-----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, Wce7opRNXIofxPB2rwXGcM4IOQwdO2MhWS2CV8nLrr2eWHfX62fKsYQbPi5ju20n 2Qb7tCX7oSCWeg9DsRyXLw== 0000950144-98-008839.txt : 19980729 0000950144-98-008839.hdr.sgml : 19980729 ACCESSION NUMBER: 0000950144-98-008839 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980728 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRPORT SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000914398 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 481099142 STATE OF INCORPORATION: KS FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-22760 FILM NUMBER: 98672539 BUSINESS ADDRESS: STREET 1: 11300 WEST 89TH ST CITY: OVERLAND PARK STATE: KS ZIP: 66214 BUSINESS PHONE: 9134920861 MAIL ADDRESS: STREET 1: 11300 WEST 89TH ST CITY: OVERLAND PARK STATE: KS ZIP: 66214 10KSB 1 AIRPORT SYSTEMS INTERNATIONAL 1 U.S. Securities and Exchange Commission Washington, D.C. FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal year ended April 30, 1998 -------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to __________ Commission file number 0-22760 ----------------------- Airport Systems International, Inc. ---------------------------------------------- (Name of small business issuer in its charter) Kansas 48-1099142 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11300 West 89th Street, Overland Park, Kansas 66214 --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (913) 495-2600 -------------------------------------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value ---------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $23,846,000 The aggregate market value of the voting stock held by non-affiliates of the issuer on June 1, 1998, based upon the average bid and ask prices for such stock on that date was $9,930,195. The number of shares of Common Stock of the issuer outstanding as of June 1, 1998 was 2,230,500 . Documents incorporated by reference: - Portions of the Annual Report to Shareholders for the year ended April 30, 1998 are incorporated by reference into Part II. - Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held September 15, 1998, are incorporated by reference into Part III. 2 Part I Item 1. DESCRIPTION OF BUSINESS (A) BUSINESS DEVELOPMENT The Company engages in the design, manufacture, marketing and installation of ground-based navaids as well as airfield signage. Navaids provide enroute and approach to landing guidance to aircraft, allowing them to safely navigate and land in poor visibility conditions. Navaids are required by the United States Federal Aviation Administration ("FAA") and the International Civil Aviation Organization ("ICAO") regulations at all airports in the world that conduct all-weather operations. Airfield signage is used to direct aircraft along runways, taxiways and to terminals. The Company's revenues are generated principally from sales of its products and services to government agencies internationally and in the United States. The products are sold directly to such agencies or through prime contractors for integration into systems procured by those agencies. The Company's sales are largely dependent upon government construction and procurement contracts. The majority of the Company's revenues in any single quarter is typically derived from relatively few customers and quarterly revenue will, therefore, fluctuate based on a number of factors, including the timing and magnitude of orders, customer installation schedules, and political and economic factors. Sales are typically made pursuant to fixed price contracts and cost overruns, if any, are assumed by the Company. Historically, the Company has not had any contracts which have required significant product development efforts, however, the Company may, in the future, enter into fixed price contracts which require significant product development efforts. See "Certain Factors That May Effect Future Results - Dependence on Fixed Price Contracts." Generally, the time from when an order is accepted until the first equipment is shipped is approximately six months. Training is normally completed during the production of the equipment. Final acceptance of the installed equipment (and thus completion of the installation portion of the contract) normally occurs two to four months after the equipment is shipped. Installation time can vary, however, with weather and site conditions, and the progress of other portions of the construction project into which the Company's products are incorporated. The Company generally provides a limited product warranty with its equipment. Warranty costs are tracked by the Company and have historically not varied materially from management's estimates. The Company was incorporated in Kansas on May 1, 1991, and completed an initial public offering on November 30, 1993. In that offering, 1,550,000 shares of common stock were sold, including an over-allotment of 150,000 shares, 700,000 shares being sold by the Company and 850,000 shares being sold by certain existing stockholders. Page 2 3 (B) BUSINESS OF THE COMPANY Products, Markets and Distribution The Company's primary products are Instrument Landing Systems (ILS), Very High Frequency Omni-Range Transmitters (VOR), Distance Measuring Equipment (DME), and Airfield Signage. ILS, VOR, and DME's are generally referred to as navaids. Navaid products, such as those manufactured by the Company, are an integral part of the air traffic control system used worldwide for navigation of aircraft operating in Instrument Meteorological Conditions (IMC) under Instrument-flight Rules (IFR). Signals generated by these products are received by electronic avionics equipment installed in all aircraft equipped for IFR. The avionics include cockpit displays which provide navigational guidance to the pilot. Most navaids are radio frequency devices which use measurement of angles and distance to establish aircraft position coordinates. An ILS system provides the close-in navigation support to an aircraft during the approach to landing phase. An ILS consists of three separate navaids: the localizer provides lateral guidance to the left and right of the runway centerline; the glide-slope provides vertical guidance above and below a glidepath which intersects the runway touchdown point at about a three degree angle; and between one and three marker beacon transmitters which provide an indication of the aircraft's position at specific points on the approach path. The Company manufactures and sells null reference and capture effect ILS configurations, offering both single and dual transmitters. The null reference configuration is less expensive, while the capture effect configuration is used when difficult terrain conditions are present near the runway. Single transmitter systems prevail in the United States, while dual systems are generally required at international sites to provide redundancy. An ILS is certified for use according to criteria which specify the applicable landing decision height which is required for a particular approach procedure. Decision height is that point above the approach end of the runway at which the pilot must either establish positive visual contact with the runway, or execute a missed approach. Category I ILS permits a landing decision height of 200 feet; Category II ILS permits a landing decision height of 100 feet; and Category III ILS permits a landing decision height of 50 feet or less. The Company produces Category I and II ILS and is nearing completion on research and development efforts for an enhanced Category II and new Category III ILS which is planned for completion and certification in the second quarter of fiscal 1999. VOR, in combination with DME, provide the principal means for enroute navigation currently used in the air traffic control system. A VOR located either at an airport or at enroute points between airports provides a line of bearing from a ground station to an aircraft based on 360 specific radials (each radial representing a point on the compass). Position accuracy is a function of range from the ground station, since a VOR provides angular bearings with an accuracy of plus or minus one degree. The Company offers both conventional and doppler effect VOR. A doppler effect VOR typically is used where difficult terrain conditions can affect signal quality. A DME provides distance measurement from the aircraft to the DME with an accuracy of approximately 500 feet. A DME uses a pulsed system, like radar, in which the ground-based DME station replies with a pulse to an interrogating signal received from an aircraft. The distance is computed by measuring the time between signals. The Company manufactures and sells a low power DME for use at airports and a high power DME for use enroute. A DME can be used in place of marker beacons in an ILS to provide distance information to the pilot. Page 3 4 Airfield signage is used to direct aircraft along runways, taxiways, and to terminals. The signs offer value-added design features, which reduce airfield activity disruption, and readily adapt to all categories and sizes of airports. The signs incorporate a unique two-post swinging design, which reduces damage from jet blasts and lowers installation costs when compared with traditional fixed-position signs. The Company serves three primary markets: international; United States non-federal; and the United States government. The international market consists of all sales where the installation of the Company's products is outside the United States. Almost all countries have civil aviation authorities which regulate the airways within their borders and procure equipment for their air traffic control systems and airports. The Company sells either directly to these international organizations through a network of representatives and distributors, or through prime contractors. The Company has over 29 independent sales representatives covering over 27 countries. The Company's international sales were 75% and 88%, of total sales for the fiscal years ended April 30, 1998, and 1997, respectively. The United States non-federal market is comprised primarily of state and local governmental entities which have responsibility for airport development, improvement and management. The Company either contracts directly with the governmental entity constructing or improving an airport for the navaids portion of the project, or acts as a subcontractor to a prime contractor. The Company's United States non-federal sales were 13% and 11%, of total sales for the fiscal years ended April 30, 1998, and 1997, respectively. The United States government market includes all governmental agencies which have a need for navaid products for installation in the United States. The primary customer for Airport Systems in this market is the FAA. The Company's sales to the United States Government were approximately 12% and 1%, of total sales for the fiscal periods ended April 30, 1998, and 1997, respectively. The Company has, to date, approached this market as both a subcontractor and direct provider. Status of Publicly Announced New Product