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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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For the Fiscal Year Ended January 31, 1999 Commission File Number 0-4988
AEROSONIC CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 74-1668471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1212 North Hercules Avenue
Clearwater, Florida 33765
(Address of principal executive offices)
(Zip Code)
Registrant's telephone no., including area code: (727) 461-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.40
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of April 27, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $38,576,721
As of April 27, 1999, the issuer had 3,943,603 shares of Common Stock
outstanding, net of treasury shares.
- --------------------------------------------------------------------------------
Documents Incorporated by Reference
Document Part of 10K
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Proxy Statement for the 1999 Part II, Items 10, 11, 12 and 13
Annual Meeting of Stockholders
PART I
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE COVERED BY
THE SAFE HARBORS CREATED THEREUNDER. FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE," "PLANS" AND "INTENDS."
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD BE INACCURATE AND THEREFORE, THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH HEREIN IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Item l. Business.
--------
Aerosonic Corporation ("the Company") is principally engaged in one business
segment: the manufacture of aircraft instruments ("Instruments"). Prior to June
1996, the Company was engaged in a second business segment: the manufacture of
ordnance products ("Ordnance") which consisted of military products as well as
commercial truck and automotive parts. The sale of this segment is described in
Note 10 to the Consolidated Financial Statements and, accordingly, has been
presented as discontinued operations. In August 1998, the Company formed a new
segment entitled Precision Components, to perform precision high volume
machining of mechanical components, which was not significant to operations in
fiscal year 1999.
The Company was incorporated under the laws of Delaware in l969, and in l970
merged with a Florida company (formerly known as "Aerosonic Corporation"). As
used herein, unless the context requires otherwise, "Aerosonic" or the "Company"
includes Aerosonic Corporation and its operating subsidiary, Avionics
Specialties, Inc.
The aircraft instrument segment consists of three operating divisions: The
Clearwater, Florida Instrumentation Division ("Clearwater Instruments"), the
Aerosonic Wichita, Kansas Instrumentation Division and Avionics Specialties,
Inc. ("Avionics"), a Virginia Corporation wholly owned by Aerosonic Corporation.
Clearwater Instruments was started in 1953 and primarily manufactures
Altimeters, Airspeed Indicators, Rate of Climb Indicators, Microprocessor
Controlled Air Data Test Sets, and a variety of other flight instrumentation.
Avionics was a division of Teledyne Industries, Inc. prior to its acquisition by
Aerosonic Corporation in January 1993. Avionics maintains four major product
lines in the aircraft instrument segment: 1) Angle of Attack ("AOA")/Stall
Warning Systems; 2) Inertial-Lead Vertical Speed Indicator ("IVSI"); 3) Power
Analyzer and Recorder ("PAR") System (a turbine engine monitoring system) and 4)
Vibration Monitoring and Analysis. For a description of the general development
of these businesses, see the narrative below.
2
PRODUCTS, SERVICES AND RECENT BUSINESS DEVELOPMENTS
Products and Distribution
The Company's products are sold to the U.S. military services and to
manufacturers of commercial and private aircraft, both domestic and foreign.
Commercial sales increased to $14,848,000 from $12,790,000 in the prior fiscal
year. Sales to the U.S. military have decreased to $4,822,000 during the current
fiscal year from $6,536,000 in the prior fiscal year. For the year ended January
31, l999, approximately 76% of the Company's total sales were to the private
sector and the remaining 24% to the military services.
Most of the Company's instrument sales are made directly through Company
employees to original equipment manufacturers or to the military, with the
Company's remaining sales being made through other distributors (who resell to
aircraft operators).
The products manufactured by the Company, together with the approximate
percentage of total sales contributed by each such product for the years ended
January 31, l999, 1998 and 1997 are as follows:
1999 1998 1997
AOA/Stall Warning Systems 35% 33% 38%
Other Aircraft Instruments 22% 19% 13%
Repairs 15% 14% 13%
Altimeters 15% 14% 10%
Air Speed Indicators 8% 14% 11%
Spare Parts 4% 6% 10%
Precision Components 1% 0% 0%
Ordnance - Commercial 0% 0% 2%
Ordnance - Military 0% 0% 3%
----------- ----------- ----------
100% 100% 100%
=========== =========== ==========
The aggregate amount of foreign sales were $3,917,000, $2,470,000 and $6,208,000
for the years ended January 31, 1999, 1998 and 1997, respectively. Domestic
sales of the Company's products are made to many different commercial
(non-government) customers. During fiscal year l999, Raytheon aircraft was the
only commercial customer representing over 10% of total revenues at $2,271,000,
or 11% of total.
3
Backlog
The Company's sales order backlog as of January 3l, l999 was $19,346,000, as
compared to $19,273,000 in the previous fiscal year. The Instrument backlog
includes $8,896,000, which is related to Avionics, and $10,450,000, which is
related to Clearwater Instruments. Management estimates that approximately 81%
of the total backlog, or $15,590,000, can reasonably be expected to be filled
during the current fiscal year.
U.S. Government contracts are subject to termination at the election of the
Government and contain specific procedures for equitable settlement in the event
of termination. It is not possible to predict whether, or to what extent, the
present backlog may be reduced or postponed in the event of reductions or
changes in U.S. Government programs. Some U.S. Government contracts contain
fixed price options for future performance and are subject to exercise by the
Government within specified time periods. These options are not included in the
Company's contractual backlog. The U.S. Government represents approximately 17%
of the Company's backlog at January 31, 1999.
Employees
As of the year ended January 3l, l999, the Company employed approximately 263
employees in its business operations. This consisted of 153 Clearwater
Instrument employees, 9 Kansas Instrument employees and 101 Avionics employees.
The Company's employees are not represented by labor unions. Management regards
its relations with its employees to be good.
Research and Development
The Company expended approximately $630,000 and $443,000 in research and
development costs for potential new products and enhancements during the years
ended January 31, 1999 and 1998. There are approximately nineteen engineers at
Aerosonic and Avionics, on a full- or part-time basis, involved in these
activities. Research and development activities for fiscal year 1999 included
the development of active matrix multifunction displays to allow the Company to
compete for a greater portion of the cockpit panel space. Additionally, the
Company has developed higher reliability transducer and servo driven
instruments. Incorporating this new technology into the Company's traditional
product line is expected to increase product reliability, while at the same time
reduce production costs associated with assembly. Market acceptance has been
exceptionally strong for both the active matrix multi-function displays and the
new generation of traditional instrumentation.
4
Research and development activities at Avionics Specialties during fiscal year
1999 concentrated on "next generation" integrated systems for use in aircraft.
In the Angle of Attack and Stall Warning products this has resulted in the
installation of networked Sensors and Indicators communicating over a digital
bus. Development of the new Air Data Transmitter has continued to advance with
the preliminary work being done to integrate the Air Data Transducers and
electronics into the basic transmitter that was delivered during the past year.
