FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
Commission File Number 0-10772
ESSEX CORPORATION
(Exact name of small business issuer as specified in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (301) 939-7000
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's class of Common
Stock as of the latest practicable date.
OUTSTANDING
CLASS AT NOVEMBER 4, 2002
----- -------------------
Common Stock, no par value per share 7,754,482
Transitional Small Business Disclosure Format (Check One);
YES NO X
----- -----
ESSEX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments for a fair presentation of results for such
period. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
30, 2001.
2
ESSEX CORPORATION
BALANCE SHEETS
September 29, December 30,
2002 2001
------------- -------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash $ 532,417 $ 568,178
Accounts receivable, net 901,443 284,649
Prepayments and other 60,703 76,969
Inventory 14,983 29,983
------------- -------------
1,509,546 959,779
------------- -------------
PROPERTY AND EQUIPMENT
Computers and special equipment 934,117 849,453
Furniture, equipment and other 255,896 260,526
------------- -------------
1,190,013 1,109,979
Accumulated depreciation and amortization (835,842) (747,059)
------------- -------------
354,171 362,920
------------- -------------
OTHER ASSETS
Patents, net 324,974 211,030
Other 21,909 19,213
------------- -------------
346,883 230,243
------------- -------------
TOTAL ASSETS $ 2,210,600 $ 1,552,942
------------ ============= =============
The accompanying notes are an integral part of these statements.
3
ESSEX CORPORATION
BALANCE SHEETS
September 29, December 30,
2002 2001
------------- -------------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Advance from accounts receivable financing $ 321,600 $ --
Accounts payable 859,939 313,741
Accrued wages and vacation 168,276 239,476
Capital leases 110,154 130,961
Accrued retirement 58,546 62,000
Other accrued expenses 230,940 101,387
Billings in excess of costs 60,000 --
------------- -------------
1,809,455 847,565
LONG-TERM DEBT
Capital leases, net of current portion 10,976 60,078
------------- -------------
Total Liabilities 1,820,431 907,643
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY
Common stock, no par value; 25 million shares
authorized; 7,435,254 and 5,155,605 shares
issued and outstanding, respectively 12,461,900 8,870,044
Convertible preferred stock, $0.01 par value;
1 million total shares authorized; 0 and 500,000
shares of Series B authorized and outstanding -- 2,000,000
Additional paid-in capital 2,000,000 2,000,000
Accumulated deficit (14,071,731) (12,224,745)
------------- -------------
390,169 645,299
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 2,210,600 $ 1,552,942
============= =============
The accompanying notes are an integral part of these statements.
4
ESSEX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 29, 2002 AND SEPTEMBER 30, 2001
2002 2001
-------------- -------------
unaudited) (unaudited)
Revenues $ 3,093,619 $ 1,880,832
Costs of goods sold and services provided (1,712,578) (948,860)
Research and development (1,226,854) (1,922,308)
Selling, general and administrative expenses (1,987,135) (1,767,553)
-------------- -------------
Operating Loss (1,832,948) (2,757,889)
Interest (expense) income, net (14,038) 8,026
------------- -------------
Loss Before Income Taxes (1,846,986) (2,749,863)
Provision for income taxes -- --
------------- -------------
Net Loss (1,846,986) (2,749,863)
Beneficial conversion feature of convertible
preferred stock -- (750,000)
------------- -------------
Net Loss Attributable to Common Stockholders $ (1,846,986) $ (3,499,863)
============= =============
Weighted Average Number of Shares Outstanding 7,329,488 6,289,513
============= =============
Basic Loss Per Common Share $ (0.25) $ (0.56)
============= =============
Diluted Loss Per Common Share $ (0.25) $ (0.56)
============= =============
The accompanying notes are an integral part of these statements.
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ESSEX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED SEPTEMBER 29, 2002 AND SEPTEMBER 30, 2001
2002 2001
------------ ------------
(unaudited) (unaudited)
Revenues $ 1,600,910 $ 745,468
Costs of goods sold and services provided (964,806) (381,880)
Research and development (260,621) (652,663)
Selling, general and administrative expenses (553,089) (693,218)
------------ ------------
Operating Loss (177,606) (982,293)
Interest (expense) income, net (4,019) (1,245)
------------ ------------
Loss Before Income Taxes (181,625) (983,538)
Provision for income taxes -- --
------------ ------------
Net Loss (181,625) (983,538)
Beneficial conversion feature of convertible
preferred stock -- (250,000)
------------ ------------
Net Loss Attributable to Common Stockholders $ (181,625) $ (1,233,538)
============ ============
Weighted Average Number of Shares Outstanding 7,410,223 6,706,225
============ ============
Basic Loss Per Common Share $ (0.02) $ (0.19)
============ ============
Diluted Loss Per Common Share $ (0.02) $ (0.19)
============ ============
The accompanying notes are an integral part of these statements.
