-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PBi64Pc95poz2NHeVJblqojqeappQT/bKkGjIXxqofLiCh20cvBHB9dq1KqF669Z L2Q63u4prEAH6SxaB1SRCw== 0000912057-97-027636.txt : 19970814 0000912057-97-027636.hdr.sgml : 19970814 ACCESSION NUMBER: 0000912057-97-027636 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRSENSORS INC CENTRAL INDEX KEY: 0000790708 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 911039211 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16115 FILM NUMBER: 97659350 BUSINESS ADDRESS: STREET 1: 16804 GRIDLEY PLACE CITY: CERRITOS STATE: CA ZIP: 90701 BUSINESS PHONE: 3108606666 MAIL ADDRESS: STREET 1: 16804 GRIDLEY PL CITY: CERRITOS STATE: CA ZIP: 90703 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K / x / Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended April 30, 1997, or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-16115 AIRSENSORS, INC. (Exact name of registrant as specified in its charter) Delaware 91-1039211 ------------------------ ---------------------- (State of Incorporation) (IRS Employer ID. No.) 16804 Gridley Place, Cerritos, California 90703 ----------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (562) 860-6666 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock; Common Stock Purchase Warrants; and Units, consisting of one share of Common Stock and one Common Stock Purchase Warrant 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, 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 (section 229.405) 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. / / Approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 1997 was $46,168,112. Number of shares outstanding of each of the registrant's classes of common stock, as of June 30, 1997: 5,771,014 shares of Common Stock Documents incorporated by reference: See Item 14 Information required by Part III is incorporated by reference from the definitive proxy statement to be filed pursuant to Regulation 14A or by an amendment hereto, in either case, within 120 days of the end of fiscal year 1997. PART I ------ ITEM 1 - BUSINESS General ------- AirSensors, Inc. (AirSensors) was incorporated in the State of Washington in 1978 and became a Delaware corporation in 1985. AirSensors, together with its wholly owned subsidiary IMPCO Technologies, Inc. (IMPCO) and IMPCO's subsidiaries, are hereinafter referred to as the "Company." The Company designs, manufactures and markets equipment that allows internal combustion engines to operate on alternative fuels, primarily propane and natural gas. ACQUISITIONS In October 1995, the Company acquired 51% of the outstanding stock of Technisch Bureau Media B.V., a private company in the Netherlands, from Centradas B.V. for 3,187,500 NLG (U.S. $2,023,000). The acquisition was financed through a term loan provided by Bank of America. The new company operates as IMPCO Media Europe B.V.(Media) and distributes gaseous fuel carburetion systems, components and related devices for use in internal combustion engines along with catalytic converters for the off-highway industrial market. Media services the European marketplace from its headquarters in the Netherlands and through its subsidiaries and facilities in Germany, France and the United Kingdom. Media's revenues totaled approximately $9,203,000 and $5,601,000 in fiscal years 1997 and 1996, respectively. In April 1996, the Company acquired substantially all of the business assets of Garretson Equipment Company, Inc. (Garretson) of Mt. Pleasant, Iowa for approximately $1,041,000. Garretson is a leading manufacturer of fuel systems, components and related devices that allow small engines of 35 horsepower or less to run on either natural gas or propane. Major product applications include generator sets, industrial equipment and utility engines. In July 1996, the Company acquired certain assets of Ateco Automotive Pty. Ltd. (Ateco), a private company in Australia, for a purchase price of approximately $6,532,000. The purchase price was primarily financed through $4,000,000 of term loans provided by Bank of America and its Sydney, Australia branch and forgiveness of accounts receivable due to IMPCO from Ateco, totaling $1,852,000. Ateco had distributed IMPCO's gaseous fuel carburetion systems, components and related devices for use in internal combustion engines since 1969. The new company operates as IMPCO Technologies Pty Ltd (Pty) and services the Australian marketplace from its offices near Melbourne. Pty's revenues totaled approximately $7,816,000 for 10 months of operations since it was acquired by the Company. PRODUCTS AND MARKETS CURRENT PRODUCTS. The Company's products include fuel management systems and components, including electronic fuel control processors, carburetors, converters or regulators, fuel lock-offs, repair kits or replacement parts and other sundry devices. The Company's products, sold for aftermarket conversions and as original equipment, are used in a variety of motor vehicles, forklifts and small portable to large stationary engines. Worldwide, the products are marketed through distributors and original equipment manufacturers (OEM) under the brand names IMPCO-registered trademark-, BEAM-registered trademark-, GARRETSON-registered trademark- and J&S Carburetion-registered trademark-. Ease of installation, consistent performance, high quality and safety are attributes of the Company's products. The Company's fuel management systems are designed to offer several levels of technology to meet customer needs. The Adaptive Digital Processor (ADP) uses advanced electronic technology to learn and store key operating characteristics of the specific vehicle. The ADP enhancer complements the ADP with diagnostics and spark timing modules. The Advanced Fuel Electronics System (AFE) uses mass sensing hot wire anemometry to calculate the engine's air/fuel mixture. During engine operation, an on-board computer adjusts the mixture to achieve optimum results in engine performance to reduce emissions. The Company is also developing a Fuel Injection System for ultra low emission vehicles. These injectors are designed for vaporized natural gas or vaporized propane for use in the latest engine technologies. The Company's carburetors are designed for use in 5 to 5,000 horsepower engines. The Company's liquid propane gas (LPG) converter is a two stage regulator and vaporizer that regulates the amount of fuel entering the carburetor and then transforms the fuel from a pressurized liquid state to a gaseous vapor by exposing the fuel to near atmospheric pressure. The Company's vacuum and electro-mechanical fuel lock-off devices stop the flow of fuel when engines stop running. The vacuum fuel lock-off has been a popular product with OEM's due to its safety characteristics. During fiscal year 1997, sales of carburetors represented approximately 33% of consolidated product sales, converters approximately 26%, fuel lock- offs approximately 6%, repair kits approximately 8%, electronic control systems approximately 11%, and other products and sundry devices approximately 16%. The product sales mix during fiscal year 1997 was substantially the same as during the prior two fiscal years. The Company's products are sold worldwide to distributors and OEMs and as aftermarket components and/or retrofit systems. The Company's equipment allows internal combustion engines to operate on alternative gaseous fuels and is primarily used in forklift and automotive applications. During fiscal year 1997, sales to distributors accounted for approximately 67% of consolidated product sales, sales to OEM customers accounted for approximately 28% and aftermarket retrofit system conversions accounted for approximately 5% of consolidated product sales. No customer accounted for more than 10% of the Company's consolidated net revenue during fiscal year 1997. Distributors primarily service the aftermarket conversion business and small-volume OEMs, and are generally specialized and privately owned enterprises. Many domestic distributors have been customers of IMPCO for more than 30 years, and most export distributors have been customers for more than 20 years. Most OEM customers are large engine, vehicle, and forklift manufacturers such as Caterpillar Inc., Clark Material Handling Co., Cummins Engine Company Inc., Ford Motor Company, General Motors Corporation, NACCO Material Handling Group, Kohler Company, Mitsubishi Caterpillar Forklift America, Inc., Onan Corporation, Toyota Industrial Equipment Mfg. Inc. and the Waukesha Engine Division of Dresser Industries, Inc. PRODUCT EVOLUTION. The Company's traditional products include the use of vacuum and mechanical controls to regulate engine air/fuel ratios. Motor vehicle carburetors, as well as some ancillary devices, often are mechanical and operate independent of other engine functions. In recent years, electronically controlled devices have replaced some vacuum actuated mechanical devices to improve the engine performance and to more tightly control the emissions from internal combustion engines. The Company has addressed this change by introducing new electronic devices designed for gaseous fuels that interface with the OEM electronics. To remain competitive, the Company is improving its traditional products and is developing new products. The Company upgraded its AFE gaseous fuel management system that is based on its mass-sensing technology and proprietary software. AFE is designed to manage air/fuel ratios to achieve the optimum air/fuel mixture and many other engine functions. The Company is enhancing its on-board computer utilizing the vehicle-specific software required for the AFE product, a mass-sensor and the necessary hardware for a variety of vehicle types including pickup trucks, vans and passenger cars. The Company is focusing its AFE marketing efforts on OEMs. The Company is also developing improved technologies including injectors, high and low pressure regulators, on-board diagnostics, high performance 32-bit engine control modules, fuel lockoffs and related components. The Company believes that it will continue to satisfy the different engine and emission control approaches being used on engines in its domestic and foreign markets. MARKET AND REGULATORY ENVIRONMENT The Company's worldwide market is influenced by global environmental laws which regulate emission standards and energy laws which strive for energy independence. In addition, there are certain economic advantages to using alternate gaseous fuels in many countries. Legislation has provided incentives and programs to promote and develop infrastructures for alternative fueled vehicles, some requiring fleet vehicle owners to phase in alternative fueled vehicles and imposed penalties upon failure to meet standards and guidelines. In the United States, the Federal Energy Policy Act of 1992 mandates that 75% of the light duty vehicles acquired by the federal, state and municipal governments by fiscal 2002, and thereafter, be alternative fueled vehicles, and non-government fleet operators of 20 or more vehicles be required to include at least 20% alternative fueled light duty vehicles in their total vehicle purchases by fiscal 2002. Beginning 2006 and thereafter, 70% of such vehicles acquired by fleet operators of 20 or more must be alternative fueled vehicles. Title XIII of the California Code of Regulations imposes comprehensive conversion requirements on operators of fleet vehicles to ensure that exhaust emission standards are met. The Company believes that many fleet vehicle operators are purchasing vehicles that operate on alternative fuels, such as natural gas or propane, as a means of complying with these regulations. Amendments to Title XIII also include provisions for certification and installation of alternative fuel retrofit systems. A "retrofit system" is a package of fuel, ignition, emission control, and engine components that are modified, removed, or added during the process of converting a vehicle to alternative fuels. These amendments require a certain percentage of retrofit conversions in California be certified, inspected, carry a product warranty, and comply with vehicle emission standards. Both the manufacturer and equipment installers are required to certify their products and services. Several other states have adopted similar regulations and mandates which are expected to increase the demand for alternative fuels. These include Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Hawaii, Iowa, Kansas, Louisiana, Massachusetts, Missouri, New Hampshire, New Mexico, New York, Oklahoma, Oregon, Texas, Utah, Virginia, Washington and West Virginia. In addition, legislation to foster energy independence and/or reduce pollution is spurning growth in the use of gaseous fuels in countries such as Australia, Mexico, Netherlands, Taiwan, Turkey and Venezuela. STRATEGIC MARKETING PLAN The Company's goal is to retain its position as one of the world's leading suppliers of engine components and systems that allow internal combustion engines to operate on gaseous fuels. A key element of the Company's steady growth has been the diversity of markets that its products serve. The increasing worldwide demand for gaseous alternative fuel management products and systems for motor vehicle uses, material handling equipment and industrial engines, provides the Company with a broad market foundation and eliminates dependency on a single market segment. The Company's two largest markets, motor vehicle (primarily fleet vehicles) and material handling (primarily forklifts), accounted for approximately 81% of the Company's consolidated product sales in the last fiscal year. See "Products and Markets." Of these two markets, the motor vehicle market is believed to have the greatest potential for significant growth. The Company anticipates that this growth will result from worldwide governmental regulations imposing more stringent emission standards to achieve energy independence. See "Market and Regulatory Environment." The Company's global short-term strategy is to continue its presence in the retrofit market for fleet vehicles and to continue introducing upgrades to its existing products. The Company will also continue its presence in both the retrofit and OEM market by promoting its products to meet the expected demand for equipment which will allow motor vehicle engines to meet the more stringent emission regulations. In the long-term, the worldwide demand for alternative fueled vehicles is making it feasible for OEM production. The Company has taken steps to become a preferred OEM supplier for gaseous fuel components. General Motors Corporation has contracted with the Company to develop and commercialize several gaseous fueled vehicle platforms. The Company believes that product quality is essential for OEM recognition and it is continually upgrading its quality assurance program. The Company's aftermarket products are primarily marketed through a network of specialized distributors which the Company expects to continue to utilize for its existing product lines. However, under recent regulations in the U.S., the Company and its installers are required to certify their products and services. To meet these requirements, the Company is seeking new channels of distribution to complement its existing distributor network. The Company has expanded the marketing of its existing non-electronically controlled products in countries with less stringent emission standards than those in the United States. This strategy is being applied in Central and South America, Eastern Europe and the Far East. In countries such as Mexico and Taiwan, where the level of emission standards is increasing, but is not as stringent as in the United States, the Company's strategy is to upgrade its existing products to improve both emission levels and engine performance. Significant changes are also occurring in the forklift industry. The increased emphasis on emissions requires engine manufacturers to consider new fuel and engine management products as a part of the engine configuration. During fiscal year 1995, IMPCO signed a distribution agreement with Mikuni American Corporation. Mikuni is a world leader in the technology and production of gasoline fuel delivery systems for internal combustion engines. Its customers include a number of major Japanese motor vehicle manufacturers and heavy equipment companies. This distribution partnership has given the Company access to the Japanese market for its array of clean fuel products. The primary growth potential for the industrial engine business is in the power generation market. North American generator set production continues to increase in response to growing global demand. Many of these sets are fueled by propane or natural gas. COMPETITION AND OTHER MARKET FACTORS The Company has competitors in various worldwide market segments in the motor vehicle gaseous fuel equipment industry. The three major independent competitors are Vialle B.V. Autogas System (Vialle), Koltec Necam B.V. and Landi. Vialle is a competitor in the European and Australian markets. Koltec Necam is a competitor in the Dutch market and the Far East. Landi, an Italian company, competes in the European, South American and Middle Eastern markets. In North America the Company's competitors include Gaseous Fuel Injection Control Systems, Inc., Beacon Power Systems, Inc. and Algas Industries, Inc. The Company also competes with OEMs such as Niki-Nippon Kikaki Seisakusyo (Nissan) and Asian Seiki Co. Ltd. (Toyota) in the Far East. To be competitive into the future, the Company believes it will be necessary to continue to enhance its gaseous fuel engine management products utilizing mass-sensing, electronic and electro-mechanical technology. Increasing regulations and competition may result in the elimination of some current competitors who lack either financial resources or technical capabilities. However, the Company anticipates new competitors will enter the alternative fuel marketplace due to the potential increase in the size of the market. These competitors may include large motor vehicle OEMs who may adapt their existing gasoline technology to alternative fueled vehicles. MANUFACTURING The Company's products are presently manufactured in the Company's facilities in Cerritos, California. Manufacturing operations consist largely of mechanical assembly with light machining. A machining facility is also operated in Mt. Pleasant, Iowa. The Company places substantial reliance on outside vendors for parts, components and electronic assemblies. It obtains product components from a variety of domestic motor vehicle and electronic part suppliers and assemblers, diecasters, metal stamping and machine shops. In fiscal year 1997, 10 suppliers accounted for approximately 46% of consolidated net inventory purchases and one supplier accounted for approximately 17% of such purchases. Material