SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14A
(Rule 14a-101)
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AMENDMENT NO. 1
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement pursuant to Section 14(a) of
The Securities Exchange Act of 1934
|X| Filed by the Registrant
|_| Filed by a party other than the Registrant
Check the appropriate box:
|X| Preliminary proxy statement
| | Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
|_| Definitive proxy statement
|_| Definitive additional materials
|_| Soliciting material pursuant to Rule 14a-11C or Rule 14a-12
ELECSYS CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (check the appropriate box):
|x | No fee required.
|| Fee computed on table below per Exchange Act Rules 14a-6(i) (4) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction:
$7.7 Million
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
$1,540
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|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule, or registration statement number.
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(3) Filing party:
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(4) Date filed:
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ELECSYS CORPORATION
11300 WEST 89TH STREET
OVERLAND PARK, KANSAS 66214
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST ___, 2001
Notice is hereby given that a Special Meeting of the stockholders of
Elecsys Corporation ("Elecsys"), which uses the ticker symbol "ASY" on the
American Stock Exchange, will be held at Elecsys' headquarters located at 11300
West 89th Street, Overland Park, Kansas 66214 on August _____, 2001, commencing
at 9:00 a.m. Kansas City time, to consider and act upon the following matter:
1. The approval of the sale of substantially all of the assets of a
wholly-owned subsidiary, Airport Systems International, Inc.
Holders of record of the outstanding Common Stock of Elecsys at the close
of business on June 15, 2001, are entitled to vote at the meeting or any
adjournment thereof.
By order of the Board of Directors
THOMAS C. CARGIN
Secretary
Overland Park, Kansas
August __, 2001
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING PLEASE DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING ENVELOPE TO WHICH NO POSTAGE
NEED BE AFFIXED IF MAILED IN THE UNITED STATES. YOUR SHARES CANNOT BE VOTED
UNLESS YOU SIGN AND RETURN A PROXY OR VOTE BY BALLOT AT THE MEETING.
Table of Contents
Page No.
Information Concerning Solicitation and Voting...............................1
Summary Term Sheet...........................................................2
Description of Transaction and Various Legal Consequences....................4
General...................................................................4
Reasons for the Sale......................................................5
Unanimous Board Recommendation............................................7
Business Conducted........................................................7
Terms of the Transaction..................................................9
History of the Transaction...............................................12
Voting Requirements......................................................15
Description of any Interest of Directors and Officers that Differs
from Stockholders' Interest..............................................15
Regulatory Approval......................................................15
Dissenters' Rights.......................................................16
Gagnon Control Shares....................................................16
Accounting Treatment.....................................................16
Federal Income Tax Consequences..........................................16
Reports, Opinions and Approvals..........................................16
Description of the Company..................................................17
General..................................................................17
Business Segments........................................................18
Competition..............................................................21
Sources and Availability of Raw Materials and Principal Suppliers........22
Dependence on One or a Few Major Customers...............................22
Patents, Trademarks, Licenses............................................22
Government Approvals.....................................................23
Effect of Existing or Probable Governmental Regulations on the
Business.................................................................23
Research And Development.................................................24
Total Number of Employees................................................24
Description of Property..................................................24
Legal Proceedings........................................................25
Management's Discussion and Analysis of Financial Condition and Results
of Operations...............................................................26
Sale of ASII.............................................................26
Results of Company Operations............................................27
Backlog..................................................................29
Inflation................................................................29
Liquidity and Capital Resources..........................................29
New Accounting Pronouncements............................................30
Forward Looking Statements...............................................31
ELECSYS CORPORATION
11300 West 89th Street
Overland Park, KS 66214
PROXY STATEMENT
For a Special Meeting of Stockholders
to be held on August __, 2001
Information Concerning Solicitation and Voting
General
The enclosed proxy is being solicited on behalf of the Board of Directors
of Elecsys Corporation ("Elecsys") for use at the Special Meeting of the
stockholders to be held on August ___, 2001 or at any adjournment thereof, at
9:00 a.m. Kansas City time, at Elecsys' headquarters located at 11300 West 89th
Street, Overland Park, Kansas 66214 (the "Meeting"). The Meeting will be held
for the purpose listed in the accompanying Meeting notice and as discussed in
this Proxy Statement. This Proxy Statement and the enclosed proxy card were
first sent to stockholders on or about August ___, 2001.
Proxies
Shares represented by a properly signed proxy received pursuant to this
solicitation will be voted in accordance with the instructions thereon. If the
proxy is properly signed and returned and no instructions are given on the proxy
with respect to the matter to be acted upon, the shares represented by the proxy
will be voted at the Meeting or any adjournment thereof for the approval of the
sale of substantially all of the assets of a wholly-owned subsidiary, Airport
Systems International, Inc. ("ASII"). The Board of Directors is not aware that
any other business, other than as set forth in this Proxy Statement and except
for matters incident to the conduct of the Meeting, is to be presented for
action at the Meeting and does not itself intend to present any other business.
Any proxy given does not affect the right to vote in person at the Meeting
and may be revoked at any time before it is exercised by notifying Thomas C.
Cargin, Secretary, by mail, telegram or facsimile, or by appearing at the
Meeting in person and casting a ballot.
The affirmative vote of a majority of shares entitled to vote is required
to approve the proposal to sell substantially all of the assets of ASII. For
purposes of determining the outcome of the vote on the proposal to sell
substantially all of the assets of ASII, an instruction to "abstain" from voting
on the proposal will be treated as shares present and entitled to vote, and will
have the same effect as a vote against the proposal. "Broker non-votes", that
occur when brokers are prohibited from exercising discretionary voting authority
for beneficial owners who have not provided voting instructions, are not counted
for the purpose of determining the number of shares present in person or
represented by proxy. Nonetheless, they will have the same effect as a vote
against the proposal to sell substantially all of the assets of ASII.
Solicitation
All expenses of this solicitation will be borne by Elecsys. In addition to
solicitations by mail, employees and directors of Elecsys may solicit proxies in
person or by telephone. Elecsys does not expect to pay any compensation for the
solicitation of proxies.
Voting Rights and Outstanding Shares
Only holders of Common Stock of Elecsys of record as of the close of
business on June 15, 2001, are entitled to vote at the Meeting. At the close of
business on that date, 2,745,831 shares of Common Stock were outstanding.
Holders of Common Stock are entitled to vote one (1) vote per share standing in
their names on the record date. Shares cannot be voted at the Meeting unless the
record owner is present in person or represented by proxy.
Summary Term Sheet
This summary term sheet relates to the proposal to sell substantially all
of the assets of ASII discussed in more detail below. Neither this summary nor
the discussion under the proposal below contain all of the information that is
important to you. You should carefully read the entire Proxy Statement and the
Asset Purchase Agreement to fully understand the transaction. The Asset Purchase
Agreement is attached to this Proxy Statement as Exhibit A. We encourage you to
read the Asset Purchase Agreement, as it is the principal document that governs
the asset sale.
Proposed Transaction
o Stockholder Vote. You are being asked to vote to approve the sale of
substantially all of the assets of a wholly-owned subsidiary, ASII, to ASI
Newco, Inc., a wholly-owned subsidiary of Alenia Marconi Systems Limited.
o The Companies.
Airport Systems International, Inc.
11300 West 89th Street
Overland Park, Kansas 66214
(913) 492-2600
ASII is a wholly-owned Kansas subsidiary of Elecsys Corporation. ASII
designs, manufactures, markets and installs navigational aids and visual aids
equipment used to aid the in-flight navigation and ground movement of aircraft.
ASI Newco, Inc.
c/o Alenia Marconi Systems Limited
Eastwood House
Glebe Road, Chelmsford
Essex CM1 1QW
England, United Kingdom
+44 (0)1245 702720
ASI Newco, Inc. is a Delaware corporation that is a wholly-owned
subsidiary of Alenia Marconi Systems Limited, a company organized under the
laws of England and Wales. Alenia Marconi Systems Limited is a wholly-owned
subsidiary of Alenia Marconi Systems N.V., an equal shares joint venture
company incorporated in The Netherlands. Alenia Marconi Systems N.V. is
owned in equal parts by BAE SYSTEMS Electronics Ltd., a public company
incorporated in England and Wales, and Finmeccanica S.p.A., a publicly listed
company incorporated in Italy. Alenia Marconi Systems N.V. is a leading
manufacturer in the European defense and electronic industries.
o Consideration to ASII. The consideration payable by ASI Newco, Inc. to
ASII for substantially all of the assets of ASII will consist of:
-cash in the amount of $7.7 million, subject to post-closing
adjustments (see "Consideration" and "Adjustment to Purchase Price" on
page 8); and
-the assumption of certain liabilities of ASII (as set forth in the
Asset Purchase Agreement) (see "Consideration" on page 8).
At the closing, ASI Newco, Inc. will:
-pay to ASII by wire transfer to an account designated by ASII,
$7,300,000 of the cash portion of the purchase price;
-deposit the remaining $400,000 of the cash portion of the
purchase price into an escrow account with an escrow agent; and
-assume certain liabilities of ASII, including approximately $1.1
million in debt held by Mutual Service Life Insurance Company.
The cash portion of the purchase price held in the escrow account
shall be held and distributed according to the Asset Purchase Agreement
and an escrow agreement (see "Escrow" on page 8).
Conditions to Completing the Transaction
The completion of the sale of substantially all of the assets of ASII
depends on the satisfaction of a number of conditions listed in the Asset
Purchase Agreement, including the approval of the asset sale by the
stockholders of Elecsys (see "Completion of the Asset Sale" on page 9).
Reasons for the Sale
The Elecsys Board of Directors believes the terms of the Asset Purchase
Agreement are in the best interest of Elecsys and the Elecsys stockholders.
Among other factors, the amount of consideration to be received by ASII from ASI
Newco, Inc. represents a premium over the book value of the assets of ASII
(using April 30 financial information) currently estimated to be approximately
11.7 percent, which will result in a gain of $727,000 for the Company. In
addition, the consideration received by ASII as a result of the asset sale will
allow Elecsys to repay significant loans (some of which are currently in
default) encumbering the assets of its subsidiaries. Furthermore, Elecsys will
continue to manufacture components of navigational
aids for ASI Newco, Inc. through its subsidiary, DCI, Inc. (see "Reasons for the
sale" on pages 5 and 6).
Voting Requirements
The sale of substantially all of the assets of ASII requires the approval
of the holders of a majority of the outstanding shares of the Elecsys' common
stock entitled to vote.
Description of any Interest of Directors and Officers that Differs from
Stockholders' Interest
One of Elecsys' directors, David Schulte, has an interest in the asset
sale that is in addition to his interest as a stockholder of Elecsys. Mr.
Schulte is a Partner and Managing Director of Kansas City Equity Partners
("KCEP"). KCEP, as the holder of a convertible subordinated debenture, will be
paid, with funds received from the asset sale, an amount necessary to bring
Elecsys current as to payments owed to KCEP by Elecsys under the convertible
subordinated debenture. The members of the Elecsys Board of Directors knew about
this additional interest, and considered it, when they approved the Asset
Purchase Agreement (see "Description of any Interest of Directors and Officers
that Differs from Stockholders' Interest" on page 13).
