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 28, 2004
OR
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
9150 Guilford Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
(301) 939-7000
(Registrant's telephone number, including area code)
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 an accelerated filer (as
defined in Rule 12b-2 of the 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.
OUTSTANDING
CLASS AT APRIL 30, 2004
----- -----------------
Common Stock, no par value per share 15,077,443
ESSEX CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX
o UNAUDITED CONSOLIDATED BALANCE SHEETS
o UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
o UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
o NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
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ESSEX CORPORATION
CONSOLIDATED BALANCE SHEETS
March 28, December 28,
2004 2003
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 29,512,904 $ 31,835,294
Accounts receivable, net 9,858,983 3,969,601
Prepayments and other 529,074 146,517
------------- -------------
Total Current Assets 39,900,961 35,951,412
------------- -------------
PROPERTY AND EQUIPMENT
Computers and special equipment 1,327,126 1,226,349
Furniture, equipment and other 258,987 250,138
------------- -------------
1,586,113 1,476,487
Accumulated depreciation and amortization (1,159,759) (1,107,790)
------------- -------------
Net Property and Equipment 426,354 368,697
------------- -------------
OTHER ASSETS
Goodwill 2,998,000 2,998,000
Patents, net 327,231 333,648
Other intangibles, net 15,000 50,141
Other 34,056 23,764
------------- -------------
Total Other Assets 3,374,287 3,405,553
------------- -------------
TOTAL ASSETS $ 43,701,602 $ 39,725,662
============= =============
The accompanying notes are an integral part of these statements.
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ESSEX CORPORATION
CONSOLIDATED BALANCE SHEETS
March 28, December 28,
2004 2003
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,642,948 $ 694,434
Note payable -- 100,000
Accrued wages and vacation 807,304 898,498
Accrued retirement plans contribution payable 162,511 298,551
Billings in excess of costs 425,000 462,000
Other accrued expenses 302,705 522,538
Capital leases -- 4,390
------------ ------------
Total Current Liabilities 5,340,468 2,980,411
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, no par value; 25 million
shares authorized; 15,052,536 and
15,241,257 shares issued and
outstanding, respectively 50,308,053 49,004,021
Additional paid-in capital 2,000,000 2,000,000
Accumulated deficit (13,946,919) (14,258,770)
------------ ------------
Total Shareholders' Equity 38,361,134 36,745,251
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 43,701,602 $ 39,725,662
============ ============
The accompanying notes are an integral part of these statements.
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ESSEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 28, 2004 AND MARCH 30, 2003
UNAUDITED
2004 2003
-------------- --------------
Revenues:
Services and products $ 8,268,551 $ 3,001,334
Purchased hardware 5,972,554 --
-------------- --------------
Total 14,241,105 3,001,334
-------------- --------------
Costs of goods sold and services provided:
Services and products (6,135,003) (2,042,211)
Purchased hardware (5,860,082) --
-------------- --------------
Total (11,995,085) (2,042,211)
-------------- --------------
Gross Margin 2,246,020 959,123
Selling, general and administrative expenses (1,834,290) (785,874)
Research and development (140,459) (131,946)
Amortization of other intangible assets (35,141) (45,726)
-------------- --------------
Operating Income (Loss) 236,130 (4,423)
Interest income (expense), net 75,721 (15,658)
-------------- --------------
Income (Loss) Before Income Taxes 311,851 (20,081)
Provision for income taxes -- --
-------------- --------------
Net Income (Loss) $ 311,851 $ (20,081)
============== ==============
Basic Earnings (Loss) Per Common Share $ 0.02 $ (0.00)
============== ==============
Diluted Earnings (Loss) Per Common Share $ 0.02 $ (0.00)
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 15,006,168 8,035,012
Effect of dilution -
Stock options 1,407,023 --
-------------- --------------
Diluted 16,413,191 8,035,012
============== ==============
The accompanying notes are an integral part of these statements.
