SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) December 31, 1996
-------------------
Electromagnetic Sciences, Inc.
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(Exact Name of Registrant as Specified in Charter)
Georgia 0-6072 58-1035424
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(State or Other Juris- (Commission (IRS Employer
diction of Incorporation) File Number) Identification No.)
660 Engineering Drive, Norcross, GA 30092
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 770-263-9200
-----------------
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(Former Name or Former Address if Changed Since Last Report)
Item 2. Acquisition or Disposition of Assets
On December 31, 1996, Electromagnetic Sciences, Inc. ("ELMG")
accepted tenders for 812,542 shares of the common stock, $.01 par
value per share (the "LXE Shares"), of LXE Inc. ("LXE") pursuant to
the Exchange Offer for such shares made by ELMG by its offering
Circular/Prospectus dated November 27, 1996 (the "Offering
Circular/Prospectus"), included in ELMG's Registration Statement on
Form S-4, SEC File No. 333-14235. As a result of the acceptance of
such LXE Shares under the Exchange Offer, each exchanging holder of
such LXE Shares is receiving .75 shares of the common stock, $.10 par
value per share (the "ELMG Shares"), of ELMG for each LXE Share
exchanged.
Following acceptance by ELMG of the LXE Shares tendered to it
under the Exchange Offer, ELMG transferred all LXE Shares then held
by it, constituting approximately 96% of all outstanding LXE Shares,
to ELMG's wholly owned subsidiary, LXE Merger Subsidiary, Inc.
Immediately following such transfer, LXE Merger Subsidiary, Inc.
caused LXE, as its 96%-owned subsidiary, to merge with and into LXE
Merger Subsidiary, Inc. (the "Merger"). As a result of the Merger,
each of the remaining 218,802 LXE Shares owned by persons other than
LXE Merger Subsidiary, Inc. were automatically, and without further
action of their holders, converted into ELMG Shares, at a ratio of
.75 ELMG shares for each LXE Share so converted. In the Merger, the
name of the surviving corporation was changed to LXE Inc.
The Exchange Offer and Merger, and certain matters related to
the conversion in the Merger of outstanding options for LXE Shares,
were approved by the shareholders of ELMG at a Special Meeting held
on December 30, 1996, by a vote of 4,098,015 shares in favor and
205,015 shares opposed.
As a result of the Merger, the assets and business previously
conducted by LXE, which prior to the Exchange Offer was 81.5% owned
by ELMG, are now held and conducted by a wholly owned subsidiary of
ELMG. In the transaction, ELMG issued an additional 773,508 ELMG
Shares, and previously outstanding options to acquire LXE Shares were
converted, on a proportionate basis, into options to acquire an
aggregate of 274,900 ELMG Shares.
ELMG has previously reported, in the Offering Circular/Prospectus and
the proxy statement (the "Proxy Statement") dated November 27, 1996,
with respect to the Special Meeting of Shareholders held on December
30, 1996, information concerning the nature of LXE's business
(Offering Circular/Prospectus, at "Summary"), the manner in which the
exchange ratio in the Exchange Offer and Merger was determined
(Offering Circular/Prospectus, at "the Exchange Offer--Background"
and "-Determination of the Exchange Ratio,"; Proxy Statement, at "The
Proposal--Background" and "-Determination of the Exchange Ratio"), and
interests in LXE Shares and options held by officers, directors and
substantial shareholders of ELMG(Offering Circular/Prospectus, at
"The Exchange Offer--Interest of Certain Persons in the Exchange
Offer and Merger" and "Security Ownership"; Proxy Statement, at The
Proposal--Shareholder Approval--Reasons for Seeking Shareholder
Approval" and "Security Ownership").
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(a) The following financial statements of LXE Inc. are filed as part
of this Report on Form 8-K, and appear immediately following the
signature page hereof:
Audited Financial Statements:
Independent Auditors' Report
Consolidated Statements of Operations - Years Ended December 31,
1995, 1994 and 1993
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Unaudited Financial Statements:
Consolidated Statements of Operations - Three Months and Nine
Months Ended September 30, 1996 and 1995
Consolidated Balance Sheets - September 30, 1996 and December
31, 1995
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1995
(b) Pro Forma Financial Information prepared pursuant to Article 11
of Regulation S-X has been previously reported by the registrant in
the Offering Circular/Prospectus and the Proxy Statement (as such
terms are defined in the response to Item 2), in each case, at the
heading "Pro Forma Consolidated Financial Information -- Unaudited."