Satellite-based navigation systems for aircraft navigation and landing is an emerging technology in the navaids industry. The Global Positioning System ("GPS"), controlled jointly by the Department of Defense and Department of Transportation, uses 24 orbiting satellites and is the only such system currently operating. Approach-to-landing satellite guidance, however, is currently affected by accuracy and integrity limitations. These limitations are, however, overcome through the use of a Differential Global Positioning System ("DGPS"). DGPS measures the GPS signal from a precisely known ground location, calculates signal errors and transmits corrections to the GPS system aboard the aircraft. The Company entered into a strategic alliance with Interstate Electronics Corporation ("Interstate") in fiscal 1995 to jointly develop a DGPS. During 1998, the Company completed development of the DGPS data link transmitter and receiver used in the ground station and airborne GPS receiver. The related software was certified by the FAA to be compliant with DO-178B software development standards. Several events occurred during 1998 which the Company believes will significantly impact not only the implementation of GPS-based landing systems, but also its viability as the sole means of aircraft navigation. In particular, the FAA made changes to the DGPS design specifications as well as the development program structure and schedule; and experienced delays in program funding. In addition, significant risks were identified regarding the use of GPS, in particular its susceptibility to wide-area jamming and single point failures. Because of this, the Company believes the market for DGPS is delayed Page 4 5 for an indeterminable period of time, and it is unlikely the GPS will replace conventional navaids as the sole means of air navigation anytime in the foreseeable future. As a result, the Company and Interstate jointly terminated their existing agreement and the Company was granted a full manufacturing license to the current design with the ability to make future enhancements to the product that resulted from the joint work with Interstate. The Company is considering several alternatives for pursuing the GPS market, including developing a teaming relationship with a partner to revise the current design, providing certain ground station components including the data link to other vendors and modifying the design internally. The Company announced in July of 1998 that it had signed a marketing and manufacturing agreement with Idman Airfield Products ("Idman"), a manufacturer of airport lighting products based in Finland. Idman, a wholly owned subsidiary of Philips Electronics, N.V., manufactures a complete line of airport lighting including approach, taxiway and runway lights. Under the terms of the agreement, the Company will have exclusive marketing and manufacturing rights for these products in North and South America and non-exclusive distribution rights in a number of other major international markets. Competition The Company competes against several large multi-national companies which provide a broad spectrum of products and which serve a wide customer base. Most contracts in the navaid and sign markets are awarded through a sealed bid or competitive request for proposal process. The principal competitive factors in these markets are (i) product conformance with FAA and ICAO specifications, (ii) quality of product manufactured and ease of customer usability and maintenance, (iii) delivery time, (iv) customer training and support, and (v) price. To date, the international and United States non-federal markets have accounted for a substantial portion of the Company's revenues. It is the Company's belief that significant barriers to entry into the markets for its existing products are presented by the difficulty and expense of developing the products and obtaining FAA and ICAO approvals. The Company's principal conventional navaid competitor in the United States non-federal market is Airsys ATM (previously Wilcox Electric Company), which is, to the Company's knowledge, the only other United States manufacturer of ground-based navaids of the type sold by the Company that has products certified for use in projects partially funded by the Airport Improvement Program (AIP). The Company has several competitors both domestically and internationally in airfield signage. Domestically, the Company's primary competitors are ADB Alnaco (a division of Siemens A.G.), Crouse Hinds (a division of Cooper Industries) and Standard Signs, Inc. (a privately held company). Internationally, the Company competes primarily against Siemens ADB and local indigenous sign manufacturers. Sources and Availability of Raw Materials and Principle Suppliers Raw materials used in the manufacture of the Company's products are readily available from a number of sources in the United States. Dependence on One or a Few Major Customers The Company had sales to two customers which, in the aggregate, accounted for 46% of total sales in fiscal 1998, and sales to four customers which accounted for 54% of total sales in fiscal 1997. Because of the nature of the Company's business, it is possible that future revenues could be dependent on one or a few major customers. Page 5 6 Patents, Trademarks, Licenses The Company holds no United States or foreign patents. The Company's only trademark is the "AIRPORT SYSTEMS" name and design which is registered with the United States Patent and Trademark office. The Company's material intellectual property consists of drawings, plans, software, specifications and engineering and manufacturing know how which the Company maintains as confidential proprietary information. In November, 1992, the Company paid Fernau Avionics, Ltd. $217,225 for an irrevocable, fully transferrable, non-exclusive perpetual royalty-free license to manufacture, sell and maintain products using DME technology owned by FAL, replacing an earlier license agreement. In addition, the Company has been granted a full manufacturing license to the current design with the ability to make future enhancements to the product that resulted from our joint work with Interstate for the development and sale of DGPS equipment. Government Approvals All navigation aids to be installed in the United States, whether purchased by airport owners, local or state governments or the FAA, require FAA and United States Federal Communications Commission ("FCC") approval. Except for the Category II and III ILS, the Company has received all applicable approvals for the products it sells in the United States. FAA approval takes different forms depending on how the equipment is procured. When the FAA purchases equipment it typically issues a detailed specification describing the functional performance requirements, and the design and production methods. FAA design and production requirements historically have contained more detailed specifications than those required in the international and the United States non-federal markets, resulting in products which are more costly to produce. Local or state governments typically procure equipment in accordance with the technical requirements of FAA Federal Airways Regulations ("FAR") Part 171. FAR Part 171 is a functional performance requirement which does not include specific design and construction methods. Because no design or construction specifications are required to be met, products sold in the United States non-federal market cost less than similar products procured by the FAA. The types of ILS, VOR and DME sold by the Company in the United States non-federal market have been approved in accordance with FAR Part 171 by the FAA. In addition, certain local or state airport projects for which the Company contracts are partially funded by the AIP, a United States government trust-fund program funded by airport user fees. When ILS or DME equipment is procured under a program funded by the AIP, the buyer of the equipment typically transfers ownership, maintenance and operation of the equipment to the FAA after installation is complete. There is an additional FAA approval process required for AIP funded contracts which requires demonstration that the FAA can successfully maintain and operate the equipment. The Company's ILS and DME products are approved by the FAA for AIP funded contracts. To the Company's knowledge, Airsys ATM is the only other company in the United States with approval to supply ILS and DME equipment for AIP funded contracts. The ICAO is a United Nations chartered organization which establishes international standards for navigation equipment, and member countries' navaids must conform with ICAO functional standards. Page 6 7 Equipment for international procurement normally is tested after installation to insure conformance with ICAO standards. In some cases, international programs may require proof of FAA FAR 171 approval prior to bid. Airfield signage must meet the requirements of FAA Circular AC150/5345-44F. The Company's airfield signage line meets these requirements. Effect of Existing or Probable Governmental Regulations on the Business The Company is subject to federal, state and local regulations concerning the environment, occupational safety and health. The Company has not experienced any difficulty in complying with such regulations and compliance has not had a material impact on the Company's business or its financial results. Research and Development During fiscal 1998, approximately 53% of the Company's engineering staff time was spent on research and development activities, none of which was borne by the customer. In fiscal 1997, the amount of engineering time spent on research and development was 43%, none of which was borne by the customer. Total Number of Employees At April 30, 1998, the Company had 122 full time employees. Of these, 68 are engaged in manufacturing, 9 in sales and marketing, 16 in engineering, 8 in quality assurance and 21 in administration. The Company's employees are not represented by a labor organization. Certain Factors That May Effect Future Results This annual report on Form 10-KSB 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. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of the Company. Forward-looking statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions, including, but not limited to, the factors summarized below and the factors and conditions which are described under the headings "Backlog," and "Quarterly Results" in the discussion of "Results of Operations" contained in Management's Discussion and Analysis of Financial Condition and Results of Operations under Item 6 of this Form 10-KSB, as well as those which have been included in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's quarterly reports on Form 10-QSB and current reports on Form 8-K, and holders of the Company's securities are specifically referred to these documents with regard to the factors and conditions that may affect future results. The reader or listener is cautioned that the Company does not have a policy of updating or revising forward-looking statements and thus he or she should not assume that silence by management of the Company over time means that actual events are bearing out as estimated in such forward-looking statements. Page 7 8 Emerging Technology - The Company's products are based upon proven ground-based radio technology which has been the standard for navaids worldwide and is the technology used in the vast majority of navaids currently in service. However, currently there are potentially competitive technologies being procured or actively considered by the FAA, ICAO and civil aviation authorities around the world, the most significant of which is GPS. Based on future FAA, ICAO and other civil aviation authorities' actions with regard to satellite technologies, the long-term ability of the Company to compete successfully will depend in large measure on its ability to acquire or develop products which are compatible with technological changes and advances in the navaids industry. The Company's ability to develop a GPS-based landing system depends to some degree on the alternatives being evaluated for pursuing the GPS market. See "Business of the Company - Status of Publicly Announced New Product." Competition - The Company is in direct competition with one other supplier of navaids in the United Sates. This competitor, Airsys ATM (formerly Wilcox Electric, Inc.), is a joint venture between Thomson-CSF, a French defense and electronics company partially owned by the French government, and Siemens A.G., a German defense and electronics company. Both Thomson-CSF and Siemens A.G. have substantially greater resources than the Company, and Airsys ATM has been, for many years, the principal supplier of navaids to the FAA. In the international market, there are several foreign competitors for one or more of the products produced by the Company, most of which are substantially larger and have greater resources than the Company. See "Business of the Company - Competition." The market potential for satellite based landing systems has resulted in alliances being formed between industry participants and companies not historically involved in ground-based navigation and will over time result in additional competitors. See "Business of the Company - Competition." Dependence on FAA Approvals - The Company's products used in the United States' national airspace system have been approved by the FAA. These approvals are required in order for the Company to sell its navaids to public use airports in the United States. Furthermore, although not specifically required, FAA approval of the Company's navaids is a very strong selling point in international sales. While the Company has no reason to expect withdrawal of FAA approvals of the Company's navaids, withdrawal of any such approvals would have an adverse impact on the ability of the Company to sell its products both domestically and internationally. See "Business of The Company - Government Approvals." Product Liability - The Company currently carries a $50 million product liability insurance policy, however, it is possible that judgment in an amount greater than the policy limits could be awarded in the event the Company's equipment was found to have been a contributing cause to an aircraft crash. Any judgment in excess of the Company's product liability insurance limits could have a material adverse effect on the Company. The United States Dollar Exchange Rates - The Company competes internationally with competitors from Europe and Japan and is thus subject to the effects of changes in United States dollar exchange rates. The strength of the U.S. Dollar compared to the German Mark and French Franc during 1998 negatively impacted the Company's competitiveness on international projects. Prior to 1998, though, this had not had an adverse effect on the Company's international competitiveness. If the United States dollar continues to gain strength against the currencies of its principal competitors, it could impede the marketing of the Company's products by making them relatively more expensive in international markets compared to competitors' products. The Company's contracts are denominated in United States dollars. Page 8 9 International Currency Devaluations - The current economic difficulties in Southeast Asia that have resulted in tighter monetary and fiscal policies following the currency devaluations in Indonesia, Thailand, Korea, Malaysia and the Philippines have had and will for the foreseeable future, have an impact on the Company's operations. The current difficulties are not, at this time, having an impact on the Company's contract with the Republic of Indonesia. Work has been progressing on the contract satisfactorily, and because the financing for the project was established through the Export Import Bank of the United States, the Company is assured of payment for work completed. However, should the Republic of Indonesia default on any of its obligations to the Export Import Bank, the Export Import Bank may suspend payments on the contract to the Company. This would force the Company to stop work until such time as the Company can be assured of receiving payment for work completed. While the Company has reallocated its marketing resources to other regions of the world, the Company is susceptible to currency devaluations in these other regions. Further currency devaluations and tighter monetary and fiscal policy may make the Company's products too expensive in these international markets and delay funding of government programs. Dependence on Key Personnel - The future success of the Company is highly dependent upon several executive officers. The Company has signed employment agreements with two executives and has purchased key man life insurance on five executive officers. There can be no assurance that the loss of any one of these individuals would not have a material adverse effect on the Company's operations or profits. See "Executive Officers of the Company." Possible Volatility of Stock Price - Company's Trading Volume Historically Limited - The trading price of the Common Stock could be subject to significant fluctuations in response to announcements of developments related to the Company's business, the Company's financial results, general conditions in the industry, the United States dollar exchange rates and the general economy. Historically, the trading volume of the Company's Common Stock on the NASDAQ National Market has been limited. Dependence on Fixed-Price Contracts - Sales are typically made pursuant to fixed price contracts and cost overruns, if any, are assumed by the Company. Revenues from fixed-price contracts are recognized using percentage-of-completion units of delivery method. Revisions in revenue and profit estimates are reflected in the period in which the conditions that require the revision become known and are estimable. Therefore, adjustments for profits or losses may have a material effect on results for the quarter in question. The risks inherent in fixed-price contracts include the forecasting of costs and schedules, while the recognition of contract revenues relates to delivery of equipment and completion of contract services. Competitive Bidding - Airport Systems generally obtains its contracts through the process of competitive bidding. There can be no assurance that the Company will continue to be successful in having its bids accepted or, if accepted, that awarded contracts will generate sufficient revenues to result in profitability for the Company. To the extent that actual costs exceed the projected costs on which bids or contract prices were based, the Company's profitability could be materially adversely affected. Additional Financing Requirements - Although at April 30, 1998 the Company had $2.4 million in cash, the financing requirements of all of the various opportunities it is currently considering, if funded solely by the Company, may exceed this amount. This includes working capital to meet current and future contract obligations as well as funding for product expansion either through acquisition or internal development. The extent of such total capital requirements cannot be quantified at this time since many of these opportunities are at an early stage of consideration. In order to fully fund all such projects, the Page 9 10 Company may need to issue debt or equity securities or engage in other financing activities. There can be no assurance that such financing will be available on favorable terms or on a timely basis, if at all. Any issuance of equity securities by the Company may result in a dilution of shareholders' equity. In addition, additional debt may have an adverse impact on operating results. Item 2. DESCRIPTION OF PROPERTY Real Estate. The Company conducts all of its operations from its facility at 11300 West 89th Street in Overland Park, Kansas, which consists of approximately 50,000 square feet. Approximately 26,000 square feet is used for manufacturing, approximately 17,000 is used for engineering and training, while the remaining 7,000 square feet is used for administration and marketing. The building and the seven acres on which it is located are owned by the Company, subject to a mortgage due June, 2011. The principal balance of the mortgage at April 30, 1998, was $1,203,000, with a final payment of approximately $788,200 due on the due date assuming no prepayments. The Company believes that its existing facility provides adequate capacity for growth for the foreseeable future. No specific plans have been formed at the present time for expanding the facility, however, the Company believes that it has a range of suitable alternatives for future expansion. The Company conducts production of airfield signage along with planned production of the airfield lighting product line from a leased facility at 8920 Bond in Overland Park, Kansas, which consists of approximately 7,200 square feet. The Company has a 2 year renewable lease for this facility. The Company believes this facility will provide adequate capacity for the remaining lease term. Manufacturing and Engineering Equipment. The Company's manufacturing equipment, including automatic lead forming/cutting and wave solder capability, is suitable for its low volume electronics production. Through-hole components are manually placed with the assistance of semi-automatic component insertion equipment. Surface mount components are manually placed and attached. The test department is equipped with general purpose and automatic test equipment such as network analyzers, spectrum analyzers and vector voltmeters. Hot mock-up test beds are used to ensure subassembly functionality, with all Navaid assemblies tested environmentally in a temperature chamber. The Company's engineering department is equipped with state of the art design and test equipment, including advanced computer-aided design systems, radio frequency signal modeling software and necessary test and design equipment. Item 3. LEGAL PROCEEDINGS The Company is not a party to any lawsuits, but is subject to contract disputes arising in the ordinary course of business, which the Company believes will not have, either individually or in the aggregate, a material adverse effect on the Company's business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of security holders, through a solicitation of proxies or otherwise, during the fourth quarter of the Company's fiscal year ended April 30, 1998. Page 10 11 Part II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Item 5 is set forth on the inside back cover of the Company's 1998 Annual Report to Shareholders, included herein as Exhibit 13. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 6 is set forth on pages 8 through 11 of the Company's 1998 Annual Report to Shareholders, included herein as Exhibit 13. Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 7 is set forth on pages 12 through 23 of the Company's 1998 Annual Report to Shareholders, included herein as Exhibit 13. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in, or disagreements with, the Company's independent accountants on accounting or financial disclosure matters. Page 11 12 Part III Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to the Company's Directors required by Item 9 will be set forth in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and such information is incorporated herein by reference. The information relating to Section 16(a) Beneficial Ownership Reporting Compliance will be set forth in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and such information is incorporated herein by reference. The information relating to the Company's Executive Officers, as required by Item 9, is set forth in the following table and description of backgrounds:
NAME AGE POSITION - -------------- ----- ------------------- Keith S. Cowan 44 President, Chief Executive Officer and Director Thomas C. Cargin 43 Vice President-Finance and Administration, Secretary and Director Anthony G. Bommarito 46 Vice President-Engineering Michael M. Warner 44 Vice President-Business Development John R. Wharton 56 Vice President-Sales Gregory C. Brand 48 Vice President-Field Operations and Training Wayne S. Howard 58 Vice President-Indonesia Programs Karl B. Gemperli 34 Vice President-Manufacturing Ronald E. Peck 37 Vice President-Quality
Each of the executive officers is a full-time employee of the Company. Set forth below are descriptions of the backgrounds of the executive officers of the Company. Keith S. Cowan has served as President and a Director of the Company since September, 1991, and as Chief Executive Officer of the Company since August, 1993. Prior to joining the Company, Mr. Cowan was an employee of the Teledyne Controls Division of Teledyne, Inc. for more than five years, last serving as Vice President, Airport and Instrumentation Products. Mr. Cowan has over 24 years of system engineering, project management and corporate experience in the development, manufacturing and sale of electronic systems. He is also a licensed pilot holding an instrument rating. Thomas C. Cargin has served as Vice President-Finance and Administration of the Company since December, 1991, as its Secretary since March, 1993, and as a Director of the Company since October, 1993. Prior to joining the Company, Mr. Cargin was a partner in the accounting firm of Ifft & Barber since 1989 and prior to that was an employee of DYMON, Inc., a specialty chemical manufacturer located in Page 12 13 Kansas City, Kansas, since 1983, last serving as Vice President of Finance and Chief Financial Officer. Mr. Cargin is a Certified Public Accountant with over 21 years of public accounting and private industry accounting experience. He is also a licensed pilot holding an instrument rating. Anthony G. Bommarito has served as Vice President-Engineering of the Company since June, 1998. Prior to joining the Company, Mr. Bommarito was an employee of Airsys ATM, Inc. (formerly Wilcox Electric), for more than 18 years, last serving as Director of Engineering and Product Development. Mr. Bommarito has over 25 years in engineering experience. Michael M. Warner has served as Vice President-Business Development since January, 1995. Prior to that, he held the position of Director-Business Development with Harris Corporation from 1993 to 1995. From 1982 to 1993 he held various positions with Hughes Aircraft Company, last serving as Manager, New Business Development. He has over 16 years experience in marketing and managing air traffic control systems projects. John R. Wharton has served as Vice President-Sales of the Company since May, 1991. Prior to joining the Company, Mr. Wharton was employed by Aviation Systems, Inc., since 1988, last serving as Vice President of Marketing, and prior thereto by Wilcox for over 20 years. Mr. Wharton has over 34 years experience in marketing airport navigation aids both in the United States and internationally. Gregory C. Brand has served as Vice President-Field Operations and Training since May, 1997. Prior to that, he was Manager of Field Services since September, 1996. Prior to joining the Company, Mr. Brand was an employee of Wilcox Electric, Inc. Mr. Brand has over 21 years experience in field installation and program management. Wayne S. Howard has served as Vice President-Indonesia Programs since January, 1997. Prior to that he was Vice President of Manufacturing Operations of the Company since March, 1994. Prior to joining the Company, Mr. Howard was an employee of New Bedford Panoramics Corporation for more than five years, last serving as Manufacturing Manager. Mr. Howard has over 30 years of electronic components manufacturing and program management experience. Karl B. Gemperli has served as Vice President of Manufacturing since March, 1996. Prior to joining the Company, Mr. Gemperli was an employee of BF Goodrich Aerospace, Test Systems Division for more than five years, last serving as Director of Manufacturing. Mr. Gemperli has over 13 years of electronic manufacturing experience. Ronald E. Peck has served as Vice President of Quality since May, 1998. Prior to that he served as Director of Quality since April 1997. Prior to joining the Company, Mr. Peck was an employee of Raytheon Company, last serving as a Principal Quality Assurance Engineer. Mr. Peck has over 15 years of quality assurance experience. Item 10. EXECUTIVE COMPENSATION The information required by Item 10 will be set forth in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders and such information is incorporated herein by reference. Page 13 14 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 will be set forth in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders and such information is incorporated herein by reference. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no transactions of the type required to be disclosed by Item 12. Item 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits have been previously filed or are being filed herewith, and are numbered in accordance with Item 601 of Regulation S-B:
NUMBER DESCRIPTION - ------ ------------------------------------------ 3.1 ARTICLES OF INCORPORATION The amended Articles of Incorporation of the Company dated September 14, 1994, attached as Exhibit 3.1 pages 19-55 of the Company's Form 10-KSB, filed July 31, 1995 with the Securities and Exchange Commission is incorporated herein by reference. 3.2 BY-LAWS The Restated By-Laws of the Company dated October 1, 1993, attached as Exhibit 3.2, of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, are incorporated herein by reference. 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS A specimen stock certificate representing shares of the common stock, par value $.01 per share, attached as Exhibit 4.1 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. 10 MATERIAL CONTRACTS (a) Teaming agreement between Airport Systems International, Inc. and Interstate Electronics Corporation (Portions omitted pursuant to a request for confidential treatment) attached as exhibit 10.1 of the Company's Form 10-QSB, filed March 17, 1995 with the Securities and Exchange Commission, is incorporated herein by reference.
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NUMBER DESCRIPTION - ------ -------------------------------------------- (b) A copy of the warrant issued by the Company to Fahnestock & Company, Inc., attached as Exhibit 4.7 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (c) Restated 1991 Stock Option Plan attached as Exhibit 10.5 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (d) Stock Option Agreement dated September 3, 1991, by and between the Company and Keith S. Cowan, as amended, attached as Exhibit 10.6 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (e) Stock Option Agreement dated January 15, 1992, by and between the company and Thomas C. Cargin, attached as Exhibit 10.7 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (f) Stock Option Agreement dated January 15, 1992, by and between the Company and John C. Roos, attached as Exhibit 10.8 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (g) Stock Option Agreement dated January 15, 1992, by and between the Company and John R. Wharton, attached as Exhibit 10.9 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (h) Stock Option Agreement dated June 25, 1993, by and between the Company and Keith S. Cowan, attached as Exhibit 10.11 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (i) Stock Option Agreement dated June 25, 1993, by and between the Company and Thomas C. Cargin, attached as Exhibit 10.12 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference.
Page 15 16
NUMBER DESCRIPTION - ------ --------------------------------------------- (j) Stock Option Agreement dated June 25, 1993, by and between the Company and John C. Roos, attached as Exhibit 10.13 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (k) Stock Option Agreement dated June 25, 1993, by and between the Company and John R. Wharton, attached as Exhibit 10.14 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (l) Stock Option Agreement dated October 1, 1993, by and between the Company and Keith S. Cowan, attached as Exhibit 10.15 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (m) Stock Option Agreement dated October 1, 1993, by and between the Company and Thomas C. Cargin, attached as Exhibit 10.16 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (n) Stock Option Agreement dated October 1, 1993, by and between the Company and John C. Roos, attached as Exhibit 10.17 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (o) Stock Option Agreement dated October 1, 1993, by and between the Company and John R. Wharton, attached as Exhibit 10.18 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (p) Stock Option Agreement dated October 1, 1993, by and between the Company and Barry L. Harris, attached as Exhibit 10.19 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (q) Stock Option Agreement dated April 15, 1994, by and between the Company and Wayne Howard, attached as Exhibit 10 of the Company's Form 10-KSB, filed July 28, 1994 with the Securities and Exchange Commission, is incorporated herein by reference.