Termination
The Asset Purchase Agreement may be terminated: (i) if the parties
mutually agree at or prior to the closing of the asset sale, (ii) upon written
notice from either ASII or ASI Newco, Inc. if a material breach or default
occurs with respect to the due and timely performance by the other party of any
of the respective covenants and agreements contained in the Asset Purchase
Agreement or any material breach of a representation or warranty under the Asset
Purchase Agreement cannot be cured prior to the closing of the asset sale, (iii)
by either ASII or ASI Newco, Inc. if the closing has not occurred by the close
of business on August 31, 2001, or (iv) by ASI Newco, Inc. if there is a
significant adverse event affecting title to, or the condition of, the real
property owned by ASII.
Unanimous Board Recommendation
The Board of Directors has unanimously approved the sale of substantially
all of the assets of ASII and the Asset Purchase Agreement and recommends that
the stockholders vote "FOR" the proposal to approve the sale of substantially
all of the assets of ASII.
Proposal
Description of Transaction and Various Legal Consequences
A. General.
On November 1, 2000, Elecsys changed its name from "Airport Systems
International, Inc." to "Elecsys Corporation" and simultaneously formed a
wholly-owned subsidiary named Airport Systems International, Inc. ("ASII"). In
conjunction with the formation of ASII, Elecsys
transferred (i) all assets, property and rights used in connection with or
related to Elecsys' design, manufacture, and sale of ground-based radio
navigation and landing systems and airfield lighting and (ii) certain related
liabilities (collectively, the "Navaids Business") to ASII. Since November 1,
2000, the Navaids Business formerly conducted by Elecsys has been conducted by
ASII. The electronics manufacturing services business acquired by the Company in
February 2000 (the "EMS Business") has been, and continues to be, conducted
through a separate subsidiary wholly-owned by the Company. That subsidiary is
DCI, Inc. ("DCI"). Elecsys and its directly and indirectly owned subsidiaries
are referred to collectively as the "Company."
On June 18, 2001, ASII and Elecsys entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with ASI Newco, Inc., a Delaware
corporation and a wholly-owned subsidiary of Alenia Marconi Systems Limited
("Buyer"), to sell substantially all of the assets of ASII, subject to the terms
and conditions set forth in the Asset Purchase Agreement (the "Transaction").
The purchase price, as described in greater detail below, is approximately $7.7
million in cash and the assumption by Buyer of (i) approximately $1.1 million in
mortgage loan debt, and (ii) certain other liabilities of ASII incurred in the
ordinary course of the Navaids Business. The Transaction will close upon the
approval of the Transaction by stockholders of Elecsys and satisfaction of all
other conditions to closing set forth in the Asset Purchase Agreement (the
"Closing"). The Navaids Business has historically been cyclical in nature. In
the past three years, the Navaids Business has been unprofitable. It is possible
that the Navaids Business could rebound in the near future, so that ASII
operations become profitable, perhaps permitting the Navaids Business to be sold
in the future at a higher price. However, there is no guarantee that the Navaids
Business will rebound or that it could then be sold at a higher price.
If the Transaction is approved by the stockholders of Elecsys and all
other conditions to closing set forth in the Asset Purchase Agreement are
satisfied, the Navaids Business and the property and facility located at 11300
West 89th Street, Overland Park, Kansas, will be transferred from ASII to Buyer.
Elecsys will continue to operate the EMS Business through DCI.
DCI currently performs electronics manufacturing services for ASII. After
the Closing, DCI will continue to conduct such services for Buyer pursuant to a
Master Manufacturing and Supply Agreement (the "Manufacturing Agreement") at its
facility located at 15301 West 109th Street, Lenexa, Kansas. Pursuant to the
Manufacturing Agreement, it is anticipated that DCI will manufacture, assemble,
store, package and deliver circuit boards, assemblies and other parts in
accordance with Buyer's specifications and requirements. The pricing for such
work is acceptable to management of the Company. The Manufacturing Agreement is
expected to be for a term of one year after the Closing and it will
automatically renew from year to year thereafter until either DCI or Buyer gives
written notice to the other, at least ninety days prior to the end of any such
term, that the Manufacturing Agreement will not be renewed. Buyer will be free
to obtain manufacturing and assembly services for any of its components from
sources other than DCI.
B. Reasons for the Sale.
The Board of Directors of Elecsys has carefully considered the terms and
conditions of the Transaction set forth in the Asset Purchase Agreement and the
price offered for substantially all of the assets of ASII and concluded that the
Transaction is in the best interest of Elecsys and the Elecsys stockholders. In
considering the terms and conditions of the Asset Purchase Agreement, the Board
of Directors considered the material factors identified below:
(1)...The sale of substantially all of the assets of ASII allows the
Company to focus its efforts on the higher growth potential of the EMS Business,
acquired by the Company last year. The market for the electronics manufacturing
businesses is widely believed to be approximately a $50 billion market annually
in North America. Although the current economic environment makes difficult any
predictions about the growth of this market, management of the Company currently
expects the overall market to grow in the range of 10 to 20 percent annually.
The world-wide market for Navaids is estimated by management of the Company to
be approximately $120 to $150 million annually. That market is cyclical and not
expected by management of the Company to grow significantly. The EMS Business is
generally viewed as having a higher growth potential as a result of the larger
domestic and international markets. The Transaction, as a result, is consistent
with the strategic direction for the Company that was first implemented in
fiscal year 2000.
(2)...The amount of consideration offered to ASII in the Transaction
represents a premium over the book value of the assets of ASII (using April 30
financial information) currently estimated to be approximately 11.7 percent,
which will result in a gain of $727,000 for the Company.
(3)...The varying levels of profitability of the Navaids Business creates
a level of risk viewed by the Board of Directors of the Company as undesirable.
Although ASII has prospects for future business, the uncertainty
of the level of profitability for such business does not guarantee financial
stability for ASII and the Company. ASII was profitable three years ago and
management of the Company expects ASII to be profitable in fiscal year 2002.
However, projected market opportunities have in the past been postponed, and
such a postponement at the current time would risk a liquidity crisis for the
Company.
(4)...The opportunity to the Company presented by the Transaction to repay
significant loans (some of which are currently in default) encumbering the
assets of the Company and strengthen the balance sheet of the Company was viewed
as important. The Company had no assurance of the continued cooperation of its
primary lender. Accordingly, the Board of Directors anticipates the Transaction
will reduce the level of risk associated with the current leverage of the
Company.
(5)...The absence of any term or condition in the Asset Purchase Agreement
that, in the view of the Board of Directors of the Company, is unduly onerous or
could materially impede or impair the consummation of the Transaction. The Board
was able to negotiate a set of representations and warranties about ASII that it
felt reasonable, and that permitted reference to generally accepted accounting
principles, all of which were viewed by the Board of Directors as limiting
liability of the Company to the Buyer. In addition, it was important to the
Board that only a very modest portion of the purchase price be held in escrow
and that the amount in escrow be held for a very short period of time. The
resolution of such issues, and others relating to such matters as non-compete
provisions and a cap on indemnification liability, caused the Board to conclude
that the Transaction would provide a reasonable price to the Company, limit the
liability of the Company to the Buyer, and permit the Company to promptly
address its liquidity issues.
(6)...The potential of the Company to continue, through the Manufacturing
Agreement to be entered into by DCI and the Buyer, to manufacture components of
navigational aids for the Buyer. Although the Manufacturing Agreement is
terminable, management of the Company expects that DCI will have the benefit of
the agreement for a sufficient period of time to cause
this to be a factor that will favorably enhance the revenues at DCI. The Company
does not anticipate any other continuing relationship with the Buyer.
(7)...The Buyer has a worldwide marketing organization currently in place
and sufficient resources to maintain a worldwide marketing network for the
Navaids Business product line, including the marketing of new navigational aids,
providing for enhanced sales opportunities. Because of the Manufacturing
Agreement to be entered into at the Closing, management of the Company expects
that the Buyer's anticipated increase in the sale of navaids over that level
experienced historically by ASII will directly benefit the Company through the
revenue generated for DCI pursuant to the Manufacturing Agreement.
In view of the variety of factors considered in relation to its evaluation
of the Asset Purchase Agreement and the Transaction, the Board of Directors did
not find it practicable to, and did not, qualify or assign relative weights to
the specific factors considered in reaching its determination.
The Board of Directors considered two alternatives to a sale of the
Navaids Business, such as the Transaction. The first, and most prominent of
those alternatives, was for ASII to enter into a distribution and marketing
agreement with one of the few corporations possessing an international marketing
capability and that would be willing to sell the ASII product line as an adjunct
to their current product line. This alternative was considered less desirable
than a sale such as the Transaction, because it would have required ASII to rely
on a different organization to achieve success in selling ASII products and
there was no assurance that any prospective distribution partner would be
successful in that effort. The Company also considered briefly the prospect of
discontinuing its marketing operations and only selling its product line in
response to customer inquiries for spares and new equipment. This option was
less attractive to the Board of Directors because it did not address liquidity
issues confronting the Company and was not as likely to generate the same
economic benefit.
The Board of Directors did not retain a financial advisor to opine as to
the fairness of the Transaction.
C. Unanimous Board Recommendation.
The Board of Directors has unanimously approved the sale of substantially
all of the assets of ASII and recommends that the stockholders vote to approve
the Transaction.
D. Business Conducted.
Elecsys Corporation
Elecsys Corporation, through its subsidiaries, is a designer and
manufacturer of electronic components, sub-assemblies and systems and a marketer
of electronic contract assembly services. The Company operates two business
segments: (i) the Navaids Business, and (ii) the EMS Business. The Navaids
Business is operated through ASII while the EMS Business is operated through
DCI, also a wholly-owned subsidiary of the Company. ASII designs, manufactures
and installs ground-based radio navigation and landing systems and airfield
lighting. Its customers consist of civil aviation authorities in the United
States and throughout the world. DCI manufactures custom liquid crystal display
devices as well as panel meter and heat-seal equipment. In addition, DCI
provides contract manufacturing services. These products
and services are used in aerospace, medical, industrial and consumer
applications. EMS sales are made primarily to customers within the United
States.
Airport Systems International, Inc.
ASII designs, manufactures, markets and installs navigational aids and
visual aids equipment used to aid the in-flight navigation and ground movement
of aircraft. The radio navigation products of ASII include instrument landing
systems, very high frequency omni-range units and distance measuring equipment.
The visual aids include runway and taxiway lighting, approach lighting systems,
control equipment and aircraft guidance signage. ASII also provides a wide range
of related services including site surveys and selection, turnkey installation,
maintenance and training. Navigational aids 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.
ASII 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 in systems procured by these agencies. ASII sales are largely
dependent upon government construction and procurement contracts. The majority
of ASII revenues in any single quarter is typically derived from relatively few
customers and quarterly revenue will 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 ASII.
ASII 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 products is outside the United States.
ASII sells either directly to international customers through a network of
representatives or distributors, or through prime contractors. ASII has over 20
independent sales representatives covering over 20 countries. The United States
non-federal market is comprised primarily of state and local governmental
entities that have responsibility for airport development, improvement and
management. ASII either contracts directly with the governmental entity or acts
as a subcontractor. The United States government market includes all
governmental agencies needing the installation of navigational aids in the
United States. The primary customers for ASII in this market are the FAA and the
U.S. Air Force.
