ELECTROMAGNETIC SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except net earnings per share)
Years ended December 31
1995 1994 1993
Net sales (note 9) $128,950 117,993 99,044
Cost of sales 83,865 73,375 61,771
Selling, general and administrative expenses 30,836 27,589 26,522
Research and development expenses 10,392 8,127 8,153
Operating income 3,857 8,902 2,598
Interest and other income 675 640 210
Interest expense (864) (482) (434)
Earnings before income taxes
and LXE minority interest 3,668 9,060 2,374
Income taxes (note 6) 1,402 3,712 896
LXE minority interest (44) 1,085 87
Net earnings $ 2,310 4,263 1,391
Net earnings per common and
common equivalent share (note 5) $ .32 .58 .20
Weighted average number of common
and common equivalent shares (note 5) 7,266 7,043 6,856
See accompanying notes to consolidated financial statements.
ELECTROMAGNETIC SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31
1995 1994
ASSETS
Current assets:
Cash, including interest-bearing deposits
of $1,998 in 1995 and $1,165 in 1994 $ 3,559 2,671
Reverse repurchase agreements 2,207 10,400
Total cash and cash equivalents 5,766 13,071
Marketable securities, at cost, which
approximates market - 400
Trade accounts receivable, net (note 3) 40,118 36,355
Inventories:
Work in process 5,701 4,905
Parts and materials 10,128 6,809
Total inventories 15,829 11,714
Deferred income taxes (note 6) 1,363 992
Total current assets 63,076 62,532
Property, plant and equipment (note 4):
Land 1,150 1,150
Building and leasehold improvements 14,690 13,626
Machinery and equipment 53,037 47,256
Furniture and fixtures 4,182 3,367
73,059 65,399
Less accumulated depreciation
and amortization 43,794 38,868
Net property, plant and equipment 29,265 26,531
Other assets 7,487 2,142
Goodwill, net of accumulated amortization
of $1,225 in 1995 and $805 in 1994 (note 2) 5,126 5,546
$104,954 96,751
See accompanying notes to consolidated financial statements.
ELECTROMAGNETIC SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(In thousands except share data)
December 31
1995 1994
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of
long-term debt (note 4) $ 3,546 3,830
Accounts payable 10,369 10,762
Income taxes - 1,490
Accrued compensation costs 3,402 3,656
Accrued retirement costs (note 7) 589 1,305
Deferred revenue 1,296 1,147
Other current liabilities 872 976
Total current liabilities 20,074 23,166
Long-term debt, excluding current
installments (note 4) 10,989 4,592
Deferred income taxes (note 6) 4,408 3,881
Total liabilities 35,471 31,639
Minority interest in LXE 9,274 8,681
Stockholders' equity (note 5):
Preferred stock of $1.00 par value
per share. Authorized 10,000,000
shares; none issued - -
Common stock of $.10 par value per
share. Authorized 75,000,000 shares,
issued and outstanding 7,004,000 in
1995 and 6,821,000 in 1994 700 682
Additional paid-in capital 10,681 9,329
Foreign currency translation adjustment (17) (115)
Retained earnings 48,845 46,535
Total stockholders' equity 60,209 56,431
Commitments and contingencies (notes 2
and 10)
$104,954 96,751
See accompanying notes to consolidated financial statements.
ELECTROMAGNETIC SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Three years ended December 31, 1995
Foreign
currency
Addi- trans- Total
tional lation stock-
Common Stock paid-in adjust- Retained holders'
Shares Amount capital ment earnings equity
Balance, December 31,
1992 6,704 $ 670 8,528 - 40,881 50,079
Net earnings - - - - 1,391 1,391
Income tax benefit from
exercise of non-
qualified stock options
(note 6) - - 14 - - 14
Exercise of common stock
options 17 2 78 - - 80
Redemption of shares upon
exercise of common
stock options (6) (1) (38) - - (39)
Foreign currency
translation adjustment - - - 23 - 23
Balance, December 31,
1993 6,715 671 8,582 23 42,272 51,548
Net earnings - - - - 4,263 4,263
Income tax benefit from
exercise of non-
qualified stock options
(note 6) - - 124 - - 124
Exercise of common stock
options 106 11 623 - - 634
Foreign currency
translation adjustment - - - (138) - (138)
Balance, December 31,
1994 6,821 682 9,329 (115) 46,535 56,431
Net earnings - - - - 2,310 2,310
Income tax benefit from
exercise of non-
qualified stock options
(note 6) - - 695 - - 695
Exercise of common stock
options 248 25 1,594 - - 1,619
Redemption of shares upon
exercise of common stock
options (65) (7) (937) - - (944)
Foreign currency
translation adjustment - - - 98 - 98
Balance, December 31,
1995 7,004 $ 700 10,681 (17) 48,845 60,209
See accompanying notes to consolidated financial statements.