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ESSEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEK PERIODS
ENDED MARCH 28, 2004 AND MARCH 30, 2003
UNAUDITED
2004 2003
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 311,851 $ (20,081)
Adjustments to reconcile Net Income (Loss) to Net
Cash (Used In) Provided By Operating Activities:
Depreciation and amortization 67,166 38,967
Amortization of other intangible assets 35,141 45,726
Contract revenue/account allowance 60,000 --
Change in Assets and Liabilities:
Accounts receivable (5,949,382) (572,694)
Prepayments and other assets (401,629) 1,457
Accounts payable 2,948,514 378,566
Accrued wages, vacation and retirement (227,234) 39,010
Billings in excess of costs (37,000) --
Other liabilities (201,833) 149,548
------------- -----------
Net Cash (Used In) Provided By Operating
Activities (3,394,406) 60,499
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of SDL -- (154,500)
Purchases of property and equipment (109,626) (32,286)
Proceeds from sale of fixed assets -- 707
------------- -----------
Net Cash Used In Investing Activities (109,626) (186,079)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 1,192,125 --
Note payable (100,000) 100,000
Exercise of stock options 93,907 --
Short-term borrowings/repayments, net -- (133,528)
Payment of capital lease obligations (4,390) (39,766)
------------- -----------
Net Cash Provided By (Used In) Financing
Activities 1,181,642 (73,294)
------------- -----------
CASH AND CASH EQUIVALENTS
Net decrease (2,322,390) (198,874)
Balance - beginning of period 31,835,294 1,030,247
------------- -----------
Balance - end of period $ 29,512,904 $ 831,373
============= ===========
The accompanying notes are an integral part of these statements.
6
ESSEX CORPORATION
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
NOTE 1: General
FISCAL YEAR AND PRESENTATION
These statements cover Essex Corporation (the "Company") and its formerly
wholly-owned subsidiary, Sensys Development Laboratories, Inc. ("SDL"), which
was acquired effective March 1, 2003 and merged into the Company effective
December 30, 2003. The Company is on a 52/53-week fiscal year ending the last
Sunday in December. Years 2004 and 2003 are 52-week fiscal years. All material
intercompany transactions have been eliminated. Certain amounts for 2003 have
been reclassified to conform to the 2004 presentation.
The information furnished in the accompanying Unaudited Consolidated Balance
Sheets, Consolidated Statements of Operations and 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 considered
necessary for a fair presentation of such information. The operating results for
the thirteen week period ended March 28, 2004 may not be indicative of the
results of operations for the year ending December 26, 2004, or any future
period. This financial information should be read in conjunction with the
Company's 2003 audited consolidated financial statements and footnotes thereto,
included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
USE OF ESTIMATES
The preparation of the consolidated 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 these
estimates.
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 in research and
development. 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 reduced by contingently
returnable shares. Diluted earnings per common share incorporates the
incremental shares issuable upon the assumed exercise of stock options and
warrants. As of March 28, 2004 and March 30, 2003, the effect of the incremental
shares from options, warrants and contingent shares (if applicable) of 110,600
and
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ESSEX CORPORATION
4,170,105, respectively, have been excluded from diluted weighted average shares
as the effect would have been antidilutive.
NOTE 3: Common Stock
The Company completed a follow-on public offering in December 2003 and issued
4,000,000 shares of common stock. The Company received net proceeds of $31.4
million. In January 2004, the underwriters exercised their over allotment option
and the Company sold an additional 150,000 common shares and received net
proceeds of $1.2 million.
In connection with the acquisition of SDL, the Company had issued approximately
422,000 common shares into escrow. These shares were to be released to certain
SDL shareholders or returned to Essex based upon certain factors, principally
the future market price of the Company's stock. During the first quarter of
2004, the 422,000 shares in escrow were returned to the Company in accordance
with the terms of the purchase agreement.
NOTE 4: Stock-Based Compensation
The Company accounts for stock options granted to employees and directors using
the intrinsic value based method of accounting. Under this method, the Company
does not recognize compensation expenses for the stock options because the
exercise price is equal to the market price of the underlying stock on the date
of the grant. If the Company had used the fair value based method of accounting,
net earnings and earnings per share would have been reduced to the pro forma
amounts listed in the table below. The Black-Scholes option pricing model was
used to calculate the pro forma stock-based compensation costs. For purposes of
the pro forma disclosures, the assumed compensation expense is amortized over
the option's vesting periods. The pro forma information is consistent with
assumptions used in the year end calculations. Accordingly, net income (loss)
and earnings (loss) per share would be as follows:
Thirteen Week Periods Ended
-------------------------------------
March 28, 2004 March 30, 2003
--------------- --------------
Net income (loss), as reported $ 311,851 $ (20,081)
Less: Total stock-based employee
compensation expense determined under
fair value based method 761,253 191,744
--------------- --------------
Pro forma loss $ (449,402) $ (211,825)
=============== ==============
Earnings (loss) per share:
Basic-as reported $ 0.02 $ (0.00)
Basic-pro forma $ (0.03) $ (0.03)
Diluted-as reported $ 0.02 $ (0.00)
Diluted-pro forma $ (0.03) $ (0.03)
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ESSEX CORPORATION
NOTE 5: Amortization of Other Intangible Assets
In connection with the March 1, 2003 acquisition of SDL, there was $431,000 of
value assigned primarily to contracts backlog. Amortization of $46,000 was
recognized in March 2003; $128,000 in the quarter ended June 2003; $121,000 in
the quarter ended September 28, 2003 and $86,000 in the quarter ended December
28, 2003. Amortization of $35,000 was recognized in the first quarter of 2004.
