other provision hereof, the Conversion Right may not be exercised at any time during which a registration statement under the Securities Act of 1933 is filed but not effective absent written consent of the Company. 3. Conversion Procedure. The Conversion Right may be exercised by the Payee by the surrender of this Note (along with the conversion form attached hereto, duly executed) to the Maker at the principal office of the Maker. Risk of loss prior to surrender of this Note shall be borne by the Payee. Consequently, hand delivery with written acknowledgement of receipt by the Maker or registered or certified mail, return receipt requested, is the preferred mode of delivery. Conversion shall be deemed to have been effected on the date when such delivery of the conversion notice is actually made or, if earlier, at the expiration of five (5) calendar days after being sent to the Maker by the Payee by registered or certified mail, return receipt requested, with postage thereon fully prepaid (the "Conversion Date"). As promptly as practicable thereafter, the Maker shall issue and deliver to the Payee: (a) a new note representing the difference between the principal amount of this Note plus interest accrued through the Conversion Date, and the principal amount hereof which has been converted pursuant hereto; and (b) certificates representing the number of shares of Common Stock to which the Payee is entitled. The Maker shall not be obligated to issue certificates representing shares of Common Stock in the name of any party other than the Payee. The person or entity in whose name the certificates representing the shares of Common Stock issuable upon conversion hereof shall be deemed to have become a holder of record on the next succeeding day on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date. The Maker covenants that all securities which may be issued upon exercise 2 of the Conversion Right will, upon issuance, be fully paid and nonassessable and free of all taxes, liens and charges caused or created by the Maker with respect to the issuance thereof. 4. Adjustments. The Conversion Price and the number and kind of securities which may be received upon the exercise of the Conversion Right shall be subject to adjustment from time to time upon the happening of certain events, as follows: (a) Stock Splits and Combinations. If the Maker shall at any time or from time to time after the date hereof effect a subdivision of its outstanding shares of Common Stock, the Conversion Price then in effect immediately before such subdivision shall be proportionately decreased, and conversely, if the Maker shall at any time or from time to time after the date hereof combine its outstanding shares of Common Stock, the Conversion Price then in effect immediately before such combination shall be proportionately increased. Any adjustment under this section shall become effective upon the close of business on the date the subdivision or combination becomes effective. (b) Certain Dividends and Distributions. In the event that the Maker shall at any time or from time to time after the date hereof make or issue, or fix a record date for the determination of holders of shares of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event, the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event that such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (2) the denominator of which shall be the sum of the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date and the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions. (c) Other Dividends and Distributions. In the event that the Maker at any time or from time to time after the date hereof shall make or issue, or fix a record date for the determination of holders of shares of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Maker other than shares of Common Stock, then and in each such event provisions shall be made so that the holder of this Note shall receive, upon conversion of this Note, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Maker which such holder would have received had its Note been converted into shares of Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, 3 retained such securities (together with any distributions payable thereon during such period) receivable by the holder as aforesaid during such period, giving application to all adjustments called for during such period under this section with respect to the rights of the holder of the Note. (d) Reclassification, Exchange or Substitution. If the shares of Common Stock issuable upon the conversion of this Note shall be changed into the same or different number of shares of any class or classes of capital stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for in subsection (e) below), then and in each such event, the holder of this Note shall have the right thereafter to convert this Note into the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, reclassification or other change, as the holder of the number of shares of Common Stock into which this Note might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (e) Reorganization, Merger, Consolidation or Sale of Assets. If, at any time or from time to time, there shall be a capital reorganization of the shares of Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this section) or a merger or consolidation of the Maker with or into another corporation, or the sale of all or substantially all of the Maker's properties and assets to any other person or entity, then as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holder of this Note shall thereafter be entitled to receive upon conversion of this Note, the number of shares of capital stock or other securities or property of the Maker, or of the successor corporation resulting from such merger or consolidation or sale, to which the holder of shares of Common Stock deliverable upon conversion would have been entitled on such reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this section with respect to the rights of the holder of this Note after the reorganization, merger, consolidation or sale to the end that the provisions of this section (including adjustment of the Conversion Price then in effect and the number of shares of Common Stock receivable upon conversion of this Note) shall be applicable after that event as nearly equivalent hereto as may be practicable. (f) Material Financing. If the Corporation at an time during a twelve (12) month period commencing on the date of issuance of the Note, enters into a transaction with a third party which is intended to provide material financing to the Corporation, and such transaction includes rights of conversion similar to those granted in this Note, then the Conversion Price shall be adjusted downward to be equal to the Conversion Price granted to such third party. (g) Minimum Adjustment. Notwithstanding anything to the contrary set forth herein, no adjustment of the Conversion Price shall be made in an amount equal to less than one cent ($.01), but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to one cent ($.01) or more. 4 (h) Certificate of Adjustment. Upon the occurrence of each adjustment or readjustment of the applicable Conversion Price pursuant to this section, the Maker shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the holder of this Note a certificate, signed by the Chairman of the Board, the President or the Chief Financial Officer, setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. (i) Notices of Record Date. If and in the event that: (1) the Maker shall set a record date for the purpose of entitling the holders of shares of Common Stock to receive a dividend, or any other distribution, payable otherwise than in cash; (2) the Maker shall set a record date for the purpose of entitling the holders of shares of Common Stock to subscribe for or purchase any shares of any class or to receive any other rights; (3) there shall occur any capital reorganization of the Maker, reclassification of the shares of capital stock of the Maker (other than a subdivision or combination of its outstanding shares of Common Stock), consolidation or merger of the Maker with or into another corporation, or sale of all or substantially all of the assets of the Maker; or (4) there shall occur a voluntary or involuntary dissolution, liquidation, or winding up of the Maker; then, and in any such case, the Maker shall cause to be mailed to the holder of record of this Note, at least [thirty (30) days] prior to the dates hereinafter specified, a notice stating the date: (A) which has been set as the record date for the purpose of such dividend, distribution, or rights; or (B) on which such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up is to take place and the record date as of which the holder of record shall be entitled to exchange this Note for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up. 5. Reservation. The Maker covenants that, during the period within which the Conversion Right may be exercised, the Maker will at all times have authorized and reserved for the purpose of issuance upon exercise of the Conversion Right, a sufficient number of shares of Common Stock (or other securities subject to the Conversion Right) to provide for the exercise of the Conversion Right in full. 6. Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares of Common Stock to which the Payee would otherwise be entitled, the Maker shall pay an amount equal to the product of such fraction multiplied by the fair value of one share of Common Stock on the Conversion Date, as determined in good faith by the Board of Directors of the Maker. 5 7. Registration Rights. The Maker hereby covenants and agrees as follows: (a) Definitions. For purposes of this section: (1) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration of effectiveness of such registration statement or other document by the Securities and Exchange Commission (the "SEC"). (2) The term "Registrable Securities" means: (A) the shares of Common Stock issued or issuable upon conversion of this Note; or (B) any other securities of the Maker issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, in exchange for or in replacement of the shares of Common Stock referenced in subsection (A) immediately above, excluding in all cases, however, any Registrable Securities sold to the public pursuant to a registration or an exemption from registration. (3) The number of shares of "Registrable Securities then outstanding" shall be the number of securities outstanding which are Registrable Securities. (4) The term "Holder" as used hereinafter in this Section 7 means any person or entity owning of record Registrable Securities. (b) Piggy-Back Registration Rights. In the event that (but without any obligation to do so) the Maker proposes to register any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-4, Form S-8 or any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Maker shall promptly give each Holder written notice of such registration (the "Piggy-Back Notice"); provided, however, that the Maker shall have no obligation to so notify Holders with respect to any registration subsequent to the first of such registrations to occur after the issuance of this Note and shall have no obligation if such registration relates to an underwritten offering by the Maker and the managing underwriter of the subject proposed offering expresses its objection thereto to the Maker. Upon the written request of each Holder given within twenty (20) days after receipt of such Piggy-Back Notice from the Maker, the Maker shall, subject to the provisions of Subsections 7(h) and 7(m) below, cause to be included in the registration statement filed by the Maker under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered; provided, however, that the Maker shall have no such obligation if such registration statement relates to an underwritten offering by the Maker and the managing underwriter of the subject offering has expressed its objection to the same to the Maker. To the extent that a Holder is offered the opportunity hereunder to include all of its Registrable Securities in a registration statement, such Holder will be deemed to have exercised its sole piggy-back registration right provided by this Subsection 7(c). 