(c) Exhibits. The following exhibits are filed as part of this
Report on Form 8-K:
1.1 Dealer Manager Agreement dated November 27, 1996, by and
between Oppenheimer & Co., Inc. and Electromagnetic Sciences, Inc.
(incorporated by reference to Exhibit 1.1 to ELMG's Registration
Statement on Form S-4, No. 333-14235, as amended by Amendment No. 1
filed November 26, 1996).
2.1 Agreement and Plan of Merger entered as of December 31,
1996, among Electromagnetic Sciences, Inc., LXE Inc. and LXE Merger
Subsidiary, Inc. (incorporated by reference to Exhibit 1 to Amendment
No. 4 to Schedule 13D filed by ELMG January 6, 1997, with respect to
the common stock of LXE Inc.)
23.1 Consent of KPMG Peat Marwick LLP to incorporation by
reference in Registration Statements Nos. 2-76455, 2-78442, 2-94049,
33-31216, 33-38829, 33-41041, 33-41042 and 33-50528, each on Form S-8.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
ELECTROMAGNETIC SCIENCES, INC.
------------------------------
(Registrant)
Date January 14, 1997 By /s/ William S. Jacobs
------------------- ------------------------------
William S. Jacobs
Vice President
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
LXE Inc.:
We have audited the accompanying consolidated balance sheets of LXE
Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, 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 LXE 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.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
January 19, 1996
LXE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31
1995 1994 1993
---- ---- ----
Net sales (note 8) $62,291 63,142 45,653
Cost of sales 35,163 31,323 22,122
------ ------ ------
Gross profit 27,128 31,819 23,531
Selling, general and adminis-
trative expenses (note 2) 20,993 19,368 16,171
Product development and
engineering expenses 6,746 6,039 6,800
------ ------ ------
Operating income (loss) (611) 6,412 560
Interest and other income 661 423 149
Interest expense (note 2) (406) (197) (210)
------ ------ ------
Earnings (loss) before
income taxes (356) 6,638 499
Income taxes (note 6) (191) 2,516 163
------ ------ ------
Net earnings (loss) $ (165) 4,122 336
====== ====== ======
Net earnings (loss) per common
and common equivalent share
(note 5) $ (.03) .71 .06
====== ====== ======
Weighted average number of
common and common equivalent
shares (note 5) 5,532 5,766 5,721
See accompanying notes to consolidated financial statements.
LXE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31
1995 1994
---- ----
ASSETS
Current assets:
Cash, including interest-bearing
deposits of $311 in 1995 and $787
in 1994 $ 1,881 1,537
Reverse repurchase agreements - 6,400
Total cash and cash equivalents 1,881 7,937
Trade accounts receivable, net of
allowance for doubtful accounts
of $500 in 1995 and $625 in 1994 16,237 16,222
Inventories:
Work in process 3,623 3,334
Parts and materials 8,906 6,145
------ ------
Total inventories 12,529 9,479
Prepaid income taxes 1,027 -
Deferred income tax benefit (note 6) 869 778
------ -----
Total current assets 32,543 34,416
Property, plant and equipment (note 3):
Land 250 250
Building and leasehold improvements 5,371 4,872
Machinery and equipment 17,213 13,919
Furniture and fixtures 1,238 1,051
------ ------
24,072 20,092
Less accumulated depreciation
and amortization 11,949 9,376
------ ------
Net property, plant and equipment 12,123 10,716
Other assets (note 4) 4,815 609
------ ------
$ 49,481 45,741
====== ======
See accompanying notes to consolidated financial statements.
LXE INC.