This cooperative project with Honeywell Incorporated has resulted in its
selection for use on the new Korean KTX aircraft; the F-16 Block 60 upgrade
program; and the first commercial win on the new Fairchild/Dornier 728 regional
passenger jet. The major effort however has been focused on the development of
the Engine and Vibration Monitoring System (EVMS) intended as a Health and Usage
Monitoring system for use on both rotary and fixed wing aircraft. The EVMS is a
modular design that can be functionally expanded on the aircraft by the addition
of new components in the future. This system also uses a networked architecture
to provide this modularity. The ability of the various modules to share and
combine data from sensors will result in a lower overall system cost for a given
capability. First installation for all of these development projects is expected
within the next year.
Competition
Most of the Company's products are sold in highly competitive markets. The
Company manufactures a larger variety of aircraft instruments than its
competitors, who, in most instances, compete with the Company on no more than a
few types of aircraft instruments. Some competitors have larger overall sales
and financial resources than the Company. Management believes that the Company's
products are priced to sell competitively with those of its competitors.
Raw Materials
The principal materials used in the Company's manufacturing processes are glass
lenses, raw metals and castings. These items, as well as other raw materials,
parts and components used by the Company's instrument divisions are generally
available from a number of sources and in sufficient quantities to meet current
requirements subject to normal lead times.
5
Item 2. Properties.
----------
The following sets forth the locations and general characteristics of the
Company's principal plants:
Approximate No. Square Feet
Location of Factory and Office Area
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Clearwater, Florida 90,000
Wichita, Kansas 7,500
Charlottesville, Virginia 53,000
All properties are well maintained, fully occupied by the Company and suitable
for the Company's present level of production. All locations operate more than
one shift, five days a week. The property in Wichita, Kansas is owned by the
Company and is unencumbered. The Clearwater, Florida property is mortgaged in
accordance with an Industrial Revenue Bond executed in l988. (See Note 7,
"Financial Statements".)
The Charlottesville, Virginia property was purchased from Teledyne Industries in
April 1994 for $1,260,000, and is mortgaged by a long-term note with the
Company's bank. The property consists of a 53,000 square foot manufacturing
facility on approximately 12 acres of land.
The Company sold its Newport, Arkansas manufacturing operation during fiscal
1995. The land and building are still owned by Aerosonic and leased to the
purchaser under a five-year lease agreement with a purchase option.
6
Item 3. Legal Proceedings.
-----------------
Sensonics, Inc. v. Aerosonic: In 1993, the Company was named as a co-defendant
in a patent infringement suit filed by Sensonics Inc. claiming that the Company
infringed Sensonics' expired patent for an electromagnetical tapping device that
the Company used as a component part. During June 1996, the Company's Board of
Directors approved a proposed settlement of the lawsuit for $2,000,000. Pursuant
to this settlement, the Company recorded a $225,000, $960,000 and $815,000
provision for the settlement of litigation during the years ended January 31,
1997, 1996 and 1995, respectively. All amounts related to the settlement were
paid during the year ended January 31, 1997.
The Company was sued in September of 1996 by David S. Goldman, former President
and Chief Executive Officer of Aerosonic Corporation, for an alleged breach of a
consulting agreement between Mr. Goldman and the Company. The suit seeks damages
in excess of $15,000. The Company has filed a motion to dismiss this action,
which is currently under review. During fiscal year 1997, the Company sued Mr.
Goldman and Mil-Spec Finishers, Inc., a former subcontractor to Aerosonic
Corporation controlled by Mr. Goldman, seeking damages in excess of $15,000, for
alleged fraud and misappropriation of funds, appropriation of corporate
opportunity, breach of fiduciary duty and conversion.
The Company is also involved in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the above matters will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
7
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
----------------------------------------------------------------
Matters.
-------
The Company's Common Stock is traded on the American Stock Exchange under the
symbol "AIM". The range of high and low bid quotations as reported by the
American Stock Exchange for each of the quarters of the fiscal years ended
January 3l, l999 and January 3l, l998 is as follows:
Fiscal Year Ended January 31, 1999
- ----------------------------------
Quarter Bid Bid
- -------------------------------------------------------------------------
1 High 19-1/8 Low 14-7/8
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2 High 20-1/8 Low 17-1/4
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3 High 17-1/4 Low 6-1/2
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4 High 14-1/4 Low 10-1/4
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Fiscal Year Ended January 31, 1998
- ----------------------------------
Quarter Bid Bid
- -------------------------------------------------------------------------
1 High 10-3/8 Low 3-7/16
- -------------------------------------------------------------------------
2 High 13-5/8 Low 9-1/16
- -------------------------------------------------------------------------
3 High 12-5/8 Low 8-1/2
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4 High 15-1/4 Low 10-1/16
- -------------------------------------------------------------------------
During those same periods, no cash dividends were paid. The payment of future
dividends, if any, on the Company's common stock and the amount thereof will be
dependent upon the Company's earnings, financial requirements, and other factors
deemed relevant by the Company's Board of Directors.
As of April 28, l999, the Company's outstanding shares of common stock were
owned by approximately 3,168 shareholders of record.
8
Item 6. Selected Financial Data.
-----------------------
The following selected financial data for the five years in the period ended
January 31, 1999 have been derived from the Company's Consolidated Financial
Statements.
Years Ended January 31,
-----------------------
1999 1998 1997 1996 1995
--------------- ---------------- --------------- --------------- ---------------
Revenue $ 19,670,000 $ 19,326,000 $ 20,232,000 $ 17,360,000 $ 19,417,000
=============== ================ =============== =============== ===============
Income (loss) from
continuing operations $ 353,000 $ 1,201,000 $ 1,123,000 $ (1,293,000) $ 1,712,000
=============== ================ =============== =============== ===============
Basic and diluted earnings (loss)
per share from
continuing operations $ 0.09 $ 0.31 $ 0.29 $ (0.34) $ 0.45
=============== ================ =============== =============== ===============
Total assets $ 20,417,000 $ 18,315,000 $ 17,215,000 $ 17,851,000 $ 18,293,000
=============== ================ =============== =============== ===============
Long-term obligations $ 3,396,000 $ 3,572,000 $ 2,444,000 $ 2,814,000 $ 2,880,000
=============== ================ =============== =============== ===============
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
Results of Operations.
---------------------
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included elsewhere
herein.
Discontinued Operations
During the fiscal years ended 1999 and 1998, the Company operated principally in
one business segment, the Instrument Division. During the fiscal year ended
1997, the Company operated in two business segments i) the Ordnance Division and
ii) the Instrument Division.
In order to focus on its core business, the Company decided to discontinue the
Ordnance Division and during May 1996, the Company sold substantially all of the
assets of this segment. The $1,700,000 sale, consisting primarily of property
and equipment, was paid in cash and resulted in a $41,000 gain.
For financial reporting purposes, the Company is accounting for the disposition
of its Ordnance segment as a discontinued operation. Accordingly, the Company's
Consolidated Statements of Income present the results of the Company's
discontinued operations separately from the results of Company's continuing
operations.
Results of Continuing Operations
Net sales for fiscal 1999 were $19,670,000 which represent a $344,000 or 2%
increase from the prior year. The increase in sales during fiscal 1999 is
attributable to the expansion of the Company's product line, increased sales of
the AOA transmitter and the overall expansion in the aircraft marketplace
inclusive of increased requirements for new production aircraft and modification
of existing aircraft worldwide.
