FORM 10-Q

-----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, V/v17Ya7cgNTqy/Z0l3aD3Tm/ZfNhQ64wHBUFyTGzSKl1yedGOqb5AbL92TsifTw m8xjwm50PeRnidBXITXEkA== 0001193125-06-106907.txt : 20060510 0001193125-06-106907.hdr.sgml : 20060510 20060510105559 ACCESSION NUMBER: 0001193125-06-106907 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060510 DATE AS OF CHANGE: 20060510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX CORP 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31703 FILM NUMBER: 06823972 BUSINESS ADDRESS: STREET 1: 6708 ALEXANDER BELL DRIVE CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 3019397000 MAIL ADDRESS: STREET 1: 6708 ALEXANDER BELL DRIVE CITY: COLUMBIA STATE: MD ZIP: 21046 FORMER COMPANY: FORMER CONFORMED NAME: ESSEX CORPORATION DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.htm FORM 10-Q FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-10772

ESSEX CORPORATION

(Exact name of registrant as specified in its charter)

Virginia

54-0846569

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6708 Alexander Bell Drive,

Columbia, Maryland

21046

(Address of principal executive offices)

(Zip Code)

(Registrant’s telephone number, including area code): (301) 939-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 30, 2006
Common Stock, no par value per share		21,653,087

Table of Contents

Essex Corporation

INDEX


Item No.		Page
PART I—Financial Information

1.	Financial Statements

	Consolidated Balance Sheets	3

	Unaudited Consolidated Statements of Operations	5

	Unaudited Consolidated Statements of Cash Flows	6

	Notes to Interim Consolidated Financial Information (Unaudited)	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

3.	Quantitative and Qualitative Disclosures about Market Risk	24

4.	Controls and Procedures	24

PART II—Other Information

1A.	Risk Factors	26

6.	Exhibits	26

	Exhibit 3.1 By-Laws, as amended

	Exhibit 31.1 Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2 Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1 Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.2 Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

ESSEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 31, 2006			December 31, 2005
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	21,741		$	27,562
Accounts receivable, net		45,953			39,229
Note receivable—current portion		868			852
Deferred tax assets—current portion		3,856			4,097
Prepayments and other		2,332			1,771

Total Current Assets		74,750			73,511

Property and Equipment
Computers and special equipment		14,275			11,538
Furniture, equipment and other		7,866			6,229

		22,141			17,767
Accumulated depreciation and amortization		(5,038	)		(4,019	)

Net Property and Equipment		17,103			13,748

Other Assets
Goodwill		72,110			71,935
Patents, net		374			378
Other intangible assets, net		4,973			5,569
Note receivable—non-current portion		1,091			1,314
Deferred tax assets—non-current portion		820			820
Other		1,396			1,308

Total Other Assets		80,764			81,324

TOTAL ASSETS	$	172,617		$	168,583

The accompanying notes are an integral part of these statements.

ESSEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


	March 31, 2006			December 31, 2005
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	9,663		$	5,925
Accrued wages and vacation		5,133			4,400
Accrued retirement plans contribution payable		398			815
Other accrued expenses		10,148			14,282
Capital leases		35			27

Total Current Liabilities		25,377			25,449
Long-Term Debt		71			55

Total Liabilities		25,448			25,504

Shareholders’ Equity
Common stock, no par value; 50,000 shares authorized; 21,572 and 21,438 shares issued and outstanding, respectively		141,713			140,278
Additional paid-in capital		6,810			6,232
Accumulated deficit		(1,354	)		(3,431	)

Total Shareholders’ Equity		147,169			143,079

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	172,617		$	168,583

The accompanying notes are an integral part of these statements.

ESSEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands except per share amounts)


	Three Month Period Ended March 31, 2006			Three Month Period Ended March 31, 2005
Revenues:
Services and products	$	43,446		$	23,423
Purchased materials		10,840			2,255

Total		54,286			25,678

Costs of goods sold and services provided:
Services and products		(29,991	)		(16,554	)
Purchased materials		(10,008	)		(2,067	)

Total		(39,999	)		(18,621	)

Gross Margin		14,287			7,057
Selling, general and administrative expenses		(9,852	)		(5,194	)
Research and development expenses		(1,347	)		(487	)
Amortization of other intangible assets		(596	)		(552	)

Operating Income		2,492			824
Interest/dividend income		244			732

Income Before Income Taxes		2,736			1,556
Provision for income taxes		(659	)		(20	)

Net Income	$	2,077		$	1,536

Basic Earnings Per Common Share	$	0.10		$	0.07

Diluted Earnings Per Common Share	$	0.09		$	0.07

Weighted Average Number of Shares
Basic		21,485			21,006
Effect of dilution—Stock options		1,460			1,601

Diluted		22,945			22,607

The accompanying notes are an integral part of these statements.

ESSEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Three Month Period Ended March 31, 2006			Three Month Period Ended March 31, 2005
Cash Flows From Operating Activities:
Net Income	$	2,077		$	1,536
Adjustments to reconcile Net Income to Net Cash Used In Operating Activities:
Depreciation and patent amortization		1,023			297
Amortization of other intangible assets		596			552
Contract reserve/account allowance		—			171
Stock compensation expense		89			—
Deferred tax expense		45			—
Change in Assets and Liabilities:
Accounts receivable		(6,724	)		(6,740	)
Prepayments and other assets		(650	)		(206	)
Accounts payable		3,737			(1,810	)
Accrued wages, vacation and retirement		317			206
Other accrued expenses		(3,935	)		4,038

Net Cash Used In Operating Activities		(3,425	)		(1,956	)

Cash Flows From Investing Activities:
Business acquisitions, net of cash acquired		—			(71,850	)
Purchases of property and equipment		(4,349	)		(1,350	)

Net Cash Used In Investing Activities		(4,349	)		(73,200	)

Cash Flows From Financing Activities:
Sales of common stock		—			(82	)
Note receivable		207			(376	)
Exercise of stock options		1,435			428
Tax benefit from stock options deduction		311			—
Debt borrowings/repayments, net		—			(7,965	)

Net Cash Provided By (Used In) Financing Activities		1,953			(7,995	)

Cash and Cash Equivalents
Net decrease		(5,821	)		(83,151	)
Balance—beginning of period		27,562			105,094

Balance—end of period	$	21,741		$	21,943

The accompanying notes are an integral part of these statements.

ESSEX CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

For the Three Months Ended March 31, 2006 and 2005

Note 1: General

Fiscal Year and Presentation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Computer Science Innovations, Inc. (“CSI”) which was acquired on April 30, 2004 and The Windermere Group, LLC and its subsidiaries (collectively, “Windermere”) which was acquired on February 28, 2005. In addition, these statements reflect the accounts and activities of the acquisition of substantially all of the assets of Performance Group, Inc. (“PGI”) which was acquired on June 25, 2004. All material intercompany transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current period presentation. The reclassifications had no affect on net income or shareholders’ equity.

The information furnished in the accompanying Consolidated Balance Sheets, Unaudited Consolidated Statements of Operations and Unaudited Consolidated Statements of Cash Flows have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, such information contains all adjustments consisting of normal recurring accruals that, in the opinion of management, are considered necessary for a fair presentation of such information. The operating results for the three month period ended March 31, 2006 may not be indicative of the results of operations for the year ending December 31, 2006, or any future period. This financial information should be read in conjunction with the Company’s 2005 audited consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 2005. Significant accounting policies are detailed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. For a discussion of our Critical Accounting Policies, refer to “Management Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Note 2: Basic and Diluted Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method. As of March 31, 2006 and March 31, 2005, the effect of the incremental shares from options and warrants of 104,000 and 35,000 respectively, have been excluded from diluted weighted average shares as the effect would have been anti-dilutive.

Note 3: Stock-Based Compensation

Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace and the company has several stock option plans with similar terms and conditions.