NOTE 6: Income Taxes
The Company is in a net operating loss (NOL) carryforward position for book and
tax purposes. The Company had a deferred income tax asset valuation allowance of
$3.5 million and $4.3 million at December 28, 2003 and December 29, 2002,
respectively. Income tax expense reconciled to the tax computed at statutory
rates is as follows:
2004 2003
--------------- ---------------
First Quarter First Quarter
--------------- ---------------
Income tax expense (benefit) at
federal corporate rates $ 106,000 $ (7,000)
Valuation allowance (106,000) 7,000
--------------- --------------
Provision for income taxes $ -- $ --
=============== ==============
The evaluation of the realizability of such deferred tax assets in future
periods is made annually at year end based upon a variety of factors for
generating future taxable income, such as intent and ability to sell assets and
historical and projected operating performance. The Company has established a
valuation reserve for all of its deferred tax assets. Such tax assets are
available to be recognized and benefit future periods.
NOTE 7: Acquisition
In April 2004, the Company agreed to acquire 100% of the common stock of
Computer Science Innovations, Inc. ("CSI"), which is headquartered in Melbourne,
Florida, for approximately $8.1 million in cash. CSI has proprietary techniques,
algorithms and tools that are used to build custom "cognitive engines" for a
broad range of intelligence, defense and commercial customers and applications.
CSI had revenue of approximately $7.5 million in its fiscal year ended March 31,
2004. The Company expects to close this transaction during the second quarter of
2004, subject to customary closing conditions.
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ESSEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 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. FOR MORE INFORMATION ON RISK FACTORS, SEE THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 28, 2003.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
INDICATED IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS.
OVERVIEW
Essex Corporation (the "Company") provides advanced optoelectronic and signal
processing services and products for U.S. Government intelligence and defense
customers and communications customers with whom we have established and
maintained long-standing and successful relationships. The Company provides
optoelectronic and signal processing services to classified U.S. Government
customers under next generation research and development contracts. The Company
supports the intelligence community's mission critical voice and video systems
infrastructure. The Company provides systems fabrication, software integration,
testing, field deployment and other engineering services to highly classified
U.S. Government customers. The Company builds optical communications and
networking system elements and components, as well as signal and image
processing software products. While the Company has historically sold our
products to the intelligence and defense markets, we believe our existing
products and our patent portfolio position us well to benefit from spending on
next generation technology that decreases the costs and increases the speed,
performance and security of existing communications networks.
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 contract. For the three months ended March 28, 2004 and March
30, 2003, revenues derived from U.S. Government programs were $14.2 million, or
100%, and $2.9 million, or 96%, of the Company's revenues, respectively. The
Company received a substantial amount of its intelligence and defense community
revenues for 2004 and 2003 from sole source contracts.
The Company's most significant expense is its cost of goods sold and services
provided, which consists primarily of direct labor and associated costs for
program personnel and direct expenses incurred to complete contracts, including
the cost of materials and equipment and subcontract efforts. The Company's
ability to accurately predict personnel requirements, salaries and other costs,
as well as to manage personnel levels and successfully redeploy personnel, can
have a significant impact on its cost of goods sold and services provided.
Selling, general and administrative expenses consist primarily of costs
associated with the Company's management,
10
ESSEX CORPORATION
finance and administrative groups and business development expenses which
include bid and proposal efforts, and occupancy, travel and other corporate
costs.