6 (c) Obligations of the Maker. Whenever the Maker shall elect to file a registration statement to effect the registration of any Registrable Securities, the Maker shall, as expeditiously as reasonably possible: (1) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of at least fifty percent (50%) of the Registrable Securities registered thereunder, keep such registration statement effective for at least four (4) months. (2) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus included therein as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (3) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (4) Use its best efforts to register and qualify the securities covered by such registration statement under the securities laws of such jurisdictions as shall be reasonably requested by the Holders for the distribution of the securities covered by the registration statement, provided that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction. (5) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with terms generally satisfactory to the managing underwriter of such offering. (6) Notify the Holders promptly after the Maker shall have received notice thereof, of the time when the registration statement becomes effective or any supplement to any prospectus forming a part of the registration statement has been filed. (7) Notify the Holders of any stop order suspending the effectiveness of the registration statement and use its reasonable best efforts to remove such stop order. (d) Furnish Information. It shall be a condition precedent to the obligations of the Maker to take any action pursuant hereto that any Holder seeking to include any of its Registrable Securities in a registration statement filed by the Maker pursuant hereto shall furnish to the Maker such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of its Registrable Securities. In that connection, each such Holder shall be required to represent to the Maker that all such information which is given is both complete and accurate in all material respects. Each of such Holders shall deliver to the Maker a statement in writing from 7 the beneficial owners of such securities that such beneficial owners bona fide intend to sell, transfer or otherwise dispose of such securities. (e) Definition of Expenses. (1) "Registration Expenses" shall mean all expenses incurred by the Maker in complying with Sections 7(c) and 7(d) hereof, including without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Maker, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Maker which shall be paid in any event by the Maker). (2) "Selling Expenses" shall mean all underwriting discounts, selling commissions and underwriters' expense allowance applicable to the sale and all fees and disbursements of any special counsel (other than the Maker's regular counsel) for any Holder. (f) Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance herewith, shall be borne by the Maker, and all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of Registrable Securities so registered. (g) Underwriting Requirements. All Holders proposing to distribute their securities through an underwriting pursuant hereto shall (together with the Maker and any other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Maker. Notwithstanding any other provision of this section, at the request of the managing underwriter, the Holder shall delay the sale of Registrable Securities which such Holder has requested be registered under this section for the ninety (90) day period commencing with the effective date of the registration statement. Notwithstanding anything to the contrary herein, no such delay shall be required with respect to securities offered by holders of securities who have requested the Maker to register such securities pursuant to a mandatory registration obligation of the Maker if other security holders of the Maker who have not made requests pursuant to such an obligation are not subject to a similar delay. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Maker and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall not be withdrawn from such registration except at the election of the Holder. (h) Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this section. (i) Indemnification. In the event that any Registrable Securities are included in a registration statement pursuant hereto: (1) To the extent permitted by law, the Maker will indemnify and hold harmless each Holder, the officers, directors and partners of each Holder, any 8 underwriter (as defined in the Securities Act) for such Holder and each person or entity, if any, that controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (A) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (B) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (C) any violation or alleged violation by the Maker of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Maker will reimburse each such Holder, officer, director or partner, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Maker (which consent shall not be unreasonably withheld), nor shall the Maker be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person; and further provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any preliminary prospectus but eliminated or remedied in the definitive prospectus, such indemnity agreement shall not inure to the benefit of the underwriter (or the benefit of any person or entity that controls such underwriter), if a copy of the definitive prospectus was not sent or given to such person or entity with or prior to the confirmation of the sale of such securities to such person or entity. (2) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Maker, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Maker within the meaning of the Securities Act or the Exchange Act, any underwriter (within the meaning of the Securities Act) for the Maker, any person who (or entity that) controls such underwriter, and any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Maker or any such director, officer, controlling person (or entity), or underwriter or controlling person, or other such Holder or director, officer or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance 9 upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Maker or any such director, officer, controlling person (or entity), underwriter or controlling person (or entity), other Holder, officer, director or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld. (3) Promptly after receipt by an indemnified party under this Section 7(i) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7(i), notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify an indemnifying party within a reasonable time of the commencement of any such action, to the extent prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7(i), but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 7(i). (j) Reports Under Securities Exchange Act of 1934. With a view toward making available to Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Maker to the public without registration, the Maker agrees to: (1) use its best efforts to make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (2) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Maker under the Securities Act and the Exchange Act; and (3) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request such information as may be reasonably requested in order to allow any Holder to avail himself of any rule or regulation of the SEC which permits the selling of any such securities without registration. 10 (k) Termination of the Maker's Obligations. (1) The Maker shall have no obligation pursuant to Section 7 with respect to any request made by any Holder after the first anniversary of the Maturity Date. (2) Notwithstanding any provision hereof to the contrary, the Maker shall not be required to effect any registration under the Securities Act or under any state securities laws on behalf of any Holder or Holders if, in the opinion of counsel for the Maker, the offering or transfer by such Holder or Holders in the manner proposed (including, without limitation, the number of shares proposed to be offered or transferred and the method of offering or transfer) is exempt from the registration requirements of the Securities Act and the securities laws of applicable states. (l) Lock Ups; Limitation on Rights. The Payee (and any subsequent Holder) by acceptance hereof hereby agrees that, in the event that subsequent to the date hereof, the Maker conducts an underwritten public offering of its securities: (i) the right to request registration pursuant to the provisions hereof shall be subject to the approval of the underwriter of such public offering; and (ii) the Payee (and any subsequent Holder) shall agree to refrain from exercising such rights or selling, transferring or otherwise disposing of any of the Registrable Securities for a period of up to thirteen months should the underwriter so request in writing. 8. Miscellaneous. (a) Restricted Securities. By acceptance hereof, the Payee understands and agrees that this Note and the shares of Common Stock issuable upon conversion hereof are "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Maker in a transaction not involving a public offering and have not been the subject of registration under the Securities Act and that under such laws and applicable regulations such securities may be resold in the absence of registration under the Securities Act only in certain limited circumstances. The Payee hereby represents that he, she or it is familiar with Rule 144 promulgated under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. (b) Further Limitations on Disposition. This Note may not be negotiated, assigned or transferred by Payee. The Payee further agrees not to make any disposition of all or any portion of this Note (or of the securities issuable upon conversion hereof) unless and until: (1) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (2) such disposition is made in accordance with Rule 144 under the Securities Act; or (3) the Payee shall have notified the Maker of the proposed disposition and shall have furnished the Maker with a detailed statement of the circumstances 11 surrounding the proposed disposition, and the Payee shall have furnished the Maker with an opinion of counsel, which opinion of counsel shall be reasonably satisfactory to the Maker, that such disposition will not require registration under the Securities Act and will be in compliance with applicable state securities laws. (c) Legends. It is understood that this Note and each certificate evidencing shares of Common Stock issuable upon conversion hereof (or evidencing any other securities issued with respect thereto pursuant to any stock split, stock dividend, merger or other form of reorganization or recapitalization) shall bear the legends (in addition to any legends which may be required in the opinion of the Maker's counsel by the securities laws of the state where the Payee is located) substantially as set forth on the first page of this Note. (d) Presentment. Except as set forth herein, Maker waives presentment, demand and presentation for payment, notice of nonpayment and dishonor, protest and notice of protest and expressly agrees that this Note or any payment hereunder may be extended from time to time by the Payee without in any way affecting the liability of Maker. 