Generally, the time from when an order is accepted by ASII until the first
equipment is shipped is approximately one to three months. Final acceptance of
the installed equipment normally occurs two to four months after the equipment
is shipped. Installation time can vary due to such factors as weather, site
conditions and the progress of other portions of the construction project into
which ASII products are incorporated. ASII generally provides a limited product
warranty with its equipment.
ASII competes against several large multi-national companies that provide
a broad spectrum of products and serve a wide customer base. Most contracts in
the navigational aids market 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
products manufactured and ease of customer usability and maintenance, (iii)
delivery time, (iv) customer training and support, and (v) price.
For the fiscal year ended April 30, 2000, the Navaids Business had sales
in the amount of $13,483,000 and reported an operating loss of $1,163,000. For
the fiscal year ended April 30, 2001, the Navaids Business had sales in the
amount of $15,078,000 and reported operating income of $660,000. The Navaids
Business is discussed in more detail in "Description of the Business" later in
this Proxy Statement.
Alenia Marconi Systems
Buyer is a wholly-owned Delaware subsidiary of Alenia Marconi Systems
Limited ("AMS"). AMS is a wholly-owned subsidiary of Alenia Marconi Systems N.V.
("AMS NV"), an equal shares joint venture company incorporated in The
Netherlands. AMS NV is a significant manufacturer in the European defense and
electronics industries. AMS NV is owned in equal part by BAE SYSTEMS Electronics
Ltd. ("BAE SYSTEMS Electronics"), a public company incorporated in England and
Wales, and Finmeccanica S.p.A., a publicly listed company incorporated in Italy
("Finmeccanica"). BAE SYSTEMS Electronics is wholly-owned by BAE SYSTEMS plc
("BAE SYSTEMS"), a public limited company incorporated in England and Wales. BAE
SYSTEMS is a world class electronic systems company with prime contractor and
systems integration skills in the land, sea, air and civil market sectors. BAE
SYSTEMS is the UK's largest exporter, Europe's biggest aerospace and defense
company and third in the world in the field of aerospace and defense.
Finmeccanica operates in over a hundred countries worldwide, and is Italy's
second largest industrial group. Finmeccanica is a major producer of advanced
technology systems in defense, aerospace, automation, transportation and energy.
E. Terms of the Transaction.
The Acquiror. Buyer is a wholly-owned Delaware subsidiary of AMS. AMS is a
wholly-owned subsidiary of AMS NV, an equal shares joint venture company
incorporated in The Netherlands. AMS NV is owned in equal part by BAE SYSTEMS
Electronics, a public company incorporated in England and Wales, and
Finmeccanica S.p.A., a publicly listed company incorporated in Italy. AMS, as
the parent of Buyer, signed a guaranty concurrently with the execution of the
Asset Purchase Agreement to guarantee the performance of all of the obligations
of Buyer under the Asset Purchase Agreement.
Consideration. The consideration payable by Buyer to ASII at the Closing
of the Transaction for the purchase of substantially all of the assets of ASII
will be cash, expected to be in the amount of $7.7 million (the "Purchase
Price"), of which $400,000 will be held in escrow and distributed in accordance
with the Asset Purchase Agreement and a related escrow agreement (the "Escrow
Agreement") (see "Escrow"), and the assumption of debt held by Mutual Service
Life Insurance Company (in the amount of approximately $1.1 million) and
liabilities incurred by ASII in the ordinary course of the Navaids Business. The
Purchase Price will be subject to possible post-Closing adjustments, as set
forth in the Asset Purchase Agreement and described in further detail below (see
"Adjustment to Purchase Price").
Escrow. At the Closing, Buyer will place $400,000 of the Purchase Price
(the "Escrowed Amount") in an escrow account to be distributed by the escrow
agent in accordance with the Escrow Agreement and the Purchase Price adjustment
procedures set forth in the Asset Purchase Agreement and summarized in the
"Final Closing Net Asset Value" and "Adjustment to the Purchase Price" sections
below.
Final Closing Net Asset Value. Within 15 days following the Closing, ASII
will deliver to Buyer a statement reflecting the book value of the assets
purchased, and the liabilities assumed, by Buyer (the "Closing Net Asset
Statement"). ASII and Buyer will agree to the calculation of the values set
forth on the Closing Net Asset Statement within 90 days of the Closing, or, if a
dispute arises, an independent accounting firm will resolve such disputes
pertaining to the calculation of the values of the Closing Net Asset Statement.
The calculation of the final value, either agreed to by the parties or
determined by an independent accounting firm, shall be referred to as the "Final
Closing Net Asset Value".
Adjustment to the Purchase Price. If the Final Closing Net Asset Value is
greater than $6,046,000 (the "Target Net Asset Value"), Buyer will pay to ASII
the difference and ASII will receive all of the Escrowed Amount. If the Final
Closing Net Asset Value is equal to the Target Net Asset Value, ASII will
receive the Escrowed Amount. If the Final Closing Net Asset Value is less than
the Target Net Asset Value and the difference is less than the Escrowed Amount,
once the difference is paid to Buyer, ASII will receive the remainder held in
escrow. If the Target Net Asset Value exceeds the Final Closing Net Asset Value
by $400,000 or more, the Buyer will receive the Escrowed Amount and ASII will
pay to Buyer the difference in excess of $400,000.
Termination. The Asset Purchase Agreement may be terminated: (i) if the
parties mutually agree at or prior to the Closing of the Transaction, (ii) upon
written notice from either ASII or ASI Newco, Inc. if a material breach or
default occurs with respect to the due and timely performance by the other party
of any of the respective covenants and agreements contained in the Asset
Purchase Agreement or if any material breach of a representation or warranty
under the Asset Purchase Agreement cannot be cured prior to the Closing of the
Transaction, (iii) by either ASII or ASI Newco, Inc. if the Closing has not
occurred by the close of business on August 31, 2001, or (iv) by ASI Newco, Inc.
if there is a significant adverse event affecting title to, or the condition of,
the real property owned by ASII.
Completion of the Asset Sale. The Company is working to complete the
Transaction as soon as possible. The Company anticipates completing the
Transaction promptly after stockholder approval, assuming prior satisfaction of
the conditions of each party as set forth below.
The Company's and ASII's obligations under the Asset Purchase Agreement
are subject to, among other things, receipt of payment of the Purchase Price
less the Escrowed Amount, receipt of a legal opinion from Buyer's counsel,
execution of the Manufacturing Agreement between Buyer and DCI (see "Description
of DCI Supply Agreement"), termination or expiration of the waiting periods for
filings under the Exon-Florio Act (see "Regulatory Approvals"), consent of third
parties to the assignment of contractual arrangements entered into with ASII,
receipt of AMS's guaranty and an executed Escrow Agreement, the assumption of
prospective liability for surety bonds under all outstanding customer contracts
of ASII, and the establishment of back-to-back letters of credit to protect ASII
from loss on certain of its outstanding letters of credit.
Buyer's obligations under the Asset Purchase Agreement are subject to,
among other things receipt of all necessary consents, including termination or
expiration of the waiting periods for filings under the Exon-Florio Act (see
"Regulatory Approvals") and the consent of third parties to the assignment of
contractual arrangements entered into with ASII, receipt of a legal opinion from
Seller's counsel, updates to the disclosure schedules set forth in the Asset
Purchase Agreement, the consent of Mutual Service Life Insurance Company as
"Lender" under a Promissory Note and Mortgage and Security Agreement relating to
the ASII real property, receipt of the Company's guaranty and an executed Escrow
Agreement, and the execution of the Manufacturing Agreement between Buyer and
DCI (see "Description of DCI Supply Agreement").
Representations and Warranties. In the Asset Purchase Agreement, the
Company and ASII have made certain representations and warranties. These
representations and warranties relate to, among other things, the Company and
ASII's good standing, due incorporation, compliance with applicable laws and
certain disclosures with respect to real and personal property, financial
information, litigation issues, insurance policies, employee benefit plans and
other matters relating to the business and operations of ASII. A condition to
the Closing of the Transaction is that all of the representations and warranties
contained in the Asset Purchase Agreement be accurate at the time of Closing.
Covenants. In the Asset Purchase Agreement, the Company and ASII have made
certain covenants including, but not limited to, using commercially reasonable
efforts to cause ASII to conduct business in the ordinary course, to do all
things necessary to consummate the Transaction and restricting ASII from taking
certain actions other than in the ordinary course of business and consistent
with past practices. Furthermore, (i) for a period of five (5) years following
the Closing, ASII and its affiliates (including the Company), and (ii) for a
period of three (3) years following the Closing, ASII's directors and the
Company's officers and directors, agree not to compete in the Navaids Business.
ASII and the Company agree not to solicit any ASII employees for a period of
five (5) years following the Closing. Prior to the Closing, ASII agrees to allow
Buyer access to the business records of ASII and to ASII employees and
customers, accompanied by representatives of ASII, to discuss continued
employment and to obtain necessary contractual consents from ASII customers.
Buyer has agreed to offer employment to all of the employees of ASII (other than
Keith Cowan and Tom Cargin). The Company and ASII agree to cause Bank of America
to release all assets of ASII from liens held by Bank of America and to release
ASII from any liability owed to Bank of America. (Bank of America holds certain
loans in which the Company, ASII and DCI are borrowers and the assets of each
company are pledged as collateral.) Upon the Closing, ASII will cease all use of
the name "Airport Systems International, Inc." and will change its name within
two (2) days following the Closing.
Indemnification and Survival. The Company and ASII have agreed to
indemnify Buyer for damages arising from any claims relating to all ASII
liabilities other than those liabilities expressly assumed by Buyer, any breach
of ASII's or the Company's representations or warranties under the Asset
Purchase Agreement or any breach or default of any covenants or agreements on
the part of the Company or ASII under the Asset Purchase Agreement. Furthermore,
the Company has agreed to indemnify Buyer for damages arising from: (i) certain
warranty claims, (ii) any performance bond claim, or (iii) any government
contract claim, that in all three cases, relates to any products manufactured or
sold, or services provided, by the Company or ASII prior to the date of Closing.
In no event will the Company and ASII be liable for any damages arising from an
untrue representation or breach of warranty under the Asset Purchase Agreement
(i) until such damages exceed $200,000 in the aggregate (and then Buyer may seek
payment of the full amount), or (ii) that are in excess of $4 million in the
aggregate, except that a claim for breach by the Company and ASII of their
representations made under the Asset Purchase Agreement relating to title of the
real and personal property of ASII, ASII
permits, or ASII environmental conditions and compliance, or an indemnification
claim relating to a warranty, performance bond or government contract claim, is
not subject to the $200,000 minimum and the $4 million maximum limitations.
Buyer has agreed to indemnify the Company and ASII for damages resulting
from certain liabilities assumed by Buyer, any breach of Buyer's representations
and warranties under the Asset Purchase Agreement, any breach or default of any
covenant or agreement on the part of Buyer under the Asset Purchase Agreement,
or any third party claims that both result solely from actions of Buyer
occurring after the date of Closing and relate to the Navaids Business or the
assets of ASII.
The representations and warranties of the Asset Purchase Agreement will
survive the Closing for a period of fifteen (15) months following the Closing,
subject to the following exceptions: (i) the representations of the Company and
ASII regarding tax returns, employee benefit plans and environmental conditions
and compliance shall survive for 60 days beyond the expiration of the applicable
statute of limitations; (ii) the representations of the Company and ASII
regarding the corporate status and authority of the Company and ASII, the
Company and ASII charter documents and broker's fees shall survive without
limitation; and (iii) the representations of Buyer regarding the corporate
status and authority of Buyer, the Buyer charter documents and broker's fee
shall survive the Closing without limitation.
