FORM 10-KSB/A No. 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File No. 0-10772
ESSEX CORPORATION
(Name of small business issuer in its charter)
Virginia 54-0846569
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9150 Guilford Road, Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (301) 939-7000
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Each Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 --- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $3,255,500
----------
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $13,615,459 as of March 6, 2001
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 15, 2001
----- -----------------------------
Common Stock, no par value per share 4,570,361
DOCUMENTS INCORPORATED BY REFERENCE
None
===============================================================================
A list of the Exhibits and Financial Statement Schedules in this Report on Form
10-KSB/A No. 1 appears on page 33.
Transitional Small Business Disclosure Format YES NO X
--- ---
Table of Contents
FORM 10-KSB/A No. 1
Essex Corporation
PART I
Item No. Page
-- INTRODUCTORY STATEMENT................................................ 3
1. DESCRIPTION OF BUSINESS............................................... 3
2. DESCRIPTION OF PROPERTIES..............................................14
3. LEGAL PROCEEDINGS......................................................14
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................14
PART II
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............15
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............15
7. FINANCIAL STATEMENTS...................................................20
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................20
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT......................21
10. EXECUTIVE COMPENSATION.................................................25
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........30
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................32
13. EXHIBITS AND REPORTS ON FORM 8-K.......................................33
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PART I
INTRODUCTORY STATEMENT
The information contained in this report pertains to the registrant, Essex
Corporation (the "Company").
1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
The Company was incorporated in Virginia in 1969 and is headquartered in
Columbia, MD. The Company is an optical and digital signal processing firm that
is developing technologies, components, devices and systems that enable
next-generation products in fast-growing areas of the telecommunications and
microelectronics industries: fiber-optic transmission, wireless
telecommunications, high-speed optoelectronic processors and advanced
semiconductor chips. The Company's products and services incorporate advances
achieved through more than two decades of pioneering work in developing
high-throughput optoelectronic processors and receivers for image, signal and
data processing, and advanced communications applications for U.S. intelligence
organizations.
COMMERCIAL FOCUS
The Company's optoelectronic-engineering team has applied its optical and
digital signal processing experience to critical challenges in the
telecommunications and advanced digital signal processing fields. As a result,
Essex is developing three product lines that it believes have the potential to
provide dramatic improvements in the speed, cost effectiveness and quality of
service for next-generation systems in fiber-optic data transmission, wireless
telecommunications and image processing. These products include:
1) An all-optical, all-passive technique, HYPERFINE WAVE DIVISION MULTIPLEXING
(HYPERFINE WDMTM), that significantly increases the number of channels and
their combined bandwidth used for dense wave division multiplexing (DWDM).
These characteristics make HyperFine particularly suitable for long-haul,
metro and local area data transmission. In addition, other components in
the HyperFine family of devices can be integrated into products throughout
optical networks at very low cost, including add/drop multiplexors,
all-optical switching and bandwidth-on-demand systems. HyperFine will
fulfill the promise of fiber to the home (FTTH) and fiber to the office
(FTTO), as well as provide for many other applications requiring up to 4000
narrow band channels per strand of optical fiber.
2) An optically enhanced digital signal processing technology, OPTICAL
PROCESSOR ENHANCED RECEIVER ARCHITECTURE (OPERATM), dramatically increases
the quality of service and carrying capacity for Code Division Multiple
Access (CDMA) wireless telecommunications systems. The OPERA technology can
revolutionize 2.5G and 3G CDMA systems set for deployment starting in 2002
by eliminating the "near-far" interference problem and allowing
significantly more channels (users) per base station.
3) A high-speed optoelectronic processor, IMAGE SYNTHESIS (IMSYNTM), enabling
extraordinarily fast processing of data for complex visual image systems
including radar imaging, magnetic
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resonance imaging (MRI), microscopy and ultrawideband signal processing. The
second generation ImSyn(TM) optoelectronic processor can accelerate computing
speed for processing of large volumes of data by factors of up to one hundred
times. Specifically, Essex has field tested a prototype ImSyn(TM) Processor with
an MRI system and provided real time images.
CORE TECHNICAL EXPERTISE
The Company's engineering-based approach to solving key bottlenecks for
rapidly growing telecommunications-related industries has its roots in the
Company's previous legacy and current high-level classified work for the U.S.
Government intelligence community. The leaders and key members of the Company's
optoelectronic team invented and fielded successful products for use by the
Intelligence Community before joining the Company. The Company's innovative and
productive optoelectronic team is led by Chief Technical Officer, Terry Turpin.
Mr. Turpin spent the first two decades of his career in the National Security
Agency (NSA). His assignments included developing optoelectronic processors for
fiber optic communications, signal processing, and CDMA telecommunications
systems. Most of his career in NSA was spent in leading the optoelectronic team
in designing and fielding engines to perform signal processing tasks well beyond
the capabilities of conventional computing technology.
The Company's special-purpose optoelectronic processors make use of the
best-proven technology in both Optics and Electronics. Algorithms developed for
carefully selected problems are designed to run optimally in state-of-the-art
optical architectures. The Company's design strategy assures processors that are
optimized for ease of use, speed and low power consumption. Practical solutions
of many commercially valuable processing problems demand economical computing
power provided only by this technology, either in stand-alone products or as
fully compatible elements of digital systems.
Essex has demonstrated its abilities to solve complex communications
systems engineering challenges as a provider of design expertise and engineering
software for Motorola's Iridium(R) and Teledesic(TM) communications systems.
Over the past 6 months, the Company has focused its engineering team primarily
on the development of purely commercial applications for its proprietary
optoelectronic products and services. The Company has dedicated substantial
capital to patent, develop and commercialize products in
telecommunications-related sectors. In telecommunications, the state of
infrastructure deployment and demand for new capacity has created large new
markets for fast, efficient and high-bandwidth technologies such as those
pioneered by Essex. The most commercially advanced of the new products under
development by Essex include HyperFine WDMTM, OPERATM and a second generation
ImSynTM. The Company currently has a wide array of additional optoelectronic
technology under development whose commercial potential is regarded by
management as significant.
BASIC PRODUCTS AND SERVICES
The Company is developing products and services in the fiber optic
networking, wireless telecommunications, and advanced digital signal processing
industries. The Company's product development efforts integrate advanced
concepts from the fields of photonics, signal processing and software
engineering in the design of next generation products for the telecommunications
and semiconductor industries. As a result of this integrated approach, Essex
products will provide for greater bandwidth over existing fiber optic systems,
improved transmission of wireless voice and data systems, and faster processing
of large volumes of data for image
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processing. In addition, the passive nature and expected inexpensive
manufacturing process for the Company's core technologies promote the
development of highly cost-effective devices and components for optical
networking, and the deployment of new advanced-processing capabilities on
silicon chips for applications in wireless communications devices and data
processors. The current array of products and services that integrate the
Company's core expertise include the following sectors of commercial activity.
OPTICAL NETWORKING
Essex is developing advanced passive fiber optic components and modules,
with a focus on wave division multiplexing (WDM). WDM is a method of
transmitting multiple communications channels, each at a different wavelength,
through fiber optic cable. Multiple channels allow use of a greater amount of
available bandwidth within the cable, and dramatically increase the
communication carrying ability of fiber optic telecommunication systems.
Each signal or "channel" in a WDM system carries a separate voice or data
transmission, which is transmitted at a unique wavelength through the fiber
optic cable. Each channel, therefore, requires its own laser, which is tuned to
a specific wavelength. WDM systems were originally designed for eight channels.
Current WDM systems carry over 160 channels. The increased number of channels
has led to a new moniker for WDM, dense wave division multiplexing (DWDM).
Traditionally, DWDM has been a point-to-point transport technology mainly used
by long-haul telecommunication carriers. DWDM has been very successful for
long-haul networks but due to its wideband nature is problematic for dynamic
short-haul networks, such as metro, access, and the last mile, where a different
set of requirements and network topologies exist.
In order to extend the capabilities of DWDM, Essex has developed HYPERFINE
WDMTM - HfWDM, a (patent pending) technology enabling ultra-dense Wave Division
Multiplexing. HfWDM helps to bring all-optical networking to short-haul networks
by channelizing wideband channels into as many as 4,000 or more narrowband
channels of 500 MHz to 2 GHz with the target bandwidth ranges of OC-12 (622
Mbps), Gigabit Ethernet (1.22 Gbps) and OC-48 (2.5 Gbps). This technology will
support channel spacing of 50 MHz to 200 GHz. At narrower bandwidths: expensive
intermediate switching and routing technology layers, such as SONET and ATM are
not needed; bandwidth can be allocated to meet surges in demand; and flexible
network configurations can be designed to accommodate dynamic traffic patterns
and multi-use channel allocation for different types of broadband media. The
Company believes that the use of this passive optical technology will lead to
new families of less expensive optical and digital networking devices, even
bringing optical channels to the desktop. HyperFine is also beneficial to
long-haul networks because narrower bandwidth channels are less sensitive to the
effects of dispersion. HyperFine is an enabling component for high performance
optical and RF test equipment. HyperFine can also be used to monitor optical
networks for activity and laser line control.
COMPETITIVE CHALLENGES: A large number of both active and passive optical
components are required to manufacture DWDM systems, which are growing in
complexity proportional to their increase in bandwidth capacity. It is thus
becoming more difficult for OEM suppliers (Lucent, Nortel, etc.) to design and
manufacture all their own components and modules. This is causing OEMs to
outsource design and manufacturing of components, and to try and minimize the
number of such components needed within the system architecture. However,
interoperability
5
among all components within a system is a necessity - ease of interoperability
reduces complexity, which in turn reduces costs and improves system reliability.
But qualifying vendors and assuring the interoperability of their products comes
with its own complications. Thus OEMs are reducing the number of producers from
whom they source product.
Given this competitive environment, Essex sees the need to design its
photonics products to be interoperable with the product lineup of large and
established component manufacturers that are in the position to integrate
Essex's products into their overall lineups of photonic equipment. The
established manufacturers can then sell components and modules to
telecommunications OEM system and subsystem providers.
WIRELESS TELECOMMUNICATIONS
Essex is designing and developing new products for the wireless
telecommunications industry by drawing on its long experience in the field of
digital signal processing, the electronic manipulation of digitized signals.
System performance problems that frequently plague cellular telephone and other
wireless communication devices can be addressed by creating algorithms
(mathematical programs) that can be performed with great efficiency by advanced
optoelectronic processors such as those designed and successfully built by Essex
for the past decade. The Company designs optoelectronic architectures optimized
for executing such algorithms. These architectures can be constructed by use of
proven optical and electronic components.
The most advanced wireless telecommunications product under development by
Essex is the OPERATM (Optical Processor Enhanced Receiver Architecture). OPERA
is an optoelectronic system (patent pending) for wireless communications that
eliminates interfering signals using optical correlation combined with
Multi-User Detection (MUD) algorithms. OPERA improves CDMA performance by
canceling the interference of other users. This improvement provides increased
capacity and quality of service.
The OPERA system uses advanced optical processing techniques to eliminate
the "near-far" problem. This problem occurs in a CDMA cell when interference
from a "near" transmitter overpowers another user's "far" signal. The current
solution is to construct more transmitters with redundant cell coverage, a
solution that is becoming impractical, particularly in metropolitan areas. OPERA
receives all signals and eliminates all interfering signals using optical
two-dimensional correlation. OPERA allows all users to perform at an error rate
approaching a single transmitter thereby improving the signal to noise ratio and
the quality of the transmission. Improving transmissions with the OPERA
technology could help make CDMA a worldwide standard cellular technology.
COMPETITIVE CHALLENGES: The Company believes that its OPERA technology can
deliver significant improvement of existing and next-generation CDMA-based
wireless communication systems. However, the market opportunity for Essex in
this field may be constrained because a few companies currently dominate the
deployment of CDMA technology for wireless applications. These companies are
significantly larger and have much greater financial and other resources than
the Company. For example, Qualcomm's CDMA technology has been adopted as a
worldwide standard for digital cellular and other wireless devices. Qualcomm
licenses and receives royalty payments on its CDMA technology from more than 80
telecommunications suppliers, and the technology has been deployed in over 40
countries with approximately 67 million total subscribers by the end of 2000.
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HYBRID SIGNAL PROCESSING (HSP) CHIPS
The Company believes that its HSP technology such as that used in OPERA can
be incorporated into high-speed integrated circuits or silicon chips for use in
a wide range of microprocessor and intelligent product applications. For
example, the Company believes that it can develop next-generation integrated
digital telephony (IDT) speech processors. These systems could be used to
communicate over data networks and combined data/voice networks. Essex
technology is adaptable to accommodate packet-based public and private networks
including the Internet, LANs, frame relay and others.
All of the Essex HSP architectures and designs will be used to provide
low-power, high-performance, cost-effective solutions for current and emerging
digital signal processing applications. Essex designs could also be incorporated
into systems designed both for speech processing and for integrated digital
telephony processors. They could be licensed to major chip and microprocessor
companies.
TELECOMMUNICATIONS SYSTEMS ENGINEERING
The Company has provided high-end systems engineering support to government
sponsors and prime contractors in the definition and development of aerospace
communications and reconnaissance systems. The Company has significant
experience in modeling, simulation and analysis of commercial and defense
satellite systems (LEO, MEO, HEO and GEO) that include Iridium(R),
Teledesic(TM), MILSTAR, TDRSS, Intelsat and others. The Company has developed
software for mission planning, payload data processing, geolocation, payload
test and evaluation, and on-board channel management and data routing.