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ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEK PERIODS
ENDED SEPTEMBER 29, 2002 AND SEPTEMBER 30, 2001
2002 2001
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,846,986) $ (2,749,863)
Adjustments to reconcile Net Loss to
Net Cash Used In Operating Activities:
Depreciation and amortization 110,994 160,250
Stock-based compensation expense 246,325 34,000
Inventory valuation reserve 15,000 60,000
Other (91) (492)
Change in Assets and Liabilities:
Accounts receivable (616,794) (173,554)
Prepayments and other assets 15,804 (33,541)
Inventory -- (70,126)
Accounts payable 546,198 102,521
Other liabilities (14,227) (111,458)
------------- -------------
Net Cash Used In Operating Activities (1,543,777) (2,782,263)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (27,465) (81,048)
Proceeds from sale of fixed assets 91 492
------------- -------------
Net Cash Used In Investing Activities (27,374) (80,556)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 1,250,003 2,000,000
Sale of preferred stock -- 750,000
Exercise of stock options 95,528 21,224
Short-term borrowings, net 321,600 --
Payment of capital lease obligations (131,741) (84,438)
------------- -------------
Net Cash Provided By Financing Activities 1,535,390 2,686,786
------------- -------------
CASH AND CASH EQUIVALENTS
Net decrease (35,761) (176,033)
Balance - beginning of period 568,178 1,015,634
------------- -------------
Balance - end of period $ 532,417 $ 839,601
============= =============
The accompanying notes are an integral part of these statements.
7
ESSEX CORPORATION
NOTES TO INTERIM FINANCIAL INFORMATION
NOTE 1: General
FISCAL YEAR AND PRESENTATION
Essex Corporation (the "Company") is on a 52/53-week fiscal year ending the last
Sunday in December. Years 2002 and 2001 are 52-week fiscal years. Certain
amounts from prior annual and quarterly periods have been reclassified to
conform to this 2002 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for
uncollectible accounts receivable, inventory obsolescence and valuation,
depreciation and amortization, intangible assets, employee benefit plans and
contingencies, among others. Actual results could differ from those estimates.
IMPORTANT BUSINESS RISK FACTORS
The Company has historically been principally a supplier of technical services
under contracts or subcontracts with departments or agencies of the U.S.
Government, primarily the military services and other departments and agencies
of the Department of Defense.
The Company has expended significant funds to transition into the commercial
marketplace, particularly the productization of its proprietary technologies in
telecommunications and optoelectronic processors. The Company has received
patents on its optoelectronic processor. The Company has filed applications to
secure patent protection for innovative technologies in two communications
device families: Fiberoptic HYPERFINE WDM (wavelength division multiplexing)
devices and wireless optical processor enhanced receiver architecture
(OPERA(TM)). Since September 2000, the Company has received nearly $6 million in
financing from its Investor Group to advance its programs to capitalize upon
these communications inventions. The long-term success of the Company in these
areas is dependent on its ability to successfully develop and market products
related to its communications devices and optoelectronic processors. The success
of these efforts is subject to changing technologies, availability of additional
financing, competition and ultimately market acceptance.
Primarily due to the expenditures for development and marketing of its
optoelectronics products and services, particularly the optical
telecommunications device technologies, and also due to expenses related to the
Company's efforts to raise additional financing, the Company incurred
significant losses in the first nine months of 2002. The Company also incurred
such losses in fiscal years 2000 and 2001. The Company plans to continue
research and development spending in 2002 in optoelectronics to the extent funds
are available. In order to maintain spending levels, the Company will need
additional funds.
The Company is seeking to establish joint ventures or strategic partnerships
including licensing of its technologies with major industry participants to
facilitate these goals. The Company will also
8
ESSEX CORPORATION
seek additional funds under appropriate terms from private sources to continue
to finance development and to achieve initial market penetration. Significant
delays in the commercialization of the Company's optoelectronic products,
failure to market such products or failure to raise substantial additional
working capital would have a significant adverse effect on the Company's future
operating results and future financial position.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Such costs include
direct labor and materials as well as a reasonable allocation of indirect costs.