Net Sales for fiscal 1998 were $19,326,000 which represent a $906,000 or 4%
decrease from the prior year. The net decrease in sales during fiscal 1998 is
related to a temporary delay in new programs related to the OEM customer base.
Certain product lines experienced a lag period where sales related to older
aircraft were slowing down and new aircraft introductions were slowly coming on
line. This downward trend was shortlived as the Company moved towards increased
production on new aircraft applications.
10
Gross Margins
The Company's gross margin percentage remained stable at 39% during fiscal 1999
compared to the prior year. This is in keeping with management's efforts to
minimize costs within the manufacturing and service processes of the Company. In
addition, management has focused on expanding the profitable product lines.
During fiscal 1998, the Company's gross margin expanded to 39% from 35% in the
prior year. This improvement reflects the changes implemented in that year to
reduce costs in the manufacturing and service processes of the company and to
focus its efforts towards the expansion of profitable product lines.
Selling General and Administrative Expenses
As a percentage of total sales, selling, general and administrative expenses
increased to 35% during fiscal 1999 from 28% and 24% during fiscal years 1998
and 1997, respectively. These increases in fiscal years 1999 and 1998 stem from
several areas, through increased R&D expenditures, expenses related to the start
up of the new Precision Components Division in fiscal year 1999 and non-cash
stock compensation related expenses. Additionally, during fiscal year 1999 the
Company capitalized $364,000 of software development costs primarily related to
the new Multi-Function Probe.
Provision for Settlement of Litigation
In connection with the Sensonics litigation previously described under Item 3.
Legal Proceedings, the Company recorded provisions totaling $0, $0 and $225,000
during fiscal years 1999, 1998 and 1997, respectively.
Interest Expense
Interest expense for fiscal l999, net of interest income, totaled $252,000
compared to $232,000 in the prior year. The Company's short- and long-term
borrowings increased by $1,739,000 to $5,536,000 at the end of fiscal 1999
compared to $3,797,000 at the end of fiscal 1998.
Interest expense for fiscal 1998, net of interest income, decreased $46,000 from
fiscal 1997, due to reduced borrowings and a reduced interest rate on borrowings
concurrent with a restructure of short-term debt to long term. Also, higher cash
balances in short term investments generated additional interest income in
fiscal year 1998. The Company's short- and long-term borrowings decreased by
$452,000 to $3,797,000 at the end of fiscal 1998 compared to $4,249,000 at the
end of fiscal 1997.
Income Tax Expense
Income tax expense decreased during fiscal 1999 to $228,000 as compared to
income tax expense of $734,000 during fiscal 1998. The decrease was primarily
due to decreases in pretax income. Income tax expense as a percent of income was
approximately 39% in fiscal 1999, and 38% in fiscal 1998.
11
Income tax expense from continuing operations increased during fiscal 1998 to
$734,000 as compared to income tax expense of $606,000 during fiscal 1997. The
increase was primarily due to increases in pretax income. Income tax expense as
percent of income from continuing operations was approximately 38% during fiscal
1998 and 35% during fiscal 1997.
Basic and Diluted Earnings Per Share
The Company recorded net income of $353,000, or $0.09 per share during fiscal
1999 as compared to net income of $1,201,000, or $0.31 per share in the
preceding year.
Net Income from continuing operations (exclusive of the Ordnance Division) was
$1,201,000 or $.31 per share during fiscal 1998 as compared to net income of
$1,123,000, or $0.29 per share in fiscal 1997. Discontinued Ordnance operations
generated a loss of $199,000 or ($0.05) during fiscal 1997.
Liquidity and Capital Resources
Management considers liquidity to be the Company's ability to generate adequate
cash to meet its short- and long-term business needs. The principal internal
source of such cash is the Company's operations, while external sources include
borrowings under the Company's credit facilities.
Net cash used in operating activities during fiscal year l999 was $1,332,000
compared to net cash generated of $1,490,000 in the prior year. During fiscal
year 1999, significant net cash used in operating activities resulted primarily
from increases in accounts receivable and inventory. During fiscal year 1998,
significant cash provided by operating activities resulted primarily from a net
increase in income tax related accounts, noncash expending of depreciation and
non-cash employee stock compensation offset by increases in inventory and
reductions in accounts payable.
Net cash used in investing activities during fiscal 1999 was $648,000 compared
to net cash used of $395,000 in the prior year. Capital expenditures during
fiscal year 1999 of $648,000 primarily consisted of machinery and equipment used
in the new Precision Components Division. These expenditures were funded by
borrowings under the Company's revolving credit facility. Capital expenditures
during fiscal year 1998 of $459,000 consisted primarily of machinery and
equipment, which was funded by operations.
Net cash generated through financing activities during fiscal year 1999 was
$1,623,000 compared to net cash used of $270,000 in the prior year. This was due
primarily to advances against the Company's revolving credit facility.
The Company has a $1,500,000 revolving credit facility, which expired on April
30, 1999 and subsequently was extended to May 31, 1999 and bears interest at the
trailing 90-day treasury index plus 2.75%. At January 31, 1999, there was
approximately $250,000 available under this facility. The Company has a
12
$1,300,000 line of credit facility used to fund the startup costs related to the
Precision Components Division, which expires in September 1999, and bears
interest at 7.72%. At January 31, 1999, there was approximately $410,000
available under this facility.
The Company's current ratio was 3.55 to 1 at January 31, 1999 compared to 5 to 1
at January 31, 1998. In addition, working capital increased by $133,000 to
$11,197,000 in fiscal year 1999. The increase primarily relates to increases in
current assets slightly exceeding increases in short term borrowings and other
current liabilities. However, approximately $600,000 in short-term borrowings
were utilized to fund certain capital expenditures related to the Precision
Components Division. At maturity, the short-term loan in the form of an
equipment line of credit is expected to be restructured to long term debt and
amortized over 10 years.
Funds necessary for future capital expenditures, notes payable and long-term
debt payments and other cash flow needs in the ordinary course of business are
expected to be funded primarily from current cash resources, internally
generated funds and availability under the current borrowing arrangements.
Year 2000
General
- -------
Aerosonic Corporation's company-wide Year 2000 Project (Project) is proceeding
on schedule. The Project is addressing the issue of computer programs being able
to distinguish between the year 1900 and the year 2000. Since 1995, the Company
has purchased and utilized generic software programs supplied by vendors for its
accounting, manufacturing and payroll functions. Embedded in the cost of these
computer programs from the various vendors, were free software upgrades to
include Year 2000 capabilities.
Project
- -------
Aerosonic's Project is divided into three major sections; software embedded in
products sold to customers, infrastructure (applications software and associated
hardware) and key vendor certifications.
Software developed for use in various product lines has been upgraded to
accommodate the Year 2000 issue. Production deliveries have commenced on
products with the upgraded software. Therefore, Company management believes that
the Year 2000 issue will not have a material impact on product sales.
Software programs utilized by the Company in its Manufacturing, Accounting and
Payroll functions were all purchased by third-party vendors and included
upgrades for, among other things, the Year 2000 issue. As of January 31, 1999,
all upgrades provided by software vendors, which include compliance with the
Year 2000 issue, have been installed and are undergoing testing to ensure
compliance with the Year 2000 issue. Management expects to complete the testing
of all upgraded software by October 31, 1999.