ELECTROMAGNETIC SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
1995 1994 1993
Cash flows from operating activities:
Net earnings $ 2,310 4,263 1,391
Adjustments to reconcile net earnings to net
cash from operating activities:
LXE minority interest (44) 1,085 87
Depreciation and amortization 5,587 5,526 5,396
Goodwill amortization 420 420 385
Deferred income taxes 93 (438) (213)
Changes in operating assets
and liabilities:
Trade accounts receivable (3,763) (7,118) (4,619)
Inventories (4,115) 765 (1,160)
Accounts payable (393) 2,015 (2,212)
Income taxes (501) 1,582 1,830
Accrued costs, deferred revenue,
and other current liabilities (954) 243 243
Other (864) (87) (122)
Net cash provided by (used in)
operating activities (2,224) 8,256 1,006
Cash flows from investing activities:
Purchase of property, plant and equipment (8,459) (5,573) (5,301)
Capitalized product software costs and
other market related investments (3,667) - -
Purchase of CAL common stock from
minority shareholders - - (537)
Proceeds from maturities of marketable
securities 400 1,590 2,421
Net cash used in
investing activities (11,726) (3,983) (3,417)
Cash flows from financing activities:
Proceeds from long-term debt 6,850 - 3,670
Repayment of long-term debt (737) (356) (1,154)
Proceeds from exercise of stock options 532 743 39
Net cash provided by
financing activities 6,645 387 2,555
Net change in cash and
cash equivalents (7,305) 4,660 144
Cash and cash equivalents at January 1 13,071 8,411 8,267
Cash and cash equivalents at December 31 $ 5,766 13,071 8,411
Supplemental disclosure of cash
flow information:
Cash paid in interest $ 864 482 434
Cash paid in income taxes $ 2,265 2,991 1,205
See accompanying notes to consolidated financial statements.
Electromagnetic Sciences, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of
Electromagnetic Sciences, Inc., its wholly-owned subsidiary, EMS
Technologies, Inc., and its majority-owned subsidiaries, LXE Inc. and CAL
Corporation (collectively, "the Company"). All significant intercompany
balances and transactions have been eliminated in consolidation. Following
is a summary of the Company's significant accounting policies:
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and revenues
and expenses reported in the financial statements and accompanying notes,
including revenue recognition under long-term contracts. Actual results
could differ from those estimates.
Revenue Recognition
Revenues are derived from sales of the Company's products to end-users and
to other manufacturers or system integrators. Revenues under certain long-
term contracts, many of which provide for periodic payments, are recognized
under the percentage-of-completion method using the ratio of cost incurred
to total estimated cost as the measure of performance. Revenues under
cost-reimbursement contracts are recorded as costs are incurred and include
an estimate of fees earned. Revenues under all other contracts are
recognized when units are delivered or services are performed. Provisions
for estimated losses on uncompleted contracts are made in the period in
which such losses are determined. Revenues collected in advance under
service contracts are recognized over the term of the contract. To
properly match revenues with costs, certain contracts may have revenue
recognized in excess of billings, and other contracts may have billings in
excess of revenue recognized.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market
(net realizable value). Work in process consists of raw material and
production costs, including indirect manufacturing costs.
Marketable Securities
Marketable securities consist of municipal general obligation bonds and
reverse repurchase agreements with a bank, with U.S. Government or other
government-backed debt securities as the underlying assets; these
marketable securities are classified as current or noncurrent depending
upon their respective maturity dates. Marketable debt securities are
carried at cost, which approximates market, because the Company has the
ability and intent to hold them until maturity. Securities underlying the
reverse repurchase agreements are book entry securities held in trust at a
bank. At December 31, 1995, all reverse repurchase agreements matured
within three days. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
primarily using the straight-line method over the following estimated
useful lives of the respective assets:
Buildings 40 years
Machinery and equipment 3 to 8 years
Furniture and fixtures 10 years
Leasehold improvements are amortized over the shorter of their estimated
useful lives or the terms of the respective leases.