However, no general and administrative costs are included. Equipment which has
alternative future uses is capitalized and charged to expense over its estimated
useful life.
NOTE 2: Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share are computed using the weighted average
number of common shares outstanding during the period and common shares issuable
upon the required conversion of preferred stock. Diluted earnings per common
share would incorporate the incremental shares issuable upon the assumed
exercise of stock options and warrants. Such incremental shares were anti
dilutive for the periods presented.
NOTE 3: Accounts Receivable Financing
The Company has a working capital financing agreement with an accounts
receivable factoring organization. Under such an agreement, the factoring
organization may purchase certain of the Company's accounts receivable subject
to full recourse against the Company in the case of nonpayment by the customers.
The Company generally receives 85%-90% of the invoice amount at the time of
purchase and the balance when the invoice is paid. The Company is charged an
interest fee and other processing charges, payable at the time each invoice is
paid. There was $322,000 of funds advanced as of September 29, 2002. There were
no funds advanced as of December 30, 2001.
NOTE 4: Commitments and Contingencies
The Company has entered into several capital leases for special optical test and
telephone equipment. The capital equipment cost of these leases was
approximately $350,000, the remaining lease terms are less than 2 years and the
remaining principal amounts due total $121,000 at September 29, 2002.
NOTE 5: Common Stock; Warrants; Preferred Stock
The Company's Articles of Incorporation authorize 1 million shares of preferred
stock, par value $0.01 per share, the series and rights of which may be
designated by the Board of Directors in accordance with applicable state and
federal law. In September 2000, the Board designated 500,000 shares of such
preferred stock as Series B. There were 312,500 shares of Series B issued in
2000 for $1,250,000 and the remaining 187,500 issued in 2001 for $750,000. Each
Series B share was converted into 4 shares of common stock in September 2002. No
Series A preferred shares are currently outstanding.
9
ESSEX CORPORATION
In connection with the issuance of the preferred stock, the Company also issued
common stock warrants to the preferred stock holders. These warrants are for an
additional 2 million shares of common stock. The warrants expire in September
2005 and can be exercised at a nominal total price of $2,000. The warrants
become exercisable under certain terms and conditions, such as the market price
of the common stock exceeding $10 through $20 per share for 5 consecutive days,
or the occurrence of an additional private placement of $10 million where the
valuation of the Company exceeds $50 million. The warrants would also become
exercisable upon a sale of all or substantially all of the assets of the Company
or a merger or acquisition of the Company. The Company has determined that the
warrants had a nominal fair value at issuance due to the restrictive covenants.
The Company has reserved 2 million shares of common stock in connection with the
possible exercise of these common stock warrants.
In accordance with Emerging Issues Task Force Issue No. 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios", the Company imputed and recorded in 2000 and 2001
a total deemed dividend of $2,000,000 on its Series B Preferred Stock equal to
the difference between the estimated current market price at original date of
issuance and the conversion price (the "beneficial conversion feature"). Such
imputed dividends had no impact on net loss from operations or cash flows but
had to be considered when calculating loss per share attributable to common
stockholders.
In October 2002, the Company negotiated a private placement with an affiliate of
its Investor Group. Initially, the Company received $150,000 for 50,000 shares
of its common stock. The Company also received $100,000 and issued warrants
which permit the investor, in its sole discretion, to invest another $1,000,000
by December 15, 2002 and another $1,000,000 by January 14, 2003 and receive
shares of common stock at a price of approximately $3 per share. If the
investments are not made in the prescribed timeframes, then only the warrant
amount of $100,000 will be converted into common stock at the $3 share price.
Under the provisions of prior private placements, the current investment
triggered a final adjustment to the purchase price in those prior private
placements from $6.50 per share to $3.00 per share. This adjustment resulted in
the issuance in October 2002 of approximately 269,000 additional shares to the
investors.
NOTE 6: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. No tax benefit will be recognized until taxable income is
realized.
NOTE 7: Statements of Cash Flows - Supplemental Disclosure
There were $62,000 of new capital leases entered into in the first nine months
of 2002. In the first nine months of 2001, the Company entered into capital
leases for new equipment for $288,000.
10
ESSEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER SECTIONS
CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S EXPECTATIONS,
ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS", "ANTICIPATES",
"PLANS", "BELIEVES", "ESTIMATES" AND VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS THAT
INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT
PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
INDICATED IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS.
STATUS
The Company's business is focused upon applications of its proprietary
optoelectronics technology and products for commercial and U.S. Government
customers and signal processing technology for U.S. Government customers.