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NUMBER DESCRIPTION - ------ --------------------------------------------- (r) Stock Option agreement dated January 23, 1995, by and between the Company and Michael M. Warner, attached as exhibit 10.1 of the Company's Form 10-QSB, filed March 17, 1995 with the Securities and Exchange Commission, is incorporated herein by reference. (s) Employment Agreement dated June 22, 1993, by and between the Company and Keith S. Cowan, attached as Exhibit 10.1 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (t) Employment Agreement dated October 11, 1993, by and between the Company and Thomas C. Cargin, attached as Exhibit 10.2 of the Company's Registration Statement, Form SB-2, filed November 29, 1993 with the Securities and Exchange Commission, is incorporated herein by reference. (u) Covenant Not To Compete Agreement dated March 20, 1997, By and between the Company and Michael M. Warner, attached as Exhibit 10.(u) of the Company's Form 10-KSB, filed July 31, 1997 with the Securities and Exchange Commission, is incorporated herein by reference. (v) Stock Option Agreement dated February 13, 1997, by and between the Company and Karl B. Gemperli, attached as Exhibit 10.(v), of the Company's Form 10-KSB, filed July 31, 1997 with the Securities and Exchange Commission, is incorporated herein by reference. (w) Sales contract by and between the Company and the Government of Indonesia attached as Exhibit 5 of the Company's Form 8-K, filed November 15, 1996 with the Securities and Exchange Commission, is incorporated herein by reference. 11. STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 13. ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED APRIL 30, 1998 (only those portions of such Annual Report to Shareholders which are specifically incorporated by reference into this Form 10-KSB shall be deemed filed with the Commission) 21. SUBSIDIARIES OF THE COMPANY 23. CONSENT OF INDEPENDENT AUDITORS 27. FINANCIAL DATA SCHEDULE (for SEC use only)
(b) REPORTS ON FORM 8-K: None Page 17 18 PART IV 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. AIRPORT SYSTEMS INTERNATIONAL, INC. By: /s/ Keith S. Cowan ---------------------------------------- Keith S. Cowan President and Chief Executive Officer Date: July 28, 1998 Pursuant to the requirements 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 date indicated: /s/ Keith S. Cowan Date: July 28, 1998 - ------------------------------------ Keith S. Cowan President, and Director (Chief Executive Officer) /s/ Thomas C. Cargin Date: July 28, 1998 - ------------------------------------ Thomas C. Cargin Director (Vice President-Finance and Administration, Principal Financial Officer, and Secretary) /s/ Michael J. Meyer Date: July 28, 1998 - ------------------------------------ Michael J. Meyer Director /s/ Thomas C. Blackburn Date: July 28, 1998 - ------------------------------------ Thomas C. Blackburn Director Page 18 19 EXHIBIT INDEX
Number Description - ------ ----------- 11. STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 13. ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED APRIL 30, 1998 (only those portions of such Annual Report to Shareholders which are specifically incorporated by reference into this Form 10-KSB shall be deemed filed with the Commission) 21. SUBSIDIARIES OF THE COMPANY 23. CONSENT OF INDEPENDENT AUDITORS 27. FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
Page 19 EX-11 2 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY NET INCOME PER SHARE COMPUTATION (In thousands, except per share data)
YEAR ENDED ---------------------------------------------------------------------- APRIL 30, 1998 APRIL 30, 1997 ---------------------------------------------------------------------- NET INCOME SHARES EPS NET INCOME SHARES EPS Basic earnings per share $ 980 2,230 $0.44 $ 599 2,230 $0.27 Effect of stock options -- 191 -- -- 170 -- ----- ----- Diluted earnings per share $ 980 2,421 $0.40 $ 599 2,400 $0.25 ===== =====
EX-13 3 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 SELECTED FINANCIAL DATA AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY (In thousands except per share data)
Year Ended April 30 1998 1997 - ----------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Sales $23,846 $20,098 Cost of products sold 16,631 14,055 ------- ------- Gross margin 7,215 6,043 Operating expenses 5,746 4,979 Interest expense 107 110 Other income, net 116 6 ------- ------- Income before income taxes 1,478 960 Provision for income taxes 498 361 ------- ------- Net income $ 980 $ 599 ======= ======= Basic earnings per common share $ .44 $ .27 ======= ======= Basic weighted average common shares outstanding 2,230 2,230 ======= ======= BALANCE SHEET DATA: Working capital $ 8,804 $ 7,716 Total assets 16,854 18,593 Current portion of long-term debt 19 18 Long-term debt, less current portion 1,184 1,202 Stockholders' equity 10,441 9,536
1. The Company has never declared or paid any dividends to the common stockholders and the company does not anticipate paying any cash dividends in the foreseeable future. P. 7 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY RESULTS OF OPERATIONS The following table sets forth for the years indicated, certain income statement data:
Year Ended Year Ended April 30, 1998 April 30, 1997 - ------------------------------------------------------------------------------------------ (Dollars in Thousands) Sales $ 23,846 100.0% $ 20,098 100.0% Cost of products sold 16,631 69.7% 14,055 69.9% -------- ----- -------- ----- Gross margin 7,215 30.3% 6,043 30.1% Selling, general and administrative expenses 4,255 17.8% 4,023 20.0% Research and development expenses 1,491 6.3% 956 4.8% -------- ----- -------- ----- Operating income 1,469 6.2% 1,064 5.3% Interest expense (107) (.4%) (110) (.5%) Other income, net 116 .4% 6 -- -------- ----- -------- ----- Income before income taxes 1,478 6.2% 960 4.8% Provision for income taxes 498 2.1% 361 1.8% -------- ----- -------- ----- Net income $ 980 4.1% $ 599 3.0% -------- ----- -------- -----
Sales in 1998 were $23.8 million, or 19% higher than sales in 1997. Of the $23.8 million, approximately $10.9 million, or 46%, represented deliveries to two customers. The increase in sales compared to 1997 was due to an increase in the number of units shipped primarily as a result of higher beginning year backlog. Gross margin was $7.2 million, or 30% of sales, up approximately 19% from $6.0 million, or 30% of sales, in 1997. Gross margin increased due to increased sales. Selling, general and administrative ("SG&A") expenses increased $232,000, or 6%, in 1998, reflecting an increase in costs attributable to the related increase in sales, but since certain of these costs are fixed in nature, SG&A expenses, as a percent of sales, decreased to 18% in 1998 from 20% in 1997. Research and development expenses increased $535,000, or 56% in 1998 reflecting continued work on enhancements to the Company's current product line which includes its category II/III Instrument Landing System (ILS) and the Company's satellite-based landing system, a local area differential global positioning system ground station (LADGPS). During 1998, the Company completed the data link transmitter and receiver used in future GPS-based aircraft landing systems. This included software approval by the Federal Aviation Administration. The Company believes this data link transmitter and receiver will play a key role in future GPS-based systems. The Company also substantially completed enhancements to its ILS product line. With the completion of the data link transmitter and receiver and the progress made on the ILS, the Company expects a reduced level of research and development activities in fiscal 1999. Other income, net increased $110,000 in 1998, due primarily to $83,000 paid in 1997 to a former sales representative as settlement of a lawsuit over litigated commissions. The remaining difference is due to increased interest income from higher average cash and investment balances as compared to 1997. The Company's effective income tax rate declined to approximately 34% in 1998 compared to approximately 38% for 1997 due primarily to increased tax benefits derived from its foreign sales corporation as further described in Note 6 to the consolidated financial statements. As a result of the above, net income for 1998 was $980,000 or 4% of sales, compared to $599,000, or 3% of sales, in 1997. P. 8 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY BACKLOG The following table sets forth the domestic and international backlog as of the dates indicated:
April 30, 1998 April 30, 1997 - ------------------------------------------------------------------------------------------ (In Thousands) Domestic $ 1,328 12.6% $ 2,987 15.5% International 9,246 87.4% 16,332 84.5% -------- ----- -------- ----- TOTAL $ 10,574 100.0% $ 19,319 100.0% -------- ----- -------- -----
The Company's backlog decreased $8.7 million or 45% to $10.6 million at April 30, 1998, compared to $19.3 million at April 30, 1997. Approximately 46% of the backlog at April 30, 1998 was represented by a contract from the Republic of Indonesia. 15% of the backlog represents a contract with the Republic of China (Taiwan) for multiple ILS systems while 13% of the backlog represents a contract with a major U.S. air traffic control contractor for the delivery of multiple ILS systems into South America. Approximately $8.6 million of the backlog at April 30, 1998 is expected to be completed and shipped in 1999, and the remainder is expected to be completed and shipped in 2000 and beyond. The decrease in backlog, as compared to April 30, 1997, is primarily the result of bookings not keeping pace with shipments. In particular, the backlog at April 30, 1997 included approximately $12.0 million related to a $17.7 million contract signed with the Republic of Indonesia in the fourth quarter of 1997. During 1998, approximately $7.0 million of this contract was shipped. Bookings for the year totaled $15.4 million, approximately the same amount as in 1997, net of the Indonesian order. The economic difficulties experienced in Southeast Asia delayed or canceled several programs for which the Company was expecting contracts to be awarded, thus significantly contributing to the lack of growth in orders during 1998. The Company plans to continue to strengthen its marketing group through the addition of domestic and international marketing personnel during 1999. The Company expects that this, combined with the introduction of enhancements to its current products (in particular its CAT II/III ILS) will increase its geographic penetration in its markets as well as improve its competitive position on future tenders. Because of this, the Company is optimistic about its ability to capture additional market share in the future. In addition, the Company has seen a noticeable shift in the position of civil aviation authorities, including the FAA, regarding conventional navaids and GPS-based navigation systems. During the year, the FAA changed its position regarding the basic design of the GPS-based navigation system and its suitability as the sole means of navigation. This not only delayed the development of GPS-based systems but also increased the likelihood that conventional navaids would be required in the foreseeable future. Based on the average age of existing navaids in the United States, the Company believes the likelihood exists for significant procurements of conventional navaids by the FAA, as well as state and local airport authorities. This will also have a spill-over effect on the procurement practices of civil aviation authorities around the world. The Company expects backlog and bidding activities as well as contract awards to continue to fluctuate due to the size and timing of contract programs. P. 9 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY QUARTERLY RESULTS The following table sets forth selected unaudited financial information for the Company for the four fiscal quarters of the year ended April 30, 1998. This unaudited information has been prepared on the same basis as the annual financial statements contained elsewhere in this Annual Report and, in the opinion of the Company, reflects all adjustments necessary for a fair presentation thereof:
Dollars in thousands July 31 October 31 January 31 April 30 - -------------------------------------------------------------------------------------------- Sales $5,753 $6,167 $6,482 $5,444 Gross margin 1,605 2,075 1,703 1,832 Operating income 212 538 239 480 Net income $ 160 $ 381 $ 150 $ 289 Gross margin % 27.9% 33.6% 26.3% 33.7%
The Company has experienced quarterly fluctuations in operating results and anticipates that these fluctuations will continue. Fluctuations in quarterly sales are caused by a number of factors, including the timing of contract awards, delivery schedules, construction or funding delays, customers' budget cycles, changes in procurement patterns and shifting political and economic factors of the Company's customers. Profitability on contracts also will vary depending on the product mix, the geographical location of the customer, the market served and the pricing strategies of competitors. INFLATION The effect of inflation on the Company has not been significant over the past several years. However, an extended period of inflation could be expected to have an impact on the Company's earnings by causing interest rates, as well as material and labor rates to increase faster than prices could be increased on new contracts. LIQUIDITY AND CAPITAL RESOURCES Net cash of $277,000 was provided by operations in 1998 compared to $2.1 million provided in 1997. The decrease was principally the result of decreases in accounts payable and accrued expenses due primarily to a decrease in customer down payments, partially offset by decreases in accounts receivable, and an increase in net income compared to the prior year. Cash used in investing activities was $258,000 for 1998 compared to $178,000 in 1997. The increase is due primarily to increased purchases of fixed assets. The Company expects capital expenditures to increase in 1999 as investments are made in new computer systems, software and manufacturing and test equipment. Cash used in financing activities was $692,000 in 1998 compared to $590,000 provided by financing activities in 1997. The decrease is due primarily to the repayment of borrowings on the Company's bank line of credit. In addition, the Company repurchased $75,000 of warrants issued in connection with its initial public offering in November 1993. The Company expects that it will meet ongoing requirements for working capital and capital expenditures from a combination of cash expected to be generated from operations, existing cash and cash equivalents, and available borrowings under the existing line of credit facility. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements and, accordingly, will have no impact on the Company's reported financial position, results of operations or cash flows. The Company will adopt SFAS No. 130 during its first quarter of 1999. FASB also issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" in 1997. This statement establishes standards for the way companies report information about operating segments in annual financial statements for periods beginning after December 15, 1997. It also establishes standards for related disclosures about P. 10 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY products and services, geographic areas, and major customers. Adoption of SFAS No. 131 is not expected to impact the Company's consolidated financial statements. The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. This statement establishes standards for accounting for derivative and hedging activities. The Company has not yet determined the adoption date of SFAS No. 133 nor what the effect of this statement will be on the earnings and financial position of the Company. The Company has considered the impact of Year 2000 issues on its internal computer systems and applications and developed a remediation plan. The Company has completed an assessment and will have to modify or replace portions of its software so that its internal computer systems will function properly with respect to dates in the Year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $165,000, which includes $125,000 for the purchase of new software and hardware that will be capitalized and $40,000 that will be expensed as incurred. The project is estimated to be completed by the end of the third quarter of 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company has considered the impact of Year 2000 issues on the navigation and landing systems it has sold and installed. The Company did a formal evaluation and testing of certain of its equipment for the FAA and an informal evaluation and testing on its other equipment and found no Year 2000 issues which were critical to flight safety. Some of the Company's older navigation and landing systems have computers with programs written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the Year 2000. No system failures will occur as a result of Year 2000 issues as navigational guidance is not dependent on this function. The Company responds to requests from customers regarding Year 2000 issues as described herein and does not believe it will incur any costs with regard to this issue which will be material to the Company's consolidated financial statements. FORWARD LOOKING COMMENTS The discussions set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other statements may contain forward-looking comments based on current expectations that involve a number of risks and uncertainties. Actual results could differ materially from those projected or suggested in the forward-looking comments. The difference could be caused by a number of factors, including, but not limited to, the factors and conditions which are described under the headings "Results of Operations," and "Backlog," as well as the competitive and pricing pressures related to all contracts, either already in the Company's backlog, or which the Company is pursuing. Further information on the factors that could affect the Company's financial results is included in the Company's other Securities and Exchange Commission filings. The reader is cautioned that the Company does not have a policy of updating or revising forward-looking statements and, thus, he or she should not assume that silence by management of the Company over time means that actual events are bearing out as estimated in such forward-looking statements. P. 11 6 CONSOLIDATED BALANCE SHEETS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
April 30, --------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------- (In thousands except per share data) ASSETS Current assets: Cash and cash equivalents $ 2,449 $ 3,122 Accounts receivable, less allowances of $51 in 1998 and $57 in 1997 (Note 2) 6,156 7,533 Inventories (Note 2) 5,261 4,717 Prepaid expenses 152 186 -------- -------- Total current assets 14,018 15,558 Property and equipment, at cost (Notes 2 and 3): Land 224 224 Building and improvements 1,259 1,204 Equipment 1,820 1,609 -------- -------- 3,303 3,037 Accumulated depreciation and amortization (1,687) (1,329) -------- -------- 1,616 1,708 Other assets, net 30 63 Cost in excess of net assets acquired, net of accumulated amortization of $267 in 1998 and $193 in 1997 1,190 1,264 -------- -------- Total assets $ 16,854 $ 18,593 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to bank (Note 2) $ - $ 600 Accounts payable 1,280 2,511 Accrued expenses 1,795 1,931 Customer deposits 2,040 2,372 Income taxes payable 10 387 Deferred income taxes (Note 6) 70 23 Current portion of long-term debt (Note 3) 19 18 -------- -------- Total current liabilities 5,214 7,842 Long-term debt, less current portion (Note 3) 1,184 1,202 Deferred income taxes (Note 6) 15 13 Stockholders' equity (Note 5): Common stock, $.01 par value: Authorized shares - 5,000,000; Issued and outstanding shares - 2,230,500 22 22 Additional paid-in capital 7,218 7,293 Retained earnings 3,201 2,221 -------- -------- Total stockholders' equity 10,441 9,536 -------- -------- Total liabilities and stockholders' equity $ 16,854 $ 18,593 -------- --------
See accompanying notes. P. 12 7 CONSOLIDATED STATEMENTS OF INCOME AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
Year Ended April 30, --------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------- (In thousands except per share data) Sales $ 23,846 $ 20,098 Cost of products sold 16,631 14,055 -------- -------- Gross margin 7,215 6,043 Selling, general and administrative expenses 4,255 4,023 Research and development expenses 1,491 956 -------- -------- Operating income 1,469 1,064 Other income (expense): Interest expense (107) (110) Other income 141 92 Other expense (25) (86) -------- -------- Income before income taxes 1,478 960 Income tax provision (Note 6) 498 361 -------- -------- Net income $ 980 $ 599 -------- -------- Basic earnings per common share $ .44 $ .27 -------- -------- Basic weighted average common shares outstanding 2,230 2,230 -------- -------- Diluted earnings per common share $ .40 $ .25 -------- -------- Diluted weighted average common shares outstanding 2,421 2,400 -------- --------
See accompanying notes. P. 13 8 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
Additional Total Common Paid-In Retained Stockholders' Stock Capital Earnings Equity - ------------------------------------------------------------------------------------------------- (In thousands) Balance at April 30, 1996 $ 22 $ 7,286 $1,622 $ 8,930 Net income -- -- 599 599 Exercise of stock options -- 7 -- 7 ----- ------- ------ -------- Balance at April 30, 1997 22 7,293 2,221 9,536 ----- ------- ------ -------- Net income -- -- 980 980 Repurchase of warrants -- (75) -- (75) ----- ------- ------ -------- Balance at April 30, 1998 $ 22 $ 7,218 $3,201 $ 10,441 ----- ------- ------ --------
See accompanying notes. P. 14 9 CONSOLIDATED STATEMENTS OF CASH FLOWS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