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which was issued in March 1995. The
adoption of SFAS 121 did not result in any adjustments to the carrying
value of property, plant and equipment or other long-lived assets.
Capitalized Software Costs
In 1995, the Company has capitalized $1,167,000 of certain costs to develop
software which will be licensed to customers. Capitalized software costs,
which are included in other assets, will be amortized using the greater of
the ratio of current gross revenues for the product to the total of current
and anticipated future gross revenues or the straight-line method over
three years.
Income Taxes
The Company provides for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Earnings Per Share
Earnings per common and common equivalent share are based on the weighted
average number of shares outstanding and equivalent shares derived from
dilutive stock options. For purposes of calculating primary earnings per
share, the Company's proportionate share of the net earnings of LXE Inc.
has been adjusted to reflect the dilutive effect of LXE's outstanding stock
options. Fully diluted earnings per share are not significantly different
from the primary earnings per share presented.
Goodwill
Goodwill represents the excess of purchase price over fair value of net
assets acquired and is amortized on a straight-line basis over fifteen
years.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at current exchange rates. Income and expenses of the
foreign subsidiaries are translated into U.S. dollars at the approximate
average exchange rates which prevailed during the year presented. CAL
Corporation conducts a material portion of the Company's overall business
operations, and the effects of translating CAL's Canadian currency
financial statements are accumulated and reported as a separate component
of stockholder's equity. LXE Inc.'s wholly owned European subsidiaries
are sales and marketing organizations with no other material business
operations, and the effects of remeasuring the foreign currency financial
statements of these subsidiaries are recognized in the consolidated
statement of earnings. Foreign currency transactions and remeasurement
resulted in a net gain of $550,000 in 1995 and $237,000 in 1994, but had no
material effect in 1993.
Common Stock Issued by LXE Inc.
In the event that LXE issues shares of common stock, the Company has
elected to recognize in the consolidated statements of earnings the gain or
loss resulting from the Company's share of the change in LXE's book value.
The Company will also provide for deferred income taxes on any such gain or
loss.
(2) ACQUISITION OF CAL CORPORATION
In January 1993, the Company acquired an approximately 74% interest in CAL
Corporation, a privately-held company headquartered in Ottawa, Canada, that
provides a range of electronic systems for space programs and satellite-
based communications networks. The cost of the Company's equity position
was approximately $1.7 million in cash, of which $1.2 million was invested
directly in CAL; the Company also made a $2.0 million intercompany loan to
CAL. The Company agreed to provide CAL with additional financing through
intercompany loans. If CAL's earnings exceed certain target levels over
the four years ended December 31, 1996, the Company is obligated to offer
to purchase all outstanding CAL shares held by other shareholders, at a
formula price based on actual earnings during the four-year period;
regardless of whether such target earnings are achieved, the Company will
have, subject to certain conditions, the right to acquire approximately 69%
of the remaining shares at a formula price that generally would be higher
than the price at which the Company is obligated to offer to purchase all
remaining shares. The acquisition was accounted for as a purchase
transaction and, accordingly, the assets and liabilities were recorded at
their estimated fair value at the date of acquisition. The operations of
CAL have been included in the consolidated statement of earnings since the
acquisition date.
(3) TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable include the following (in thousands):
December 31
1995 1994
Amounts billed under contracts $ 27,774 27,221
Unbilled revenues (substantially all to
be billed during the following twelve
months) 13,873 11,112
Deferred revenue (1,009) (1,333)
Allowance for doubtful accounts (520) (645)
Trade accounts receivable, net $ 40,118 36,355
(4) LONG-TERM DEBT
The following is a summary of long-term debt (in thousands):
December 31
1995 1994
Industrial development revenue bond secured by
land, building and equipment, due in varying
monthly installments to March 1997, including
interest at a rate of 79% of a prime rate not
to exceed 13.5% and not less than 7% (7% at
the end of 1995 and 1994) $ 350 594
Reducing revolving credit loan secured by land
and building, maturing in December 2000,
interest payable quarterly at a variable rate
(8.0% at the end of 1995 and 8.75% at the end
of 1994) 3,770 3,770
Revolving credit loan of LXE Inc., unsecured,
maturing in December 1998, interest payable
quarterly at a variable rate (7.67% at the end
of 1995) 6,850 -
Line of credit secured by the assets
of CAL Corporation, interest payable at a
prime rate plus 1.0% (8.5% at the end of
1995 and 8.0% at the end of 1994) 3,068 3,392
Term loan secured by certain fixed assets
of CAL Corporation, due in installments to
March 1997, interest payable at a prime rate
plus 2.5% (10.0% at the end of 1995 and 10.5%
at the end of 1994) 423 565
Term loan secured by certain fixed assets of
CAL Corporation, due in installments to April
1997, interest payable at a prime rate plus
1.5% (9.0% at the end of 1995 and 9.5% at the
end of 1994) 74 101
Total long-term debt 14,535 8,422
Less current installments of long-term debt 3,546 3,830
Long-term debt,
excluding current installments $10,989 4,592
In December 1995, the Company amended and restated its reducing revolving
credit agreement with a bank to increase available credit from $5,400,000
to $10,000,0000, and extend the loan maturity from January 1, 1997 to
December 29, 2000. Reductions in credit available under the agreement
occur annually on a fixed schedule over the loan term until credit
available reduces to $8,000,000 during the final year of the loan
agreement. Based on the level of borrowing at December 31, 1995, no
principal payments are required until maturity.