Since mid 2000, the Company has been working to patent, develop and
commercialize its key leading-edge optical technologies, principally the
HYPERFINE WDM devices and wireless OPERA(TM) technology. The purpose of the
HYPERFINE WDM device is to increase the number of usable communications channels
within a single optical fiber. The purpose of OPERA(TM) is to increase capacity
and improve voice and data quality of wireless systems. TheSE inventions arose
from the Company's work and expertise in the optical device and communications
fields.
The Company has prototypes of the HYPERFINE WDM technology which are being
demonstrated to prospective strategic partners and investors. The Company began
placing prototypes of its initial HYPERFINE WDM devices in field trials by
potential customers in September 2001 and announced the initial order for a
prototype unit in September 2002. The Company is deferring development of its
OPERA(TM) wireless receiver device technology until adequaTE funding is
obtained.
In order to develop prototypes, the Company has needed and will need significant
additional capital until a profitable revenue stream is established. The Company
has been working since September 2000 with an Investor Group which, through
September 2002, has invested approximately $6 million in several private
placements.
In October 2002, the Company negotiated another private placement with an
affiliate of the Investor Group. Initially, the Company received $150,000 for
50,000 shares of its common stock. The Company also received $100,000 and issued
warrants which permit the investor, in its sole discretion, to invest another
$1,000,000 by December 15, 2002 and another $1,000,000 by January 14, 2003 and
receive shares of common stock at a price of approximately $3 per share. If the
investments are not made in the prescribed timeframes, then only the warrant
amount of $100,000 will be converted into common stock at the $3 share price.
Under the provisions of prior private placements, the current investment
triggered a final adjustment to the purchase price in those prior private
placements from $6.50 per share to $3.00 per share. This
11
ESSEX CORPORATION
adjustment resulted in the issuance in October 2002 of approximately 269,000
additional shares to the investors.
The development of these optoelectronic devices required a diversion of labor
resources from revenue generation in 2001 and continues to do so in 2002. The
Company may hire additional personnel to augment existing technical and sales
staff. Since the Company is investing the new capital in such research,
development and marketing, the financial statements reflect higher than normal
expenses, which increases the Company's reported losses.
While the Company saw a significant increase in its third quarter 2002 revenues
and expects similar revenues in the fourth quarter, the Company has been unable
to maintain customer programs of sufficient volume and to expand such work to
achieve an overall breakeven or better level of operations on such revenues.
Work based on or related to the patented ImSyn(TM) Processor, other Essex
optical hardware and signal processing and techniquES continues for the
development of advanced SAR (synthetic aperture radar). These efforts generally
fall under SBIR (U.S. Government Small Business Innovative Research) programs.
Recent technical successes on these SBIR programs have resulted in invitations
to submit proposals to program offices within the military departments. Theses
proposals will continue the engineering development programs, and begin
transition of the technology to field operators. These transition programs are
expected to be higher in volume and of a longer term nature. The Company is
working to reduce the overall deficit from operations and to improve its cash
flows. Backlog and order issues will continue to be major concerns until
substantial revenue improvements realized from customer funded SBIR development
programs have been achieved.
The Company currently does not have sufficient resources to bring all of its
telecommunications and optoelectronics processing devices to market. In order to
maintain development and marketing spending levels, the Company will need
additional funds. Accordingly, the Company will likely have to partner with or
enter into licensing arrangements with major industry participants in order to
successfully introduce its technology and products. There can be no assurance
that the Company will be successful in entering into such agreements.
REVENUES
Revenues were $1,601,000 and $745,000 for the third quarters of 2002 and 2001,
respectively. Revenues for the first thirty-nine week period of 2002 were
$3,094,000, an increase of 64% from the $1,881,000 in revenues for the first
thirty-nine week period of 2001. The increase in revenues was due to a $2.3
million new U.S. Government program for design of a next generation advanced
optical processor (AOP) demonstration unit, including procurement of necessary
materials and equipment. This initial program commenced in May 2002 and is
scheduled to be completed by December 2002; however, the Company anticipates to
continue the program at a significant level of effort. The Company also recorded
$137,000 of revenue in the third quarter of 2002 from the collection of a final
bill for additional costs on a government contract completed over five years
ago.
As of September 29, 2002, the Company had funded backlog on programs related to
services and applications of optoelectronics and signal processing of
approximately $1.5 million, down from $2.8 million at June 30, 2002.
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ESSEX CORPORATION
INCOME (LOSS)
There was an operating loss of $178,000 and $982,000 in the third quarters of
2002 and 2001, respectively. There were operating losses of $1,833,000 and
$2,758,000 in the first thirty-nine week periods of 2002 and 2001, respectively.