System modeling and simulation supports the entire system life cycle,
including system definition, performance analysis, space segment definition and
ground segment design. The Company has developed custom models for the design
and analysis of mobile voice and wideband data systems, and has developed
algorithms for communications system operations.
The Company's satellite system models consist of several integrated
software modules hosted on a Silicon Graphics computer network. The satellite
orbital propagation and geometry software module models the coverage and
performance aspects of multiple vehicle constellations, including single or
statistical events, motion and pointing effects and comparisons of
constellations. They deal with passive geolocation, time difference of arrival,
frequency difference of arrival, time of arrival, frequency of arrival, angle of
arrival and numerous error sources, and provide automated link budget
computation. The geographical software module plots parameter versus parameter
outputs from other modules. The mapping module plots data and contours from
other computational modules on map backgrounds. It provides selectable
projections, user-specified levels of detail and various antenna patterns.
HIGH-SPEED DATA PROCESSING EQUIPMENT
Another application of Essex expertise in optoelectronics is an advanced
high-speed, high-performance processor for image processing applications. This
product derives from the early 1990s, when Essex embarked on a vigorous internal
program to develop proprietary optoelectronic processors with significant
performance advantages over conventional computers and specialized
7
image processing devices in such applications as radar imaging, magnetic
resonance imaging (MRI), microscopy and ultrawideband signal processing. Several
patents have been issued to the Company and others are in prosecution. By 1997,
the Company had developed a limited number of its processor units.
IMSYN(TM), which stands for image synthesis, is a high performance
processor for real-time image processing applications. The processor is a hybrid
of high-speed electronics and optics that computes the discrete Fourier
transform. A comparative performance level for an all-digital processor is 1.6
teraflops. The completed unit weighs 60 pounds and only uses 350 Watts of power,
far less than an equivalent all-digital supercomputer.
Six prototype units of the ImSyn(TM) processor were completed between 1996
and 1998. They were installed in several government locations for synthetic
aperture radar processing, and in two university hospitals for processing
high-speed magnetic resonance imaging (MRI) data. The Company is currently
developing the second-generation system for commercial product release. In
addition, the Company continues to make a limited number of such optoelectronic
processors available for sale to commercial and government markets while seeking
strategic partnerships or outside financing to further develop these
applications into commercially viable products.
OTHER BUSINESS INFORMATION
MARKETING AND FINANCING
In September 2000, the Company closed on a private placement funding
transaction. Under the terms of the funding, the Company received $1,250,000 in
2000 and will receive another $750,000 over the first nine months of 2001 from
GEF Optical Investment Company, LLC and Networking Ventures, L.L.C. (the
"Investor Group"). The Company also received a separate additional investment of
$400,000 in December 2000 from the Investor Group. The funds are to be used
substantially to patent, develop and commercialize its key leading-edge optical
technologies, principally HfWDM and OPERA. (See Management's Discussion and
Analysis section and Liquidity and Capital Resources for further details about
the private placement.)
Although constrained by limited financial resources, the Company's
commercial marketing has expanded through use of internal staff and consultants.
Military end-use marketing continues to be carried out by key employees, both
directly to government agencies and indirectly through prime contractors,
through the submission of proposals. Such proposals may be in response to
customer requests while others are unsolicited proposals by the Company to
potential customers to solicit new work.
ESSEX CHALLENGES
The above applications and exploratory activities are being developed as
funding becomes available. At the same time the Company is seeking strategic
partnerships with companies active in applicable markets. The Company is also
seeking additional government contracts, particularly in the ImSyn(TM) processor
area.
RECENT DEVELOPMENTS
On March 15, 2001, the Company negotiated an additional investment of $2
million with its two major investors, Networking Ventures, L.L.C. and GEF
Optical Investment Company LLC. The additional investment is structured as a
private placement of 500,000 shares of Essex common
8
stock. The funds will be received in four equal installments during 2001 with
the first payment in late March 2001. The proceeds will primarily be used to
expand development in the Company's optoelectronic telecommunications device
technologies.
CONTRACT MIX
Services of the Company are performed under cost-reimbursement (45% and 39%
in 2000 and 1999, respectively), time and material (33% and 57% of revenues in
2000 and 1999, respectively) or fixed-price (22% and 4% in 2000 and 1999,
respectively) contracts and subcontracts. Fixed-price contracts have a greater
degree of risk and higher potential reward than cost-type contracts since the
Company is obligated to provide specific deliverables within the confines of the
contracted price.
GOVERNMENT PROGRAMS
Historically, a significant portion of the Company's revenues have been
derived from contracts, or subcontracts thereunder, with departments or agencies
of the U.S. Government, primarily the military services and other departments
and agencies of the Department of Defense (DoD). In 2000 and 1999, approximately
73% and 49%, respectively, of the Company's total revenues were derived from
government DoD contracts or subcontracts. Government military programs include
work principally with the Army, and to a lesser extent with the Air Force, Navy
and other DoD entities. The Company also works with industrial companies,
engineering firms, equipment manufacturers and research institutions.
The Company's business is focused increasingly upon applications of its
proprietary optoelectronics technology and products. Work based on the patented
ImSyn(TM) Processor has continued on a key DoD program and an application
contract by the Defense Advanced Research Projects Agency (DARPA) for the
development of advanced synthetic aperture radar (SAR) techniques. This effort
is a Phase 2 Small Business Innovation Research Program (SBIR). The approximate
value of the contract is $730,000, incrementally funded over 2 years.
During early 2000, the Company was awarded several contracts for Small
Business Innovation Research and a similar program that deal with ImSyn(TM)
Processor applications. The first award was to develop a proof-of-concept
electro-optic channelizer for the DoD. It has applications in radar processing
and wideband signal processing. This program was a 9-month, $350,000 effort.
Naval Air Warfare Center, Patuxent Naval Air Station awarded Essex a contract to
install certain performance upgrades in its ImSyn(TM) Processor. This second
award was in support of the Naval Air Warfare Center Advanced Development NP-3
Synthetic Aperture Radar (SAR) program. This 18-month program is a $600,000
Phase 2 SBIR effort. A third award from the U.S. Army Space Missile Defense
Command for $750,000 over 2 years is to create related algorithms for enhanced
2D or 3D imaging using Essex optical hardware processing and techniques.
COMMERCIAL PROGRAMS AND PRODUCTS
Presently, the Company's commercial business is focused increasingly upon
applications of its proprietary optoelectronics and products, particularly in
telecommunications applications. The Company is using its funds to patent,
develop and commercialize its fiberoptic HyperFine Wave Division Multiplex
channelizers and wireless Optical Processor Enhanced Receiver Architecture.
9
The Company is using customer funds, principally U.S. Government research and
development funding, to enhance and improve its ImSyn(TM) processor device for
directed government customer applications and for potential application for
commercial customers.
The Company has a laboratory model of the HfWDM which is being demonstrated
to prospective strategic partners and investors. The Company is developing
simulations of its OPERA wireless receiver device technology and is undertaking
to determine the various market entry points for such device technology. The
Company is also having discussions with various established commercial entities
that are in the wireless communications market in order to determine the best
commercial applications of such technology.
A significant portion of the Company's revenues in prior years had come
from support of Motorola communications satellite programs. The Company assisted
initially in the design and then in the operational improvement of the
Iridium(R) satellite constellation that was to provide global wireless
communications to handheld telephones and pagers. The Company's engineers
developed and used software to model satellite and intersatellite communications
links to assess system capacity and availability, and helped develop
channel-assignment algorithms for maximizing system capacity. The Company has
also been involved in modeling and simulation support in the design of the
Teledesic(TM) "internet in the sky" satellite data communications systems for
Motorola. The Company's work for Motorola substantially ended in 1999 although a
modest amount of work was done in 2000. Such work generated over 23% ($733,000)
of revenues in 2000 and 45% ($2.2 million) in 1999. The Company is continuing
its efforts to rebuild satellite communications engineering backlog, which was
$232,000 at yearend 2000.
PATENTS
The Company has a significant patent portfolio covering the core
intellectual property for the Company's products. The portfolio is divided into
five technology groups: HyperFine WDMTM, OPERATM, ImSynTM, Virtual Lens Sensor
TechnologyTM (VLST) and True Time Delay Beam Formation. During the past six
months, six patent applications have been filed, three full applications and
three provisional applications.
The Company believes that its patents and patent applications provide it
with a competitive advantage. Accordingly, in the event the Company's products
and technologies under development gain market acceptance, patent protection
would be important to the Company's business. However, obtaining patent and
other intellectual property protection may not adequately protect our rights or
permit us to gain or keep any competitive advantage. For instance, unauthorized
parties may attempt to copy, reverse engineer or otherwise obtain and use our
patented products or technology without our permission, thus eroding or
eliminating the competitive advantage we hope to gain through the exclusive
rights provided by patent protection. Moreover, our existing patents and patents
we have applied for (if granted) may not protect us against competitors that
independently develop proprietary technologies that are substantially equivalent
or superior to our technologies, or design around our patents. In addition, the
competitive advantage provided by patenting our technology may erode if we do
not upgrade, enhance and improve our technology on an ongoing basis to meet
competitive challenges.
HYPERFINE WDMTM
The first HyperFine U.S. patent was filed on October 13, 2000 and covers
the use of the device as a receiver and demultiplexer for wavelength division
multiplexing fiber optic networks. Two
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HyperFine provisional patents were filed on January 22, 2001 for an add/drop
multiplexer device and use of the HyperFine technology for optical CDMA.
OPERATM
The Optical Processor Enhanced Receiver Architecture (OPERA) application
was filed with the U.S. Patent office on January 19, 2001. OPERA is an
optoelectronic system for wireless communications that eliminates interfering
signals using optical correlation combined with Multi-User Detection (MUD)
algorithms.
IMSYNTM
There are currently four ImSyn(TM) patents which have issued in the U.S.
The first three patents cover the optoelectronic architecture and application of
the product ImSyn(TM) including accelerating image reconstructions for synthetic
aperture radar and magnetic resonance imaging. The claims in the fourth patent
cover the sensing and reconstruction techniques of the Virtual Lens
Microscope(TM) (VLM) product which is part of the company's VLST technology
family. The VLM has application for semiconductor inspection, ground penetrating
radar, biomedical imaging, and non-destructive testing.
The first ImSyn(TM)U.S. Patent No. 5,079,555, "Sequential Image
Synthesizer", includes 20 claims and expires January 7, 2009. The corresponding
patent, No. 2,058,209, issued in Canada, expires November 25, 2011. The
corresponding European patent for a subset of the claims, No. 0543064, is in
force in Great Britain and Germany, and will expire November 21, 2011. Japan has
issued Patent No. 3113338 for the same claims as the U.S. version and it will
expire on October 29, 2011.
The second ImSyn(TM)patent, U.S. Patent No. 5,384,573, "Image Synthesis
Using Time Sequential Holography" includes 157 claims and expires on January 24,
2012. Two patents, for a subset of the U.S. claims, are in process in Europe.
Japanese and Canadian versions are also in the examination stage.
The third ImSyn(TM)U.S. Patent No. 5,736,958, "Image Synthesis Using Time
Sequential Holography", with 8 claims expires April 7, 2015.
The fourth ImSyn(TM)U.S. Patent No. 5,751,243, "Image Synthesis Using Time
Sequential Holography" with 21 claims expires May 11, 2015.
VIRTUAL LENS SENSOR TECHNOLOGYTM (VLST)
The ImSyn(TM) U.S. Patent No. 5,751,243 discloses the Virtual Lens
Microscope, a 2D and 3D sensing and reconstruction technique called the
Synthetic Aperture Microscope at the time of the patent. On December 11, 2000 a
provisional patent was filed in the VLST family entitled "Efficient Fourier
Transform Algorithm For Non-Uniform Data".
TRUE TIME DELAY BEAM FORMATION
Three U.S. patents for the invention of the True Time Delay Beamformer
(TTD) have been issued to the Company. U.S. Patent No. 5,202,776 expires on
April 13, 2010. U.S. Patent No. 5,390,046 expires on February 14, 2012. U.S.
Patent No. 5,623,620 expires on April 22, 2014. TTD enables accurate electronic
steering of exceedingly broadband array antennas for aircraft, space, maritime
and ground systems. At the current time, the Company is not using this
technology for any products.
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COMPETITION
Competition for U.S. Government and commercial professional and technical
services contracts has grown in intensity and proposals have become increasingly
costly. This stimulated the Company to initiate its program to develop
proprietary products and services, particularly for the commercial market. As
such proprietary items are developed, the Company has relied increasingly upon
offers of its specialized optical engineering capabilities, sharply reducing
resources applied in response to proposals for solely professional and technical
services. Examples of such proprietary items include HyperFine WDM and OPERA as
well as ImSyn(TM) processors.
Market acceptance of Essex optical products and technology has not yet been
accomplished. The Company only began in late 2000 to announce the capabilities
of its HfWDM and OPERA technologies. Since then, the Company has been in contact
with major telecommunications firms who are users and/or supplies of equipment
and services where the Company's technology would be beneficial. In the
telecommunications industry, all the largest international telecommunications
firms such as Lucent, Nortel, WorldCom, and all the largest international fiber
optic equipment manufacturers and suppliers such as JDS Uniphase, SDL, Avanex,
Ciena and Corvis, have the ability to produce competing products in the
specialty areas which Essex technology and products would address. These
companies are all larger and well established and have existing customer bases.
