-----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, CXiFsu6YCBRMg+5JtK1MidycXxhyiQ3AQN4e+mti19P3xYZAhQkccSGI4k552TlH ezPB3wIaVUxgxIfUBmpvog== 0000355199-99-000004.txt : 19990726 0000355199-99-000004.hdr.sgml : 19990726 ACCESSION NUMBER: 0000355199-99-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990723 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: 1227 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-10772 FILM NUMBER: 99669582 BUSINESS ADDRESS: STREET 1: 9150 GILFORD RD 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 1999 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 27, 1999 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 27, 1999 ----- ---------------- Common Stock, par value $0.10 per share 4,397,861 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. Theses 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 27, 1998. 2 ESSEX CORPORATION BALANCE SHEETS
June 27, December 27, 1999 1998 ------------- -------------- (unaudited) (audited) ASSETS Current Assets Cash $ 313,934 $ 543,538 Accounts receivable, net 774,201 562,033 Inventory 346,972 344,175 Prepayments and other 41,212 54,596 ------------- ------------- 1,476,319 1,504,342 ------------- ------------- Property and Equipment Production and special equipment 959,401 870,953 Furniture, equipment and other 309,888 427,618 ------------- ------------- 1,269,289 1,298,571 Accumulated depreciation and amortization (1,133,674) (1,211,910) ------------- ------------- 135,615 86,661 ------------- ------------- Other Assets Patents, net 146,631 154,125 Other 35,146 39,417 ------------- ------------- 181,777 193,542 ------------- ------------- TOTAL ASSETS $ 1,793,711 1,784,545 ============= ============= ============= ============= The accompanying notes are an integral part of these statements.
3 ESSEX CORPORATION BALANCE SHEETS
June 27, December 27, 1999 1998 --------------- ------------- (unaudited) (audited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Advance from accounts receivable financing $ 243,347 $ 163,920 Accounts payable 213,403 159,811 Accrued wages and vacation 173,443 165,578 Accrued lease settlement 140,908 215,277 Capital lease 64,224 8,777 Other accrued expenses 147,624 130,346 -------------- ------------- 982,949 843,709 Long-term Debt 10% Convertible Collateralized Debentures 375,714 375,714 -------------- ------------- Total Liabilities 1,358,663 1,219,423 -------------- ------------- Commitments and Contingencies (Note 4) Stockholders' Equity Common stock, $0.10 par value; 25 million shares authorized; 4,397,861 shares issued and outstanding for 1999 and 1998, respectively 439,786 439,786 Redeemable preferred stock, $0.01 par value; 1 million total shares authorized; 2,500 shares of Series A authorized, $100 liquidation value, -0- shares outstanding -- -- -- Contributions in excess of par value 5,634,234 5,634,234 Retained deficit (5,638,972) (5,508,898) -------------- ------------- 435,048 565,122 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,793,711 $ 1,784,545 ============== ============= The accompanying notes are an integral part of these statements.
4 ESSEX CORPORATION STATEMENTS OF OPERATONS FOR THE TWENTY-SIX WEEK PERIODS ENDED JUNE 27, 1999 AND JUNE 28, 1998
1999 1998 -------------- -------------- (unaudited) (unaudited) Revenues $ 2,209,582 $ 2,043,164 Costs of goods sold and services provided (1,143,981) (1,147,494) Selling, general and administrative expenses (1,167,698) (1,154,304) -------------- ------------- Operating Loss (102,097) (258,634) Interest expense, net and debenture financing amortization (27,977) (80,478) -------------- ------------- -------------- ------------- Loss Before Income Taxes (130,074) (339,112) Benefit from income taxes -- -- -------------- ------------- Net Loss $ (130,074) $ (339,112) ============== ============= ============== ============= Weighted Average Number of Shares Outstanding 4,397,861 4,176,847 ============== ============= ============== ============= Basic Earnings (Loss) Per Share $ (0.03) $ (0.08) ============== ============= The accompanying notes are an integral part of these statements.