13
In May 1998, questionnaires requiring vendor certifications were sent to all key
vendors. These certifications address issues primarily related to the vendors'
ability to provide uninterrupted service or product flow to the Company into the
new millennium. As of January 31, 1999, approximately 85% of all vendors
questioned completed the questionnaire and certified that they are either in
compliance or will be in compliance prior to the year 2000.
Costs
- -----
The total costs associated with required modifications to become Year 2000
compliant have not been material to the Company's financial position to date.
Additionally, anticipated costs to complete the Year 2000 project are not
anticipated to be material to the Company's financial position. Arrangements
with all software vendors include free upgrades on an ongoing basis, which
include upgrades for the Year 2000 issue. Incidental costs such as clerical
labor to perform testing of upgraded software, postage and clerical labor to
administer the vendor questionnaires as well as management level review of the
results are not expected to materially impact the financial position of the
Company.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party vendors and customers, the
Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material external agents. The Company believes that, with the completion of the
Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced. Aerosonic Corporation believes that the most
reasonably likely worst case scenario would be business interruptions with
trading partners due to problems inherent in their own systems. This problem is
not anticipated to have a significant impact given that the Company trades with
a high number of vendors and customers, thereby minimizing its exposure to any
one trading partner.
Contingency plan
- ----------------
Aerosonic Corporation's contingency plan is scheduled to be completed by the
middle of 1999. The contingency plan will include a team to be established to
monitor all critical systems through significant date transitions and to
promptly respond to any problems.
14
Acquisitions
Currently, the Company has no arrangements or understandings with respect to any
acquisitions. However, the Company continues to monitor acquisition
opportunities.
Accounting Standards
In 1998, the Financial Accounting Standards Board issued Financial Accounting
Standard (FAS) 133, Accounting for Derivative Instruments and Hedging, effective
for fiscal years beginning after June 15, 1999. The new standard requires an
entity to recognize derivatives as either assets or liabilities in the financial
statements, to measure those instruments at fair value and to reflect the
changes in fair value of those instruments as either components of comprehensive
income or in net income, depending on the types of those instruments. Aerosonic
Corporation does not use derivatives or other financial products for speculative
purposes. The Company has not yet determined to what extent the standard will
impact its financial statements.
Other Matters
- -------------
Major emphasis is being devoted to continuing last year's effort of sales
expansion. The areas of focus lie with the introduction of a wider array of
products that incorporate both existing designs and new technology allowing the
Company to compete for a larger portion of cockpit panel space. Additionally,
these new designs incorporate technology that enables a higher degree of
automation in the production process, thereby increasing production
efficiencies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The primary market risk exposure for the Company is interest rate risk. The
Company does not currently utilize any financial instruments to manage interest
rate risk.
Interest Rate Risk
- ------------------
The Company is exposed to changes in interest rates primarily as a result of its
variable rate short-term and long-term borrowings. A hypothetical 10% increase
in the Company's weighted average interest rate would not have a significant
effect on the Company's net income in the next fiscal year. Additionally, due to
the variable interest rate nature of the Company's long-term borrowings a 10%
decrease in interest rates would not have a material effect on the fair value of
the outstanding long term debt at January 31, 1999.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The consolidated financial statements and supplementary data required by Item 8
are listed in the index beginning on page 19 and are included in this Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
Not applicable.
15
PART III
Item l0. Directors and Executive Officers.
--------------------------------
Information concerning the Directors and Executive Officers of the Company is
incorporated by reference to the Company's definitive proxy statement, which
will be filed with the Securities and Exchange Commission (Commission) within
120 days after the close of fiscal 1999.
Item ll. Executive Compensation.
----------------------
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 1999.
Item l2. Security Ownership of Certain Beneficial Owners to Management.
-------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to the Company's definitive proxy
statement, which will be filed with the Commission within 120 days after the
close of fiscal 1999.
Item l3. Certain Relationships and Related Transactions.
----------------------------------------------
Information concerning certain relationships and related transactions is hereby
incorporated by reference to the Company's definitive proxy statement, which
will be filed with the Commission within 120 days after the close of fiscal
1999.
Item l4. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) (1) Financial Statements:
The following consolidated financial statements of the Company are included
herein.
Page
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at January 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended
January 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-17
16
(a) (2) Financial Statement Schedules:
All schedules have been omitted inasmuch as the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Company's
Consolidated Financial Statements, including the notes thereto.
(a) (3) Exhibits:
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
January 31, 1999.
17
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AEROSONIC CORPORATION
(Registrant)
By: /s/ J. Mervyn Nabors Date: April 30 ,1999
----------------------------- -------------
J. Mervyn Nabors, President
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ J. Mervyn Nabors
-----------------------------
J. Mervyn Nabors Date: April 30 ,1999
President, Chief Executive Officer --------------
and Chairman of the Board
/s/ David A. Baldini
-----------------------------
David A. Baldini Date: April 30 ,1999
Vice President and --------------
Vice Chairman of the Board
/s/ Eric J. McCracken
-----------------------------
Eric J. McCracken Date: April 30 ,1999
Executive Vice President, --------------
Chief Financial Officer and Director
/s/ P. Mark Perkins
-----------------------------
P. Mark Perkins Date: April 30 ,1999
Executive Vice President and Director --------------
/s/ Carm Russo
------------------------------
Carm Russo Date: April 30,1999
Executive Vice President and Director -------------
/s/ William C. Parker
-----------------------------
William C. Parker. Date: April 30 ,1999
Director --------------
/s/ Melissa Clark Daley
-----------------------------
Melissa Clark Daley Date: April 30 ,1999
Director --------------
18
AEROSONIC CORPORATION AND SUBSIDIARY
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Index to Consolidated Financial Statements
Pages
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - January 31, 1999 and 1998 F-3
Consolidated Statements of Income - Years ended January 31, 1999, 1998, and 1997 F-4
Consolidated Statements of Shareholders' Equity - Years ended January 31,
1999, 1998, and 1997 F-5
Consolidated Statements of Cash Flows - Years ended January 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-17
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of Aerosonic Corporation
Clearwater, Florida
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Aerosonic
Corporation and its subsidiary (the Company) as of January 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 31, 1999 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Tampa, Florida
April 26, 1999
F-2