Essex will likely have to partner with or license to one of the major industry
entities in order to successfully introduce its technology and products.
In business areas where ImSyn(TM) processors could be utilized, Essex is
just beginning to express itself outside the development laboratory and is not
yet firmly in the market. ImSyn(TM) processors are undergoing enhancement
development and testing which are not expected to be completed until late 2001
or early 2002. As far as the world of systems integration is concerned, Essex
ImSyn(TM) products are not yet widely known or available. When performing
desired functions using conventional technology (e.g. high-end workstations,
array processors or digital signal processors boards) takes too long or costs
too much, designers do not specify those functions. When Essex offers
cost-effective means of providing such functions, system integrators can state,
correctly, that there is "no requirement" for them within the design
specifications. That means that no expenditure is justified, no matter what the
gain in system effectiveness may be. Such design limitations are a key obstacle
to market penetration by the Company's products. Large electronic systems
integrators such as Lockheed Martin, Boeing, Motorola, Raytheon, TRW, General
Electric, Siemens and Hughes Telecom control an immense portion of the markets
of interest to Essex. As systems integrators, they also specify the requirements
for commercial military and space products. These companies determine which
suppliers' products become a part of military and other systems. To the extent
Essex is able to further develop ImSyn(TM) processors and promote their
utilization in specific applications, integrators will have an opportunity to
consider specifying them.
BACKLOG
As of December 31, 2000, the Company had a total backlog (funded and
unfunded) of approximately $1,229,000 as compared with $787,000 at December 26,
1999. Of these amounts, all backlog was funded at yearend 2000 as compared to
$435,000 funded and $352,000 unfunded at yearend 1999. 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
12
such contracts. Even though such contracts are fully funded by appropriations,
they are subject to other risks inherent in government and commercial contracts,
such as termination for the convenience of the customer.
RESEARCH AND DEVELOPMENT
The Company incurred and expensed approximately $775,000 and $500,000 in
2000 and 1999, respectively, on internally-funded research and development
activities.
EMPLOYEES
As of February 28, 2001, the Company had approximately 40 employees, of
whom 25 were full-time employees.
13
2. DESCRIPTION OF PROPERTIES
OFFICE FACILITIES
The Company leases its offices. The Company's corporate headquarters and
offices are located in a one-story building at 9150 Guilford Road, Columbia,
Maryland where the Company occupies approximately 18,000 square feet. The lease
is through October 2005. The Company believes that its present facility is
adequate for its current business needs.
EQUIPMENT
The Company owns a variety of computer workstations, test equipment,
microcomputers, printers and reproduction equipment. The Company leases computer
workstations in support of customer work. Other computer hardware and software,
test equipment, word processing and reproduction equipment used by the Company
are leased.
OPTOELECTRONICS LABORATORY
The laboratory consists of optical hardware and computer hardware and
software, optical benches and test equipment. The laboratory includes the
physical property which demonstrates and tests the capabilities of the Company's
patent-pending HyperFine WDM(TM) and OPERA(TM) and patented Image Synthesizer
(ImSyn(TM)) technology as well as other optoelectronic devices and applications.
3. LEGAL PROCEEDINGS - None
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 4, 2000, the Company held its 2000 Annual Meeting of
Shareholders. At the meeting, each member of the Board of Directors was elected
to serve until the next annual meeting or until their successors are duly
elected and qualified. The votes cast and withheld for each such director were
as follows:
FOR WITHHELD
---------------- -----------------
John G. Hannon 8,193,952 123,934
Robert W. Hicks 8,193,352 124,534
Ray M. Keeler 8,193,352 124,534
H. Jeffrey Leonard 8,193,552 124,334
Frank E. Manning 8,193,127 124,759
Marie S. Minton 8,193,352 124,534
Leonard E. Moodispaw 8,192,952 124,934
Caroline S. Pisano 8,172,443 145,443
Terry M. Turpin 8,160,983 156,903
In addition, the Company's shareholders approved the following proposals:
The ratification of the Essex Corporation 2000 Stock Option and
Appreciation Rights Plan, as follows:
FOR 6,690,786 AGAINST 92,994 ABSTAIN 135,146
--------- ------ -------
The ratification of the appointment of Stegman & Company as
independent accountants, as follows:
FOR 8,156,840 AGAINST 20,500 ABSTAIN 140,546
--------- ------ -------
14
PART II
5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is quoted and trades are executed through the
OTC Bulletin Board under the symbol "ESEX".
The following table sets forth the range of high and low actual sales
prices of the Common Stock for the periods indicated. Sales prices include
prices between dealers, may not reflect mark-ups, mark-downs or commissions and
may not represent final actual transactions.
2000 1999
----------------------- ------------------------
High Low High Low
--------- --------- --------- ----------
First Quarter......... $ 3.31 $ 1.00 $ 0.72 $ 0.41
Second Quarter........ 2.25 0.63 0.72 0.38
Third Quarter......... 5.13 1.06 1.28 0.44
Fourth Quarter........ 4.09 1.50 1.50 0.56
At March 1, 2001, there were approximately 1,400 beneficial owners of the
Company's Common Stock which includes 346 holders of record.
SALE OF UNREGISTERED SECURITIES
In December 2000, the Company sold 160,000 shares of unregistered Common
Stock to the new Investor Group, consisting of two accredited investors, for
$400,000. The stock was sold in reliance upon the exemption from registration
provided for private offerings provided by Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act") and Regulation D. Appropriate
restrictive legends were placed on the shares. No placement agent or underwriter
was involved in the sale of the common stock and the Company did not pay any
commissions.
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND OTHER
SECTIONS CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON MANAGEMENT'S
EXPECTATIONS, ESTIMATES, PROJECTIONS AND ASSUMPTIONS. WORDS SUCH AS "EXPECTS",
"ANTICIPATES", "PLANS", "BELIEVES", "ESTIMATES", VARIATIONS OF SUCH WORDS AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS
THAT INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUES, EARNINGS, SEGMENT
PERFORMANCE, CASH FLOWS AND CONTRACT AWARDS. SUCH FORWARD-LOOKING STATEMENTS ARE
MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
THEREFORE, ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM WHAT IS
FORECAST IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. CERTAIN RISK
FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS FORM 10-KSB INCLUDE BUT
ARE NOT LIMITED TO: LOW REVENUE VOLUME, CONCENTRATION OF CURRENT SALES TO
LIMITED CUSTOMER BASE, LOW CONTRACT BACKLOG, DELAYS IN COMMERCIALIZATION AND
SALES OF OPTOELECTRONIC TECHNOLOGY, LIMITED SOURCES FOR WORKING CAPITAL AND
IMPORTANCE OF PATENT PROTECTION AND ENFORCEMENT.
15
STATUS
The Company's business is focused increasingly upon applications of its
proprietary optoelectronics technology and products.
In September 2000 the Company closed on a private placement funding
transaction with the Investor Group. Under the terms of the funding, the Company
received $1,250,000 in 2000 and will receive another $750,000 over the first
nine months of 2001. The Investor Group received preferred stock that is
initially convertible into 1,250,000 shares of common stock. Additional
preferred stock convertible into another 750,000 common shares will be issued as
payments are made. The investor group was also issued warrants for an additional
2 million shares of common stock. The warrants can be exercised for a nominal
price under certain terms and conditions. In December 2000 the Company received
a separate additional investment of $400,000 from the Investor Group through the
purchase of Common Stock. See Note 10 of Notes to Financial Statements for
further details.
The Company's primary use of the funds is to patent, develop and
commercialize its key leading-edge optical technologies, principally the
fiberoptic HyperFine Wave Division Multiplex channelizers (HfWDM) and wireless
Optical Processor Enhanced Receiver Architecture (OPERA). The Company began the
internal work to support patent filings and the related development work on the
technology devices during the third quarter of 2000. The purpose of the HfWDM is
to increase the number of usable communications channels within a single optical
fiber. The purpose of the OPERA 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 devices and communications fields.
The Company has a working laboratory model of the HfWDM which is being
demonstrated to prospective strategic partners and investors. The Company is
developing simulations of its OPERA wireless receiver device technology and is
undertaking to determine the various market entry points for such device
technology. The Company is also having discussions with various established
commercial entities that are in the wireless communications market in order to
determine the best commercial applications of such technology.
The development of these devices required a diversion of labor resources
from revenue generation in 2000 and also over the next several quarters in 2001.
The Company has begun to hire additional personnel to augment existing technical
staff. Since the Company is investing the new capital in such research and
development, the financial statements reflect higher than normal expenses which
increases the Company's reported losses.
The Company's backlog of work in the telecommunications and optoelectronics
business areas has always been funded incrementally. The telecommunications work
was principally with one major customer, Motorola, and was approximately $2.2
million (45%) of the Company's revenues for 1999. This telecommunications work
substantially declined in 2000 to $733,000 (23%) of revenues.
Because of the emphasis on development, the Company has been unable to
maintain other programs of sufficient volume and to expand such work to
consistently achieve a breakeven or better level of operations on such revenues.
Work based on the patented ImSyn(TM) Processor
16
continues on an application contract by the Defense Advanced Research Projects
Agency (DARPA) for the development of advanced synthetic aperture radar (SAR)
techniques. This effort is a Phase 2 Small Business Innovation Research Program
(SBIR). The approximate value of the contract is $730,000, incrementally funded
over 2 years.
The Company is working to reduce the deficit from such operations and to
improve its cash flows. Backlog and order issues will continue to be major
concerns until substantial improvements realized from customer funded
development programs have been achieved. The Company has established significant
reserves against its ImSyn(TM) inventory for such changes and delays in the
introduction of these first units. The existing configuration of finished goods
in inventory is being redesigned. The current inventory has been written down to
its estimated net realizable value as components or subassemblies in the
redesigned and upgraded units.
The Company currently does not have sufficient resources to bring its
telecommunications and optoelectronics processing devices to market.
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.
2000 COMPARED TO 1999
Revenues were $3,255,000 and $4,813,000 for 2000 and 1999, respectively, a
decrease of 32% primarily due to the reduction in revenues from commercial
satellite communications systems as discussed below. The Company's revenue in
2000 on U.S. Government programs for research on the use of the Company's
optoelectronics products was $2.2 million (67%) compared to $2.4 million (50%)
in 1999. While the work in 1999 was principally with one customer, the work in
2000 was funded by six customer programs. The Company has a backlog of
approximately $997,000 on programs related to optoelectronic devices and
services.
The Company's work for Motorola in satellite communication systems
accounted for revenues of $733,000 and $2.2 million in 2000 and 1999,
respectively. This represented approximately 23% and 45% of revenues for 2000
and 1999, respectively. There was a decrease in revenues from this program
between 1999 and 2000, as the Company's involvement on the initial satellite
system was essentially completed in December 1999. The Company continues to bid
on new work for the current and successor satellite systems. The balance of the
Company's revenues came from providing software and engineering services
primarily to other government prime contractors and from final billings for
recovery for excess indirect costs on government contracts completed in prior
years.
There was an operating loss of $1,183,000 in 2000 compared to an operating
profit of $101,000 in 1999. Cost of goods sold and services provided ("COGS") as
a percentage of revenues (excluding revenue from recovery of prior year excess
costs) for 2000 was relatively unchanged at 53.5% as compared to 53.7% in 1999.
COGS is generally higher on government work and profit margins are lower
compared to commercial work.
Research and development (R&D) increased in 2000 to approximately $775,000
from approximately $500,000 in 1999 and $474,000 in 1998. In 2000, the majority
of the R&D costs were incurred on efforts related to optical telecommunications
technology. In 1999 and 1998, the majority of the expenditures were on ImSyn(TM)
development. The Company greatly increased its
17
R&D spending since the September 2000 capital infusion and expects to
significantly increase its R&D spending in the optical and telecommunications
areas in 2001.
Selling, general and administrative expenses ("SG&A") include the cost of
retaining essential technical capabilities and personnel in the optoelectronics
and telecommunications businesses. In 2000, SG&A expenses remained high and
increased as a percentage of revenue as the Company continued to seek to
commercialize its optoelectronic products and services. The Company increased
its expenditures in 2000 for consultants, marketing and public relations
relating to its telecommunications device technology. The 2000 SG&A expenses
also included expenses related to the September private placement.
CORPORATE MATTERS
In 2000, the Company's net interest expense and debenture financing
amortization costs declined due to lower average accounts receivable financings
under its working capital financing agreement. The Company also netted $39,000
of interest income in 2000 primarily from the temporary investment of funds from
the private placement. Total net interest expense and debenture financing
amortization costs were $9,000 in 2000 compared to $56,000 in 1999.
The Company recognized the majority of its remaining tax benefit amount
recoverable from the carryback of net operating losses prior to 1994. The
Company is in a net operating loss (NOL) carryforward position. No provision or
benefit from income taxes was recognized in 2000 or 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company evaluates its liquidity position using various factors as is
discussed below:
SELECTED FINANCIAL DATA
($ Thousands)
as of
---------------------------------
December 31, December 26,
2000 1999
--------------- ---------------
Total Assets $ 1,619 $ 1,609
=============== ===============
Working Capital $ 736 $ 384
=============== ===============
Current Ratio 2.39:1 1.39:1
=============== ===============
Convertible Debentures $ -- $ 376
Advances from Accounts Receivable
Financing -- 59
Capital Leases 23 23
--------------- ---------------
Total Debt/Financing $ 23 $ 458
=============== ===============
Stockholders' Equity $ 1,091 $ 610
=============== ===============
In 2000, the Company received $1,250,000 from the private placement sale of
312,500 shares of Series B Preferred Stock. The preferred stock was acquired by
GEF Optical Investment Company, LLC and Networking Ventures L.L.C. (together,
the "Investor Group"). The Company will receive another $750,000 from 3
quarterly payments beginning March 2001 in exchange for an
18
additional 187,500 shares of Series B Preferred Stock. The funds are to be used
primarily for the development of the optical telecommunications device
technologies.