ESSEX CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)—(Continued)

For the Three Months Ended March 31, 2006 and 2005

portion of previously granted awards for which the requisite service has not been rendered (“nonvested awards”) that were outstanding as of January 1, 2006 over the remaining requisite service period of the awards. The compensation expense recognized for the nonvested awards was based on the fair value of the awards and amounted to $89,000 for the three month period ended March 31, 2006. The compensation expense was all associated with the portion of previously granted awards for which the requisite service has not been rendered (“nonvested awards”) that were outstanding as of January 1, 2006. No stock options were granted during the three month period ended March 31, 2006. The Company recognized the fair value of stock-based compensation awards as selling, general and administrative expenses in the Consolidated Statement of Operations for the period ended March 31, 2006 on a straight-line basis over the vesting period.

The adoption of SFAS No. 123R resulted in the recognition of compensation expense of $89,000, which had no material effect on diluted earnings per share for the three month period ended March 31, 2006. In accordance with the modified prospective application method of SFAS No. 123R, prior period amounts have not been restated to reflect the recognition of stock-based compensation costs.

SFAS No. 123R requires that we recognize compensation expenses for only the portion of stock-based compensations that are expected to vest. Therefore, we apply estimated forfeiture rates that are based on historical activity. We periodically adjust the estimated forfeiture rates so that only stock-based compensation that vest are included in selling, general, and administrative expenses. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock compensation expense may be required in future periods.

Prior to January 1, 2006, the Company applied the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. If the Company had used the fair value based method, net earnings and earnings per share for the quarter ended March 31, 2005 would have been reduced to the pro forma amounts listed in the below table.


(In thousands, except per share amounts)	Three Month Period Ended March 31, 2005
Net income	$	1,536
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		838

Pro forma income	$	698

Earnings per share:
Basic-as reported	$	0.07
Basic-pro forma	$	0.03
Diluted-as reported	$	0.07
Diluted-pro forma	$	0.03

No income tax benefit was applicable in 2005 as the Company provided a full valuation allowance.

No options were granted in the three month period ended March 31, 2006.

ESSEX CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)—(Continued)

For the Three Months Ended March 31, 2006 and 2005

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.

The weighted average and other assumptions used in the model were as follows for the period ended March 31, 2005:


	March 31, 2005
Dividend yield	0.00	%
Weighted average volatility	53.82	%
Weighted average risk free interest rate	4.26	%
Weighted average expected lives of grants	6.3 years

The weighted average grant date fair value of the options issued during the three month period ending March 31, 2005 was $10.08.

Stock Option Plans


	Number of Shares		Weighted Average Exercise Price Per Share ($)	Aggregate Intrinsic Value (In thousands)
Outstanding, 12/31/05	2,237,745		9.45
Granted	—		—
Exercised	(113,822	)	10.89
Canceled	(8,185	)	16.30

Outstanding, 03/31/06	2,115,738		9.35	26,735

Exercisable, 03/31/06	2,046,073		9.12	26,317

As of March 31, 2006, the weighted average price for options outstanding was $9.35 and for options exercisable $9.12. The weighted average life for options outstanding was 5.3 years and for options exercisable 5.2 years. The total intrinsic value of options exercised during the period ended March 31, 2006 was approximately $1.2 million.

As of March 31, 2006, the weighted average price for non plan stock options and awards outstanding and exercisable of 417,325 shares was $2.54. The weighted life for non plan stock options and awards outstanding and exercisable was 4.4 years. The total aggregate intrinsic value of non plan stock options and awards outstanding and exercisable was approximately $8.1 million. The intrinsic value of non plan stock options exercised during the period ended March 31, 2006 was $248,000.

Our adoption of SFAS No. 123R will continue to affect our operating results in future periods. At March 31, 2006, the total value of all remaining options both outstanding and vesting after April 1, 2006 is expected to be approximately $315,000.

ESSEX CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)—(Continued)

For the Three Months Ended March 31, 2006 and 2005

Note 4: Other Accrued Expenses

Other accrued expenses consists of the following:


(In thousands)	At March 31, 2006		At December 31, 2005
Subcontractors accruals	$	6,534	$	6,190
Costs awaiting payment processing		2,755		7,143
Advance payments		714		641
Payroll tax withholding		145		308

Total accrued expenses	$	10,148	$	14,282

Subcontractors accruals represent amounts due to subcontractors for direct labor under contracts that are awaiting billing from subcontractors. Costs awaiting payment processing include such items as legal expenses and equipment and supply vendor costs awaiting invoicing from the vendor. Advance payments represent timing differences between our revenue recognition policies and our contractual billing terms and conditions which allow us on occasion to bill prior to revenue recognition.

Note 5: Amortization of Other Intangible Assets

The following value was assigned to intangible assets for the acquisitions noted below:


(In thousands)	Assets of Entity Acquired or Acquired Entity	Value Assigned to Intangible Assets
Date of Acquisition	Assets of Entity Acquired or Acquired Entity	As of March 31, 2006		As of December 31, 2005
February 28, 2005	Windermere	$	6,779	$	6,779
June 25, 2004	PGI		1,498		1,498
April 30, 2004	CSI		1,279		1,279

Total Intangible Assets Acquired			9,556		9,556
Less Accumulated Amortization			4,583		3,987

Other Intangible Assets, net		$	4,973	$	5,569

Intangible assets relate primarily to customer relationships. In addition, intangibles include non-compete agreements and intellectual property. Intangibles are amortized over their estimated life, not exceeding five years. Total amortization through March 31, 2006 amounts to approximately $4.6 million. During the first three months of 2006, amortization of other intangible assets was $596,000 as compared to $552,000 in the comparable period in 2005.

Note 6: Income Taxes

The Company accrues income taxes based on an estimated annual effective tax rate applied to quarterly earnings and adjusted for discrete items occurring in the quarter. The effective tax rate considers such items as permanent differences and applicable credits, such as the research and development credit. The research and development credit tax legislation expired December 31, 2005 but is currently part of pending legislation. Although the R&D credit is expected to be reinstated retroactive to January 1, 2006, the Company has not included the effect of this expected legislation in calculating the estimated annual effective rate applied in the first quarter of 2006. The Company will adjust its effective tax rate for the effect of the legislation in the quarter enacted.

ESSEX CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)—(Continued)

For the Three Months Ended March 31, 2006 and 2005

Until the fourth quarter of 2005, the Company provided a full valuation allowance against its net deferred tax assets, principally its net operating loss and tax credit carry forwards. Based upon a review of a number of factors, including the Company’s recent historical operating performance and its expectation that it can generate consolidated taxable income for the foreseeable future, the Company reversed in the fourth quarter of 2005 substantially all, or approximately $5.6 million, of its valuation allowance against net deferred tax assets.

The actual effective tax rate for the three months ended March 31, 2006 and 2005 was 24.1% and 1.3%, respectively. The income tax provision for the three months ended March 31, 2006 is $659,000, which includes a benefit of $440,000 resulting from the completion of the study by our outside consultants of our methodology for determining research and development credit-eligible costs. Although the Company maintained a full valuation allowance against net deferred tax assets in the three month period ended March 31, 2005, the Company recorded a provision for state income taxes of $20,000 in jurisdictions where our net operating loss carryforwards were not available to offset current taxable income.