Aerosonic Corporation and Subsidiary
Consolidated Balance Sheets
January 31, 1999 and 1998
ASSETS 1999 1998
Current assets:
Cash and cash equivalents $ 1,718,000 $ 2,075,000
Receivables 4,394,000 3,348,000
Income tax receivable 13,000 0
Inventories 8,888,000 8,057,000
Costs and estimated earnings in excess of billings on uncompleted contract
0 48,000
Prepaid expenses 161,000 36,000
Deferred income taxes 391,000 314,000
---------------- ----------------
Total current assets 15,565,000 13,878,000
---------------- ----------------
Property, plant and equipment, net 4,434,000 4,369,000
Other assets 418,000 68,000
---------------- ----------------
4,852,000 4,437,000
---------------- ----------------
$ 20,417,000 $ 18,315,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturity of long-term debt and notes payable $ 328,000 $ 196,000
Revolving credit facilities 2,140,000 0
Accounts payable, trade 987,000 409,000
Compensation and benefits 685,000 619,000
Income taxes payable 0 836,000
Other accrued expenses 228,000 662,000
---------------- ----------------
Total current liabilities 4,368,000 2,722,000
Long-term debt and notes payable, net of current maturity 3,068,000 3,376,000
Note payable, related party 0 225,000
Deferred income taxes 231,000 214,000
---------------- ----------------
Total liabilities 7,667,000 6,537,000
---------------- ----------------
Commitments and contingencies (Note 13)
Shareholders' equity:
Common stock, $.40 par value; authorized 8,000,000 shares, issued 3,986,262
1,595,000 1,595,000
Additional paid-in capital 4,335,000 3,684,000
Retained earnings 6,984,000 6,631,000
Less treasury stock; 39,659 shares in 1999 and 76,393 shares in 1998, at cost
(164,000) (132,000)
---------------- ----------------
Total shareholders' equity 12,750,000 11,778,000
---------------- ----------------
$ 20,417,000 $ 18,315,000
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Aerosonic Corporation and Subsidiary
Consolidated Statements of Income
for the years ended January 31, 1999, 1998 and 1997
1999 1998 1997
Net sales $ 19,670,000 $ 19,326,000 $ 20,232,000
Cost of goods sold 11,934,000 11,780,000 13,225,000
---------------- ---------------- ----------------
Gross profit 7,736,000 7,546,000 7,007,000
Selling, general and administrative expenses 6,891,000 5,490,000 4,767,000
---------------- ---------------- ----------------
Operating income 845,000 2,056,000 2,240,000
---------------- ---------------- ----------------
Other income (deductions):
Provision for settlement of litigation (Note 13) 0 0 (225,000)
Interest expense, net (252,000) (232,000) (278,000)
Other, net (12,000) 111,000 (8,000)
---------------- ---------------- ----------------
(264,000) (121,000) (511,000)
---------------- ---------------- ----------------
Income from continuing operations before income taxes
581,000 1,935,000 1,729,000
Income tax expense (228,000) (734,000) (606,000)
---------------- ---------------- ----------------
Income from continuing operations 353,000 1,201,000 1,123,000
Discontinued ordnance operations:
Loss from discontinued operations, net of income tax
benefit of $0, $0, and $94,000, respectively
0 0 (240,000)
Gain on sale of discontinued operations 0 0 41,000
---------------- ---------------- ----------------
Net income $ 353,000 $ 1,201,000 $ 924,000
================ ================ ================
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.09 $ 0.31 $ 0.29
Discontinued operations 0.00 0.00 (0.05)
---------------- ---------------- ----------------
$ 0.09 $ 0.31 $ 0.24
================ ================ ================
Basic weighted average shares outstanding 3,944,359 3,867,057 3,806,173
================ ================ ================
Diluted weighted average shares outstanding 3,944,893 3,893,579 3,806,173
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Aerosonic Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
for the years ended January 31, 1999, 1998 and 1997
Additional Total
Common Paid-In Retained Treasury Shareholders'
Stock Capital Earnings Stock Equity
----------- ----------- ------------ ----------- --------------
Balances at February 1, 1996 $1,595,000 $ 3,410,000 $ 4,506,000 $ (322,000) $ 9,189,000
Net income 0 0 924,000 0 924,000
Reissuance of 8,019 shares of treasury stock 0 0 0 14,000 14,000
----------- ----------- ------------ ----------- --------------
Balances at January 31, 1997 1,595,000 3,410,000 5,430,000 (308,000) 10,127,000
Net income 0 0 1,201,000 0 1,201,000
Exercise of 60,500 stock options 0 78,000 0 104,000 182,000
Reissuance of 14,960 shares of treasury stock 0 148,000 0 26,000 174,000
Employee stock bonus of 26,900 shares 0 48,000 0 46,000 94,000
----------- ----------- ------------ ----------- --------------
Balances at January 31, 1998 1,595,000 3,684,000 6,631,000 (132,000) 11,778,000
Net income 0 0 353,000 0 353,000
Exercise of 1,000 stock options 0 1,000 0 2,000 3,000
Purchase of 10,000 shares of Treasury Stock 0 0 0 (120,000) (120,000)
Employee stock bonus of 36,800 shares 0 493,000 0 71,000 564,000
Reissuance of 8,934 shares treasury stock 0 157,000 0 15,000 172,000
---------- ----------- ------------ ----------- --------------
Balances at January 31, 1999 $1,595,000 $ 4,335,000 $ 6,984,000 $ (164,000) $ 12,750,000
=========== =========== ============ =========== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Aerosonic Corporation and Subsidiary
Consolidated Statements of Cash Flows
for the years ended January 31, 1999, 1998 and 1997
1999 1998 1997
Cash flows from operating activities:
Net income $ 353,000 $ 1,201,000 $ 924,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Increase (decrease) in allowance for doubtful accounts 5,000 (29,000) 27,000
Stock compensation 736,000 268,000 0
Depreciation 583,000 533,000 674,000
Amortization 17,000 0 0
Loss on disposal of equipment 0 14,000 0
(Gain) on disposal of ordnance division 0 0 (41,000)
Deferred income taxes (111,000) (285,000) 693,000
Changes in current assets and liabilities:
Receivables (1,051,000) 79,000 (55,000)
Income tax receivable (13,000) 149,000 287,000
Inventories (831,000) (771,000) (1,254,000)
Cost and estimated earnings in excess of billings
on uncompleted contract
48,000 10,000 204,000
Prepaid expenses (125,000) 30,000 (29,000)
Other assets (367,000) 22,000 121,000
Accounts payable 578,000 (555,000) (5,000)
Income taxes payable (836,000) 836,000 0
Accrued expenses and other liabilities (318,000) (12,000) (2,074,000)
---------------- ---------------- ----------------
Net cash provided by (used in) operating (1,332,000) 1,490,000 (528,000)
activities
---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 0 34,000 9,000
Proceeds from sale of ordnance division 0 0 1,700,000
Capital expenditures (648,000) (459,000) (399,000)
Collection of note receivable 0 30,000 30,000
---------------- ---------------- ----------------
Net cash provided by (used in) investing (648,000) (395,000) 1,340,000
activities
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 0 1,432,000 2,524,000
Proceeds from related party notes payable 0 0 1,250,000
Proceeds from revolving credit facilities 2,140,000 0 0
Purchase of treasury stock (120,000) 0 0
Principal payments on long-term debt and notes payable (175,000) (1,609,000) (2,596,000)
Principal payments on related party notes payable (225,000) (275,000) (750,000)
Proceeds from exercise of stock options 3,000 182,000 0
---------------- ---------------- ----------------
Net cash provided by (used in) financing 1,623,000 (270,000) 428,000
activities
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (357,000) 825,000 1,240,000
Cash and cash equivalents at beginning of year 2,075,000 1,250,000 10,000
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 1,718,000 $ 2,075,000 $ 1,250,000
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 259,000 $ 232,000 $ 353,000
================ ================ ================
Income taxes $ 1,057,000 $ 95,000 $ 0
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business - The primary business of Aerosonic Corporation
and subsidiary (the Company) is to manufacture and sell aircraft
instrumentation to government and commercial users (instrument division)
from its plants located in Florida, Virginia and Kansas. Prior to May
1996, the Company also sold non-munitions components for artillery
projectiles to the U.S. Government and automotive and truck parts to
commercial customers (ordnance division) from its plant located in
Florida. The Company's customers are located worldwide.