costs represent the major component of cost of sales. Coordination with suppliers for quality control and timely shipment is critical to maximize the Company's inventory management. The Company uses a computerized material requirements planning system to schedule material flow and balance the competing demands of timely shipments, productivity and inventory management. The Company has not experienced, and does not expect to experience, any significant difficulty in complying with environmental regulations applicable to its manufacturing processes and facilities. PRODUCT CERTIFICATION The Company must obtain certification from the Environmental Protection Agency (EPA) to sell certain of its products in the United States and from the California Air Resources Board to market certain products in California. California regulations require that all of model year 1997 retrofit conversions be certified, inspected, carry a product warranty and comply with new emission standards. Manufacturers are also required by California regulations to conduct 100,000 mile durability tests. Some other states have similar types of regulations. The Company has been successful in obtaining certifications in the past, and the Company's continued ability to comply with these and future regulations will significantly affect its future success in the aftermarket for motor vehicles in the United States. The Company seeks product approval by Underwriters Laboratories, Inc. (registered trademark) (UL-registered trademark-), the American Gas Association, and international approval services on certain products. While approval is not always required, the Company believes such approval enhances the acceptability of products in the domestic marketplace. Many foreign countries also accept these agency approvals as satisfying "approval for sale" requirements in their markets. PATENTS AND TRADEMARKS The Company holds a number of domestic and foreign patents. While the Company believes that these patents and patent applications protect certain proprietary rights and technologies, there can be no assurance that any existing and future patents will provide such protection. Moreover, the Company believes that its growth and future success are more dependent upon technical expertise and marketing skills than on the ownership of patent rights. Also, other technology exists which performs functions substantially equivalent to the technology covered by the Company's patents and patent applications, and that technology may be used by others without infringing upon the Company's patents. The "IMPCO", "BEAM", "GARRETSON" and "CARBURETION J&S" marks are registered as trademarks on the United States Principal Register. They are also registered in various other countries throughout the world. The trademark "AirSensors" has been registered as a trademark on the United States Supplemental Register. BACKLOG The Company's backlog consists of anticipated sales of products for which the Company has confirmed orders scheduled for shipments over the next 90 days. Such backlog was approximately $11,500,000 and $10,900,000 at April 30, 1997 and April 30, 1996, respectively. The Company believes that backlog as of any date is not necessarily indicative of future product sales. EMPLOYEES The Company employed 426 persons worldwide as of April 30, 1997. None of the employees are represented by labor unions, and rapport with employees is believed to be good. ITEM 2 - PROPERTIES The Company's executive offices and manufacturing facilities are located in Cerritos, California and occupy 105,000 square feet in two buildings at a single 4-acre location. The Company believes these facilities are adequate for its present core product manufacturing operations, however, an additional facility may be needed in the near future for OEM development programs and production. The site is leased until May 1999, and the Company has two 5-year renewal options. The Company maintains a research and development facility in a suburb of Seattle, Washington which occupies approximately 10,000 square feet in a portion of an office park building. These premises are leased until November 30, 1997. The Company also owns a machine shop in Mt. Pleasant, Iowa which occupies approximately 16,500 square feet at an industrial site. The Company's facility in Rijswijk, Holland occupies approximately 16,000 square feet and is leased until October 31, 2000, with a five year renewal option. The Company's facility in Cheltenham, Australia occupies approximately 15,000 square feet and is leased until May 31, 2001, with a four year renewal option. ITEM 3 - LEGAL PROCEEDINGS In late July 1997, the Company became aware that a certain fourth quarter 1997 transaction could be in violation of certain U.S. Government export regulations. The Company immediately engaged legal counsel to investigate and assess whether a violation of such regulations had occurred and determine what, if any, fines, penalties, or other punishment could be assessed against the Company. In addition, the Company authorized legal counsel to notify the appropriate Government authorities of the matter. The Company has also instituted policies and procedures which are designed to insure that all export transactions will comply with appliciable Government regulations. Currently no charges of wrongdoing have been brought against the Company or any employee of the Company by any Government authority. It is the opinion of the Company that its voluntary disclosure of the facts to the appropriate authorities, and in light of the facts that the transaction was a one-time sale of non-sensitive products and the Company has installed policies and procedures to prevent future violations of export regulations, that the ultimate settlement with the Government should not have a material adverse effect on the Company's financial position or results of operations. However, until the matter is settled with the Government, the amount of fines, if any, or other sanctions that may be imposed cannot be reasonably estimated. The Company is a party to several legal actions, but based on discussions with legal counsel, management does not believe that any of these actions will have a material adverse effect on its business or financial condition. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year ended April 30, 1997. PART II ------- ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ National Market under the symbol "ARSN". The following bid prices reflect the range of high and low bid information during the last two fiscal years as quoted in the NASD Monthly Statistical Report. The prices reflect inter-dealer prices and do not reflect retail mark-up, mark-down or commissions. Fiscal year 1997 Fiscal year 1996 ------------------- ------------------- Quarter Ended High Low High Low ------------- -------- -------- -------- -------- July 31 $ 11 1/8 $ 8 $ 12 3/8 $ 8 1/2 October 31 9 7/8 6 13 3/4 8 3/8 January 31 10 7/8 5 3/4 9 7/8 7 1/2 April 30 11 7/8 7 1/2 9 1/2 7 3/4 At June 30, 1997, the number of shareholders of record of the common stock was 832. The Company has never paid dividends on its common stock. It intends to retain future earnings to finance the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future on common stock. The holders of the 1993 Series 1 Preferred Stock are entitled to cumulative cash dividends in an amount equivalent to interest at an annual rate per share (based on a deemed value of $1,000 per share) equal to the Seafirst Bank prime rate of interest, plus 1.5%, but not to exceed $105 per share nor be less than $80 per share annually. ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA In thousands, except per share amounts ---------------------------------------------------- Fiscal Years Ended April 30, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Statement of operations data: - ------------------ Net revenue(1) $ 61,828 $ 51,575 $ 45,231 $ 36,410 $ 32,111 Research and development expense 8,480 7,171 6,197 5,103 2,095 Operating income 4,850 4,132 3,540 3,069 3,662 Financing charges(2) 1,100 504 292 320 1,415 Net income(3) 3,225 4,671 2,967 2,511 1,780 Preferred stock expenses(4) 581 610 548 612 821 Net income applicable to common stock 2,644 4,061 2,420 1,898 960 Net income per share: Primary .45 .65 .40 .32 .27 Fully diluted .45 .63 .40 .32 .27 Number of shares used in per share computation(5) Primary 6,793 6,648 6,566 6,388 3,929 Fully diluted 6,793 7,771 6,566 6,388 3,929 Balance sheet data: - --------------------- Total current assets $ 29,904 $ 24,578 $ 13,626 $ 10,420 $ 10,010 Total assets 47,113 37,728 22,109 17,464 17,156 Total current liabilities(6) 11,656 9,266 5,111 4,810 6,932 Long-term obligations 12,721 8,823 1,855 334 504 Stockholders' equity 22,063 19,256 15,143 12,320 9,721 - ---------------------------- See accompanying notes. NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (1) Includes contract revenue during fiscal year ended April 30, 1997, 1996, 1995 and 1994, of $3,392,000, $3,087,000, $1,524,000 and $3,880,000, respectively. See note 10 of the Notes to "Consolidated Financial Statements." (2) Includes a $150,000 call premium for fiscal year ended April 30, 1993 on put warrant to purchase redeemable common stock of IMPCO Technologies, Inc. (3) Includes an income tax benefit of $1,700,000, due to the reduction in the valuation allowance for deferred tax assets and $318,000 net income from the Company's European subsidiary during the year ended April 30, 1996 (See notes 2 and 4 of the Notes to "Consolidated Financial Statements", respectively). Includes an extraordinary charge of $130,000, net of tax benefit, due to the early extinguishment of debt during the year ended April 30, 1993. (4) Includes dividends on Preferred Stock and charges arising from a Stock Exchange Agreement. (5) Number of shares used in per share computations are adjusted for a one-for-six reverse stock split effective February 2, 1993, and includes the dilution from the potential exercise of stock options and warrants when the effect is dilutive. During fiscal year 1996, shares assumed to be issued upon conversion of the Company's preferred stock were included in the calculation since it resulted in a reportable dilution. (6) At April 30, 1993 amounts related to the put warrant to purchase redeemable common stock are included in current liabilities in the Company's "Consolidated Balance Sheets." ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical in nature are 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. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Certain Factors" at the end of this discussion and other factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission. All period references are to the Company's fiscal periods ended April 30, 1997, 1996 or 1995, unless otherwise indicated. Overview - ---------- AirSensors, Inc. designs, manufactures and markets equipment that allows internal combustion engines to operate on alternative gaseous fuels, primarily propane and natural gas. The Company's products include fuel management systems and components, and are sold for maintenance, aftermarket conversions and as original equipment on motor vehicles, forklifts and small portable to large stationary engines. Worldwide, the products are marketed through distributors and original equipment manufacturers. Results of Operations - ----------------------- Acquisitions - -------------- In October 1995, the Company acquired 51% of the outstanding stock of Technisch Bureau Media B.V., a private company in the Netherlands, from Centradas B.V. for 3,187,500 NLG (U.S. $2,023,000). The acquisition was financed through a term loan provided by Bank of America. The new company operates as IMPCO Media Europe B.V.(Media) and distributes gaseous fuel carburetion systems and related devices for use in internal combustion engines along with catalytic converters for the off-highway industrial market. Media services the European marketplace from its headquarters in the Netherlands and through its subsidiaries and facilities in Germany, France and the United Kingdom. Media's revenues totaled approximately $9,203,000 and $5,601,000 in fiscal years 1997 and 1996, respectively. In April 1996, the Company acquired substantially all of the business assets of Garretson Equipment Company, Inc. (Garretson) of Mt. Pleasant, Iowa for approximately $1,041,000. Garretson is a leading manufacturer of fuel systems, components and related devices that allow small engines of 35 horsepower or less to run on either compressed natural gas or propane. Major product applications include generator sets, industrial equipment, utility engines and material handling equipment. In July 1996, the Company acquired certain assets of Ateco Automotive Pty. Ltd. (Ateco), a private company in Australia, for a purchase price of approximately $6,532,000. The purchase price was primarily financed through $4,000,000 of term loans provided by Bank of America and its Sydney, Australia branch and forgiveness of accounts receivable due to IMPCO from Ateco totaling $1,852,000. Ateco had distributed IMPCO's gaseous fuel carburetion systems, components and related devices for use in internal combustion engines since 1969. The new company operates as IMPCO Technologies Pty Ltd (Pty) and services the Australian marketplace from its offices near Melbourne. Pty's revenues totaled approximately $7,816,000 for 10 months of operations since it was acquired by the Company. Net Revenue - ------------- The Company continued to experience growth during fiscal year 1997, with net revenue increasing by $10,253,000 or 20% to $61,828,000, compared to $51,575,000 in 1996. During 1997, product sales and contract revenue increased by approximately 21% and 10%, respectively. The following table sets forth the Company's product sales by application, (all dollars in thousands): Fiscal years ended April 30, --------------------------------- 1997 1996 1995 --------- --------- --------- Motor vehicle products $ 23,784 $ 17,063 $ 17,139 Forklifts and other material handling equipment 23,291 23,316 18,706 Small portable to large stationary engines 11,362 8,108 7,862 --------- --------- --------- Total product sales $ 58,437 $ 48,487 $ 43,707 --------- --------- --------- --------- --------- --------- During fiscal year 1997, sales for the Company's motor vehicle products increased by $6,721,000, or 39%, over 1996. The following table sets forth the Company's worldwide motor vehicle product sales by application, (all dollars in thousands): Fiscal years ended April 30, --------------------------------- 1997 1996 1995 --------- --------- --------- Component parts $ 20,864 $ 13,982 $ 15,542 Upfitting systems 2,920 3,081 1,597 --------- --------- --------- Total motor vehicle products $ 23,784 $ 17,063 $ 17,139 --------- --------- --------- --------- --------- --------- Sales for the Company's motor vehicle component parts in 1997 increased $6,882,000, or 49%, as compared with 1996. The Company recognized incremental revenue of $5,294,000 resulting from its Australian acquisition. Increased sales to Latin America accounted for most of the remaining increase. The decrease in component parts sales during 1996, as compared to 1995, was primarily due to lower shipments of products to a South American customer and to a domestic original equipment truck manufacturer, as well as regulatory restrictions which limited the marketability of certain motor vehicle products in the United States. Management anticipates that revenue attributable to the Company's motor vehicle component parts will be higher during fiscal year 1998 as compared to 1997 primarily as a result of its Australian operations and an increase in demand in Latin America. This is a forward-looking statement. See "Certain Factors" below. A portion of revenue attributable to upfitting vehicles for aftermarket fleet use in 1997 resulted from a program with Ford Motor Company in which the Company's bi-fuel propane system was utilized in 1996 model year F-150 and F-250 pickup trucks. The Ford program was completed during the second quarter of fiscal year 1997. During the third quarter, the Company began converting postal vehicles to compressed natural gas under a $1.5 million Postal Service contract. Deliveries were completed during the fourth quarter of the current year. During fiscal year 1996, upfitting revenue increased approximately 93% as compared to 1995, which primarily resulted from a Postal Service contract to convert postal vehicles to compressed natural gas and initial shipments of the aforementioned 1996 model year F-150 and F-250 Ford trucks utilizing the Company's bi-fuel propane system. Management anticipates that the commercialization by General Motors Corporation of model year 1997 and 1998 Chevrolet and GMC pickup trucks, and other vehicles, with the Company's systems will result in significantly higher revenue during 1998. This is a forward looking statement. See "Certain Factors" for a description of risk factors. Companies that manufacture retrofit systems for use in California are required to comply with requirements under Title XIII, which require that a certain percentage of retrofit conversions be certified, inspected, carry a product warranty and comply with new emission standards. For vehicle model year 1998, the Company will be required to certify all of its retrofit engine families. Manufacturers are also required to conduct 100,000 mile durability tests and comply with in-service emission standards. The Environmental Protection Agency has proposed the adoption of similar requirements for the entire United States. While the Company has been successful in obtaining certifications for certain vehicle families in the past, the Company's ability to comply with these and future regulations will significantly affect its future success in the United States aftermarket for motor vehicles. Total revenue from forklifts and material handling equipment in fiscal year 1997 was comparable to 1996 revenue. During 1996, revenues increased by approximately 25% as compared to 1995. This increase was primarily attributable to the acquisition of Technisch Bureau Media B.V. in the Netherlands in October 1995. Revenue attributable to the Company's domestic operations, for the forklift and other material handling equipment, during fiscal year 1996 was comparable to levels recognized during fiscal year 1995. Management anticipates that the market for forklifts and other material handling equipment will grow during fiscal year 1998, primarily as a result of its European operations. In addition, it is anticipated in the near future that the Environmental Protection Agency will adopt emission requirements for forklifts, other material handling equipment and small portable to large stationary engines that are similar to those being adopted for the motor vehicle industry. This is a forward-looking