Note 7: Acquisitions

On February 28, 2005, the Company acquired 100% of the ownership and membership interests of the Annapolis, Maryland based Windermere for a total initial purchase price of $72.0 million, including the initial payment of $69.4 million and legal and other fees of $2.6 million. The acquisition agreement for the Windermere transaction contains earn-out provisions that may require us to make an additional purchase price payment on May 31, 2006, to be calculated based on excess earnings before interest, taxes, depreciation and amortization (“EBITDA”) of Windermere during the applicable earn-out period. Under the Windermere earn-out arrangement, the Company’s aggregate contingent earn-out obligation may range from a low of zero dollars to a maximum of $30.0 million in cash, and associated fees, depending upon the extent to which Windermere’s EBITDA during the period March 1, 2005 through February 28, 2006 exceeds the EBITDA target of $5.5 million for such period established and defined in the acquisition agreement. EBITDA under the agreement may be reduced by allocations of certain corporate costs. In addition, the earn-out payment may be reduced for warranty items as well as the remaining balance of February 2006 receivables, both billed and unbilled, at the date of the payout. We have entered into discussions with the Windermere sellers regarding the earn-out and expect to pay any earn-out amount due by May 31, 2006, as specified in the agreement. Without adjustment for the items noted above, the maximum payout of $30 million would be achieved. The ultimate payout will be subject to finalizing these adjustments and negotiations.

Pursuant to an oral agreement between Stephen E. Tate, who was an Executive Vice President of Essex from the date of the Windermere acquisition until his resignation on April 28, 2006, and Essex, Essex paid Stephen E. Tate a $1.7 million finder’s fee in connection with the Windermere acquisition. To the extent any earn-out is payable to the sellers in connection with the acquisition of Windermere, the Company will be obligated to pay Stephen E. Tate an additional fee equal to 2.5% multiplied by such earn-out amount, up to a maximum $750,000. An additional 1% finder’s fee is also due to an individual who is neither affiliated with nor employed by Essex. If amounts become payable under the earn-out arrangement, or if additional amounts become payable under the finder’s fee arrangements, appropriate increases will be made to Goodwill associated with the acquisition.

To the extent significant earn-out and related finder’s fee obligations amounts become payable, we expect to pay such amounts from cash balances then existing, and if such cash balances are not sufficient to fund the payments, we will likely fund the payments through borrowings under our credit facility.

ESSEX CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)—(Continued)

For the Three Months Ended March 31, 2006 and 2005

Windermere provides engineering services, software development and information technology solutions to government agencies, the intelligence community and commercial customers. Windermere had revenues of $64.7 million, including $2.5 million of revenues from discontinued operations, for the calendar year ended December 31, 2004, its last full year of operations prior to acquisition.

Note 8: Statements of Cash Flows—Supplemental Disclosures

There were $29,000 of capital leases entered into in the first three months of 2006. There were no new capital leases entered into in the comparable period in 2005.

Note 9: Major Customers

Most of the Company’s revenues are derived from contracts with the U.S. Government, where the Company is either the prime contractor or a subcontractor, depending on the award. For the three month periods ended March 31, 2006 and March 31, 2005, revenues derived from U.S. Government programs were $53.2 million, or 98% of the Company’s total revenues and $24.0 million, or 93% of the Company’s total revenues, respectively. For the three month period ended March 31, 2006, revenues from the top three customer programs (consisting of our Thunder, Woodstock and Taxi contracts), were $31.1 million or 57% of the Company’s revenues, with the largest of those contracts (our Thunder contract) representing 35% of revenues. In addition, revenues generated under our Woodstock contract represent 20% of our total revenues for the three month period ended March 31, 2006. For the three month period ended March 31, 2005, approximately $13.8 million or 54% of revenues were derived from our top three customer programs (Thunder, Woodstock and Jackhammer). Revenues from our largest customer were $40.8 million, or 75% of the Company’s revenues for the three month period ended March 31, 2006, as compared to $19.7 million, or 77% for the comparable period in 2005.

Note 10: Line of Credit

On June 30, 2005, the Company and its subsidiaries entered into an Amended and Restated Revolving Line of Credit Loan and Security Agreement (the “Credit Facility”) with Bank of America, N.A. (the “Bank”). The Credit Facility replaced a previous credit facility with the Bank to which Windermere and its subsidiaries were parties. The Company’s obligations under the Credit Facility are secured by all assets of the Company and its subsidiaries except patents and have a maturity date of June 30, 2008. Under the Credit Facility, the Bank has committed, subject to customary conditions precedent, to provide advances and letters of credit of up to $20.0 million with guidance line advances of up to an additional $20.0 million at the Bank’s discretion. The amount of advances permitted at any time may depend in part upon the Company’s funded debt to earnings ratio and on the amount of accounts receivable. Proceeds of the Credit Facility may be used for working capital, permitted acquisitions of other entities or assets, and other general corporate purposes not inconsistent with the terms of the Credit Facility. Amounts borrowed under the Credit Facility may be borrowed, prepaid and reborrowed from time to time. The Credit Facility contains certain financial covenants, with which the Company was in compliance as of March 31, 2006. There were no borrowings under this Credit Facility outstanding as of March 31, 2006.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the United States Private Securities Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects”, “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on management’s current expectations and are subject to risks, uncertainty and changes in circumstances, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. All statements contained herein that are not clearly historical in nature are forward looking. The forward-looking statements in this report include statements regarding the Company’s cash requirements, the Company’s projected positive operating cash flows, the amount of the Company’s backlog, the Company’s expected utilization of total backlog, the Company’s competitive environment, the Company’s expected product introductions and functionality, the Company’s expected opportunities and ability to expand sales and develop its technology, the Company’s expected continuation of revenues to be from U.S. Government contracts, the Company’s expectations regarding government spending, the Company’s expectations regarding future demand for our products and services, the Company’s expectation for improvement within the Commercial Communications Products Division (CCPD), the Company’s expected statutory effective income tax rate, reduced by any estimated research and development credit, the possible use of the company’s credit facility or a future public offering of securities under its shelf registration statement, the effects of the adoption of SFAS No. 123R, the Company’s expectation that any of its customers will continue to exercise contract options and other statements that are predictions of or indicate future events, trends, plans or objectives are also forward-looking statements. In this Form 10-Q, “we”, “us” and “our” refers to Essex Corporation, including its consolidated subsidiaries.

OVERVIEW

Essex provides advanced technology solutions primarily for U.S. Government intelligence and defense customers. Our solutions include advanced signal processing, image processing, information processing, information assurance and engineering innovations. We create our solutions by integrating our services and expertise with hardware, software, and our proprietary and patented technology to meet our customers’ requirements. We have expanded our capabilities, customer set, and technologies through the integration of several strategic acquisitions. Our ability to directly integrate essential technologies into innovative solutions is an important differentiator for Essex with its customers.

During the first quarter of 2005, we completed our acquisition of the Annapolis, Maryland based Windermere. The Windermere acquisition adds breadth and depth to Essex’s existing technical capabilities and to its intelligence community customer set. In addition, Windermere adds information assurance and engineering innovations to the range of intelligence technologies we offer.

Within the intelligence and defense communities, we have established and maintained long-standing and successful customer relationships. We are also developing next generation signal, image and information processing, information assurance and engineering innovations solutions under classified U.S. Government research and development contracts. We have been able to develop our current proprietary technology using a combination of government funding and our own internal funding and we believe this combination should allow us to continue to enhance and expand our technology and services for future market needs. Essex is also expanding its ability to create products from its technologies for both government and commercial applications.

While we have primarily marketed our services and products to the intelligence and defense markets, we believe we are also well positioned to apply our solutions to growth areas within the commercial market. Historically, our proprietary technology and products, although critical to our solutions offerings, have not accounted for a significant portion of our revenues on a stand-alone basis.

Our awards with the U.S. Government generally extend over multiple years. Most of our contracts are classified. Therefore, we are often prohibited from disclosing or asked not to disclose the name of the contract or the program or specific client. For ease of reference in this Form 10-Q, we refer to specific contracts by our internal project names. In this report, we refer to five of our most significant contracts under the following internal project names:

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“Thunder” is our $227.4 million signal processing contract for the intelligence community. The Thunder contract was first awarded in October 2003 for $57.1 million over a three-month base period plus four option years, was expanded in December 2004 to $227.4 million and is expected to run through December 2007.