9. Notices. (a) Notices to the Payee. Any notice required by the provisions of this Note to be given to the holder hereof shall be in writing and may be delivered by personal service, facsimile transmission or by registered or certified mail, return receipt requested, with postage thereon fully prepaid or overnight delivery courier. All such communications shall be addressed to the Payee of record at its address appearing on the books of the Maker. Service of any such communication made only by mail shall be deemed complete on the date of actual delivery as shown by the addressee's registry or certification receipt or at the expiration of the third (3rd) business day after the date of mailing, whichever is earlier in time. (b) Notices to the Maker. Whenever any provision of this Note requires a notice to be given or a request to be made to the Maker by the Payee or the holder of any other security of the Maker obtained in connection with a recapitalization, merger, dividend or other event affecting this Note, then and in each such case, any such notice or request shall be in writing and shall be sent by registered or certified mail, return receipt requested with postage thereon fully prepaid to the Maker at its principal place of business. No notice given or request made hereunder shall be valid unless signed by the Payee of this Note or other holder giving such notice or request (or, in the case of a notice or request by Holders of a specified percent in aggregate principal amount of outstanding Notes, unless signed by each Holder of a Note whose Note has been counted in constituting the requisite percentage of Notes required to give such notice or make such request). 10. Events of Default. (a) Each of the following shall constitute an event of default (an "Event of Default") hereunder: (i) the failure to pay when due any principal or interest hereunder and the continuance of such failure for a period of thirty (30) days after written notice from the Payee 12 to the Maker of such failure; (ii) the violation by the Maker of any covenant or agreement contained in this Note and the continuance of such violation for a period of thirty (30) days after written notice from the Payee to the Maker of such failure; (iii) any change in control of the Maker which the Board of Directors of the Maker deems to be hostile or unfriendly; (iv) the assignment for the benefit of creditors by the Maker; (v) the application for the appointment of a receiver or liquidator for the Maker or for property of the Maker; (vi) the filing of a petition in bankruptcy by or against the Maker; (vii) the issuance of an attachment or the entry of a judgment against the Maker in excess of $50,000; (viii) a default by the Maker with respect to any other indebtedness due to the Payee; (ix) the making or sending of a notice of an intended bulk sale by the Maker; or (x) the termination of existence, dissolution or insolvency of the Maker. Upon the occurrence of any of the foregoing Events of Default, this Note shall be considered to be in default and the entire unpaid principal sum hereof, together with accrued interest, shall at the option of the holder hereof become immediately due and payable in full. Upon the occurrence of an Event of Default which remains uncured as set forth herein and the placement of this Note in the hands of an attorney for collection, the Maker agrees to pay reasonable collection costs and expenses, including reasonable attorneys' fees and interest from the date of the default at the rate of fifteen percent (15%) per annum computed on the unpaid principal balance. (b) The Payee may waive any Event of Default hereunder. Such waiver shall be evidenced by written notice or other document specifying the Event or Events of Default being waived and shall be binding on all existing or subsequent Payees under this Note. (c) Notwithstanding anything else to the contrary set forth herein, upon the occurrence of an Event of Default, including but not limited to the failure to pay when due any principal or interest hereunder, the Maker shall have six (6) months from the date of the occurrence of each such Event of Default to cure such default, during which time, the Payee may not take any action against the Maker with respect to collection hereunder or enforcement of the provisions hereof. 11. Survival. In the event that all or a portion of the principal hereunder is converted pursuant to Section 3 above, Section 7 hereof relating to registration rights shall survive the termination of this Note upon cancellation hereof resulting from repayment of the balance of amounts outstanding hereunder or the issuance of a new note pursuant to Section 3 above. 12. Construction; Governing Law. The validity and construction of this Note and all matters pertaining hereto are to be determined in accordance with the laws of the State of Maryland without regard to the conflicts of law principles thereof. 13 IN WITNESS WHEREOF, Maker, by its appropriate officers thereunto duly authorized, has executed this convertible promissory note and affixed its corporate seal as of this 24th day of June, 1997. ESSEX CORPORATION By: Joseph R. Kurry, Jr. -------------------------- Joseph R. Kurry, Jr., Chief Financial Officer ATTEST: By: Sarah E. Roberts - ----------------------- Sarah E. Roberts, Assistant Secretary 14 CONVERSION FORM The undersigned hereby elects to convert the following principal amount of the attached Non-Negotiable 8% Convertible Promissory Note (the "Note") (not to exceed $______) into shares (not to exceed _______ shares) of Newco Common Stock or Company Common Stock, in accordance with the formula set forth in Section 2(a). State such amount: _____________________________________ ($___________). Date: Signature: -------------------------------------------------- (Sign exactly as your name appears on the Note) EX-10 7 EXHIBIT 10.20 EXHIBIT 10.20 8% Convertible Note Payable - Samuel Hopkins NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS PERMITTED UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. NON-NEGOTIABLE 8% CONVERTIBLE PROMISSORY NOTE $ 20,000 Columbia, Maryland June 24, 1997 FOR VALUE RECEIVED, the undersigned, Essex Corporation, a Virginia corporation (hereinafter referred to as the "Maker" or the "Company") hereby promises to pay Samuel Hopkins (the "Payee") at 45 Warrenton Road, Baltimore, MD 21210 or at such other place as the holder hereof may from time to time designate in writing, the principal sum of Twenty Thousand and 00/100 Dollars ($20,000) in one installment due upon the earlier of: (i) one (1) year from the date of issuance of the promissory note; or (ii) ten (10) business days after the date of consummation of stock acquisition/sale of substantially all of the assets or the merger of the Company by or with an unrelated entity or business enterprise (the "Acquisition"), which transaction requires shareholder approval. Interest shall be paid by Maker to the Payee on the Maturity Date at the simple rate of eight (8%) percent per annum computed on the unpaid principal balance. By acceptance of this Non-Negotiable 8% Convertible Promissory Note (the "Note"), the Payee represents, warrants, covenants and agrees that he, she or it will abide by and be bound by its terms. 1. Prepayment, Extension and Notices. The unpaid principal balance outstanding under this Note may be prepaid in part or in full by the Maker without penalty, upon fifteen (15) days notice to the Payee stating the repayment amount and repayment date (the "Repayment Date"). The Maker must provide notice of its intention to prepay amounts outstanding hereunder at least five (5) business days prior to the Maturity Date to the Payee. 2. Conversion. The unpaid principal amount of this Note and the interest thereon, shall be convertible at the option of the Payee (the "Conversion Right") prior to the Maturity Date, in the manner and on the terms hereinafter set forth, into shares of common stock of the Company, par value ($.10) at any time prior to the Maturity Date at a conversion price equal to the greater of market value on the date that the election to convert is made or fifty cents ($.50) per shares, subject to adjustment pursuant to Section 4 hereof; provided however, that in the event the assets of the optoelectronics division of the Company have been transferred to another business 1 enterprise [in which the Company has a controlling shareholder interest] ("Transferee"), and at the election of the Payee, the unpaid principal amount of this Note and the accrued interest thereon, shall be convertible into a percentage equity interest of the Transferee determined pursuant to the following formula: x/y where x is the dollar amount converted and y is the fair market value (or mean fair market value, if more than one valuation methodology is utilized) as determined by a third party expert in providing such valuations retained by the Company.. (b) Notice of the right to convert shall be given promptly after the date of Acquisition and Maker shall have the period of time between such Notice date and the Maturity Date (but in no event less than ten (10) business days) during which Payee shall have the opportunity to elect to convert the principal and interest into Newco Common Stock, or receive cash payment. (c) Notwithstanding any other provision of this Note to the contrary, upon receipt of notice of the Maker's intent to prepay part or all of the principal amount hereunder or of an Accelerated Maturity Date, the Payee may elect to exercise the Conversion Right and convert a portion (as set forth in subsection (a) hereof) of the amount of unpaid principal which the Maker intends to prepay, up to the close of business on the last business day before the stated Repayment Date. (d) Notwithstanding any other provision hereof, the Conversion Right may not be exercised at any time during which a registration statement under the Securities Act of 1933 is filed but not effective absent written consent of the Company. 3. Conversion Procedure. The Conversion Right may be exercised by the Payee by the surrender of this Note (along with the conversion form attached hereto, duly executed) to the Maker at the principal office of the Maker. Risk of loss prior to surrender of this Note shall be borne by the Payee. Consequently, hand delivery with written acknowledgement of receipt by the Maker or registered or certified mail, return receipt requested, is the preferred mode of delivery. Conversion shall be deemed to have been effected on the date when such delivery of the conversion notice is actually made or, if earlier, at the expiration of five (5) calendar days after being sent to the Maker by the Payee by registered or certified mail, return receipt requested, with postage thereon fully prepaid (the "Conversion Date"). As promptly as practicable thereafter, the Maker shall issue and deliver to the Payee: (a) a new note representing the difference between the principal amount of this Note plus interest accrued through the Conversion Date, and the principal amount hereof which has been converted pursuant hereto; and (b) certificates representing the number of shares of Common Stock to which the Payee is entitled. The Maker shall not be obligated to issue certificates representing shares of Common Stock in the name of any party other than the Payee. The person or entity in whose name the certificates representing the shares of Common Stock issuable upon conversion hereof shall be deemed to have become a holder of record on the next succeeding day on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date. The Maker covenants that all securities which may be issued upon exercise 2 of the Conversion Right will, upon issuance, be fully paid and nonassessable and free of all taxes, liens and charges caused or created by the Maker with respect to the issuance thereof. 