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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For the Fiscal Year Ended January 31, 2001 Commission File Number 0-4988
AEROSONIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1668471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1212 North Hercules Avenue
Clearwater, Florida 33765
(Address of principal executive offices)
(Zip Code)
Registrant's telephone no., including area code: (727) 461-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.40
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of April 24, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $44,752,000.
As of April 24, 2001, the issuer had 3,919,845 shares of Common Stock
outstanding, net of treasury shares.
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Documents Incorporated by Reference
Document Part of 10K
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Proxy Statement for the 2001 Part II, Items 10, 11, 12 and 13
Annual Meeting of Stockholders
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PART I
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE COVERED BY
THE SAFE HARBORS CREATED THEREUNDER. FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE," "PLANS" AND "INTENDS."
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD BE INACCURATE AND THEREFORE, THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH HEREIN IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Item l. Business.
--------
Aerosonic Corporation ("the Company") was incorporated under the laws of
Delaware in l969, and in l970 merged with a Florida company (formerly known as
"Aerosonic Corporation"). As used herein, unless the context requires otherwise,
"Aerosonic" or the "Company" includes Aerosonic Corporation and its operating
subsidiary, Avionics Specialties, Inc.
The Company is principally engaged in one business segment: The manufacture of
aircraft instruments ("Instruments"). The Company consists of three geographical
locations and four operating divisions. The divisions are; the Clearwater,
Florida Instrument Division (`Clearwater Instruments"), the Aerosonic Wichita,
Kansas Division ("Kansas Instruments"), Avionic Specialties, Inc. ("Avionics"),
a Virginia Corporation wholly owned by the Company and Precision Component
Division ("Precision Components").
Clearwater Instruments was started in 1953 and primarily manufactures
Altimeters, Airspeed Indicators, Rate of Climb Indicators, Microprocessor
Controlled Air Data Test Sets, and a variety of other flight instrumentation.
Kansas Instruments is the source inspection location for our Wichita customers
and is the primary location for Clearwater Instruments' repair business.
Avionics was a division of Teledyne Industries, Inc. prior to its acquisition by
Aerosonic Corporation in January 1993. Avionics maintains three major product
lines in the aircraft instrument segment: 1) Angle of Attack ("AOA")/Stall
Warning Systems; 2) Integrated Multifunction Probe (IMFP), an integrated air
data sensor; and 3) Engine Vibration Monitoring System (EVMS), an aircraft
health and usage monitor. In August 1998, the Company formed a new division
entitled Precision Components, to perform precision high volume machining of
mechanical components, which was not significant to operations in fiscal year
2001, 2000 or 1999.
2
Industry
A wide range of information, including airspeed, altitude and fuel levels, is
critical for the proper and safe operation of an aircraft.
Redundant systems are a vital element of aircraft design and safety. The Company
is an industry leader in the manufacturing of mechanical instrument systems.
These instruments are used both for primary flight data and standby redundant
instruments in cockpits that use electronic displays for primary flight data.
Mechanical instruments operate completely independent of the aircraft's primary
electrical system, which is used to power the computer based display panels.
Pilots find comfort in being able to check operation and accuracy of the
displays against the reliable independent mechanical device.
The Company's three-inch product line was industry standard for many years. The
additional information now available in the cockpit has made panel space more
valuable. This has opened a new opportunity for smaller two-inch standby
instruments. The Company has a full line of two-inch instruments that benefit
the aircraft in space and weight.
Pilots use air data for a number of important purposes, including maintaining
safe separation from other aircraft. Until recently, aircraft on a similar
flight path at altitudes exceeding 29,000 feet have been required to maintain a
vertical separation of at least 2,000 feet. As air travel has increased, U.S.
and international aviation organizations have sought ways to increase traffic
flow on high traffic routes. Reduced vertical separation minimums ("RVSM") have
adopted a vertical separation of 1,000 feet on certain highly traveled routes.
Safe travel on RVSM routes requires that an aircraft's altimeter and test
equipment associated with the altimeter is extremely accurate. The Company
manufactures an Air Data Test Set that exceeds the tight tolerances of the new
RVSM requirements. The technology used to develop this test equipment is
adaptable for use in an electronic based altimeter system. RVSM is mandated
between the altitudes of 31,000 and 39,000 feet on certain North Atlantic
routes. RVSM is scheduled to be mandated between 29,000 and 41,000 feet on these
North Atlantic routes by January 2002.
Strategy
The Company's goal is to continue to reposition its products for profitable
growth by maintaining dominance within niche markets. The Company intends to
focus on the development of profitable long-term contracts. New aircraft
cockpits are increasingly being developed through strategic alliances with
market leaders. The Company is well positioned to take advantage of these
strategic alliances. Expected sales increases will be derived through new
product introduction and further penetration of existing markets. The Company
continues to hold a competitive advantage derived from its philosophy of
vertical integration. The Company is more than 80% vertically integrated.
3
Products and Distribution
The Company's products are sold to manufacturers of commercial and private
aircraft, both domestic and foreign, and the U.S. military services. For the
fiscal year ended January 31, 2001, approximately 71% of the Company's total
sales were to the private sector and 29% to military services. Domestic sales of
the Company's products are made to many different commercial (non-government)
customers. During fiscal year 2001, there was only one commercial customer
representing over 10% of total revenues at approximately 12%. The aggregate
percentage of foreign sales were 23%, 31% and 20% for the fiscal years ended
January 31, 2001, 2000 and 1999, respectively.
Most of the Company's instrument sales are made directly through Company
employees to original equipment manufacturers or to the military, with the
Company's remaining sales being made through other distributors (who resell to
aircraft operators).
The Company produces a full line, of both three- and two-inch, mechanical and
electro-mechanical cockpit instruments.
The Integrated Multifunction Probe (IMFP) is a combination of existing
technologies: the Angle of Attack/Air Data Sensing Probe and pressure sensing
electronics. This integrated approach to providing aircraft air data reduces the
customers' system complexity on aircraft troubleshooting and logistics support
while increasing reliability and decreasing system costs.
The Engine Vibration Monitoring System (EVMS) is an onboard aircraft health and
usage monitoring system. This system provides the user with useful data as to
the health of the aircraft as well as the ability to assess engine/system
performance against manufacturer standards.
The Angle of Attack (AOA)/Stall Warning product line has undergone a redesign of
its basic components. The Combined Stall Warning Transmitter takes existing
technologies of AOA and Stall Warning and combines them into a single TSO C54
Stall Warning Transmitter. This combined instrument dramatically reduced the
system weight and increased the system reliability.
Precision Components operates as a high-volume, high-precision machining
operation. Products produced by Precision Components are a variety of mechanical
parts primarily related to the optics industry. Some of the products include the
mechanical components for rifle scopes, printing presses, microscopes and tank
gun sights. The majority of the products produced by the division are under
long-term agreements.
Customers
The Company primarily markets its products to the original equipment
manufactures (OEMs), particularly the manufactures of corporate and private jets
as well as contractors of military jets. Customers include, among others, the
United States government and the majority of OEM's throughout the world. The
Company's products reach the private aircraft owners through our network of
authorized distributors.
4
Backlog
The Company's sales order backlog as of January 3l, 2001 was $36,878,000 as
compared to $30,820,000 in previous fiscal year. The increase in sales order
backlog is due, in part, to the Company's expanded relationships with worldwide
OEM market and the new rifle scope program award to Precision Components.