Description of DCI Supply Agreement. As a condition to the Closing of the
Transaction, Buyer and DCI have agreed to enter into a manufacturing agreement,
on terms and conditions mutually agreed to by the parties.
F. History of the Transaction.
In early November 2000, at an air traffic control conference, Keith Cowan,
CEO of the Company, had an initial conversation with Giancarlo Elmi and Giorgio
Gulienetti of AMS regarding the possibility of forming a strategic relationship
between the Company and AMS. That initial conversation considered at least two
possible forms for the strategic partnership. One alternative was for AMS to
provide marketing and distribution services to ASII. The second alternative was
the purchase of ASII, either in a stock or asset transaction.
In a telephone conversation in late November 2000 and in several
subsequent telephone conversations over the next few days, Mr. Gulienetti and
Mr. Cowan discussed the preparation of an appropriate confidentiality agreement
for the purpose of exchanging information. The confidentiality agreement between
the Company and AMS was signed on December 7, 2000. Prior to the end of 2000,
the parties had no further discussions about the form of any proposed strategic
relationship.
On January 4, 2001, as a result of conversations between Mr. Cowan,
Michael Meyer, a member of the Board of Directors of the Company, and Mr.
Gulienetti of AMS, the parties agreed to set up a meeting to discuss a possible
acquisition of ASII. This was the first meeting at which the parties
specifically discussed, and ultimately agreed, that the strategic relationship
should take the form of an acquisition. AMS expressed a desire for an
acquisition in order to obtain complete control over the Navaids Business, and
the Company favored an acquisition, as opposed to a marketing and distribution
agreement, because it did not pose the risk that ASII would be completely
reliant on the marketing efforts of a third party. Management of the Company was
also concerned that a marketing and distribution relationship with AMS may
prevent ASII from retaining its business relationships with competitors of AMS.
Because the parties separately came to the conclusion that an acquisition was
preferred, there was not significant conversation between the two parties
concerning the two alternatives. No principal terms of any proposed acquisition
were discussed in that January 4 conversation. Shortly thereafter, Mr.
Gulienetti and John McGlynn of AMS visited the Company's facilities in Overland
Park, Kansas to further discuss the opportunities and goals of an acquisition of
ASII by AMS. ASII provided significant business information to AMS, and the
parties discussed business opportunities available to ASII. However, the parties
did not discuss any terms of the proposed acquisition.
On January 31, 2001, as a result of the inquiry from AMS to purchase the
Navaids Business, the Board of Directors made the decision that in order to
maximize stockholder value, the Company should pursue the sale or significant
restructuring of the Navaids Business and established a small list of
prospective buyers to contact regarding the possible acquisition of ASII. This
list was comprised of competitors of the Company in the navigation aids
business, as well as air traffic control system prime contractors. Various Board
members, including Mr. Cowan, were assigned the task of initiating contact with
the designated prospective buyers to explore the possibility of an acquisition
of ASII.
On February 19, 2001 Mr. Elmi sent a letter to Mr. Cowan requesting that
Mr. Cowan provide a firm indication of the Board of Directors willingness to
sell the Navaids Business and the price at which the Company would be willing to
sell.
On February 20, 2001 at a regularly scheduled meeting of the Board of
Directors, an offer price was established for the sale of the ASII stock or
assets to AMS. Mr. Cowan sent a letter of intent ("LOI") to Buyer
immediately following the Board meeting, expressing the Board's desire to sell
all of the issued and outstanding capital stock of ASII at a price set forth in
the LOI and setting forth certain terms and conditions pursuant to such offer.
On February 28, 2001 David Griffiths, Commercial Officer of AMS, sent a
letter to Mr. Cowan proposing a meeting to further discuss the LOI and the
potential acquisition of ASII with Andrew Walsh, Chief Financial Officer of AMS,
and Roger Mathias, the Strategic Planning Director of AMS. There were no oral
communications between the parties from January 31 through February 28, 2001.
On March 7, 2001, Mr. Walsh, Mr. Mathias and Mr. Elmi of AMS visited the
Company's facilities in Overland Park, Kansas and continued discussions
regarding a possible acquisition of ASII. As was the case on January 31, 2001,
the discussions included a business description of ASII. In addition to the
review of the Navaids Business, Mr. Cowan explained in great detail the
relationship between DCI and ASII, so that AMS could better understood what
assets would be included in any proposed transaction. The manufacturing work
conducted at DCI for ASII required detailed explanation, to permit the AMS
representatives to better understand the separation between the two entities and
to become confident that an acquisition of ASII, and the execution of an
accompanying manufacturing agreement with DCI, would permit AMS to separately
conduct the Navaids Business. In addition, the parties discussed which employees
of ASII were likely to continue with Elecsys after the anticipated Transaction,
and, with the greater understanding of the distinction between ASII and DCI, the
representatives of the Company took the opportunity to confirm their price
expectations.
On March 26, 2001, the Company received and signed a non-binding
indicative offer letter from AMS (the "Letter"), setting forth the terms of
AMS's offer to purchase the Navaids Business for eight million dollars, subject
to adjustment and to certain terms and conditions set forth in the Letter.
Initial due diligence began on April 2, 2001, at which time AMS conducted
an on-site review of documents requested by AMS. Participants in the due
diligence review included outside attorneys and accountants for AMS, Mr. Norman
Weatherup and Mr. Marcantonio Somacal, AMS employees having accounting and
marketing responsibilities, respectively. The parties discussed in general terms
whether a proposed transaction might be accomplished more expediently as an
asset purchase or stock purchase, but no other negotiations took place at that
time.
AMS provided to the Company a first draft of a purchase agreement on April
17, 2001 and on April 19, 2001 the parties began negotiations toward a
definitive agreement. Along with a discussion of purchase price, the parties
focused on the valuation of the assets acquired, indemnification issues, certain
liabilities to be assumed by Buyer, Buyer's access to ASII employees and
customers, and non-compete agreements with various officers and directors of the
Company and ASII. All communications between the parties during this time took
place in writing, with correspondence by counsel to the Company and accompanied
by revisions to the proposed purchase agreement. Comments from AMS were then
relayed in writing back to counsel to the Company, also with various revisions
to the proposed purchase agreement.
On May 10, at a special meeting of the Board of Directors of the Company,
the Board authorized Mr. Cowan, Mr. Meyer, David Schulte, all members of the
Board of Directors, and counsel to the Company, (collectively referred to as the
"Negotiating Committee") to participate in discussions with representatives of
AMS to negotiate a definitive agreement.
On May 14 and 15, the Negotiating Committee met with Norman Weatherup of
AMS, outside counsel to AMS, and Andrew Price, counsel to AMS, in Washington,
D.C. to negotiate the terms of a definitive agreement. At this time, AMS
determined it would offer to purchase substantially all of the assets and assume
certain liabilities of ASII for a cash purchase price of $7.7 million, less an
amount to be retained in escrow, subject to a post-Closing adjustment.
On May 17, 2001, at a regularly scheduled meeting of the Board of
Directors of the Company, the Board approved the sale of substantially all of
the assets of ASII to AMS and the form of Asset Purchase Agreement, subject to
modifications and deletions: (i) as set forth in a memorandum prepared by Steven
Carman to the Board of Directors dated May 16, 2001, and (ii) as the Negotiating
Committee may deem appropriate. Further, the Board of Directors recommended the
approval of the Transaction and Asset Purchase Agreement by the stockholders of
the Company. At that time, the Board of Directors was aware that the Company was
in default on its obligations to its lenders, and the Company had no assurance
that its senior lender would both (i) continue to forbear from the right to
exercise remedies relating to the Company's then-existing events of default, and
(ii) provided additional letters of credit for new projects undertaken by ASII.
From May 17 until June 18, the parties negotiated, by the exchange of
revised drafts of the agreement and periodic telephone conversations principally
between counsel to the Company and counsel to AMS, the definitive terms and
conditions of the Asset Purchase Agreement and the ancillary agreements.
Specifically, the parties focused on the terms of the non-compete
provisions, the nature of the indemnification to be provided, and the manner in
which the post-Closing adjustment was to occur.
Keith Cowan, on behalf of ASII and the Company, executed a definitive
Asset Purchase Agreement on June 18, 2001. Mr. Walsh executed the agreement
at the same time on behalf of the Buyer.
G. Voting Requirements.
The Transaction requires the approval of the holders of a majority of the
outstanding shares of the Company's Common Stock entitled to vote. The failure
to vote or a broker non-vote has the same effect as a vote against the proposed
Transaction. Section 5.29 of the Asset Purchase Agreement provides that, subject
to their obligation to exercise their fiduciary duties, including those as
directors of Elecsys, each of the directors constituting the Board of Directors
of Elecsys intends to vote the shares of Elecsys that he beneficially owns in
favor of approving the Transaction. Directors of Elecsys beneficially own
341,790 shares of Elecsys (such amount including presently exercisable options
to purchase shares of Elecsys). The Company is aware of no other agreements to
vote shares for or against the Transaction.
H. Description of any Interest of Directors and Officers that Differs from
Stockholders' Interest.
One of the Company's directors has an interest in the Transaction that is
in addition to his interest as a stockholder in the Company. Mr. Schulte is a
Partner and Managing Director of Kansas City Equity Partners ("KCEP"). KCEP is a
significant stockholder in the Company and the holder of a convertible
subordinated debenture due February 2005 (the "Debenture"). As of the date of
this Proxy Statement, four quarterly installment payments totaling approximately
$50,000 due to KCEP by the Company under the Debenture have been deferred. Part
of the cash consideration received by the Company upon consummation of the
Transaction will be used to bring the Company current as to payments owed to
KCEP under the Debenture. KCEP will also prepare a conversion price and warrant
adjustment for the forbearance period. The members of the Company's Board of
Directors knew about this additional interest, and considered it, when they
approved the Asset Purchase Agreement.
I. Regulatory Approval.
There are no federal or state regulatory requirements to be complied with,
or approval to be obtained, in connection with the Transaction with the
exception of a filing required by the Exon-Florio Act.
The Exon-Florio Amendment to the Defense Production Act of 1950 requires
Elecsys, ASII, Buyer and AMS to submit certain information to the Department of
Treasury. Elecsys, ASII and Buyer do not intend on consummating the
Transaction unless and until the applicable waiting periods under this Act have
been satisfied. Elecsys, ASII and Buyer intend to make their filings under the
Exon-Florio Amendment as soon as reasonably practicable and expect to
satisfy this condition to Closing within 30 days after the filing is made.
J. Dissenters' Rights.
Stockholders of the Company do not have dissenters' rights with respect to
the Transaction.
K. Gagnon Control Shares.
Under the Kansas Control Share Acquisition Statute, (K.S.A. 17-1286 et
seq.), a person who acquires shares representing at least 20% of the voting
power ("control shares") of an issuing public corporation has only those voting
rights, with respect to the control shares, that are granted to such person by
resolution approved by the stockholders of the issuing public corporation.