statement. See "Certain Factors" below. During fiscal year 1997, sales of small portable to large stationary engines increased $3,254,000, or 40%, over sales in 1996. The increase was attributable to the Garretson product line purchased in April 1996 and to higher demand for large and small power generation units used in power replacement and recreational applications. Management anticipates that revenue from industrial engines in fiscal year 1998 will be comparable to 1997 levels. This is a forward-looking statement. See "Certain Factors" below. Contract revenue was 5% of total revenue in fiscal year 1997, as compared to 6% and 3% in 1996 and 1995, respectively. During 1997, total contract revenue increased by approximately $304,000, or 10%, as compared to 1996. Revenues relating to General Motors Corporation (GM) development contracts increased 70% to approximately $3.2 million. During 1996, contract revenue increased by approximately $1.5 million, or 103%, as compared to 1995. This increase was primarily due to the extension of a development contract with GM in August 1995, and the addition of other development programs. Management anticipates that contract revenues during fiscal year 1998 will be significantly higher than 1997 due to continuing development contracts with GM and other new developmental contracts. This is a forward-looking statement. See "Certain Factors" below. During fiscal year 1997, 1996 and 1995 the Company's revenue was generated in the following geographic regions: Fiscal years ended April 30, --------------------------------- 1997 1996 1995 --------- --------- --------- United States and Canada 66% 67% 75% Pacific Rim 11% 10% 11% Europe 12% 16% 7% Latin America 11% 7% 7% Gross Profit Margin --------------------- The Company's gross profit margin on product sales during fiscal year 1997 was $21,095,000 (36%) as compared to $16,476,000 (34%) during 1996. The Company's foreign operations contributed significantly to this increase. Favorable market driven sales price adjustments and product mix improvements from domestic operations accounted for the remaining increase. Gross profit margins on product sales were comparable in 1996 and 1995. During fiscal year 1996, the Company's gross profit margin on product sales was favorably impacted by its European operation. This contribution was offset by lower gross profit margins on upfitting motor vehicles, increased expenditures for current product support and a net product warranty charge of approximately $217,000. Research and Development - -------------------------- Research and development (R&D) expense for fiscal year 1997 was approximately $8,480,000, a 18% increase over 1996. This increase was primarily due to application and development of the Company's products under the GM contract and internally funded product development work. Management believes the Company's future success depends on its ability to design, develop and market new products that interface successfully with new engine electronic technology, and which meet mandated emission standards. This expenditure level on R&D costs is expected to continue in the future as a result. Management anticipates that R&D expense during fiscal year 1998 will be significantly higher than the levels experienced during the current year due to new product development under the GM contract. This is a forward-looking statement. See "Certain Factors" below. Selling General and Administrative - ------------------------------------ Selling, general and administrative (SG&A) expense for fiscal year 1997 was approximately $11,157,000, a $2,896,000 (35%) increase over 1996. The combined SG&A expenses for the Company's European and Australian operations in 1997 were $4,526,000, compared to $1,357,000 for European expenses only in 1996. SG&A as a percentage of sales has increased due to the Company's foreign operations. The European facilities distribute alternative fuel products from multiple locations in Europe and incur higher SG&A expenses as a percentage of sales than the Company's domestic operations. Management anticipates that SG&A expenses during fiscal year 1998 will increase as compared to 1997 primarily as a result of including a full year of the Company's Australian operations and additional expenses to support anticipated growth in revenues. However, SG&A expenses, as a percent of revenue is expected to be lower in fiscal year 1998 as compared to 1997. This is a forward-looking statement. See "Certain Factors" below. Financing charges - ------------------- Financing charges for fiscal year 1997 increased by approximately 118% as compared to 1996. The increase is attributable to loans associated with the acquisitions of Media and Ateco, and the increased use of the line of credit. Financing charges in 1996 increased 73% over 1995 due to loans associated with the acquisition of Media and increased use of the line of credit. Provision for income taxes - ---------------------------- The Company's effective income tax rate for fiscal years 1997, 1996 and 1995 was 7.6%, (37.2%), and 8.6%, respectively. The effective tax rate represents the statutory income tax rate reduced by the use of net operating loss carryforwards, R&D tax credits and other items. During the fourth quarter of fiscal year 1996, the Company reduced its valuation allowance for deferred tax assets as required by SFAS No. 109 and recorded $1,700,000 of income tax benefits primarily related to the assumed future utilization of net operating loss carryforwards. During the fourth quarter of fiscal year 1997, the Company increased the tax asset by $273,000 increasing the deferred tax asset account to $1,973,000 at April 30, 1997. Provision for taxes consist primarily of federal, state and foreign income taxes which are computed using statutory rates. Liquidity and Capital Resources - --------------------------------- The Company uses cash generated from its operations and external financing to fund capital expenditures, pay dividends on the preferred stock and invest in and operate its existing operations and new businesses. These sources are sufficient to meet all current obligations on a timely basis. Management believes that such sources of funds will be sufficient to meet the needs of its business for the foreseeable future. This is a forward looking statement. See "Certain Factors" for a description of risk factors. The Company's financial condition remains strong. The ratio of current assets to current liabilities was 2.57 at April 30, 1997, as compared to 2.65 at the end of 1996. The total amount of working capital increased by $2,936,000 to $18,248,000 at the end of 1997. This compares to $15,312,000 at the end of the prior year. Net cash provided by operating activities was $3,418,000 during 1997, compared to $2,195,000 and $1,370,000 in 1996 and 1995, respectively. Net cash used in investing activities in fiscal year 1997 was approximately $6,096,000, an increase of approximately $1,176,000 from 1996. Investing activities principally included the purchase of the Company's Australian subsidiary, which resulted in a net use of cash of approximately $4,655,000. Capital expenditures for dies, molds and patterns and machinery and equipment totaled $1,628,000 in 1997, compared to $1,996,000 in 1996 and $1,660,000 in 1995. Management projects an increase in capital expenditures during fiscal year 1998, as compared to fiscal year 1997, primarily relating to equipment enhancements and facilities for the development and production of new products. The Company expects to fund a major portion of these expenditures from cash generated from operations and by use of its bank credit facility. This is a forward-looking statement. See "Certain Factors" below. Net cash provided by financing activities in fiscal year 1997 was approximately $4,174,000, of which $3,969,000 was from a term loan with Bank of America to finance the acquisition of the Company's Australian subsidiary. During 1997, the Company increased its borrowing under the operating line of credit by approximately $2,050,000 primarily for current operations and material purchases. The Company has a $8,000,000 revolving line of credit and a $3,525,000 capital lease facility with Bank of America. At April 30, 1997, approximately $5,450,000 and $1,819,000 was outstanding under the revolving line of credit and the capital lease facility, respectively. The revolving line of credit expires on August 31, 1998, and the capital lease facility expires on December 31, 2001. In addition, the Company's subsidiary in the Netherlands has a 3,000,000 NLG (U.S. $1,829,000) credit facility with Mees Pierson, a financial institution in the Netherlands. At April 30, 1997, there was no outstanding balance on the Dutch credit facility. Certain Factors - ----------------- The preceding discussion contains 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. The Company faces a number of risks and uncertainties which could cause actual results or events to differ materially from those contained in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, the following: DELAY IN IMPLEMENTATION OF GOVERNMENT REGULATIONS The market for alternative fueled vehicles and the demand for the Company's products are, to a significant degree, driven by local, state and federal regulations in the United States related to air quality and requiring conversion of motor vehicles to alternative fuels. The Company's international business is also affected by similar foreign governmental regulations. Delays in implementing these regulations could have an unfavorable impact on the Company. DEPENDENCE ON ALTERNATIVE FUEL MARKET Although the Company believes that there will be substantial growth in the market for alternative fueled engines, especially among fleet vehicle owners, there can be no assurance that such growth will materialize or, if such growth does occur, that it will result in increased sales of the Company's products. The Company's products are designed for gaseous alternative fueled vehicles, but not for alternative fuels such as electricity, reformulated gasoline, methanol and ethanol. If the major growth in the alternative fuel market is for such fuels, the Company will be adversely affected. At present, the lack of a well-developed infrastructure for the supply of alternative fuels is limiting growth in the alternative fuel engine market. Such an infrastructure is necessary for widespread use of alternate fuels. DEPENDENCE ON NEW PRODUCTS The Company believes that its future success is dependent upon its ability to design and market new fuel management products as well as enhance its existing products. It believes that the markets for its products will be characterized by rapidly changing technology, new product introductions and the entry of new competitors. The Company's ability to enhance existing products in a timely manner and to develop and introduce new products that incorporate new technologies, conform to increasingly stringent emission standards and achieve market acceptance in a timely manner will significantly affect its future performance. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results are subject to annual and quarterly fluctuations as a result of a variety of factors, including without limitation, budget cycles and funding arrangements of governmental agencies, purchasing cycles of fleet operators, the uncertainty of timing of deliveries of vehicles to be upfitted, the timing of implementation of government regulations promoting alternative fuel vehicles, as well as general economic factors. RISK OF INTERNATIONAL OPERATIONS The Company operates in Europe and Australia and markets its products and technologies in other international markets, including both industrialized and developing countries. The Company's international operations are subject to various risks common to international activities, such as exposure to currency fluctuations, the inherent difficulty of administering business abroad and the need to comply with a wide variety of foreign import and United States export laws. The Company's competitiveness in overseas markets may be negatively impacted when there is a significant increase in the value of the dollar against foreign currencies where the Company does business. COMPETITION The Company believes that competition in the alternative fuel engine marketplace is increasing, particularly in the growing market for propane and natural gas fueled vehicle products. Many of the current competitors and potential future competitors are large, well-financed companies, with financial and marketing resources and research and development capabilities that are substantially larger than those of the Company. ENTRY OF ORIGINAL EQUIPMENT MANUFACTURERS INTO MARKET As the market for alternative fueled vehicles increases, original equipment manufacturers may find it advantageous to develop and produce their own fuel management equipment rather than purchasing such equipment from suppliers such as the Company. If this occurs, the demand for the Company's products could be adversely impacted. ABILITY TO MEET OEM SPECIFICATIONS In 1995 the Company began to offer complete alternative fuel systems, which include tanks, brackets, electronics and all other under-hood components required to convert a motor vehicle to alternative fuels. Customers for such systems require that they meet OEM standards. These requirements have resulted in increased development, manufacturing, warranty and administrative costs. If these costs increase significantly, the Company's profitability could be adversely affected. DEPENDENCE ON QUALIFIED PERSONNEL The Company is dependent upon a limited number of key management and technical personnel. In addition, as products become complex, the Company's future success will depend in part upon its ability to attract and retain highly qualified personnel. INCREASED WARRANTY CLAIMS Vehicle manufacturers are, in response to consumer demand, providing increasingly longer warranty periods for their products. Suppliers, such as the Company, are required to provide correspondingly longer product warranties. Consequently, the Company could incur substantially greater warranty claims in the future. NEED TO COMPLY WITH GOVERNMENTAL REGULATIONS The Company must obtain product certification from governmental agencies such as the Environmental Protection Agency and the California Air Resources Board to sell certain of its products in the United States automotive markets. A substantial portion of the Company's future sales will depend upon sales of fuel management products that are certified to meet existing and future air quality and energy standards. Although the Company believes its technologies will permit its existing and new products to meet these standards, there can be no assurance that this will occur. ABILITY TO SECURE FUTURE DEVELOPMENT CONTRACTS The Company has obtained funding under development contracts with original equipment manufacturers and governmental agencies to develop specified products. There can be no assurance that such funding will be obtainable in the future, the lack of which may significantly impact the Company's ability to develop and market new products and technologies. PRODUCT LIABILITY Although the Company carries and plans to continue to carry product liability insurance, there can be no assurance that such coverage is adequate or that adequate coverage will continue to be available or, if available, that it will be available at an acceptable cost. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is indexed in Part IV in Item 14. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III -------- The information required in Part III (Items 10, 11, 12 and 13) is incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A or by an amendment hereto, in either case, no later than 120 days after the end of the fiscal year covered by this Form 10-K. PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed As Part of This Report: --------------------------------------- (1) Consolidated Financial Statements: ---------------------------------- Report of independent auditors Consolidated balance sheets as of April 30, 1997 and 1996 Consolidated income statements for the years ended April 30, 1997, 1996 and 1995 Consolidated statements of stockholders' equity for the years ended April 30, 1997, 1996 and 1995 Consolidated statements of cash flows for the years ended April 30, 1997, 1996 and 1995 Notes to consolidated financial statements (2) Supplemental Financial Statement Schedules: ------------------------------------------- Schedule II - Valuation accounts All other schedules are omitted because the information is not applicable or is not material, or because the information is included in the consolidated financial statements or the notes thereto. (3) Exhibits: --------- 10.12 Employment Agreement dated April 1, 1997 between AirSensors, Inc and IMPCO Technologies Inc., as the Company, and Robert M. Stemmler, as the Employee. 10.14 1996 Incentive Stock Option Plan 11.1 Computation of net income per share. 22.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP dated July 25, 1997. Executive Compensation Plans and Arrangements. ---------------------------------------------- Employment Agreement dated April 1, 1997, between AirSensors, Inc. and IMPCO Technologies, Inc., as the Company, and Robert M. Stemmler, as the Employee - Exhibit 10.12. 1991 Executive Stock Option Plan dated November 5, 1991 among AirSensors, Inc., as the Company, and Bertram R. Martin, James J. Mantras and Dale L. Rasmussen, as Optionees - Exhibit 10.3 1989 Incentive Stock Option Plan and Amendment to 1989 Incentive Stock Option Plan - Exhibits 10.2 and 10.9, respectively. 