Also in December 1995, LXE Inc. entered into a $10,000,000 revolving credit
agreement with a bank that extends through December 1998. Under the credit
agreement, LXE must maintain certain ratios related to interest coverage
and leverage, and must maintain net worth of at least $25,000,000, among
other restrictions.
Interest under both of the revolving credit agreements is, at the Company's
option, a function of either the bank's prime rate or LIBOR. A commitment
fee equal to .20% per annum of the daily average unused credit available is
payable quarterly in arrears under both loans.
CAL's line of credit expired in July 1995, and CAL is in technical default
of certain financial covenants. CAL and its bank are currently negotiating
a new credit agreement that would extend the maturity and increase
available credit. The Company expects that the new agreement will be
completed in the first half of 1996.
The approximate principal maturities of long-term debt for each of the next
five years are $3,546 in 1996, $369 in 1997, $6,850 in 1998, $0 in 1999,
and $3,770 in 2000. At December 31, 1996 the Company has available four
immediate sources of credit: $6.2 million remaining under the reducing
revolving credit agreement; $3.1 million available under the LXE revolving
credit loan; a separate $5 million unused line of credit with a bank; and
$430,000 available under a CAL credit line.
(5) STOCK OPTION PLANS
The Company has granted incentive and nonqualified stock options to key
employees and directors under several stock option plans. All outstanding
options have been granted at 100% of fair market value on each option's
grant date. All outstanding options become exercisable from one to three
years after the date of grant and expire from six to ten years after the
date of grant. Some nonqualified options are contingent upon continued
employment or noncompetition after retirement. Under all plans at December
31, 1995, options for a total of 518,168 shares of stock were exercisable,
and options for a total of 169,000 shares were available for future grants.
Following is a summary of activity in all of the Company's stock option
plans for the two years ended December 31, 1995 and 1994 (in thousands,
except price per share data):
Option Total
price option
Shares per share price
Options outstanding at
December 31, 1993 1,015 $ 3.63-12.62 $ 6,692
Granted 108 8.25- 9.00 893
Canceled or expired (15) 6.38-12.62 (178)
Exercised (106) 3.63- 8.00 (574)
Options outstanding at
December 31, 1994 1,002 3.63-11.50 6,833
Granted 69 11.59-14.13 878
Canceled or expired (16) 6.13- 8.25 (117)
Exercised (248) 3.63-11.63 (1,619)
Options outstanding at
December 31, 1995 807 $ 3.63-14.13 $ 5,975
LXE Inc. maintains a separate stock incentive plan which, as amended,
provides 1,000,000 shares of LXE common stock for grants of restricted
shares or options to directors and employees. At December 31, 1995,
options for 408,000 shares of LXE stock were outstanding at prices per
share ranging from $3.77 to $18.25. These options become exercisable at
various dates through 2001, with 318,000 exercisable at December 31, 1995.
Certain options are subject to possible acceleration to earlier exercise
dates based on achievement of criteria expected to be specified in the
future. All outstanding LXE options expire by 2002.