U.S. Government contracts are subject to termination at the election of the
Government and contain specific procedures for equitable settlement in the event
of termination. In the case of government contracts, only the portion that
funding has been obtained has been included in our backlog. The U.S. Government
represents approximately 16% of the Company's backlog at January 31, 2001.
Contracts
The Company's contracts are normally for production or development. Production
contracts are typically fixed-price over a three to five year period.
Fixed-price contracts provide for a firm fixed price on a variety of products
and quantities of those products. These contracts allow the Company to negotiate
better overall prices that fit into customers production programs. These
long-term commitments also allow the Company to capitalize on quantity based
price reduction for raw materials. Under the firm fixed-price contracts, the
Company agrees to perform for an agreed-upon price. Accordingly, the Company
derives benefits from cost savings, but bears the risk of cost overruns.
Development contracts provide resources for technology advancement necessary for
development of various products. The Company negotiates for and generally
receives progress payments from customers that correlate with the costs
incurred.
Sales and Marketing
The Company has generally focused sales efforts on government and military
entities, OEMs and resellers. The Company intends to increase sales efforts with
respect to retrofit, modifications and repair programs.
The Company, due to the system impact of its components, is involved at a very
early stage with the aircraft manufacturer's engineers to implement its system
into the aircraft design. All components are integrated to the safe operation of
the airplane.
In several segments of the worldwide market, the Company uses distributors and
representatives to enhance its customer contact and broaden technical scope. The
Company also makes use of dealers, where appropriate, to streamline the handling
of spare parts orders.
In January of fiscal year 2001, the Company moved the repair operation to the
Kansas facility. The Company believes this will improve its ability to provide
prompt and effective repair and upgrade service.
5
Government Regulation
The manufacture and installation of the Company's products in aircraft owned and
operated in the United States is governed by U.S. Federal Aviation
Administration (FAA) regulations. The most significant of these regulations, to
the Company, is the Technical Standard Order (TSO) and Type Certificate (TC) or
supplemental Type Certificate (STC) certifications. TSO outlines the minimum
standards that a certain type of equipment has to meet to be TSO certified. Many
OEMs and Retrofitters prefer TSO-certified aviation equipment because it acts as
an industry-wide stamp of approval. The Company also sells its products to
European and other non-US OEMs, which typically require approval from the Joint
Aviation Authorities (JAA).
The Company holds TSO approval on over 400 different instruments. This provides
a significant advantage to the Company and its customers in reducing the time
required obtaining TSO approval on new instruments. Most new instruments qualify
for approval based on similarity. The Company also has many instruments with JAA
approval.
With respect to RVSM air data products, the FAA also requires that these
products be RVSM-certified before they are used in flight. This certification
process may be undertaken in conjunction with the TC/STC certification process.
RVSM certification requires ground and flight tests and an analysis of flight
data to ensure the accuracy, reliability, system safety and mean time between
failure rates of the product. The RVSM certification process typically lasts one
to three months.
Quality Assurance
Product quality is imperative to the aviation industry, and we strive to
maintain the highest standards within each of the divisions.
The Company was recognized at Lockheed's annual Star Supplier conference as one
of only 18 companies to receive the Star Supplier award. Boeing also recognized
the Company as a Q100 supplier. The Q100 program uses multilevel criteria to
identify the top 100 worldwide suppliers to the Boeing Company.
The Company is ISO 9001 certified. ISO 9001 standards are an international
consensus on effective management practices for ensuring that a company can
consistently deliver its products and related services in a manner that meets or
exceeds customer quality requirements. ISO 9001 standards outline the minimum
requirements a quality system must meet to achieve this certification. As an ISO
9001-certified manufacturer, the Company can represent to its customers that it
maintains high quality industry standards in the education of employees and the
design and manufacture of its products. In addition, the Company's products
undergo extensive quality control testing prior to being delivered to customers.
As part of the Company's quality assurance procedures, the Company maintains
detailed records of test results and quality control processes.
6
Patents and Licenses
The Company has patents on certain commercial and military products such as air
data probes. The Company has certain registered trademarks, none of which are
considered significant to current operations. The patents and intellectual
property portfolio, in the aggregate, is valuable to operations, however the
Company does not believe the business, as a whole, is materially dependent on
any single patent, trademark or copyright.
Research and Development
The Company expended approximately $780,000 and $801,000 in research and
development costs for potential new products and enhancements during the fiscal
years 2001 and 2000. There are approximately 25 engineers working at the
Company, on a full- or part-time basis, involved in these activities.
Research and development in fiscal year 2001 continued the development of the
new Integrated Multi function Probe (IMFP) and Engine and Vibration Monitoring
System (EVMS). The EVMS was successfully installed and demonstrated in
helicopters in Norway and China culminating with certification approval of the
system by the Civil Aviation Authority (CAA) in the UK and the Norwegian Civil
Aviation Authority (NCAA). This system will be slightly modified in fiscal year
2002 to expand its capabilities and increase the number and types of aircraft
that it is applicable to. The IMFP development was flight tested by Airbus
Industries on an A320 at the end of the year. Further commercial flight testing
by Cessna and Dornier is scheduled for early this year. The development of this
product for the two current military contracts, Korean T-50 and Lockheed F-16
Block 60 and the future possibility of the Joint Strike Fighter will begin
qualification and wind tunnel testing early in fiscal year 2002. The development
programs and testing for IMFP, and the installation and certification of the
EVMS will dominate the research and development efforts in fiscal year 2002.
The combined stall warning and angle of attack transmitter (SWTx) completed
certification and FAA/JAA acceptance on the CASA C295 and Raytheon Premier
aircraft, and started production deliveries on those programs. Software
development for the U-2 version of the SWTx has been completed and is awaiting
final flight testing before installation in all of the U-2 aircraft. Initial
software customization followed by bench and flight testing of the SWTx for the
British Aerospace Nimrod and Swearingen SJ-30 programs will continue this coming
year. The concept of common hardware using customized software has proven
successful with these five programs, all using a common manufactured part that
is aircraft specific by loading the appropriate software just prior to delivery.
The Company continued development of active matrix multifunction displays and
servo driven instruments. Product enhancement activities included software
enhancements for the air data test set to meet a market demand for additional
functionality.
7
Competition
The markets for the Company's products are highly competitive and characterized
by several industry niches in which a number of manufacturers specialize. The
Company manufactures a larger variety of aircraft instruments than its
competitors, who, in most instances, compete with the Company on no more than a
few types of aircraft instruments.
The Company believes that the principal competitive factors are price,
development cycle time, responsiveness to customer preferences, product quality,
technology, reliability and variety of products. Management believes that the
Company's significant and long-standing customer relationships reflect its
ability to compete favorably with respect to these factors.
Manufacturing, Assembly and Material Acquisition
The Company's manufacturing processes, excluding certain electronic products,
includes manufacturing principally all components and subassemblies for the
instruments, the assembly of those components and testing of products at various
stages in the manufacturing and assembly process.
The Company manufactures or has the capability to manufacture, principally all
components and subassemblies for the instruments. Raw materials, such as, glass
lenses, raw metals and castings are generally available from a number of sources
and in sufficient quantities to meet current requirements, subject to normal
lead times. The Company believes that retaining the ability to completely
manufacture the instruments allows the Company the flexibility to respond to
customers quickly and control the quality of its products.