CONSOLIDATED BALANCE SHEETS, cont'd
(In thousands)
December 31
1995 1994
---- ----
(In thousands, except share data)
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt (note 3) $ 275 244
Current installments of long-term
debt to Parent (notes 2 and 3) 275 275
Accounts payable 4,431 5,552
Income taxes - 1,186
Accrued compensation costs 994 1,452
Deferred revenue 1,296 1,147
Other current liabilities 220 593
Due to Parent (note 2) 240 355
------ ------
Total current liabilities 7,731 10,804
Long-term debt, excluding current
installments (note 3) 6,925 350
Long-term debt to Parent, excluding
current installments (notes 2 and 3) 1,397 1,672
Deferred income taxes (note 6) 817 617
------ ------
Total liabilities 16,870 13,443
------ ------
Stockholders' equity (note 5):
Preferred stock of $1.00 par value
per share. Authorized 5,000,000
shares; none issued or outstanding - -
Common stock of $0.01 par value per
share. Authorized 20,000,000 shares;
issued and outstanding 5,555,000 in
1995 and 5,436,000 in 1994 56 54
Additional paid-in capital 18,949 18,473
Retained earnings 13,606 13,771
------ ------
Total stockholders' equity 32,611 32,298
------ ------
Commitments (note 9)
$ 49,481 45,741
====== ======
LXE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1995 1994 1993
(In thousands) ---- ---- ----
Cash from operating activities:
Net earnings (loss) $ (165) 4,122 336
Adjustments to reconcile net
earnings to net cash from
operating activities:
Depreciation and amortization 2,747 2,468 2,121
Provision for doubtful accounts (125) 325 100
Deferred income taxes 109 (96) (363)
Changes in operating assets and
liabilities:
Trade accounts receivable 110 (4,461) (2,609)
Inventories (3,050) 997 (1,550)
Accounts payable (1,121) 2,087 571
Income taxes (2,213) 913 (277)
Accrued compensation costs (458) 587 (114)
Deferred revenue 149 127 293
Due to Parent and other (301) 376 303
----- ----- -----
Net cash provided by
(used in) operating
activities (4,318) 7,445 (1,189)
----- ----- -----
Cash flows from investing
activities:
Purchase of property, plant and
equipment (4,259) (2,622) (2,343)
Proceeds from maturities of
marketable securities - 800 1,210
Investment in non-public U.S.
company (2,500) - -
Capitalized product software (1,167) - -
----- ----- -----
Net cash used in
investing activities (7,926) (1,822) (1,133)
----- ----- -----
Cash flows from financing activities:
Payments on long-term debt to
Parent (275) (275) (275)
Payments on long-term debt (244) (217) (192)
Borrowings under long-term debt
agreement 6,850 - -
Proceeds from exercise of
stock options 237 109 -
Withholding taxes paid on stock
options (380) - -
----- ----- -----
Net cash provided by
(used in) financing
activities 6,188 (383) (467)
----- ----- -----
Net change in cash and
cash equivalents (6,056) 5,240 (2,789)
Cash and cash equivalents at
January 1 7,937 2,697 5,486
----- ----- -----
Cash and cash equivalents at
December 31 $ 1,881 7,937 2,697
===== ===== =====
Supplemental disclosure of
cash flow information:
Cash paid for income taxes $ 1,476 1,349 953
Cash paid for interest $ 372 197 210
See accompanying notes to consolidated financial statements.
