<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------- ----- -------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------
<S> <C>
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.
</TABLE>
Page 14
<PAGE> 15
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ --------------------------------------------
<S> <C>
(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.
</TABLE>
Page 15
<PAGE> 16
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ---------------------------------------------
<S> <C>
(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.
</TABLE>
Page 16
<PAGE> 17
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ---------------------------------------------
<S> <C>
(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)
</TABLE>
(b) REPORTS ON FORM 8-K: None
Page 17
<PAGE> 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
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
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)
</TABLE>
Page 19
<PAGE> 1
EXHIBIT 11
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NET INCOME PER SHARE COMPUTATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1997
----------------------------------------------------------------------
NET INCOME SHARES EPS NET INCOME SHARES EPS
<S> <C> <C> <C> <C> <C> <C>
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
===== =====
</TABLE>
<PAGE> 1
Exhibit 13
SELECTED FINANCIAL DATA
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended April 30
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ended Year Ended
April 30, 1998 April 30, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(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%
-------- ----- -------- -----
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
- ------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
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%
-------- ----- -------- -----
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Dollars in thousands July 31 October 31 January 31 April 30
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 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
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
April 30,
---------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
(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
-------- --------
</TABLE>
See accompanying notes.
P. 12
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
(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
-------- --------
</TABLE>
See accompanying notes.
P. 13
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(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
----- ------- ------ --------
</TABLE>
See accompanying notes.
P. 14
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Year ended April 30,
--------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
(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
------- -------
</TABLE>
See accompanying notes.
P. 15
<PAGE> 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
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
Inventories are summarized by major classification as follows:
<TABLE>
<CAPTION>
April 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In Thousands)
Raw materials $3,168 $3,128
Work-in-process 1,794 1,306
Finished goods 299 283
------ ------
$5,261 $4,717
------ ------
</TABLE>
Property and Equipment
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
Description Years
----------------------------------------
<S> <C>
Building and improvements 30
Equipment 5
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------
Net Income Shares Earnings Net Income Shares Earnings
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(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
---- ----- ----- ---- ----- -----
</TABLE>
P. 17
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Year (In Thousands)
---------------------------------------------
<S> <C>
1999 $ 19
2000 21
2001 22
2002 24
2003 26
</TABLE>
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:
<TABLE>
<CAPTION>
Shares Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
------------------------------------
</TABLE>
P. 19
<PAGE> 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.
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
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%
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(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)
===== =====
</TABLE>
The income tax provision for the years ended April 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(In Thousands)
Current $ 449 $ 475
Deferred 49 (114)
----- -----
Total $ 498 $ 361
===== =====
</TABLE>
The income tax provision differs from amounts computed at the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
(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
===== =====
</TABLE>
P. 21
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
(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
======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 18
BOARD OF DIRECTORS AND CORPORATE OFFICERS
AIRPORT SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<S> <C> <C>
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
</TABLE>
This is a picture of Airport Systems' personnel receiving a commendation.
FAA commendation to Airport Systems' team for accomplishments in DME program.
P. 24
<PAGE> 19
STOCKHOLDER INFORMATION
<TABLE>
<S> <C>
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.
</TABLE>
<PAGE> 1
EXHIBIT 21
AIRPORT SYSTEMS INTERNATIONAL, INC.
SUBSIDIARIES OF THE COMPANY
Subsidiary Jurisdiction
ASII International, Inc. Barbados, W.I.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,449
<SECURITIES> 0
<RECEIVABLES> 6,507
<ALLOWANCES> 51
<INVENTORY> 5,261
<CURRENT-ASSETS> 14,018
<PP&E> 3,303
<DEPRECIATION> 1,687
<TOTAL-ASSETS> 16,854
<CURRENT-LIABILITIES> 5,214
<BONDS> 1,184
0
0
<COMMON> 22
<OTHER-SE> 10,419
<TOTAL-LIABILITY-AND-EQUITY> 16,854
<SALES> 23,846
<TOTAL-REVENUES> 23,846
<CGS> 16,631
<TOTAL-COSTS> 22,377
<OTHER-EXPENSES> 25
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 1,478
<INCOME-TAX> 498
<INCOME-CONTINUING> 980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 980
<EPS-PRIMARY> .44
<EPS-DILUTED> .40
</TABLE>