When appropriate, less critical component parts are purchased under short and
long term supply agreements. These purchased parts are normally standard parts
that can be easily obtained from a variety of suppliers. This allows the company
to lower overhead expenses and maintain control required to meet the exacting
tolerances demanded in the industry.
Employees
As of the fiscal year ended January 3l, 2001, the Company employed approximately
255 employees in its business operations. This consisted of 128 Clearwater
Instrument employees, 9 Kansas Instrument employees, 114 Avionics employees and
4 Precision Component employees. The Company's future success depends on the
ability to attract, train and retain quality personnel. The Company's employees
are not represented by labor unions and Management regards its relations with
its employees to be good.
8
Item 2. Properties.
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The following sets forth the locations and general characteristics of the
Company's principal plants:
Approximate No. Square Feet
Location of Factory and Office Area
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Clearwater, Florida 90,000
Wichita, Kansas 7,500
Charlottesville, Virginia 53,000
All properties are well maintained, fully occupied by the Company and suitable
for the Company's present level of production. All locations operate more than
one shift, five days a week. The property in Wichita, Kansas is owned by the
Company and is unencumbered. The Clearwater, Florida property, which is used by
both Clearwater Instruments and the Precision Components, is mortgaged in
accordance with an Industrial Revenue Bond executed in l988. (See Note 6,
"Financial Statements".)
The Charlottesville, Virginia property was purchased from Teledyne Industries in
April 1994 and is mortgaged by a long-term note with the Company's bank. The
property consists of a 53,000 square foot manufacturing facility on
approximately 12 acres of land.
9
Item 3. Legal Proceedings.
-----------------
David S. Goldman, former President and Chief Executive Officer of Aerosonic
Corporation sued the Company in September 1996, for an alleged breach of a
consulting agreement between Mr. Goldman and the Company. The suit seeks damages
in excess of $15,000. During fiscal year 1997, the Company sued Mr. Goldman and
Mil-Spec Finishers, Inc., a former subcontractor to Aerosonic Corporation, owned
and controlled by Mr. Goldman, seeking damages in excess of $15,000, for alleged
fraud and misappropriation of funds, appropriation of corporate opportunity,
breach of fiduciary duty and conversion. The Company filed an amended complaint,
adding claims for civil theft against both defendants, in October of 1997. The
majority of discovery is completed and a trial date is set for June of 2001.
Management believes that the ultimate resolution of this matter will not have a
material, negative effect on the financial position of the Company.
From time to time the Company can be involved in claims and legal actions
arising in the ordinary course of business. In the opinion of management, at
this time there are no claims or legal actions that will have a material adverse
effect on the Company's financial position, results of operations, or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
10
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
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Matters.
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The Company's Common Stock is traded on the American Stock Exchange under the
symbol "AIM". The range of high and low bid quotations as reported by the
American Stock Exchange for each of the quarters of the fiscal years ended
January 3l, 2001 and January 3l, 2000 is as follows:
Fiscal Year Ended January 31, 2001
----------------------------------
Quarter Bid Bid
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1 High 11-1/8 Low 9-1/8
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2 High 10-5/8 Low 9-1/8
-------------------------------------------------------------------------
3 High 10-7/16 Low 8-1/8
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4 High 12-1/2 Low 9-7/8
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Fiscal Year Ended January 31, 2000
----------------------------------
Quarter Bid Bid
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1 High 15-5/16 Low 11-3/4
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2 High 14-3/4 Low 11-9/16
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3 High 14-1/2 Low 11-1/8
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4 High 13 Low 10
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During those same periods, no cash dividends were paid. The payment of future
dividends, if any, on the Company's common stock and the amount thereof will be
dependent upon the Company's earnings, financial requirements, and other factors
deemed relevant by the Company's Board of Directors.
As of April 24, 2001, the Company's outstanding shares of common stock were
owned by approximately 2,918 shareholders of record.
11
Item 6. Selected Financial Data.
-----------------------
The following selected financial data for the five years in the period ended
January 31, 2001 have been derived from the Company's Consolidated Financial
Statements.
Years Ended January 31,
-----------------------
2001 2000 1999 1998 1997
--------------- ---------------- --------------- --------------- ---------------
Revenue $ 24,672,000 $ 23,271,000 $ 19,670,000 $ 19,326,000 $ 20,232,000
=============== ================ =============== =============== ===============
Income from
Continuing operations $ 456,000 $ 260,000 $ 353,000 $ 1,201,000 $ 1,123,000
=============== ================ =============== =============== ===============
Basic and diluted earnings per
share from
Continuing operations $ 0.12 $ 0.07 $ 0.09 $ 0.31 $ 0.29
=============== ================ =============== =============== ===============
Total assets $ 21,566,000 $ 22,774,000 $ 20,417,000 $ 18,315,000 $ 17,215,000
=============== ================ =============== =============== ===============
Long-term obligations $ 4,530,000 $ 3,906,000 $ 3,396,000 $ 3,572,000 $ 2,444,000
=============== ================ =============== =============== ===============
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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Results of Operations.
---------------------
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included elsewhere
herein.
Results of Operations
Revenues
Revenues increased $1,401,000, or 6%, to $24,672,000 for fiscal year 2001 from
$23,271,000 for fiscal year 2000. The increase was attributable to increased
penetration on new models and panel retrofit for RVSM requirements. RVSM has
also provided a significant increase in demand for the Air Data Test Set. The
increases in sales were offset by decreased sales of the Angle of Attack product
as the Company neared the completion of a large contract to retrofit Tornado
fighter jets.
Revenues increased $3,601,000, or 18%, to $23,271,000 for fiscal year 2000 from
$19,670,000 for fiscal year 1999. The increase in revenue was primarily
attributable to continued growth in the angle-of-attack product line.
Cost of Sales
Cost of sales increased $734,000, or 5%, to $15,654,000, or 63% of revenues, for
fiscal year 2001 from $14,920,000 or 64% of revenues, for fiscal year 2000. The
increase in dollar amount was related to the increase in revenues, and the
decrease in percentage of revenues was primarily related to the Company
capitalizing on material acquisition related to long term contracts and the sale
of higher margin products.
Cost of sales increased $2,986,000, or 25%, to $14,920,000, or 64% of revenues,
for fiscal year 2000 from $11,934,000 or 61% of revenues, for fiscal year 1999.
The increase in dollar amount was related to the increase in revenues, and the
increase in percentage of revenues was primarily related to the management's
concerted efforts to begin to sell off the lower margin products in order to
focus its entire efforts on the newer, high margin products.
Selling General and Administrative Expenses
Selling, general and administrative expense increased $461,000, or 6%, to
$7,918,000, or 32% of revenue, for fiscal year 2001 from $7,457,000, or 32% of
revenues for fiscal year 2000. The increased spending is attributable to the
legal expense increase of $285,000 to $461,000 from $176,000 in fiscal year 2000
and the environmental expense increase of $72,000 to $155,000 from $83,000 in
fiscal year 2000. This was offset by decreased general and administrative labor
costs.
Selling, general and administrative expense increased $566,000, or 7%, to
$7,457,000, or 32% of revenue, for fiscal year 2000 from $6,891,000, or 35% of
revenues for fiscal year 1999. The decrease in percentage of revenue primarily
relates to the increase in sales while the increase in
13
dollars spent relates to management's efforts to reduce certain fixed costs in
the overall operation while still absorbing higher R&D expenditures and costs
associated with the Precision Components Division.