5 ESSEX CORPORATION STATEMENTS OF OPERATONS FOR THE THIRTEEN WEEK PERIODS ENDED JUNE 27, 1999 AND JUNE 28, 1998
1999 1998 -------------- -------------- (unaudited) (unaudited) Revenues $ 1,243,820 $ 1,239,653 Costs of goods sold and services provided (638,832) (720,508) Selling, general and administrative expenses (570,051) (562,329) -------------- -------------- Operating Income (Loss) 34,937 (43,184) Interest expense, net and debenture financing amortization (15,684) (37,930) -------------- -------------- -------------- -------------- Income (Loss) Before Income Taxes 19,253 (81,114) Benefit from income taxes -- -- -------------- -------------- Net Income (Loss) $ 19,253 $ (81,114) ============== ============== ============== ============== Weighted Average Number of Shares Outstanding 4,397,861 4,219,630 ============== ============== ============== ============== Basic Earnings (Loss) Per Share $ 0.00 $ (0.02) ============== ============== 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 27, 1999 AND JUNE 28, 1998
1999 1998 ------------ ------------- (unaudited) (unaudited) Cash Flows From Operating Activities: Net Loss $ (130,074) $ (339,112) Adjustments to reconcile Net Loss to Net Cash Used In Operating Activities: Depreciation and amortization 83,278 113,139 Inventory valuation reserve -- 15,000 (Gain)/Loss on sale/retirement of fixed assets (740) 1,291 Other -- 16,118 Change in Assets and Liabilities: Accounts receivable (212,168) (348,857) Inventory (2,797) (17,242) Prepayments and other assets 13,528 35,019 Accounts Payable 53,592 92,366 Other Liabilities (49,226) (31,209) Non-cash charges and working capital changes of discontinued operations -- 129,579 ---------- ------------ Net Cash Used In Operating Activities (244,607) (333,908) ---------- ------------ Cash Flows From Investing Activities: Purchases of property and equipment (15,454) -- Proceeds from sale of fixed assets 1,554 2,630 Proceeds from sale of discontinued operations -- 1,290,516 ---------- ------------- ---------- ------------- Net Cash (Used In) Provided By Investing Activities (13,900) 1,293,146 ----------- ------------- ----------- ------------- Cash Flows From Financing Activities: Short-term borrowings (repayments), net 79,427 (163,874) Repayment of convertible debentures -- (857,386) Payment of capital lease obligations (50,524) (31,265) ------------ ------------- ------------ ------------- Net Cash Provided By (Used In) Financing Activities 28,903 (1,052,525) ------------ ------------- ------------ ------------- Cash and Cash Equivalents Net decrease (229,604) (93,287) Balance - beginning of period 543,538 367,136 ------------ ------------- ============ ============= Balance - end of period $ 313,934 $ 273,849 ============ ============= ============ ============= 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 1998 have been reclassified to conform to the 1999 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for uncollectible accounts receivable, inventory obsolescence and valuation, depreciation and amortization, intangible assets, employee benefit plans and contingencies, among others. Actual results could differ from those estimates. IMPORTANT BUSINESS RISK FACTORS The Company has historically been principally a supplier of technical services under contracts or subcontracts with departments or agencies of the U.S. Government, primarily the military services and other departments and agencies of the Department of Defense. Since 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 losses over the last decade, primarily due to the development and marketing of its optoelectronics products and services. The Company also experienced difficulty in sustaining and expanding revenue volume in certain areas of the Technical Services and Products business segment which it discontinued in 1997. The Optoelectronics Products and Services business segment, which is part of continuing operations, experienced net cash expenditures (including all general and administrative expenses) over receipts of approximately $30,000-$40,000 per month during the second quarter of 1999. The Company is seeking additional funds from private financing markets 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. The Company believes that it will be able to meet its 1999 funding requirements from the aforementioned sources, although there can be no assurances in this regard. Failure to commercialize or significant delays in the commercialization of the Company's optoelectronic products would have a significant adverse effect on the Company's future operating results and future financial position; however, the Company believes that in 8 ESSEX CORPORATION such event it could successfully manage and reduce cash requirements for operations by curtailing expenditures in optoelectronics operations (including general and administrative expenses), although there can be no assurances in this regard. NOTE 2: Basic Earnings (Loss) Per Share Basic earnings (loss) per share have been calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during each of the periods presented. Common stock equivalents were anti-dilutive or immaterial in the periods presented. NOTE 3: Accounts Receivable Financing The Company has a working capital financing agreement with an accounts receivable factoring organization. Under such an agreement, the factoring organization may purchase certain of the Company's accounts receivable subject to full recourse against the Company in the