The Company paid off the $376,000 of Convertible Debentures in November
2000. In December 2000, the Company received proceeds of $400,000 from the sale
of 160,000 shares of common stock to the Investor Group.
The Company incurred significant losses in 2000, primarily due to the
increased expenditures for development of its optoelectronics products and
services, particularly the optical telecommunications device technologies. The
Company plans to continue research and development spending in 2001 in the
optoelectronics operations. In order to maintain spending levels, the Company
will need additional funds.
The Company's 2000 working capital and ratio increased primarily due to the
sales of the preferred and common stock. On March 15, 2001, the Company
negotiated an additional investment of $2 million with its two major investors,
Networking Ventures, L.L.C. and GEF Optical Investment Company LLC. The
additional investment is structured as a private placement of 500,000 shares of
Essex common stock. The funds will be received in four equal installments during
2001 with the first payment in late March 2001. The proceeds will primarily be
used to expand development in the Company's optoelectronic telecommunications
device technologies.
The Company is seeking to establish joint ventures or strategic
partnerships including licensing of its technologies to major industrial
concerns 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.
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.
The Company has a working capital financing arrangement 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 were no funds advanced as of December 31, 2000.
Under the settlement agreement reached with the former landlord, certain
payments are triggered only by other future cash inflows. The remaining $108,000
portion of the landlord settlement obligation (which has been accrued and
expensed in prior years), is not payable until future earnings (as defined),
operating asset sales or equity capital funding occur. If and when such future
events occur, only a portion of the cash flows or proceeds generated are
payable.
The Company believes that it will be able to meet its 2001 funding
requirements and obligations from the aforementioned sources of revenue and
capital, and if necessary, by cost reductions. However, there can be no
assurances in this regard and the Company expects that it will need significant
additional financing in the future.
19
THE PRECEDING PARAGRAPHS CONTAIN FORWARD-LOOKING STATEMENTS AND THE FACTORS
AFFECTING THE ABILITY OF THE COMPANY TO MEET ITS FUNDING REQUIREMENTS AND MANAGE
ITS CASH RESOURCES INCLUDE, AMONG OTHER THINGS, THE MAGNITUDE AND TIMING OF
PRODUCT SALES AND THE MAGNITUDE OF FIXED COSTS, ALL OF WHICH INVOLVE RISKS AND
UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT.
INFLATION
The Company, because of its substantial activities in professional services
and product development, 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 its costs;
however, the net effect during the years 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 type contracts, the Company endeavors to protect its
margins by including cost escalation provisions or other specific inflation
protective terms in its contracts.
7. FINANCIAL STATEMENTS
See Item 13(a)(1) in Part III of this Form 10-KSB/A No. 1.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
20
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Directors* and executive officers elected by the Board are:
NAME AGE POSITION
Leonard E. Moodispaw 58 President; Chief Executive Officer and
Director (3)(4)
Terry M. Turpin 58 Sr. Vice President; Chief Technical
Officer and Director
Joseph R. Kurry, Jr. 50 Sr. Vice President; Treasurer and Chief
Financial Officer
Matthew S. Bechta 47 Vice President
Craig H. Price 51 Vice President
Gerald J. Davieau 44 Vice President
Kimberly J. DeChello 40 Chief Administrative Officer and
Secretary
H. Jeffrey Leonard 46 Chairman; Director (4)
Frank E. Manning 81 Chairman Emeritus; Director (2)
John G. Hannon 63 Director (2)
Robert W. Hicks 63 Director (1)
Ray M. Keeler 69 Director (1)(2)
Marie S. Minton 39 Director (1)
Caroline S. Pisano 34 Director (3)(4)
* Directors are elected annually at the Company's Annual Meeting of
Stockholders.
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Ethics Committee of the Board of Directors.
(4) Member of the Executive Committee of the Board of Directors.
Leonard E. Moodispaw, President, Chief Executive Officer and Director of
the Company, rejoined Essex in 1998. He held the office of Chief Operating
Officer until September 2000 when he was elected Chief Executive Officer. Mr.
Moodispaw was an employee and consultant with Essex during 1988 to 1993. From
1988 to 1993, he was President of the former Essex subsidiary, System
Engineering and Development Corporation (SEDC), and later served as Essex Chief
Administrative Officer and General Counsel. From April 1994 to April 1998, Mr.
Moodispaw was President of ManTech Advanced Systems International, Inc. (MASI),
a subsidiary of ManTech International Corporation. Early in his career, Mr.
Moodispaw was engaged in the private practice of law, and from 1965 to 1978 was
a senior manager in the National Security Agency (NSA). He is the Founder of the
Security Affairs Support Association (SASA) that brings government and industry
together to solve problems of mutual interest. He received a Bachelor of Science
degree in Business Administration from the American University in Washington,
D.C. in 1965, a Master of Science degree in Business Administration from George
Washington University in Washington D.C. in 1969 and Juris Doctor in Law from
the University of Baltimore, Maryland in 1977.
Terry M. Turpin was elected a Director of the Company in January 1997. He
is Senior Vice President and Chief Technical Officer for the Company, positions
he has held since 1996. He joined Essex through merger with SEDC where he was
Vice President and Chief Scientist from September 1984 through June 1989. From
December 1983 to September 1984 he was an
21
independent consultant. From 1963 through December 1983, Mr. Turpin was employed
by the NSA. He was Chief of the Advanced Processing Technologies Division for
ten years. He holds patents for optical computers and adaptive optical
components. Mr. Turpin represented NSA on the Tri-Service Optical Processing
Committee organized by the Under Secretary of Defense for Research and
Engineering. He received a Bachelor of Science degree in Electrical Engineering
from the University of Akron in 1966 and a Master of Science degree in
Electrical Engineering from Catholic University in Washington, D.C. in 1970.
Joseph R. Kurry, Jr. joined Essex Corporation in March 1985. He is
Treasurer, Chief Financial Officer and Senior Vice President, positions he has
held since 1985. Mr. Kurry was controller of ManTech International Corporation
from December 1979 to March 1985. Mr. Kurry received a Bachelor of Science
degree in Business Administration in 1972 from Georgetown University, in
Washington, D.C. and is a Certified Public Accountant.
Matthew S. Bechta was elected Vice President in October 1993. As Director
of the Processing Systems Group, Mr. Bechta is responsible for the development
and delivery of signal processing solutions to government, industry and
commercial customers. Mr. Bechta is also the acting Director of Business
Operations responsible for program controls, marketing support, information
systems, security and purchasing. Mr. Bechta joined Essex in 1989 with the
merger of Essex and SEDC. As one of the founders of SEDC, he served in various
technical and management capacities since incorporation in 1980. From 1975-1980,
Mr. Bechta was employed by NSA as a systems engineer. Mr. Bechta holds a
Bachelor of Science degree in Electrical Engineering from Spring Garden College,
Pennsylvania and a Master of Science degree in Computer Science from the Johns
Hopkins University.
Craig H. Price was elected Vice President in October 1993. Dr. Price,
Director of Optoelectronic Products, is responsible for the development of
products utilizing Essex patented optical technologies. Dr. Price joined Essex
in 1989 as a result of the merger of Essex and SEDC. Dr. Price had joined SEDC
in 1985, with varied assignments in engineering, analysis and advanced
technologies. Previously, he served in numerous technical and project positions
in the U.S. Air Force during the period 1974 - 1985, and he was awarded the
Distinguished Service Medal. Dr. Price holds a Bachelor of Science degree in
Electrical Engineering from Kansas State University, a Master of Science degree
in Electrical Engineering from Purdue University and a Doctor of Philosophy
degree in Electrical Engineering, from Stanford University.
Gerald J. Davieau joined Essex in 1989 as a result of the merger of Essex
with SEDC, and was elected Vice President in November 1997. From 1996 to 1997
Mr. Davieau was technical director of telecommunications systems engineering
operations. Mr. Davieau is responsible for design and analysis of wireless
satellite applications. He is listed on more than 20 Motorola patent disclosures
from work on Iridium(R) and Teledesic(TM) satellite programs. Mr. Davieau was
employed by SPACECOM in Gaithersburg, Maryland, 1982-1987. He served in the U.S.
Army from 1978 to 1982. Mr. Davieau holds a Bachelor of Science degree in
Electrical Engineering from Lehigh University and a Master of Science degree in
Electrical Engineering from the University of Maryland.
Kimberly J. DeChello joined Essex in May 1987 and has served in various
administrative and management capacities. She was appointed Chief Administrative
Officer in November 1997 and Corporate Secretary in January 1998. Ms. DeChello
is responsible for administration, human resources, investor relations and
industrial insurance. Ms. DeChello received a Master of Science
22
degree in Human Resources Management in 2000 from the University of Maryland.
Ms. DeChello also holds an Associate of Arts degree in Accounting and a Bachelor
of Science degree in Criminal Justice/Criminology from the University of
Maryland.
Frank E. Manning, Chairman Emeritus, is the founder of the Company. Mr.
Manning has served as a Director of the Company since its organization in 1969.
Mr. Manning has been a special advisor to the CEO for the past five years. Mr.
Manning received a Bachelor of Science degree in Economics from Franklin and
Marshall College in 1942, and a Masters of Letters degree in Industrial
Relations from the University of Pittsburgh in 1946.
H. Jeffrey Leonard, was elected a Director of the Company in September 2000
and Chairman of the Board in December 2000. Dr. Leonard is the President and
founding shareholder of Global Environment Fund. Since 1989, Dr. Leonard has
served as Chairman of the Investment Committee for GEF's five investment funds.
He has extensive experience in international private equity and project finance
investments, and advanced technology investments in the energy, environmental,
applications software, intelligent systems engineering, biological and medical
fields. Dr. Leonard also serves as a member of the Board of Directors of
Measuring and Monitoring Inc., Aurora Flight Sciences Corp., Athena
Technologies, Sorbent Technologies, International Pepsi-Cola Bottlers Limited
and Global Forest Products Company Limited. He has served as an advisor to the
U.S. Office of Technology Assessment and is a member of the Board of Directors
of the National Council for Science and the Environment. Dr. Leonard received a
Bachelor of Arts degree in 1976 from Harvard College, a Master of Science degree
from the London School of Economics in 1978 and a Doctor of Philosophy degree
from Princeton University in 1984.
John Hannon was elected a Director of the Company in September 2000. He is
a partner in Networking Ventures, L.L.C., a privately held company dedicated to
investing in and guiding technology companies in the expanding optical and
information security sector. From 1979 to March 2000, Mr. Hannon served as the
Chief Executive Officer of Pulse Engineering, Inc. an information security and
signals processing company which was sold in March 2000. Mr. Hannon started his
business career in 1963 after serving in the United States Marine Corps. Since
that time, he has been involved in numerous entrepreneurial ventures. He is a
Director of the Armed Forces Communications and Electronics Association (AFCEA).
Robert W. Hicks was elected a Director of the Company in August 1988. He
has been an independent consultant since 1986. During this period he was engaged
for three and one-half years by the State of Maryland Deposit Insurance Fund
Corporation, Receiver of several savings and loan associations, first as an
Agent and then as a Special Representative (both court-approved positions). He
was a principal officer and stockholder in Asset Management & Recovery, Inc., a
consulting firm which primarily provided services, directly and as a
subcontractor, to the Resolution Trust Corporation and law firms engaged by the
Resolution Trust Corporation. Mr. Hicks is also a Director and the Corporate
Secretary of the Kirby Lithographic Company, Inc. In 1998 he formed Hicks Little
Company, LLC for the purpose of conducting consulting activity.
Ray M. Keeler was elected a Director of the Company in July 1989. Since
1986, he has been an independent consultant to both industry and government
organizations in areas related to national and tactical intelligence programs.
Mr. Keeler served on the Board of Directors of SEDC from December 1987 through
April 1989. From 1988 to November 1995, he was President of CRYTEC, Inc., a
service company providing management, business development and technical support
to companies involved in classified cryptologic projects. Since December 1995,
he has
23
been a consultant to companies involved in national technical intelligence
programs. From 1982 to 1986, Mr. Keeler was Director of Program and Budget for
the NSA. He received a Bachelor of Arts degree from the University of
Wisconsin-Madison in 1957.
Marie S. Minton was elected a Director of the Company in December 2000. Ms.
Minton is the Chief Financial Officer and Director of Global Environment Fund,
an international, private equity, investment management firm. Ms. Minton has
been a member of the senior management team of GEF since 1994. Before joining
GEF, Ms. Minton was the Vice President of Finance for Clean Air Capital Markets
Corporation, a boutique investment banking firm. Prior to that, Ms. Minton was
an Audit Manager in the Entrepreneurial Services Division of Ernst & Young from
1986 through 1993. Ms. Minton graduated from the University of Virginia in 1996
with a Bachelor of Science degree in Commerce. She is a member of the Virginia
Society and American Institute of Certified Public Accountants, the Washington
Society of Investment Analysts and the Association for Investment Management and
Research. Ms. Minton is a Certified Public Accountant and a Chartered Financial
Analyst.
Caroline Pisano was elected a Director of the Company in September 2000.