Interest Expense
Net interest expense increased $55,000 to $471,000 in fiscal year 2001 from net
interest expense of $416,000 in fiscal year 2000. The net interest expense
increase was primarily due to higher average outstanding debt during the year
and increased interest rates.
Net interest expense increased $164,000 to $416,000 in fiscal year 2000 from net
interest expense of $252,000 in fiscal year 1999. The net interest expense
increase was due to increased short- and long-term borrowings primarily related
to the start-up of the new Precision Components Division and increased interest
rates.
Other, net
Other income, net increased $120,000 to $124,000 in fiscal year 2001 from other
income, net $4,000 in fiscal year 2000. The increase was primarily related to
sale of property in Newport Arkansas. The gain on the sale of land was
approximately $131,000.
Income Tax Expense
Income tax expense was $297,000 for fiscal year 2001 as compared to $222,000 for
fiscal year 2000. The increased amount is related to the higher income before
tax. The effective rate decreased 6.6% to 39.4% in fiscal year 2001 from 46% in
fiscal year 2000. The decrease in the effective rate was attributable to the
lower non-deductible expenses in fiscal year 2001 compared to fiscal year 2000
and is consistent with fiscal year 1999.
Income tax expense was $222,000 for fiscal year 2000 as compared to $228,000 for
fiscal year 1999. The decreased amount is related to the lower income before tax
and the effective tax rate. The effective rate increased 6.67% to 46.00% in
fiscal year 2000 from 39.33% in fiscal year 1999. The increase in the effective
rate was primarily attributable to one-time, higher non-deductible expenses in
fiscal year 2000.
Net Income
As a result of the factors described above, our net income increased $196,000 or
75% to $456,000, or 2% of revenue, for fiscal year 2001 from $260,000 or 1% of
revenues, for fiscal year 2000. Earnings per share increased $ .05 or 71% to $
.12 for fiscal year 2001 from $ .07 in fiscal year 2000.
As a result of the factors described above, our net income decreased $93,000 or
26% to $260,000, or 1% of revenue, for fiscal year 2001 from $353,000 or 2% of
revenues, for fiscal year 1999.
14
Earnings per share decreased $ .02 or 22% to $ .07 for fiscal year 2000 from $
.09 in fiscal year 1999.
Liquidity and Capital Resources
Cash flows from operating activities increased to $1,711,000 for fiscal year
2001 as compared to cash flow used of $724,000 for fiscal year 2000. The
increase was primarily attributable to decreased accounts receivable, decreased
inventory and increased net income.
Cash flows used in operating activities decreased to $724,000 for fiscal year
2000 as compared to $1,332,000 for fiscal year 1999. The decrease was primarily
attributable to increased accounts payable, accrued expenses and taxes payable.
This decrease was offset by increased accounts receivable, inventory and lower
net income.
Cash flow used in investing activities was $238,000 for fiscal year 2001 as
compared to $558,000 for fiscal year 2000. The decrease was primarily
attributable to the decrease in purchases of large equipment for the Precision
Components Division.
Cash flow used in investing activities was $558,000 for fiscal year 2001 as
compared to $648,000 for fiscal year 2000. Capital expenditures during fiscal
year 2000 primarily consisted of machinery and equipment used in the new
Precision Components Division. These expenditures were funded by borrowings
under the Company's revolving credit facility.
Cash flow used in financing activities was $1,360,000 for fiscal year 2001 as
compared to cash provided of $528,000 in fiscal year 2000. This decrease was a
direct result of the increased cash flow from operations and the decrease in
large purchased of equipment.
Cash flow provided in financing activities was $528,000 for fiscal year 2000 as
compared to $1,623,000 in fiscal year 1999. The amount of financing was
attributable to the purchases of machinery and equipment for Precision
Components Division.
To accommodate fluctuation in cash flow the Company has a $1,000,000 revolving
credit facility, which expires in May 2001 and bears interest at the trailing
90-day treasury index plus 2.75%. At January 31, 2001, there was approximately
$1,000,000 available under this revolving credit facility.
The Company's current ratio was approximately 4.25 to 1 at January 31, 2001
compared to 2.80 to 1 at January 31, 2000. In addition, working capital
increased by $1,475,000 to $12,686,000 in fiscal year 2001 as compared to
$11,211,000 in fiscal year 2000. The increase primarily relates to the
refinancing of the revolving credit facility to long-term debt.
Future capital requirements depend on numerous factors, including research and
development, expansion of products lines, Precision Components Division and
other factors. Management believes that cash and cash equivalents, together with
the Company's cash flow from operations and current borrowing arrangements will
provide for these necessary capital expenditures. Furthermore, the Company may
develop and introduce new or enhanced products, respond to competitive
15
pressures, invest or acquire businesses or technologies or respond to
unanticipated requirements or developments, which would require additional
resources.
The Company does not believe that inflation has had a material effect on the
Company's financial position or results of operations. However, the Company can
not predict the future effects of inflation.
Acquisitions
Currently, the Company has no arrangements or understandings with respect to any
acquisitions. However, the Company continues to monitor acquisition
opportunities.
Accounting Standards
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Hedge
Activities", which amended Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 138 must be adopted
concurrently with the adoption of Statement No. 133. The Company expects to
adopt these new statements effective February 1, 2001. These statements require
an entity to recognize derivatives as either assets or liabilities in the
financial statements, to measure those instruments at fair value and to reflect
the changes in fair value of those instruments as either components of
comprehensive income or in net income, depending on the types of those
instruments. As of January 31, 2001, the Company does not have any derivative
instruments as defined in the statements or engage in hedging activities.
Environmental Matters
In accordance with a consent agreement signed by the Company in 1993, the
Company's environmental consultant has developed an interim remedial action plan
to contain and remediate certain contamination on and underlying the Company's
property. During 1997 the Company recorded a provision of approximately $175,000
related to the estimated costs to be incurred under this plan. As of January 31,
2000 the company had utilized all amounts originally recorded in other accrued
expenses, and phase-one remediation had been completed.
During the third quarter of fiscal year 2001 management assessed the
post-remediation monitoring expense related to the environmental clean up of
1993 would cost approximately $125,000. This amount was accrued and expensed
during the third quarter, fiscal year 2001. Approximately $73,000 remains
accrued in Other accrued expenses at January 31, 2001.
16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The primary market risk exposure for the Company is interest rate risk. The
Company does not currently utilize any financial instruments to manage interest
rate risk.
Interest Rate Risk
------------------
The Company is exposed to changes in interest rates primarily as a result of its
variable rate short-term and long-term borrowings. A hypothetical 10% increase
in the Company's weighted average interest rate would have increased the
Company's interest expense by approximately $40,000 based on the balance of
variable rate debt outstanding at January 31, 2001.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The consolidated financial statements and supplementary data required by Item 8
are listed in the index beginning on page 15 and are included in this Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
Not applicable.
17
PART III
Item l0. Directors and Executive Officers.
--------------------------------
Information concerning the Directors and Executive Officers of the Company is
incorporated by reference to the Company's definitive proxy statement, which
will be filed with the Securities and Exchange Commission (Commission) within
120 days after the close of fiscal 2001.
Item ll. Executive Compensation.
----------------------
Information concerning executive compensation is hereby incorporated by
reference to the Company's definitive proxy statement, which will be filed with
the Commission within 120 days after the close of fiscal 2001.
Item l2. Security Ownership of Certain Beneficial Owners to Management.
