UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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Commission File Number 0-6072
ELECTROMAGNETIC SCIENCES, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1035424
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation of organization)
660 Engineering Drive
Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (770) 263-9200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on November 13, 1996:
Class Number of Shares
Common Stock, $.10 par Value 7,578,013
FORM 10-Q
-2-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1996 and 1995 3
Consolidated Balance Sheets - September 30,
1996 and December 31, 1995 4-5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996
and 1995 6
Notes to Interim Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
FORM 10-Q
-3-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
Net sales $37,908 28,135 106,771 93,930
Cost of sales 24,926 19,303 69,094 61,629
Selling, general and
administrative expenses 7,377 8,040 23,053 22,410
Research and development
expenses 3,062 3,002 9,136 7,654
------ ------ ------ ------
Operating income (loss) 2,543 (2,210) 5,488 2,237
Interest and other income,
net of foreign exchange
gains and losses (39) 28 102 509
Interest expense (293) (257) (831) (592)
------ ------ ------ ------
Earnings (loss) before
income taxes and LXE
minority interest 2,211 (2,439) 4,759 2,154
Income taxes 897 (926) 1,943 803
LXE minority interest 93 (576) (100) (83)
------ ------ ------ ------
Net earnings (loss) $ 1,221 (937) 2,916 1,434
====== ====== ====== ======
Net earnings (loss) per
common and common equiva-
lent shares $ .16 (.13) .38 .20
====== ====== ====== ======
Weighted average number
of common and common
equivalent shares 7,808 6,984 7,669 7,124
See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-4-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Consolidated Balance sheets (Unaudited)
(In thousands)
September 30 December 31
1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 4,210 5,766
Trade accounts receivable, net 45,512 40,118
Inventories:
Work in process 5,784 5,701
Parts and materials 11,910 10,128
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Total inventories 17,694 15,829
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Deferred income taxes 1,363 1,363
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Total current assets 68,779 63,076
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Property, plant and equipment:
Land 1,150 1,150
Building and leasehold improvements 14,827 14,690
Machinery and equipment 57,964 53,037
Furniture and fixtures 4,387 4,182
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Total property, plant
and equipment 78,328 73,059
Less accumulated depreciation and
amortization 48,013 43,794
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Net property, plant and
equipment 30,315 29,265
Other assets 8,875 7,487
Goodwill, net of accumulated amortization 6,872 5,126
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$114,841 104,954
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See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-5-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Consolidated Balance sheets (Unaudited)
(In thousands except share data)
September 30 December 31
1996 1995
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,029 3,546
Accounts payable 13,301 10,369
Accrued compensation costs 3,930 3,402
Accrued retirement costs 888 589
Deferred revenue 1,463 1,296
Other liabilities 1,173 872
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Total current liabilities 23,784 20,074
Long-term debt, excluding current
installments 12,422 10,989
Deferred income taxes 4,408 4,408
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Total liabilities 40,614 35,471
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Minority interest in LXE 6,093 9,274
Stockholders' equity:
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 7,479,000 in
1996 and 7,004,000 in 1995 752 700
Additional paid-in capital 15,633 10,681
Foreign currency translation adjustment (12) (17)
Retained earnings 51,761 48,845
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Total stockholders' equity 68,134 60,209
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$114,841 104,954
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See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-6-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30
1996 1995
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Cash flow from operating activities:
Net earnings $ 2,916 1,434
Adjustments to reconcile net earnings
to net cash from operating activities:
LXE minority interest (100) (83)
Depreciation and amortization 4,219 4,256
Goodwill amortization 379 315
Changes in assets and liabilities:
Trade accounts receivable (5,394) 1,861
Inventories (1,865) (5,011)
Accounts payable 2,933 459
Income taxes 84 (1,628)
Accrued costs, deferred revenue
and other current liabilities 1,351 (1,193)
Other (1,638) (1,150)
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Net cash provided by (used in)
operating activities 2,885 (740)
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Cash flows from investing activities:
Purchase of property, plant and equipment (5,269) (7,098)
Purchase of subsidiary common stock (note 3) (500) -
Capitalized product software costs and
other market related investments - (3,143)
------ ------
Net cash used in investing
activities (5,769) (10,241)
------ ------
Cash flows from financing activities (note 3):
Borrowing under line of credit 1,614 4,650
Repayment of long-term debt (698) (1,597)
Proceeds from exercise of stock options 412 540
------ ------
Net cash provided by
financing activities 1,328 3,593
------ ------
Net change in cash and cash
equivalents (1,556) (7,388)
Cash and cash equivalents at January 1 5,766 13,471
------ ------
Cash and cash equivalents at September 30 $ 4,210 6,083
====== ======
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 831 592
Cash paid for income taxes $ 1,558 2,215
See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-7-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
The interim 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"). In the opinion of management,
the interim consolidated financial statements reflect all normal and
recurring adjustments necessary for a fair presentation of results for
such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Company's Annual
report on Form 10-K for the year ended December 31, 1995.