Gagnon Securities LLC ("Gagnon") has acknowledged its prior acquisition of
beneficial ownership of 24% of the Company's outstanding common stock, and all
of such shares of Company common stock are control shares. Based on the
information now available to the Company, the Company believes Gagnon currently
has no right to vote any of such shares. It may obtain voting rights as to the
control shares only if the Company's stockholders vote to grant Gagnon voting
rights. Gagnon has not asked that the stockholders vote at this Meeting to
restore to it voting rights as to the control shares that it owns. Accordingly,
for purposes of approving this Transaction, Gagnon's shares will not be included
in the total amount of shares outstanding.
L. Accounting Treatment.
The terms of the Asset Purchase Agreement include cash consideration in
the amount of $7.7 million, subject to adjustment after the execution of the
Asset Purchase Agreement, and Buyer's assumption of certain liabilities. The
Buyer will account for the Transaction under the purchase method of
accounting.
M. Federal Income Tax Consequences.
Because of existing deferred tax assets, the Company does not expect this
Transaction to result in any federal or state tax liability.
N. Reports, Opinions and Approvals.
No reports, opinions and appraisals that materially relate to the
Transaction were received from outside parties or are referred to in the Proxy
Statement.
Description of the Company
General
Elecsys, through its subsidiaries, is a designer and manufacturer of
electronic components, sub-assemblies and systems and a marketer of electronic
contract assembly services. Elecsys, as the parent company, operates two
business segments: (i) the Navaids Business, and (ii) the EMS Business. The
Navaids Business is operated through a wholly-owned subsidiary, ASII, while the
EMS Business is operated through DCI, also a wholly-owned subsidiary of Elecsys.
ASII designs, manufactures and installs ground-based radio navigation and
landing systems ("Navaids") and airfield lighting. Its customers consist of
civil aviation authorities in the United States and throughout the world. DCI
manufactures custom liquid crystal display ("LCD") devices as well as panel
meter and heat-seal equipment. In addition,
DCI also provides contract manufacturing services. Its products are used in
aerospace, medical, industrial and consumer applications. Sales are made
primarily to customers within the United States.
Elecsys was incorporated in Kansas on May 1, 1991, and completed an
initial public offering on November 30, 1993.
In fiscal year 2000, Elecsys implemented a new strategic direction,
leveraging to other vertical markets its core competency as a manufacturer of
high quality electronics. The new initiative focused, primarily through
acquisition, on diversifying into the manufacture and sale of electronic
components and systems of both a proprietary and contract assembly nature.
Contract electronics manufacturing services ("EMS") is viewed by management of
the Company as a large and growing market. This is driven by manufacturers of
all sizes outsourcing their electronics manufacturing, allowing them to focus on
core business competencies such as product design and marketing. These trends
had generated steady annual sales growth at DCI. The world-wide market for
Navaids, by comparison, is only $120-150 million annually, and cyclical.
The first phase of the new strategy began with the acquisition of DCI in
February 2000. DCI is located in Lenexa, Kansas and had sales for the calendar
year ended December 31, 1999 of approximately $8.1 million. The acquisition was
accretive to the Company's historical earnings on a pro forma basis. The
acquisition of DCI repositioned the Company as a reputable electronic
manufacturing service provider and consolidator, offering a platform for future
acquisitions. The Company has obtained ISO 9001 certification at DCI and
implemented a rigorous quality assurance program critical to EMS operations. In
pursuing its acquisition strategy, the Company can judiciously utilize equity as
acquisition currency. The Company focuses its EMS marketing efforts on customers
that use design assistance and shorter production runs and need custom LCD
displays. This differentiated strategy has been successful for DCI and led to
its historical growth.
In conjunction with the first phase of the Company's new strategy and to
better define the Company's business, as well as the businesses operated by its
subsidiaries, the Company changed its name from "Airport Systems International,
Inc." to "Elecsys Corporation" on November 1, 2000. Simultaneously with the name
change, the Company formed a wholly-owned subsidiary named "Airport Systems
International, Inc." and transferred the Navaids Business from Elecsys to ASII
(the "Company Restructure"). The stockholders of the Company approved the name
change at the 2000 Annual Meeting on September 12, 2000. Although not
specifically contemplated in fiscal year 2000, the sale by the Company of the
Navaids Business is consistent with the desire of the Company to focus on its
core competency as a manufacturer of high quality electronics. The Company will
no longer have the expense or ongoing financial responsibility for either the
design and certification of new navaids or the international marketing of
navaids to governmental and quasi-governmental agencies. Because of constraints
on the liquidity of the Company, no additional actions have been completed to
further implement the new strategy of the Company.
Business Segments
A. Electronics Manufacturing Services Business.
DCI is a specialized electronics manufacturer providing a complete range
of innovative design and manufacturing capabilities focused on
miniaturization, custom display technology and automated
production processes. Products and services from DCI include electronic design
and manufacturing services, custom liquid crystal displays ("LCD"), LCD modules,
digital panel instruments and electronic manufacturing process equipment. DCI
designs, manufactures and supports electronic assemblies for original equipment
manufacturers ("OEM") in medical, aerospace, industrial, consumer, military and
other major industries. DCI operates from a 35,000 square foot manufacturing
facility in Lenexa, Kansas. DCI's design and manufacturing capabilities,
combined with materials management, make DCI a single resource for product
development and manufacturing which allows customers to integrate their supply
chains and reduce their vendor bases. DCI strives to form long-term partnerships
with customers. Substantially all of DCI's sales are to domestic customers,
serviced through a combination of in-house sales personnel and outside
representatives.
Electronic manufacturing services from DCI encompass turnkey product
design and development, manufacturing and testing. The engineering staff
provides hardware design, software design and component engineering services
under contract to OEMs. Manufacturing processes produce
assemblies incorporating both conventional electronic packaging and the high
density configurations, including ball grid array and microelectronic
technologies. DCI's manufacturing capabilities include automated surface mount
technology component placement, automated solder paste application and
soldering, automated plated through hole component placement, wire bonded chip
on board microelectronics assembly, and complete in-circuit and functional
testing services. Electronic manufacturing services comprise approximately 81%
of total sales.
DCI's LCD fabrication facility produces custom LCDs and integrated display
modules for all applications while also offering standard character and graphic
display modules. An LCD is a low power display device in which liquid crystal
material is sealed in a cell composed of specially etched plates of conductively
coated glass. LCDs are used to display information in a variety of applications
from commercial and industrial to consumer products where low power consumption
is required. DCI fabricates LCDs for OEMs focusing on low to medium volume
specialty applications. DCI contracts with an Asian manufacturer for high volume
requirements. DCI is one of a few companies in the United States capable of
designing and manufacturing the complete display module involving both the LCD
cell and the supporting electronics.
DCI LCDs are produced in a clean room in its Lenexa facility. This clean
room was built to Class 10000 specifications and incorporates a self-contained
HVAC system with HEPA filtration and a controlled entry airlock. The clean room
also includes automated glass scribing and photo-imaging process equipment.
Sales of LCDs are made to customers principally in the United States. LCD and
LCD module sales currently comprise approximately 10% of total EMS Business
sales.
DCI's various proprietary electronic products are targeted toward
specialized niche applications. Digital panel instruments are used in process,
laboratory and quality control applications including research labs, ground
support equipment in the aerospace industry, waste water treatment plants, and
power generation plants. These instruments measure a number of different process
attributes, including voltage, current, temperature, RPM, pressure, fluid
volume, and torque. Digital panel instruments may operate as stand alone
equipment or interface to programmable systems. DCI electronic manufacturing
process equipment is used to bond flexible connectors to either LCD glass or
printed circuit boards. Proprietary equipment sales are
made to end users and OEMs principally in the United States and currently
comprise approximately 9% of total sales.
B. Navaids Business
The Navaids Business operated through ASII engages in the design,
manufacture, marketing and installation of ground-based Navaids and visual aids,
including airfield lighting and 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. Visual aids are used to direct aircraft along runways,
taxiways and to terminals.
ASII's Navaids products are Instrument Landing Systems ("ILS"), Very High
Frequency Omni-Range Transmitters ("VOR"), and Distance Measuring Equipment
("DME"). ASII products also include airfield lighting and signage. Navaids such
as those manufactured by ASII, are an integral part of the air traffic control
system used worldwide for navigation of aircraft operating in Instrument
Meteorological Conditions under Instrument-Flight Rules ("IFR"). Signals
generated by these products are received by electronic avionics equipment
installed in all aircraft equipped for IFR, which then provide navigational
guidance to the pilot. Most Navaids are radio frequency devices that 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 is certified for use according to
criteria that specify the applicable landing decision height 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. ASII produces Category I, II, and III ILS.
A VOR, in combination with DME, provides 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).
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. ASII manufactures and sells a low power DME for use at airports
and a high power DME for use enroute. A DME may be used in place of marker
beacons in an ILS to provide distance information to the pilot.
ASII'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. ASII's sales are largely
dependent upon government construction and procurement contracts. The majority
of ASII'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 ASII.
Generally, the time from when an order is accepted until the first
equipment is shipped is approximately one to three 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, because of weather conditions, site
conditions, or the progress of other portions of the construction project into
which ASII's products are incorporated. ASII generally provides a limited
product warranty with its Navaids and other products. Warranty costs are tracked
by ASII and have historically not varied materially from management's estimates.
In July, 1998, the Company 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, precision approach path indicators (PAPI),
as well as control equipment. On November 1, 2000, in conjunction with the
Company Restructure, the agreement with Idman was transferred from Elecsys to
ASII. Under the terms of the agreement, ASII has 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. During fiscal 1999, FAA certification was obtained for Idman's elevated
runway and taxiway lights. In July 1999, Idman's PAPI (Precision Approach Path
Indicator) was certified by the FAA.
ASII 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
products is outside the United States. Almost all countries have civil aviation
authorities that regulate the airways within their borders and procure equipment
for their air traffic control systems and airports. ASII sells either directly
to international customers through a network of representatives or distributors,
or through prime contractors. ASII has over 20 independent sales representatives
covering over 35 countries. ASII's international sales were 49%, 72% and 80%, of
total consolidated sales for the fiscal years ended April 30, 2001, 2000, and
1999, respectively.
The United States non-federal market is comprised primarily of state and
local governmental entities that have responsibility for airport development,
improvement and management. ASII either contracts directly with the governmental
entity constructing or improving an airport for the portion of the project ASII
can complete, or acts as a subcontractor to a prime contractor. ASII's United
States non-federal sales were 16%, 12% and 17%, of total consolidated sales for
the fiscal years ended April 30, 2001, 2000, and 1999, respectively.
The United States government market includes all federal governmental
agencies needing the installation of ASII products in the United States. The
primary customers for ASII in this market are the FAA and the U.S. Air Force.
Sales to the United States government were approximately 14%, 5% and 3%, of
total consolidated sales for the fiscal periods ended April 30, 2001, 2000, and
1999, respectively. ASII has, to date, approached this market as both a
subcontractor and direct provider.
Competition
A. Electronics Manufacturing Services Business
DCI competes against different competitors for each of its lines of
products. There are a limited number of LCD competitors in the United States.