She is a partner in Networking Ventures, L.L.C., a privately held company
dedicated to investing in and guiding technology companies in the expanding
optical and information security sector. From August 1996 to March 2000, Ms.
Pisano served as the Chief Financial Officer of Pulse Engineering, Inc., an
information security and signal processing company which was sold in March 2000.
From August 1992 to July 1996 Ms. Pisano served as a senior transactional
attorney with the law firm of Wechsler, Selzer, and Gurvitch, Chartered. From
June 1988 to August 1990, Ms. Pisano, a Certified Public Accountant, practiced
public accounting with Arthur Andersen & Co. Ms. Pisano received her Juris
Doctor from the Washington College of Law at the American University in
Washington, D.C. Ms. Pisano graduated Magna Cum Laude with a Bachelor of Science
degree in Accounting from the University of Maryland.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities (the "Reporting Persons"), to file reports of ownership and changes
in ownership of equity securities of the Company with the Securities and
Exchange Commission ("SEC"). Officers, directors, and greater than ten percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file.
Based solely upon a review of Forms 3 and Forms 4 furnished to the Company
pursuant to Rule 16(a)-3 under the Exchange Act during its most recent fiscal
year and Forms 5 with respect to its most recent fiscal year, the Company
believes that all such forms required to be filed pursuant to Section 16(a) of
the Exchange Act were timely filed by the Reporting Persons during the fiscal
year ended December 31, 2000, except for the following: (i) John G. Hannon was
late in filing two Form 4s with respect to three purchase transactions and was
late in filing a Form 5 to report the gifting of 6,000 shares of Common Stock
during 2000; and (ii) H. Jeffrey Leonard, John G. Hannon, Caroline S. Pisano,
Marie S. Minton, James P. Gregory, GEF, and Networking Ventures were each late
in filing a Form 4 to report the scheduled purchase of 31,250 shares of
Preferred Stock by each of Networking Ventures and GEF in December 2000.
24
10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers who served as such at the end of the last fiscal
year and whose total compensation exceeds $100,000.
=================================================================================================================
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------
Other Securities
Annual Underlying
Name and Compensation Options/SARs
Principal Position Year Salary($)(1) Bonus ($) ($)(3) (#)
---------------------------- ------- ------------- -------------- ----------------- -----------------------------
Leonard E. Moodispaw(2) 2000 136,404 0 0 100,000
President and CEO 1999 124,800 0 0 45,000
1998 60,240 0 0 75,000
Harry Letaw, Jr.(4) 2000 144,764 0 0 0
Former Chairman of the 1999 135,200 0 0 0
Board and CEO 1998 135,200 0 0 0
Terry M. Turpin 2000 134,496 25,000 4,785 52,000
Senior Vice President and 1999 122,720 0 3,682 15,000
Director 1998 122,720 0 3,682 0
Joseph R. Kurry, Jr. 2000 122,804 15,000 4,134 61,500
Treasurer, Senior Vice 1999 114,400 0 3,432 15,000
President and CFO 1998 114,400 0 3,432 0
Craig H. Price 2000 114,184 15,000 3,875 27,500
Vice President 1999 103,260 0 3,098 10,000
1998 102,960 0 3,089 0
Matthew S. Bechta 2000 112,840 10,000 3,685 31,000
Vice President 1999 102,960 0 3,089 10,000
1998 102,960 0 3,089 0
=================================================================================================================
(1) Includes amounts deferred at the election of the named executive officer
pursuant to Section 401(k) of the Internal Revenue Code ("401(k)").
(2) Mr. Moodispaw rejoined the Company in May 1998 on a full-time basis.
(3) Represents matching 401(k) contributions made on behalf of the respective
named executive officer pursuant to the Company's Retirement Plan and
Trust. Excludes other perquisites and benefits not exceeding the lesser of
$50,000 or 10% of the named executive officer's total annual salary and
bonus.
(4) Dr. Letaw resigned as Chairman and CEO effective September 12, 2000.
25
DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan, the Essex
Corporation Retirement Plan and Trust, which includes a 401(k) salary reduction
feature for its employees. The Plan calls for an employer matching contribution
of up to 3% of eligible employee compensation under the salary reduction feature
and a discretionary contribution as determined by the Board of Directors. No
discretionary contribution was made by the Company to the Retirement Plan for
1998 - 2000. The total authorized contribution under the matching contribution
feature of the Plan was approximately $67,000 in 2000. All employee
contributions are 100% vested at all times and Company contributions vest based
on length of service. Vested contributions are distributable and benefits are
payable only upon death, disability, retirement or break in service.
Participants may request that their accrued benefits under the Section 401(k)
portion of the Plan be allocated among various investment options established by
the Plan administrator.
The Company contributions under the Retirement Plan for the persons
referred to in the Summary Compensation Table are included in that Table.
EMPLOYEE INCENTIVE PERFORMANCE AWARD PLAN
The Company has an Employee Incentive Performance Award Plan under which
bonuses are distributed to employees. All employees are eligible to receive such
awards under flexible criteria designed to compensate for superior division and
individual performance during each fiscal year. Awards are generally recommended
annually by management and approved by the Board of Directors. Such awards may
be constrained by overall Company performances. There was approximately $141,000
awarded in 2000, including the $65,000 awarded to persons named in the Summary
Compensation Table. No awards were made in 1998 and 1999.
RESTRICTED STOCK BONUS PLAN
Essex Corporation has a Restricted Stock Bonus Plan under which up to
50,000 shares of the Company's common stock may be reserved for issuance to
non-employee members of the Board of Directors and key employees of the Company
selected by the Board of Directors. Shares of restricted stock may be issued
under the Plan subject to forfeiture during a restriction period, fixed in each
instance by the Board of Directors, whereby all rights of the grantee to the
stock terminate upon certain conditions such as cessation of continuous
employment during the restriction period. Upon expiration of the restriction
period, or earlier upon the death or substantial disability of the grantee, the
restrictions applicable to all shares of restricted stock of the grantee expire.
The Plan also provides that loans may be advanced by the Company to a grantee to
pay income taxes due on the taxable value of shares granted under the Plan. Such
loans must be evidenced by an interest bearing promissory note payable five (5)
years after the date of the loan, and be secured by shares of stock of the
Company (which may be restricted stock) having a fair market value equal to 200
percent of the loan.
During 1999 and 2000 there were no awards. During 1998, the Board awarded a
total of 18,000 shares to four directors. There were approximately 4,000 shares
remaining in the plan as of December 31, 2000.
26
EMPLOYMENT AGREEMENTS
In September 2000 the Company entered into two-year employment agreements
with Terry M. Turpin, Craig H. Price and Matthew S. Bechta. The agreements
provide for an annual base salary of $155,000, $135,000 and $130,000 for each of
Messrs. Turpin, Price and Bechta, respectively. The agreements provided for a
signing bonus that must be repaid to the Company if the executive terminates
employment with the Company before August 31, 2001 for any reason other than
death or disability. The agreements also contain standard intellectual property
and confidentiality provisions.
The above agreements restrict the individuals' right to compete with the
Company and prohibit misappropriation of proprietary rights of the Company, both
during and after the term of employment.
OPTIONS TO PURCHASE SECURITIES
The Company has established an Essex Corporation 2000 Stock Option and
Appreciation Rights Plan (the "2000 Plan"). The 2000 Plan provides for the grant
of options to purchase shares of common stock of the Company, no par value per
share (the "Common Stock"), which qualify as incentive stock options ("Incentive
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), to persons who are employees, as well as options which do not so
qualify ("Non-Qualified Options") to be issued to persons or consultants,
including those who are not employees. The 2000 Plan also provides for grants of
stock appreciation rights ("SARs") in connection with the grant of options under
this 2000 Plan. The exercise price of an Incentive Option under the 2000 Plan
may not be less than the "fair market value" of the shares of Common Stock at
the time of grant; the exercise price of Non-Qualified Options and the
appreciation base price of SARs are determined in the discretion of the Board of
Directors except that the SAR appreciation base price may not be less than 50%
of the fair market value of a share of Common Stock on the grant date with
respect to awards to persons who are officers or directors of the Company. The
2000 Plan reserves 300,000 shares of Common Stock for issuance. As of February
28, 2001, options for 86,500 shares of the Company's Common Stock were
outstanding at exercise prices ranging from $3.00 - $3.96. As of February 28,
2001, there remained 213,500 shares available for future grants of options or
SARs.
The Company has established a 1999 Stock Option and Appreciation Rights
Plan (the "1999 Plan"). The 1999 Plan as presently in effect is similar to the
2000 Plan described above. The 1999 Plan reserves 300,000 shares of Common Stock
for issuance. As of February 28, 2001, options for 300,000 shares of the
Company's Common Stock were outstanding at exercise prices ranging from $2.04 -
$3.96. The Company has established a 1998 Stock Option and Appreciation Rights
Plan (the "1998 Plan"). The 1998 Plan as presently in effect is similar to the
Plans described above. The 1998 Plan reserves 297,500 shares of Common Stock for
issuance. As of February 28, 2001, options for 296,700 shares of the Company's
Common Stock were outstanding at exercise prices ranging from $1.00 - $2.40. As
of February 28, 2001, there remained 800 shares available for future grants of
options or SARs.
The Company also has a 1996 Stock Option and Appreciation Rights Plan (the
"1996 Plan"). The 1996 Plan as presently in effect is similar to the Plans
described above. The 1996 Plan reserves 290,000 shares of the Company's Common
Stock for issuance. As of February 28, 2001, options for 289,850 shares of the
Company's Common Stock remained outstanding and exercisable
27
under this Plan at exercise prices ranging from $1.00 - $3.96. As of February
28, 2001, there remained 150 shares available for future grants of options or
SARs.
The Company had an Option and Stock Appreciation Rights Plan which expired
on January 31, 1997. As of February 28, 2001, options for 258,650 shares of the
Company's Common Stock remained outstanding and exercisable under this Plan at a
price of $3.00.
The Company grants non plan non-qualified options from time to time
directly to certain parties. In 2000, the Company issued such options for
100,000 shares to its President and 61,500 to its Chief Financial
Officer/Treasurer.
The following table shows for the fiscal year ended December 31, 2000 for
the persons named in the Summary Compensation Table, information with respect to
options to purchase Common Stock granted during 2000. No options granted under
the stock plans or otherwise were exercised by the persons listed below in 2000.
STOCK OPTIONS GRANTS
FOR FISCAL YEAR ENDED DECEMBER 31, 2000
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL OPTIONS/
OPTIONS SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE
====================================== ================= =========================== ================ ================
Leonard E. Moodispaw 100,000 (3) 23.4 2.04 09/05/10
Harry Letaw, Jr. --- --- --- ---
Terry M. Turpin 22,000 (1) 5.1 1.69 03/15/10
30,000 (3) 7.0 2.04 09/05/10
Joseph R. Kurry, Jr. 21,500 (2) 5.0 1.69 03/15/10
40,000 (3) 9.3 2.04 09/05/10
Craig H. Price 12,500 (1) 2.9 1.69 03/15/10
15,000 (3) 3.5 2.04 09/05/10
Matthew S. Bechta 16,000 (1) 3.7 1.69 03/15/10
15,000 (3) 3.5 2.04 09/05/10
(1) Such options became exercisable beginning March 16, 2000.
(2) Such options became exercisable beginning April 30, 2000.
(3) Such options became exercisable beginning September 6, 2000.
28
The following table shows for the fiscal year ended December 31, 2000 for
the persons named in the Summary Compensation Table, information with respect to
option/SAR exercises and fiscal year end values for unexercised options/SARs.
AGGREGATED OPTION/SAR EXERCISES AND FY-END OPTION/SAR VALUES
TABLE FOR FISCAL YEAR ENDED DECEMBER 31, 2000
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
OPTIONS AT UNEXERCISED
FY-END (#) IN-THE-MONEY
OPTIONS AT
EXERCISABLE/ FY-END($)(1)
SHARES UNEXERCISABLE
ACQUIRED ON VALUE EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE
================================ ================= ================== ======================== =======================
Leonard E. Moodispaw --- --- 200,500/60,000 $157,600/$26,600
Harry Letaw, Jr. --- --- 0/0 0/0
Terry M. Turpin --- --- 92,500/17,500 $53,715/$7,325
Joseph R. Kurry, Jr. --- --- 107,500/22,500 $45,585/$8,675
Craig H. Price --- --- 65,000/10,000 $29,425/$5,300
Matthew S. Bechta --- --- 65,000/10,000 $31,595/$5,300
(1) Market value of underlying securities based on the closing price of the
Company's Common Stock on December 29, 2000 (last trading day prior to
December 31, 2000) on the OTC Bulletin Board system of $2.31 minus the
exercise price.
REMUNERATION OF DIRECTORS
The Company's Directors generally meet quarterly. Additionally, the By-Laws
provide for special meetings and, as also permitted by Virginia law, Board
action may be taken without a meeting upon unanimous written consent of all
Directors. There are two Board members not employed by the Company who receive a
maximum of $1,500 for each Board or $750 for each Board Committee Meeting
attended. In 2000 the Board held four meetings; the entire membership of the
Board was present at all of the meetings except two where one former director
was absent. The Board members waived the fee for three of the meetings. There
are four Board members who are employed by either Global Environment Fund or
Networking Ventures, L.L.C. and who have waived any board fees.
29
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
The following table and accompanying notes set forth as of February 28,
2001, information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person or group who beneficially owns more than 5% of
the Common Stock, (ii) each of the directors of the Company, (iii) each of the
officers of the Company named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group.