The Company has accounted for the issuance of options to employees under
Accounting Principles Board Opinion No. 25 (APB 25), which recognizes
compensation cost from the issuance of options based upon the option's
"intrinsic value," the amount by which the quoted market price of an
option's underlying stock exceeds the amount an employee must pay to
acquire the stock. APB 25 specifies different dates for the pertinent
quoted market price, depending on whether the terms of an award are fixed
or variable. Substantially all of the options granted by the Company have
not resulted in compensation cost under APB 25. In October 1995, the
Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15,
1995. SFAS 123 requires the recognition or disclosure of compensation cost
based upon the "fair value" of a stock option (estimated by an option-
pricing valuation model such as Black-Scholes) as of the grant date. The
Company intends to comply with the provisions of SFAS 123 beginning in
fiscal 1996 by continuing to recognize compensation cost from stock options
under the "intrinsic value" method of APB 25, with additional footnote
disclosures to be provided, including the pro forma effects of applying the
"fair value" method of SFAS 123. Based upon this accounting policy, the
Company wold not have recognized any compensation cost associated with
stock options granted in fiscal 1995, nor does the Company expect to
recognize any such cost in 1996.
In 1989, the Company adopted a Shareholder Rights Plan, under which each
outstanding share of common stock carries a contingent right to purchase
additional common stock. These rights are triggered by any of the
following: (i) the acquisition of at least a 20% beneficial ownership in
the Company, (ii) the acquisition of an additional 2% beneficial interest
by an existing 20% holder, or (iii) certain merger, consolidation or asset
sale transactions, in each case without the consent of a majority of the
outside members of the Company's Board of Directors not having an interest
in the acquiror. Upon being triggered, each right entitles its holder
(other than the acquiror and certain related parties) to buy for $30 shares
having at that time a market value of $60. The rights expire on April 6,
1999, are subject to redemption by vote of the disinterested directors at a
price of $.01 per right, and do not have voting power. Prior to becoming
exercisable, they are not separately tradeable and do not have a dilutive
effect on earnings per share. In addition to the common shares issuable
under the Shareholder Rights Plan, the Board of Directors may issue up to
10,000,000 shares of preferred stock, with such preferences, limitations
and relative rights as may be determined by the Board.
(6) INCOME TAXES
Total income tax expense (benefit) provided for in the Company's
consolidated financial statements consists of the following (in thousands):
1995 1994 1993
Consolidated income tax expense $ 1,402 3,712 896
Income tax benefit resulting from
exercise of stock options credited
to stockholders' equity and
minority interest (1,316) (479) (14)
Total $ 86 3,233 882
The components of income tax expense were (in thousands):
1995 1994 1993
Current:
Federal $ 979 3,312 1,058
State 98 626 188
Foreign 232 212 -
Total current expense 1,309 4,150 1,246
Deferred:
Federal (153) (335) (44)
State (1) (70) (6)
Foreign 247 (33) (300)
Total deferred (benefit) expense 93 (438) (350)
Total income tax expense $ 1,402 3,712 896
Income tax expense differed as follows from the amounts computed by
applying the U.S. federal income tax rate of 34% to earnings before income
taxes and LXE minority interest (in thousands):
1995 1994 1993
Computed "expected" income
tax expense $ 1,247 3,080 807
Tax credits from
research activities (141) (150) (112)
State income taxes, net of
federal income tax benefit 64 330 119
Higher foreign tax rates 208 28 (121)
Change in deferred tax asset
valuation allowance (47) 69 (34)
Amortization of goodwill 143 143 131
Other (72) 212 106
Income tax expense $ 1,402 3,712 896
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are presented below (in thousands):
1995 1994
Deferred tax assets:
Accounts receivable $ 269 442
Inventories 209 251
Accrued compensation costs 417 427
Foreign research expense and
tax credit carryforward 5,838 4,777
Foreign net operating loss
carryforward 239 241
Foreign note receivable 327 319
Other 225 13
Total gross deferred tax assets 7,524 6,470
Valuation allowance (6,161) (5,328)
Net deferred tax assets 1,363 1,142
Deferred tax liabilities:
Property, plant and equipment 1,866 1,802
Gain from issuance of LXE stock 2,229 2,229
Net gain from foreign transactions and
remeasurement 313 -
Total gross deferred tax liabilities 4,408 4,031
Net deferred tax liability $ 3,045 2,889
The valuation allowance for deferred tax assets at December 31, 1995,
includes $5,280,000 related to tax benefits from the operations of CAL
Corporation; which will be first allocated to goodwill when recognized.