Principles of Consolidation - The consolidated financial statements
include the financial statements of Aerosonic Corporation (which
operates as the Clearwater, Florida and Wichita, Kansas Instrument
divisions) and its wholly owned subsidiary, Avionics Specialties, Inc.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the consolidated balance
sheets and consolidated statements of cash flows, the Company considers
all short-term investments purchased with an original maturity of three
months or less to be cash equivalents.
Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally
of cash and receivables. As of January 31, 1999 and 1998, substantially
all of the Company's cash balances, including amounts representing
outstanding checks, were deposited with high credit quality financial
institutions. During the normal course of business, the Company extends
credit to customers conducting business in the aviation industry
worldwide.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method. Provisions are
made for any inventory deemed excess or obsolete
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation on plant and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. Upon
disposition, the cost and related accumulated depreciation are removed
from the accounts and any related gain or loss is reflected in earnings.
Research and Development - Research and development costs are normally
expensed as incurred. Research and development expense approximated
$630,000, $443,000, and $460,000 during the years ended January 31,
1999, 1998 and 1997, respectively.
F-7
Notes to Consolidated Financial Statements, Continued
1. Description of Business and Summary of Significant Accounting Policies,
continued:
Capitalized Software Costs - Included in other assets are capitalized
software, which are recorded at cost less accumulated amortization.
Production costs for computer software that is to be utilized as an
integral part of a product is capitalized when both (a) technological
feasibility is established for the software and (b) all research and
development activities for the other components of the product have been
completed. Amortization is charged to expense on a straight line method
over three years from the date the product becomes available for general
release to customers. Software costs of $364,000 were capitalized during
the year ended January 31, 1999. Accumulated amortization amounted to
$17,000 at January 31, 1999.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes." Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is provided against the
future benefit of deferred tax assets if it is determined that it is
more likely than not that the future tax benefits associated with the
deferred tax asset will not be realized.
Revenue Recognition - The Company generally recognizes revenue from
sales of its products on the accrual basis on the date such products are
shipped. In certain circumstances, the U.S. Government accepts title to
products while still on the Company's premises. The Company records
these items as sales when the government accepts title in writing and
assumes all other risks and rewards of ownership.
The Company follows the percentage-of-completion method of accounting
for income on one long-term engineering service contract. Under this
method, contract revenue is computed as that percentage of estimated
total revenue that costs incurred to date bear to total estimated costs,
after giving effect to the most recent estimates of costs to complete.
Revisions in costs and revenue estimates are reflected in the period in
which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined without regard to the percentage-of-completion.
Environmental Expenditures - The Company accrues for environmental
expenses resulting from existing conditions that relate to past
operations when the costs are probable and reasonably estimable.
F-8
Notes to Consolidated Financial Statements, Continued
1. Description of Business and Summary of Significant Accounting Policies,
continued:
Computation of Earnings Per Share - Basic earnings per share is computed
using the weighted average of common stock outstanding. Diluted earnings
per share is computed using the treasury stock method which is
summarized as follows:
1999 1998 1997
--------------- --------------- ---------------
Weighted average common stock outstanding 3,944,359 3,867,057 3,806,173
Weighted average common stock equivalents 534 26,522 0
--------------- --------------- ---------------
Shares used in diluted earnings per share calculation
3,944,893 3,893,579 3,806,173
=============== =============== ===============
Use of Estimates in the Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative
instruments and requires that these items be recognized as assets or
liabilities in the statement of financial position. This statement is
effective for fiscal years beginning after June 15, 1999. As of January
31, 1999 the Company does not have any derivative instruments.
Therefore, management does not believe this pronouncement will have any
material effect on the Company.
Segment reporting - In June 1997, the FASB issued SFAS No. 131
"Disclosure About Segments of an Enterprise and Related information."
SFAS No. 131 requires disclosure of certain information about operating
segments and about products and services, geographic areas in which the
Company operates and their major customers. As of January 31, 1999
management does not believe the Company has any reportable segments as
defined in SFAS No. 131.
Reclassifications - Certain amounts shown in prior years have been
reclassified to conform with the 1999 presentation. These
reclassifications did not have any effect on total assets, total
liabilities, stockholder's equity or net income.
F-9
Notes to Consolidated Financial Statements, Continued
2. Receivables:
Receivables at January 31, 1999 and 1998 consisted of the following:
1999 1998
Trade, less allowance for doubtful accounts of $73,000 in 1999 and
$68,000 in 1998 $ 4,361,000 $ 3,315,000
Officers and employees 33,000 3,000
Current notes receivable and other 0 30,000
---------------- ----------------
$ 4,394,000 $ 3,348,000
================ ================
3. Inventories:
Inventories at January 31, 1999 and 1998 consisted of the following:
1999 1998
Raw materials and work in process $ 8,306,000 $ 7,265,000
Finished goods 582,000 792,000
---------------- ----------------
$ 8,888,000 $ 8,057,000
================ ================
4. Property, Plant and Equipment:
Property, plant and equipment at January 31, 1999 and 1998 consisted of
the following:
Estimated
Useful Life
(years)
1999 1998
Land and improvements 15 - 20 $ 466,000 $ 462,000
Buildings and improvements 25 - 30 3,367,000 3,215,000
Machinery and equipment 3 - 10 4,295,000 3,911,000
Patterns, dies, and tools 3 - 5 189,000 172,000
Furniture and fixtures 5 - 10 524,000 433,000
---------------- ----------------
8,841,000 8,193,000
Less accumulated depreciation and amortization 4,407,000 3,824,000
---------------- ----------------
$ 4,434,000 $ 4,369,000
================ ================
F-10
Notes to Consolidated Financial Statements, Continued
5. Costs and Estimated Earnings on Uncompleted Contract:
The Company has one long-term contract to provide engineering services,
which is recorded on the percentage of completion method. Costs and
estimated earnings in excess of billings on this contract at January 31,
1999 and 1998 are comprised of the following:
1999 1998
Costs incurred to date $ 2,009,000 $ 2,009,000
Estimated earnings 331,000 331,000
---------------- ----------------
2,340,000 2,340,000
Less billings to date 2,340,000 2,292,000
---------------- ----------------
$ 0 $ 48,000
================ ================
During 1999 this contract was completed.