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“Woodstock” is our $205.0 million contract that is focused on signals technology and services for the defense and intelligence communities. The Woodstock contract was awarded to Windermere in September 2004, pre-acquisition, and is expected to run through September 2009, including options.

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“Jackhammer” is our $51.0 million contract where we are a subcontractor providing communications systems support to the intelligence community. Both Essex and Windermere are subcontractors on this contract. The Essex Jackhammer contract was awarded in December 2002 and is expected to run through September 2011, including options. The Windermere Jackhammer contract was awarded in January 2002 and is expected to run through September 2008, including options.

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“Cougar” is our $46.0 million contract for the Department of Defense (DoD) providing field engineers, systems engineers and analysts in support of the DoD’s critical mission. The Cougar contract was awarded in December 2005 and is expected to run through September 2010, including options.

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“Taxi” is our $11.0 million subcontract to provide enhanced communications system support for the DoD. The Windermere Taxi subcontract was awarded in September 2004 and will continue through October 2006.

On certain projects, our customers require us to purchase and provide the materials portion (which may include hardware, software and firmware) of the total system solution, which entails our purchasing materials from third party vendors and reselling it to our customers. We show revenues and costs from purchased materials separately since these revenues carry significantly lower margins than our products and services revenues. The purchased materials revenues can be highly variable from period to period.

Our most significant expenses are cost of goods sold and services provided, which consist primarily of direct labor and associated costs for program personnel and direct expenses incurred to complete projects,

including the cost of materials and equipment and amounts paid or accrued to subcontractors. Our ability to accurately predict personnel requirements, salaries and other costs, as well as to manage personnel levels and utilize our personnel versus subcontracting the work, can have a significant impact on our cost of goods sold and services provided. Utilizing our own employees on projects results in higher gross margins compared to utilizing subcontracted employees for the same work. As a result, we seek to maximize our internal labor content on our awards. Selling, general and administrative expenses consist primarily of costs associated with our management, facilities, finance and administrative groups and business development expenses which include bid and proposal efforts, and occupancy, travel and other corporate costs. We have revenues from some awards on which our U.S. Government customers pay us to perform research and development on their behalf. We also spend funds on internal research and development, which are separately classified as such in the financial statements.

The Company accrues income taxes at an estimated annual effective tax rate which considers such items as permanent differences and applicable credits, such as the research and development credit. The research and development credit expired on December 31, 2005 but is part of pending legislation. Although the R&D credit is expected to be reinstated retroactive to January 1, 2006, the Company has not included the effect of this expected legislation in calculating the estimated annual effective rate applied in the first quarter of 2006. The Company will adjust its effective tax rate for the effect of the legislation in the quarter enacted. Prior to the fourth quarter of 2005, the Company had a full valuation allowance against its net deferred tax asset as it had a history of net operating losses. Based on current and expected future operating results, the Company reversed substantially all of its valuation allowance on its net deferred tax assets in the fourth quarter of 2005.

To the extent significant earn-out amounts and related fees become payable, we expect to pay such amounts from cash balances then existing, and if such cash balances are not sufficient to fund the payments, we will likely fund the payments through borrowings under our credit facility. Windermere provides engineering services, software development and information technology solutions to government agencies, the intelligence community and commercial customers. Windermere had revenues of $64.7 million, including $2.5 million of revenues from discontinued operations, for the calendar year ended December 31, 2004, its last full year of operations.

During the second quarter of 2005, we created the Commercial Communications Products Division (CCPD) to develop and sell fiber optic modules and subsystems for advanced communications applications to both commercial and government markets. CCPD designs, manufactures, integrates and tests our communication products, which include the 80km and extended range XFP Transceivers, DuoBinary 300-pin MSA Transponders, and Microwave Transceiver Assemblies (MTA). Production of the MTA began in December 2005 and, subject to the results of testing and certification, availability of production units for the XFP Transceivers and DuoBinary Transponders is planned for early in the third quarter of 2006. In 2005 less than 1% of our total

revenues were derived from CCPD. While the initial CCPD operating costs and the research and development investment impacted our 2005 and the three month period ended March 31, 2006 earnings, we expect product orders to be completed in 2006. CCPD operates within the Commercial Products Group organization of Essex, which has the charter to create innovative solutions to satisfy customer and market needs, to evaluate and select innovations for productization and to manage the productization, marketing and sales of Essex products to both commercial and government customers at commercial product rates.

Critical Accounting Policies and Estimates

The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we re-evaluate our estimates, including those related to revenue recognition, research and development, intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are used when accounting for uncollectible accounts receivable, depreciation and amortization, intangible assets, goodwill, and employee benefit plans and contingencies, among others. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We enter into the following types of U.S. Government agreements:

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Time and material. On time and material agreements, revenue is recognized to the extent of billable rates multiplied by hours delivered, plus other billable direct costs.

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Cost plus fee. We recognize revenue on cost plus fee arrangements to the extent costs are incurred plus a proportionate amount of fee earned. We must determine that the costs incurred are proper and that the ultimate costs incurred will not overrun the expected funding on the project and still deliver the scope of work proposed. Even though cost plus fee arrangements generally do not require that we expend costs in excess of the award value, such expenditures may be required in order to achieve customer satisfaction and receive additional work. In addition, since the reimbursable costs include both direct and indirect costs, we must determine that the indirect costs are properly accounted for and allocated in accordance with reasonable cost allocation methods and/or Cost Accounting Standards.

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Fixed price. On fixed price agreements, we must determine that the costs incurred provide a proportionate amount of progress on the work and that the ultimate costs incurred will not overrun the funding on the award for the required services or product to be delivered.

Award or incentive fees may be received in lieu of, or in addition to, other fees on time and material or cost plus fee contracts. Where award or incentive fees are applicable, we record as revenues an estimate of the expected award or incentive fee proportionate to the work performed. Estimated fee is based on our experience under the contract or similar contracts and on on-going communication with the client regarding performance.

We use historical technical performance experience where applicable to evaluate progress on fixed price and cost plus fee jobs. We use historical government audit experience in the indirect cost area to evaluate the propriety and expected recovery of our indirect costs on cost plus fee agreements. The following table sets forth the percentage of revenues under each type of contract for the three month periods ended March 31, 2006 and March 31, 2005:


	Percentage of Revenues by Contract Type Three Month Periods Ended (Unaudited)
	March 31, 2006		March 31, 2005
Time and material	52.0	%	67.4	%
Cost plus fixed fee	24.1		18.8
Cost plus incentive fee	20.1		8.9
Fixed price	3.8		4.9

Total	100.0	%	100.0	%

The change for the respective periods is principally attributable to the contract mix of the revenue associated with the Windermere acquisition which was more heavily weighted toward cost plus contracts.

Costs of Goods Sold and Services Provided

Our costs are categorized as either direct or indirect costs. Direct costs are those that can be identified with and allocated to specific contracts and tasks. They include labor, fringe (for example, leave time, medical/dental, retirement plan, payroll taxes, employee welfare, worker’s compensation and other benefits), subcontractor costs, consultant fees, travel expenses, materials and equipment. Indirect costs are either overhead or general and administrative expenses. Indirect costs cannot generally be identified with specific contracts or tasks, and to the extent that they are allowable, they are allocated to contracts and tasks using appropriate government-approved methodologies. Costs determined to be unallowable under the Federal Acquisition Regulations cannot be allocated to projects. Our principal unallowable costs are interest expense, amortization expense for separately identified intangibles from acquisitions, certain general and administrative expenses, financing and merger/acquisition costs.

Research and Development

Research and development costs are expensed as incurred. Such costs include direct labor and materials as well as a reasonable allocation of overhead costs. However, no general and administrative costs are included. Equipment which has alternative future uses is capitalized and charged to expense over its estimated useful life.