-------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to the Company's definitive proxy
statement, which will be filed with the Commission within 120 days after the
close of fiscal 2001.
Item l3. Certain Relationships and Related Transactions.
----------------------------------------------
Information concerning certain relationships and related transactions is hereby
incorporated by reference to the Company's definitive proxy statement, which
will be filed with the Commission within 120 days after the close of fiscal
2001.
18
Item l4. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) (1) Financial Statements:
The following consolidated financial statements of the Company are included
herein.
Page
Report of Independent Certified Public Accountants F - 2
Consolidated Balance Sheets at January 31, 2001 and 2000 F - 3
Consolidated Statements of Income for the years ended
January 31, 2001, 2000 and 1999 F - 4
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 2001, 2000 and 1999 F - 5
Consolidated Statements of Cash Flows for the years ended
January 31, 2001, 2000 and 1999 F - 6
Notes to Consolidated Financial Statements F-7 - F-16
(a) (2) Financial Statement Schedules:
All schedules have been omitted inasmuch as the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Company's
Consolidated Financial Statements, including the notes thereto.
(a) (3) Exhibits:
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
January 31, 2001.
19
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AEROSONIC CORPORATION
(Registrant)
By: /s/ J. Mervyn Nabors Date: April 27, 2001
--------------------- --------------
J. Mervyn Nabors, President
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ J. Mervyn Nabors
-------------------------------------------------
J. Mervyn Nabors Date: April 27, 2001
President, Chief Executive Officer ---------------
and Chairman of the Board
/s/ David A. Baldini
--------------------------------------------------
David A. Baldini Date: April 27, 2001
Vice Chairman of the Board ---------------
and Executive Vice President
/s/ Eric J. McCracken
--------------------------------------------------
Eric J. McCracken Date: April 27, 2001
Executive Vice President, ---------------
Chief Financial Officer and Director
/s/ P. Mark Perkins
--------------------------------------------------
P. Mark Perkins Date: April 27, 2001
Executive Vice President and Director ---------------
/s/ Carm Russo
--------------------------------------------------
Carm Russo Date: April 27, 2001
Executive Vice President and Director ---------------
/s/ William C. Parker
--------------------------------------------------
William C. Parker, Director Date: April 27, 2001
---------------
/s/ Melissa Clark Daley
-----------------------------------------------
Melissa Clark Daley, Director Date: April 27, 2001
---------------
20
Aerosonic Corporation and Subsidiary
Table of Contents
--------------------------------------------------------------------------------
Page(s)
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - January 31, 2001 and 2000 F-3
Consolidated Statements of Income - For the Years Ended
January 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity - For the Years Ended
January 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - For the Years Ended
January 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-17
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
of Aerosonic Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 19 present fairly, in all material
respects, the financial position of Aerosonic Corporation and its subsidiary
(the Company) as of January 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers L.L.P.
Tampa, Florida
March 30, 2001
F-2
Aerosonic Corporation and Subsidiary
Consolidated Balance Sheets
January 31, 2001 and 2000
-------------------------------------------------------------------------------
2001 2000
---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 1,077,000 $ 964,000
Receivables 5,055,000 5,349,000
Inventories 9,949,000 10,606,000
Prepaid expenses 122,000 128,000
Deferred income taxes 295,000 388,000
---------------- ----------------
Total current assets 16,498,000 17,435,000
---------------- ----------------
Property, plant and equipment, net 4,157,000 4,462,000
Capitalized software costs and other assets 818,000 877,000
---------------- ----------------
4,975,000 5,339,000
---------------- ----------------
Total Assets $ 21,473,000 $ 22,774,000
---------------- ----------------
Liabilities and Shareholders' Equity
Current liabilities:
Current maturity of long-term debt and notes payable $1,019,000 $ 542,000
Revolving credit facilities - 2,314,000
Accounts payable, trade 1,252,000 1,968,000
Compensation and benefits 849,000 659,000
Income taxes payable 153,000 144,000
Other accrued expenses 621,000 597,000
---------------- ----------------
Total current liabilities 3,894,000 6,224,000
Long-term debt and notes payable, net of current maturity 4,335,000 3,751,000
Deferred income taxes 113,000 155,000
---------------- ----------------
Total liabilities 8,342,000 10,130,000
---------------- ----------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, $.40 par value; authorized 8,000,000 shares,
issued and outstanding 3,986,262 1,595,000 1,595,000
Additional paid-in capital 4,457,000 4,440,000
Retained earnings 7,700,000 7,244,000
Less treasury stock: 66,417 and 68,963 shares in 2001 and
2000, at cost (621,000) (635,000)
---------------- ----------------
Total shareholders' equity 13,131,000 12,644,000
---------------- ----------------
Total liabilities and shareholders' equity $ 21,473,000 $ 22,774,000
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Aerosonic Corporation and Subsidiary
Consolidated Statements of Income
For the Years Ended January 31, 2001, 2000 and 1999
------------------------------------------------------------------------------------------
2001 2000 1999
------------ ------------- --------------
Net sales $24,672,000 $ 23,271,000 $ 19,670,000
Cost of goods sold 15,654,000 14,920,000 11,934,000
------------ ------------- --------------
Gross profit 9,018,000 8,351,000 7,736,000
Selling, general and administrative expenses 7,918,000 7,457,000 6,893,000
------------ ------------- --------------
Operating income 1,100,000 894,000 843,000
------------ ------------- --------------
Other income (deductions):
Interest expense, net (471,000) (416,000) (252,000)
Other, net 124,000 4,000 (10,000)
------------ ------------- --------------
(347,000) (412,000) (262,000)
------------ ------------- --------------
Income from before income
taxes 753,000 482,000 581,000
Income tax expense 297,000 222,000 228,000
------------ ------------- --------------
Net income $ 456,000 $ 260,000 $ 353,000
------------ ------------- --------------
Basic and diluted earnings per share $ .12 $ .07 $ .09
------------ ------------- --------------
Basic weighted average shares outstanding 3,917,687 3,937,078 3,944,359
------------ ------------- --------------
Diluted weighted average shares outstanding 3,917,687 3,937,078 3,944,893
------------ ------------- --------------
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Aerosonic Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
For the Years Ended January 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------
Additional Total
Common Paid-In Retained Treasury Shareholders'
Stock Capital Earnings Stock Equity
------------- -------------- ------------- ------------- ---------------
Balances at February 1, 1998 $1,595,000 $3,684,000 $6,631,000 $ (132,000) $ 11,778,000
Net income - - 353,000 - 353,000
Exercise of 1,000 stock options - 1,000 - 2,000 3,000
Purchase of 10,000 shares of treasury stock - - - (120,000) (120,000)
Employee stock bonus of 36,800 shares - 493,000 - 71,000 564,000
Reissuance of 8,934 shares treasury stock - 157,000 - 15,000 172,000
------------- -------------- ------------- ------------- ---------------
Balances at January 31, 1999 1,595,000 4,335,000 6,984,000 (164,000) 12,750,000
Net income - - 260,000 - 260,000
Purchase of 43,500 shares of treasury stock - - - (542,000) (542,000)
Reissuance of 13,696 shares of treasury stock - 101,000 - 69,000 170,000
Employee stock bonus of 500 shares - 4,000 - 2,000 6,000
------------- -------------- ------------- ------------- ---------------
Balances at January 31, 2000 1,595,000 4,440,000 7,244,000 (635,000) 12,644,000
Net income 456,000 456,000
Purchase of 15,500 shares of treasury stock (157,000) (157,000)
Reissuance of 17,046 shares of treasury stock 15,000 162,000 177,000
Employee stock bonus of 1,000 shares 2,000 9,000 11,000
------------- -------------- ------------- ------------- ---------------
Balances at January 31, 2001 $1,595,000 $4,457,000 $7,700,000 $ (621,000) $ 13,131,000
------------- -------------- ------------- ------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Aerosonic Corporation and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended January 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------
