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 -------- ---------------------------
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.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
None.
PART II
Item 5.
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 - ------------------------------------------------------------------------- 2 High 20-1/8 Low 17-1/4 - ------------------------------------------------------------------------- 3 High 17-1/4 Low 6-1/2 - ------------------------------------------------------------------------- 4 High 14-1/4 Low 10-1/4 - -------------------------------------------------------------------------
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 - ------------------------------------------------------------------------- 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.
Item 6.
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.
Item 7.
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.
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.
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
$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.
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.
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.
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.
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.
Item 9. Changes in and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------
Not applicable.
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.
(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.
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)
AEROSONIC CORPORATION AND SUBSIDIARY
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
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
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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.
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.
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:
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.
Notes to Consolidated Financial Statements, Continued
2. Receivables:
Receivables at January 31, 1999 and 1998 consisted of the following:
3. Inventories:
Inventories at January 31, 1999 and 1998 consisted of the following:
4. Property, Plant and Equipment:
Property, plant and equipment at January 31, 1999 and 1998 consisted of the following:
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:
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:
Notes to Consolidated Financial Statements, Continued
6. Income Taxes, continued:
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:
7. Long-Term Debt and Notes Payable:
Long-term debt and notes payable at January 31, 1999 and 1998 consisted of the following:
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.
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.
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:
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.
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:
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.
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.