STATUS
The Company has experienced significant growth in its U.S. Government business
and has been actively pursuing growth strategies from internal efforts and
external merger sources. These efforts have resulted in profitable operations
for the first three months of 2004 and fiscal 2003. The Company completed,
effective March 1, 2003, the acquisition of Sensys Development Laboratories,
Inc. ("SDL"), a Maryland-based provider of system and software engineering
support services. This merger added over 25 highly skilled professionals to the
Company's staff and approximately $6 million of annual revenue for 10 months in
2003. In April 2004, the Company agreed, subject to customary closing
conditions, to acquire 100% of the common stock of Computer Science Innovations,
Inc. ("CSI"), which is headquartered in Melbourne, Florida, for approximately
$8.1 million in cash. CSI has proprietary techniques, algorithms and tools that
are used to build custom "cognitive engines" for a broad range of intelligence,
defense and commercial customers and applications. CSI had revenue of
approximately $7.5 million in its fiscal year ended March 31, 2004. The Company
expects to close this transaction during the second quarter of 2004.
In October 2003, the Company was awarded a new defense-related contract for
approximately $57 million over 4 years (a 3 month base period plus 4 option
years). This is a delivery order contract for software and systems engineering
and the delivery of custom systems to national priority programs. The Company is
the prime contractor and there are numerous team members/subcontractors who will
work on this program.
The Company continues to patent, develop and commercialize its key leading-edge
optical technologies, principally the fiberoptic HYPERFINE WDM devices and
wireless optical processor enhanced receiver architecture (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.
Prototypes of the HYPERFINE WDM technology are being demonstrated to prospective
strategic partners and investors. During the first nine months of 2003, the
Company sold ten of its initial HYPERFINE WDM family devices consisting of five
prototype demultiplexers and five of the new flat-top HYPERFINE WDM devices for
use in building advanced optical code division multiple access (OCDMA) systems
for $457,000 to several government and intermediate customers. The Company is
also developing applications for using HYPERFINE WDM to achieve privacy in an
all optical network. The Company is developing simulations of its OPERA(TM)
wireless receiver device technology and is undertaking to determine the various
market entry points for such device technology. The Company is also holding
discussions with various established entities that are in the wireless
communications market in order to determine the best communications applications
of such technology.
The Company was awarded a patent for its HYPERFINE WDM technology in August
2003. In light of the continued unfavorable conditions in the communications
markets, the market for our optical technologies and products has been slow in
developing; however, we sold in fiscal 2003 the first 10 HYPERFINE WDM family
devices to our customers in the intelligence and defense
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ESSEX CORPORATION
communities. As noted above, we are significantly expanding our U.S. Government
business base. The expansion is designed to take advantage of our government
contracting experience and technical expertise and the increased government
contracting activity in the defense, intelligence and homeland security areas.
We are also pursuing sales of HYPERFINE WDM in communications markets and other
optical technologies in the government marketplace.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires the Company 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
on-going basis, the Company re-evaluates its estimates, including those related
to revenue recognition, R&D, inventories, intangible assets, income taxes and
contingencies. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be 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. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its financial statements.
REVENUE RECOGNITION
The Company enters into three types of U.S. Government contracts: cost plus
fixed fee, fixed price and time and material. The Company recognizes revenue on
cost plus fixed fee contracts to the extent costs are incurred plus a
proportionate amount of fee earned. The Company must determine that the costs
incurred are proper and that the ultimate costs incurred will not overrun the
expected funding on the contract and still deliver the scope of work proposed.
Even though cost plus fixed fee contracts generally do not require that the
Company expend costs in excess of the contract 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, the Company must determine that the indirect costs are properly accounted
for and allocated in accordance with government cost accounting requirements. On
fixed price service contracts, the Company 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 contract and the
required hours will be delivered. On fixed price product orders, revenue is not
recorded until the Company determines that the goods have been delivered and
accepted by the customer. On time and material contracts, revenue is recognized
to the extent of billable rates multiplied by hours delivered, plus other direct
costs. This is generally the most straightforward revenue computation. The
Company uses historical technical performance experience where applicable to
evaluate progress on fixed price and cost plus fixed fee jobs. The Company uses
historical government audit experience in the indirect cost area to evaluate the
propriety and expected recovery of its indirect costs on cost plus fixed fee
contracts.
RESEARCH AND DEVELOPMENT
The Company has expended significant amounts for research and development for
new products. In accordance with generally accepted accounting principles, the
Company expenses and does not capitalize and add to inventory such expenditures.
When product design and prototypes are finalized and product marketability and
viability have been established, expenditures for
12
ESSEX CORPORATION
inventory are treated accordingly. There is a judgmental aspect to this decision
which could result in the over-expensing in some cases or the early
capitalization in other cases of such expenditures.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's business acquisitions typically result in goodwill and other
intangible assets, which affect the amount of future period amortization expense
and possible impairment expense that the Company will incur. The Company has
adopted Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill
and Other Intangible Assets", which requires that the Company, 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
judgment is required in calculating the fair value of the reporting units.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
items in the statement of operations in relation to revenue.