1996 Incentive Stock Option Plan - Exhibit 10.14. (b) Reports on Form 8-K. -------------------- No reports were filed on Form 8-K during the last quarter of the Company's fiscal year covered by this report. (c) Exhibits -------- 2.1 Agreement of Purchase and Sale of Stock by and among IMPCO Technologies, Inc., as buyer, and Centradas B.V., as Shareholder, dated as of October 31, 1995. (10) 2.2 Shareholders Agreement for Technisch Bureau Media B.V. by and among IMPCO Technologies, Inc., and Centradas B.V., dated as of October 31, 1995. (10) 2.3 Loan Agreement for Technisch Bureau Media B.V., Technisch Bureau Media GmbH, Technique Media S.A.R.L. as borrowers and Depa Holding B.V., as lendor, dated as of October 31,1995. (10) 2.4 Guarantee by and among, Depa Holding B.V., as lendor, IMPCO Technologies, Inc., as Shareholder and AirSensors, Inc., as Guarantor, dated as of October 31, 1995. (10) 2.5 Deed of Sale of Business by and among IMPCO Technologies Pty Limited, as buyer, and Ateco Automotive Pty Limited, as seller, dated as of July 1, 1996. (12) 2.6 Deed of Release by and among IMPCO Technologies, Inc. and Ateco Automotive Pty Limited dated as of July 1, 1996. (12) 2.7 Shareholders Agreement for Gas Parts (NSW) Pty Limited by and among IMPCO Technologies Pty Limited, Gas Parts Pty Limited and Gas Parts (NSW) Pty Limited, dated as of July 4, 1996. (12) 2.8 Loan Agreement for IMPCO Technologies, Inc. as borrower, AirSensors, Inc., as Guarantor, and Bank of America Nattional Trust and Savings Association, as lendor, dated as of June 25, 1996. (12) 2.9 Loan Agreement for IMPCO Technologies Pty Limited as borrower and Bank of America Pty Limited, as lendor, dated as of June 27, 1996. (12) 3.1 Articles of Incorporation and Bylaws. (1) 3.2 Amended Certificate of Designation of AirSensors, Inc. establishing 1993 Series 1 Preferred Stock. (5) 3.3 Certificate of Amendment of Certificate of Incorporation providing for limitation of directors' liability. (3) 3.4 Certificate of Amendment of Certificate of Incorporation providing for the decrease in authorized shares of common stock from 50,000,000 to 25,000,000. (6) 10.1 Lease between L-W Income Properties and IMPCO Technologies, Inc. dated May 10, 1989. (2) 10.2 1989 Incentive Stock Option Plan. (3) 10.3 1991 Executive Stock Option Plan dated November 5, 1991, among AirSensors, Inc., as the Company, and Bertram R. Martin, James J. Mantras and Dale L. Rasmussen, as Optionees. (4) 10.4 First Amendment to Lease dated April 19, 1993, between L-W Income Properties and IMPCO Technologies, Inc. (6) 10.5 Warrant to Purchase Shares of AirSensors, Inc. Common Stock issued to Cohig & Associates, Inc. expiring in March 9, 1998. (6) 10.6 Warrant to Purchase Common Stock Purchase Warrants issued by AirSensors, Inc. to Cohig & Associates, Inc. expiring March 9, 1998. (6) 10.7 Pursuant Agreement between AirSensors, Inc. and First Interstate Bank of Washington, N.A. dated as of March 8, 1993, establishing terms and conditions of Common Stock Purchase Warrants expiring March 10, 1996. (6) 10.8 1993 Stock Option Plan for Nonemployee Directors (7) 10.9 Amendment to 1989 Incentive Stock Option Plan (7) 10.10 Loan and Security agreement dated September 28, 1994, between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as the borrower. (8) 10.11 Lease Intended as Security dated September 28, 1994, between BA Leasing and Capital Corporation, as lessor, and IMPCO Technologies, Inc., as lessee. (8) 10.12 Employment Agreement dated April 1, 1997, between AirSensors, Inc. and IMPCO Technologies, Inc., as the Company, and Robert M. Stemmler, as the employee. (13) 10.13 Amendment dated September 13, 1995 to Loan and Security agreement dated September 28, 1994, between Bank of America National Trust and Savings, as lender, and IMPCO Technologies, Inc., as the borrower. (11) 10.14 1996 Incentive Stock Option Plan (13) 11.1 Computation of net income per share. (13) 22.1 Subsidiaries of the Company. (13) 23.1 Consent of Ernst & Young LLP dated July 25, 1997. (13) -------------------------------------- (1) Incorporated by reference from Form S-18 filed under Registration No. 33-4013-S. (2) Incorporated by reference from Form 10-K for fiscal year 1989. (3) Incorporated by reference from Form 10-K for fiscal year 1990. (4) Incorporated by reference from Form 10-K for fiscal year 1992. (5) Incorporated by reference from Form S-2, File no. 33-56610 declared effective March 9, 1993 (6) Incorporated by reference from Form 10-K for fiscal year 1993. (7) Incorporated by reference from Form 10-K for fiscal year 1994. (8) Incorporated by reference from Form 8-K dated September 28, 1994, and filed as Exhibit Numbers (10.25) through (10.26) thereunder. (9) Incorporated by reference from Form 10-K for fiscal year 1995. (10) Incorporated by reference from Form 8-K dated October 31, 1995, and filed as Exhibit Numbers (2.1) through (2.4) thereunder. (11) Incorporated by reference from Form 10-K for fiscal year 1996. (12) Incorporated by reference from Form 8-K/A dated July 1, 1996, and filed as Exhibit Number (2.5) through (2.9) thereunder. (13) Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIRSENSORS, INC. By /s/ Robert M. Stemmler ------------------------------------- Robert M. Stemmler, President & Chief Executive Officer Dated August 11, 1997 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/Robert M. Stemmler President, August 11, 1997 ------------------------- Chief Executive Officer and Director (Principal Executive Officer) /s/ Thomas M. Costales Chief Financial Officer August 11, 1997 ------------------------- and Treasurer (Principal Financial Officer) /s/ Brian Olson Corporate Controller August 11, 1997 ------------------------- /s/ Rawley F. Taplett Chairman of the Board August 11, 1997 ------------------------- Vice-Chairman of the Board ------------------------- Edwin J. Schneebeck /s/ Peter B. Bensinger Director August 11, 1997 ------------------------- /s/ Norman L. Bryan Director August 11, 1997 ------------------------- /s/ V. Robert Colton ------------------------- Director August 11, 1997 /s/ Paul Mlotok Director August 11, 1997 ------------------------- /s/ Don Simplot Director August 11, 1997 ------------------------- /s/ Douglas W. Toms Director August 11, 1997 ------------------------- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders AirSensors, Inc. We have audited the accompanying consolidated balance sheets of AirSensors, Inc. as of April 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended April 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AirSensors, Inc. at April 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Los Angeles, California June 27, 1997, except for Note 14, as to which the date is August 11, 1997 AIRSENSORS, INC. CONSOLIDATED BALANCE SHEETS April 30, 1997 and 1996 ----------- ASSETS ------ 1997 1996 ------------ ------------ Current assets: Cash $ 1,975,903 $ 811,148 Accounts receivable 11,456,539 9,679,317 Less allowance for doubtful accounts 288,111 165,322 ------------ ------------ Net accounts receivable 11,168,428 9,513,995 Inventories: Raw materials and parts 7,717,710 6,096,292 Work-in-process 754,576 930,548 Finished goods 5,711,966 4,411,162 ------------ ------------ Total inventories 14,184,252 11,438,002 Other current assets 2,575,055 2,815,181 ------------ ------------ Total current assets 29,903,638 24,578,326 Equipment and leasehold improvements: Dies, molds and patterns 4,272,220 3,297,764 Machinery and equipment 4,846,940 5,267,529 Office furnishings and equipment 4,130,351 2,895,187 Leasehold improvements 1,997,174 1,953,131 ------------ ------------ 15,246,685 13,413,611 Less accumulated depreciation and amortization 8,026,594 6,935,878 ------------ ------------ Net equipment and leasehold improvements 7,220,091 6,477,733 Intangibles arising from acquisitions 11,351,802 7,915,314 Less accumulated amortization 2,950,805 2,689,397 ------------ ------------ Net intangibles arising from acquisitions 8,400,997 5,225,917 Other assets 1,588,364 1,445,911 ------------ ------------ $47,113,090 $37,727,887 ------------ ------------ ------------ ------------ See accompanying notes. AIRSENSORS, INC. CONSOLIDATED BALANCE SHEETS April 30, 1997 and 1996 (Continued) ----------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ 1997 1996 ------------ ------------ Current liabilities: Notes payable $ 328,839 $ 541,398 Accounts payable 4,538,243 3,532,070 Accrued payroll obligations 1,564,028 1,701,034 Accrued warranty obligations 275,760 469,639 Income taxes payable 563,947 706,057 Other accrued expenses 2,869,218 1,598,451 Current portion of term loans 1,515,585 716,932 ------------ ------------ Total current liabilities 11,655,620 9,265,581 Line of credit 5,450,000 3,400,000 Term loan - Bank of America NT&SA 3,592,013 1,435,000 Term loan - DEPA Holding B.V. 2,154,399 2,820,640 Other long term liabilities 1,524,906 1,167,447 Minority interest 673,044 383,197 Commitments and contingencies - - Stockholders' equity: 1993 Series 1 Preferred Stock, $0.01 par value, 5,950 shares authorized, issued and outstanding $5,950,000 liquidation value 5,650,000 5,650,000 Common stock, $.001 par value, authorized 25,000,000 shares; 5,814,587 issued and outstanding at April 30, 1997 (5,654,568 at April 30, 1996) 5,815 5,655 Additional paid-in capital relating to common stock 29,342,121 28,746,994 Shares held in trust (8,814) - Accumulated deficit (12,467,953) (15,111,879) Foreign currency translation adjustment (458,061) (34,748) ------------ ------------ Total stockholders' equity 22,063,108 19,256,022 ------------ ------------ $47,113,090 $37,727,887 ------------ ------------ ------------ ------------ See accompanying notes. AIRSENSORS, INC. CONSOLIDATED STATEMENTS OF INCOME Years ended April 30, 1997, 1996 and 1995 --------- 1997 1996 1995 ------------ ------------ ------------ Revenue: Product sales $58,436,508 $48,487,480 $43,707,271 Contract revenue 3,391,528 3,087,229 1,523,952 ------------ ------------ ------------ Net revenue 61,828,036 51,574,709 45,231,223 Costs and expenses: Cost of sales 37,341,704 32,011,253 29,124,860 Research and development expense 8,479,919 7,170,965 6,197,216 Selling, general and administrative expense 11,156,547 8,260,778 6,369,632 ------------ ------------ ------------ Total costs and expenses 56,978,170 47,442,996 41,691,708 Operating income 4,849,866 4,131,713 3,539,515 Financing charges 1,100,449 503,886 292,024 ------------ ------------ ------------ Income before income taxes and minority interest in income of consolidated subsidiary 3,749,417 3,627,827 3,247,491 Provision (benefit) for income taxes 262,459 (1,348,616) 280,000 Minority interest in income of consolidated subsidiary 261,667 305,568 - ------------ ------------ ------------ Net Income before Dividends 3,225,291 4,670,875 2,967,491 Dividends on preferred stock 581,365 609,875 547,895 ------------ ------------ ------------ Net income $ 2,643,926 $ 4,061,000 $ 2,419,596 ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share: Primary $ .45 $ .65 $ .40 ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted $ .45 $ .63 $ .40 ------------ ------------ ------------ ------------ ------------ ------------ Number of shares used in per share calculation: Primary 6,792,548 6,647,993 6,566,022 ------------ ------------ ------------ ------------ ------------ ------------ Fully Diluted 6,792,548 7,771,482 6,566,022 ------------ ------------ ------------ ------------ ------------ ------------ See accompanying notes. AIRSENSORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended April 30, 1997, 1996 and 1995 ---------
1997 1996 1995 ------------ ------------ ------------ 1993 Series 1 Preferred Stock: Beginning balance $ 5,650,000 $ 5,650,000 $ 5,650,000 ------------ ------------ ------------ Ending balance 5,650,000 5,650,000 5,650,000 Common Stock: Beginning balance 5,655 5,641 5,577 Issuance of common stock (13,198, 62,422, and 90,641 shares, respectively) resulting from the exercise of options pursuant to the stock option plans 139 14 62 Issuance of common stock (2,350 shares) resulting from the exercise of warrants 21 - 2 ------------ ------------ ------------ Ending balance 5,815 5,655 5,641 Additional paid-in-capital: Beginning balance 28,746,994 28,660,181 28,256,861 Issuance of common stock resulting from the exercise of options pursuant to the stock option plans 439,335 86,813 350,185 Issuance of common stock resulting from the exercise of warrants 155,792 - 17,625 Reduction in current tax liability related to stock options - - 35,510 ------------ ------------ ------------ Ending balance 29,342,121 28,746,994 28,660,181 Treasury Stock (8,814) - - Deficit: Beginning balance (15,111,879) (19,172,879) (21,592,475) Net income applicable to common stock 2,643,926 4,061,000 2,419,596 ------------ ------------ ------------ Ending balance (12,467,953) (15,111,879) (19,172,879) Foreign currency translation adjustment (458,061) (34,748) - ------------ ------------ ------------ Total stockholders' equity $22,063,108 $19,256,022 $15,142,943 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes. AIRSENSORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended April 30, 1997, 1996 and 1995 --------- 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income $3,225,291 $4,670,875 $2,967,491 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangibles arising from acquisition 263,998 239,639 235,096 Depreciation and other amortization 2,452,594 1,774,695 1,328,054 Increase in accounts receivable (2,750,026) (2,578,110) (2,989,467) Increase in inventories (385,003) (1,158,391) (1,130,359) Increase in deferred tax asset (272,856) (1,700,000) - Increase in accounts payable 58,508 978,963 717,360 Increase in accrued expenses 799,321 266,570 399,028 Other, net 26,201 (299,517) (157,295) ------------ ------------ ------------ Net cash provided by operating activities 3,418,028 2,194,724 1,369,908 Cash flows from investing activities: Purchase of equipment and leasehold improvements (1,628,158) (1,995,981) (1,660,022) Investment in Media - (1,965,678) - Investment in Impco Pty (4,654,794) - - Deferred software production costs - (430,597) (470,192) Other, net 186,610 (528,020) 131,880 ------------ ------------ ------------ Net Cash Used in investing activities (6,096,342) (4,920,276) (1,998,334) Cash flow from financing activities: Net borrowings in lines of credit 2,050,000 2,400,000 82,710 Payments on notes payable (1,083,615) (508,833) (495,589) Proceeds from issuance of notes payable 558,685 643,818 582,667 Proceeds from issuance of common stock 595,288 86,828 403,384 Payments on term loan (1,035,454) (334,656) (332,800) Proceeds from issuance of bank term note 3,968,750 2,050,000 - Payment of other long-term liabilities (297,961) (256,072) (103,063) Dividends on preferred stock (581,365) (609,875) (547,895) ------------ ------------ ------------ Net cash provided by (used in) financing activities 4,174,328 3,471,210 (410,586) ------------ ------------ ------------ Translation Adjustment (331,259) - - Net increase (decrease) in cash 1,164,755 745,659 (1,039,012) Cash beginning of year 811,148 65,489 1,104,501 ------------ ------------ ------------ Cash at end of year $ 1,975,903 $ 811,148 $ 65,489 ------------ ------------ ------------ ------------ ------------ ------------ See accompanying notes. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS - The consolidated financial statements of AirSensors, Inc. (the Company) include the accounts of the Company and it's subsidiaries, including IMPCO Technologies, Inc. (IMPCO), and IMPCO's majority owned subsidiary Impco Europe Media B.V. (Media) and its wholly owned subsidiary IMPCO Technologies, Pty, Ltd (Impco Pty). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is engaged in the design, manufacturing and marketing of gaseous fuel delivery systems and related devices that allow internal combustion engines to operate on alternative fuels, primarily propane and natural gas. Worldwide the Company's products are sold to distributors and original equipment manufacturers (OEMs). (b) INVENTORIES - Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method while market is determined by replacement cost for raw materials and parts and net realizable value for work-in-process and finished goods. (c) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated on the basis of historical cost. Depreciation of equipment is provided using the straight-line method over the assets' estimated useful lives, ranging from three to seven years. Amortization of leasehold improvements, and equipment financed by the Company's capital lease facility, is provided using the straight-line method over the shorter of the assets' estimated useful lives or the lease terms. (d) INTANGIBLES ARISING FROM ACQUISITION - Intangibles arising from acquisition are recorded based on the excess of the cost of the acquisition over amounts assigned to tangible assets and liabilities. These intangible assets include goodwill, product rights and trademarks. The intangible assets are being amortized using the straight-line method over their estimated lives of twenty years. (e) DEFERRED COSTS - Deferred costs represent amounts paid for software and other costs incurred after the establishment of technological feasibility. These costs are capitalized and subsequently amortized using the greater of the straight-line method over the estimated economic life of the related product or over the units of production beginning when the related product is available for general release to customers. (f) WARRANTY COSTS - The Company provides warranties on its products by recognizing a charge to cost of sales, to cover future warranty obligations. Estimates are based, in part, on historical experience. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued (g) RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged to expense as incurred. Equipment used in research and development with alternative future uses is capitalized. (h) CONTRACT REVENUE RECOGNITION - Contract revenue is principally recognized by the percentage of completion method. Profits expected to be realized on contracts are based on the Company's estimates of total contract sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts. (i) MINORITY INTEREST IN SUBSIDIARY - In October 1995, IMPCO purchased 51 percent of Media. In July 1996, IMPCO acquired Impco Pty which included a 50 percent share in a subsidiary (Gas Parts, NSW.) Minority interest represents the minority shareholder's proportionate share of equity in Media and the Impco Pty subsidiary. The amounts in minority interest at April 30, 1997 represent 49 percent of the equity held by the single minority shareholder in Media and 50 percent of the equity held by the single minority shareholder in Gas Parts, NSW. (j) NET INCOME PER SHARE - Net income per share was computed in accordance with the modified treasury stock method. Primary income per share is computed by dividing net income applicable to common stock, by the weighted average number of common shares and, if dilutive, all common stock equivalents outstanding. Common stock equivalents include the Company's outstanding stock options and warrants. Fully diluted income per share is computed based on the weighted average number of common shares, all common stock equivalents, and if dilutive, shares issued upon conversion of preferred stock. During the twelve months and three months ended April 30, 1997, shares assumed to be issued upon conversion of the Company's preferred stock were anti-dilutive and were excluded in the calculation of fully diluted earnings per share. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued (k) STOCK BASED COMPENSATION - In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting of Stock Based Compensation", which established accounting and reporting standards for stock based employee compensation plans effective in 1996. SFAS 123 encourages entities to adopt the new method ("fair value based method") of accounting; however it also allows an entity to continue to measure compensation cost prescribed under existing rules ("intrinsic value based method") prescribed by Accounting Principle Board No. 25. Such entities who elect to remain on the "intrinsic value based" method must make certain pro forma disclosures as if the new fair value method had been applied (see note 7). (l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF - During the first quarter of 1997, the company adopted SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. The Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment (significant decrease in market value of an asset, significant change in extent or manner in which the asset is used or significant physical change to the asset) are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. During fiscal year 1997, the Company did not experience any significant changes in the business climate or in the use of assets that would require the Company to write down the value of the assets recorded in the balance sheet. The adoption of SFAS No.121 did not have a material effect on the consolidated financial position or results of operations of the Company. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued (m) USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (n) RECLASSIFICATIONS - Certain reclassifications have been made to the fiscal year 1995 and 1996 consolidated financial statements to conform to the fiscal year 1997 presentation. (o) FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the company's foreign subsidiaries are generally translated at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a currency component in shareholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred. (p) FAIR VALUE OF FINANCIAL INSTRUMENTS - The following assumption was used by the Company in estimating its fair value disclosures for long-term debt as defined by the Financial Accounting Standards Board (FASB) Statement No. 107, "Disclosure about Fair Value of Financial Instruments". The carrying value of the Company's long-term debt approximates its fair value since the interest rates on the debt are reset at intervals not to exceed twelve months. 2. ACQUISITION AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (a) ATECO AUTOMOTIVE PTY. LTD. On July 1, 1996, the Company acquired certain assets of Ateco Automotive Pty. Ltd. ("Ateco") for approximately $6,532,000. Ateco, an Australian private company, has distributed IMPCO's gaseous fuel carburetion systems and related devices for use with internal combustion engines since 1969 through it Gas Division near Melbourne, Australia. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 2. ACQUISITION, continued (a) ATECO AUTOMOTIVE PTY. LTD., continued In order to effectuate the transaction, IMPCO established a wholly owned subsidiary in Australia, Impco Technologies Pty. Limited (Pty). The acquisition of Ateco has been accounted for under the purchase method of accounting and the acquired operations have been included in the consolidated financial statements since the date of acquisition. The assets acquired by Impco Pty. primarily consist of receivables, inventory, equipment, a note, business goodwill, distribution rights in Australia, and a 50% interest in Ateco's sub-distributor. The amount of the consideration was determined through negotiations between Ateco and Impco Pty. The purchase price was financed through approximately $4,000,000 of term loans provided by Bank of America NT&SA and its Sydney Australia Branch (See note 3(a)(iii)). The term loans are both three-year loans with a five-year amortization schedule and interest at market rates. In addition, accounts receivable due to IMPCO by Ateco, totaling approximately $1,852,000, were offset against the purchase price. The balance of the purchase price was paid with proceeds from IMPCO's existing line of credit with Bank of America NT&SA. The Company recognized approximately $3,601,000 of intangible assets arising from acquisition which will be amortized over 20 years. The purchase price allocation is based on management's best estimates at the acquisition date. The tangible assets and liabilities have been recorded at their estimated fair values as of the date of acquisition as follows: Value --------- Accounts receivable $398,399 Inventory 2,265,589 Equipment 44,879 Notes Receivable 158,200 Other assets 49,930 --------- 2,916,997 Accrued payroll and related expenses (17,959) --------- Net tangible assets $2,899,038 --------- --------- AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 2. ACQUISITION, continued (a) ATECO AUTOMOTIVE PTY. LTD., continued The following table presents the unaudited pro forma consolidated results of operations as if the acquisition had occurred at the beginning of each period. YEAR ENDED APRIL 30, -------------------------- 1997 1996 ----------- ------------ Revenue $62,703,000 $ 56,908,000 Net income applicable to common stock 2,622,000 3,946,000 Net income per share: Primary .44 .64 The proforma consolidated results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the beginning of the respective periods or of results which may occur in the future. (b) MEDIA On October 31, 1995, the Company, through its wholly owned subsidiary IMPCO, acquired 51 percent of the outstanding stock of Media, a private company in the Netherlands, from Centradas B.V., a private company in the Netherlands, for cash in the amount of 3,187,500 Dutch Guilders (U.S. $2,023,000). Media has distributed IMPCO's gaseous fuel carburetion systems and related devices for use in internal combustion engines since 1972. Media services the European marketplace from its headquarters in the Netherlands and through its subsidiaries in Germany, France and the United Kingdom. The acquisition was financed through a term loan provided by Bank of America which will be repaid over a five-year period with interest at market rates [See Note 3(a)(ii)]. The acquisition of Media has been accounted for under the purchase method of accounting and has been included in the consolidated financial statements since October 31, 1995, the date of acquisition. The Company recognized $2,100,000 of intangible assets arising from acquisition which will be amortized on the straight-line method over 20 years. The tangible AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 2. ACQUISITION, continued (b) MEDIA, continued assets and liabilities of Media have been recorded at their estimated fair market values at the date of the acquisition as follows: Value ------------ Cash $ 57,747 Accounts receivable 1,808,609 Inventory 3,062,545 Equipment 591,109 Other assets 171,691 ------------ 5,691,701 (2,021,422) Accounts payable and accrued expense (2,693,283) Term loan - DEPA Holding B.V. Other liability - DEPA Holding B.V. (810,561) ------------ Net tangible assets $ 166,435 ------------ ------------ AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 3. DEBT PAYABLE (a) BANK OF AMERICA NT&SA On June 26, 1996 IMPCO amended its credit facility with Bank of America NT&SA by extending the term of the revolving line of credit for a twelve month period ending August 31, 1998 and expanding the facility to include a $2,000,000 term loan for the acquisition of Ateco (now Impco Pty.). Including the $8,000,000 revolving line of credit, the $3,525,000 capital lease facility and the $2,050,000 term loan for the acquisition of Media, the total Bank of America credit facility was $15,575,000 at April 30, 1997. (i) REVOLVING LINE OF CREDIT The revolving line of credit carries interest, payable monthly, at a fluctuating per annum rate equal to the Bank of America reference rate (which was 8.5% on April 30, 1997). The Company may elect to have all or portions of the line bear interest at an alternative interest rate (Offshore rate which was 7.43% on April 30, 1997) agreed upon by the Bank and IMPCO for periods of not less than 30 days nor more than one year. At April 30, 1997, $5,000,000 of the total outstanding line of credit balance of $5,450,000 was subject to the offshore rate. The remaining $450,000 was subject to the reference rate. The unused portion of the line of credit is subject to a commitment fee of .1875% per annum. It is management's intent to renew the amount of its present long-term obligation under the revolving line of credit for an uninterrupted period extending beyond one year from the balance sheet date. The line may be used for financing commercial letters of credit with a maximum maturity of 180 days and standby letters of credit with a maximum maturity of five years not to extend beyond April 30, 2001. The amount of letters of credit outstanding at any one time may not exceed $2,000,000 for commercial letters of credit and $750,000 for standby letters of credit. At April 30, 1997, $375,000 was outstanding on the standby letter of credit. The maximum amount available at any one time on the revolving line of credit and the commercial letters of credit is $8,000,000. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 3. DEBT PAYABLE, continued (a) BANK OF AMERICA NT&SA, continued (ii) TERM LOAN FOR ACQUISITION OF MEDIA The term loan carries interest, payable on a monthly basis, at the Bank's reference rate. The Company may elect to have all or portions of the term loan bear interest at an alternative interest rate agreed upon by the Bank and IMPCO for periods of not less than 30 days nor more than one year. The alternative interest rate is based on the Offshore rate plus 1.50%. Each alternative rate portion must be for an amount not less than $500,000 and may not include any portion of principal which is scheduled to be repaid before the last day of the applicable interest period. At April 30, 1997, the total outstanding balance of $1,435,000 was subject to the offshore rate at 7.18%. The term loan is to be repaid in eighteen consecutive quarterly installments of $102,500 (principal only). The term loan may be prepaid, with payments applied in inverse order of maturity, in whole or in part, at any time. (iii) TERM LOAN FOR THE ACQUISITION FOR ATECO The term loan carries interest, payable on a monthly basis, at the Bank's reference rate. The Company may elect to have all or portions of the term loan bear interest at an alternative interest rate agreed upon by the Bank and IMPCO for periods of not less than 30 days nor more than one year. The alternative interest rate is based on the Offshore rate plus 2.10%. Each alternative rate portion must be for an amount not less than $500,000 and may not include any portion of principal which is scheduled to be repaid before the last day of the applicable interest period. At April 30, 1997, the total outstanding balance of $1,700,000 was subject to the offshore rate of 7.78%. The term loan is to be repaid in eleven consecutive quarterly installments of $100,000 (principal only) through July 31, 1999 at which time the remaining principal balance plus any outstanding interest is due. The term loan may be prepaid, with payments applied in inverse order of maturity, in whole or in part, at any time. (iv) CAPITAL LEASE FACILITY The capital lease facility is available in incremental draws of $50,000 or more to finance acquisitions of equipment such as machinery, dies, molds, office furniture, and motor vehicles. At April 30, AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 3. DEBT PAYABLE, continued (a) BANK OF AMERICA NT&SA, continued (iv) CAPITAL LEASE FACILITY, continued 1997, approximately $1,819,000 was outstanding and approximately $1,043,000 was available under the capital lease facility. Each draw is to be repaid in twenty consecutive quarterly installments. Each draw bears interest at either a variable rate or fixed rate of interest. The fixed rate of interest is the U.S. Treasury note bond-equivalent yield per annum corresponding to the number of months remaining on the draw, plus 2.899 percentage points. The variable rate of interest is equal to Bank of America's London Branch 3-month LIBOR rate plus 2.45 percentage points. At April 30, 1997, all draws were subject to the variable rate of interest. The long-term and short-term portions of the capital lease facility are included in other long term liabilities and other accrued expenses, respectively, on the Company's balance sheet. If the Company exercises an early termination option before the scheduled expiration date of a capital lease, a termination charge will be assessed. The termination charge is a sliding percentage (not to exceed 5%) of the balance on the lease at time of termination. (v) LOAN COVENANTS AND COLLATERAL The Bank of America credit facility contains certain restrictions and financial covenants, including liquidity, tangible net worth and cash flow coverage thresholds, as well as limitations on other indebtedness, and is secured by substantially all of the Company's assets. At April 30, 1997, the Company was in compliance with all covenants. (b) TERM LOAN - DEPA HOLDING B.V. At the date of acquisition Media had a term loan payable in the amount of 4,250,000 Dutch Guilders (U.S. $ 2,693,000). On January 29, 1996, Media's term-loan from DEPA was increased by 1,279,000 Dutch Guilders (U.S. $766,000) to reflect Media's current year earnings prior to the acquisition. Interest on the term loan is payable quarterly. Media may elect a rate of interest for a three, six or twelve month period based on the Amsterdam Interbank Offer Rate (AIBOR), plus 1%, or a sixty month interest period based on a preferred rate of interest at a major Netherlands bank, plus 1%. Once an interest period is elected, it may not be lengthened or shortened. If an interest period is not elected, the default interest period is three AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 3. DEBT PAYABLE, continued (b) TERM LOAN - DEPA HOLDING B.V., continued months. As of April 30, 1997, the outstanding principal balance on the term-loan was 4,760,000 Dutch Guilders (U.S. $2,442,000) and was subject to the annual interest rate of 4.11%. The remaining balance is to be repaid in thirty-four additional quarterly principal installments of 140,000 Dutch Guilders (U.S. $72,000). (c) CREDIT FACILITY - MEES PIERSON In February of 1996, Media secured a 3,000,000 Dutch Guilder (U.S. $1,829,000) revocable credit facility with Mees Pierson, a financial institution in the Netherlands. The interest rate is determined weekly based on a weighted average of several money market indices. Media's borrowings under this facility may not exceed the combined total of a specified amount of its accounts receivable (70% of book value) and inventory (50% of book value). At April 30, 1997, the interest rate was 4.625% and there was no outstanding balance on the credit facility (U.S. $1,538,856 was available at April 30, 1997). (d) TERM LOAN - BANK OF AMERICA, AUSTRALIA On June 27, 1996, Impco Technologies, Pty Ltd. obtained a credit facility from Bank of America NT&SA, Sydney Branch, in the amount of A$2,500,000 (U.S. $1,934,000) to be used to purchase certain assets of Ateco Automotive Pty Ltd. The loan carries interest, payable on a quarterly basis, at the Bank Bill Buying Rate plus 2.10% (which was 8.24% on April 30, 1997). The loan is to be repaid in eleven quarterly installments of A$125,000 (U.S. $97,000), principal only, commencing on September 30, 1996. On June 30, 1999, Impco Pty will repay the remaining principal balance plus any interest then due. The term loan may be prepaid provided the Bank is notified at least 30 days in advance of the amount of the prepayment, which must be in minimums of A$250,000 (U.S. $193,000) and multiples of A$125,000 (U.S. $97,000). The payments will be applied in reverse order of maturity. At April 30, 1997, the outstanding balance of the term loan was A$2,125,000 (U.S. $1,657,000). AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 4. INCOME TAXES The provision (benefit) for income taxes consists of the following:
FISCAL YEARS ENDED APRIL 30, ----------------------------------------------- 1997 1996 1995 Current: -------------- ------------- ------------- Federal $ 79,065 $ 32,352 $ 91,000 State 23,828 (29,966) 189,000 Foreign 432,422 348,998 - -------------- ------------- ------------- 535,315 351,384 280,000 -------------- ------------- ------------- -------------- ------------- ------------- Deferred: Federal (272,856) (1,600,000) - State - (100,000) - Foreign - - - -------------- ------------- ------------- (272,856) (1,700,000) 280,000 -------------- ------------- ------------- -------------- ------------- ------------- Total provision (benefit) for income taxes: $ 262,459 $ (1,348,616) $ 280,000 -------------- ------------- ------------- -------------- ------------- -------------