Earnings before income taxes for U.S. operations were $2,460,000 in 1995,
$8,817,000 in 1994, and $3,185,000 in 1993. Foreign operations reported
earnings before income taxes of $1,208,000 in 1995, $243,000 in 1994, and a
loss before income taxes of $811,000 in 1993. The Company's deferred tax
assets at December 31, 1995, include $239,000 for a cumulative $725,000 net
operating loss incurred by certain foreign operations, which may be carried
forward through 2000; management believes that these operations will
generate adequate earnings within the next two years to fully realize this
deferred tax asset.
(7) RETIREMENT PLANS
The Company established a qualified defined contribution plan in 1993. All
U.S.-based employees that meet a minimum service requirement are eligible
to participate in the plan. Company contributions are allocated to each
participant based upon an age-weighted formula that discounts an equivalent
benefit at age 65 to each employee's current age. Accumulated
contributions are invested at each participant's discretion from among a
diverse range of investment options offered by an independent investment
firm selected by the Company.
The Company's contribution to this plan is determined each year by the
Board of Directors. There is no required minimum annual contribution, but
the target contribution has been approximately 5% of base payroll. The
Company accrued an expense for the defined contribution plan of $1,564,000
for 1995, $1,250,000 for 1994, and $1,031,000 for 1993.
The Company also sponsors qualified retirement savings plans in the U.S.
and Canada, in which the Company matches a portion of each eligible
employee's contributions. The Company's matching contributions to these
plans were $403,000 in 1995, $300,000 in 1994 and $218,000 in 1993.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes certain information regarding the fair value of
the Company's financial instruments at December 31, 1995:
Cash and cash equivalents, trade accounts receivable and accounts
payable - The carrying amount approximates fair value because of
the short maturity of these instruments.
Other assets - Included in other assets at December 31, 1995 is $2.5
million minority interest investment in a non-public U.S. company with
complimentary technologies. Based upon the discounted cash flows
expected to be derived from this investment, management estimates
that its carrying value approximates its fair value.
Long-term debt - Substantially all of the Company's long-term debt
bears interest at variable rates which management believes are
commensurate with rates currently available on similar debt.
Accordingly, the carrying value of long-term debt approximates
fair value.
(9) BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company designs and produces advanced communications and signal-
processing products with an emphasis on wireless networks; applications
include space and satellite communications; cellular telecommunications,
radar, surveillance, and military counter-measures. The Company also
designs and produces wireless logistics systems mainly for commercial
materials handling operations. Following is a summary of business segment
information (in thousands):
1995 1994 1993
Net sales:
Advanced communications and
signal-processing products $ 66,659 54,851 53,391
Wireless logistics systems 62,291 63,142 45,653
Total $ 128,950 117,993 99,044
Operating income:
Advanced communications and
signal-processing products $ 4,468 2,490 2,038
Wireless logistics systems (611) 6,412 560
Total $ 3,857 8,902 2,598
Identifiable assets:
Advanced communications and
signal-processing products $ 54,912 51,010 49,996
Wireless logistics systems 49,281 45,741 37,865
Total $ 104,193 96,751 87,861
Capital expenditures:
Advanced communications and
signal-processing products $ 4,200 2,845 2,690
Wireless logistics systems 4,259 2,728 2,611
Total $ 8,459 5,573 5,301
Depreciation and amortization:
Advanced communications and
signal-processing products $ 3,260 3,478 3,662
Wireless logistics systems 2,747 2,468 2,119
Total $ 6,007 5,946 5,781
In 1993, the Company established operations outside the U.S. Following is
a summary of geographic area information, as measured by the locale of
revenue-producing operations, for the years ended December 31, 1995, 1994,
and 1993 (in thousands):
1995 1994 1993
Net sales:
United States $ 99,088 96,124 76,727
Canada 17,306 15,059 21,044
Europe 12,556 6,810 1,273
Total $ 128,950 117,993 99,044
Operating income (loss):
United States $ 2,763 8,639 2,315
Canada 816 (19) 474
Europe 278 282 (191)
Total $ 3,857 8,902 2,598
Identifiable assets:
United States $ 81,003 76,234 70,061
Canada 17,174 16,037 15,843
Europe 6,777 4,480 1,957
Total $ 104,954 96,751 87,861
Export sales from the U.S. to unaffiliated customers were approximately
$16.0 million, $18.1 million and $12.7 million in 1995, 1994 and 1993,
respectively. Exports to the U.S. by the Company's Canadian subsidiary to
non-affiliated U.S. customers were approximately $1.3 million in 1995, $1.1
million in 1994, and $1.8 million in 1993.