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Shares of Common Stock
OF BENEFICIAL OWNER* OWNERSHIP (1) BENEFICIALLY OWNED
--------------------------------- ----------------------- -----------------------------
H. Jeffrey Leonard (2) 1,439,500 24.73
John G. Hannon (3) 1,410,225 24.23
Caroline S. Pisano (4) 1,416,000 24.33
Marie S. Minton (5) 1,410,000 24.23
Terry M. Turpin (6) 390,493 8.34
Leonard E. Moodispaw (7) 327,650 6.77
Joseph R. Kurry, Jr. (8) 178,359 3.79
Frank E. Manning (9) 130,275 2.82
Matthew S. Bechta (10) 114,198 2.46
Craig H. Price (11) 89,342 1.92
Robert W. Hicks (12) 71,700 1.56
Ray M. Keeler (13) 47,500 1.03
James P. Gregory (14) 1,410,000 24.23
Harry Letaw, Jr. (15) 669,859 14.66
Paul R. Young (16) 301,790 6.60
GEF Optical Investment
Company, LLC (17)(20) 1,410,000 24.23
Networking Ventures, L.L.C. (18)(20) 1,410,000 24.23
All Directors and Executive Officers
as a Group (14 persons) (19) 2,874,318 43.05
* Except as noted below, all beneficial owners are directors and/or
officers of the Company and can be reached c/o Essex Corporation, 9150
Guilford Road, Columbia, MD 21046-1891.
(1) The shares listed above include options and rights to acquire shares
within sixty (60) days and shares held of record by the Essex
Corporation Retirement Trust as to which shares the respective
participant has disposition and voting rights. The percentage ownership
is computed based upon the number of shares which would be outstanding
if such options and rights were exercised.
(2) H. Jeffrey Leonard is Chairman of the Board of the Company and a
director of the managing member of GEF. Of the shares shown as
beneficially owned, 29,500 are owned directly by Mr. Leonard and
1,410,000 may be deemed to be beneficially owned by Mr. Leonard as
described in footnotes (17) and (19) below. Mr. Leonard's address is
c/o GEF, 1225 Eye Street, N.W., Suite 900, Washington, DC 20005.
(3) John G. Hannon is a Director of the Company and a managing member of
Networking Ventures. Of the shares shown as beneficially owned, 225 are
owned directly by Mr. Hannon and 1,410,000 shares may be deemed to be
beneficially owned by Mr. Hannon as described in footnotes (18) and
(19) below. Mr. Hannon's address is c/o Networking Ventures, 9150
Guilford Road, Columbia, MD 21046-189l.
(4) Caroline S. Pisano is a Director of the Company and a managing member
of Networking Ventures. Of the shares shown as beneficially owned,
6,000 are owned directly by Ms. Pisano and 1,410,000 shares may be
deemed to be beneficially owned by Ms. Pisano as described in
footnotes (18) and (19) below. Ms. Pisano's address is c/o Networking
Ventures, 9150 Guilford Road, Columbia, MD 21046-189l.
30
(5) Marie S. Minton is a Director of the Company and a director of the
managing member of GEF. Ms. Minton may be deemed to be the beneficial
owner of these shares by virtue of the arrangements described in
footnotes (17) and (19) below. Ms. Minton's address is c/o GEF, 1225
Eye Street, N.W., Suite 900, Washington, DC 20005.
(6) Terry M. Turpin is a Director, Senior Vice President and Chief
Technical Officer of the Company. Of the shares shown as beneficially
owned, 111,800 represent presently exercisable rights to acquire Common
Stock through stock options.
(7) Leonard E. Moodispaw is President, Chief Executive Officer and a
Director of the Company. Of the shares shown as beneficially owned,
270,500 represent presently exercisable rights to acquire Common Stock
through stock options.
(8) Joseph R. Kurry, Jr. is Senior Vice President, Treasurer and Chief
Financial Officer of the Company. Of the shares shown as beneficially
owned, 140,000 represent presently exercisable rights to acquire
Common Stock through stock options.
(9) Mr. Manning is the Chairman Emeritus and a Director of the Company. Of
the shares shown as beneficially owned, 44,000 represent presently
exercisable rights to acquire Common Stock through stock options. Does
not include 40,000 shares of the Company's Common Stock owned of record
and beneficially by Mrs. Eva L. Manning, wife of Mr. Frank E. Manning.
Also does not include 169,000 shares beneficially owned by six separate
family trusts of which Mrs. Manning is the sole trustee and over which
trusts she has exclusive voting and dispositive power.
(10)Matthew S. Bechta is Vice President of the Company. Of the shares shown
as beneficially owned, 75,000 represent presently exercisable rights
to acquire Common Stock through stock options.
(11)Craig H. Price is Vice President of the Company. Of the shares shown as
beneficially owned, 75,000 represent presently exercisable rights to
acquire Common Stock through stock options.
(12)Robert W. Hicks is a Director of the Company. Of the shares shown as
beneficially owned, 31,500 represent presently exercisable rights to
acquire Common Stock through stock options.
(13)Ray M. Keeler is a Director of the Company. Of the shares shown as
beneficially owned, 32,500 represent presently exercisable rights to
acquire Common Stock through stock options.
(14)James P. Gregory is a director of the managing member of GEF. Mr.
Gregory may be deemed to be the beneficial owner of these shares by
virtue of the arrangements described in footnotes (17) and (19) below.
Mr. Gregory's address is c/o GEF, 1225 Eye Street, N.W., Suite 900,
Washington, DC 20005.
(15)Dr. Harry Letaw, Jr. is the former Chairman of the Board and Chief
Executive Officer of the Company. His address is 1023 Benfield
Boulevard, Millersville, MD 21108.
(16)Based on a Schedule 13D filed with the SEC on November 15, 2000. Mr.
Young's address is 11890-T Old Baltimore Pike, Beltsville, MD 20705.
(17)Consists of 625,000 shares of Common Stock issuable upon conversion of
156,250 shares of Preferred Stock and 80,000 shares directly owned by
GEF. Also consists of 625,000 shares of Common Stock issuable on
conversion of 156,250 shares of Preferred Stock and 80,000 shares
directly owned by Networking Ventures, by virtue of the voting
arrangements described in footnote (20) below. GEF is a Delaware
limited liability company with its principal executive offices located
at 1225 Eye Street, N.W., Suite 900, Washington, DC 20005.
(18)Consists of 625,000 shares of Common Stock issuable upon conversion of
156,250 shares of Preferred Stock and 80,000 shares directly owned by
Networking Ventures. Also consists of 625,000 shares of Common Stock
issuable on conversion of 156,250 shares of Preferred Stock and 80,000
shares directly owned by GEF, by virtue of the voting arrangements
described in footnote (20) below. Networking Ventures is a Maryland
limited liability company with its principal executive offices located
at 9150 Guilford Road, Columbia, MD 21046-1891.
(19)Of the shares shown as beneficially owned, 855,800 represent presently
exercisable rights to acquire Common Stock through stock options. Also
includes 1,250,000 shares of Common Stock which are presently issuable
upon conversion of the Preferred Stock.
(20)Based on a Schedule 13D/A filed with the SEC on December 14, 2000, each
of GEF, Mr. Leonard, Ms. Minton, Mr. Gregory, Networking Ventures, Mr.
Hannon and Ms. Pisano may be deemed the beneficial owner of 1,250,000
shares of Common Stock issuable upon conversion of 312,500 shares of
Preferred Stock and 160,000 shares of Common Stock directly held for
the account of GEF and Networking Ventures by virtue of the provisions
of a Shareholders Voting Agreement between GEF and Networking Ventures
providing for certain voting arrangements with respect to such shares.
A copy of the Shareholders Voting Agreement is included as Exhibit 3 to
the Schedule 13D/A.
31
PREFERRED STOCK
The following table shows information concerning the beneficial ownership
of the Company's Preferred Stock as of February 28, 2001 by each director, by
each of the officers named in the Summary Compensation Table, by all directors
and executive officers as a group and by each person who is known to the Company
to be the beneficial owner of more than 5% of any series of Preferred Stock.
Directors and executive officers omitted from the following table do not
beneficially own any shares of Preferred Stock.
Amount and Nature Percentage of Outstanding
of Beneficial Shares of Preferred Stock
NAME OF BENEFICIAL OWNER OWNERSHIP BENEFICIALLY OWNED
--------------------------------- ----------------------- -----------------------------
John G. Hannon(1) 312,500 100
Caroline S. Pisano(2) 312,500 100
H. Jeffrey Leonard(3) 312,500 100
Marie S. Minton(4) 312,500 100
James P. Gregory(5) 312,500 100
GEF Optical Investment
Company, LLC(6)(8) 312,500 100
Networking Ventures, L.L.C.(7)(8) 312,500 100
All Directors and Executive Officers
as a Group 312,500 100
(1) John G. Hannon is a Director of the Company and a managing member of
Networking Ventures. These shares may be deemed to be beneficially
owned by Mr. Hannon as described in footnotes (7) and (8) below.
(2) Caroline S. Pisano is a Director of the Company and a managing member
of Networking Ventures. These shares may be deemed to be beneficially
owned by Ms. Pisano as described in footnotes (7) and (8) below.
(3) H. Jeffrey Leonard is Chairman of the Board of the Company and a
director of the managing member of GEF. Mr. Leonard may be deemed to
be the beneficial owner of these shares by virtue of the arrangements
described in footnotes (6) and (8) below.
(4) Marie S. Minton is a Director of the Company and a director of the
managing member of GEF. Ms. Minton may be deemed to be the beneficial
owner of these shares by virtue of the arrangements described in
footnotes (6) and (8) below.
(5) James P. Gregory is a director of the managing member of GEF. Mr.
Gregory may be deemed to be the beneficial owner of these shares by
virtue of the arrangements described in footnotes (6) and (8) below.
(6) Consists of 156,250 shares of Preferred Stock owned directly by GEF.
Also consists of 156,250 shares of Preferred Stock directly owned by
Networking Ventures, by virtue of the voting arrangements described in
footnote (8) below.
(7) Consists of 156,250 shares of Preferred Stock owned by Networking
Ventures. Also consists of 156,250 shares of Preferred Stock directly
owned by GEF, by virtue of the voting arrangements described in
footnote (8) below.
(8) Based on the Schedule 13D, each of GEF, Mr. Leonard, Ms. Minton, Mr.
Gregory, Networking Ventures, Mr. Hannon and Ms. Pisano may be deemed
the beneficial owner of 312,500 shares of Preferred Stock deemed
beneficially held for the account of GEF and Networking Ventures by
virtue of the provisions of a Shareholders Voting Agreement between GEF
and Networking Ventures providing for certain voting arrangements with
respect to such shares. A copy of the Shareholders Voting Agreement is
included as Exhibit 3 to the Schedule 13D.
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, Essex acquired VeriTerre Corporation for $113,000. Dr. Harry
Letaw, former Chairman and CEO of Essex, was the Chairman and Founder of
VeriTerre. This entity is currently inactive.
32
13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Report of Independent Auditors 35
Balance Sheet 36
Statements of Operations 37
Statements of Changes in Stockholders' Equity 38
Statements of Cash Flows 39
Notes to Financial Statements 40 - 51
(2) Exhibits
(i) None.
(ii) Exhibit 3(i) - Articles of Incorporation and Amendments
thereto A Exhibit 3(ii) -By-Laws, as amended Filed as
Exhibits 3(i) and 3(ii) to Registrant's Registration
Statement on Form SB-2 filed October 17, 1994, Registration
No. 33-82920
(iii) Exhibit 4 - Instruments defining the Rights of Holders
4.3 Specimen of Common Stock Certificate B
(iv) Exhibit 10 - Material Contracts
10.3 Restricted Stock Bonus Plan B
10.4 Option and Stock Appreciation Rights Plan B
10.6 Pension Plan and Trust Agreement B
10.7 Defined Contribution Retirement Plan B
10.8 Incentive Performance Award Plan B
10.10 Settlement Agreement between the Company and Rumsey Associates B
Limited Partnership
10.11 Option Agreement between the Company and Rumsey Associates B
Limited Partnership
10.13 Registration Rights Agreement B
10.15 1996 Stock Option and Appreciation Rights Plan D
10.22 1998 Stock Option and Appreciation Rights Plan E
10.23 1999 Stock Option and Appreciation Rights Plan F
10.24 2000 Stock Option and Appreciation Rights Plan G
(v) Exhibit 23 - Consent of Experts and Counsel
23.1 Consent of Independent Auditors 52
(vi) Exhibit 99
(a) Securities Purchase Agreement dated September 7, 2000 C
(b) Registration Rights Agreement dated September 7, 2000 C
(c) Common Stock Purchase Warrants dated September 12, 2000 C
(d) Articles of Amendment dated September 6, 2000 C
(b) Reports on Form 8-K
None.
-----------------------
A Incorporated by reference as indicated
B Filed as Exhibit to Registrant's Registration Statement on Form SB-2 filed October 17, 1994, Registration No. 33-82920
C Filed as Exhibit to Registrant's Form 8-K dated September 20, 2000
D Filed as Exhibit to Registrant's Form 8-K dated November 13, 1996
E Filed as Exhibit to Form Def 14a - Definitive Proxy Statement dated October 12, 1998
F Filed as Exhibit to Form Def 14a - Definitive Proxy Statement dated October 11, 1999
G Filed as Exhibit to Form Def 14a - Definitive Proxy Statement dated November 20, 2000
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ESSEX CORPORATION
(Registrant)
By: /S/ LEONARD E. MOODISPAW
--------------------------------------------
Leonard E. Moodispaw
President and Chief Executive Officer;
Principal Executive Officer
August 9, 2001
By: /S/ JOSEPH R. KURRY, JR.