4. Adjustments. The Conversion Price and the number and kind of securities which may be received upon the exercise of the Conversion Right shall be subject to adjustment from time to time upon the happening of certain events, as follows: (a) Stock Splits and Combinations. If the Maker shall at any time or from time to time after the date hereof effect a subdivision of its outstanding shares of Common Stock, the Conversion Price then in effect immediately before such subdivision shall be proportionately decreased, and conversely, if the Maker shall at any time or from time to time after the date hereof combine its outstanding shares of Common Stock, the Conversion Price then in effect immediately before such combination shall be proportionately increased. Any adjustment under this section shall become effective upon the close of business on the date the subdivision or combination becomes effective. (b) Certain Dividends and Distributions. In the event that the Maker shall at any time or from time to time after the date hereof make or issue, or fix a record date for the determination of holders of shares of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event, the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event that such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (2) the denominator of which shall be the sum of the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date and the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions. (c) Other Dividends and Distributions. In the event that the Maker at any time or from time to time after the date hereof shall make or issue, or fix a record date for the determination of holders of shares of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Maker other than shares of Common Stock, then and in each such event provisions shall be made so that the holder of this Note shall receive, upon conversion of this Note, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Maker which such holder would have received had its Note been converted into shares of Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, 3 retained such securities (together with any distributions payable thereon during such period) receivable by the holder as aforesaid during such period, giving application to all adjustments called for during such period under this section with respect to the rights of the holder of the Note. (d) Reclassification, Exchange or Substitution. If the shares of Common Stock issuable upon the conversion of this Note shall be changed into the same or different number of shares of any class or classes of capital stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for in subsection (e) below), then and in each such event, the holder of this Note shall have the right thereafter to convert this Note into the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, reclassification or other change, as the holder of the number of shares of Common Stock into which this Note might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (e) Reorganization, Merger, Consolidation or Sale of Assets. If, at any time or from time to time, there shall be a capital reorganization of the shares of Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this section) or a merger or consolidation of the Maker with or into another corporation, or the sale of all or substantially all of the Maker's properties and assets to any other person or entity, then as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holder of this Note shall thereafter be entitled to receive upon conversion of this Note, the number of shares of capital stock or other securities or property of the Maker, or of the successor corporation resulting from such merger or consolidation or sale, to which the holder of shares of Common Stock deliverable upon conversion would have been entitled on such reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this section with respect to the rights of the holder of this Note after the reorganization, merger, consolidation or sale to the end that the provisions of this section (including adjustment of the Conversion Price then in effect and the number of shares of Common Stock receivable upon conversion of this Note) shall be applicable after that event as nearly equivalent hereto as may be practicable. (f) Material Financing. If the Corporation at an time during a twelve (12) month period commencing on the date of issuance of the Note, enters into a transaction with a third party which is intended to provide material financing to the Corporation, and such transaction includes rights of conversion similar to those granted in this Note, then the Conversion Price shall be adjusted downward to be equal to the Conversion Price granted to such third party. (g) Minimum Adjustment. Notwithstanding anything to the contrary set forth herein, no adjustment of the Conversion Price shall be made in an amount equal to less than one cent ($.01), but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to one cent ($.01) or more. 4 (h) Certificate of Adjustment. Upon the occurrence of each adjustment or readjustment of the applicable Conversion Price pursuant to this section, the Maker shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the holder of this Note a certificate, signed by the Chairman of the Board, the President or the Chief Financial Officer, setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. (i) Notices of Record Date. If and in the event that: (1) the Maker shall set a record date for the purpose of entitling the holders of shares of Common Stock to receive a dividend, or any other distribution, payable otherwise than in cash; (2) the Maker shall set a record date for the purpose of entitling the holders of shares of Common Stock to subscribe for or purchase any shares of any class or to receive any other rights; (3) there shall occur any capital reorganization of the Maker, reclassification of the shares of capital stock of the Maker (other than a subdivision or combination of its outstanding shares of Common Stock), consolidation or merger of the Maker with or into another corporation, or sale of all or substantially all of the assets of the Maker; or (4) there shall occur a voluntary or involuntary dissolution, liquidation, or winding up of the Maker; then, and in any such case, the Maker shall cause to be mailed to the holder of record of this Note, at least [thirty (30) days] prior to the dates hereinafter specified, a notice stating the date: (A) which has been set as the record date for the purpose of such dividend, distribution, or rights; or (B) on which such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up is to take place and the record date as of which the holder of record shall be entitled to exchange this Note for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up. 5. Reservation. The Maker covenants that, during the period within which the Conversion Right may be exercised, the Maker will at all times have authorized and reserved for the purpose of issuance upon exercise of the Conversion Right, a sufficient number of shares of Common Stock (or other securities subject to the Conversion Right) to provide for the exercise of the Conversion Right in full. 6. Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares of Common Stock to which the Payee would otherwise be entitled, the Maker shall pay an amount equal to the product of such fraction multiplied by the fair value of one share of Common Stock on the Conversion Date, as determined in good faith by the Board of Directors of the Maker. 5 7. Registration Rights. The Maker hereby covenants and agrees as follows: (a) Definitions. For purposes of this section: (1) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration of effectiveness of such registration statement or other document by the Securities and Exchange Commission (the "SEC"). (2) The term "Registrable Securities" means: (A) the shares of Common Stock issued or issuable upon conversion of this Note; or (B) any other securities of the Maker issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, in exchange for or in replacement of the shares of Common Stock referenced in subsection (A) immediately above, excluding in all cases, however, any Registrable Securities sold to the public pursuant to a registration or an exemption from registration. (3) The number of shares of "Registrable Securities then outstanding" shall be the number of securities outstanding which are Registrable Securities. (4) The term "Holder" as used hereinafter in this Section 7 means any person or entity owning of record Registrable Securities. (b) Piggy-Back Registration Rights. In the event that (but without any obligation to do so) the Maker proposes to register any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-4, Form S-8 or any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Maker shall promptly give each Holder written notice of such registration (the "Piggy-Back Notice"); provided, however, that the Maker shall have no obligation to so notify Holders with respect to any registration subsequent to the first of such registrations to occur after the issuance of this Note and shall have no obligation if such registration relates to an underwritten offering by the Maker and the managing underwriter of the subject proposed offering expresses its objection thereto to the Maker. Upon the written request of each Holder given within twenty (20) days after receipt of such Piggy-Back Notice from the Maker, the Maker shall, subject to the provisions of Subsections 7(h) and 7(m) below, cause to be included in the registration statement filed by the Maker under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered; provided, however, that the Maker shall have no such obligation if such registration statement relates to an underwritten offering by the Maker and the managing underwriter of the subject offering has expressed its objection to the same to the Maker. To the extent that a Holder is offered the opportunity hereunder to include all of its Registrable Securities in a registration statement, such Holder will be deemed to have exercised its sole piggy-back registration right provided by this Subsection 7(c). 6 (c) Obligations of the Maker. Whenever the Maker shall elect to file a registration statement to effect the registration of any Registrable Securities, the Maker shall, as expeditiously as reasonably possible: (1) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of at least fifty percent (50%) of the Registrable Securities registered thereunder, keep such registration statement effective for at least four (4) months. (2) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus included therein as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (3) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (4) Use its best efforts to register and qualify the securities covered by such registration statement under the securities laws of such jurisdictions as shall be reasonably requested by the Holders for the distribution of the securities covered by the registration statement, provided that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction. (5) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with terms generally satisfactory to the managing underwriter of such offering. (6) Notify the Holders promptly after the Maker shall have received notice thereof, of the time when the registration statement becomes effective or any supplement to any prospectus forming a part of the registration statement has been filed. (7) Notify the Holders of any stop order suspending the effectiveness of the registration statement and use its reasonable best efforts to remove such stop order. (d) Furnish Information. It shall be a condition precedent to the obligations of the Maker to take any action pursuant hereto that any Holder seeking to include any of its Registrable Securities in a registration statement filed by the Maker pursuant hereto shall furnish to the Maker such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of its Registrable Securities. In that connection, each such Holder shall be required to represent to the Maker that all such information which is given is both complete and accurate in all material respects. Each of such Holders shall deliver to the Maker a statement in writing from 7 the beneficial owners of such securities that such beneficial owners bona fide intend to sell, transfer or otherwise dispose of such securities. (e) Definition of Expenses. (1) "Registration Expenses" shall mean all expenses incurred by the Maker in complying with Sections 7(c) and 7(d) hereof, including without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Maker, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Maker which shall be paid in any event by the Maker). (2) "Selling Expenses" shall mean all underwriting discounts, selling commissions and underwriters' expense allowance applicable to the sale and all fees and disbursements of any special counsel (other than the Maker's regular counsel) for any Holder. (f) Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance herewith, shall be borne by the Maker, and all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of Registrable Securities so registered. (g) Underwriting Requirements. All Holders proposing to distribute their securities through an underwriting pursuant hereto shall (together with the Maker and any other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Maker. Notwithstanding any other provision of this section, at the request of the managing underwriter, the Holder shall delay the sale of Registrable Securities which such Holder has requested be registered under this section for the ninety (90) day period commencing with the effective date of the registration statement. Notwithstanding anything to the contrary herein, no such delay shall be required with respect to securities offered by holders of securities who have requested the Maker to register such securities pursuant to a mandatory registration obligation of the Maker if other security holders of the Maker who have not made requests pursuant to such an obligation are not subject to a similar delay. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Maker and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall not be withdrawn from such registration except at the election of the Holder. (h) Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this section. (i) Indemnification. In the event that any Registrable Securities are included in a registration statement pursuant hereto: (1) To the extent permitted by law, the Maker will indemnify and hold harmless each Holder, the officers, directors and partners of each Holder, any 8 underwriter (as defined in the Securities Act) for such Holder and each person or entity, if any, that controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (A) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (B) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (C) any violation or alleged violation by the Maker of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Maker will reimburse each such Holder, officer, director or partner, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Maker (which consent shall not be unreasonably withheld), nor shall the Maker be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person; and further provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any preliminary prospectus but eliminated or remedied in the definitive prospectus, such indemnity agreement shall not inure to the benefit of the underwriter (or the benefit of any person or entity that controls such underwriter), if a copy of the definitive prospectus was not sent or given to such person or entity with or prior to the confirmation of the sale of such securities to such person or entity. (2) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Maker, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Maker within the meaning of the Securities Act or the Exchange Act, any underwriter (within the meaning of the Securities Act) for the Maker, any person who (or entity that) controls such underwriter, and any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Maker or any such director, officer, controlling person (or entity), or underwriter or controlling person, or other such Holder or director, officer or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance 9 upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Maker or any such director, officer, controlling person (or entity), underwriter or controlling person (or entity), other Holder, officer, director or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld. (3) Promptly after receipt by an indemnified party under this Section 7(i) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7(i), notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify an indemnifying party within a reasonable time of the commencement of any such action, to the extent prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7(i), but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 7(i). (j) Reports Under Securities Exchange Act of 1934. With a view toward making available to Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Maker to the public without registration, the Maker agrees to: (1) use its best efforts to make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (2) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Maker under the Securities Act and the Exchange Act; and (3) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request such information as may be reasonably requested in order to allow any Holder to avail himself of any rule or regulation of the SEC which permits the selling of any such securities without registration. 10 (k) Termination of the Maker's Obligations. (1) The Maker shall have no obligation pursuant to Section 7 with respect to any request made by any Holder after the first anniversary of the Maturity Date. (2) Notwithstanding any provision hereof to the contrary, the Maker shall not be required to effect any registration under the Securities Act or under any state securities laws on behalf of any Holder or Holders if, in the opinion of counsel for the Maker, the offering or transfer by such Holder or Holders in the manner proposed (including, without limitation, the number of shares proposed to be offered or transferred and the method of offering or transfer) is exempt from the registration requirements of the Securities Act and the securities laws of applicable states. (l) Lock Ups; Limitation on Rights. The Payee (and any subsequent Holder) by acceptance hereof hereby agrees that, in the event that subsequent to the date hereof, the Maker conducts an underwritten public offering of its securities: (i) the right to request registration pursuant to the provisions hereof shall be subject to the approval of the underwriter of such public offering; and (ii) the Payee (and any subsequent Holder) shall agree to refrain from exercising such rights or selling, transferring or otherwise disposing of any of the Registrable Securities for a period of up to thirteen months should the underwriter so request in writing. 8. Miscellaneous. (a) Restricted Securities. By acceptance hereof, the Payee understands and agrees that this Note and the shares of Common Stock issuable upon conversion hereof are "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Maker in a transaction not involving a public offering and have not been the subject of registration under the Securities Act and that under such laws and applicable regulations such securities may be resold in the absence of registration under the Securities Act only in certain limited circumstances. The Payee hereby represents that he, she or it is familiar with Rule 144 promulgated under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. (b) Further Limitations on Disposition. This Note may not be negotiated, assigned or transferred by Payee. The Payee further agrees not to make any disposition of all or any portion of this Note (or of the securities issuable upon conversion hereof) unless and until: (1) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (2) such disposition is made in accordance with Rule 144 under the Securities Act; or (3) the Payee shall have notified the Maker of the proposed disposition and shall have furnished the Maker with a detailed statement of the circumstances 11 surrounding the proposed disposition, and the Payee shall have furnished the Maker with an opinion of counsel, which opinion of counsel shall be reasonably satisfactory to the Maker, that such disposition will not require registration under the Securities Act and will be in compliance with applicable state securities laws. (c) Legends. It is understood that this Note and each certificate evidencing shares of Common Stock issuable upon conversion hereof (or evidencing any other securities issued with respect thereto pursuant to any stock split, stock dividend, merger or other form of reorganization or recapitalization) shall bear the legends (in addition to any legends which may be required in the opinion of the Maker's counsel by the securities laws of the state where the Payee is located) substantially as set forth on the first page of this Note. (d) Presentment. Except as set forth herein, Maker waives presentment, demand and presentation for payment, notice of nonpayment and dishonor, protest and notice of protest and expressly agrees that this Note or any payment hereunder may be extended from time to time by the Payee without in any way affecting the liability of Maker. 9. Notices. (a) Notices to the Payee. Any notice required by the provisions of this Note to be given to the holder hereof shall be in writing and may be delivered by personal service, facsimile transmission or by registered or certified mail, return receipt requested, with postage thereon fully prepaid or overnight delivery courier. All such communications shall be addressed to the Payee of record at its address appearing on the books of the Maker. Service of any such communication made only by mail shall be deemed complete on the date of actual delivery as shown by the addressee's registry or certification receipt or at the expiration of the third (3rd) business day after the date of mailing, whichever is earlier in time. (b) Notices to the Maker. Whenever any provision of this Note requires a notice to be given or a request to be made to the Maker by the Payee or the holder of any other security of the Maker obtained in connection with a recapitalization, merger, dividend or other event affecting this Note, then and in each such case, any such notice or request shall be in writing and shall be sent by registered or certified mail, return receipt requested with postage thereon fully prepaid to the Maker at its principal place of business. No notice given or request made hereunder shall be valid unless signed by the Payee of this Note or other holder giving such notice or request (or, in the case of a notice or request by Holders of a specified percent in aggregate principal amount of outstanding Notes, unless signed by each Holder of a Note whose Note has been counted in constituting the requisite percentage of Notes required to give such notice or make such request). 10. Events of Default. (a) Each of the following shall constitute an event of default (an "Event of Default") hereunder: (i) the failure to pay when due any principal or interest hereunder and the continuance of such failure for a period of thirty (30) days after written notice from the Payee 12 to the Maker of such failure; (ii) the violation by the Maker of any covenant or agreement contained in this Note and the continuance of such violation for a period of thirty (30) days after written notice from the Payee to the Maker of such failure; (iii) any change in control of the Maker which the Board of Directors of the Maker deems to be hostile or unfriendly; (iv) the assignment for the benefit of creditors by the Maker; (v) the application for the appointment of a receiver or liquidator for the Maker or for property of the Maker; (vi) the filing of a petition in bankruptcy by or against the Maker; (vii) the issuance of an attachment or the entry of a judgment against the Maker in excess of $50,000; (viii) a default by the Maker with respect to any other indebtedness due to the Payee; (ix) the making or sending of a notice of an intended bulk sale by the Maker; or (x) the termination of existence, dissolution or insolvency of the Maker. Upon the occurrence of any of the foregoing Events of Default, this Note shall be considered to be in default and the entire unpaid principal sum hereof, together with accrued interest, shall at the option of the holder hereof become immediately due and payable in full. Upon the occurrence of an Event of Default which remains uncured as set forth herein and the placement of this Note in the hands of an attorney for collection, the Maker agrees to pay reasonable collection costs and expenses, including reasonable attorneys' fees and interest from the date of the default at the rate of fifteen percent (15%) per annum computed on the unpaid principal balance. (b) The Payee may waive any Event of Default hereunder. Such waiver shall be evidenced by written notice or other document specifying the Event or Events of Default being waived and shall be binding on all existing or subsequent Payees under this Note. (c) Notwithstanding anything else to the contrary set forth herein, upon the occurrence of an Event of Default, including but not limited to the failure to pay when due any principal or interest hereunder, the Maker shall have six (6) months from the date of the occurrence of each such Event of Default to cure such default, during which time, the Payee may not take any action against the Maker with respect to collection hereunder or enforcement of the provisions hereof. 