Thirteen Week Periods Ended
(unaudited)
------------------------------------------------------
March 28, 2004 March 30, 2003
------------------------- --------------------------
Revenues:
Services and products 58.1% 100.0%
Purchased hardware 41.9 --
------------ ------------
Total 100.0 100.0
Costs of goods sold and
services provided:
Services and products (74.2) (68.0)
========== ===========
Purchased hardware (98.1) --
========== ===========
Total (84.2) (68.0)
------------ ------------
Gross Margin 15.8 32.0
Selling, general and
administrative expenses (12.9) (26.2)
Research and development (1.0) (4.4)
Amortization of other
intangible assets (0.2) (1.5)
------------ ------------
Operating income (loss) 1.7 (0.1)
Interest income (expense),
net 0.5 (0.5)
------------ ------------
Income (loss) before income 2.2 (0.6)
taxes
Benefit (provision) for income
taxes 0.0 0.0
------------ ------------
Net income (loss) 2.2% (0.6)%
============ ============
REVENUES. Total revenues were $14.2 million and $3.0 million in the first
quarters of fiscal 2004 and 2003, respectively. The key factors for the higher
revenue were the increased activity on the October 2003 $57 million multi-year
award and the January 2004 $4.5 million two-year award for
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ESSEX CORPORATION
software and systems engineering and the delivery of custom systems to national
priority programs. Revenues from these two awards in the first quarter of 2004
were $9.2 million and $1.6 million, respectively, total $10.8 million of which
$6.0 million was for purchased hardware. There was no comparable purchased
hardware revenue in the first quarter of 2003. The Company's communications
services contracts contributed $1.1 million of revenues in the first quarter of
2004 and $0.6 million of revenues for the same period in fiscal 2003.
COST OF GOODS SOLD AND SERVICES PROVIDED ("CGS"). Total CGS provided increased
$10.0 million to $12.0 million for the first quarter of 2004 from $2.0 million
for the comparable period in 2003. As a percentage of total revenues, total CGS
was approximately 84.2% for the first quarter of 2004, compared to approximately
68.8% for the comparable period in fiscal 2003. For services and products
revenue, CGS was 74.2% for the first quarter of 2004 as compared to 68.0% for
the comparable period in 2003. In the first quarter of 2004, there was a
significant increase in subcontractor costs for the two large customer systems
programs. On these two contracts combined there were subcontractor costs of $3.6
million. For purchased hardware revenues, CGS was 98.1% in the first quarter of
2004 and there were no comparable purchases in the first quarter of 2003. The
Company receives a lower markup on subcontractors work and purchased hardware.
Overall, the higher volume during the first quarter of 2004 contributed a larger
amount of gross profit, though at lower gross profit percentages.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million to $1.8 million for the first
quarter of 2004 from $0.8 million for the comparable period in 2003. The
increase was partially due to higher management and related costs in the
government contracts area and increased business development as well as
continuing costs in the optoelectronics and communications new device business
areas.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
$9,000 to $141,000 in the first quarter of 2004 compared to $132,000 in the
comparable period in 2003. The Company incurred the majority of its research and
development on efforts related to optical communications technology.
AMORTIZATION OF OTHER INTANGIBLE ASSETS. During the first quarter of 2004,
amortization of other intangible assets was $35,000, all of which was related to
the SDL acquisition. There was $46,000 amortization costs in the comparable
period in 2003 relating to SDL. The amortization of other intangibles related to
this acquisition is substantially complete.
NET INTEREST INCOME (EXPENSE). Net interest income was $76,000 in the first
quarter of 2004 compared to net interest expense of $16,000 in the comparable
period in 2003. The net interest income reflects the temporary investment of the
$32 million of proceeds from the stock offering.
NET INCOME (LOSS). The Company recorded net income of $312,000 and a net loss
$20,000 in the first quarters of 2004 and 2003, respectively. The Company is in
a net operating loss carryforward position for book and tax purposes. No
provision for or benefit from income taxes was recognized in the first quarters
of 2004 or 2003 due to the net operating loss carryforwards. We adjusted our
income tax valuation reserves accordingly during these periods.