LXE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1995
(In thousands)
Additional Total
Common stock paid-in Retained stockholders'
Shares Amount capital earnings equity
------ ------ ---------- -------- ------------
Balance, December 31,
1992 5,351 $ 54 $17,897 $ 9,313 $27,264
Net earnings - - - 336 336
Grant of restricted
stock 8 - 113 - 113
----- --- ------ ------ ------
Balance, December 31,
1993 5,359 54 18,010 9,649 27,713
Net earnings - - - 4,122 4,122
Exercise of common
stock options 96 - 362 - 362
Income tax benefit
from exercise of
non-qualified
stock options (note
6) - - 354 - 354
Redemption of shares
upon exercise of
common stock options (19) - (253) - (253)
----- --- ------ ------ ------
Balance, December 31,
1994 5,436 54 18,473 13,771 32,298
Net loss - - - (165) (165)
Exercise of common
stock options 172 2 235 - 237
Income tax benefit
from exercise of
non-qualified stock
options (note 6) - - 621 - -
Redemption of shares
upon exercise of
common stock option (53) - (380) - (380)
----- --- ------ ------ ------
Balance, December 31,
1995 5,555 $ 56 $18,949 $13,606 $32,611
----- --- ------ ------ ------
See accompanying notes to consolidated financial statements
LXE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of LXE
Inc. and its wholly-owned subsidiaries, LXE GmbH, LXE Belgium
N.V., LXE Netherlands B.V., LXE Sweden A.B., and LXE France
S.A.R.L., (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
LXE Inc. was organized in Georgia effective January 1, 1989 as a
wholly-owned subsidiary of Electromagnetic Sciences, Inc. (the
"Parent"), at which time the Company's initial capitalization was
established. The Company completed its initial public offering
in April 1991. As a result of this offering and stock options
subsequently exercised by employees, the Parent's ownership
interest in the Company decreased from 100% to 72% as of December
31, 1995.
The Company is engaged in the design, development, manufacture,
sale, and support of wireless data communications products.
Following is a summary of the significant accounting policies
followed by the Company:
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,
liabilities, revenues and expenses reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Revenues under most contracts are recognized when units are
delivered or services are performed and represent amounts earned
and billed under the terms of the contracts. Revenues collected
in advance under certain service contracts are initially deferred
and later recognized over the term of the contract. A provision
for doubtful accounts is made for revenues estimated to be
uncollectible and is adjusted periodically based upon the
Company's evaluation of the economy, the industry and collection
experience.
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. Provisions for obsolescence and variances
from standard costs are made in the period in which such amounts
are determined.
CASH EQUIVALENTS
Cash equivalents at December 31, 1995 and 1994 consist of reverse
repurchase agreements with a bank, with U. S. government
securities as the underlying assets, and short term interest-bearing
deposits. For 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.
PRODUCT WARRANTY
The Company's products typically have a 180-day warranty.
Management maintains an accrual for warranty claims and adjusts
this accrual periodically based on historical experience and
known warranty claims.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation
is provided on the straight-line method over the following
estimated useful lives of the assets:
Buildings 25 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
Standard No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and 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.
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 of common stock outstanding and
the equivalent shares derived from dilutive stock options (except
in loss periods.) Fully diluted earnings per share are not
significantly different from the primary earnings per share
presented.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are
remeasured into U.S. dollars at current exchange rates. Income
and expenses of the foreign subsidiaries are remeasured into U.S.
dollars at the approximate average exchange rates which prevailed
during the year presented. The Company does not engage in any
foreign currency speculation. The effects of remeasuring foreign
currency financial statements are accumulated and reported in the
consolidated statement of operations. 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.
RELATED PARTY TRANSACTIONS
The Parent charges the Company for directly providing a variety
of administrative services, including accounting, personnel,
facilities operation and maintenance, data processing, copying
and employee relations services, and for a portion of expenses
related to employees of the Parent who provide senior management
services to the Company. The charges for these services
represent a portion of actual direct and overhead expenses
incurred by the Parent, and are allocated to the Company based on
estimated relative time commitments of managerial personnel,
relative net sales and relative numbers of employees. Management
believes that these allocation methods are reasonable for the
relevant costs. Charges from the Parent are reported in cost of
sales, product development and engineering expenses or selling,
general and administrative expenses, depending on the nature of
each charge.
The Company's employees participate in the Parent's defined
contribution pension plan. The contribution for all eligible
employees under this plan is determined each year by the Parent's
board of directors; although a minimum annual contribution is not
required, the contribution target has been 5% of base payroll.
Contributions to the plan are allocated to employees based upon
an age-weighted formula that results in an equivalent benefit at
age 65. The Parent allocates defined contribution expense to the
Company based on actual cost. The Company also participates in
the Parent's group health insurance plan, for which the Parent
allocates expense based on the number of employees.