6. Income Taxes:
Income tax (expense) benefit for the years ended January 31, 1999, 1998
and 1997 consisted of:
1999 1998 1997
Continuing operations:
Current:
Federal $ (294,000) $ (957,000) $ 87,000
State (45,000) (62,000) 0
---------------- ---------------- ----------------
(339,000) (1,019,000) 87,000
---------------- ---------------- ----------------
Deferred:
Federal 97,000 279,000 (603,000)
State 14,000 6,000 (90,000)
---------------- ---------------- ----------------
111,000 285,000 (693,000)
---------------- ---------------- ----------------
$ (228,000) $ (734,000) $ (606,000)
================ ================ ================
Discontinued operations:
Current:
Federal $ 0 $ 0 $ 94,000
State 0 0 0
---------------- ---------------- ----------------
$ 0 $ 0 $ 94,000
================ ================ ================
Total
Current:
Federal $ (294,000) $ (957,000) $ 181,000
State (45,000) (62,000) 0
---------------- ---------------- ----------------
(339,000) (1,019,000) 181,000
---------------- ---------------- ----------------
Deferred:
Federal 97,000 279,000 (603,000)
State 14,000 6,000 (90,000)
---------------- ---------------- ----------------
111,000 285,000 (693,000)
---------------- ---------------- ----------------
$ (228,000) $ (734,000) $ (512,000)
================ ================ ================
F-11
Notes to Consolidated Financial Statements, Continued
6. Income Taxes, continued:
1999 1998 1997
Federal tax rate (34.00)% (34.00)% (34.00)%
Increase in taxes resulting from:
State income taxes, net of federal tax benefit (3.30) (3.85) (3.30)
Decrease in valuation allowance 0.00 3.15 4.74
Other (2.03) (3.20) (3.10)
------------- ------------- -------------
Effective tax rate (39.33)% (37.90)% (35.66)%
============= ============= =============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 31, 1999 and 1998 are as follows:
1999 1998
Current deferred tax assets:
Accounts receivable $ (68,000) $ (102,000)
Inventories, principally due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986
330,000 246,000
Compensated absences, principally due to accrual for financial
reporting purposes
105,000 100,000
Other 24,000 70,000
---------------- ----------------
Total current deferred tax assets 391,000 314,000
---------------- ----------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in
depreciation and capitalized interest
231,000 214,000
---------------- ----------------
Total gross deferred tax liabilities 231,000 214,000
---------------- ----------------
Net deferred tax asset $ 160,000 $ 100,000
================ ================
7. Long-Term Debt and Notes Payable:
Long-term debt and notes payable at January 31, 1999 and 1998 consisted
of the following:
1999 1998
Note payable $ 1,600,000 $ 1,628,000
Industrial development revenue bonds 1,039,000 1,113,000
Mortgage note payable 757,000 831,000
Note payable, related party 0 225,000
---------------- ----------------
3,396,000 3,797,000
Less current maturity 328,000 196,000
---------------- ----------------
Long-term debt and notes payable, less current maturity $ 3,068,000 $ 3,601,000
================ ================
F-12
Notes to Consolidated Financial Statements, Continued
7. Long-Term Debt and Notes Payable, continued:
The amount of long-term debt and notes payable maturing in each of the
fiscal years 2001, 2002, 2003 and 2004 approximates $329,000, $329,000,
$329,000, $329,000 and $1,751,000, respectively.
Note Payable - The note payable is payable in monthly installments
beginning in October 1998 through September 30, 2003 including interest
at the 90-day average of the 90-day treasury bill plus 2.75% (7.09% and
7.99% at January 31, 1999 and 1998 respectively). The note payable is
collateralized by accounts receivable and inventory.
Industrial Development Revenue Bonds - The industrial development
revenue bonds are payable in quarterly principal installments of
approximately $19,000 and monthly interest installments through December
2012 and bear interest at 90% of prime. The bonds are collateralized by
property, plant and equipment located in Clearwater, Florida. The
pledged collateral has a carrying value of approximately $2,208,000 at
January 31, 1999. The mortgage and underlying bonds may be redeemed by
the holder, in whole, at the principal amount plus accrued interest on
the 10th, 15th, or 20th anniversary date of the mortgage and underlying
bonds. If the tax exempt status of the bond is revoked or impaired,
certain portions could become immediately payable, or the interest rate
will be increased. In addition, the outstanding balance of $1,039,000 is
subject to accelerated maturity upon a material, adverse change in
financial condition or operation which in the opinion of the Trustee
materially affect the borrower's ability to repay the obligation as
defined in the loan agreement.
Mortgage Note Payable - The mortgage note is payable in monthly
installments through May 2009, including interest at 7.5% through May
1999 and prime plus 1 percent thereafter. The lender has a put option
exercisable in May 2001. The note is collateralized by substantially all
property, plant and equipment at the Avionics Specialties, Inc.
location. The collateralized property has a carrying value of
approximately $1,178,000 at January 31, 1998.
Note Payable, Related Party - The note payable, related party consists
of a term loan owed to a shareholder of the Company. The loan, which is
uncollateralized, is payable in full at maturity during May 2001 and
bears interest at prime. At January 31, 1999 the note payable was paid
in full.
The Company's long-term debt agreements include certain restrictive
covenants, including restrictions on dividends (dividends during any
single calendar year cannot exceed 25 percent of net income for that
year), limitations on business acquisitions and sales of assets, and the
requirement to maintain: a debt to tangible net worth ratio of 1.0:1, a
current ratio of 2.0:1 and a Long Term Debt Service Coverage of 1.25:1.
The Company is in compliance with all of the above debt covenants at
January 31, 1999.
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments.
Cash, accounts receivable, short-term borrowings, accounts payable and
accrued liabilities are reflected in the financial statements at fair
value because of the short-term maturity of these instruments. The
carrying amount of long-term debt and notes payable at January 31, 1999
and 1998 approximates fair value due to their adjustable rates which
change frequently. The prime rate of interest at January 31, 1999 and
1998 was 7.75% and 8.5%, respectively.
F-13
Notes to Consolidated Financial Statements, Continued
8. Revolving Credit Facilities:
The Company had available a $1,500,000 line of credit. Interest was
payable monthly at the 90-day average of the 90-day treasury bill plus
2.75% (7.99% at January 31, 1998) and principal was payable on demand.
The line of credit agreement, which expired in April 1998, was
collateralized by equipment and receivables, and was subject to the same
covenants included in the Company's long-term debt agreements.
In May 1998 the Company acquired a new line of credit in the amount of
$1,500,000. Interest is payable monthly at the 90-day average of the
90-day treasury bill plus 2.75% (7.09% at January 31, 1999) and
principal is payable on demand. The line of credit agreement is
collateralized by receivables, inventory and general intangibles, and is
subject to the same covenants included in the Company's long-term debt
agreements. Approximately $250,000 of additional credit was available
under this facility at January 31, 1999. The average interest rate under
this facility for the year ended January 31, 1999 was 7.41%.
During September 1998 the Company entered into a $1,300,000 line of
credit for new equipment purchases. Interest is payable monthly at a
rate of 7.72%. The line of credit expires in September 1999.
Approximately $410,000 of additional credit was available under this
facility at January 31, 1999.
The revolving credit facilities include the same restriction covenants
as those for the Company's long-term debt. The Company is in compliance
with all of the related covenants.