Year ended April 30, -------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Net income $ 980 $ 599 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 472 486 (Gain) loss on sale of equipment (15) 1 Deferred income taxes 49 (114) Changes in operating assets and liabilities: Accounts receivable, net 1,377 (2,811) Refundable income taxes -- 201 Inventories (544) (1,031) Prepaid expenses 34 103 Accounts payable (1,231) 1,232 Accrued expenses and customer deposits (468) 3,036 Income taxes payable (377) 387 ------- ------- Net cash provided by operating activities 277 2,089 INVESTING ACTIVITIES Proceeds from sale of short-term investments 2,567 -- Purchases of short-term investments (2,567) -- Purchases of property and equipment (273) (193) Proceeds from sale of property and equipment 15 15 ------- ------- Net cash used in investing activities (258) (178) FINANCING ACTIVITIES Principal payments on long-term debt (17) (17) Net borrowings (repayments) on note payable to bank (600) 600 Repurchase of warrants (75) -- Proceeds from exercise of stock options -- 7 ------- ------- Net cash provided by (used in) financing activities (692) 590 ------- ------- Net increase (decrease) in cash and cash equivalents (673) 2,501 Cash and cash equivalents at beginning of year 3,122 621 ------- ------- Cash and cash equivalents at end of year $ 2,449 $ 3,122 ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 107 $ 121 ------- ------- Income taxes $ 826 $ 49 ------- -------
See accompanying notes. P. 15 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Airport Systems International, Inc. and Subsidiary (the Company) designs, manufactures, markets and installs ground-based aircraft radio navigation equipment and airfield signage, both of which are sold internationally and domestically. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Airport Systems International, Inc. and its wholly-owned subsidiary ASII International, Inc. (a foreign sales corporation). All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents include all cash and highly liquid investments with original maturities of three months or less. Derivative Financial Instruments The Company uses derivative financial instruments to reduce foreign exchange exposures. The Company maintains a control environment which includes policies and procedures for risk assessment and for the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for trading purposes. Foreign currency forward contracts are marked to market and gains and losses on foreign currency forward contracts to hedge firm foreign currency commitments are deferred and accounted for as part of the related foreign currency transaction. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables and derivative financial instruments. The Company grants credit to customers who meet the Company's preestablished credit requirements. The Company generally requires foreign customers to issue letters of credit which secure payment of the accounts receivable balances. Credit losses are provided for in the Company's consolidated financial statements and have been within management's expectations. With respect to its derivative contracts, the Company is also subject to credit risk of nonperformance by counter parties. The counter parties to these contracts are major financial institutions, and the Company believes that the risk of loss is remote. Revenue Recognition Generally, the Company generates revenues pursuant to contracts with its customers, most of which are less than one year in duration. Revenue on the Company's contracts is principally recognized using the percentage of completion, units of delivery method. Inventories Inventories are stated at the lower of cost, or market. Inventories valued using the last-in, first-out (LIFO) method comprised 79% and 87% of consolidated inventories at April 30, 1998 and 1997, respectively. Inventories not valued by the LIFO method are valued using the first-in, first-out (FIFO) method. At April 30, 1998 and 1997, cost determined by using the LIFO method exceeded current cost by approximately $571,000 and $453,000, respectively. P. 16 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY Inventories are summarized by major classification as follows:
April 30, 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) Raw materials $3,168 $3,128 Work-in-process 1,794 1,306 Finished goods 299 283 ------ ------ $5,261 $4,717 ------ ------
Property and Equipment Depreciation is computed using the straight-line method over the following estimated useful lives:
Description Years ---------------------------------------- Building and improvements 30 Equipment 5
Income Taxes The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes". The liability method provides that deferred tax assets and liabilities are recorded based upon the differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes. Cost in Excess of Net Assets Acquired The cost in excess of net assets acquired relates to the acquisition of the airfield signage business in fiscal 1995 and is being amortized on the straight-line method over 20 years. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $17,300 and $26,300 for the years ended April 30, 1998 and 1997, respectively. Earnings Per Share In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share." This new standard simplifies the earnings per share (EPS) calculation and makes the U.S. standard for computing EPS more consistent with international accounting standards. The Company adopted SFAS No. 128 in the third quarter of fiscal 1998. EPS for the year ended April 30, 1997, has been restated to comply with SFAS No. 128. Under SFAS No. 128, primary and fully diluted EPS were replaced with basic and diluted EPS. Basic EPS is calculated by dividing income available to common shareholders by the weighted average common shares outstanding. Previously, primary EPS was based on the weighted average of both outstanding and issuable shares assuming all dilutive options and warrants had been exercised. Under SFAS No. 128, fully diluted EPS has not changed significantly, but has been renamed diluted EPS. Diluted EPS includes the effect of all potentially dilutive securities, including stock options. A reconciliation of the numerators and the denominators of the basic and diluted EPS computations is as follows:
1998 1997 --------------------------------------------------------------------------------- Net Income Shares Earnings Net Income Shares Earnings (Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share - ------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Basic earnings per share $980 2,230 $ .44 $599 2,230 $ .27 Effect of stock options -- 191 -- -- 170 -- ---- ----- ----- ---- ----- ----- Diluted earnings per share $980 2,421 $ .40 $599 2,400 $ .25 ---- ----- ----- ---- ----- -----
P. 17 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY Stock Compensation The Company elected to continue to account for employee stock options in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and the related interpretations because the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recognized since the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. Letters of Credit The Company has outstanding secured and unsecured letters of credit totaling $3,762,000 and $2,497,000 at April 30, 1998 and 1997, respectively. New Accounting Standards SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997. This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement is effective for the Company's fiscal 1999 financial statements. Management does not expect the implementation of this Statement to have a material impact on its financial statements. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" was also issued in June 1997. This Statement establishes new standards for the way that public companies report information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is effective for the Company's fiscal 1999 financial statements and is not expected to have a significant effect on the Company's financial statements. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter. The Company has not yet determined the adoption date of the new Statement. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of SFAS No. 133 will be on the earnings and financial position of the Company. 2. NOTE PAYABLE TO BANK The Company has a line of credit agreement with a bank which expires September 1, 1998. The agreement allows for borrowings up to a maximum of $6,000,000, at an interest rate of prime (8.50% at April 30, 1998), secured by accounts receivable, inventory and equipment. There were no outstanding borrowings under the line of credit at April 30, 1998. Borrowings outstanding under the line of credit totaled $600,000 at April 30, 1997. The weighted average interest rate on short-term borrowings outstanding as of April 30, 1997 equaled 8.50%. 3. LONG-TERM DEBT At April 30, 1998 and 1997, long-term debt consisted of a note payable amounting to $1,203,000 and $1,220,000, respectively. The note payable bears interest, adjustable May 2001 and 2006, at the prior five-year Treasury Index average plus 2.5% (7.94% at April 30, 1998), and is due in monthly installments of $9,486, including interest, through June 2011 with a final payment of approximately $788,000 due on that date. The note is secured by a first mortgage on real property and improvements with a net book value of $1,174,000 at April 30, 1998. P. 18 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY The aggregate amount of principal to be paid on this note payable during each of the next five years ending April 30 is as follows:
Year (In Thousands) --------------------------------------------- 1999 $ 19 2000 21 2001 22 2002 24 2003 26
Pursuant to the provisions of the Company's long-term debt and line of credit agreements, the Company is subject to certain restrictive covenants which, among other things, require the maintenance of certain financial ratios and minimum levels of tangible net worth. 4. OPERATING LEASES The Company leases certain operating facilities and equipment under noncancelable operating leases. Future minimum lease payments due under noncancelable operating leases are $77,900, $53,800, and $6,900 in 1999, 2000, and 2001, respectively. Rent expense under all operating leases was $82,800 and $48,000 for the years ended April 30, 1998 and 1997, respectively. 5. STOCK OPTIONS AND WARRANTS The Company has reserved 375,000 shares of common stock for issuance to employees and consultants of the Company pursuant to the 1991 stock option plan (the Plan) which the Company adopted in December 1991. According to the terms of the Plan, both incentive stock options and non-qualified stock options to purchase common stock of the Company may be granted to key employees of and consultants to the Company, at the discretion of the Board of Directors. Incentive stock options may not be granted at prices which are less than the fair market value on the date of grant. Non-qualified options may be granted at prices determined appropriate by the Board of Directors of the Company. Generally, these options become exercisable and vest over one to five years and expire within 10 years of the date of grant. At April 30, 1998 and 1997, options to purchase 279,000 and 264,000 shares, respectively, were vested and exercisable. Information with respect to options granted under the Plan is as follows:
Shares Price - ------------------------------------------------------------------------------------------------------ Outstanding at April 30, 1996 296,750 $0.34 - $8.75 Granted 15,000 5.50 Exercised (22,750) .34 Canceled -- -- ------------------------------------ Outstanding at April 30, 1997 289,000 0.34 - 8.75 ------------------------------------ Granted 5,000 5.63 Exercised -- -- Canceled -- -- Outstanding at April 30, 1998 294,000 $0.34 - $8.75 ------------------------------------
P. 19 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY The following table summarizes information about stock options outstanding at April 30, 1998.