NOTE 2 - RELATED PARTY TRANSACTIONS
Following is a summary of transactions with the Parent (in
thousands):
1995 1994 1993
---- ---- ----
Due to Parent and long-term debt
to Parent, beginning balance $ 2,302 2,381 2,773
Charges from Parent:
Administrative and related
services 1,724 1,739 1,579
Retirement plan 588 535 411
Group health plan 1,346 1,319 1,199
Interest 177 132 141
Short-term advances from Parent 1,000 - -
Payments to Parent (4,950) (3,529) (3,447)
----- ----- -----
Net change in due to Parent (115) 196 (117)
Repayment of long-term debt to
Parent (275) (275) (275)
----- ----- -----
Due to Parent and long-term debt
to Parent, ending balance $ 1,912 2,302 2,381
===== ===== =====
NOTE 3 - LONG-TERM DEBT AND LONG-TERM DEBT TO PARENT
Following is a summary of long-term debt and long-term debt to
Parent (in thousands):
December 31
1995 1994
---- ----
Industrial development revenue bond secured
by land, building and equipment, due in
varying monthly installments until March
1997, including interest at 79% of the
prime rate not to exceed 13.5% and not less
than 7% (7% at the end of 1995 and 1994) $ 350 594
Revolving credit loan, unsecured, maturing
in December 1998, interest payable quarterly
at a variable rate (7.67% at the end of
1995) 6,850 -
Junior mortgage debt to Parent secured by
land, building and equipment, due in monthly
installments of $23 through December
2001, plus interest at the prime rate
(8.75% at the end of 1995 and 8.5% at the
end of 1994) 1,672 1,947
----- -----
Total long-term debt and long-term
debt to Parent 8,872 2,541
Less current installments 550 519
----- -----
Long-term debt and long-term debt
to Parent, excluding current
installments $ 8,322 2,022
===== =====
The approximate principal maturities of long-term debt and long-term debt
to Parent for each of the next five years are $550,000 in 1996, $349,000
in 1997, $7,125,000 in 1998, $275,000 in 1999 and $275,000 in 2000.
In December 1995, the Company entered into a $10 million
revolving credit agreement with a bank that extends through
December 1998. Under the terms of the credit agreement, LXE must
maintain certain ratios related to interest coverage and
leverage, and maintain net worth of at least $25 million, among
other restrictions. Interest is, at the Company's option, a
function of either the bank's prime rate or LIBOR. Additionally,
a commitment fee equal to .20% per annum of the daily average
unused credit available is payable quarterly in arrears. At
December 31, 1995 the Company has $3.1 million of available
credit under the revolving credit loan.
NOTE 4 - OTHER ASSETS
Following is a summary of other assets (in thousands):
1995 1994
---- ----
Investment in non-public U.S. company $ 2,500 -
Capitalized software costs 1,167 -
Other 1,148 609
----- ---
Total other assets $ 4,815 609
===== ===
The Company made an investment in a non-public U.S. company
with complementary technologies; the investment comprised a
minority ownership interest and a loan repayable in three years.
This investment is valued at cost.
The Company also capitalized $1,167,000 of certain costs incurred
in 1995 to develop software which will be licensed to customers.
Capitalized software costs 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.
NOTE 5 - STOCK INCENTIVE PLAN
The Company established a stock incentive plan in 1989 with
1,000,000 shares available for grant of restricted shares or
options to employees and directors. The exercise prices of the
options granted under this plan prior to the
Company's initial public offering in 1991 were established at
what the board of directors determined to be the fair market
values of the Company's common stock at the dates of grant.
Subsequent to the public offering, the exercise price of the
options granted under this plan has been at 100% of fair market
value on the grant date, as determined by the closing price of
the Company's stock in the over-the-counter market. These
options become exercisable at various dates through 2000, with
318,000 exercisable at December 31, 1995. Certain options are
subject to possible acceleration to earlier dates based on
achievement of criteria that are expected to be specified in the
future. All outstanding options expire not later than 2004.