--------------------------------------------
Joseph R. Kurry, Jr.
Senior Vice President, Treasurer and Chief Financial Officer;
Principal Financial and Accounting Officer
August 9, 2001
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/S/ JOHN G. HANNON
-----------------------------
John G. Hannon, Director Marie S. Minton, Director
August 9, 2001 August 9, 2001
/S/ LEONARD E. MOODISPAW
------------------------
Robert W. Hicks, Director Leonard E. Moodispaw, Director
August 9, 2001 August 9, 2001
/S/ RAY M. KEELER /S/ CAROLINE S. PISANO
----------------------------- ----------------------
Ray M. Keeler, Director Caroline S. Pisano, Director
August 9, 2001 August 9, 2001
/S/ TERRY M. TURPIN
-------------------
H. Jeffrey Leonard, Director Terry M. Turpin, Director
August 9, 2001 August 9, 2001
/S/ FRANK E. MANNING
-----------------------------
Frank E. Manning, Director
August 9, 2001
34
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Essex Corporation:
Columbia, Maryland
We have audited the accompanying balance sheet of Essex Corporation as of
December 31, 2000 and the related statements of operations, changes in
stockholders' equity and cash flows for the fiscal years ended December 31, 2000
and December 26, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Essex Corporation as of
December 31, 2000 and the results of its operations and its cash flows for the
fiscal years ended December 31, 2000 and December 26, 1999 in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 11 to the accompanying financial statements, the
Company has restated its financial statements for the fiscal year ended December
31, 2000 to recognize a beneficial conversion feature associated with its
convertible preferred stock.
Stegman & Company
Baltimore, Maryland
February 9, 2001, except as to Note 11
which is dated August 8, 2001
35
ESSEX CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 1,015,634
Accounts receivable, net 165,614
Inventory 49,857
Prepayments and other 33,433
--------------
1,264,538
PROPERTY AND EQUIPMENT
Computers and special equipment 737,980
Furniture, equipment and other 225,508
--------------
963,488
Accumulated depreciation and amortization (863,254)
--------------
100,234
OTHER ASSETS
Patents, net 158,100
Other 96,461
--------------
254,561
TOTAL ASSETS $ 1,619,333
------------ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 131,934
Accrued wages and vacation 184,489
Accrued lease settlement 107,766
Capital leases 22,622
Other accrued expenses 81,748
--------------
Total Liabilities 528,559
--------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock, no par value; 25 million shares
authorized; 4,570,361 shares issued and outstanding 6,496,320
Convertible preferred stock, $0.01 par value; 1 million total
shares authorized; 500,000 shares of Series B authorized,
312,500 shares outstanding 1,250,000
Additional paid-in capital 1,250,000
Accumulated deficit (7,905,546)
---------------
Total Stockholders' Equity 1,090,774
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,619,333
------------------------------------------ ==============
The accompanying notes are an integral part of this statement.
36
ESSEX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE FIFTY-THREE WEEK FISCAL YEAR ENDED
DECEMBER 31, 2000 AND
FOR THE FIFTY-TWO WEEK FISCAL YEAR ENDED
DECEMBER 26, 1999
2000 1999
----------------- ------------------
Revenues $ 3,255,500 $ 4,813,228
Cost of goods sold and services provided (1,625,644) (2,524,480)
Research and development (771,234) (494,516)
Selling, general and administrative expenses (2,041,482) (1,693,654)
------------------ -----------------
Operating (Loss) Income (1,182,860) 100,578
Interest expense, net and debenture financing
amortization (8,556) (55,810)
------------------- ------------------
(Loss) Income Before Income Taxes (1,191,416) 44,768
Provision for income taxes -- --
------------------ -----------------
Net (Loss) Income (1,191,416) 44,768
Beneficial conversion feature of convertible
preferred stock (1,250,000) --
------------------ -----------------
Net (Loss) Income Attributable to Common Stockholders $ (2,441,416) $ 44,768
================== =================
Weighted Average Number of Shares
Outstanding 4,717,276 4,397,861
================== =================
Basic (Loss) Earnings Per Common Share $ (0.52) $ 0.01
================= ================
Diluted (Loss) Earnings Per Common Share $ (0.52) $ 0.01
================= ================
The accompanying notes are an integral part of these statements.
37
ESSEX CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
COMMON STOCK PREFERRED STOCK Additional Total
------------ --------------- Stock-
Shares Shares Paid-In Accumulated holders'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL DEFICIT EQUITY
---------- ------------ --------- ------------ ------------- ------------- ----------
BALANCE, DECEMBER 27, 1998 4,397,861 $ 439,786 -- $ -- $ 5,634,234 $ (5,508,898) $ 565,122
Net income -- -- -- -- -- 44,768 44,768
---------- ----------- --------- ----------- ------------- ------------ -----------
BALANCE, DECEMBER 26, 1999 4,397,861 439,786 -- -- 5,634,234 (5,464,130) 609,890
Amend par value to no par -- 5,634,234 -- -- (5,634,234) -- --
Preferred stock issued -- -- 312,500 1,250,000 -- -- 1,250,000
Beneficial conversion feature of
preferred stock -- -- -- -- 1,250,000 (1,250,000) --
Common stock issued 160,000 400,000 -- -- -- -- 400,000
Stock options exercised 12,500 12,500 -- -- -- -- 12,500
Stock option compensation -- 9,800 -- -- -- -- 9,800
Net loss -- -- -- -- -- (1,191,416) (1,191,416)
---------- ----------- --------- ----------- ------------- ------------ -----------
BALANCE, DECEMBER 31, 2000 4,570,361 $ 6,496,320 312,500 $ 1,250,000 $ 1,250,000 $(7,905,546) $ 1,090,774
========== =========== ========= ============ ============= ============ ===========
The accompanying notes are an integral part of these statements.
38
ESSEX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
------------------------------------
Net (Loss) Income $ (1,191,416) $ 44,768
Adjustments to reconcile Net (Loss) Income to Net Cash
(Used In) Provided By Operating Activities:
Depreciation and amortization 98,674 191,988
Inventory valuation reserve 115,000 146,000
Stock option compensation expense 9,800 --
Other (3,981) (912)
Change in Assets and Liabilities:
Accounts receivable 479,950 (83,531)
Inventory 15,321 11,997
Prepayments and other 13,362 9,451
Accounts payable 53,595 (81,472)
Accrued lease settlement (15,682) (91,829)
Other assets and liabilities (222,787) 49,471
-------------- --------------
Net Cash (Used In) Provided By Operating Activities (648,164) 195,931
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
------------------------------------
Purchases of property and equipment (54,072) (25,736)
Proceeds from sale of fixed assets 5,471 1,725
-------------- --------------
Net Cash Used In Investing Activities (48,601) (24,011)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
------------------------------------
Sale of preferred stock 1,250,000 --
Sale of common stock 400,000 --
Exercise of stock options 12,500 --
Short-term repayments of receivables financing, net (59,470) (104,450)
Repayment of convertible debentures (375,714) --
Payment of capital lease obligations (17,580) (108,345)
-------------- --------------
Net Cash Provided By (Used In) Financing Activities 1,209,736 (212,795)
-------------- --------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) 512,971 (40,875)
Balance - beginning of year 502,663 543,538
-------------- --------------
Balance - end of year $ 1,015,634 $ 502,663
============== ==============
The accompanying notes are an integral part of these statements.
39
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER IMPORTANT FACTORS
These statements cover Essex Corporation (the "Company"). Certain amounts
for prior years have been reclassified or recalculated to conform to the
2000 presentation.
REPORTING YEAR
The Company is on a 52-53 week fiscal year ending the last Sunday in
December. Year 2000 was a 53-week fiscal year. Year 1999 was a 52-week
fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for
uncollectible accounts receivable, inventory obsolescence and valuation,
depreciation and amortization, intangible assets, employee benefit plans
and contingencies, among others. Actual results could differ from those
estimates.
IMPORTANT BUSINESS RISK FACTORS
The Company has historically been principally a supplier of technical
services under contracts or subcontracts with departments or agencies of
the U.S. Government, primarily the military services and other departments
and agencies of the Department of Defense. In recent years, the Company's
revenues had been principally from a commercial customer in the satellite
communications (SatCom) business area. This work substantially ended in
December 1999 and limited other work has continued.
The Company has expended significant funds to transition into the
commercial marketplace, particularly the productization of its proprietary
technologies in optoelectronic processors. In June 2000, the Company
announced that it had filed applications to secure patent protection for
innovative technologies in two communications device families: Fiberoptic
HyperFine Wave Division Multiplex channelizers (HfWDM) and Optical
Processor Enhanced Receiver Architecture (OPERA). In September 2000, the
Company obtained $2 million in financing to advance its programs to
capitalize upon these 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.
The Company incurred significant losses in 2000, primarily due to the
increased expenditures for research and development of its optoelectronics
products and services, particularly the optical telecommunications device
technologies. The Company plans to continue research and
40
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
development spending in 2001 in the optoelectronics operations. 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 industrial
concerns to facilitate these goals. The Company will also 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.
CONTRACT ACCOUNTING
Revenues consist of services rendered on cost-plus-fixed-fee, time and
materials and fixed-price contracts. Revenue on cost-plus-fixed-fee
contracts (approximately 45% and 39% of total revenues in 2000 and 1999,
respectively) is recognized to the extent of costs incurred plus a
proportionate amount of fee earned. Revenue on time and materials
contracts (approximately 33% and 57% of total revenues in 2000 and 1999,
respectively) is recognized to the extent of billable rates multiplied by
hours delivered, plus other direct costs. Revenue on fixed-price contracts
(approximately 22% and 4% of total revenues in 2000 and 1999,
respectively) is recognized on the percentage-of-completion method of
accounting based on costs incurred in relation to the total estimated
costs. Anticipated losses are recognized as soon as they become known. A
portion of the Company's business is with agencies of the U.S. Government
and such contracts are subject to audit by cognizant government audit
agencies. Furthermore, while such contracts are fully funded by
appropriations, they may be subject to other risks inherent in government
contracts, such as termination for the convenience of the government.
Because of the inherent uncertainties in estimating costs and the
potential for audit adjustments by U.S. Government agencies, it is at
least reasonably possible that the estimates will change in the near term.
INCOME TAXES
Deferred income taxes are recorded under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future
tax consequences, measured by enacted tax rates, attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period the rate change
becomes effective. Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will
not be realized.
INVENTORY
Inventory costs include purchased parts, labor and manufacturing overhead.
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO)
41
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
method. Management continually monitors the market value of its inventory
and records valuation allowances when deemed necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using straight-line methods based on useful lives as follows:
Leasehold improvements Life of lease
Production and special equipment 3 to 5 years
Furniture and equipment 3 to 5 years
Repairs and maintenance are charged to expense as incurred. When assets
are retired or otherwise disposed of, the asset and related allowance for
depreciation are eliminated from the accounts and any resulting gain or
loss is reflected in income.
PATENT COSTS
Patent costs include legal and filing fees covering the various patents
which have been issued to the Company. Patent costs are amortized over
their respective lives (15 - 20 years) and amortization was $15,000 in
2000 and 1999.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount should be addressed. Impairment is
measured by comparing the carrying value to the estimated undiscounted
future cash flows expected to result from use of the assets and their
eventual disposition.
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share are 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, warrants and convertible
debentures. Such incremental shares were anti dilutive for the periods
presented.
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 selling, general and administrative costs are
included. Equipment which has alternative future uses is capitalized and
charged to expense over its estimated useful life.
42
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
2000 1999
--------- ---------
A. Cash paid during the year for-
Interest $ 42,500 $ 59,000
Income taxes $ -- $ 500
B. In 2000 and 1999, there were new capital leases of $17,000 and
$127,000, respectively.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
U.S. Government
Amounts billed, including retainages $ 118,629
Commercial and other 96,985
-------------
215,614
Contract reserves and allowances for doubtful accounts (50,000)
-------------
$ 165,614
=============
U.S. Government receivables arise from U.S. Government prime contracts and
subcontracts. Retainages (which are not material) will be collected upon
job completion or settlement of audits performed by cognizant U.S.
Government audit agencies. Company cost records have been audited through
1999. In the year an audit is settled, the difference between audit
adjustments and previously established reserves is reflected in income.
Contract reserves and allowances for doubtful accounts have been provided
where less than full recovery under the contract is expected.
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 were no funds advanced as of December
31, 2000.
43
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
4. INVENTORY
Inventory costs are all related to the Company's ImSyn(TM) optoelectronic
processor.
Finished Goods $ 250,440
Systems In-Process 24,832
Purchased Parts 209,825
------------
485,097
Valuation Reserve (435,240)
------------
$ 49,857
The existing configuration of finished goods in inventory is being
redesigned. The current inventory has been written down to its estimated
net realizable value as components or subassemblies in the redesigned and
upgraded units and a new cost basis established. Depending upon the time
to complete redesign and the ability to use the current inventory in the
upgraded units, it is at least reasonably possible that management's view
of the ultimate realizable value of inventory will change in the near
term.