The Company had one domestic customer that accounted for 12.4% of 1995
consolidated net sales. No customers accounted for more than 10% of
consolidated net sales in 1994 and 1993.
(10) COMMITMENTS
The Company is committed under several non-cancelable operating leases for
office space, certain computer and office equipment and automobiles.
Minimum annual lease payments under such leases are $1,655,000 in 1996,
$1,216,000 in 1997, $563,000 in 1998, $401,000 in 1999, and $311,000 in
2000. The Company also has short-term leases for regional sales offices,
equipment and automobiles. Total rent expense under all operating leases
was approximately $2,425,000, $1,889,000, and $2,101,000 in 1995, 1994 and
1993, respectively.
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of interim financial information for the years ended
December 31, 1995 and 1994 (in thousands, except per share data):
1995 Quarters ended
March 31 June 30 September 30 December 31
Net sales $ 32,757 33,006 28,135 35,052
Operating income(loss) 2,161 2,325 (2,210) 1,581
Net earnings (loss) 1,077 1,294 (937) 876
Net earnings (loss)per
share .15 .18 (.13) .12
1994 Quarters ended
March 31 June 30 September 30 December 31
Net sales $ 26,240 27,389 31,076 33,288
Operating income 1,574 1,884 2,505 2,939
Net earnings 665 751 1,145 1,702
Net earnings
per share .09 .10 .16 .23
(12) SUBSEQUENT EVENT (UNAUDITED)
On February 12, 1996, the Company increased its ownership of LXE Inc. from
72% to 81% by purchasing 548,000 shares of LXE Inc. in a private
transaction. The purchase price was paid with a combination of $500,000 in
cash and 457,000 newly issued shares of the Company's common stock. The
greater level of ownerhship will increase the Company's participation in
LXE's future operating results and will enable the Company to consolidate
LXE for corporate income tax purposes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electromagnetic Sciences, Inc.:
We have audited the accompanying consolidated balance sheets of
Electromagnetic Sciences, Inc. and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Electromagnetic Sciences, Inc. and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
January 27, 1996
Selected Financial Data
(In thousands, except earnings per share)
Years ended December 31
1995 1994 1993 1992 1991
Net sales $128,950 117,993 99,044 71,822 75,340
Cost of sales 83,865 73,375 61,771 44,407 46,506
Selling, general and
administrative expenses 30,836 27,589 26,522 17,786 15,789
Research and development
expenses 10,392 8,127 8,153 7,518 6,609
Operating income 3,857 8,902 2,598 2,111 6,436
Gain on initial public
offering of LXE common stock - - - - 5,867
Interest and other income 675 640 210 776 831
Interest expense (864) (482) (434) (81) (164)
Earnings before
income taxes and
minority interest 3,668 9,060 2,374 2,806 12,970
Income tax expense 1,402 3,712 896 1,038 4,909
LXE minority interest (44) 1,085 87 844 605
Earnings from continu-
ing operations before
cumulative effect of
change in accounting
principle 2,310 4,263 1,391 924 7,456
Discontinued operations:
Loss from Gamma-f operations
(net of taxes) - - - - (75)
Loss on disposal of Gamma-f
(net of taxes) - - - - (1,350)
Loss from discontinued
operations - - - - (1,425)
Earnings before
cumulative effect of
change in accounting
principle 2,310 4,263 1,391 924 6,031
Cumulative effect at January 1,
1991 of change in accounting
for income taxes - - - - 370
Net earnings $ 2,310 4,263 1,391 924 6,401
Earnings per common
and common equivalent shares:
From continuing operations $ .32 .58 .20 .10 .98
From discontinued operations - - - - (.19)
From accounting change - - - - .05
Net earnings per
common and common
equivalent shares .32 .58 .20 .10 .84
Weighted average number of
common and common equivalent
shares 7,266 7,043 6,856 7,331 7,605
As of December 31
1995 1994 1993 1992 1991
Working capital $ 43,002 39,366 33,104 32,890 33,860
Total assets 104,954 96,751 87,861 72,970 75,147
Long-term debt (excluding
current installments) 10,989 4,592 5,060 927 1,104
Stockholders' equity 60,209 56,431 51,548 50,079 52,063
No cash dividends have been declared or paid during any of the periods
presented.