2001 2000 1999
Cash flows from operating activities:
Net income $ 456,000 $ 260,000 $ 353,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Allowance for doubtful accounts 27,000 (23,000) 5,000
Stock compensation 188,000 176,000 736,000
Depreciation 543,000 530,000 583,000
Amortization 175,000 30,000 17,000
Gain on sale of property (131,000) - -
Deferred income taxes (44,000) (109,000) (111,000)
Changes in current assets and liabilities:
Receivables 267,000 (932,000) (1,051,000)
Income tax receivable - 13,000 (13,000)
Inventories 657,000 (1,718,000) (831,000)
Cost and estimated earnings in excess of billings on
uncompleted contract - - 48,000
Prepaid expenses 6,000 33,000 (125,000)
Other assets (135,000) (489,000) (367,000)
Accounts payable (566,000) 981,000 578,000
Income taxes payable 104,000 180,000 (836,000)
Accrued expenses and other liabilities 164,000 344,000 (318,000)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities 1,711,000 (724,000) (1,332,000)
---------------- ---------------- ----------------
Cash flows from investing activities:
Capital expenditures (238,000) (558,000) (648,000)
---------------- ---------------- ----------------
Net cash used in investing activities (238,000) (558,000) (648,000)
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable - 1,974,000 -
Payments/proceeds from revolving credit facilities (447,000) 174,000 2,140,000
Purchase of treasury stock (157,000) (542,000) (120,000)
Principal payments on long-term debt and notes payable (756,000) (1,078,000) (175,000)
Principal payments on related party notes payable - - (225,000)
Proceeds from exercise of stock options - - 3,000
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities (1,360,000) 528,000 1,623,000
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 113,000 (754,000) (357,000)
Cash and cash equivalents at beginning of year 964,000 1,718,000 2,075,000
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 1,077,000 $ 964,000 $ 1,718,000
---------------- ---------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 472,000 $ 485,000 $ 259,000
Income taxes $ 165,000 $ 139,000 $ 1,057,000
Noncash investing and financing activities:
Settlement of notes payable from sale of property $ 150,000 $ - $ -
Conversion of line of credit to note payable $ 1,800,000 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The primary business of Aerosonic Corporation and subsidiary (the Company)
is to manufacture and sell aircraft instrumentation to government and
commercial users from its plants located in Florida, Virginia and Kansas.
The Company's customers are located worldwide.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Aerosonic Corporation (which operates as the Clearwater, Florida Instrument,
Precision Component Division and Wichita, Kansas Instrument division) and
its wholly owned subsidiary, Avionics Specialties, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts shown in prior years have been reclassified to conform with
the 2001 presentation. These reclassifications did not have any effect on
total assets, total liabilities, stockholder's equity or net income.
Cash and Cash Equivalents
The Company considers all short-term investments purchased with an original
maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and receivables. As of January 31, 2001 and 2000, substantially
all of the Company's cash balances, including amounts representing
outstanding checks, were deposited with high credit quality financial
institutions. During the normal course of business, the Company extends
credit to customers conducting business in the aviation industry worldwide.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Provisions are made for any inventory
deemed excess or obsolete.
F-7
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation on plant and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any related gain
or loss is reflected in earnings. Expenditures for repairs and improvements
that significantly add to the productive capacity or extend the useful life
of an asset are capitalized. Repair and maintenance charges are expenses as
incurred. Property under a capital lease is amortized over the lease terms.
Valuation Assessment of Long-Lived Assets
Management periodically evaluates long-lived assets for potential impairment
and will reserve for impairment whenever events or changes in circumstances
indicate the carrying amount of the assets may not be fully recoverable. As
of January 31, 2001, management does not believe that any assets are
impaired.
Research and Development
Research and development costs are expensed as incurred. Research and
development expense approximated $780,000, $801,000 and $630,000, during the
years ended January 31, 2001, 2000 and 1999, respectively.
Capitalized Software Costs
Included in capitalized software costs and other assets are capitalized
software, which are recorded at cost less accumulated amortization.
Production costs for computer software that is to be utilized as an integral
part of a product is capitalized when both (a) technological feasibility is
established for the software and (b) all research and development activities
for the other components of the product have been completed. Amortization is
charged to expense on a straight line method over three years from the date
the product becomes available for general release to customers. Software
costs of $131,000 and $386,000 were capitalized during the years ended
January 31, 2001 and 2000, respectively. Total capitalized costs were
$881,000 and $750,000 at January 31, 2001 and 2000, respectively.
Accumulated amortization amounted to $222,000 and $47,000 at January 31,
2001 and 2000, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. A
valuation allowance is provided against the future benefit of deferred tax
assets if it is determined that it is more likely than not that the future
tax benefits associated with the deferred tax asset will not be realized.
F-8
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
Revenue Recognition
The Company generally recognizes revenue from sales of its products when the
following have occurred: evidence of a sale arrangement exists; delivery has
occurred or services have been rendered; our price to the buyer is fixed or
determinable; and collectibility is reasonable assured. In certain
circumstances, the U.S. Government accepts title to products while still on
the Company's premises. The Company records these items as sales when the
government accepts title in writing and assumes all other risks and rewards
of ownership.
The Company follows the percentage-of-completion method of accounting for
income on one long-term engineering service contract. Under this method,
contract revenue is computed as that percentage of estimated total revenue
that costs incurred to date bear to total estimated costs, after giving
effect to the most recent estimates of costs to complete. Revisions in costs
and revenue estimates are reflected in the period in which the revisions are
determined. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined without regard to the
percentage-of-completion.
Environmental Expenditures
The Company accrues for environmental expenses resulting from existing
conditions that relate to past operations when the costs are probable and
reasonably estimable.
Computation of Earnings Per Share
Basic earnings per share is computed using the weighted average of common
stock outstanding. Diluted earnings per share is computed using the treasury
stock method which is summarized as follows:
2001 2000 1999
------ ------ ------
Weighted average common stock outstanding 3,917,687 3,937,078 3,944,359
Weighted average common stock equivalents -- -- 534
--------- --------- ---------
Shares used in diluted earnings per share calculation 3,917,687 3,937,078 3,944,893
========= ========= =========
Segment Reporting
As of January 31, 2001 management does not believe the Company has any
reportable segments as defined in SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information."
New Accounting Pronouncements
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Hedge Activities", which amended Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 138 must be
adopted concurrently with the adoption of Statement No. 133. The Company
expects to adopt these new statements effective February 1, 2001. These
F-9
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
statements require an entity to recognize derivatives as either assets or
liabilities in the financial statements, to measure those instruments at
fair value and to reflect the changes in fair value of those instruments as
either components of comprehensive income or in net income, depending on the
types of those instruments. As of January 31, 2001, the Company does not
have any derivative instruments as defined in the statements or engage in
hedging activities.