The current provision (benefit) for income taxes for fiscal years 1997, 1996 and 1995 has been reduced by the utilization of approximately $3,953,000, $1,650,000 and $3,800,000 of federal net operating loss carryforwards, respectively. During fiscal years 1997, 1996 and 1995, the current provision for state taxes was reduced by the utilization of approximately $246,000, $140,000 and $112,000, respectively, of investment and/or research tax credits. In addition, in fiscal year 1996 a state income tax refund of approximately $82,000 was applied to the 1996 provision. During the fourth quarter of fiscal year 1996, the Company reevaluated the valuation allowance for its deferred tax assets. Based on this reevaluation, which considered among other items projections as to future taxable income, the Company determined that the valuation allowance should be reduced by AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 4. INCOME TAXES, continued $1,700,000 principally due to the presumed future use of federal net operating loss carryforwards. This reduction in the valuation allowance is reflected in the deferred tax benefit for fiscal year 1996. During the fourth quarter of fiscal year 1997, the Company reevaluated the valuation allowance for its deferred tax assets. Based on this reevaluation, which considered among other items, projections as to future taxable income, the Company determined that the valuation allowance should be reduced by $1,559,000 principally due to the presumed future use of federal net operating loss carryforwards. This reduction in the valuation allowance is reflected in the deferred tax benefit for fiscal year 1997. A reconciliation of income taxes computed at the federal statutory income tax rate to income taxes reported in the consolidated statements of income is as follows: FISCAL YEARS ENDED APRIL 30, ------------------------------ 1997 1996 1995 -------- -------- --------- Federal statutory income tax rate 34.0% 34.0% 34.0% Permanent differences 4.0% 3.0 3.0 Benefit of net operating loss carryforward (38.0) (15.4) (35.0) Federal alternative minimum tax 2.1 .9 2.8 State tax, net .6 (3.7) 3.8 Foreign tax, net 4.9 .5 - Recognition of Deferred Tax Asset - (56.5) - -------- -------- --------- Effective tax rate 7.6% (37.2)% 8.6% -------- -------- --------- -------- -------- --------- The components of the Company's deferred tax liabilities and assets and the related valuation allowance is as follows: AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 4. INCOME TAXES, continued YEARS ENDED APRIL 30, --------------------------- 1997 1996 ------------ ------------ Deferred tax liabilities: Tax over book depreciation $ (866,000) $ (336,000) Other (53,000) (453,000) ------------ ------------ (919,000) (789,000) ------------ ------------ Deferred tax assets: Net operating loss carryforwards 1,234,000 2,557,000 Tax credit carryforwards 1,564,000 1,158,000 Inventory reserves 224,000 150,000 Other provisions for estimated expenses 380,000 693,000 ------------ ------------ 3,402,000 4,558,000 ------------ ------------ Gross deferred tax asset 2,483,000 3,769,000 Valuation allowance (510,000) (2,069,000) ------------ ------------ Net deferred tax asset recognized $ 1,973,000 $ 1,700,000 ------------ ------------ ------------ ------------ The valuation allowance decreased during fiscal years 1997 and 1996 principally due to the use of net operating loss carryforwards in the current fiscal year and the presumed use of net operating loss carryforwards in future years. For federal income tax purposes, at April 30, 1997, the Company had net operating loss carryforwards of approximately $3,600,000 available to offset future taxable income which will expire in fiscal years 2000 through 2007. Also, the Company has a general business tax credit carryforward available for federal income tax purposes of approximately $1,279,000 which, if not utilized, will expire by fiscal year 2012. Additionally, the Company has an alternative minimum tax credit carryforward available for federal income tax purposes of approximately $285,000 which does not expire for tax reporting purposes. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 5. COMMITMENTS AND CONTINGENCIES (a) LEASES The Company has certain noncancelable operating leases for facilities and equipment, and noncancelable capital leases for machinery, equipment and motor vehicles. Future minimum lease commitments under noncancelable leases are as follows: Lease Obligations -------------------------------- Fiscal years ending April 30, Capital Operating ----------------------------- -------------- -------------- 1998 $ 660,983 $ 711,734 1999 684,698 668,924 2000 582,572 236,834 2001 324,374 119,338 2002 90,595 4,500 -------------- -------------- Total minimum lease payments 2,343,222 $ 1,741,330 -------------- -------------- Less imputed interest 342,994 -------------- Present value of future minimum lease payments 2,000,228 Less current portion 506,325 -------------- Long-term capital lease obligation $ 1,493,903 -------------- -------------- Total rental expense under the operating leases for the fiscal years ended April 30, 1997, 1996 and 1995 was $903,000, $632,000, and $557,000, respectively. IMPCO currently leases a facility in Cerritos, California at an annual cost of approximately $460,000. The facility lease is a non-cancelable operating lease ending May 1999, with two five-year renewable options. Media leases a facility in Rijswijk, Holland at an annual cost of approximately $100,000. The facility lease is a non-cancelable operating lease ending October 31, 2000, with a five-year renewal option. Impco Pty leases a facility in Cheltenham, Australia at an approximate annual cost of $42,000. The lease is a non-cancelable operating lease ending May 31, 2001 with a four-year renewal option. During fiscal year 1996, IMPCO increased its $2,600,000 capital lease facility to $3,525,000 to finance acquisitions of equipment such as machinery, dies, molds and patterns, office furniture and fixtures and motor vehicles. At April 30, 1997 and 1996 respectively, approximately $1,819,000 and $1,387,000 had been borrowed under the capital lease facility. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 5. COMMITMENTS AND CONTINGENCIES, continued (b) CONTINGENCIES The Company is currently subject to certain legal proceedings and claims arising in the ordinary course of business. Based on discussions with legal counsel, management does not believe that the outcome of any of these matters will have a materially adverse effect on the Company's consolidated financial statements. 6. STOCKHOLDERS' EQUITY (a) 1993 SERIES 1 PREFERRED STOCK The holders of the Company's' 1993 Series 1 Preferred Stock (1993 Preferred) are entitled to receive annual cumulative dividends of up to $105 per share and not less than $80 per share ($100 per share at April 30, 1997). The dividend rate, which is adjusted on the first day of each calendar quarter, is based on the Seafirst Bank prime rate of interest plus 1.5% (assuming a deemed principal value of $1,000 per share). Holders of 1993 Preferred are entitled to vote on all matters brought before the common stockholders and have the number of votes equal to the number of full shares of common stock into which the 1993 Preferred could then be converted. The 1993 Preferred is convertible into common stock at the option of the holders by dividing the then conversion price into its liquidation value of $1,000 for each share being converted. At April 30, 1997, the conversion price was $5.30 per share. The conversion price decreases if additional shares of common stock are issued for a consideration per share less than the then conversion price. Each share of 1993 Preferred automatically converts into shares of common stock upon the Company reporting audited consolidated net earnings of $5,000,000 for a fiscal year, or upon the closing of an underwritten public offering of the Company's common stock in which the Company realizes gross proceeds of $10,000,000 or more and the public offering price is at least $12.00 per share, provided that all dividends in arrears are paid and the obligation of the underwriters is that all offered shares must be purchased. Commencing March 31, 1999, the Company has the right to convert the 1993 Preferred to AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 6. STOCKHOLDERS' EQUITY, continued (a) 1993 SERIES 1 PREFERRED STOCK, continued common stock if the average market price for the common stock for the immediately preceding 30 trading days equals or exceeds the conversion price then in effect and the Company pays all accrued dividends. (b) WARRANTS TO PURCHASE COMMON STOCK During fiscal year 1993, 1,725,000 common stock purchase warrants (1993 Warrants) were issued in a public offering. Two 1993 Warrants entitle the holder to purchase one share of the Company's common stock for $7.50. Effective November 7, 1996, the Company voluntarily extended the expiration date of the 1993 Warrants from March 7, 1997 to March 7, 1998. The holders of 1993 Warrants are not entitled to vote, to receive dividends or to exercise any of the rights of stockholders for any purpose. The 1993 Warrants contain registration rights and antidilutive clauses. The Company has the right, at its discretion, to call all of the 1993 Warrants for redemption on 45 days' prior written notice at a redemption price of $0.10 per warrant if (i) the closing bid price of the Company's common stock exceeds the warrant exercise price by at least 50% during a period of at least 20 of the 30 trading days immediately preceding the notice of redemption and (ii) the Company has in effect a current registration statement covering the common stock issuable upon exercise of the warrants. If the Company elects to exercise its redemption right, holders of warrants may either exercise their warrants within 45 days or tender their warrants to the Company for redemption. At April 30, 1997, 1,678,750, warrants of this type were outstanding. In connection with the 1993 public offering, the Company issued two types of warrants to the underwriters. One entitles the holders to purchase up to 150,000 shares of the Company's common stock at a purchase price of $6.25 per share at any time prior to March 10, 1998. These warrants provide certain registration rights and contain antidilutive clauses. The other entitles the holders to purchase up to 150,000 common stock purchase warrants at a purchase price of $0.001 per warrant. Two of these common stock AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 STOCKHOLDERS' EQUITY, continued (b) WARRANTS TO PURCHASE COMMON STOCK, continued purchase warrants entitle the holders to purchase one share of the Company's common stock for $7.50 any time prior to March 10, 1998. Except for the expiration date, these warrants have the same rights and restrictions as the 1993 Warrants. At April 30, 1997, all of these warrants were outstanding. At April 30, 1997, the Company also had the following outstanding warrants which entitled the holders to purchase the Company's common stock at various specified prices for each outstanding warrant. The following table sets forth the expiration dates, number of warrants and the respective exercise prices of these warrants. Expiration Number Date of warrants Exercise price ---------- ----------- -------------- Fiscal 1998 166,667 $4.50 In March 1997, 80,321 warrants with an exercise price of $7.47 expired. The Company had 246,988 outstanding warrants of this type as of April 30, 1996 and 1995. These warrants have certain antidilutive clauses. (c) STOCK OPTIONS As of April 30, 1997, 1996 and 1995, the Company had outstanding stock options of 902,811, 841,303 and 798,335, respectively, to purchase shares of common stock. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 6. STOCKHOLDERS' EQUITY, continued (c) STOCK OPTIONS, continued 1996 INCENTIVE STOCK OPTION PLAN During fiscal year 1997, the Company adopted the 1996 Incentive Stock Option Plan. Options for up to 250,000 shares of common stock may be issued to eligible employees. Options vest at a rate of 40% after the first two years following the date of grant and 20% each year thereafter so that the employee is 100% vested in the option after 5 years. Further information relating to this plan is as follows: Option price per share April 30, 1997 --------------- -------------- Granted $6.25 to $8.75 218,118 Relinquished $6.25 to $8.75 (5,535) ------- Ending balance $6.25 212,583 ------- Exerciseable at April 30 - ------- ------- Shares available for future grant 37,417 ------- ------- 1993 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS During fiscal year 1994, the Company adopted the 1993 Stock Option Plan for Nonemployee Directors. Options for up to 350,000 shares of the Company's common stock may be issued to members of the Company's Board of Directors who are not and have not been employees of the Company within three years prior to the date of the grant of an option. Options are not assignable and generally vest cumulatively at the rate of 25% per year, commencing twelve months following the date of grant. The option exercise price per share is the higher of (i) the average of the fair market values for the fifteen trading days immediately following the date of grant or (ii) the market value on the fifteenth trading day immediately following the date of grant. Further information relating to this plan is as follows: AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 6. STOCKHOLDERS' EQUITY, continued (c) STOCK OPTIONS, continued Fiscal year ended April 30, --------------------------- Option price per share 1997 1996 1995 --------------- ------- ------- ------- Beginning balance $8.64 to $11.78 270,000 220,000 180,000 Granted $8.64 to $11.78 - 70,000 40,000 Relinquished 11.78 - (20,000) - ------- ------- ------- Ending balance $8.64 to $11.78 270,000 270,000 220,000 ------- ------- ------- ------- ------- ------- Exerciseable at April 30 222,500 200,000 180,000 ------- ------- ------- ------- ------- ------- During fiscal year 1992, the Company adopted the 1991 Executive Stock Option Plan, under which three executive officers were granted Series A and Series B options. These options may be exercised at any time through November 6, 2001, are not assignable, and may be exercised whether or not the optionee is an employee at the time of exercise. The Series B options were granted in exchange for the termination of certain executive officers rights in the 1989 phantom stock pool. Further information relating to this Plan is as follows: Fiscal year ended April 30, --------------------------- Series A options Option price ---------------- per share 1997 1996 1995 --------------- ---- ---- ---- Beginning balance $3.89 126,668 126,668 141,668 Exercised $3.89 (75,000) - (15,000) ------- ------- ------- Ending balance $3.89 51,668 126,668 126,668 ------- ------- ------- ------- ------- ------- Exerciseable at April 30 51,668 126,668 126,668 ------- ------- ------- ------- ------- ------- Series B options ---------------- Outstanding $0.06 53,520 96,900 96,900 ------- ------- ------- ------- ------- ------- Exerciseable at April 30 53,520 96,900 96,900 ------- ------- ------- ------- ------- ------- AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 6. Stockholders' equity, continued (c) STOCK OPTIONS, continued Under the Company's 1989 Incentive Stock Option Plan, up to 500,000 options may be issued. Options generally vest at the rate of 25% per year, cumulatively, beginning on the first anniversary of the date of grant. Further information relating to the 1989 Incentive Stock Option Plan is as follows:
Fiscal year ended April 30, --------------------------- Option price per share 1997 1996 1995 --------------- ------ ------- ------- Beginning balance $5.25 to $15.00 347,735 354,767 299,792 Granted $5.25 to $15.00 - 25,000 133,000 Exercised $6.00 to $ 7.31 (20,864) (13,198) (47,422) Relinquished $6.00 to $10.38 (11,832) (18,834) (30,603) ------- ------- ------- Ending balance $5.25 to $15.00 315,039 347,735 354,767 ------- ------- ------- Exerciseable at April 30 174,039 153,321 97,272 ------- ------- ------- ------- ------- ------- Shares available for future grant 12,836 1,004 7,170 ------- ------- ------- ------- ------- -------
7. FASB 123: COMPENSATORY STOCK OPTION PLAN The Company has elected to account for its employee stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. No compensation expense is recorded under APB 25 because the exercise price of the Company's employee common stock options equals the market price of the underlying common stock on the grant date. Statement 123 requires "as adjusted" information regarding net income and net income per share to be disclosed for new options granted after fiscal year 1996. The Company determined this information using the fair value method of that Statement. The fair value of these options was determined at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 7. FASB 123: COMPENSATORY STOCK OPTION PLAN, continued YEAR ENDED APRIL 30, 1997 1996 1995 ---- ---- ---- Expected dividend yield 0% 0% 0% Calculated volatility .486 .497 .599 Risk-free interest rate 3% 3% 3% Expected Life of the option in years 5 5 5 The estimated fair value of the options is amortized to expense over the options' vesting period for "as adjusted" disclosures. The net income per share "as adjusted" for the effects of statement No. 123 is not indicative of the effects on reported net income/loss for future years. The Company's reported "as adjusted" information at April 30 is as follows: (in thousands, except per share amounts): YEAR ENDED APRIL 30, 1997 1996 1995 ------ ------- ------- Net Income $2,644 $4,061 $2,420 As Adjusted $2,548 $4,003 $2,414 Net Income Per Share As Reported - Primary $.45 $.65 $.40 Net Income Per Share "As Adjusted" - Primary $.43 $.64 $.40 Net Income Per Share As Reported - Fully Diluted $.45 $.63 $.40 Net Income Per Share "As Adjusted" - Fully Diluted $.43 $.63 $.40 In management's opinion existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 8. REVENUES During fiscal year 1997, the Media and IMPCO Pty subsidiaries accounted for approximately twelve percent and nine percent of total consolidated revenues, respectively, and contract revenue accounted for approximately five percent (see Note 9). During fiscal years 1997, 1996 and 1995, no single unaffiliated customer exceeded 10% of consolidated revenues. The Company routinely sells products to a broad base of customers, which includes distributors and original equipment manufacturers. Based on the nature of these customers, credit is generally granted without collateral being required. Management does not anticipate that a significant credit risk exists as a result of these customer relationships. 9. GEOGRAPHIC DATA The Company has a U.S. based operating subsidiary (IMPCO) and two foreign based operating subsidiaries in Holland (Media) and Australia (IMPCO Pty). Transfers between geographic areas include inter-company sales which are eliminated in consolidation. Operating income is total revenue less operating expenses, excluding finance charges and taxes. Information concerning the Company's geographic areas of operation in fiscal year 1997 is as follows (dollars in thousands):
Fiscal year ended April 30, 1997 ------------------------------------------------------------------------- United States Europe Australia Elims Consolidated ------------- ------ --------- ----- ------------ Sales to unaffiliated customers $44,809 $9,203 $7,816 $ - $61,828 Transfers between geographic areas 4,354 - - (4,354) - ------- ------ ------ ------- ------- Total revenue 49,163 9,203 7,816 (4,354) 61,828 ------- ------ ------ ------- ------- ------- ------ ------ ------- ------- Operating income 3,656 890 376 (72) 4,850 ------- ------ ------ ------- ------- ------- ------ ------ ------- ------- Identifiable assets, at April 30, 1997 39,728 5,837 7,800 (6,252) 47,113 ------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Export sales from the corporation's United States operations to unaffiliated customers were as follows (dollars in thousands): 1997 1996 1995 ---- ---- ---- Canada $1,499 $1,659 $1,963 Pacific Rim 4,139 4,966 4,635 Europe 5,500 2,529 3,092 Latin America 6,537 3,779 2,844 AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 10. CONTRACT REVENUE In August 1995, the Company extended its original 1993 two year fixed-price contract with General Motors Corporation (GM) to develop, manufacture and install compressed natural gas engine management systems (CNG systems). Under the terms of the contract, IMPCO is engineering, testing and validating CNG systems for certain 1997 and 1998 model year car and truck platforms in compliance with GM's specifications. To date, no product sales have occurred under this contract and GM is not obligated to take delivery or install CNG systems on a minimum number of vehicles. Revenues for development efforts are principally recognized by the percentage of completion method and principally related to contracts with GM. During fiscal year 1997, 1996, and 1995 GM contract revenues comprised 5%, 4% and 2% of the Company's total revenues, respectively. Operating income earned on the GM development contract during fiscal year 1997, 1996 and 1995 was approximately $400,000, $155,000 and $90,000 after deducting an allocation for selling, general and administrative costs. 11. PURCHASES During fiscal years 1997, 1996 and 1995, purchases from one vendor constituted approximately 17%, 20% and 28% of consolidated net inventory purchases, respectively. In fiscal year 1997, 10 suppliers accounted for approximately 46% of consolidated net inventory. 12. SUPPLEMENTARY CASH FLOW INFORMATION During fiscal years 1997, 1996 and 1995 the following non-cash transactions were effected and are not reflected in the Consolidated Statements of Cash Flows: a) The Company incurred capital lease obligations of $835,000, $700,000 and $951,000 respectively. b) Pursuant to the Media acquisition an outstanding debt obligation of 1,279,000 Dutch Guilders (U.S. $766,000), was converted into a term loan during fiscal year 1996. AIRSENSORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 12. SUPPLEMENTARY CASH FLOW INFORMATION, continued c) Interest and taxes paid during fiscal year 1997, 1996, and 1995 are as follows: Fiscal year ended April 30, ----------------------------------- 1997 1996 1995 ---------- --------- -------- Interest paid $1,062,175 $435,553 $194,520 Taxes paid 754,627 110,000 176,140 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) A summary of the unaudited quarterly results of operations follows (in thousands, except per share amounts):