Cost of goods sold and services provided (COGS) as a percentage of revenues
(excluding revenue from the final bill) for the thirty-nine week period of 2002
was 57.9% compared to 50.5% in the comparable period in 2001. In the third
quarter of 2002, COGS was 65.9% of revenues (excluding the final billing)
compared to 51.3% in the same period of 2001. In 2001, the major component of
COGS was direct labor and associated costs. In 2002, due to the new AOP program
referenced above, there was a significant increase in the direct materials and
equipment component of COGS. The Company receives a higher markup on direct
labor than direct material and equipment costs.
Research and development (R&D) was approximately $1,227,000 in the first
thirty-nine week period of 2002, down 36% from approximately $1,922,000 in the
same period in 2001. Expenditures for the initial HYPERFINE WDM development in
2001 required significant outside vendor costs for materials and non-recurring
engineering. Such costs have declined in 2002 and are also being managed against
available funding. The majority of the R&D costs were incurred on efforts
related to optical telecommunications technology. The Company has maintained its
R&D spending since the September 2000 capital infusion and, subject to the
availability of funds, expects to continue its R&D spending in the optical and
telecommunications areas for the remainder of 2002.
The Company has increased selling, general and administrative expenses ("SG&A"),
particularly in marketing for optoelectronics and telecommunications new device
business areas. The Company has also incurred higher expenses related to the
Company's efforts to raise additional financing in 2002. Overall, SG&A expenses
remain high relative to the revenue volume as the Company seeks to commercialize
its optoelectronic telecommunications products and services. The high SG&A
expenses contributed to the operating losses in the first thirty-nine week
periods of 2002 and 2001.
Overall, the year-to-date 2002 net loss declined primarily due to the decline in
development expenses and the higher revenue volume covering a greater portion of
fixed expenses.
CORPORATE MATTERS
The Company recognized a $750,000 charge in the first nine months of 2001 from
the beneficial conversion feature of convertible preferred stock. As proceeds
were received from the sale of preferred stock in 2001 and 2000, the Company
recognized the pro rata beneficial conversion feature on the convertible
preferred stock as a deemed dividend for purposes of computing net loss
attributable to common stockholders and per share amounts. The total recorded
was $750,000 in 2001 and $1,250,000 in 2000. This imputed amount had no effect
on net loss (from operations) or cash flows.
Total interest expense was $14,000 in the first thirty-nine week period of 2002.
In the same period in 2001, the Company netted $8,000 of interest income,
primarily from the temporary investment of funds from the private placements.
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ESSEX CORPORATION
The Company is in a NOL carryforward position. No provision or benefit from
income taxes was recognized in the first half of 2002 or 2001.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
SELECTED FINANCIAL DATA ($ Thousands)
AS OF
---------------------------------------------
September 29, December 30, September 30,
2002 2001 2001
------------ ------------ ------------
(unaudited) (audited) (unaudited)
Total Assets $ 2,211 $ 1,553 $ 1,893
============ ============ ============
Working Capital (Deficit) $ (300) $ 112 $ 649
============ ============ ============
Current Ratio 0.83:1 1.13:1 1.99:1
============ ============ ============
Advance from Accounts Receivable
Financing
$ 322 $ -- $ --
Capital Leases 121 191 227
------------ ------------ ------------
Total Debt/Financing $ 443 $ 191 $ 227
============ ============ ============
Stockholders' Equity $ 390 $ 645 $ 1,146
============ ============ ============
The net cash provided by financing activities in 2002 and 2001 is primarily from
the Company completing several private placements of equity securities to its
Investor Group or their affiliates. The Company received $3,400,000 and
$1,250,000 in fiscal 2001 and fiscal 2000, respectively and another $1,250,000
in the first nine months of 2002 from these private placements. The funds have
been and are to be used primarily for the development, marketing and management
of the optical telecommunications device technologies.
The net cash used in operating activities has resulted from the significant
losses incurred by the Company in 2002 and 2001, primarily due to the
expenditures for development and marketing of its optoelectronics products and
services, particularly in the optical telecommunications device technologies
field. The Company's working capital and ratio continue to decrease primarily
due to these losses. The Company is addressing its working capital deficit
through new investment (see below), increased revenues, cost reductions and
extended payment terms from certain vendors.