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Consolidated net sales increased to $129 million in 1995 from $118 million
in 1994 and $99 million in 1993, reflecting changes in the Company's two
business segments. In the segment for advanced communications and signal
processing products, sales increased to $67 million in 1995 from $55
million in 1994 and $53 million in 1993. Space and satellite programs and
cellular antenna systems made significant contributions to the 1995
increase. The 1994 sales increase in this segment also included growth
from space and satellite programs, as well as from other core applications;
however, these increases were mostly offset by a reduction in revenues
resulting from disposal of the defense electronics group of the CAL
Corporation subsidiary late in 1993.
In the segment for wireless logistics systems (sold through the Company's
LXE Inc. subsidiary), revenues were $62 million in 1995 compared with $63
million in 1994 and $46 million in 1993. The 1995 change was especially
affected by a third quarter revenue shortfall associated with LXE beginning
the transition to an expanded product line. The 1994 increase was
attributable to sales growth through European sales subsidiaries and U.S.
- -based third party distributors.
Cost of sales increased to 65% of consolidated net sales in 1995 compared
with 62% in both 1994 and 1993. The increase was attributable to LXE
products, for which the cost of sales percentage has increased in each of
the last three years (56%, 50%, and 48% of net LXE sales in 1995, 1994 and
1993, respectively) due to increased distribution through indirect channels
that typically carry lower gross profit margins and to a more competitive
pricing environment. The LXE-related increases in the cost of sales
percentage were partially offset by improvement in the advanced
communication and signal processing business segment, which had a more
profitable mix of contracts.
Selling, general and administrative expenses were 24% of sales in 1995,
compared with 23% in 1994 and 27% in 1993. The growth from 1994 to 1995
related to expansion of European sales and marketing efforts for LXE
products, marketing support for the Company's new cellular antenna
products, and additional personnel to support management information
systems. The decrease from 1993 to 1994 in the selling, general and
administrative expense percentage resulted mainly from the benefit of a
higher sales base to absorb fixed costs.
Research and development expenses represent the cost of the Company's
internally funded efforts. Significant research and development costs are
also incurred with many specific customer orders for advanced
communications and signal processing equipment and, accordingly, are
included in cost of sales. The 1995 increase in internally funded
research and development related to new LXE products with DOS and Windows
capabilities that support client/server networks and emerging software
standards. The Company also increased its efforts to develop antennas,
aeronautical terminals and other products for advanced mobile
communications markets.
Interest and other income did not change significantly in 1995 compared
with 1994, because an increase in the gains from foreign currency
transactions and remeasurement associated with LXE's European subsidiaries
more than offset a decrease in interest income from lower cash available
for investment. In 1994, higher levels of cash available for investment as
well as gains from foreign currency transactions and remeasurement resulted
in higher interest and other income compared with 1993. Interest expense
increased in 1995 compared with 1994 and 1993 due to increased borrowing
during the year at LXE.
The effective income tax rate was 38% in 1995, 41% in 1994, and 38% in
1993. The change in 1995 reflected the effect of tax credits for research
and development. The increase in 1994 was related to profit growth from
certain LXE operations in Europe and to the reduced effect of tax credits
for research and development.
Liquidity and Capital Resources
Cash and cash equivalents decreased as a result of several factors during
1995, including an increase in inventory levels that resulted from lower
LXE sales in the second half of the year. Additionally, the timing of
billings on several long-term contracts for advanced communications
products resulted in higher unbilled receivables compared with the prior
year end. More cash was also used in investing activities in 1995 compared
with 1994 as a result of increases in capital expenditures for purchases of
equipment, facility expansion, development of product software, and the
acquisition of a minority interest in a strategic business partner.
Capital expenditures were financed by existing cash and cash equivalents
and by borrowing under the revolving credit agreements.
During 1995, the Company amended its existing revolving credit mortgage
agreement with a bank to extend the term five years to December 2000 and to
increase available borrowing under the agreement from $5.4 million to $10
million. In addition, the LXE subsidiary entered into a $10 million,
three-year revolving credit agreement with a bank, which replaced an
existing $5 million short-term line of credit.
At December 31, 1995, the Company had available four immediate sources of
credit: $6.2 million remaining under the revolving credit mortgage
agreement, an unused $5 million line of credit, $3.2 million remaining
under the LXE revolving credit agreement, and approximately $430,000
available under a CAL line of credit. Management believes that the
Company's present liquidity, together with cash from operations and sources
of external financing, will support its current business activities and
capital investment plans.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
which will be effective for the Company's fiscal year ended December 31,
1996. Management believes that adoption of this new accounting standard
will not have a material effect on the Company's financial statements.