(2) Earnings per Share
Earnings per common and common equivalent share for the interim
periods were 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 net earnings of LXE Inc. is 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.
(3) Purchase of LXE Inc. Common Stock
On February 11, 1996, the Company increased its ownership of LXE
Inc. from 72% to 81% by purchasing 548,000 shares of the common stock of
LXE Inc. in a private transaction. The purchase price was paid with a
combination of $500,000 of cash and 457,000 newly issued shares of the
Company's common stock. Goodwill, to be amortized over 25 years, was
recognized to the extent that the purchase price of the LXE stock
exceeded the fair value of the additional net assets acquired. The
greater level of ownership 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.
(4) Accounting for Stock-Based Compensation
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. The Company intends to comply with
the provisions of SFAS 123 in fiscal 1996 by continuing to recognize
compensation cost from stock options under the "intrinsic value" method,
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 does not expect to recognize any
compensation cost associated with stock options granted in 1996.
(5) Proposed Exchange Offer
On October 3, 1996, the Company announced a proposal to offer .75
shares of its common stock, $.10 par value, in exchange for each
outstanding share of the common stock, $.01 par value, of LXE (Nasdaq -
LXEI). The proposed offering would be open to all holders of the
approximately 1,030,000 shares held by other investors. The proposed
offering will be made only by means of an Offering Circular/Prospectus
following registration of the offered shares under the Securities Act of
1933. The Company does not expect the registration process to be
completed earlier than November 1996. The purpose of the proposed
offering is to permit the Company to acquire 100% ownership of LXE.
FORM 10-Q
-8-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
ITEM 2. Management's Discussion And Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Consolidated sales for the third quarter and first nine months of 1996
were $38 million and $107 million, respectively, compared with $28
million and $94 million for the same respective periods in 1995. Much of
these increases was the result of revenue growth from the space and other
wireless technology markets served by the Company's advanced
communications business segment. This segment's sales increased to $20
million and $58 million for the third quarter and first nine months of
1996, respectively, compared with $17 million and $49 million for the
same respective periods in 1995. In the Company's wireless logistics
segment, revenues for the third quarter and first nine months were $18
million and $49 million, respectively, compared with $11 million and $45
million for the interim periods ended September 30, 1995. LXE's revenues
from materials handling markets increased in both North American and
international markets; revenues also increased with LXE's entry into the
healthcare information management market.
Cost of sales, as a percentage of net sales, did not vary significantly
in 1996 compared with 1995, despite variations in the revenue mix.
Selling, general and administrative expenses in 1996 were also comparable
with 1995. Research and development expenses for the nine months ended
September 30, 1996 were higher than for the same period in 1995 as a
result of efforts to expand the LXE product line, to complete development
of the new CALQuest (tm) aeronautical terminal for commercial
satellite-based communications, and to develop other new technologies for
commercial wireless network infrastructure markets.
Interest and other income was reported net of a foreign exchange loss in
the third quarter of 1996 and lower gains for the first nine months of
1996 compared with 1995, resulting from currency fluctuations that
affected the accounting translation of LXE's European subsidiaries'
financial statements into U.S. dollars. Interest expense increased in
1996 as a result of increased borrowing under the Company's revolving
credit agreement. The effective income tax rate for the first nine
months of 1996 was 41%, which was comparable with 38% for the preceding
fiscal year.
Liquidity and Capital Resources
- -------------------------------
For the nine months ended September 30, 1996, cash provided by operations
totaled almost $3 million, but capital purchases exceeded $5 million due
to the Company's continued growth, and the result was a net decrease in
cash and cash equivalents to $4.2 million at September 30, 1996 from $5.8
million at the beginning of the year. Management does not expect to
generate significant positive cash flow in the fourth quarter of 1996;
however, 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.
FORM 10-Q
-9-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K - The Company has not filed any reports on Form
8-K during the three months ended September 30, 1996.
FORM 10-Q
-10-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ELECTROMAGNETIC SCIENCES, INC.
By: /s/ Date: 11/14/96
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Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Date: 11/14/96
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Don T. Scartz
Treasurer and Chief Financial
Officer
Exhibit 11.1
-11-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Statement re: Computation of Per Share Earnings
(In thousands, except per share data)
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
----- ----- ----- -----
Common and common equivalent
shares:
Common stock - weighted average
shares outstanding 7,494 6,984 7,340 6,906
Dilutive effect of outstanding
common stock options (as deter-
mined by the treasury stock
method using the average market
price for the period) 335 - 329 218
Total common and common
equivalent shares 7,808 6,984 7,669 7,124
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. Following is
a summary of net earnings
applicable to earnings per
common and common equivalent
share:
Net earnings excluding LXE Inc. $ 810 510 2,616 1,650
Adjusted proportionate share
of net earnings (loss) of LXE
Inc. 411 (1,447) 163 (216)
Total net earnings
applicable to earnings
per common and common
equivalent share $1,221 (937) 2,779 1,434
Net earnings per common and
common equivalent share $ .16 (.13) .36 .20