Business Combination

We apply the provisions of SFAS No. 141, Business Combinations, whereby the net tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair market values at the acquisition date. The purchase price in excess of the estimated fair market value of the net tangible and separately identifiable intangible assets acquired represents goodwill. The allocation of the purchase price related to our business combinations involves significant estimates and management judgment that may be adjusted during the allocation period, but in no case beyond one year from the acquisition date. External costs incurred related to successful business combinations are capitalized as costs of business combinations, while internal costs incurred by us for acquisition opportunities are expensed.

Goodwill and Other Intangible Assets

Business acquisitions typically result in the recording of goodwill which represents the excess of purchase price over the fair value of net assets acquired using the purchase method of accounting. Other intangible assets, which relate primarily to customer relationships, non-compete agreements and intellectual property, represent purchased assets that lack physical substance but can be distinguished from goodwill because of being sold or exchanged either on their own or in a combination with contracts or assets. We have adopted Statement of Financial Accounting Standards, or SFAS, No. 142 which requires that we, on an annual basis, calculate the fair value of the reporting units that contain the goodwill and compare that to the carrying value of the reporting unit to determine if impairment exists. Impairment testing must take place more often if circumstances or events indicate a change in the impairment status. Management’s judgment is required in calculating the fair value of the reporting units. Because of the integral technologies and operations of the acquisitions to date, we have determined that Essex has only one corporate-wide reporting entity to which this test applies. Intangibles are amortized over their estimated life, not exceeding five years.

Stock Options

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock Issued to Employees”. SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options, be valued at fair value on the grant date and be expensed over the applicable vesting period. SFAS No. 123R became effective for the Company on January 1, 2006. The Company adopted SFAS No. 123R using the “modified prospective application”. Under the “modified prospective application”, compensation costs are recognized in the financial statements for all new share-based payments granted after January 1, 2006. Additionally, the Company recognizes compensation costs for the portion of previously granted awards for which the requisite service has not been rendered (“nonvested awards”) that were outstanding as of January 1, 2006 over the remaining requisite service period of the awards. The compensation expense recognized for the nonvested awards was based on the fair value of the awards and amounted to $89,000 for the three month period ended March 31, 2006. The compensation expense was all associated with the portion of previously granted awards for which the requisite service has not been rendered (“nonvested awards”) that were outstanding as of January 1, 2006. No stock options were granted during the three month period ended March 31, 2006. The Company recognized the fair value of stock-based compensation awards as selling, general and administrative expenses in the Consolidated Statement of Operations for the period ended March 31, 2006 on a straight-line basis over the vesting period.

Our adoption of SFAS No. 123R will continue to affect our operating results in future periods. The Company expects to continue issuing options, but plans to extend the vesting period of the options granted to reduce the impact on earnings. In addition, the Company plans to use performance-based options, where

appropriate. The existing stock option plans permit these changes to historical practice. At March 31, 2006, the total value of all remaining options both outstanding and vesting after April 1, 2006 is expected to be approximately $315,000.

Income Taxes

The Company accrues income taxes at an estimated annual effective tax rate which considers such items as permanent differences and applicable credits, such as the research and development credit. The research and development credit expired on December 31, 2005 but is part of pending legislation. Although the R&D credit is expected to be reinstated retroactive to January 1, 2006, the Company has not included the effect of this expected legislation in calculating the estimated annual effective rate applied in the first quarter of 2006. The Company has significant net deferred tax assets, principally net operating loss and tax credit carry forwards which are expected to reduce currently payable income taxes in 2006. The Company also expects to reduce currently payable income taxes for the tax benefit from exercises of certain stock options.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements with or through any unconsolidated entity or which have not been recognized and disclosed in these financial statements.

Results of Operations

The following table sets forth, for each period indicated, the percentage of items in the statement of operations in relation to revenue.


	Three Months Ended
(Unaudited)	March 31, 2006		March 31, 2005
Revenues:
Services and products	80.0	%	91.2	%
Purchased materials	20.0		8.8

Total	100.0		100.0
Costs of goods sold and services provided	(73.7	)	(72.5	)

Gross margin	26.3		27.5
Selling, general and administrative expenses	(18.1	)	(20.2	)
Research and development expenses	(2.5	)	(1.9	)
Amortization of other intangible assets	(1.1	)	(2.2	)

Operating income	4.6		3.2
Interest/dividend income (expense), net	0.4		2.8

Income before income taxes	5.0		6.0
Provision for income taxes	(1.2	)	—

Net income	3.8	%	6.0	%

The following table sets forth, for each component of our revenues, the related gross margin provided expressed as a percentage of the related revenues for the periods indicated.


	Three Months Ended
(Unaudited)	March 31, 2006		March 31, 2005
Gross Margin by Revenue Type
Services and products	31.0	%	29.3	%
Purchased materials	7.7	%	8.3	%

Revenues. Our revenues increased $28.6. million, or approximately 111%, to $54.3 million for the three month period ended March 31, 2006, from $25.7 million for the comparable period in 2005. Revenues increased as a result of both acquisition and internal growth. With regard to acquisition related revenues, the 2006 results include a full three months of revenues from Windermere, which was acquired on February 28, 2005. The 2005 results include one month of revenue from Windermere. In the last full year of operations prior to the acquisition, Windermere reported revenues of $64.7 million (less $2.5 million from a unit that was not acquired). The internal growth results primarily from our Thunder and Woodstock contracts and the ramp-up of our Cougar contract. We expect our revenues for the remainder of 2006 to continue to be primarily from U.S. Government contracts.

Revenue from purchased materials increased by $8.6 million. Revenue from purchased materials increased as a percentage of total revenue to 20% in the three month period ended March 31, 2006, from 8.8% of the total in the three month period ended March 31, 2005. Purchased materials are hardware, software, and firmware acquired as part of our total solution offering to our clients. The purchased materials revenues can be highly variable from period to period and generally carry a very low margin.

Cost of Goods Sold and Services Provided (“CGS”). Total CGS increased $21.4 million to $40 million for the three month period ended March 31, 2006 from $18.6 million for the comparable period in 2005. CGS increased as a result of increased revenue volume at improved gross margins. As a percentage of total revenues, total CGS was approximately 73.7% for the three month period ended March 31, 2006, as compared to approximately 72.5% for the comparable period in 2005. For services and products revenue, CGS was 69% for the three month period ended March 31, 2006 as compared to 70.7% for the comparable period in 2005.

Gross Margin. For the three month period ended March 31, 2006, services and products gross margin increased to 31% from 29.3% for the comparable period of 2005. The increase in services and products gross margin percent results primarily from shifts from subcontractor labor to our labor under our Thunder and Woodstock contracts. Overall gross margin declined because of the revenue mix. Low margin materials revenue growth outpaced the revenue from services and products, lowering the overall gross margin from 27.5% at March 31, 2005 to 26.3% at March 31, 2006.

Selling, General and Administrative Expenses (“SG&A”). For the three month period ended March 31, 2006, SG&A increased $4.7 million to $9.9 million from $5.2 million for the comparable period in 2005. The increase in SG&A is attributable to the expanded infrastructure to support our growing business, including information systems, accounting and finance, business development and facilities expansions. SG&A has decreased to 18.1% of revenues for the three month period ended March 31, 2006 as compared to 20.2% of revenues for the three month period ended March 31, 2005.

Research and Development Expenses. Research and development expenses increased $860,000 to $1.3 million for the three month period ended March 31, 2006, from $487,000 in the comparable period in 2005. The increase primarily reflects continued investment in our optical communications and signal processing technologies. This includes our optical encryptor, as well as communication technologies of our Commercial Communications Products Division.

Amortization of Other Intangible Assets. For the three month period ended March 31, 2006, amortization of other intangible assets increased by $44,000 to $596,000 compared to $552,000 in the comparable period in 2005. This increase resulted from the amortization of customer contracts and other intangibles associated with the Windermere acquisition that occurred in February 2005. Amortization of existing intangibles is expected to decline for the remainder of fiscal 2006.