5. MAJOR CUSTOMER INFORMATION
The Company's largest customer was Motorola, Inc. for whom the Company
performed work on the design and other aspects of the Iridium(R) satellite
constellation. The Company's contracts to perform such work amounted to
23% ($733,000) of revenues in 2000 and 45% ($2.2 million) in 1999. This
work substantially ended in December 1999 and limited other work has
continued.
The Company's second largest customer was for subcontract work to an
agency of the Department of Defense. In 1999, the Company began research
work on the use of its optoelectronics products in certain customer
systems and applications. Such work amounted to over $538,000 (17%) of
2000 revenues and $2.4 million (50%) of 1999 revenues. The first phase of
such work ended in early 2000 and a follow-on stage is proposed to begin
in early 2001.
6. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases office space and certain equipment. As of December 31,
2000, the Company is committed to pay aggregate rentals under these leases
as follows:
2001 $ 235,000
2002 $ 223,000
2003 $ 226,000
2004 $ 233,000
2005 $ 199,000
44
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
Rental expense charged to operations, including payments made under
short-term leases, amounted to $174,000 and $391,000 in 2000 and 1999,
respectively.
In early 2001, the Company entered into several capital leases for special
optical test and telephone equipment. The capital equipment cost of these
leases is approximately $300,000 and the lease terms are 2-3 years.
The Company's office facility is under a long-term lease which expires
October 2005. The lease contains provisions to pay for proportionate
increases in operating costs and property taxes.
LEASE SETTLEMENT
In 1994, the Company settled a legal dispute with a former landlord. Under
the Settlement Agreement, the Company remains liable for contingent cash
payments of 25% of future earnings (as defined) and 10-15% of the net
proceeds from the sale of common stock or operating assets. The period for
computation of such contingent payments ends December 2004. The $108,000
accrual as of December 31, 2000 represents the remaining contingent
portion which is to be paid over the applicable consideration period.
7. RETIREMENT PLAN
The Company has a qualified defined contribution retirement plan, the Essex
Corporation Retirement Plan and Trust, which includes a salary reduction
401(k) feature for its employees. The Plan calls for an employer matching
contribution of up to 3% of eligible employee compensation under the salary
reduction feature and allows for a discretionary contribution. Total
authorized contributions under the matching contribution feature of the
Plan were approximately $67,000 in 2000 and $58,000 in 1999. There were no
discretionary contributions in these years.
In accordance with the retirement plan and trust, as amended, such
authorized contributions and the resulting annual expense can be reduced by
forfeitures by terminated employees of unvested amounts of prior years'
contributions. Forfeitures of $7,000 and $10,000 were utilized to reduce
annual expenses in 2000 and 1999, respectively.
45
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
8. INCOME TAXES
The components of the Company's net deferred tax asset account are as
follows as of December 31, 2000:
2000
==============
Acquisition NOL and tax credit carryforward $ 289,000
NOL carryforward 1,701,000
Tax credit carryforward 130,000
Allowance for doubtful accounts 17,500
Depreciation and amortization 61,000
Inventory valuation reserve 152,000
Accrued employee benefit costs 30,000
Lease settlement accrual 38,000
Other 12,000
Valuation Reserve (2,430,500)
--------------
Net Deferred Tax Asset $ 0
==============
As a result of an acquisition, the Company has net operating loss ("NOL")
and tax credit carryforwards of approximately $726,000 and $35,000,
respectively, that are available, subject to certain limitations, to offset
future book and taxable income and taxes payable. The net operating loss
expires in 2001 and 2002 and the tax credits expire in 2001.
The Company also has a regular NOL carryforward of $4,860,000 and tax
credit carryforwards of $130,000 that are available, subject to certain
limitations, to offset future book income and taxes payable. The NOL begins
to expire in 2008 and the tax credit carryforwards expire through 2018.
The evaluation of the realizability of such deferred tax assets in future
periods is made 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. At this time, 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.
The Company recorded no benefit or provision for income taxes in 2000 or
1999.
9. STOCK OPTION AND STOCK BONUS PLANS; OTHER STOCK OPTIONS
The Company adopted a 2000 Stock Option and Appreciation Rights Plan (the
"2000 Plan") in December 2000. This plan reserves 300,000 shares of the
Company's unissued shares for option and stock appreciation rights ("SAR")
grants. This plan expires in 2010. Options, which may be tax qualified
("ISOs") and non-qualified ("NSOs"), are exercisable for a period of up to
10 years at prices at or above market price as established on the date of
grant. Upon
46
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
the exercise of a stock appreciation right, the recipient will receive
payment in the form of stock, cash, or both, as determined by the Company,
equal to the appreciation in value of the shares to which the rights were
awarded. Increases and decreases in the market price of the stock also
cause an increase in or reduction to plan expense to record the impact of
the SARs outstanding. No options or SARs under this plan were granted in
2000.
The Company has a 1999 Stock Option and Appreciation Rights Plan ("1999
Plan") and a 1998 Stock Option and Appreciation Rights Plan ("1998 Plan").
The 1999 Plan reserves 300,000 shares and the 1998 Plan reserves 297,500
shares of the Company's unissued shares for option and SAR grants. Each
plan is similar to the 2000 Plan. The 1999 Plan expires in 2010 and the
1998 Plan expires in 2008. There are no SARs outstanding in either plan.
1998 PLAN 1999 PLAN
------------------------------- ------------------------------
Number of Number of
Shares Price Per Share Shares Price Per Share
--------- ------------------ --------- ------------------
Outstanding, 12/27/98 0
Granted 132,500 $ 1.00
---------
Outstanding, 12/26/99 132,500 $ 1.00
Granted 166,700 $ 1.69 - $ 2.40 110,000 $ 2.04 - $ 2.40
Exercised (2,500) $ 1.00 0 -
--------- ---------
Outstanding, 12/31/00 296,700 $ 1.00 - $ 2.40 110,000 $ 2.04 - $ 2.40
========= =========
Exercisable, 12/21/00 224,200 $ 1.00 - $ 2.40 70,000 $ 2.04 - $ 2.40
========= =========
Under the 1998 Plan, the weighted average price for options outstanding and
exercisable was $1.56 and $1.49, respectively. The weighted average life
for options outstanding and exercisable was 9 years. Under the 1999 Plan,
the weighted average price for options outstanding and exercisable was
$2.08 and $2.09, respectively. The weighted average life for options
outstanding and exercisable was 9.7 years.
The Company has a 1996 Stock Option and Appreciation Rights Plan ("1996
Plan") which reserves 290,000 shares of the Company's unissued shares for
option and SAR grants. This plan expires in 2006. This plan is similar to
the plans above. There are no SARs outstanding.
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------------
Outstanding, 12/27/98 256,300 $ 1.00 - $ 3.00
Granted 46,350 $ 1.00
Canceled (14,200) $ 1.00 - $ 3.00
-------------
Outstanding, 12/26/99 288,450 $ 1.00 - $ 3.00
Granted 19,700 $ 1.69 - $ 2.04
Exercised (10,000) $ 1.00
Canceled (10,300) $ 1.00
-------------
Outstanding, 12/31/00 287,850 $ 1.00 - $ 3.00
=============
Exercisable, 12/31/00 287,850 $ 1.00 - $ 3.00
=============
47
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
The weighted average price for options outstanding and exercisable was
$1.35 and $1.36, respectively. The weighted average life for options
outstanding and exercisable was 6 years.
An earlier Option and Stock Appreciation Rights Plan expired in 1997.
Outstanding ISO or NSO options previously granted are exercisable through
January 30, 2007. The activity in this plan for the last two years is as
follows.
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------------
Outstanding, 12/27/98 651,250 $ 2.52 - $ 3.08
Canceled/Expired (101,600) $ 2.52 - $ 3.08
-------------
Outstanding, 12/26/99 549,650 $ 2.94 - $ 3.00
Canceled/Expired (291,000) $ 2.94 - $ 3.00
-------------
Outstanding, 12/31/00 258,650 $ 3.00
=============
Exercisable, 12/31/00 258,650 $ 3.00
=============
The weighted average price for options outstanding and exercisable was
$3.00. The weighted average life for options outstanding and exercisable
was 3.7 years. Since this Plan expired in 1997, there are no shares
available for future grants. There are no SARs outstanding.
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices # Life (Years) Price ($) # Price ($)
---------------------- -------------- ----------------- ---------------- --- ----------------- ------------------
$ 1.00 - $ 1.69 400,650 7.5 1.14 378,150 1.15
$ 2.04 - $ 2.40 254,900 8.8 2.07 164,900 2.08
$ 3.00 297,650 3.9 3.00 297,650 3.00
---------------------- -------------- ----------------- ---------------- --- ---------------- -------------------
---------------------- -------------- ----------------- ---------------- --- ---------------- -------------------
953,200 6.7 1.80 840,700 1.79
====================== ============== ================= ================ === ================ ===================
The Company has a Restricted Stock Bonus Plan covering key employees and
directors of the Company. The Plan can reserve up to 50,000 of the
Company's unissued shares for awards. There were no shares awarded in 2000.
There were 18,000 shares awarded to four directors of the Company in 1998.
As of December 31, 2000, there were 4,050 shares available for award under
the Plan.
In 1994, the Company issued an option for 125,000 shares of unregistered
common stock under a lease settlement (see Note 6). The option is
exercisable through December 31, 2004 at an
48
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
exercise price (as adjusted) of $1.29 per share. The option price is
subject to adjustment under anti-dilution provisions of the option
agreement. The optionholders have certain registration rights for these
shares of common stock.
In 2000, the Company issued non-qualified options for 100,000 shares
directly to its President and 61,500 to its Chief Financial
Officer/Treasurer. The exercise price is equal to the market price on the
date of grant.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option or similar equity
instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. The Company has historically accounted
for employee stock options or similar equity instruments under the
"intrinsic value method" as defined by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". 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.
SFAS No. 123 allows an entity to continue to use the intrinsic value method
and management has elected to do so. However, entities electing to remain
with the accounting in APB Opinion No. 25 must make pro forma disclosures
of net income and earnings per share, as if the fair value based method of
accounting had been applied. Because the SFAS No. 123 method of accounting
has not been applied to options granted prior to January 1, 1995, the
resulting proforma compensation costs may not be representative of the cost
to be expected in future years. Accordingly, net income (loss) and earnings
(loss) per share would be as follows:
As Reported Pro Forma
------------------------------------------- ------------------------------------------
Net Income Net Income (Loss)
(Loss) Attributable to
Attributable to Common
Year Common Stockholders
Ended Stockholders Per Share Per Share
----------------- ------------------ ------------------ ------------------- -------------------
----------------- ------------------ ------------------ ------------------- -------------------
2000 $ (2,441,416) $ (0.52) $ (2,909,650) $ (0.62)
1999 $ 44,768 $ 0.01 $ (271,636) $ (0.06)
49
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2000 1999
----------- ----------
Dividend yield 0.00% 0.00%
Volatility 203.40% 70.00%
Weighted average risk free interest rate 6.05% 5.70%
Weighted average expected lives of grants 10 years 3 years
The weighted average grant date fair value of the options issued in 2000
and 1999 was approximately $1.98 and $0.50, respectively.
10. 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. The remaining 187,500 are
subscribed for at $750,000 which will be paid in three quarterly
installments beginning March 2001. Each Series B share must be converted
into 4 shares of common stock before September 12, 2002. The Series B has
51% voting rights, subject to certain terms and conditions, on all
stockholder matters. No Series A preferred shares are currently
outstanding.
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 have a term of 5 years and can be exercised at a nominal 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 4 million shares of common stock in
connection with the convertible preferred stock and the possible exercise
of the related 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 has imputed and
recorded a deemed dividend of $1,250,000 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"). There remains an additional $750,000 of beneficial
conversion feature to be recorded as a deemed dividend when the remaining
preferred stock is issued. Such imputed dividends have no
50
ESSEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
impact on net income (loss) from operations or cash flows but have to be
considered when calculating earnings (loss) per share attributable to
common stockholders.
11. RESTATEMENT OF CERTAIN 2000 FINANCIAL DATA
The Company has restated components of Stockholders' Equity to reflect the
effect of the beneficial conversion feature of the Series B Convertible
Preferred Stock, by increasing Additional Paid-In Capital to $1,250,000
from $0 and changing Accumulated Deficit by a like amount, from
$(6,655,546) to $(7,905,546). There was no change to total stockholders'
equity of $1,090,774.
The Company has restated the computation of Year 2000 net loss
attributable to common stockholders and the related per share amount for
the effect of the beneficial conversion feature of the preferred stock as
follows.
Originally Reported As Restated
--------------------------------------- --------------------------------------
Amount Per Share Amount Per Share
------------------- ------------------ -------------------- -----------------
------------------- ------------------ -------------------- -----------------
Net loss $ (1,191,416) $ (0.25) $ (1,191,416) $ (0.25)
Beneficial conversion feature of
convertible preferred stock -- -- (1,250,000) (0.27)
------------------- ------------------ -------------------- -----------------
------------------- ------------------ -------------------- -----------------
Net loss attributable to common
stockholders $ (1,191,416) $ (0.25) $ (2,441,416) $ (0.52)
=================== ================== ==================== =================
=================== ================== ==================== =================
51
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report dated February 9, 2001, except as to Note 11 which is dated August 8,
2001, included in this Form 10-KSB/A No. 1, into Essex Corporation's previously
filed Registration Statements on Form S-8, File No. 33-47900, File No. 33-336770
and File No. 333-57122.
Stegman & Company
Baltimore, Maryland
August 8, 2001
52