The Company plans to continue R&D spending in 2002 in the optoelectronics
operations to the extend funds are available. In order to maintain spending, the
Company will need additional funds. The Company is seeking to establish joint
ventures or strategic partnerships including licensing of its technologies to
major industry participants, to facilitate these goals. The Company will also
seek additional funds under appropriate terms from private sources, including
the Investor Group, to continue to finance development and to achieve initial
market penetration. As part of this funding effort, in October 2002, the Company
negotiated another private placement with an affiliate of its Investor Group.
Initially, the Company received $150,000 for 50,000 shares of its common stock.
The Company also received $100,000 and issued warrants
14
ESSEX CORPORATION
which permit the investor, in its sole discretion, to invest another $1,000,000
by December 15, 2002 and another $1,000,000 by January 14, 2003 and receive
shares of common stock at a price of approximately $3 per share. Funds, if any,
from additional investments will be used to support commercialization of the
Company's HYPERFINE family of devices. If the investments are not made in the
prescribed timeframes, then only the warrant amount of $100,000 will be
converted into common stock at the $3 share price. Significant delays in the
commercialization of the Company's optoelectronic products, failure to market
such products or failure to raise substantial additional working capital would
have a significant adverse effect on the Company's future operating results and
financial position.
The Company has a working capital financing arrangement with an accounts
receivable factoring organization. Under such agreement, the factoring
organization may purchase certain of the Company's accounts receivable subject
to full recourse against the Company in the case of nonpayment by the customers.
The Company generally receives 85%-90% of the invoice amount at the time of
purchase and the balance when the invoice is paid. The Company is charged an
interest fee and other processing charges, payable at the time each invoice is
paid. There was $322,000 of funds advanced as of September 29, 2002. There were
no funds advanced as of December 30, 2001.
The Company believes that it will be able to meet its remaining 2002 funding
requirements and obligations from the aforementioned sources of revenue and
capital, and if necessary, by cost reductions and extended vendor payment terms.
However, there can be no assurances in this regard and the Company expects that
it will need significant additional financing in the future.
THE PRECEDING PARAGRAPHS DISCUSSING THE COMPANY'S FINANCIAL CONDITION CONTAIN
FORWARD-LOOKING STATEMENTS. THE FACTORS AFFECTING THE ABILITY OF THE COMPANY TO
MEET ITS FUNDING REQUIREMENTS AND MANAGE ITS CASH RESOURCES INCLUDE, AMONG OTHER
THINGS, THE AMOUNT AND TIMING OF PRODUCT SALES, INVENTORY TURNOVER, THE
MAGNITUDE OF FIXED COSTS AND THE ABILITY TO OBTAIN WORKING CAPITAL, ALL OF WHICH
INVOLVE RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
ITEM 3. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-QSB, the Company's Chief Executive Officer and Chief
Financial Officer believe the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that
information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. There were no significant
changes in the Company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
15
ESSEX CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 - Securities Purchase Agreement dated October 17, 2002
with Global Environment Strategic Technology Partners,
L.P. and/or its affiliates
Exhibit 99.3 - Registration Rights Agreement dated October 17, 2002
with Global Environment Strategic Technology Partners,
L.P. and/or its affiliates
Exhibit 99.4 - Common Stock Purchase Warrant No. 1 dated October 17,
2002 with Global Environment Strategic Technology
Partners, L.P. and/or its affiliates
Exhibit 99.5 - Common Stock Purchase Warrant No. 2 dated October 17,
2002 with Global Environment Strategic Technology
Partners, L.P. and/or its affiliates
(b) Reports on Form 8-K
None
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ESSEX CORPORATION
(Registrant)
Date: November 6, 2002
/S/ JOSEPH R. KURRY, JR.
------------------------------
Joseph R. Kurry, Jr.
Senior Vice President
Treasurer and Chief Financial Officer
(Mr. Kurry is the Principal Financial and Accounting Officer and has been duly
authorized to sign on behalf of the Registrant.)
16
ESSEX CORPORATION
SECTION 302 CERTIFICATION
I, Leonard E. Moodispaw, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Essex Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d -14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in the quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated November 6, 2002 /S/ LEONARD E. MOODISPAW
-----------------------------------
Leonard E. Moodispaw
President and Chief Executive Officer
17
ESSEX CORPORATION
SECTION 302 CERTIFICATION
I, Joseph R. Kurry, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Essex Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d -14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in the quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated November 6, 2002 /S/ JOSEPH R. KURRY, JR.
-----------------------------------
Joseph R. Kurry, Jr.
Senior Vice President, Treasurer and
Chief Financial Officer
18