Following is a summary of activity in the Company's stock option
plan for the years ended December 31, 1995 and 1994 (in
thousands, except price per share data):
Option
Price Total
Per Option
Shares Share Price
------ ------ ------
Options outstanding at
December 31, 1993 730 $3.77-18.25 $4,023
Grants 11 8.75-11.25 111
Exercised (96) 3.77 (362)
Canceled (66) 5.66-18.25 (470)
Options outstanding at
December 31, 1994 579 3.77-18.25 3,302
Grants 20 15.00 300
Exercised (172) 3.77- 5.66 (660)
Canceled (20) 5.66-18.25 (193)
Options outstanding at
December 31, 1995 407 $3.77-18.25 $2,749
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 would 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.
Note 6 - INCOME TAXES
The 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
(benefit) $ (191) 2,516 163
Income tax benefit resulting
from exercise of stock options
credited to stockholders' equity (621) (354) -
---- ----- ---
$ (812) 2,162 163
==== ===== ===
Income tax expense (benefit) differed as follows from the amounts
computed by applying the U.S. federal income tax rate of 34% to
earnings (loss) before income taxes (in thousands):
1995 1994 1993
---- ---- ----
Computed "expected" income taxes $ (121) 2,257 170
State income taxes, net of
federal income tax benefit (99) 216 42
Credit for increasing research
activities (141) (150) (112)
Effect of higher foreign tax rate 172 50 (121)
Change in valuation allowance (47) (30) 77
Benefit from foreign sales
corporation (FSC) (73) (141) -
Other, net 118 314 107
---- ----- ---
$ (191) 2,516 163
==== ===== ===
The components of income tax expense (benefit) were (in
thousands):
1995 1994 1993
---- ---- ----
Current: Federal $ (370) 2,102 452
State (162) 395 72
Foreign 232 73 -
---- ----- ----
(300) 2,570 524
---- ----- ----
Deferred: Federal (83) (130) (53)
State 12 (30) (8)
Foreign 180 106 (300)
---- ----- ----
109 (54) (361)
---- ----- ----
$ (191) 2,516 163
==== ===== ====
The tax effects of temporary differences between the financial
statement carrying amounts and tax bases of assets and
liabilities 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 $ 170 231
Inventories 186 231
Accrued compensation costs 130 115
Foreign net operating loss carryforward 239 241
Credits for increasing research activities 141 -
Other, net 3 7
---- ----
Total gross deferred tax assets 869 825
Less valuation allowance - (47)
---- ----
Net deferred tax assets 869 778
Deferred tax liability:
Property, plant and equipment (504) (529)
Foreign currency transaction and
remeasurement gain (313) (88)
---- ----
Total gross deferred tax liabilities (817) (617)
---- ----
Net deferred tax asset $ 52 161
==== ====
The components of earnings (loss) before income tax expense
(benefit) were as follows (in thousands):
1995 1994 1993
---- ---- ----
U.S. earnings (loss) before
income taxes $(1,201) 6,115 1,252
Foreign earnings (loss) before
income taxes 845 523 (753)
------ ----- -----
$ (356) 6,638 499
====== ===== =====
As of December 31, 1995, the Company had recognized a cumulative
deferred tax asset of $239,000 relating to cumulative net
operating losses of $725,000 from certain foreign operations,
which may be carried forward through 2000. Management believes
that the foreign operations will generate adequate earnings
before income taxes within the next two years to fully realize
this deferred tax asset.
NOTE 7 - 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 a $2.5 million
minority interest investment in a non-public U.S. company made in
1995. Based on the discounted cash flows 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.
NOTE 8 - GEOGRAPHIC INFORMATION
The Company operates in one industry segment related to the
design and production of wireless data communications systems
primarily for materials handling operations. The Company's
primary operations are in the United States, but in 1993 the
Company also began conducting significant sales and marketing
activities through its wholly owned subsidiaries in Europe.