case of nonpayment by the customers. The Company generally receives 85%-90% of the invoice amount at the time of purchase and the balance when the invoice is paid. The Company is charged an interest fee and other processing charges, payable at the time each invoice is paid. Funds advanced were $243,000 as of June 27, 1999 and $164,000 as of December 27, 1998. NOTE 4: Commitments and Contingencies LEASE SETTLEMENT Effective July 1994, the Company settled a legal dispute with a former landlord. Under the Settlement Agreement ("Agreement"), the Company remains liable for 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 period for computation of such contingent payments ends December 2004. The $141,000 accrual as of June 27, 1999 represents the remaining contingent portion which is to be paid over the applicable consideration period. NOTE 5: Warrants Outstanding; Preferred Stock and Convertible Debentures In connection with a 1994 Stock Offering ("Offering"), the Company has 25,000 warrants outstanding to obtain an additional 625,000 new shares. The warrants expire on December 31, 1999 and are exercisable at $75.00 each in exchange for 25 shares. In connection with the Offering, the Company entered into a Placement Agency Agreement with a registered broker/dealer. The broker/dealer received warrants for 175,000 shares of common stock. The warrants are exercisable through December 1, 1999 at a price of $2.30 per share, subject to adjustment under anti-dilution provisions of the Warrant Agreement. The warrant holders have certain registration rights for these shares of common stock. In connection with the outstanding 10% Convertible Collateralized Debentures Due 2000, the Company has reserved approximately 107,000 shares of common stock for conversion at $3.50 per share. In addition, the Company has issued warrants to the broker/dealer for 28,571 shares of common stock. The warrants are exercisable through December 1, 2000 at a price of $3.50 per share, subject to adjustment under anti-dilution provisions of the Warrant Agreement. The 9 ESSEX CORPORATION 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 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 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 liquidation value and an 8% annual dividend. These preferred shares were convertible into shares of Essex common stock at $0.50 per share or market value, whichever greater. There were 1,200 shares of preferred stock issued in 1997. The preferred stock plus accrued dividends were converted into 245,796 shares of common stock in 1998. The Company has reserved approximately 1,014,000 shares of common stock in connection with the convertible debentures and the possible exercise of all such warrants. NOTE 6: Income Taxes The Company is in a net operating loss (NOL) carryforward position for book and tax purposes. No tax benefit will be recognized until taxable income is realized. NOTE 7: Statements of Cash Flows - Supplemental Disclosure In 1999, the Company entered into a capital lease for new equipment for $110,000. There were no new capital leases entered into in the first half of 1998. NOTE 8: Discontinued Operations In June 1997, the Board of Directors unanimously approved the disposition of the Systems Effectiveness Division ("SED") and operations of the Federal Systems Division ("FSD") except for the telecommunications and government-related optoelectronics programs which are comprised of different customers, a separate location in Columbia, Maryland and distinguishable operations. The discontinued operations 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. There was an additional contingent cash payment of $73,000 which was received in early 1998. Another portion of the operations of FSD which were performed primarily in the Company's facility in Huntsville, Alabama were discontinued and the facility closed. The Company settled on the sale of the Huntsville facility in June 1998. Effective October 1, 1997, the Company sold the business and net assets of SED. The aggregate sale price was $1,475,000. The Company sold the accounts receivable, contracts, fixed assets and certain other assets. The acquiring company assumed certain liabilities. The Company received $525,000 in cash at closing and took a note receivable for $325,000 which was paid off 10 ESSEX CORPORATION in June 1998. The balance of $625,000 was placed in escrow and was received through February 1998 as the respective contracts of SED were novated to the acquirer. The proceeds from the sale of discontinued operations and non-cash charges and changes in working capital are shown in the statements of cash flows. There were no revenues from discontinued operations in 1999 or 1998. 