Net Interest/Dividend Income (Expense). Net interest/dividend income was $244,000 for the three month period ended March 31, 2006 compared to $732,000 in comparable period in 2005. During the period ended March 31, 2005, we held cash from our November 2004 offering of common stock until the consummation of the purchase of Windermere on February 28, 2005. In addition, Essex received $285,000 from a $25 million loan to

the Windermere owners prior to the acquisition of Windermere. The decrease in net interest/dividend income for the period ended March 31, 2006 in comparison to the prior year primarily results from the payoff of the loan and the decline in interest bearing assets following the acquisition of Windermere.

Provision for income taxes. The actual effective tax rate for the three months ended March 31, 2006 and 2005 was 24.1% and 1.3%, respectively. The income tax provision for the three months ended March 31, 2006 is $659,000, which includes a benefit of $440,000 resulting from the completion of the study by our outside consultants of our methodology for determining research and development credit-eligible costs. The provision in 2005 is for state and local income taxes where our net operating loss carry forwards were not available to offset current taxable income. The research and development credit tax legislation expired December 31, 2005 but is currently part of pending legislation. Although the R&D credit is expected to be reinstated retroactive to January 1, 2006, the Company has not included the effect of this expected legislation in calculating the estimated annual effective rate applied in the first quarter of 2006. The Company will adjust its effective tax rate for the effect of the legislation in the quarter enacted.

Net Income. Net income was $2.1 million and $1.5 million in the three month periods ended March 31, 2006 and March 31, 2005, respectively.

Backlog

Our awards with the U.S. Government generally extend over multiple years. Funded backlog generally consists of the sum of all awarded amounts of work for which funding has been approved and awards granted, less the value of work performed under such awards. Since the U.S. Government operates under annual appropriations, our customers typically fund awards on an incremental basis, generally for periods of one year or less. In many cases, our awards include unexercised options. Accordingly, a significant amount of our backlog is “unfunded”. We include in unfunded backlog the total value of signed contracts, less funding to date. Unfunded backlog includes awarded options based upon expected performance levels for those options. Unfunded backlog does not include any estimate of future potential delivery orders that might be awarded under indefinite delivery indefinite quantity contracts beyond the current level of effort being performed under those contracts.

As of March 31, 2006, we had total backlog, funded and unfunded, of $458.2 million as compared with $408.1 million at March 31, 2005. Of these amounts, funded backlog was $120.4 million and unfunded backlog was $337.8 million at March 31, 2006 compared to $103.6 million and $304.5 million, respectively, at March 31, 2005. Unfunded backlog at March 31, 2006 includes the remaining balance of $66.2 million on our Thunder contract. At March 31, 2005 unfunded backlog on this contract was $153.2 million. Unfunded backlog at March 31, 2006 also includes the remaining balance of $146.4 million on our Woodstock contract. In addition to priced options through September 2009, the Woodstock contract includes an annual option to double the value of each annual contract option. The customer exercised and funded that option in 2005 and based on the 2006 tasks proposed to date, we expect that the customer will continue to exercise that doubling option. As a result, we include these options through the contract period in unfunded backlog. Unfunded backlog at March 31, 2006 also includes $38.8 million from of our $46.0 million Cougar contract awarded in December 2005. Both Windermere and Essex are subcontractors on a single contract, referred to as Jackhammer. The total contract value of both subcontracts is $51.0 million. The total unfunded backlog for both subcontracts at March 31, 2006 was $18.3 million. Unfunded backlog for the Essex subcontract was $18.6 million at March 31, 2005.

We expect approximately 72% of our total backlog at March 31, 2006 to be recognized as revenue after December 31, 2006.

Financial Condition—Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to finance the costs of our operations and to make capital expenditures and acquisitions. A significant part of our business strategy is to pursue one or more

significant strategic acquisitions and we used a substantial portion of our cash balance at fiscal year end 2004 during the three month period ended March 31, 2005 for the acquisition of Windermere. The acquisition agreement for the Windermere acquisition contains earn-out provisions that may require us to make an additional purchase price payment on May 31, 2006, to be calculated based on excess earnings before interest, taxes, depreciation and amortization (“EBITDA”) of Windermere during the applicable earn-out period.

Under the Windermere earn-out arrangement, the Company’s aggregate contingent earn-out obligation may range from a low of zero dollars to a maximum of $30.0 million in cash, and associated fees, depending upon the extent to which Windermere’s EBITDA during the period March 1, 2005 through February 28, 2006 exceeds the EBITDA target of $5.5 million for such period established and defined in the acquisition agreement. EBITDA under the agreement may be reduced by allocations of certain corporate costs. In addition, the earn-out payment may be reduced for warranty items as well as the remaining balance of February 2006 receivables, both billed and unbilled, at the date of the payout. We have entered into discussions with the Windermere sellers regarding the earn-out and expect to pay any earn-out amount due by May 31, 2006, as specified in the agreement. Without adjustment for the items noted above, the maximum payout of $30 million would be achieved. The ultimate payout will be subject to finalizing these adjustments and negotiations.

We evaluate our liquidity position using various factors. The following represents some of the more important factors:


(In thousands)	SELECTED FINANCIAL DATA AS OF
	March 31, 2006 (Unaudited)		December 31, 2005 (Audited)		March 31, 2005 (Unaudited)
Total Assets	$	172,617	$	168,583	$	147,256

Working Capital ⁽¹⁾	$	49,373	$	48,062	$	38,477

Current Ratio ⁽²⁾		2.95:1		2.89:1		3.17:1

Capital Leases		106		82		38
Other Debt		—		—		29

Total Debt/Financing	$	106	$	82	$	67

Shareholders’ Equity	$	147,170	$	143,079	$	129,510

(1)

Working Capital represents current assets minus current liabilities.

(2)

Current Ratio represents current assets divided by current liabilities.

For the three month period ended March 31, 2006, net cash used in operating activities was $3.4 million. Cash used in operating activities for the three month period ended March 31, 2006 was from an increase in accounts receivable and prepaid expenses and other assets and a change in other liabilities of $7.3 million , offset by net income and non-cash depreciation, amortization and other charges of approximately $3.9 million. An increase in accounts receivable during the three month period ended March 31, 2006 was primarily due to the

timing of collections on our Thunder and Woodstock contracts that we normally would have expected to have received within the three month period ended March 31, 2006 (we received approximately $6.1 million from these contracts during the first half of April 2006), our mid-quarter financial system conversion and the ramp-up of our Cougar contract. We expect to see a reduction in our days sales outstanding as we reestablish our billing cycles and with certain anticipated changes in contract and billing terms going forward.

For the three month period ended March 31, 2006, net cash used in investing activities was $4.3 million which represented the additional purchases of property, equipment and leasehold improvements to support our growing workforce. Our working capital at March 31, 2006 increased to $49.4 million from $48.1 million at fiscal year end 2005. We anticipate continued investment in infrastructure for the remainder of 2006 as we continue to support our growing workforce and as we expand our facilities to support our Thunder, Woodstock, and Cougar contracts.

For the three month period ended March 31, 2006, net cash provided by financing activities was $2.0 million which primarily represented funds received from stock option exercises and the tax benefit from stock options deduction.

On July 11, 2005, the Securities and Exchange Commission declared effective our equity shelf registration statement on Form S-3 relating to one or more future offerings of up to an aggregate of $100 million of our common stock. We believe the shelf registration statement will provide us with more efficient and immediate access to capital markets when considered appropriate. Our board of directors has authorized management to pursue an underwritten public offering of up to $100 million in our common stock under the shelf registration statement. As of May 10, 2006, we have not issued any securities pursuant to the shelf registration statement.