Geographic information for the years ended December 31, 1995,
1994 and 1993, as measured by the locale of revenue producing
activities, were as follows (in thousands):
1995 1994 1993
---- ---- ----
Net sales to unaffiliated customers
United States $49,735 56,332 44,380
Europe 12,556 6,810 1,273
------ ------ ------
Total $62,291 63,142 45,653
------ ------ ------
Operating income (loss)
United States $ (889) 6,130 751
Europe 278 282 (191)
------ ------ ------
Total $ (611) 6,412 560
------ ------ ------
Identifiable assets
United States $42,504 41,261 35,908
Europe 6,777 4,480 1,957
------ ------ ------
Total $49,281 45,741 37,865
====== ====== ======
The Company's intercompany policy is to transfer product at third
party prices. Export sales from the U.S. to European affiliates
were approximately $6.3 million in 1995, $3.3 million in 1994 and
$1.3 million in 1993. Export sales from the U.S. to unaffiliated
customers were approximately $10.3 million, $10.8 million, and
$8.9 million in 1995, 1994 and 1993, respectively.
NOTE 9 - COMMITMENTS
The Company is committed under several noncancellable operating
leases for computer equipment and for sales and administrative
office space at its headquarters. All of these leases expire
within three years, and the combined minimum annual lease
payments are $403,000 in 1996, $218,000 in 1997, and $35,000 in
1998. The Company also has short-term leases for office
equipment, regional sales office space, and automobiles. The
total rent expense under all operating leases was approximately
$1,527,000, $1,032,000, and $1,130,000 in 1995, 1994, and 1993,
respectively.
NOTE 10 - 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 $17,306 16,534 11,348 17,103
Gross profit 8,132 7,187 4,151 7,658
Net earnings (loss) 907 817 (2,023) 134
Net earnings (loss)
per share .16 .14 (.36) .02
1994 Quarters Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net sales $13,100 15,300 17,031 17,711
Gross profit 6,911 7,733 8,344 8,831
Net earnings 767 918 1,109 1,328
Net earnings per
share .13 .16 .19 .23
LXE INC.
Interim Period 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 $18,243 11,348 48,935 45,188
Cost of sales 10,756 7,197 27,711 25,718
------ ------ ------ ------
Gross profit 7,487 4,151 21,224 19,470
Selling, general and
administrative expenses 4,717 5,395 15,276 15,170
Product development and
engineering expenses 1,703 1,993 5,118 5,100
------ ------ ------ ------
Operating income (loss) 1,067 (3,237) 830 (800)
Interest and other income, net
of foreign exchange gains
and losses (50) 55 31 473
Interest expense (204) (132) (536) (247)
------ ------ ------ ------
Earnings (loss) before
income taxes 813 (3,314) 325 (574)
Income taxes 309 (1,291) 125 (275)
------ ------ ------ ------
Net earnings (loss) $ 504 (2,023) 200 (299)
====== ====== ====== ======
Net earnings (loss) per
common and common equiva-
lent share $ .09 (.36) .04 (.05)
====== ====== ====== ======
Weighted average number
of common and common
equivalent shares 5,734 5,555 5,659 5,525
See accompanying notes to interim consolidated financial statements.
LXE INC.
Interim Period Consolidated Balance Sheets (Unaudited)
(In thousands)
September 30 December 31
1996 1995
------------ -----------
ASSETS
Current assets:
Cash and interest bearing deposits $ 2,547 1,881
Trade accounts receivable, net 18,969 16,237
Inventories:
Work in process 2,859 3,623
Parts and materials 10,094 8,906
------- ------
Total inventories 12,953 12,529
Prepaid income taxes 1,291 1,027
Deferred income tax benefit 869 869
------- ------
Total current assets 36,629 32,543
Property, plant and equipment:
Land 250 250
Building and leasehold improvements 5,462 5,371
Machinery and equipment 19,721 17,213
Furniture and fixtures 1,248 1,238
------- -------
Total property, plant
and equipment 26,681 24,072
Less accumulated depreciation and
amortization 13,996 11,949
------- -------
Net property, plant and
equipment 12,685 12,123
Other assets (note 4) 5,074 4,815
------- -------
$ 54,388 49,481
======= =======
See accompanying notes to interim consolidated financial statements.
LXE INC.