11. Survival. In the event that all or a portion of the principal hereunder is converted pursuant to Section 3 above, Section 7 hereof relating to registration rights shall survive the termination of this Note upon cancellation hereof resulting from repayment of the balance of amounts outstanding hereunder or the issuance of a new note pursuant to Section 3 above. 12. Construction; Governing Law. The validity and construction of this Note and all matters pertaining hereto are to be determined in accordance with the laws of the State of Maryland without regard to the conflicts of law principles thereof. 13 IN WITNESS WHEREOF, Maker, by its appropriate officers thereunto duly authorized, has executed this convertible promissory note and affixed its corporate seal as of this 24th day of June, 1997. ESSEX CORPORATION By: Joseph R. Kurry, Jr. ------------------------- Joseph R. Kurry, Jr., Chief Financial Officer ATTEST: By: Sarah E. Roberts - ---------------------- Sarah E. Roberts, Assistant Secretary 14 CONVERSION FORM The undersigned hereby elects to convert the following principal amount of the attached Non-Negotiable 8% Convertible Promissory Note (the "Note") (not to exceed $______) into shares (not to exceed _______ shares) of Newco Common Stock or Company Common Stock, in accordance with the formula set forth in Section 2(a). State such amount: _____________________________________ ($___________). Date: Signature: ------------------------------------------------- (Sign exactly as your name appears on the Note) EX-10 8 EXHIBIT 10.21 EXHIBIT 10.21 8% Convertible Note Payable - Harold P. Hanson NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS PERMITTED UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. NON-NEGOTIABLE 8% CONVERTIBLE PROMISSORY NOTE $ 10,000 Columbia, Maryland June 24, 1997 FOR VALUE RECEIVED, the undersigned, Essex Corporation, a Virginia corporation (hereinafter referred to as the "Maker" or the "Company") hereby promises to pay Harold P. Hanson, Trustee, Harold P. Hanson Trust (the "Payee") at 2385 N.W. 18th Place, Gainesville, FL 32605 or at such other place as the holder hereof may from time to time designate in writing, the principal sum of Ten Thousand and 00/100 Dollars ($10,000) in one installment due upon the earlier of: (i) one (1) year from the date of issuance of the promissory note; or (ii) ten (10) business days after the date of consummation of stock acquisition/sale of substantially all of the assets or the merger of the Company by or with an unrelated entity or business enterprise (the "Acquisition"), which transaction requires shareholder approval. Interest shall be paid by Maker to the Payee on the Maturity Date at the simple rate of eight (8%) percent per annum computed on the unpaid principal balance. By acceptance of this Non-Negotiable 8% Convertible Promissory Note (the "Note"), the Payee represents, warrants, covenants and agrees that he, she or it will abide by and be bound by its terms. 1. Prepayment, Extension and Notices. The unpaid principal balance outstanding under this Note may be prepaid in part or in full by the Maker without penalty, upon fifteen (15) days notice to the Payee stating the repayment amount and repayment date (the "Repayment Date"). The Maker must provide notice of its intention to prepay amounts outstanding hereunder at least five (5) business days prior to the Maturity Date to the Payee. 2. Conversion. The unpaid principal amount of this Note and the interest thereon, shall be convertible at the option of the Payee (the "Conversion Right") prior to the Maturity Date, in the manner and on the terms hereinafter set forth, into shares of common stock of the Company, par value ($.10) at any time prior to the Maturity Date at a conversion price equal to the greater of market value on the date that the election to convert is made or fifty cents ($.50) per shares, subject to adjustment pursuant to Section 4 hereof; provided however, that in the event the assets of the optoelectronics division of the Company have been transferred to another business 1 enterprise [in which the Company has a controlling shareholder interest] ("Transferee"), and at the election of the Payee, the unpaid principal amount of this Note and the accrued interest thereon, shall be convertible into a percentage equity interest of the Transferee determined pursuant to the following formula: x/y where x is the dollar amount converted and y is the fair market value (or mean fair market value, if more than one valuation methodology is utilized) as determined by a third party expert in providing such valuations retained by the Company.. (b) Notice of the right to convert shall be given promptly after the date of Acquisition and Maker shall have the period of time between such Notice date and the Maturity Date (but in no event less than ten (10) business days) during which Payee shall have the opportunity to elect to convert the principal and interest into Newco Common Stock, or receive cash payment. (c) Notwithstanding any other provision of this Note to the contrary, upon receipt of notice of the Maker's intent to prepay part or all of the principal amount hereunder or of an Accelerated Maturity Date, the Payee may elect to exercise the Conversion Right and convert a portion (as set forth in subsection (a) hereof) of the amount of unpaid principal which the Maker intends to prepay, up to the close of business on the last business day before the stated Repayment Date. (d) Notwithstanding any other provision hereof, the Conversion Right may not be exercised at any time during which a registration statement under the Securities Act of 1933 is filed but not effective absent written consent of the Company. 3. Conversion Procedure. The Conversion Right may be exercised by the Payee by the surrender of this Note (along with the conversion form attached hereto, duly executed) to the Maker at the principal office of the Maker. Risk of loss prior to surrender of this Note shall be borne by the Payee. Consequently, hand delivery with written acknowledgement of receipt by the Maker or registered or certified mail, return receipt requested, is the preferred mode of delivery. Conversion shall be deemed to have been effected on the date when such delivery of the conversion notice is actually made or, if earlier, at the expiration of five (5) calendar days after being sent to the Maker by the Payee by registered or certified mail, return receipt requested, with postage thereon fully prepaid (the "Conversion Date"). As promptly as practicable thereafter, the Maker shall issue and deliver to the Payee: (a) a new note representing the difference between the principal amount of this Note plus interest accrued through the Conversion Date, and the principal amount hereof which has been converted pursuant hereto; and (b) certificates representing the number of shares of Common Stock to which the Payee is entitled. The Maker shall not be obligated to issue certificates representing shares of Common Stock in the name of any party other than the Payee. The person or entity in whose name the certificates representing the shares of Common Stock issuable upon conversion hereof shall be deemed to have become a holder of record on the next succeeding day on which the transfer books are open, but the Conversion Price shall be that in effect on the Conversion Date. The Maker covenants that all securities which may be issued upon exercise 2 of the Conversion Right will, upon issuance, be fully paid and nonassessable and free of all taxes, liens and charges caused or created by the Maker with respect to the issuance thereof. 4. Adjustments. The Conversion Price and the number and kind of securities which may be received upon the exercise of the Conversion Right shall be subject to adjustment from time to time upon the happening of certain events, as follows: (a) Stock Splits and Combinations. If the Maker shall at any time or from time to time after the date hereof effect a subdivision of its outstanding shares of Common Stock, the Conversion Price then in effect immediately before such subdivision shall be proportionately decreased, and conversely, if the Maker shall at any time or from time to time after the date hereof combine its outstanding shares of Common Stock, the Conversion Price then in effect immediately before such combination shall be proportionately increased. Any adjustment under this section shall become effective upon the close of business on the date the subdivision or combination becomes effective. (b) Certain Dividends and Distributions. In the event that the Maker shall at any time or from time to time after the date hereof make or issue, or fix a record date for the determination of holders of shares of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event, the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event that such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (2) the denominator of which shall be the sum of the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date and the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions. (c) Other Dividends and Distributions. In the event that the Maker at any time or from time to time after the date hereof shall make or issue, or fix a record date for the determination of holders of shares of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Maker other than shares of Common Stock, then and in each such event provisions shall be made so that the holder of this Note shall receive, upon conversion of this Note, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Maker which such holder would have received had its Note been converted into shares of Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, 3 retained such securities (together with any distributions payable thereon during such period) receivable by the holder as aforesaid during such period, giving application to all adjustments called for during such period under this section with respect to the rights of the holder of the Note. (d) Reclassification, Exchange or Substitution. If the shares of Common Stock issuable upon the conversion of this Note shall be changed into the same or different number of shares of any class or classes of capital stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for in subsection (e) below), then and in each such event, the holder of this Note shall have the right thereafter to convert this Note into the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, reclassification or other change, as the holder of the number of shares of Common Stock into which this Note might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (e) Reorganization, Merger, Consolidation or Sale of Assets. If, at any time or from time to time, there shall be a capital reorganization of the shares of Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this section) or a merger or consolidation of the Maker with or into another corporation, or the sale of all or substantially all of the Maker's properties and assets to any other person or entity, then as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holder of this Note shall thereafter be entitled to receive upon conversion of this Note, the number of shares of capital stock or other securities or property of the