11 ESSEX CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER SECTIONS CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS, ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS", "ANTICIPATES", "PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT. THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS INDICATED IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. STATUS The Company's principal focus is in the telecommunications and optoelectronics business areas. Work backlog has been funded incrementally in both. Telecommunications work has been concentrated with one major customer, Motorola. The Company is Motorola's first industrial partner on the Iridium7 cellular satellite communications program and obtains approximately seventy percent of its revenues from that activity. This modeling, simulation and software development work has continued for nearly a decade but is presently decreasing in volume. The Company has invested substantial sums in developing its line of patented optoelectronic processors. These exceedingly high-speed computational engines combine the power of laser optics and semiconductor chips. They reconstruct ("develop") images from radar signals, medical magnetic resonance (MRI) equipment, ultrasound equipment and the Company's laser holographic Virtual Lens MicroscopeJ. Although the Company has sold a few pre-production units to the U.S. Defense community, it has not yet succeeded in commercializing these unique products. Recently, the Company began work utilizing its optoelectronic technology on a subcontract with a prime U.S. Government contractor. While this business has not been added to backlog because the terms and conditions have not yet been finalized, the Company is collecting these receivables and believes that it has the potential to add significantly to long-term backlog in the second half of 1999 and following periods. The Company has also recently begun work on an initially small subcontract with another prime U.S. Government contractor in connection with its shipboard missile defense radar. This program builds upon the Company's optoelectronic radar data processor breadboard previously constructed for the U.S. Government. Should this program proceed to fruition, it has potential to add significantly to long-term backlog. The ImSyn(TM) Processors loaned by the Company to the University of Maryland Medical School and to the Hospital of the University of Pennsylvania are being used to develop innovative MRI procedures. Under terms of a Maryland Industrial Partnerships grant, the Company is collaborating in a program to capitalize on the high speed of its equipment to enable functional and fluoroscopic MRI. In the University of Pennsylvania, different objectives are being pursued, but the program is based upon demonstrated computing speed. It should be noted that these programs are not expected to develop significant revenues in the near term. 12 ESSEX CORPORATION Military and commercial radar imaging applications are among the important initiatives of the Company. Small prime contracts and substantial Company expenditures have financed progress in this field that has resulted in performance commendations by customers. The U.S. Air Force nomination of the Company for excellence in producing an optoelectronic processor survived a searching competition leading to the award of a prestigious prize in 1997. The U.S. Small Business Administration recognized that important achievement with the presentation of a Tibbetts Award to the Company in a White House ceremony. Building upon its military and intelligence experience as well as its considerable investment, the Company now has several active initiatives that could lead to substantial commercial business programs. One of these is based upon the capability of the ImSyn(TM) Processor to enable the Company's proprietary Holographic Ground Penetrating Imaging Radar. The Company is seeking to organize a joint venture to capitalize upon this capability. The Company envisions powerful systems to produce 3-D images of buried infrastructure such as utility lines, highway subgrades and hazardous materials buried under Brownfields, former industrial sites that developers wish to bring back to economic utility. The financial performance of the Company has been adversely impacted during the past several years as a result of its continued expenditures to maintain its skilled team and develop its optoelectronic products. The Company has had difficulty bringing these products to market, in part, because it has been financially unable to timely perform both the required development work and the extensive sales and marketing effort required. Those large outflows of cash are moderating substantially. Net cash used in operating activities was $1.6 million in 1997, declining to under $200,000 in 1998. In the first half of 1999, net cash used was approximately $244,000, primarily from costs incurred in retaining essential staff pending award of anticipated new business. The Company believes that its active pursuit of new business will be rewarded. Some new business has been booked and some is in the process of finalizing contract terms and conditions. It is important to note however, that the Company may not achieve the anticipated new business due to technical problems or economic or other developments beyond the Company's control. In addition, negotiation of joint ventures or other strategic relationships involve complex legal and business issues, which may put severe strain on the Company's financial and operational resources. Moreover, the targeted customers and joint venture participants are all significantly larger and have more financial and other resources than the Company. This imbalance of resources may cause the terms of any sale or joint venture involving ImSyn(TM) to be less favorable to the Company than they otherwise would be. Management is cautiously optimistic but recognizes that we continue to face significant challenges. REVENUES Revenues were $1,244,000 and $1,240,000 for the second quarters of 1999 and 1998, respectively. Revenues for the first half of 1999 were $2,210,000, an increase of 8% over the $2,043,000 in revenues for the first half of 1998. The Company's work