Interim Period Consolidated Balance Sheets (Unaudited), continued
(In thousands, except share data)
September 30 December 31
1996 1995
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 143 275
Current installments of long-term debt
to Parent 275 275
Accounts payable 7,224 4,431
Accrued compensation costs 1,061 994
Deferred revenue 1,463 1,296
Other current liabilities 495 220
Due to Parent 290 240
------ ------
Total current liabilities 10,951 7,731
Long-term debt, excluding current
installments 8,500 6,925
Long-term debt to Parent, excluding
current installments 1,191 1,397
Deferred income taxes 817 817
------ ------
Total liabilities 21,459 16,870
------ ------
Stockholders' equity:
Preferred stock of $1.00 par value
per share. Authorized 5,000,000
shares; none issued - -
Common stock of $.01 par value per
share. Authorized 20,000,000 shares;
issued and outstanding 5,574,518 in
1996 and 5,436,275 in 1995 56 56
Additional paid-in capital 19,067 18,949
Retained earnings 13,806 13,606
------ ------
Total stockholders' equity 32,929 32,611
------ ------
$54,388 49,481
====== ======
See accompanying notes to interim consolidated financial statements.
LXE INC.
Interim Period Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30
1996 1995
-------- --------
Cash flow from operating activities:
Net earnings (loss) $ 200 (299)
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 2,047 2,038
Changes in operating assets and
liabilities:
Trade accounts receivable (2,732) 3,283
Inventories (424) (5,043)
Accounts payable (2,793) (222)
Income taxes (264) (1,760)
Accrued compensation costs 67 (275)
Deferred revenue 167 (192)
Due to Parent and other 389 (791)
----- -----
Net cash provided by (used in)
operating activities 2,243 (3,261)
----- -----
Cash flows from investing activities:
Purchase of property, plant and equipment (2,609) (3,643)
Capitalized product software costs and
other market-related investments (323) (3,143)
----- -----
Net cash used in investing
activities (2,932) (6,786)
----- -----
Cash flows from financing activities:
Repayment of long-term debt (183)
Repayment of long-term debt to Parent (206)
Borrowing under line of credit 4,650
Proceeds from exercise of stock options - (136)
----- -----
Net cash provided by financing
activities 1,355 4,125
----- -----
Net change in cash and cash
equivalents 666 (5,922)
Cash and cash equivalents at January 1 1,881 7,937
----- -----
Cash and cash equivalents at September 30 $2,547 2,015
===== =====
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 204 247
Cash paid for income taxes $ 70 1,378
See accompanying notes to interim consolidated financial statements.
LXE INC.
Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
In the opinion of management, these 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 financial statements should be read in conjunction with
the 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 (Loss) Per Share
Earnings(loss)per common and common equivalent share for the interim
periods were based on the weighted average number of shares of common
stock outstanding and equivalents shares derived from dilutive stock
options, except dilutive stock options are excluded for loss periods.
Fully diluted earnings per share are not significantly different from the
primary earnings per share presented.
(3) 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.
(4) Other Assets
Following is a summary of other assets as of September 30, 1996 and
December 31, 1995 (in thousands):
September 30, December 31,
1996 1995
------------ -----------
Investment in non-public U.S. Company $ 2,500 2,500
Capitalized software costs 1,392 1,167
Other 898 1,148
----- -----
Total other assets $ 4,790 4,815
===== =====
The Company's investment in a non-public U.S. company comprises a
minority ownership interest and a loan repayable in three years. This
investment is valued at cost.
The Company also capitalized certain costs to develop software which will
be licensed to customers. Capitalized software costs 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.
Exhibit 23.1
ELECTROMAGNETIC SCIENCES, INC. AND SUBSIDIARIES
Independent Auditors' Consent
The Board of Directors and Stockholders
We consent to incorporation by reference in Registration
Statements Nos. 2-76455, 2-78442, 2-94049, 33-31216, 33-38829, 33-41041,
33-41042 and 33-50528 on Form S-8 of Electromagnetic Sciences, Inc.
of our report dated January 19, 1996, relating to the
consolidated balance sheets of LXE Inc. and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31,
1995, which reports appear in the Report on Form 8-K, dated December 31,
1996, of Electromagnetic Sciences, Inc.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
January 14, 1997