These include Planar/Standish, LXD, Crystaloid and Polytronics. Panel meter
competitors include Newport Labs, Red Lion, Digitec, Non-linear Systems, Lincoln
Instruments, Doric Instruments, Analogic, and Kessler Ellis. The electronic
manufacturing services industry is very competitive. DCI competes against
numerous domestic and foreign manufacturing service providers, some of whom are
substantially larger than DCI, with greater financial, operating, manufacturing
and marketing resources. Some have broader geographic breadth, a broader range
of services, and more established overseas operations. In addition, DCI faces
competition from the manufacturing operations of its current and potential
customers who continually evaluate the relative benefits of internal
manufacturing versus outsourcing. DCI believes that the principal competitive
factors in its target markets are product quality, flexibility and timeliness in
responding to design and schedule changes, reliability in meeting product
delivery schedules, pricing, technological sophistication, and geographic
location. To remain competitive, DCI must continue to provide technologically
advanced manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, and compete
effectively on price.
B. Navaids Business
ASII competes against several large multi-national companies that provide
a broad spectrum of products and serve a wide customer base. Most Navaids and
airfield lighting and signage contracts 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. The
significance of any individual factor depends on the customer and the situation.
Typically, the international and United States non-federal markets have
accounted for a substantial portion of ASII's revenues. It is ASII'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 international certifications and approvals.
ASII's principal Navaids competitor in the United States non-federal
market is Airsys ATM (previously Wilcox Electric Company). To ASII's knowledge,
Airsys ATM is the only other United States manufacturer of ground-based Navaids
of the type sold by ASII that has products certified for use in projects
partially funded by the Airport Improvement Program ("AIP"). AIP funding is
generally relied on for the construction of new or improved runways or airports.
Airsys ATM is a joint venture company, approximately 60% owned by Thomson CSF
and 40% owned by Siemens A. G., a German defense and electronics company.
Internationally, ASII has competed against several Navaids suppliers,
including Airsys ATM. However, Airsys ATM is the only competitor that has a full
line of Navaids. In addition, ASII competes against several other smaller
companies, none of which carry a full line of Navaids products.
ASII has several visual aids competitors both domestically and
internationally. ASII's primary competitors are ADB Alnaco (a division of
Siemens A.G.), Crouse Hinds (a division of Cooper Industries), Honeywell and
Standard Signs, Inc. (a privately held company).
Sources and Availability of Raw Materials and Principal Suppliers
Generally, the raw materials used in the manufacture of ASII's and DCI's
products are readily available from a number of sources in the United States.
Dependence on One or a Few Major Customers
ASII and DCI each had sales to one customer that accounted for 16% and
18%, respectively, of their total sales in fiscal 2001, and sales to their top
five customers accounted for 48% and 50%, respectively, of total sales in fiscal
2001. As a result of the transaction proposed for stockholder approval,
management expects that future revenues will be less dependent on one or a few
major customers.
Patents, Trademarks, Licenses
The Company holds no United States or foreign patents. The Company's only
trademark is the "AIRPORT SYSTEMS" name and design owned by ASII. As part of the
sale of substantially all of the assets of ASII, that trademark will be sold and
assigned to Buyer. The "Elecsys" name is currently pending registration 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 that ASII, primarily,
maintains as confidential proprietary information.
In conjunction with the Company Restructure, certain agreements relating
to the intellectual property of the Navaids Business were transferred from
Elecsys to ASII. Included in those agreements were the following three license
agreements: (i) a license agreement with Fernau Avionics, Ltd. ("FAL") dated
November, 1992, in which ASII agreed to pay FAL $217,225 for an irrevocable,
fully transferable, non-exclusive perpetual royalty-free license to manufacture,
sell and maintain products using DME technology owned by FAL, (ii) a license
agreement with Interstate Electronics Corporation ("Interstate") in which ASII
has been granted a full manufacturing license to the current design with the
ability to make future enhancements to the product that resulted from joint work
with Interstate for the development and sale of DGPS equipment, and (iii) a
license agreement with Idman to manufacture certain airfield lighting products
as discussed above.
In conjunction with the purchase of DCI, the Company obtained a
non-exclusive license and information relating to the research and development
of Fast response Multistable Liquid Crystal Display (FMLCD) technology from
Advanced Display Systems, Inc. ("ADS"). DCI has deferred active marketing of the
FMLCD pending resolution of several technical issues concerning the feasibility
of the technology of ADS.
Government Approvals
All Navaids 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. The Company has received all applicable approvals
for Navaids sold 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 United States non-federal markets, resulting in products that 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 that does not include
specific design and construction methods. The types of ILS, VOR and DME sold by
ASII in the United States non-federal market have been approved in accordance
with FAR Part 171 by the FAA.
In addition, ASII contracts for certain local or state airport projects
that are partially funded by the AIP, a United States government trust-fund
program funded by airport user fees. When an ILS or DME is procured under a
program funded by the Airport Improvement Program ("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 that requires demonstration
that the FAA is able to successfully maintain and operate the equipment. ASII's
2100 and 1100 model ILS and DME are approved by the FAA for AIP-funded
contracts. To ASII's knowledge, Airsys ATM is the only other company in the
United States with approval to supply ILS and DME 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. Equipment for
international procurement normally is tested after installation to insure
conformance with ICAO standards. In some cases, international programs may
require proof of FAR Part 171 approval prior to bid.
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
Substantially all research and development at the Company occurs in the
Navaids Business. During fiscal 2001, approximately 23% of
ASII's engineering staff time was spent on research and development activities,
none of which was paid for directly by any customer. In fiscal 2000, the amount
of engineering time spent on research and development was 46%, none of which was
paid for directly by any customer.
Total Number of Employees
At April 30, 2001, the Company had a total of 157 full time employees. Of
these, 62 were employees of ASII and 95 were employees of DCI. Upon the
consummation of the Transaction, all of the employees of ASII (except Tom Cargin
and Keith Cowan) will become employees of Buyer. The number of employees of DCI
will not change as a result of the Transaction. The Company's employees are not
represented by a labor organization.
Description of Property
Real Estate - The Company conducts its EMS Business from a 33,000 square
foot facility built on four acres at 15301 West 109th Street, Lenexa, Kansas.
The Company has a leasehold interest in this property subject to City of Lenexa,
Kansas Variable Rate Demand Industrial Development Revenue Bonds (DCI Project)
Series 1998. The face amount outstanding on the bond at April 30, 2001 was
$2,470,000 and is due in annual payments of $100,000 to $200,000 through 2017.
Approximately 20,000 square feet is used for manufacturing while the
remaining 13,000 square feet is used for engineering, administration and
marketing.
ASII's Navaids Business conducts operations from a facility of
approximately 50,000 square feet at 11300 West 89th Street in Overland Park,
Kansas. Approximately 26,000 square feet is used for manufacturing,
approximately 17,000 square feet 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 first mortgage due June, 2011. The principal balance of that
mortgage at April 30, 2001, was $1,141,000 with a final payment of approximately
$788,200 due at maturity assuming no prepayments. In conjunction
with the closing of the Transaction, the building used by ASII will be
transferred to Buyer and the first mortgage will be assumed by the Buyer. The
Company believes its existing facilities provide adequate capacity for
growth for the foreseeable future. No specific plans have been formed at the
present time for expanding any facility; however, the Company believes it has a
range of suitable alternatives for future expansion.
Manufacturing and Engineering Equipment - The EMS Business manufacturing
capability includes equipment for high speed, as well as low to moderate volume,
insertion of surface mount components, automated through-hole axial lead
equipment, controlled solder paste applications and advanced clean-room
capabilities. The Navaids Business manufacturing equipment is suitable for its
low volume electronics production. The test department at ASII is equipped with
general purpose and automatic test equipment, with all Navaids assemblies tested
environmentally in a temperature chamber. ASII'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.
Legal Proceedings
The Company is a party to one lawsuit, which the Company does not believe
to be material.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sale of ASII
The sale of substantially all of the assets of ASII will allow the Company
to focus its efforts on the EMS Business, which, because of its significantly
larger market, is viewed as having higher growth potential. The Transaction will
allow the Company to repay debt, strengthen its balance sheet and remove other
financial obligations in the form of standby letters of credit that were issued
against the Company's bank credit facility to secure performance bonds, bid
bonds and down payments related to contracts entered into by ASII. The Company
intends to use the proceeds from the sale to pay short term borrowings
outstanding on its bank line of credit and a term note payable to the bank (due
in February 2003), pay principal and interest owed in arrears to subordinated
debt holders and pay related transaction costs. A summary of the cash received,
and use of the proceeds, assuming the Transaction was completed on April 30,
2001 follows (in thousands):
Purchase price (a) $7,700
Adjustment to the purchase price (a)
Final closing net asset value (b) $7,182
Target net asset value (a ) 6,046
------------
Adjustment to purchase price 1,136 1,136
-------
Cash proceeds 8,836
Uses of cash proceeds:
Retire line of credit and term note payable to bank (5,711)
Payment of sub-debt principal in arrears (312)
Payment of sub-debt interest in arrears (150)
Estimated transaction costs (200)
-------
Net cash received $2,463
======
(a) As set out in the Asset Purchase Agreement
(b) Net assets of ASII as of April 30, 2001 less adjustment of $727 to the
net assets as agreed to in the Asset Purchase Agreement.
Pro forma data reflecting financial information about the Company as a
result of the Transaction is set forth on pages F-34 through F-39 of the
financial information section of this Proxy Statement.
Results of Company Operations
The following table sets forth for the years indicated, certain statement
of operations data of the Company (in thousands):
Year Ended
------------------------------------------
April 30, 2001 April 30, 2000
------------------------------------------
Sales $21,716 100.0% $15,128 100.0%
Cost of products sold 14,951 68.8% 10,793 71.3%
------------------------------------------
Gross margin 6,765 31.2% 4,335 28.7%
Selling, general and administrative
expenses 5,757 26.5% 4,456 29.5%
Research and development expenses 82 .4% 831 5.5%
-----------------------------------------
Operating income (loss) 926 4.3% (952) (6.3%)
Interest expense (1,023) 4.7% (377) 2.5%
Other income, net 1 --- 9 .1%
-----------------------------------------
Income (loss) before income taxes (96) (.4%) (1,320) (8.7%)
Income tax expense (117) .5% --- ---
-----------------------------------------
Net loss $(213) (.9%) $(1,320) (8.7%)
=========================================
Because fiscal year 2000 reflects DCI operating results only for the
period February 7, 2000 to April 30, 2000, the following summarized financial
information is being presented to assist the reader in understanding the impact
DCI had on operations in fiscal year 2001 and 2000:
Fiscal Year 2001
--------------------------------------------
Inter-
Navaids EMS segment Total
--------------------------------------------
Sales $ 15,078 $ 7,183 $ (545) $ 21,716
Gross Margin 4,157 2,609 (1) 6,765
% of Sales 28% 36% 31%
Operating Income $ 660 $ 267 $ (1) $ 926
Fiscal Year 2000
--------------------------------------------
Inter-
Navaids EMS segment Total
--------------------------------------------
Sales $ 13,483 $ 1,792 $ (147) $ 15,128
Gross Margin 3,516 836 (17) 4,335
% of Sales 26% 47% 29%
Operating Income
(loss) $ (1,163) $ 228 $ (17) $ (952)
Consolidated sales in 2001 were $21.7 million, $6.6 million or 43% higher
than sales in 2000 of $15.1 million. This was due primarily to higher sales from
DCI as a result of reporting a full year worth of sales. DCI sales after
inter-company elimination totaled $6.6 million in 2001 and $1.6 million in 2000,
which only included sales from February 7, 2000 (the date DCI was acquired) to
April 30, 2000. ASII sales were $15.1 million, up 1.6 million, or 12% compared
to 2000. This increase was due to an increase in the number of units shipped
resulting from a higher opening backlog and increased orders for Navaids.