2. Receivables
Receivables at January 31, 2001 and 2000 consisted of the following:
2001 2000
------ ------
Trade, less allowance for doubtful accounts of $77,000
and $50,000 in 2001 and 2000, respectively $5,000,000 $5,317,000
Officers and employees 55,000 32,000
---------- ----------
$5,055,000 $5,349,000
========== ==========
3. Inventories
Inventories at January 31, 2001 and 2000 consisted of the following:
2001 2000
------ ------
Raw materials and work in process $9,591,000 $10,056,000
Finished goods 358,000 550,000
---------- -----------
$9,949,000 $10,606,000
========== ===========
4. Property, Plant and Equipment
Property, plant and equipment at January 31, 2001 and 2000 consisted of the
following:
Estimated
Useful Life
(Years) 2001 2000
------------ ------ ------
Land and improvements 15-20 $ 467,000 $ 474,000
Buildings and improvements 25-30 3,455,000 3,396,000
Machinery and equipment 3-10 4,885,000 4,754,000
Patterns, dies, and tools 3-5 240,000 222,000
Furniture and fixtures 5-10 603,000 566,000
---------- ----------
9,650,000 9,412,000
Less accumulated depreciation and amortization 5,493,000 4,950,000
---------- ----------
$4,157,000 $4,462,000
========== ==========
F-10
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
5. Income Taxes
Income tax expense for the years ended January 31, 2001, 2000 and 1999
consisted of:
2001 2000 1999
------ ------ ------
Current:
Federal $295,000 $287,000 $294,000
State 46,000 44,000 45,000
-------- -------- --------
341,000 331,000 339,000
-------- -------- --------
Deferred:
Federal (39,000) (95,000) (97,000)
State (5,000) (14,000) (14,000)
-------- -------- --------
(44,000) (109,000) (111,000)
-------- -------- --------
$297,000 $222,000 $228,000
======== ======== ========
Federal tax rate 34.00% 34.00% 34.00%
Increase in taxes resulting from:
State income taxes, net of federal tax benefit 3.30% 3.30% 3.30%
Other-primarily non-deductible expenses 2.10% 8.70% 2.03%
-------- -------- --------
Effective tax rate 39.40% 46.00% 39.33%
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at January
31, 2001 and 2000 are as follows:
2001 2000
------ ------
Current deferred tax assets:
Accounts receivable $ (3,000) $ (45,000)
Inventories, principally due to additional
costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 227,000 336,000
Compensated absences, principally due to
accrual for financial reporting services 62,000 97,000
Other 9,000 --
--------- ---------
Total current deferred tax assets 295,000 388,000
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation and capitalized interest 113,000 155,000
--------- ---------
Total non-current deferred tax liabilities 113,000 155,000
--------- ---------
Net deferred tax asset $ 182,000 $ 233,000
========= =========
F-11
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
6. Long-Term Debt and Notes Payable
Long-term debt and notes payable at January 31, 2001 and 2000 consisted of
the following:
2001 2000
------ ------
Note payable $1,234,000 $1,268,000
Industrial development revenue bonds 890,000 965,000
Mortgage note payable 611,000 831,000
Note payable, equipment 1,005,000 1,229,000
Note payable, II 1,614,000 --
---------- ----------
5,354,000 4,293,000
Less current maturity 1,019,000 542,000
---------- ----------
Long-term debt and notes payable, less current maturity $4,335,000 $3,751,000
========== ==========
The amount of long-term debt and notes payable maturing in each of the
fiscal years 2002, 2003, 2004, 2005 and thereafter approximates $1,019,000,
$1,040,000, $1,341,000, $1,041,000 and $913,000, respectively.
Note Payable
The note payable is payable in monthly installments beginning in October
1998 through September 30, 2003 including interest at the 90-day average of
the 90-day treasury bill plus 2.75% (8.04% and 7.74% at January 31, 2001 and
2000 respectively). The note payable is collateralized by accounts
receivable and inventory.
Industrial Development Revenue Bonds
The industrial development revenue bonds are payable in quarterly principal
installments of approximately $19,000 and monthly interest installments
through December 2012 and bear interest at 90% of prime. The bonds are
collateralized by property, plant and equipment located in Clearwater,
Florida. The pledged collateral has a carrying value of approximately
$1,270,000 at January 31, 2001. The mortgage and underlying bonds may be
redeemed by the holder, in whole, at the principal amount plus accrued
interest on the 10th, 15th, or 20th anniversary date of the mortgage and
underlying bonds. If the tax exempt status of the bond is revoked or
impaired, certain portions could become immediately payable, or the interest
rate will be increased. In addition, the outstanding balance of $890,000 is
subject to accelerated maturity upon a material, adverse change in financial
condition or operation which in the opinion of the Trustee materially affect
the borrower's ability to repay the obligation as defined in the loan
agreement.
F-12
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
Mortgage Note Payable
The mortgage note is payable in monthly installments through May 2009,
including interest at 7.5% through May 1999 and prime plus 1 percent
thereafter. The note is collateralized by substantially all property, plant
and equipment at the Avionics Specialties, Inc. location. The collateralized
property has a carrying value of approximately $1,315,000 at January 31,
2001.
Note Payable, Equipment
During September 1999, the Company converted its equipment revolving credit
facility into a note payable. The note payable is payable in monthly
installments beginning in September 1999 through September 2004 including
interest at 8.05%. The note payable is collateralized by all machinery and
equipment at the Clearwater location.
Note Payable, II
During July 2000, the Company converted $1,800,000 of its Revolving Credit
Facility (Note 7) into a long term note payable. This note bears interest at
the rate of 8.71% per annum until October 31, 2000; on October 31, 2000 the
interest rate was adjusted to 275 basis points over the "trailing 90 day
average of the 90 day Treasury bill rate" on the last day of each of the
Company's fiscal calendar quarters (8.61% at January 31, 2001). This note is
payable in thirty-seven monthly principal installments of $37,103, plus
accrued interest, with the outstanding principal balance due on or before
September 30, 2003. This note is collateralized by receivables, inventory
and general intangibles.
The Company's long-term debt agreements include certain restrictive
covenants, including restrictions on dividends (dividends during any single
calendar year cannot exceed 25 percent of net income for that year),
limitations on business acquisitions and sales of assets, and the
requirement to maintain: a debt to tangible net worth ratio of 1.0:1, a
current ratio of 2.0:1 and a long-term debt service coverage of 1.25:1. The
Company is in compliance with all of the above debt covenants at January 31,
2001.
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments.
Cash, accounts receivable, short-term borrowings, accounts payable and
accrued liabilities are reflected in the financial statements at fair value
because of the short-term maturity of these instruments. The carrying amount
of long-term debt and notes payable at January 31, 2001 and 2000
approximates fair value due to their adjustable rates which change
frequently. The prime rate of interest at January 31, 2001 and 2000 was
9.05% and 8.50%, respectively.
7. Revolving Credit Facilities
During July 2000, the Company acquired a revolving credit facility in the
amount of $1,000,000 to replace the prior facility that matured in June
2000. The interest is payable monthly and bears interest at the rate of
8.71% per annum until October 31, 2000; on October 31, 2000 the interest
rate was adjusted to 275 basis points over the "trailing 90 day average of
the 90 day Treasury
F-13
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
bill rate" on the last day of each of the Company's fiscal calendar quarters
(8.61% at January 31, 2001). At January 31, 2001, there were no borrowings
outstanding under this revolving credit facility. This note is due and
payable on demand, and if no demand is made, is due and payable May 30,
2001. The revolving credit facility agreement is collateralized by
receivables, inventory and general intangibles, and is subject to the same
covenants that are included in the Company's long-term debt agreements.