Maker, or of the successor corporation resulting from such merger or consolidation or sale, to which the holder of shares of Common Stock deliverable upon conversion would have been entitled on such reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this section with respect to the rights of the holder of this Note after the reorganization, merger, consolidation or sale to the end that the provisions of this section (including adjustment of the Conversion Price then in effect and the number of shares of Common Stock receivable upon conversion of this Note) shall be applicable after that event as nearly equivalent hereto as may be practicable. (f) Material Financing. If the Corporation at an time during a twelve (12) month period commencing on the date of issuance of the Note, enters into a transaction with a third party which is intended to provide material financing to the Corporation, and such transaction includes rights of conversion similar to those granted in this Note, then the Conversion Price shall be adjusted downward to be equal to the Conversion Price granted to such third party. (g) Minimum Adjustment. Notwithstanding anything to the contrary set forth herein, no adjustment of the Conversion Price shall be made in an amount equal to less than one cent ($.01), but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to one cent ($.01) or more. 4 (h) Certificate of Adjustment. Upon the occurrence of each adjustment or readjustment of the applicable Conversion Price pursuant to this section, the Maker shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the holder of this Note a certificate, signed by the Chairman of the Board, the President or the Chief Financial Officer, setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. (i) Notices of Record Date. If and in the event that: (1) the Maker shall set a record date for the purpose of entitling the holders of shares of Common Stock to receive a dividend, or any other distribution, payable otherwise than in cash; (2) the Maker shall set a record date for the purpose of entitling the holders of shares of Common Stock to subscribe for or purchase any shares of any class or to receive any other rights; (3) there shall occur any capital reorganization of the Maker, reclassification of the shares of capital stock of the Maker (other than a subdivision or combination of its outstanding shares of Common Stock), consolidation or merger of the Maker with or into another corporation, or sale of all or substantially all of the assets of the Maker; or (4) there shall occur a voluntary or involuntary dissolution, liquidation, or winding up of the Maker; then, and in any such case, the Maker shall cause to be mailed to the holder of record of this Note, at least [thirty (30) days] prior to the dates hereinafter specified, a notice stating the date: (A) which has been set as the record date for the purpose of such dividend, distribution, or rights; or (B) on which such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up is to take place and the record date as of which the holder of record shall be entitled to exchange this Note for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up. 5. Reservation. The Maker covenants that, during the period within which the Conversion Right may be exercised, the Maker will at all times have authorized and reserved for the purpose of issuance upon exercise of the Conversion Right, a sufficient number of shares of Common Stock (or other securities subject to the Conversion Right) to provide for the exercise of the Conversion Right in full. 6. Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of any fractional shares of Common Stock to which the Payee would otherwise be entitled, the Maker shall pay an amount equal to the product of such fraction multiplied by the fair value of one share of Common Stock on the Conversion Date, as determined in good faith by the Board of Directors of the Maker. 5 7. Registration Rights. The Maker hereby covenants and agrees as follows: (a) Definitions. For purposes of this section: (1) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration of effectiveness of such registration statement or other document by the Securities and Exchange Commission (the "SEC"). (2) The term "Registrable Securities" means: (A) the shares of Common Stock issued or issuable upon conversion of this Note; or (B) any other securities of the Maker issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, in exchange for or in replacement of the shares of Common Stock referenced in subsection (A) immediately above, excluding in all cases, however, any Registrable Securities sold to the public pursuant to a registration or an exemption from registration. (3) The number of shares of "Registrable Securities then outstanding" shall be the number of securities outstanding which are Registrable Securities. (4) The term "Holder" as used hereinafter in this Section 7 means any person or entity owning of record Registrable Securities. (b) Piggy-Back Registration Rights. In the event that (but without any obligation to do so) the Maker proposes to register any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-4, Form S-8 or any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Maker shall promptly give each Holder written notice of such registration (the "Piggy-Back Notice"); provided, however, that the Maker shall have no obligation to so notify Holders with respect to any registration subsequent to the first of such registrations to occur after the issuance of this Note and shall have no obligation if such registration relates to an underwritten offering by the Maker and the managing underwriter of the subject proposed offering expresses its objection thereto to the Maker. Upon the written request of each Holder given within twenty (20) days after receipt of such Piggy-Back Notice from the Maker, the Maker shall, subject to the provisions of Subsections 7(h) and 7(m) below, cause to be included in the registration statement filed by the Maker under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered; provided, however, that the Maker shall have no such obligation if such registration statement relates to an underwritten offering by the Maker and the managing underwriter of the subject offering has expressed its objection to the same to the Maker. To the extent that a Holder is offered the opportunity hereunder to include all of its Registrable Securities in a registration statement, such Holder will be deemed to have exercised its sole piggy-back registration right provided by this Subsection 7(c). 6 (c) Obligations of the Maker. Whenever the Maker shall elect to file a registration statement to effect the registration of any Registrable Securities, the Maker shall, as expeditiously as reasonably possible: (1) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of at least fifty percent (50%) of the Registrable Securities registered thereunder, keep such registration statement effective for at least four (4) months. (2) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus included therein as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (3) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (4) Use its best efforts to register and qualify the securities covered by such registration statement under the securities laws of such jurisdictions as shall be reasonably requested by the Holders for the distribution of the securities covered by the registration statement, provided that the Maker shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction. (5) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with terms generally satisfactory to the managing underwriter of such offering. (6) Notify the Holders promptly after the Maker shall have received notice thereof, of the time when the registration statement becomes effective or any supplement to any prospectus forming a part of the registration statement has been filed. (7) Notify the Holders of any stop order suspending the effectiveness of the registration statement and use its reasonable best efforts to remove such stop order. (d) Furnish Information. It shall be a condition precedent to the obligations of the Maker to take any action pursuant hereto that any Holder seeking to include any of its Registrable Securities in a registration statement filed by the Maker pursuant hereto shall furnish to the Maker such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of its Registrable Securities. In that connection, each such Holder shall be required to represent to the Maker that all such information which is given is both complete and accurate in all material respects. Each of such Holders shall deliver to the Maker a statement in writing from 7 the beneficial owners of such securities that such beneficial owners bona fide intend to sell, transfer or otherwise dispose of such securities. (e) Definition of Expenses. (1) "Registration Expenses" shall mean all expenses incurred by the Maker in complying with Sections 7(c) and 7(d) hereof, including without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Maker, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Maker which shall be paid in any event by the Maker). (2) "Selling Expenses" shall mean all underwriting discounts, selling commissions and underwriters' expense allowance applicable to the sale and all fees and disbursements of any special counsel (other than the Maker's regular counsel) for any Holder. (f) Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance herewith, shall be borne by the Maker, and all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of Registrable Securities so registered. (g) Underwriting Requirements. All Holders proposing to distribute their securities through an underwriting pursuant hereto shall (together with the Maker and any other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Maker. Notwithstanding any other provision of this section, at the request of the managing underwriter, the Holder shall delay the sale of Registrable Securities which such Holder has requested be registered under this section for the ninety (90) day period commencing with the effective date of the registration statement. Notwithstanding anything to the contrary herein, no such delay shall be required with respect to securities offered by holders of securities who have requested the Maker to register such securities pursuant to a mandatory registration obligation of the Maker if other security holders of the Maker who have not made requests pursuant to such an obligation are not subject to a similar delay. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Maker and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall not be withdrawn from such registration except at the election of the Holder. (h) Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this section. (i) Indemnification. In the event that any Registrable Securities are included in a registration statement pursuant hereto: (1) To the extent permitted by law, the Maker will indemnify and hold harmless each Holder, the officers, directors and partners of each Holder, any 8 underwriter (as defined in the Securities Act) for such Holder and each person or entity, if any, that controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (A) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (B) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (C) any violation or alleged violation by the Maker of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Maker will reimburse each such Holder, officer, director or partner, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Maker (which consent shall not be unreasonably withheld), nor shall the Maker be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person; and further provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any preliminary prospectus but eliminated or remedied in the definitive prospectus, such indemnity agreement shall not inure to the benefit of the underwriter (or the benefit of any person or entity that controls such underwriter), if a copy of the definitive prospectus was not sent or given to such person or entity with or prior to the confirmation of the sale of such securities to such person or entity. (2) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Maker, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Maker within the meaning of the Securities Act or the Exchange Act, any underwriter (within the meaning of the Securities Act) for the Maker, any person who (or entity that) controls such underwriter, and any other Holder selling securities in such registration statement or any of its directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Maker or any such director, officer, controlling person (or entity), or underwriter or controlling person, or other such Holder or director, officer or controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance 9 upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Maker or any such director, officer, controlling person (or entity), underwriter or controlling person (or entity), other Holder, officer, director or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld. (3) Promptly after receipt by an indemnified party under this Section 7(i) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7(i), notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify an indemnifying party within a reasonable time of the commencement of any such action, to the extent prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7(i), but the omission so to notify the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 7(i). (j) Reports Under Securities Exchange Act of 1934. With a view toward making available to Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Maker to the public without registration, the Maker agrees to: (1) use its best efforts to make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (2) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Maker under the Securities Act and the Exchange Act; and (3) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request such information as may be reasonably requested in order to allow any Holder to avail himself of any rule or regulation of the SEC which permits the selling of any such securities without registration. 10 (k) Termination of the Maker's Obligations. (1) The Maker shall have no obligation pursuant to Section 7 with respect to any request made by any Holder after the first anniversary of the Maturity Date. (2) Notwithstanding any provision hereof to the contrary, the Maker shall not be required to effect any registration under the Securities Act or under any state securities laws on behalf of any Holder or Holders if, in the opinion of counsel for the Maker, the offering or transfer by such Holder or Holders in the manner proposed (including, without limitation, the number of shares proposed to be offered or transferred and the method of offering or transfer) is exempt from the registration requirements of the Securities Act and the securities laws of applicable states. (l) Lock Ups; Limitation on Rights. The Payee (and any subsequent Holder) by acceptance hereof hereby agrees that, in the event that subsequent to the date hereof, the Maker conducts an underwritten public offering of its securities: (i) the right to request registration pursuant to the provisions hereof shall be subject to the approval of the underwriter of such public offering; and (ii) the Payee (and any subsequent Holder) shall agree to refrain from exercising such rights or selling, transferring or otherwise disposing of any of the Registrable Securities for a period of up to thirteen months should the underwriter so request in writing. 8. Miscellaneous. (a) Restricted Securities. By acceptance hereof, the Payee understands and agrees that this Note and the shares of Common Stock issuable upon conversion hereof are "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Maker in a transaction not involving a public offering and have not been the subject of registration under the Securities Act and that under such laws and applicable regulations such securities may be resold in the absence of registration under the Securities Act only in certain limited circumstances. The Payee hereby represents that he, she or it is familiar with Rule 144 promulgated under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. (b) Further Limitations on Disposition. This Note may not be negotiated, assigned or transferred by Payee. The Payee further agrees not to make any disposition of all or any portion of this Note (or of the securities issuable upon conversion hereof) unless and until: (1) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (2) such disposition is made in accordance with Rule 144 under the Securities Act; or (3) the Payee shall have notified the Maker of the proposed disposition and shall have furnished the Maker with a detailed statement of the circumstances 11 surrounding the proposed disposition, and the Payee shall have furnished the Maker with an opinion of counsel, which opinion of counsel shall be reasonably satisfactory to the Maker, that such disposition will not require registration under the Securities Act and will be in compliance with applicable state securities laws. (c) Legends. It is understood that this Note and each certificate evidencing shares of Common Stock issuable upon conversion hereof (or evidencing any other securities issued with respect thereto pursuant to any stock split, stock dividend, merger or other form of reorganization or recapitalization) shall bear the legends (in addition to any legends which may be required in the opinion of the Maker's counsel by the securities laws of the state where the Payee is located) substantially as set forth on the first page of this Note. (d) Presentment. Except as set forth herein, Maker waives presentment, demand and presentation for payment, notice of nonpayment and dishonor, protest and notice of protest and expressly agrees that this Note or any payment hereunder may be extended from time to time by the Payee without in any way affecting the liability of Maker. 9. Notices. (a) Notices to the Payee. Any notice required by the provisions of this Note to be given to the holder hereof shall be in writing and may be delivered by personal service, facsimile transmission or by registered or certified mail, return receipt requested, with postage thereon fully prepaid or overnight delivery courier. All such communications shall be addressed to the Payee of record at its address appearing on the books of the Maker. Service of any such communication made only by mail shall be deemed complete on the date of actual delivery as shown by the addressee's registry or certification receipt or at the expiration of the third (3rd) business day after the date of mailing, whichever is earlier in time. (b) Notices to the Maker. Whenever any provision of this Note requires a notice to be given or a request to be made to the Maker by the Payee or the holder of any other security of the Maker obtained in connection with a recapitalization, merger, dividend or other event affecting this Note, then and in each such case, any such notice or request shall be in writing and shall be sent by registered or certified mail, return receipt requested with postage thereon fully prepaid to the Maker at its principal place of business. No notice given or request made hereunder shall be valid unless signed by the Payee of this Note or other holder giving such notice or request (or, in the case of a notice or request by Holders of a specified percent in aggregate principal amount of outstanding Notes, unless signed by each Holder of a Note whose Note has been counted in constituting the requisite percentage of Notes required to give such notice or make such request). 10. Events of Default. (a) Each of the following shall constitute an event of default (an "Event of Default") hereunder: (i) the failure to pay when due any principal or interest hereunder and the continuance of such failure for a period of thirty (30) days after written notice from the Payee 12 to the Maker of such failure; (ii) the violation by the Maker of any covenant or agreement contained in this Note and the continuance of such violation for a period of thirty (30) days after written notice from the Payee to the Maker of such failure; (iii) any change in control of the Maker which the Board of Directors of the Maker deems to be hostile or unfriendly; (iv) the assignment for the benefit of creditors by the Maker; (v) the application for the appointment of a receiver or liquidator for the Maker or for property of the Maker; (vi) the filing of a petition in bankruptcy by or against the Maker; (vii) the issuance of an attachment or the entry of a judgment against the Maker in excess of $50,000; (viii) a default by the Maker with respect to any other indebtedness due to the Payee; (ix) the making or sending of a notice of an intended bulk sale by the Maker; or (x) the termination of existence, dissolution or insolvency of the Maker. Upon the occurrence of any of the foregoing Events of Default, this Note shall be considered to be in default and the entire unpaid principal sum hereof, together with accrued interest, shall at the option of the holder hereof become immediately due and payable in full. Upon the occurrence of an Event of Default which remains uncured as set forth herein and the placement of this Note in the hands of an attorney for collection, the Maker agrees to pay reasonable collection costs and expenses, including reasonable attorneys' fees and interest from the date of the default at the rate of fifteen percent (15%) per annum computed on the unpaid principal balance. (b) The Payee may waive any Event of Default hereunder. Such waiver shall be evidenced by written notice or other document specifying the Event or Events of Default being waived and shall be binding on all existing or subsequent Payees under this Note. (c) Notwithstanding anything else to the contrary set forth herein, upon the occurrence of an Event of Default, including but not limited to the failure to pay when due any principal or interest hereunder, the Maker shall have six (6) months from the date of the occurrence of each such Event of Default to cure such default, during which time, the Payee may not take any action against the Maker with respect to collection hereunder or enforcement of the provisions hereof. 11. Survival. In the event that all or a portion of the principal hereunder is converted pursuant to Section 3 above, Section 7 hereof relating to registration rights shall survive the termination of this Note upon cancellation hereof resulting from repayment of the balance of amounts outstanding hereunder or the issuance of a new note pursuant to Section 3 above. 12. Construction; Governing Law. The validity and construction of this Note and all matters pertaining hereto are to be determined in accordance with the laws of the State of Maryland without regard to the conflicts of law principles thereof. 13 IN WITNESS WHEREOF, Maker, by its appropriate officers thereunto duly authorized, has executed this convertible promissory note and affixed its corporate seal as of this 24th day of June, 1997. ESSEX CORPORATION By: Joseph R. Kurry, Jr. ------------------------- Joseph R. Kurry, Jr., Chief Financial Officer ATTEST: By: Sarah E. Roberts - ---------------------- Sarah E. Roberts, Assistant Secretary 14 CONVERSION FORM The undersigned hereby elects to convert the following principal amount of the attached Non-Negotiable 8% Convertible Promissory Note (the "Note") (not to exceed $______) into shares (not to exceed _______ shares) of Newco Common Stock or Company Common Stock, in accordance with the formula set forth in Section 2(a). State such amount: _____________________________________ ($___________). Date: Signature: ------------------------------------------------ (Sign exactly as your name appears on the Note) EX-27 9 FDS 2ND QTR 10-QSB 1997
5 1,000 6-MOS DEC-28-1997 DEC-30-1996 JUN-29-1997 782 0 515 (98) 781 2,050 1,866 (1,530) 3,977 2,653 1,400 120 0 363 5,316 3,977 2,064 2,064 1,392 2,832 0 0 117 (885) 0 (885) (101) 0 0 (986) (.27) (.27)
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