On June 30, 2005, the Company and its subsidiaries entered into the Credit Facility with Bank of America, N.A. The Company’s obligations under the Credit Facility are secured by all assets of the Company and its subsidiaries except patents and have a maturity date of June 30, 2008. Under the Credit Facility, the bank has committed, subject to customary conditions precedent, to provide advances and letters of credit of up to $20.0 million, with guidance line advances of up to an additional $20.0 million at the bank’s discretion. The Credit Facility contains certain financial covenants, with which the Company was in compliance as of March 31, 2006. There were no borrowings outstanding under this Credit Facility as of May 10, 2006.

The Company expects to satisfy its operating cash requirements for the remainder of 2006 from its projected positive operating cash flows and existing cash balance. To the extent that future acquisitions, capital requirements, or any potential earn-out payment under the Windermere purchase agreement and related finder’s fee obligations require cash beyond our expected positive cash flows and existing cash balance over the next twelve months, the Company may utilize its Credit Facility with the bank or proceeds from the offering under the shelf registration, if consummated, or both. There can be no assurance that the Company will, or based on market factors or business activities that the Company will be able to, issue shares under the shelf registration statement or otherwise obtain financing on terms favorable to us, if at all.

Contractual Obligations

Our contractual cash obligations increased to $25.5 million from $22.2 million at December 31, 2005 due expanding our facilities to support our Thunder and Cougar contracts, net of payments made during the three month period ended March 31, 2006.

Inflation

Because of the Company’s substantial activities in professional services and product development, the Company is more labor intensive than firms involved primarily in industrial activities. To attract and maintain higher caliber professional staff, the Company must structure its compensation programs competitively. The

wage demand effect of inflation is felt almost immediately in the Company’s costs; however, the net effect during the periods presented is minimal. First, the inflation rate in the United States generally has little impact on the Company’s cost-reimbursable type contracts and other short-term contracts. Second, for longer-term, fixed-price and time and material type contracts, the Company endeavors to protect its margins by including cost escalation provisions or other specific inflation protective terms in these contracts.

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, the magnitude of fixed costs, sales growth and the ability to obtain working capital, all of which involve risks and uncertainties that are difficult to predict.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no variable rate debt outstanding as of March 31, 2006.

Our exposure to market risk relates to changes in interest rates on our cash investments. At March 31, 2006, such cash investments were $12.1 million and averaged $12.7 million during the three month period ended March 31, 2006. Presently, such cash investments earn approximately 4%. Based upon our cash investments for the first three months of 2006, a hypothetical 1% increase or decrease in interest rates would have increased or decreased income by $10,000 for every $1.0 million invested and would have increased or decreased our annual cash flow and interest income by a comparable amount.

Item 4.

CONTROLS AND PROCEDURES

As disclosed in our Form 10-K for the year ended December 31, 2005, Essex identified certain material weaknesses in internal controls over financial reporting of its Windermere subsidiary that was acquired on February 28, 2005. The weaknesses identified, which we believe are not unusual for a privately held company of the size of Windermere, included a lack of segregation of duties of financial personnel and inadequate financial management systems including weaknesses in its budgetary analysis and processes. As a result of these weaknesses, which were identified at acquisition, we have made organizational and personnel changes and have implemented new financial systems and processes across the organization. Specifically, we have altered financial reporting structures within Windermere; evaluated, planned, and begun executing financial management training; and hired new financial management personnel. In addition, in February, 2006, Essex consolidated general ledger accounting systems into one system, integrating personnel and began to adopt corporate-wide processes for approval, entry, review and reconciliation of transaction processing activities. Finally, during that same month, Essex expanded our detailed budget review process, a key internal control in our financial reporting structure, to our Windermere subsidiary. Remediation efforts to correct weaknesses will continue through the second quarter of 2006 as we: (1) finalize the execution of our hiring plan, (2) complete more financial management training, and (3) fully implement corporate-wide processes and policies. Essex undertook additional review procedures to ensure that the financial statements for the quarter ended March 31, 2006, were in accordance with U.S. GAAP.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Form 10-Q, an evaluation was performed under the supervision and with the participation of Essex’s management (including the Chief Executive Officer and Chief Financial Officer) of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) under the Exchange Act). This evaluation included the consideration of the effect of the remediation efforts regarding the material weaknesses described above. Based on their most recent evaluation, Essex’s Chief Executive Officer and Chief Financial Officer conclude that Essex’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e) are effective as of the end of the period covered by this Form 10-Q.

Changes in Internal Controls Over Financial Reporting

As noted above, during the quarter Essex consolidated general ledger accounting systems, expanded our detailed budget review process to our Windermere subsidiary, and began integrating personnel and adopting corporate-wide policies and procedures. The budgetary system provides detailed budget analysis capability designed to provide substantive assurance that the information disclosed is accurate. These changes are expected to strengthen our internal controls over financial reporting and address the material weaknesses we identified at Windermere. These changes during the quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no other changes during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, do not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no assessment of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II—OTHER INFORMATION

Item 1A.

RISK FACTORS

There has been no material change with regard to the risk factors previously disclosed in our most recent annual report. For more information on the Company’s business and risk factors, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Item 6.

EXHIBITS


Exhibit 3.1—		By-Laws, as amended
Exhibit 31.1—		Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2—		Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1—		Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
Exhibit 32.2—		Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

These exhibits are being “furnished” with this periodic report and are not deemed “filed” with the Securities and Exchange Commission and are not incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation by reference language in any such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ESSEX CORPORATION

(Registrant)

Date: May 10, 2006



		/S/ LISA G. JACOBSON
		Lisa G. Jacobson Executive Vice President and Chief Financial Officer

(Ms. Jacobson is the Principal Financial and Chief Accounting Officer of the Registrant and has been duly authorized to sign on behalf of the Registrant.)

EX-3.1 2 dex31.htm EXHIBIT 3.1 EXHIBIT 3.1

EXHIBIT 3.1

Restated as of December 22, 2003

BY-LAWS

ESSEX CORPORATION

ARTICLE I. OFFICES

The Principal office of the corporation shall be located in the City of Alexandria, Virginia, or such other location as the Board of Directors may designate. The corporation may have such other offices as the Board of Directors may designate or as the business of the corporation may require from time to time.

ARTICLE II. SHAREHOLDERS

SECTION 1. Annual Meeting. The annual meeting of the shareholders shall be held on the 3rd Friday in the month of April, or such other date, as the Board of Directors may designate from time to time, in each year at the hour of 10:00 o’clock A.M., for the purpose of electing Directors and for transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the location designated, such meeting shall be held on the next succeeding business day. If the election of Directors shall not be held on the day designated herein for any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as conveniently may be.

SECTION 2. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the President or by the Board of Directors, and shall be called by the President at the request of the holders of not less than one-tenth of all the outstanding shares of the corporation entitled to vote at the meeting.

SECTION 3. Place of Meeting. The Board of Directors may designate any place, unless otherwise prescribed by statute, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, unless otherwise prescribed by statute, as the place for the holding of such meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the corporation.

SECTION 4. Notice of Meeting. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the President, or the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid.

SECTION 5. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, 50 days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the stock

transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 50 days, and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof.

SECTION 6. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least 10 days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of 10 days prior to such meeting, shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders.

SECTION 7. Quorum. One-third of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares are represented at a meeting, one-third of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum; provided, however, that no action of the shareholders will be valid without the affirmative vote specified by law.

SECTION 8. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting.

SECTION 9. Voting of Shares. Subject to the provisions of Section 11 of this Article II, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders.

SECTION 10. Voting of Shares by Certain Holders. Shares standing the name of another corporation may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine.

Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name.

Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so contained in an appropriate order of the court by which such receiver was appointed.

A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

Shares of its own stock belonging to the corporation or held by it in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time.

SECTION 11. Informal Action by Shareholders. Unless otherwise provided by law, any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof.

ARTICLE III. BOARD OF DIRECTORS

SECTION 1. General Powers. The business and affairs of the corporation shall be managed by its Board of Directors.