Options outstanding Options exercisable ----------------------------------------- ------------------------- Weighted Weighted Weighted Number at average average Number average outstanding remaining exercise exercisable at exercise Range of exercise prices 4/30/98 contractual life price 4/30/98 price - ------------------------------------------------------------------------------------------------------- $0.34 178,500 3.8 years $ 0.34 178,500 $ 0.34 5.25 - 8.75 115,500 6.6 years 6.05 100,500 6.12 ------- ------- $0.34 - 8.75 294,000 4.9 years $ 2.58 279,000 $ 2.42 ======= =======
The per share weighted-average fair value of stock options granted during 1998 and 1997 was $2.62 and $2.56, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1998 1997 - ---------------------------------------------------------------------------------------------------- Expected years until exercise 5 5 Risk-free interest rate 6.0% 6.2% Expected stock volatility 43.5% 43.5% Expected dividend yield 0% 0%
Since the Company applies APB Opinion No. 25 in accounting for its stock options, no compensation cost has been recognized in connection with stock options issued to employees in the accompanying financial statements. Had the Company recorded compensation expense based on the fair value method under SFAS No. 123, the Company's net income and earnings per share on a diluted basis would have been reduced by approximately $22,400 or $.01 per share in 1998 and approximately $19,700 or $.01 per share in 1997. Pro forma net income reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation expense for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above, because compensation cost is reflected over the options' vesting period of ten years for these options. Accordingly, the pro forma amounts presented above are not necessarily representative of the effects on reported net income or losses in future years. In connection with the Company's initial public offering, the Company issued a warrant that allowed the holder to purchase up to an aggregate of 75,000 shares of common stock at a per share price of $12.30 through December 1998. The holder exercised certain rights under the warrant during fiscal 1998 that required the Company to repurchase the warrant at $1.00 per share. P. 20 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY 6. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at April 30, 1998 and 1997 are as follows:
1998 1997 - ---------------------------------------------------------------------------------------------------- (In Thousands) Deferred tax assets: Current: Warranty accrual $ 43 $ 43 Accrued expenses 154 186 Other 20 22 ----- ----- 217 251 Noncurrent: Amortization of intangibles 38 55 ----- ----- Total deferred tax assets 255 306 Deferred tax liabilities: Current: Basis differences in acquired assets (287) (274) Non-current: Basis differences in acquired assets (53) (68) ----- ----- Total deferred tax liabilities (340) (342) ----- ----- Net deferred tax liability $ (85) $ (36) ===== =====
The income tax provision for the years ended April 30, 1998 and 1997 is as follows:
1998 1997 - ---------------------------------------------------------------------------------------------------- (In Thousands) Current $ 449 $ 475 Deferred 49 (114) ----- ----- Total $ 498 $ 361 ===== =====
The income tax provision differs from amounts computed at the statutory federal income tax rate as follows:
1998 1997 - ---------------------------------------------------------------------------------------------------- (In Thousands) Provision at statutory rate $ 503 $ 326 State income taxes, net of federal income tax effect 65 42 Tax benefit from foreign sales: Corporation (76) (23) Other 6 16 ----- ----- $ 498 $ 361 ===== =====
P. 21 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY 7. FINANCIAL INFORMATION The carrying value of the Company's financial instruments, including cash, accounts receivable, accounts payable, note payable and long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value. The Company has entered into foreign exchange forward contracts to hedge the value of contract costs due international vendors that are denominated in a foreign currency. The hedges used by the Company are directly related to firm commitments and are not used for trading or speculative purposes. The foreign exchange forward contracts have maturities at various dates through February 1999. At April 30, 1998, the Company had forward exchange contracts to sell $1,300,000 in foreign currencies. The net gain or loss recorded to reflect the fair value of these contracts is recorded at maturity of the contract. The deferred unrealized loss on the contracts using quoted spot rates at April 30, 1998 was $533,000. 8. SEGMENT INFORMATION The Company had sales to two customers which accounted for 46% of total sales for the year ended April 30, 1998 and sales to four customers which accounted for 54% of total sales for the year ended April 30, 1997. The Company's export sales to foreign customers by primary geographic region and in total are set forth below:
1998 1997 - ------------------------------------------------------------------------------------------------------- (In Thousands) Asia $ 11,055 $ 12,638 Africa and the Middle East 3,298 3,640 South America 2,326 292 Canada 1,152 626 Europe 69 556 Other 4 3 Australia 1 7 -------- -------- $ 17,905 $ 17,762 ======== ========
9. EMPLOYEE BENEFIT PLAN The Company has a defined contribution employee benefit plan which covers substantially all full-time employees who have attained age 21 and completed six months of service. Each qualified employee is entitled to make voluntary contributions to the plan of up to 15% of their annual compensation subject to Internal Revenue Code maximum limitations. The Company contributes 50% of each employee's contribution up to a maximum of 6% of the employee's pay. Participants in the plan may direct 50% of the Company's contribution into mutual funds and money market funds, with the remaining 50% of the Company's contribution provided in common stock of the Company. Additionally, the Company may make discretionary contributions to the plan. For the years ended April 30, 1998 and 1997, Company contributions to the plan amounted to approximately $82,000 and $30,000, respectively. P. 22 17 REPORT OF INDEPENDENT AUDITORS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY THE BOARD OF DIRECTORS AND STOCKHOLDERS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY We have audited the accompanying consolidated balance sheets of Airport Systems International, Inc. and subsidiary (the Company) as of April 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Airport Systems International, Inc. and subsidiary at April 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Kansas City, Missouri Ernst & Young LLP June 22, 1998 P. 23 18 BOARD OF DIRECTORS AND CORPORATE OFFICERS AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY BOARD OF DIRECTORS Walter H. Stowell, Jr. Thomas C. Cargin Michael J. Meyer Chairman of the Board Vice President - Finance and President Retired Senior Vice President Administration, Secretary Merit Capital Management, Inc. and General Manager Airport Systems International, Inc. (private equity merchant banking) Equipment Division Raytheon Company Thomas C. Blackburn Keith S. Cowan Robert D. Taylor Vice President President and President Kansas Venture Capital, Inc. Chief Executive Officer Taylor Financial Corporation (private investments) Airport Systems International, Inc. (financial and management consulting) CORPORATE OFFICERS Walter H. Stowell, Jr. Gregory C. Brand Michael M. Warner Chairman of the Board Vice President - Field Operations Vice President - Business and Training Development Keith S. Cowan Karl B. Gemperli John R. Wharton President, Chief Executive Officer Vice President - Manufacturing Vice President - Sales Thomas C. Cargin Wayne S. Howard Ronald E. Peck Vice President - Finance and Vice President - Indonesia Vice President - Quality Administration, Secretary Programs Anthony Bommarito Vice President - Engineering
This is a picture of Airport Systems' personnel receiving a commendation. FAA commendation to Airport Systems' team for accomplishments in DME program. P. 24 19 STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS COMMON STOCK PRICE RANGE AND DIVIDEND INFORMATION 11300 West 89th Street The prices in the table below represent the high and low Overland Park, Kansas 66214 sales prices for Airport Systems common stock as Telephone: (913) 495-2600 reported by the Nasdaq National Market. No cash Fax: (913) 492-0870 dividends have been declared. As of April 30, 1998, www.airportsystem.com Airport Systems had approximately 2,000 stockholders based on the number of holders of record and an estimate GENERAL COUNSEL of the number of individual participants represented by Blackwell Sanders Peper Martin, L.C. security position listings. Kansas City, Missouri 1998 High Low INDEPENDENT AUDITORS First Quarter $ 8 1/8 $ 5 7/8 Ernst & Young LLP Second Quarter 9 6 1/2 Kansas City, Missouri Third Quarter 10 7 1/2 Fourth Quarter 7 5/8 4 3/4 REGISTRAR & TRANSFER AGENT For the Year 10 4 3/4 UMB Bank, N.A. Post Office Box 410064 1997 High Low Kansas City, Missouri 64141-0064 First Quarter $ 6 1/8 $ 5 1/2 Telephone: (816) 860-7761 Second Quarter 6 1/2 4 7/8 Third Quarter 6 3/8 4 7/8 For change of name, address, or to replace lost stock Fourth Quarter 6 1/4 5 1/8 certificates, write or call the Securities Transfer Division. For the Year 6 3/8 4 7/8 INVESTOR RELATIONS FORM 10-KSB For corporate information, please contact: Stockholders may receive a copy of Airport System's 1998 Mr. Thomas C. Cargin Annual Report to the Securities and Exchange Commission Vice President - Finance and Administration, Secretary on Form 10-KSB by writing to Mr. Thomas C. Cargin, Vice Telephone: (913) 495-2614 President - Finance and Administration, at the corporate headquarters. STOCK TRADING The Company's common stock trades on The Nasdaq ANNUAL MEETING Stock Market (National Market) under the symbol ASII. Stockholders are cordially invited to attend the 1998 Annual Meeting of Stockholders, which will be held at The Doubletree Hotel at Corporate Woods, 10100 College Boulevard, Overland Park, Kansas, commencing at 2:00 p.m. local time on Tuesday, September 15, 1998.
EX-21 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 AIRPORT SYSTEMS INTERNATIONAL, INC. SUBSIDIARIES OF THE COMPANY Subsidiary Jurisdiction ASII International, Inc. Barbados, W.I. EX-23 5 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (form 10-KSB) of Airport Systems International, Inc. and Subsidiary of our report dated June 22, 1998, included in the 1998 Annual Report to Shareholders of Airport Systems International, Inc. and Subsidiary. Ernst and Young LLP Kansas City, Missouri June 22, 1998 EX-27 6 FINANCIAL DATA SYSTEMS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AIRPORT SYSTEMS INTERNATIONAL, INC. ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AS EXHIBIT 13 OF THE AIRPORT SYSTEMS INTERNATIONAL, INC. FORM 10-KSB. 1,000 U.S. DOLLARS YEAR APR-30-1998 MAY-01-1997 APR-30-1998 1 2,449 0 6,507 51 5,261 14,018 3,303 1,687 16,854 5,214 1,184 0 0 22 10,419 16,854 23,846 23,846 16,631 22,377 25 0 107 1,478 498 980 0 0 0 980 .44 .40
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