14
ESSEX CORPORATION
BACKLOG
As of March 28, 2004, the Company had total contract backlog, funded and
unfunded, of approximately $102.0 million as compared with $112.8 million at
December 28, 2003. Of these amounts, funded backlog was $31.3 million and
unfunded backlog was $70.7 million at March 28, 2004 compared to $15.0 million
and $97.8 million, respectively, at fiscal year end 2003. Of the unfunded
backlog at March 28, 2004, approximately $18.5 million represents the remaining
balance of a $25.0 million U.S. Government Indefinite Delivery Indefinite
Quantity, or IDIQ, contract through May 2007 to provide technology to enhance
Department of Defense radar programs. Unfunded backlog as of March 28, 2004 also
includes the remaining balance of approximately $22.9 million on our $30
million, ten-year contract to provide communications systems support to the
intelligence community. Unfunded backlog at March 28, 2004 also includes the
remaining balance of approximately $24.8 million on our $57.1 million multi-year
contract for software and systems engineering that we received in October 2003.
Funded backlog generally consists of the sum of all contract amounts of work for
which funding has been approved and contracts signed, less the value of work
performed under such contracts.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity and capital resource needs are to finance the costs of our
operations including research and development, to make capital expenditures, and
to finance acquisitions. Based upon our current level of operations, we expect
that our cash flow from operations and amounts of cash on hand will be adequate
to meet our anticipated needs for the foreseeable future.
The Company evaluates its liquidity position using various factors. The
following represents some of the more important factors:
SELECTED FINANCIAL DATA AS OF
(In thousands)
-----------------------------------------------
March 28, December 28, March. 30,
2004 2003 2003
------------- ------------ -------------
Total Assets $ 43,702 $ 39,726 $ 7,587
============= ============ =============
Working Capital $ 34,560 $ 32,971 $ 883
============= ============ =============
Current Ratio 7.47:1 12.06:1 1.34:1
============= ============ =============
Advance from Accounts Receivable
Financing $ -- $ -- $ 36
Capital Leases -- 4 36
Convertible Debt -- -- 500
Other Debt -- 100 100
------------- ------------ -------------
Total Debt/Financing $ -- $ 104 $ 672
============= ============ =============
Shareholders' Equity $ 38,361 $ 36,745 $ 4,358
============= ============ =============
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ESSEX CORPORATION
During the first quarter of 2004, net cash used in operating activities was
$3,394,000. Cash provided from net income and non cash depreciation,
amortization and other charges of approximately $474,000 was offset by an
increase in accounts receivable net of the change in accounts payable and
accrued items of $3,868,000. The increase in accounts receivable during the
first quarter of 2004 was due to the increase in sales and does not reflect any
change in payment cycle. The Company's working capital at March 28, 2004
increased to $34.6 million from $33.0 million at fiscal year end 2003. The
increase was primarily a result of the sale of common stock for $1.2 million in
January 2004.
During the first quarter of 2004, net cash used in investing activities was
$110,000 for property and equipment to support our growing work force.
During the first thirteen week period of fiscal 2004, net cash provided by
financing activities of $1.2 million resulted primarily from the sale of common
stock and proceeds from exercises of stock options. (See Note 3 - Common Stock.)
The Company expects to satisfy its operating cash requirements for the remainder
of 2004 from existing cash flows or from its cash balance.
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.
The inflation rate in the United States generally has little impact on the
Company's cost-reimbursable type contracts and other short-term contracts. 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, INVENTORY TURNOVER, 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.
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ESSEX CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no debt outstanding as of March 28, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, Leonard E. Moodispaw, the Company's Chief
Executive Officer and Joseph R. Kurry, Jr., the Company's Chief Financial
Officer, have concluded that the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covered by this report 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 be recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms.
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.
17
ESSEX CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
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.
(b) Reports on Form 8-K
(1) Form 8-K dated February 5, 2004 filing of Company's press release
which announced the Corporation's preliminary revenue results for
the fourth quarter 2003, updated earlier guidance for full year
2003 and plans to release its audited fourth quarter and full year
2003 financial results after market close on March 9, 2004 with a
conference call to follow on March 10th at 10:30 a.m.
(2) Form 8-K dated March 10, 2004 filing of Company's press release
which reported financial results for the fiscal year ended December
28, 2003.
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, 2004
/S/ JOSEPH R. KURRY, JR.
--------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President
Treasurer and Chief Financial Officer
(Mr. Kurry is the Principal Financial and Chief Accounting Officer of the
Registrant and has been duly authorized to sign on behalf of the Registrant.)
18