9. Major Customer Information:
Sales to U. S. Government agencies, when combined, represented 10
percent or more of net sales and amounted to approximately $4,822,000,
$6,536,000, and $5,079,000 for the years ended January 31, 1999, 1998
and 1997, respectively. Sales to an additional customer represented 10
percent or more of net sales and amounted to $2,271,000, $1,599,000 and
$1,693,000 for the years ended 1999, 1998 and 1997 respectively. Foreign
sales for the years ended January 31, 1999, 1998 and 1997 represented 10
percent or more of net sales and amounted to approximately $3,917,000,
$2,470,000, and $6,208,000, respectively. All foreign sales contracts
are payable in U.S. dollars therefore avoiding any foreign currency
exchange risk. No other customer sales totaled greater than 10 percent
of net sales for years ended January 31, 1999, 1998 or 1997.
Receivables at January 31, 1998 included approximately $743,000 due from
the U.S. government. Receivables at January 31, 1999 included
approximately $821,000 and $874,000 due from the U.S. government and an
additional customer, respectively. No other customers represented
greater than 10 percent of receivables at January 31, 1999 or 1998.
10. Discontinued Operations - Sale of Ordnance Division:
During June 1996, the Company sold substantially all assets of its
ordnance division. The sale, which totaled $1,700,000, resulted in a
$41,000 gain.
F-14
Notes to Consolidated Financial Statements, Continued
10. Discontinued Operations - Sale of Ordnance Division, continued:
Information summarizing discontinued ordnance operations for the year
ended January 31, 1997 is as follows:
1997
Net sales $ 945,000
================
Loss from discontinued operations before income taxes $ (293,000)
Income tax benefit 94,000
----------------
Net loss from discontinued operations $ (199,000)
================
11. Benefit Plans:
Effective February 1, 1993, the Company adopted a tax-deferred savings
plan which covers substantially all employees of the Company. Under the
plan, participants may elect to contribute up to 10% of pre-tax
earnings. The Company will fund a 100% matching contribution, up to 3%
of the participant's yearly compensation. Such matching contributions
will be made in cash or common stock of the Company. Additional
contributions may be made at the Company's discretion. For the years
ended January 31, 1999, 1998 and 1997, the Company's contribution was
approximately $172,000, $174,000, and $165,000, respectively. During the
years ended January 31, 1999, 1998 and 1997, the Company issued 8,934,
14,960, and 8,019, shares of treasury stock, respectively, in partial
payment of the Plan. These stock contributions were properly accounted
for as non-cash transactions.
During 1998, the Company paid a stock bonus of 100 shares to each
employee. The fair market value of the stock at the date the bonus was
granted was charged to expense in the amount of approximately $94,000.
During 1999, the Company paid stock bonuses totaling 36,800 shares to
employees. The fair value of the stock at the date of the bonus was
granted was charged to expense in the amount of approximately $565,000.
In March 1993, the Board of Directors adopted, subject to shareholder
approval, an Incentive Stock Option Plan, which provides for the
granting of 300,000 shares of the Company's authorized but unissued
common stock to key employees. Under the plan, options granted may be
either incentive stock options as defined by the Internal Revenue code,
or non-qualified stock options. Options may be granted at prices not
less than fair market value at the date of option grant. The option
price for incentive stock options granted to an optionee who possesses
more than 10% total combined voting power of value of the Company may
not be less than 110% of the fair market value at the date of option
grant. The stock options will be exercisable over a period determined by
the Board of Directors, but no longer than five years after the date
they are granted.
F-15
Notes to Consolidated Financial Statements, Continued
11. Benefit Plans, continued:
A summary of the status of the Company's stock option plan is as
follows:
Exercise
Shares Price
---------------- ----------------
Balance, January 31, 1996 85,500
Canceled (13,500) $3.00
----------------
Balance, January 31, 1997 72,000
Exercised (60,500) $3.00
Canceled (7,500) $3.00
----------------
Balance, January 31, 1998 4,000
Exercised (1,000) $3.00
Canceled (3,000) $3.00
----------------
0
================
At January 31, 1999 there are no remaining options available for grant
or exercise under the plan.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Company has adopted the disclosure only
provisions of SFAS No. 123 but applies Accounting Principles Board (APB)
Opinion No. 25 and related interpretations in accounting for its plan.
SFAS No. 123 and APB No. 25 have no financial accounting or reporting
impact on the Company for the years ended January 31, 1999, 1998 and
1997 due to the Company not granting any stock options.
12. Related Party Transactions:
During the year ended January 31, 1997, the Company obtained short-term
financing totaling $500,000 from a shareholder and officer. The loan,
which was fully repaid during 1997, was non-interest bearing and
uncollateralized.
During the year ended January 31, 1997, the Company obtained long-term
financing from a shareholder totaling $750,000 at origination. Principal
repayments totaling $225,000, $275,000, and $250,000 were made during
1999, 1998 and 1997 respectively. At January 31, 1999 all principal and
interest was paid in full.
F-16
Notes to Consolidated Financial Statements, Continued
13. Commitments and Contingencies:
In 1993, the Company was named as a co-defendant in a patent
infringement suit filed by Sensonics Inc. claiming that the Company
infringed Sensonics' expired patent for an electromagnetical tapping
device that the Company used as a component part. During May 1996, the
Company's Board of Directors approved a proposed settlement of the
lawsuit for $2,000,000. Pursuant to this settlement, the Company
recorded a $0, $0 and $225,000 provision for the settlement of
litigation during the years ended January 31, 1999, 1998 and 1997,
respectively. All amounts related to the settlement were paid by the
Company during the year ended January 31, 1997.
The Company was sued in September 1996 by David S. Goldman, former
President and Chief Executive Officer of Aerosonic Corporation, for an
alleged breach of a consulting agreement between Mr. Goldman and the
Company. The suit seeks damages in excess of $15,000. The Company has
filed a motion to dismiss this action, which is currently under review.
During fiscal year 1997, the Company sued Mr. Goldman and Mil-Spec
Finishers, Inc., a former subcontractor to Aerosonic Corporation
controlled by Mr. Goldman, seeking damages in excess of $15,000, for
alleged fraud and misappropriation of funds, appropriation of corporate
opportunity, breach of fiduciary duty and conversion. Management
believes that the ultimate resolution of this matter will not have a
material effect on the financial position of the Company.
In accordance with a consent agreement signed by the Company in 1993,
the Company's environmental consultant has developed an interim remedial
action plan to contain and remediate certain contamination on and
underlying the Company's property. This plan was submitted to the
Florida Department of Environmental Protection (FDEP) in 1997 and is
currently under review and discussion. During 1997, the Company recorded
a provision of approximately $175,000 related to the estimated costs to
be incurred under this plan. As of January 31, 1999 the Company has a
remaining liability of approximately $59,000 recorded in Other accrued
expenses to cover future environmental expenditures related to the
remediation of this site. Management believes that any additional
liability in excess of the amounts accrued at January 31, 1999 will not
have a material affect on the financial position of the Company.
The Company is also involved in certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of the above matters will not have a material
adverse effect on the Company's financial position, results of
operations, or liquidity.
At January 31, 1999, the Company was committed to future purchases
primarily for materials of approximately $1,738,000. At January 31,
1999, the Company had an additional $79,000 letter of credit which
guarantees trade activities. The contract amount of all of the Company's
letters of credit is a reasonable estimate of their fair value, as the
value for each is fixed over the life of the commitment.
F-17