Fiscal year 1997 July 31 Oct. 31 Jan. 31 Apr. 30 ------- ------- ------- ------- Product sales $14,179 $14,014 $14,765 $15,479 Contract revenue 970 633 294 1,495 Total revenue 15,149 14,647 15,059 16,974 Cost of sales 9,109 8,636 9,183 10,414 Gross Profit 6,040 6,011 5,876 6,560 Research and development expense 2,284 2,087 1,784 2,325 Net income 567 495 623 959 Net income per share: Primary .10 .09 .11 .16 Fully diluted .10 .09 .10 .16 Fiscal year 1996: Product sales $11,796 $10,402 $12,116 $14,173 Contract revenue 341 982 1,010 754 Total revenue 12,137 11,384 13,126 14,927 Cost of sales 7,611 7,105 8,302(2) 8,993 Gross Profit 4,526 4,279 4,824 5,934 Research and development expense 1,780 2,016 1,726 1,649 Net income 739 666 543 2,723(1) Net income per share: Primary .10 .09 .07 .40(1) Fully diluted .10 .09 .07 .36(1)
- -------------------- (1) Includes an income tax benefit of $1,700,000, due to the reduction in the valuation allowance for deferred tax assets, or $.25 per share. (2) Includes a net product warranty charge of approximately $217,000. 14. OTHER MATTERS In late July 1997, the Company became aware that a certain fourth quarter 1997 transaction could be in violation of certain U.S. Government export regulations. The Company immediately engaged legal counsel to investigate and assess whether a violation of such regulations had occurred and determine what, if any, fines, penalties, or other punishment could be assessed against the Company. In addition, the Company authorized legal counsel to notify the appropriate Government authorities of the matter. The Company has also instituted policies and procedures which are designed to insure that all export transactions will comply with appliciable Government regulations. Currently no charges of wrongdoing have been brought against the Company or any employee of the Company by any Government authority. It is the opinion of the Company that its voluntary disclosure of the facts to the appropriate authorities, and in light of the facts that the transaction was a one-time sale of non-sensitive products and the Company has installed policies and procedures to prevent future violations of export regulations, that the ultimate settlement with the Government should not have a material adverse effect on the Company's financial position or results of operations. However, until the matter is settled with the Government, the amount of fines, if any, or other sanctions that may be imposed cannot be reasonably estimated. AIRSENSORS, INC SCHEDULE II - VALUATION ACCOUNTS
Additions charged Balance at (credited) Write-offs Balance beginning to costs and and other at end of of period expenses adjustments period --------- ------------ ----------- --------- Allowance for doubtful accounts for the years ended: April 30, 1997 $165,322 $157,288 ($34,499) $288,111 April 30, 1996 153,802 13,000 (1,480) 165,322 April 30, 1995 143,802 10,000 153,802 Inventory valuation reserve for the years ended: April 30, 1997 610,515 384,829 (157,626) 837,718 April 30, 1996 1,280,000 237,151 (906,636) 610,515 April 30, 1995 994,489 308,319 (22,808) 1,280,000 Warranty reserve for the years ended: April 30, 1997 469,639 222,122 (416,000) 275,761 April 30, 1996 217,123 627,978 (375,462) 469,639 April 30, 1995 173,923 58,000 (14,800) 217,123 Product liability reserve for the years ended: April 30, 1997 156,848 10,793 (75,705) 91,936 April 30, 1996 234,489 (77,641) 156,848 April 30, 1995 178,768 131,936 (76,215) 234,489
EX-10.12 2 EXHIBIT 10.12, EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made on April 1, 1997 by and among AIRSENSORS, Inc., a Delaware corporation ("AirSensors"), IMPCO Technologies, Inc., a Delaware corporation ("IMPCO") (AirSensors and IMPCO are sometimes referred to collectively as the "Company"), and Robert M. Stemmler ("Employee"). Capitalized terms not otherwise defined in this Agreement shall have the meanings specified in Section 5 unless the context otherwise requires. Section 1. EMPLOYMENT. The Company hereby employs Employee to render services to the Company in an executive capacity as the President and Chief Executive Officer of both AirSensors and IMPCO. Employee shall be a Director and member of the Executive Committee of both AirSensors and IMPCO during the Term. Employee hereby accepts employment under this Agreement and agrees to devote his best effort and substantially full time, attention and energy to the Company's business. Employee's duties shall include all of the duties normally associated with the position of chief executive officer and shall include such other activities, responsibilities and duties as may be reasonably assigned from time to time by the Board of Directors. The Company, through the Board of Directors, shall retain full direction and control of the manner, means and methods by which Employee performs the services for which he is employed hereunder, provided that Employee's duties and responsibilities shall be of substantially the same character as, or equivalent to, those performed by a chief executive officer. Section 2. COMPENSATION. 2.1 BASE SALARY. During the Term, IMPCO will pay Employee a base salary of not less than $230,000 per year prorated on a daily basis for any period of the Term which is less than a full calendar year. The base salary may be modified from time to time as mutually agreed between the parties. The base salary will be paid to Employee in equal semi-monthly payments, payable on or about the thirteenth and twenty-eighth day of each calendar month or pursuant to IMPCO's normal payroll policy, as modified from time to time. 2.2 INCENTIVE COMPENSATION. During the Term, Employee shall be eligible for an annual cash bonus under a plan approved by the Executive Committee of the Board of Directors on August 16, 1994 (Attachment A), which shall be payable each year within 100 days following the end of the Fiscal Year and shall be prorated on a daily basis for any period of the Term which does not include all of a Fiscal Year. 2.3 STOCK OPTIONS Employee is granted stock options in the amount of 150,000 shares in accordance with the 1998 Stock Option Plan as approved by the AirSensors Board of Directors. In addition, employee shall be granted an additional 50,000 shares, under the same terms and conditions as outlined in the 1998 Stock Option Plan if the stock price reaches the targeted share price anytime during FY'98 (May 1, 1997 through April 30, 1998) 2.4 BENEFITS. During the Term, Employee shall be entitled to the following fringe benefits: (a) Except as otherwise specified in this Agreement, the fringe benefits that the Company makes generally available to its executive officers, which currently include medical insurance and a Section 401(k) defined contribution employee savings plan; (b) Term life insurance in the face amount of $750,000; (c) Long-term disability insurance providing for monthly disability payments of $5,000 to age 65 after a waiting period not in excess of ninety (90) days; (d) A car allowance of $12,000 per year, plus reimbursement of fuel, maintenance, registration and other expenses, pro rated on a daily basis for any period of the Term which is less than a full year; (e) Three (3) weeks of paid vacation each calendar year, pro rated on a daily basis for any period of the Term which is less than a full year; (f) Ten (10) days of sick leave each calendar year, pro rated on a daily basis for any period of the Term which is less than a full year. Unused sick leave will not be accumulated or carried over nor paid for upon termination of this Agreement. 2.5 BUSINESS EXPENSE REIMBURSEMENT. During the Term, the Company will reimburse Employee for reasonable out-of-pocket expenses incurred by Employee in performance of service for the Company under this Agreement (E.G., transportation, lodging and food expenses incurred while traveling on Company business), all subject to such policies and other requirements as the Company may from time to time establish for its employees generally. Employee shall maintain such records as will enable the Company to deduct such items as business expenses when computing its taxes. 2.6 WITHHOLDING. Payment of compensation to Employee will be subject to withholding of such amounts on account of payroll taxes, income taxes and other withholding as may be required by applicable law, rule or regulation of any governmental authority or as consented to by Employee. 2 Section 3. TERM AND TERMINATION PAYMENTS. 3.1 TERM. Subject to approval of this Agreement by the Board of Directors, the Term will commence on April 1, 1995, and shall automatically continue for two consecutive twelve (12) month periods commencing, respectively, on the first and second anniversary of the initial commencement date of the Term, unless earlier terminated as a result of: (a) Company's termination of Employee's employment pursuant to Section 3.2; (b) Employee's resignation of employment pursuant to Section 3.3; (c) death of Employee; or (d) the disability of Employee resulting from injury, illness or disease, whether of a mental or physical nature, which substantially impairs or prevents the Employee from performing his duties and obligations under this Agreement for a period of three (3) consecutive months as determined in good faith by the Board of Directors. 3.2 TERMINATION BY COMPANY. Company may terminate Employee's employment with or without cause at any time by giving Employee written notice at least thirty (30) days prior to the effective date of termination; PROVIDED, that if such termination of employment is effective: (a) Prior to the expiration of first twelve (12) months of the Term, then the Employee shall be paid a lump sum payment equal to the annual base salary under Section 2.1 plus the additional cash compensation under Section 2.2 that Employee would have earned for the twelve (12) months following the effective date of termination of employment, and the benefits provided pursuant to Section 2.4 shall continue for twelve (12) months following the effective date of termination of employment; and (b) After the period specified in clause (a), during the second and third years of this agreement, the Company shall pay Employee a lump sum payment equal to seventy-five percent (75%) of the annual base salary under Section 2.1 plus an amount equal to the additional cash compensation under Section 2.2 that Employee would have earned for nine (9) months following the effective date of termination of employment, and the benefits provided pursuant to Section 2.4 shall continue for nine (9) months following the effective date of termination of employment. 3.3 TERMINATION BY EMPLOYEE. Employee may resign at any time by giving the Company written notice at least thirty (30) days prior to the effective date of such termination. In the event of termination by Employee, Employee shall not be entitled to any compensation or benefits following the effective date of termination of employment. 3.4 DEATH OR DISABILITY. If Employee's employment is terminated by death or disability as provided in Section 3.1(d), Employee shall not be entitled to any compensation or benefits from the Company except as provided in Sections 2.4(b) and (c). 3 Section 4. CONFIDENTIALITY. 4.1 CONFIDENTIAL INFORMATION. Employee shall not at any time during the period of his employment or thereafter, except as required in the course of his employment with the Company or as authorized in writing by the Board of Directors, directly or indirectly use, disclose, disseminate or reproduce any Confidential Information or use any Confidential Information to compete, directly or indirectly, with the Company. All notes, notebooks, memoranda, computer programs and similar repositories of information containing or relating in any way to Confidential Information shall be the property of the Company. All such items made or compiled by Employee or made available to Employee during the Term, including all copies thereof, shall be delivered to the Company by Employee upon termination of the Term or at any other time upon request of the Company. 4.2 PROPRIETARY INFORMATION OF OTHERS. Employee will not use in the course of Employee's employment with the Company, or disclose or otherwise make available to the Company, any information, documents or other items which Employee may have received from any prior employer or other person and which Employee is prohibited from so using, disclosing or making available by reason of any contract, court order, law or other obligation by which Employee is bound. 4.3 EQUITABLE RELIEF. Employee acknowledges that: the provisions of this Section 4 are essential to the Company; the Company would not enter into this Agreement if it did not include such provisions; the damages sustained by the Company as a result of any breach of such provisions cannot be adequately remedied by damages; and, in addition to any other right or remedy that the Company may have under this Agreement, by law or otherwise, the Company will be entitled to injunctive and other equitable relief to prevent or curtail any breach of any such provisions. Section 5. DEFINITIONS. Whenever used in this Agreement with initial letters capitalized, the following terms will have the following meanings: "BOARD OF DIRECTORS" means, unless otherwise specified, AirSensors' Board of Directors. "CONFIDENTIAL INFORMATION" means information not generally known relating to the business of the Company or any third party that is contributed to, developed by, disclosed to, or known to Employee in his course of employment by the Company, including but not limited to customer lists, specifications, data, research, test procedures and results, know-how, services used, computer programs, information regarding past, present and prospective plans and methods of purchasing, accounting, engineering, business, marketing, merchandising, selling and servicing used by the Company. 4 "FISCAL YEAR" means the Company's fiscal year for financial accounting purposes, which is currently a fiscal year ending on April 30. "TERM" means the period during which Agreement is in effect as provided in Section 3.1. Section 6. MISCELLANEOUS. 6.1 COMPLIANCE WITH LAWS. In the performance of this Agreement, each party will comply with all applicable laws, regulations, rules, orders and other requirements of governmental authorities having jurisdiction. 6.2 NON-WAIVER. The failure of any party to insist upon or enforce strict performance by any other of any provision of this Agreement or to exercise any right, remedy or provision of this Agreement will not be interpreted or construed as a waiver or relinquishment to any extent of such party's right to consent or rely upon the same in that or any other instance; rather, the same will be and remain in full force and effect. 6.3 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement, and supersedes any and all prior Agreements, between the Company and Employee. No amendment, modification or waiver of any of the provisions of this Agreement will be valid unless set forth in a written instrument signed by the party to be bound thereby. 6.4 APPLICABLE LAW AND VENUE. This Agreement will be interpreted, construed and enforced in all respects in accordance with the local laws of the State of California and venue for any action arising out of this Agreement shall be in Los Angeles County, California. 6.5 SURVIVAL. Section 4, together with all other provisions of this Agreement that may reasonably be interpreted or construed to survive any termination of the Term, shall survive termination of the Term. 6.6 ATTORNEYS' FEES. In the event any suit or proceeding is instituted by any party against another arising out of this Agreement, the prevailing party shall be entitled to recover its attorneys' fees and expenses of litigation or arbitration. 6.7 SEVERABILITY. If any term, provision, covenant, or condition of this Agreement shall be held by a court of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement shall remain in full force and effect. 6.8 HEADINGS. The headings and captions of this Agreement are provided for convenience only and are not intended to have any effect upon the interpretation or construction of the Agreement. 