During 1999 the Company acquired a revolving credit facility in the amount
of $2,450,000. Interest is payable monthly at the 90-day average of the
90-day treasury bill plus 2.75% (7.74% at January 31, 2000) and principal is
payable on demand. The line of credit agreement is collateralized by
receivables, inventory and general intangibles, and is subject to the same
covenants included in the Company's long-term debt agreements. Approximately
$135,000 of additional credit was available under this facility at January
31, 2000. The revolving credit facility matures in June 2000. The average
interest rate under this facility for the year ended January 31, 2000 was
7.39%.
8. Major Customer Information
Sales to U. S. Government agencies, when combined, represented 10 percent or
more of net sales and amounted to approximately $7,180,000, $5,869,000 and
$4,822,000 for the years ended January 31, 2001, 2000 and 1999,
respectively. Sales to an additional customer represented 10 percent or more
of net sales and amounted to $2,996,000 and $2,271,000 for the years ended
2001 and 1999, respectively. Foreign sales for the years ended January 31,
2001, 2000 and 1999 represented 10 percent or more of net sales and amounted
to approximately $5,671,000, $7,116,000 and $3,917,000, respectively. All
foreign sales contracts are payable in U.S. dollars. No other customer sales
totaled greater than 10 percent of net sales for years ended January 31,
2001, 2000 or 1999.
Receivables at January 31, 2001 included approximately $840,000, $382,000
and $1,551,000 due from the U.S. Government, an additional customer and
foreign customers, respectively. Receivables at January 31, 2000 included
approximately $1,035,000, $545,000 and $1,250,000 due from the U.S.
Government, an additional customer and foreign customers, respectively. No
other customers represented greater than 10 percent of receivables at
January 31, 2001 or 2000.
9. Benefit Plans
Effective February 1, 1993, the Company adopted a tax-deferred savings plan
which covers substantially all employees of the Company. Under the plan,
participants may elect to contribute up to 15% of pre-tax earnings. The
Company will fund a 100% matching contribution, up to 3% of the
participant's yearly compensation. Such matching contributions will be made
in cash or common stock of the Company. Additional contributions may be made
at the Company's discretion. For the years ended January 31, 2001, 2000 and
1999, the Company's contribution
F-14
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
was approximately $188,000, $187,000 and $172,000, respectively. During the
years ended January 31, 2001, 2000 and 1999, the Company issued 17,046,
13,696 and 8,934 shares of treasury stock, respectively, in partial payment
of the Plan. These stock contributions were accounted for as non-cash
transactions.
During 1999, the Company paid stock bonuses totaling 36,800 shares to
employees. The fair value of the stock at the date of the bonus was granted
was charged to expense in the amount of approximately $565,000.
In March 1993, the Board of Directors adopted, subject to shareholder
approval, an Incentive Stock Option Plan, which provides for the granting of
300,000 shares of the Company's authorized but unissued common stock to key
employees. Under the plan, options granted may be either incentive stock
options as defined by the Internal Revenue code, or non-qualified stock
options. Options may be granted at prices not less than fair market value at
the date of option grant. The option price for incentive stock options
granted to an optionee who possesses more than 10% total combined voting
power of value of the Company may not be less than 110% of the fair market
value at the date of option grant. The stock options will be exercisable
over a period determined by the Board of Directors, but no longer than five
years after the date they are granted.
Exercise
Shares Price
------- ----------
Balance, February 1, 1998 4,000
Exercised (1,000) $3.00
Canceled (3,000) $3.00
-------
Balance, January 31, 1999 --
=======
At January 1, 1999, there are no remaining options available for grant or
exercise under the plan. SFAS No. 123, "Accounting for Stock-Based
Compensation," establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Company has adopted the
disclosure only provisions of SFAS No. 123 but applies Accounting Principles
Board (APB) Option No. 25 and related interpretations in accounting for its
plan. SFAS No. 123 and APB No. 25 have no material financial accounting or
reporting impact on the Company for the years ended January 31, 2000, 1999
and 1998.
10. Related Party Transactions
During the year ended January 31, 1997, the Company obtained long-term
financing from a shareholder totaling $750,000 at origination. Principal
repayments totaling $225,000, $275,000, and $250,000 were made during 1999,
1998, and 1997, respectively. At January 31, 1999, all principal and
interest were paid in full.
F-15
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
11. Commitments and Contingencies
The Company was sued in September 1996 by David S. Goldman, former
President and Chief Executive Officer of Aerosonic Corporation, for an
alleged breach of a consulting agreement between Mr. Goldman and the
Company. The suit seeks damages in excess of $15,000. During fiscal year
1997, the Company sued Mr. Goldman and Mil-Spec Finishers, Inc., a former
subcontractor to Aerosonic Corporation owned and controlled by Mr. Goldman,
seeking damages in excess of $15,000, for alleged fraud and
misappropriation of funds, appropriation of corporate opportunity, breach
of fiduciary duty and conversion. An amended complaint, adding claims for
civil theft against both defendants, was filed by the Company in October of
1997. The majority of discovery is completed and a trial date is set for
June of 2001. Management believes that the ultimate resolution of this
matter will not have a material effect on the financial position of the
Company.
In accordance with a consent agreement signed by the Company in 1993, the
Company's environmental consultant has developed an interim remedial action
plan to contain and remediate certain contamination on and underlying the
Company's property. During 1997, the Company recorded a provision of
approximately $175,000 related to the estimated costs to be incurred under
this plan. As of January 31, 2000, the Company had utilized all amounts
originally recorded in other accrued expenses, and phase-one remediation
had been completed.
During the third quarter of 2001, management assessed the post-remediation
monitoring expense related to the environmental clean up of 1993 would cost
approximately $125,000. This amount was accrued and expensed during the
third quarter of 2001. Approximately $73,000 remains accrued in other
accrued expenses at January 31, 2001.
From time to time the Company can be involved in claims and legal actions
arising in the ordinary course of business. In the opinion of management,
at this time there are no claims or legal actions that will have a material
adverse effect on the Company's financial position, results of operations,
or liquidity.
At January 31, 2001, the Company was committed to future purchases
primarily for materials of approximately $3,336,844.
F-16
Aerosonic Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------
12. Quarterly Data (unaudited):
Quarter Ended
---------------------------------------------------------------
April 30 July 31 October 31 January 31
--------- --------- ------------ ------------
2001
Net sales $6,484,000 $5,632,000 $5,706,000 $6,850,000
Gross profit (loss) 2,090,000 1,954,000 2,080,000 2,894,000
Income (loss) from operations 248,000 334,000 (178,000) 696,000
Net income (loss) 91,000 120,000 (193,000) 438,000
Earnings (loss) per share (EPS) - basic 0.02 0.03 (0.05) 0
Earnings (loss) per share (EPS) - diluted 0.02 0.03 (0.05) 0
2000
Net sales $4,894,000 $5,861,000 $6,237,000 $6,279,000
Gross profit 1,965,000 2,088,000 2,250,000 2,048,000
Income from operations 137,000 318,000 230,000 209,000
Net income (loss) 49,000 144,000 68,000 (1,000)
Earnings per share (EPS) - basic 0.01 0.04 0.02 0
Earnings per share (EPS) - diluted 0.01 0.04 0.02 0
F-17