Consolidated gross margin was $6.8 million, or 31% of sales, up $2.5
million or 56% from $4.3 million, or 29% of sales in 2000. Consolidated gross
margin increased primarily as a result of gross margin generated from DCI and
the shipment by ASII of higher gross margin contracts during 2001. DCI gross
margins totaled $2.6 million, or 36% of its sales. The higher gross margin
contracts shipped by ASII consisted primarily of spares orders, which generally
have higher gross margins. Despite these contracts, ASII continued to experience
business conditions in the Navaids market, including aggressive competitor
pricing, which led to lower prices.
Selling, general and administrative ("SG&A") expenses increased $1.3
million, or 29% in 2001. The increase was due primarily to an increase in DCI
expenses from $600K (for the period February 7, to April 30, 2000) to $2.3
million for fiscal 2001. ASII's fiscal 2001 SG&A expenses were $3.4 million,
down from $3.8 million in fiscal 2000. As a percent of sales, SG&A expenses
decreased from 29% to 26% primarily as a result of higher consolidated sales.
Research and development expenses decreased $749,000 or 90% in 2001 to
$82,000, reflecting decreased labor and expenses related to development work on
the new Category II/III ILS. Expenditures made during fiscal 2000 were primarily
to obtain Category III approval from the FAA for the ILS (which is nearly
complete) and to reduce production costs. Category III approval would permit the
Company to participate in procurement opportunities in the United States that
require delivery of a Category III system. These procurement opportunities tend
to be larger, and therefore more attractive, sales opportunities. No significant
new research and development projects were undertaken by the Company during
2001.
Interest expense increased from $377,000 to $1,023,000 due to higher
average short term borrowings, the additional debt taken on as a result of the
DCI acquisition, and higher average interest rates.
No domestic income tax provision or benefit was recorded for fiscal 2001
or 2000 due primarily to net operating losses incurred in fiscal 2001 and 2000
as well as the establishment of valuation reserves against deferred tax assets
related to net operating loss carry forwards. The tax benefits will be
recognized in the future when used to offset future taxable income. The income
tax expense shown in fiscal 2001 reflects foreign income taxes related to a
contract completed by ASII in a foreign country.
As a result of the above, the net loss for 2001 was $213,000, compared to
a net loss of $1,320,000 in 2000.
Backlog
The following table sets forth the domestic and international backlog of
ASII as of the dates indicated (In thousands):
April 30, 2001 April 30, 2000
Domestic $ 2,093 40.9% $ 351 6.4%
International 3,024 59.1% 5,115 93.6%
----- ------ ----- -----
Total $ 5,117 100.0% $ 5,466 100.0%
ASII's backlog decreased $349,000 or 6% to $5.1 million at April 30, 2001,
compared to $5.4 million at April 30, 2000. Approximately 57% of the backlog at
April 30, 2001 consists of three contracts. Thirty-three percent of the backlog
represents a contract to provide localizer antennas to a contractor for supply
to the United States Air Force. This contract also includes options to purchase
additional antennas valued at $3.7 million. Twelve percent of the backlog
represents a contract with a major U.S. air traffic control contractor for the
delivery of spares to support multiple ILS systems into South America, while 12%
of the backlog represents a contract to provide a VOR/DME into South America.
Substantially all of the ASII backlog at April 30, 2001 is expected to be
completed and shipped in fiscal 2002.
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 $296,000 was used in operations in 2001 compared to net cash
used of $692,000 in 2000. The improvement was principally the result of a lower
net loss for the year, higher non-cash depreciation and amortization as compared
to the previous year, and decreases in inventory offset by decreases in accounts
payable and customer deposits. The increases in
non-cash depreciation and amortization are due primarily to depreciation and
amortization of fixed assets and the costs in excess of net assets acquired
related to the DCI acquisition. The decline in inventory was due primarily to
units held by ASII at April 30, 2000 awaiting customer acceptance or delivery
instructions. These units were subsequently shipped in fiscal 2001. Customer
deposits were down principally due to a decrease in bookings of contracts during
the year with down payment provisions.
Cash used in investing activities decreased to $206,000 for 2001 compared
to $2.7 million in 2000 reflecting the purchase in 2000 of DCI as well as
decreased property and equipment expenditures partially offset by decreased
proceeds from the sale of property and equipment.
Cash provided by financing activities was $528,000 in 2001 compared to
$3.3 million in 2000. The decrease is due primarily to decreased borrowings on
the Company's bank line of credit in 2001 and proceeds from the issuance in 2000
of common stock and subordinated debt through a private placement, which funded
the purchase of DCI in fiscal 2000.
The Company has a line of credit agreement with a bank that expires October
7, 2001. At April 30, 2001 the Company had borrowings outstanding on the line of
credit totaling $5,241,000. In addition, it had issued against this line of
credit standby letters of credit totaling $1,932,000. The Company also has a
term note due this bank which matures in February 2003. At April 30, 2001 the
amount due on this term note was $470,000. At April 30, 2001, the Company was in
default of its net worth covenant. Because the bank has a right, pursuant to an
event of default, to demand repayment of all amounts outstanding under its
credit agreements, although it has not expressed its interest to do so, we have
classified this note payable as a current maturity. As a result of the sale of
the assets of ASII, the Company expects to repay its line of credit and term
note payable to the bank. In addition, under terms of the agreement, the Buyer
will assume the obligations of ASII related to the outstanding standby letters
of credit. The Company does not have any current capital commitments. Management
anticipates that current net working capital is sufficient to meet anticipated
needs for working capital and capital expenditures for the next twelve months if
the Transaction is not approved; provided, however, that the Company would need
access to its bank line of credit in order to increase sales in any line of
business. There is no guarantee that the Company's senior lender would
accommodate any such request. For these reasons, the Company and the bank have
elected not to negotiate a banking facility agreement until the Transaction is
completed, and at that time the Company anticipates an appropriate banking
facility can be finalized. However, there is no guarantee that the Company will
be able to negotiate a banking facility on acceptable terms or at all.
New Accounting Pronouncements
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, 2000. The Statement requires 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 of
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. When this Statement was adopted in May 2001, it did not
have a material impact on the Company's consolidated financial statements.
Forward Looking Statements
This Proxy Statement 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 described under the headings
"Backlog," and in the discussion of "Results of Operations" contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Proxy Statement, as well as those 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. 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 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.
INDEX TO FINANCIAL STATEMENTS
Page
ELECSYS CORPORATION.....................................................F-2
Report of Independent Auditors....................................F-2
Consolidated Balance Sheets.......................................F-3
Consolidated Statements of Operations.............................F-5
Consolidated Statements of Stockholders' Equity...................F-6
Consolidated Statements of Cash Flows.............................F-7
Notes to Consolidated Financial Statements........................F-9
AIRPORT SYSTEMS INTERNATIONAL, INC.....................................F-24
Statements of Net Assets.........................................F-25
Statements of Operations.........................................F-27
Statements of Cash Flows.........................................F-28
Notes to Financial Statements....................................F-30
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND BALANCE SHEET......................................................F-35
Unaudited Pro Forma Condensed Consolidated Statements
of Operations........................................................
Year ended April 30, 2000...................................F-36
Year ended April 30, 2001...................................F-37
Notes to Pro Forma Consolidated Statements of Operations.........F-38
Unaudited Pro Forma Condensed Consolidated Balance Sheet.............
At April 30, 2001...........................................F-39
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet..................................................F-40
Report of Independent Auditors
The Board of Directors and Stockholders
Elecsys Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Elecsys
Corporation (formerly Airport Systems International, Inc.) and subsidiaries (the
Company) as of April 30, 2001 and 2000, and the related consolidated statements
of operations, 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 auditing standards generally accepted
in the United States. 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 Elecsys
Corporation and subsidiaries at April 30, 2001 and 2000, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Ernst & Young
Kansas City, Missouri
June 29, 2001
Elecsys Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands except share data)
April 30,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 26 $ --
Accounts receivable, less allowances of
$60 in 2001 5,828 5,812
and $67 in 2000 (Note 4)
Inventories (Note 4) 7,444 7,988
Prepaid expenses 260 230
-------- ----------
Total current assets 13,558 14,030
Property and equipment, at cost (Notes 4 and 5):
Land 860 860
Building and improvements 2,173 2,136
Equipment 3,644 3,407
-------- ----------
6,677 6,403
Accumulated depreciation and amortization (2,511) (2,049)
-------- ----------
4,166 4,354
Restricted cash (Note 5) 1,153 1,288
Other assets, net 159 268
Cost in excess of net assets acquired (Note 2) 2,014 1,868
-------- --------
Total assets $ 21,050 $ 21,808
======== ==========
Elecsys Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands except share data)
April 30,
2001 2000
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank (Note 4) $ 5,241 $ 4,340
Accounts payable 1,751 1,968
Accrued expenses 2,020 1,716
Customer deposits 217 1,223
Income taxes payable --- 154
Current portion of long-term debt (Note 5) 1,755 679
--------- ---------
Total current liabilities 10,984 10,080
Long-term debt, less current portion (Note 5) 3,856 5,371
Stockholders' equity (Note 7):
Common stock, $.01 par value:
Authorized shares - 5,000,000;
Issued and outstanding shares - 2,635,581 and
2,578,913 in 2001 and 2000, respectively 26 26
Additional paid-in capital 8,088 8,003
Receivable from officers from sale of
stock (19) ---
Accumulated deficit (1,885) (1,672)
--------- ---------
Total stockholders' equity 6,210 6,357
--------- ---------
Total liabilities and stockholders' equity $ 21,050 $ 21,808
========= =========
See accompanying notes.
Elecsys Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands except per share data)
Year Ended April 30,
2001 2000
---- ----
Sales $ 21,716 $ 15,128
Cost of products sold 14,951 10,793
-------- ---------
Gross margin 6,765 4,335
Selling, general and administrative 5,757 4,456
expenses
Research and development expenses 82 831
-------- ---------
Operating income (loss) 926 (952)
Other income (expense):
Interest expense (1,023) (377)
Other income, net 1 9
-------- ---------
Loss before income taxes (96) (1,320)
Income tax expense 117 ---
-------- ---------
Net loss $ (213) $ (1,320)
======== =========
Basic and diluted (loss) per common share $ (.08) $ (.57)
======== =========
Basic and diluted weighted average common
shares outstanding 2,588 2,311
======== =========
See accompanying notes.
Elecsys Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands)
Receivable
from officers
Additional from sale of Total
Common Paid-In Common Accumulated Stockholders'
Stock Capital Stock Deficit Equity
Balance at April 30, 1999 $ 22 $ 7,218 $ --- $ (352) $ 6,888
Issuance of common
stock through private
placement 2 498 --- --- 500
Issuance of common
stock warrants -- 50 --- --- 50
Issuance of common
stock in
connection with
acquisition 2 237 --- --- 239
Net loss --- -- --- (1,320) (1,320)
--------- ---------- ------------ --------- ----------
Balance at April 30, 2000 26 8,003 --- (1,672) 6,357
Issuance of common stock
to officers in exchange
for notes receivable --- 85 (85) --- ---
Payments on notes
receivable from
officers 66 --- 66
Net loss --- --- --- (213) (213)
--------- ---------- ------------ --------- ----------
Balance at April 30, 2001 $ 26 $ 8,088 $ (19) $ (1,885) $ 6,210
========= ======== ============ ========= ==========
See accompanying notes.