SECTION 2. Number, Tenure and Qualifications. The number of directors of the corporation shall be not less than three nor more than nine, said number to be fixed from time to time by resolution of the Board of Directors. Each director shall hold office until the next annual meeting of shareholders and until his successor shall have been elected and qualified. Notwithstanding anything herein to the contrary, any member of the Board of Directors may be removed for any reason by the affirmative vote of the holders of two-thirds of all the votes entitled to be cast thereon.

SECTION 3. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this by-law immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution.

SECTION 4. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place for holding any special meeting of the Board of Directors called by them.

SECTION 5. Notice. Notice of any special meeting shall be given at least 5 days previously thereto by written notice delivered personally or mailed to each director at his business address, or by telegram. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.

SECTION 6. Quorum. A majority of the number of directors then in office shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

SECTION 7. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

SECTION 8. Vacancies. Any vacancy existing in the Board of Directors or to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of a majority of the directors then in office, unless otherwise provided by law. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office.

SECTION 9. Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

SECTION 10. Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed, unless incapacitated, to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

SECTION 11. Executive Committee. The Board of Directors may designate two or more of its members to constitute an executive committee which shall have and may exercise all of the authority of the Board of Directors except to approve an amendment of the articles of incorporation, a plan of merger or consolidation, a plan of exchange under which the corporation would be acquired, the sale, lease or exchange, or the mortgage or pledge for a consideration other than money, of all, or substantially all, of the property and assets of the corporation otherwise than in the usual and regular course of its business, the voluntary dissolution of the corporation, or revocation of voluntary dissolution proceedings.

SECTION 12. Other Committees. The Board of Directors may designate two or more of its members to constitute audit, compensation or other committees, which committees, if any, shall have the authority and responsibilities set forth in the resolutions of the Board of Directors with regard to the establishment and/or activities of such committees.

SECTION 13. Officers of the Board. The Board of Directors shall have a Chairman of the Board, a Vice-Chairman of the Board, and, at the discretion of the Board, have other officers. The Chairman of the Board and the other officers shall be appointed from time to time by the Board of Directors and shall have such powers and duties as shall be designated by the Board of Directors and as are otherwise set forth in Article IV of these By-laws.

ARTICLE IV. OFFICERS

SECTION 1. Number. The Officers of the Corporation shall be a Chairman of the Board of Directors, Vice-Chairman of the Board of Directors, a Chief Executive Officer, a President, a Secretary, up to two (2) Assistant Secretaries, and a Treasurer, each of whom shall be elected by the Board of Directors. Vice presidents and such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors.

SECTION 2. Election and Term of Office. The officers of the corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided.

SECTION 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

SECTION 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

SECTION 5. Chairman of the Board of Directors. The Chairman of the Board of Directors or the Chief Executive Officer shall preside at all meetings of the Board of Directors and shareholders. The Chairman of the Board shall have such other duties as may be prescribed by the Board of Directors.

SECTION 6. Chief Executive Officer. Unless otherwise provided by a resolution adopted by the Board of Directors, the Chief Executive Officer shall have general and active supervision over the property, organization, operation, and conduct of the business and affairs of the Corporation and over its several officers. He may appoint, remove, employ and discharge officers, agents or employees other than those appointed by the board of Directors. He may sign, execute and deliver in the name of the Corporation powers of attorney, contracts, deeds, bonds and other obligations and instruments which the Board of Directors has authorized to be executed, and shall perform other duties as prescribed form time to time by the board of Directors or by these By-Laws.

SECTION 7. President. The President shall perform other duties and have such additional authority as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer.

SECTION 8. Vice-Presidents. Vice-Presidents shall perform such duties as from time to time may be assigned to them by the Chief Executive Officer.

SECTION 9. Secretary. The Secretary or any Assistant Secretary shall keep the minutes of the shareholders’ and Board of Directors’ meetings in one or more books provided for that purpose and shall see that all notices are duly given in accordance with the provisions of these by-laws or as required by law. The Secretary or any Assistant Secretary shall be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized. Directly, or through duly authorized agents, including any Assistant Secretary, the Secretary shall keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder. Directly, or through duly authorized agents, including any Assistant Secretary, the Secretary shall have general charge of the stock transfer books of the corporation and in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Chief Executive Officer or by the Board of Directors.

SECTION 10. Treasurer. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. He shall have charge and custody of and be responsible for all funds and securities of the corporation, receive and give receipt for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of Article V of these by-laws, and in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

SECTION 11. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation.

SECTION 12. Employment of Officers. Notwithstanding the above provisions of this Article IV of these bylaws, the directors are authorized on behalf of the Corporation to enter into contracts with persons to act as officers for such periods as the directors shall in their discretion determine to be in the best interests of the Corporation, and at such compensation as the directors shall in their best judgment determine; provided, however, that any such contract shall include a clause permitting the removal of such officer, with or without cause, upon the vote of two-thirds of the directors then in office without prejudice to the contract or other rights, if any, of the person so removed.

ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS

SECTION 1. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

SECTION 2. Loans. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances.

SECTION 3. Checks, drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

SECTION 4. Deposits. All funds of the corporation not otherwise employed or invested shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the Board of Directors may select.

ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER

SECTION 1. Certificates for Shares. Certificates representing shares of the corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the President and by the Secretary or by such other officers authorized by law and by the Board of Directors to do so. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate, a new one may be issued therefore upon such terms and indemnity to the corporation as the Board of Directors may prescribe.

SECTION 2. Transfer of Shares. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record .thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes.

ARTICLE VII. FISCAL YEAR

The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

ARTICLE VIII. DIVIDENDS

The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the term and conditions provided by law and its articles of incorporation.

ARTICLE IX. SEAL

The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation and the state of incorporation and the words, “Corporate Seal.”

ARTICLE X. WAIVER OF NOTICE

Unless otherwise provided by law, whenever any notice is required to be given to any shareholder or director of the corporation under the provisions of these by-laws or under the provisions of the articles of incorporation, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

ARTICLE XI. AMENDMENTS

These bylaws may be altered, amended or repealed and new bylaws may be adopted by a vote of the shareholders representing a majority of all the shares issued and outstanding, at any annual shareholders’ meeting or at any special shareholders’ meeting or by vote of a majority of the Board of Directors at any regular or special meeting of the Board.

EX-31.1 3 dex311.htm EXHIBIT 31.1 EXHIBIT 31.1

EXHIBIT 31.1

Essex Corporation

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Leonard E. Moodispaw, certify that:

1.	I have reviewed the quarterly report on Form 10-Q of Essex Corporation for the period ending March 31, 2006;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 10, 2006				/S/ LEONARD E. MOODISPAW
				Leonard E. Moodispaw President and Chief Executive Officer

EX-31.2 4 dex312.htm EXHIBIT 31.2 EXHIBIT 31.2

EXHIBIT 31.2

Essex Corporation

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Lisa G. Jacobson, certify that:

1.	I have reviewed the quarterly report on Form 10-Q of Essex Corporation for the period ending March 31, 2006;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 10, 2006				/S/ LISA G. JACOBSON
				Lisa G. Jacobson Executive Vice President and Chief Financial Officer

EX-32.1 5 dex321.htm EXHIBIT 32.1 EXHIBIT 32.1

Exhibit 32.1

Section 1350 Certification

In connection with the quarterly report of Essex Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leonard E. Moodispaw, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.




Date: May 10, 2006		/S/ LEONARD E. MOODISPAW
		Leonard E. Moodispaw President and Chief Executive Officer

EX-32.2 6 dex322.htm EXHIBIT 32.2 EXHIBIT 32.2

Exhibit 32.2

Section 1350 Certification

In connection with the quarterly report of Essex Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lisa G. Jacobson, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.




Date: May 10, 2006		/S/ LISA G. JACOBSON
		Lisa G. Jacobson Executive Vice President and Chief Financial Officer

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