for Motorola for the Iridium and other cellular satellite communication systems accounted for revenues of $1,474,000 and $1,485,000 in the first half of 1999 and 1998, respectively. This represented 67% and 73% of total revenues for the first half of 1999 and 1998, respectively. Revenues from this program decreased between the first half of 1998 and 1999 as tasks have been completed for the initial systems and new tasks for 13 ESSEX CORPORATION follow-on satellite systems have been deferred by the customer. The Company has been impacted by well-reported difficulties in the satellite communications industry, notably the Iridium(R) program. Furthermore, as a result of the previously announced redeployment by Motorola of personnel assigned to the Teledesic program, certain tasking by Motorola to the Company has been suspended. Such work has amounted to a reduction of approximately $100,000 (25%) in overall monthly revenues beginning in June. The Company is unsure of the duration of the suspension of this work. The Company has a backlog on the Motorola programs of approximately $398,000, down from $996,000 at March 28, 1999. As of June 27, 1999, the Company had a backlog on programs related to optoelectronic devices and services of approximately $433,000 up from $254,000 at March 28, 1999. The Company did not have any firm orders for ImSyn(TM) units as of the date of this report. INCOME (LOSS) There was operating income of $19,000 and an operating loss of $81,000 in the second quarters of 1999 and 1998, respectively. There were losses of $130,000 and $339,000 in the first half periods of 1999 and 1998, respectively. Cost of goods sold and services provided as a percentage of revenues for the first half of 1999 were 51.8%, which was lower than the 56.2% in 1998. This reduction was primarily due to the Company performing a larger amount of direct work in-house in 1999 compared to 1998 when more work had to be subcontracted out. The Company receives a larger margin on work performed in-house. The Company has curtailed selling, general and administrative expenses ("SG&A") where possible while retaining essential technical capabilities and personnel in the optoelectronics and telecommunications businesses. Overall, SG&A expenses remain high relative to the revenue volume as the Company seeks to commercialize its optoelectronic products and services. The higher SG&A expenses contributed to the operating loss. CORPORATE MATTERS In 1998, the Company's interest costs were higher due to the larger amount of outstanding debentures during the first half of 1998. Total interest costs, net and debenture financing amortization were $28,000 in the first half of 1999 compared to $80,000 in the same period of 1998. 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 benefit from income taxes was recognized in the first half of 1999 or 1998. 14 ESSEX CORPORATION YEAR 2000 STATE OF READINESS The overwhelming majority of the Company's computer systems consist of desktop computers running popular software programs which purport to be Year 2000 compliant. The Company has not requested Year 2000 compliance statements from major vendors based on its belief that the time and costs involved in such a process would not make economic sense given the Company's limited personnel and financial resources. There have been no indications, however, that major vendors will not be Year 2000 compliant. If vendors are not Year 2000 compliant, the Company believes that it will be able to find suitable alternate suppliers and contract with them on reasonable terms. A significant portion of the Company's revenues are derived from consulting services that do not implicate date recognition concerns, such as the work as a subcontractor for Motorola on its Iridium7 cellular satellite communication system. Based on its contacts and experience with Motorola on the Iridium7 project, the Company does not expect Year 2000 compliance issues to materially impact its Iridium7 revenues or costs. COSTS TO ADDRESS THE YEAR 2000 ISSUES Management of the Company believes that the impact of the Year 2000 on the Company's internal systems will not result in material costs to the Company or have a material adverse impact on future results. RISKS OF THE YEAR 2000 ISSUES The main risk to the Company with respect to Year 2000 is the failure of major vendors and infrastructure providers, such as utility and telephone companies, to be Year 2000 compliant. Failure on their part could result in delays or inability to communicate with customers or obtain components and supplies, increased costs of components, supplies and services, and an overall inability to conduct business in the event of a shutdown of major utility or telecommunications providers. The Company cannot estimate the financial impact of any failure to be Year 2000 compliant by such third party vendors and service providers. CONTINGENCY PLANS The Company does not have a contingency plan for Year 2000 compliance because it does not anticipate that it will fail to be Year 2000 compliant, particularly in relation to those systems, software programs, and hardware that are under its control. However, there can be no assurances that all measures being taken to avoid Year 2000 problems will be effective and as such, unforeseen issues could arise that could lead to a material adverse effect upon the Company's business, operating results and financial condition. 15 ESSEX CORPORATION FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES The Company evaluates its liguidity position using various factors. The following represents some of the more important factors:
SELECTED FINANCIAL DATA ($ Thousands) AS OF ------------------------------------------------ June 27, December 27, June 28, 1999 1998 1998 ------------- -------------- ------------- Total Assets $ 1,794 $ 1,785 $ 1,877 ============= ============= ============= ============= ============= ============= Working Capital $ 493 $ 661 $ 381 ============= ============= ============= ============= ============= ============= Current Ratio 1.50:1 1.78:1 1.33:1 ============= ============= ============= ============= ============= ============= Receivables Financing/Bank Line of Credit $ 243 $ 164 $ -- Convertible Debentures 376 376 376 Current and Long-Term Capital Leases 64 9 34 ============= ============= ============= Total Debt/Financing $ 683 $ 549 $ 410 ============= ============= ============= ============= ============= ============= Stockholders' Equity $ 435 $ 565 $ 348 ============= ============= ============= ============= ============= =============
The Company experienced a decrease in its working capital and current ratio due primarily to the net loss of $130,000 in the first half of 1999. The net loss and a $212,000 increase in accounts receivable were the primary factors in the $245,000 of net cash used in operations in the first half of 1999. The 1999 first half net loss was funded from cash balances provided by accounts receivable financing. During the first half of 1998, the Company received approximately $1.3 million in cash related to the sales of discontinued operations. Most of these proceeds were used to reduce outstanding indebtedness. See Note 8 to the Financial Statements included in Part I. No proceeds were received from sales of discontinued operations in 1999. The Company has incurred losses over the last decade, primarily due to the development and marketing of its optoelectronics products and services. The optoelectronics products and services business area experienced net cash expenditures (including all general and administrative expenses) over receipts of approximately $30,000 - $40,000 per month during the second quarter of 1999. The Company is seeking additional funds from private financing markets 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. The Company believes that it will be able to meet its 1999 funding requirements from the aforementioned sources, although there can be no assurances in this regard. Failure to commercialize or further significant delays in the commercialization of the Company's 16 ESSEX CORPORATION optoelectronic products would have a significant adverse effect on the Company's future operating results and future financial position; however, the Company believes that in such event it could successfully manage and reduce cash requirements for operations by curtailing expenditures in optoelectronics operations (including general and administrative expenses), although there can be no assurances in this regard. The Company has approximately $347,000 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 the date of this report. The Company has a working capital financing agreement with an accounts receivable factoring organization. Under such an agreement, the factoring organization may purchase certain of the Company's accounts receivable subject to full recourse against the Company in the case of nonpayment by the customers. The Company generally receives 85%-90% of the invoice amount at the time of purchase and the balance when the invoice is paid. The Company is charged an interest fee and other processing charges, payable at the time each invoice is paid. Funds advanced were $243,000 as of June 27, 1999. Effective July 1994, the Company settled a legal dispute with a former landlord. Under the Settlement Agreement ("Agreement"), the Company remains liable for 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 period for computation of such contingent payments ends December 2004. The $141,000 accrual as of June 27, 1999 represents the remaining contingent portion which is to be paid over the applicable consideration period The preceding paragraphs discussing the Company's financial condition contain forward-looking statements. The factors affecting the ability of the Company to meet its funding requirements and manage its cash resources include, among other things, the amount and timing of product sales, inventory turnover, the magnitude of fixed costs and the ability to obtain working capital, all of which involve risks and uncertainties that are difficult to predict. 17 ESSEX CORPORATION PART II - OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K (a) Exhibits (i) Exhibit 27 - Financial Data Schedule 27.1 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURE In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ESSEX CORPORATION (Registrant) Date: July 23, 1999 /s/ Joseph R. Kurry, Jr. ----------------------------------- Joseph R. Kurry, Jr. Senior Vice President Treasurer and Chief Financial Officer (Mr. Kurry is the Principal Financial and Accounting Officer and has been duly authorized to sign on behalf of the Registrant.) 18 EX-27 2 FDS 2ND QTR. 10-QSB 1999
5 1,000 6-MOS Dec-26-1999 Dec-28-1998 Jun-27-1999 314 0 774 (50) 347 1,476 1,269 (1,134) 1,794 983 376 0 0 440 (5) 1,794 2,210 2,210 (1,144) 2,312 0 0 (28) (130) 0 (130) 0 0 0 (130) (.03) (.03)
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