5 6.9 NOTICES. Any notice, request, consent, or approval required or permitted to be given under this Agreement or pursuant to law shall be sufficient if in writing, and personally delivered to Employee or by registered or certified mail to Employee's residence (as noted in the Company's records), or if personally delivered to the Company's Corporate Secretary at the Company's principal office. AIRSENSORS, INC. By /s/Rawley Taplett ----------------- Its Chairman IMPCO TECHNOLOGIES, INC. By /s/Rawley Taplett ----------------- Its Chairman EMPLOYEE /s/ Robert M. Stemmler ---------------------- Robert M. Stemmler Dated: 6-6-97 6 EX-10.14 3 EXHIBIT 10.14, AIRSENSORS, INC. 1996 INCENT STOCK AIRSENSORS, INC. 1996 INCENTIVE STOCK OPTION PLAN Purpose of the Plan. The purpose of this Incentive Stock Option Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees of the Company and to promote the success of the Company's business. It is intended that options issued pursuant to this Incentive Stock Option Plan constitute "incentive stock options" within the meaning of Section 422 of the Code. 1. Definitions. As used herein, the following definitions shall apply: "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the Company's common stock, par value $.001 per share. "Company" means AirSensors, Inc., a Delaware corporation. "Committee" means the Committee appointed by the Board in accordance with Section 3(a) of the Plan. "Employee" means any person employed by the Company or any Subsidiary of the Company which now exists or is hereafter organized or is acquired by the Company. "IMPCO" means IMPCO Technologies, Inc., a Delaware corporation. "Option" means a stock option granted pursuant to the Plan. "Optioned Stock" means the Common Stock subject to an Option. "Optionee" means a person who holds an Option. "Plan" means this 1996 Incentive Stock Option Plan. "Subsidiary" means a corporation of which more than 50% of the voting shares are held directly by the Company or directly and indirectly by the Company and one or more Subsidiaries, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 2. Stock Subject to the Plan. Subject to Section 10, the maximum number of shares which may be optioned and sold under the Plan is 250,000 shares of Common Stock. If an Option should expire or become unexercisable in whole or in part for any reason, the remaining shares of Common Stock which were subject to the Option shall, unless the Plan shall have been terminated, become available for other Options under the Plan. 3. Administration of the Plan. (a) Procedure. The Plan shall be administered by the Board or, as determined by the Board, a Committee appointed by the Board. The Committee shall consist of not less than three members of the Board and shall administer the Plan subject to such terms and conditions as the Board may prescribe. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. The Committee shall select one of its members as chairman and shall hold meetings at such times and places as it may determine. Members of the Board who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of Options to him. As used in the Plan and in any Option, the term "Board" shall refer to the Board, or the Committee if a Committee has been appointed. (b) Powers of the Board/Committee. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information, the fair market value of the Common Stock; (ii) to determine the exercise price per share of Options to be granted, which price shall in no event be less than the fair market value per share of Common Stock on the date of grant of the Option, or 110% of such fair market value in the case of any Option granted to an Employee who, immediately before the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or of its parent or Subsidiaries; (iii) to determine the Employees to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (iv) to interpret the Plan; (v) to prescribe, amend and rescind rules and regulations relating to the Plan; (vi) except as otherwise provided in this Plan, to determine the terms and provisions of each Option granted under the Plan (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (vii) to accelerate the exercise date of any Option; (viii) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option granted by the Board; and (ix) to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option. If the Board has appointed a Committee, the actions of the Committee shall be reported to the Board. 4. Eligibility. Options may be granted only to Employees. An Employee who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. No Option may be granted to an Optionee under the Plan if, as the result of such grant, the aggregate fair market value (determined as of the time each Option is granted) of the shares of Common Stock for which such Optionee has been granted options which are exercisable for the first time by such Optionee during any calendar year (under all incentive stock option plans of the Company) would exceed $100,000. The Plan shall not confer upon any Optionee any right with respect to continuation of employment by the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment at any time. 5. Term of Plan. Subject to Section 16, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years from the effective date unless sooner terminated under Section 12. 6. Term of Option. Except as otherwise provided in Sections 8 and 10, the term of each Option shall be for not more than ten (10) years from the date of grant thereof, except that the term of each Option granted to an employee who, immediately before such Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or of its parent or Subsidiaries shall be for not more than five (5) years from the date of grant thereof. Subject to the foregoing, the term of each Option shall be determined by the Board. 7. Option Price and Consideration. (a) The price for the shares of Common Stock to be issued pursuant to an Option shall be such price as is determined by the Board, but shall in no event be less than the fair market value per share of the Common Stock on the date of grant of the Option. In the case of an Option granted to an Employee who, immediately before the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or of its parent or Subsidiaries, the price shall be not less than 110% of the fair market value per share of such Common Stock. The fair market value shall be determined by the Board in its discretion; provided, that if there is a public market for the Common Stock, the fair market value shall be (i) the closing sale price as of the date of grant on the Nasdaq National Market or a stock exchange if the Common Stock is traded on the Nasdaq National Market or a stock exchange, and (ii) the mean of the reported closing bid and ask prices for the Common Stock as of the date of grant if the Common Stock is not traded as provided in clause (i). (b) The consideration to be paid for the Common Stock to be issued upon exercise of an Option, and the method of payment, shall be determined by the Board and may consist of cash or any other consideration and method of payment for the issuance of common stock which is permitted under the Delaware Corporation Law and complies with other applicable laws and regulations (including but not limited to, applicable federal tax and federal and state securities laws and regulations). 8. Vesting and Exercise of Options. (a) Vesting and Exercise of Options While an Employee. Each Option held by an Optionee shall vest and shall be exercisable at any time so long as such Optionee continues to be an Employee, cumulatively, (i) as to forty percent (40%) of the total number of shares subject to such Option, twenty-four (24) months following the date of grant of such Option, and (ii) as to twenty percent (20%) of the total number of shares subject to such Option, once during each twelve (12) month period commencing on the third and each subsequent anniversary date of the grant of such Option, so that sixty (60) months following the date of the grant of each Option one hundred percent (100%) of the shares subject to such Option may be purchased by exercise of the Option. (b) Vesting of Options Upon Retirement. All Options held by an Optionee who retires at age 62 or older and was continuously an Employee for five (5) years immediately preceding retirement which are not vested as provided in Section 8(a) shall immediately vest upon such Optionee's retirement and be exercisable as provided in Section 8(c). (c) Exercise of Options Following Termination of Status as an Employee. Following termination of employment as an Employee, an Optionee may exercise an Option to the extent that he or she was entitled to exercise the Option at the date of such termination as provided in Section 8(a) and (b) as follows: (i) Except in the case of death or disability (within the meaning of Section 22(e)(3) of the Code), within thirty (30) days following the date of termination of employment, except that the Board may extend the period for such exercise up to a period not exceeding three (3) months following the date of termination; (ii) If an Optionee dies while an Employee, the period of time within which the Board may permit exercise of Options after the date of death may be up to one (1) year, and such Options may be exercised by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance or by reason of the death of an Optionee; and (iii) If an Optionee becomes disabled while an Employee, the period of time within which the Board may permit exercise of Options after the date of termination as an Employee of the Company may be up to one (1) year. Options which are not vested as provided in Section 8(a) and (b) or which are vested but not exercised as required by Section 8(c) shall terminate. (d) Special Limitation on Exercise. Notwithstanding Sections 8(a) and (b), in no event shall an Option be exercisable (i) during the six (6) month period immediately following the date of grant except as otherwise provided in Section 10, or (ii) for the first time during any calendar year for the purchase of Common Stock with an aggregate fair market value (determined as of the date of grant) in excess of $100,000. (e) Procedure for Exercise; Rights as Stockholder. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the shares of Common Stock with respect to which the Option is exercised has been received by the Company. An Option may not be exercised for a fraction of a share of Common Stock. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such shares of Common Stock, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to such Common Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10. Exercise of an Option shall result in a decrease in the number of shares of Common Stock which thereafter may be available, both for purposes of the Plan and for purchase under the Option, by the number of shares of Common Stock as to which the Option is exercised. 9. Non-Transferability of Options. An Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares of Common Stock affected without receipt of consideration by the Company; provided, that conversion of any convertible securities of the Company shall not be deemed to have been "affected without receipt of consideration." Such adjustment shall be made by the Board, whose determination shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. In the event of (i) the dissolution or liquidation of the Company, (ii) the sale of substantially all of the assets of the Company or of IMPCO, or (iii) the merger, consolidation or other reorganization of the Company with or into another corporation, the Options will terminate unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board or may give all or certain Optionees the right to exercise their Options as to all or any part of the shares of Common Stock which are subject to such Options, including shares of Common Stock as to which Options would not otherwise be exercisable. In the event of a "change of control" of the Company, the Board may, in the exercise of its sole discretion, give all or certain Optionees the right to exercise their Options as to all or any part of the shares of Common Stock which are subject to such Options, including shares of Common Stock as to which Options would not otherwise be exercisable. For purposes of this paragraph, "change of control" shall mean (i) within the meaning of Section 13(d) of the Securities Exchange Act of 1934, any person or group becomes a beneficial owner, directly or indirectly, of the Company's securities representing 50% or more of the total voting power of the Company's then outstanding securities, (ii) the stockholders of the Company approve the dissolution or liquidation of the Company, (iii) the stockholders of the Company approve an agreement to merge or consolidate, or otherwise reorganize, whether into one or more entities, as a result of which less than 50% of the total voting power of securities of the surviving or resulting entity are, or are to be, owned by former stockholders of the Company, or (iv) the stockholders or directors of the Company or IMPCO approve, respectively, the sale of seventy-five percent (75%) or more of the Company's or IMPCO's business and/or assets. No Option granted pursuant to this Plan shall be adjusted by the Board pursuant to this Section 10 in a manner that causes the Option to fail to continue to qualify as an incentive stock option within the meaning of Section 422 of the Code. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 11. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee to whom an Option is so granted within a reasonable time after the date of such grant. 12. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable, except that, without approval of the holders of a majority of the outstanding shares of the Common Stock, no such revision or amendment shall: (i) Increase the number of shares of Common Stock subject to the Plan other than in connection with an adjustment under Section 10 of the Plan; (ii) materially change the designation of the class of employees eligible to be granted Options; (iii) remove the administration of the Plan from the Board; or (iv) materially increase the benefits accruing to participants under the Plan. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options granted prior to such amendment or termination and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 13. Conditions Upon Issuance of Shares. Shares of Common Stock shall not be issued with respect to an Option granted under the Plan unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or market upon which the Common Stock may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such Common Stock if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain from any regulatory body having jurisdiction authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of Common Stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such shares as to which such requisite authority shall not have been obtained. 15. Option Agreements. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Stockholder Approval. Effectiveness of the Plan shall be subject to approval within twelve (12) months following the Board of Directors' adoption of this Plan by the holders of the Company's outstanding Common Stock. Adopted by the Board of Directors on January 11, 1996. Approved by the stockholders on November 7, 1996. EX-11.1 4 EXHIBIT 11.1, AIRSENSORS, INC. COMP OF NET INCOME Exhibit 11.1 AIRSENSORS, INC. COMPUTATION OF NET INCOME PER SHARE Years ended April 30, 1997, 1996, and 1995 ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- PRIMARY CALCULATION: Net income $3,486,958 $4,976,443 $2,967,491 Dividends on preferred stock (581,365) (609,875) (547,895) Minority interest (261,667) (305,568) - ----------- ----------- ----------- Net income applicable to common stock $2,643,926 $4,061,000 $2,419,596 Add: Effect of treasury stock on repayment of borrowings 386,086 247,265 158,980 Add: Effect of treasury stock on purchase of investments/securities - - 26,457 ----------- ----------- ----------- Net income applicable to common stock for calculation of net income per share $3,030,012 $4,308,265 $2,605,033 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding 5,722,382 5,648,290 5,620,317 Dilutive effect of outstanding stock options and warrants (As determined by application of the modified treasury stock method) 1,070,166 999,703 945,705 ----------- ----------- ----------- Weighted average number of common shares, as adjusted for calculation of net income per share 6,792,548 6,647,993 6,566,022 ----------- ----------- ----------- ----------- ----------- ----------- Net income per share $0.45 $0.65 $0.40 ----------- ----------- ----------- ----------- ----------- ----------- FULLY DILUTED CALCULATION: Net income applicable to common stock for calculation of net income per share before effect of treasury stock on repayment of borrowings $2,643,926 $4,061,000 $2,419,596 Add: Effect of treasury stock on repayment of borrowings 386,086 247,265 158,980 Add: Effect of treasury stock on purchase of investments/securities - - 19,843 ----------- ----------- ----------- Net income applicable to common stock for calculation of net income per share $3,030,012 $4,308,265 $2,598,419 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding 5,722,382 5,648,290 5,620,317 Dilutive effect of outstanding stock options and warrants (As determined by application of the modified treasury stock method) 1,070,166 999,703 945,705 Assuming conversion of preferred stock - 123,489 - ----------- ----------- ----------- Weighted average number of common shares, as adjusted for calculation of net income per share 6,792,548 6,771,482 6,566,022 ----------- ----------- ----------- ----------- ----------- ----------- Net income per share $0.45 $0.63 $0.40 ----------- ----------- ----------- ----------- ----------- ----------- EX-22.1 5 EXHIBIT 22.1, AIRSENSORS, INC. SUB OF THE CO Exhibit 22.1 AIRSENSORS, INC. SUBSIDIARIES OF THE COMPANY --------------------------- Name Jurisdiction of Incorporation ---------------------------- ----------------------------- IMPCO Technologies, Inc. Delaware Fuel Injection Centers of America, Inc. Washington Canadian AirSensors, Inc. British Columbia, Canada IMPCO Europe B.V. Holland IMPCO Media Europe B.V. Holland IMPCO Technologies Pty Ltd Australia EX-23.1 6 EXHIBIT 23.1, CONSENT OF ERNST & YOUNG, LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in (a) Amendment No. 3 to the Registration Statement (Form S-3, No. 33-56610) pertaining to shares of common stock of AirSensors, Inc. and in the related Prospectus, (b) Amendment No. 1 to the Registration Statement (Form S-8, No. 33-38649) pertaining to the 1989 Incentive Stock Option Plan of AirSensors, Inc. and in the related Prospectus, (c) the Registration Statement (Form S-8, No. 33-72008) pertaining to the 1991 Executive Stock Option Plan of AirSensors, Inc. and in the related Prospectus, (d) the Registration Statement (Form S-3, No. 33- 37035) pertaining to the 1996 Incentive Stock Option Plan of AirSensors, Inc., and (e) the Registration Statement (Form S-8, No. 33-62889) pertaining to the IMPCO Investment and Tax Savings Plan, of our report dated June 27, 1997, except for Note 14, as to which the date is August 11, 1997, with respect to the consolidated financial statements and financial statement schedule of AirSensors, Inc. included in this Annual Report (Form 10-K) for the year ended April 30, 1997. /s/ Ernst & Young LLP Los Angeles, California August 11, 1997 EX-27 7 EXHIBIT 27 - FDS
5 YEAR APR-30-1997 APR-30-1997 1,975,903 0 11,456,539 288,111 14,184,252 29,903,638 15,246,685 8,026,594 47,113,090 11,655,620 0 0 5,650,000 5,815 16,407,293 47,113,090 58,436,508 61,828,036 37,341,704 56,978,170 0 0 1,100,449 3,749,417 262,459 3,225,291 0 0 0 2,643,926 0.45 0.45
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