Elecsys Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended April 30,
2001 2000
Operating Activities:
Net loss $ (213) $(1,320)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 729 413
Changes in operating assets and
liabilities net of the acquisition of
DCI, Inc. and KHC
Accounts receivable, net (16) 948
Income taxes refundable - 634
Inventories 307 (2,255)
Other current assets (30) (175)
Additions to other assets - (219)
Accounts payable (217) 449
Accrued expenses and customer (702) 833
deposits
Income taxes payable (154) -
-------- --------
Net cash used in operating activities (296) (692)
Investing Activities:
Acquisition of DCI, Inc. and KHC (47) (2,880)
Purchases of property and equipment (322) (489)
Restricted cash 135 110
Proceeds from sale of property and
equipment 28 583
-------- --------
Net cash used in investing activities (206) (2,676)
Consolidated Statements of Cash Flows (continued)
Year ended April 30,
2001 2000
---- ----
Financing Activities:
Principal payments on long-term debt $ (439) $ (315)
Net borrowings on note payable to bank 901 2,590
Payments on notes receivables from officers 66 500
Proceeds from issuance of long-term debt --- 500
-------- --------
Net cash provided by financing activities 528 3,275
-------- --------
Net (increase) in cash and cash equivalents 26 (93)
Cash and cash equivalents at beginning of year --- 93
-------- --------
Cash and cash equivalents at end of year $ 26 $ ---
======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $ 749 $ 331
======== ========
Income taxes $ 117 $ ---
======== ========
Non-Cash Financing Activities:
Issuance of subordinated debt in conjunction
with acquisition of DCI, Inc. and KHC $ --- $ 1,248
======== ========
Issuance of common stock in conjunction with
acquisition of DCI, Inc. and KHC $ --- $ 239
======== ========
Common stock issued to officers in exchange for
notes receivable $ 85 $ ---
======== ========
See accompanying notes.
Elecsys Corporation and Subsidiaries
Notes to Consolidated Financial Statements
April 30, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
On November 1, 2000, Airport Systems International, Inc. changed its name
to Elecsys Corporation and simultaneously formed a wholly-owned subsidiary named
Airport Systems International, Inc. (ASII). In conjunction with the formation of
ASII, Elecsys Corporation transferred the assets and operations of the navaids
business into ASII. Elecsys Corporation and its subsidiaries, (collectively the
"Company"), are primarily engaged in the design and manufacture of various
electronic components, sub-assemblies and systems. Through its navaids unit, the
Company designs, manufactures and installs ground-based radio navigation and
landing systems (navaids) and airfield lighting. The Company's electronic
manufacturing services (EMS) unit provides contract electronic manufacturing
services, custom liquid crystal display devices as well as other metering and
heat seal equipment. The Company markets and sells its products both
internationally and domestically.
As more fully described in Note 3, on June 18, 2001, the Company entered
into an agreement to sell substantially all the assets and operations of its
navaids unit.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Elecsys Corporation (Elecsys) and its wholly-owned subsidiaries ASII, DCI, Inc.
(DCI) and 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 accounting principles generally accepted in the United States 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 those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid
investments with original maturities of three months or less.
Restricted Cash
As more fully described in Note 5, DCI issued Industrial Revenue Bonds
totaling $2,570,000 during 1998. The unexpended proceeds from the Industrial
Revenue Bonds have been classified as restricted cash in the accompanying
consolidated balance sheets. All such restricted cash is reserved for future
eligible equipment additions.
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, which were not material in 2001 and 2000. The
Company grants credit to customers who meet the Company's pre-established credit
requirements. The Company generally requires foreign customers to issue letters
of credit, which secure payment of their accounts receivable balances. Credit
losses are provided for in the Company's consolidated financial statements and
historically have been within management's expectations.
Revenue Recognition
Revenue from the Company's EMS unit is recognized upon shipment of
products. The Company's navaids unit generates revenues pursuant to
contracts with its customers, most of which are less than one year in duration.
Revenue on these 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 at the
Company's EMS unit are valued using the first-in, first-out (FIFO) method.
Inventories at the navaids unit are valued principally under the last-in,
first-out (LIFO) method. Inventories valued under the LIFO method comprised
approximately 65% and 72% of consolidated inventories at April 30, 2001 and
2000, respectively. At April 30, 2001 and 2000, cost of these LIFO inventories
exceeded current cost by approximately $634,000 and $685,000, respectively.
Inventories are summarized by major classification as follows (in
thousands):
April 30,
2001 2000
Raw materials $ 3,984 $ 4,802
Work-in-process 2,425 1,398
Finished goods 1,035 1,788
------- -------
$ 7,444 $ 7,988
======= =======
Property and Equipment
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Description Years
Building and improvements 30
Equipment 5-8
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". Under the liability method, 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, as measured by the enacted tax rates which will be in effect when
these differences are expected to reverse.
Cost in Excess of Net Assets Acquired
The cost in excess of net assets acquired relates to the acquisition of
DCI and certain net assets of KHC of Lenexa, LLC (KHC) in fiscal 2000. These
costs are being amortized using the straight-line method over 15 years.
The carrying amount of cost in excess of net assets acquired is reviewed
for impairment whenever significant events or changes occur which might impair
the recovery of recorded costs using estimated undiscounted cash flows over the
assets' remaining life. If an impairment exists, the amount of such impairment
is calculated based on the estimated fair value of the assets compared to the
assets' carrying cost.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising
expense charged to operations amounted to $194,000 and $42,000 for the years
ended April 30, 2001 and 2000, respectively.
Earnings Per Share
Under SFAS No. 128, basic earnings per share is calculated by dividing
income available to common stockholders by the weighted average common shares
outstanding. Diluted earnings per share includes the effect of all
potentially dilutive securities, including stock options. The diluted
earnings per share excludes 229,084 and 154,180 shares issuable under
outstanding stock options in 2001 and 2000, respectively, since their effect was
antidilutive.
Stock Compensation
The Company accounts 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 had outstanding secured and unsecured letters of credit
totaling $1,932,000 and $2,146,000 at April 30, 2001 and 2000, respectively.
New Accounting Pronouncements
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, 2000. The Statement requires 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 of
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. When this Statement was adopted in May 2001, it had no
material impact on the Company's consolidated financial statements.
2. ACQUISITION
On February 7, 2000, Elecsys acquired all of the issued and outstanding
stock of DCI. The acquisition was accounted for as a purchase and, accordingly,
the accompanying financial statements include the results of operations of DCI
from the date of acquisition. The assets acquired and liabilities assumed were
recorded at their estimated fair values as of the date of acquisition. The
Company paid $1,234,000 in cash, issued 150,000 shares of its common stock
(valued at $239,000) and delivered a four-year promissory note in the amount of
$1,248,000 in consideration for the common stock of DCI. The total consideration
for the acquisition of common stock from DCI was $2,721,000.
In connection with and immediately following its acquisition by Elecsys,
DCI acquired substantially all the assets and assumed certain liabilities of
KHC, which was wholly-owned by the stockholders of DCI. The assets acquired and
liabilities assumed primarily consisted of restricted cash, land and buildings
and the related Industrial Revenue Bonds payable to the City of Lenexa, Kansas.
The acquisition was accounted for as a purchase and accordingly, the assets
acquired and liabilities assumed were recorded at their estimated fair values as
of the date of the acquisition. DCI paid $1,290,000 in cash as consideration for
the net assets acquired from KHC.
The aggregate purchase price for both DCI and KHC totaled approximately
$4,369,000 (including acquisition costs of approximately $358,000). The
aggregate purchase price in excess of the acquired net assets, amounting to
$2,190,610 has been classified as costs in excess of net assets acquired in the
accompanying consolidated balance sheet.
The following unaudited supplemental pro forma financial information
presents the combined historical results of operations of the Company as though
the acquisition of DCI had occurred at the beginning of 2000. The pro forma
information is unaudited and not necessarily indicative of the results of the
Company had the acquisition occurred at the beginning of 2000. Pro forma results
for the year ended April 30, 2000 were as follows (in thousands, except per
share amount):
Revenues $20,840
Net loss (1,033)
Diluted loss per share (.42)
3. ASSET SALE AGREEMENT
On June 18, 2001, the Company signed an agreement to sell substantially
all of the assets and operations and transfer certain liabilities of ASII to ASI
Newco, Inc. Pursuant to the terms of that agreement, the Company will receive
approximately $8.8 million in exchange for substantially all of the assets and
operations of ASII. ASI Newco, Inc. will also assume certain liabilities of
ASII. The closing of this transaction, which is subject to approval by the
Company's stockholders, is expected to occur during the second quarter of fiscal
2002. Since this transaction is subject to approval by the Company's
stockholders, the Company has not reflected the ASII operations as a
discontinued operation in the accompanying consolidated financial statements.
Upon approval by the Company's stockholders, all such operations of ASII will be
reflected as discontinued operations. Net assets of ASII to be sold pursuant to
the agreement are recorded at their historical cost basis in the consolidated
balance sheet at April 30, 2001 and consist of the following (in thousands):
Accounts receivable $ 4,805
Inventory 5,402
Other current assets 43
Property and equipment, net 1,570
Current liabilities (2,796)
Long term debt ( 1,115)
---------
$ 7,909
=========
4. NOTE PAYABLE TO BANK
The Company has a line of credit agreement with a bank that expires August
8, 2001. The agreement allows for borrowings up to a maximum of $9,000,000, at
an interest rate ranging from prime plus 2% to prime plus 3% (10.1% weighted
average at April 30, 2001), secured by eligible accounts receivable, inventory
and equipment. Borrowings outstanding under the line of credit totaled
$5,241,000 at April 30, 2001 and $4,340,000 at April 30, 2000. The weighted
average interest rate on short-term borrowings outstanding for the years ended
April 30, 2001 and 2000 equaled 10.3% and 10.0%, respectively. The Company was
in default of its credit agreement at April 30, 2001. See Note 5.
The line of credit is principally secured by the assets of ASII which is
subject to the asset sale agreement described in Note 3. Accordingly,
outstanding borrowings under this line of credit are due and payable at the time
the sale transaction is closed.
5. LONG-TERM DEBT
Long-term debt as of April 30, 2001 and 2000 consists of the following (in
thousands):
April 30, 2001 2000 Industrial revenue bond,
variable interest rate (4.40% as of April 30,
2001), due in annual principal payments ranging
from $100,000 to $200,000 through maturity in
October 2017, secured by property and equipment
and restricted cash in the amount of $1,153,000
and an irrevocable letter of credit in favor of
the bond Trustee up to a maximum amount of
$2,599,573 through September, 2001. In connection
with the acquisition of DCI, the face amount of
this IRB was discounted approximately $178,000
resulting in an effective interest rate of 4.75%. $ 2,302 $ 2,392
Note payable to bank, interest at prime plus three
percent (11.0% at April 30, 2001), payable in
monthly installments of $27,129, including
interest, with final payment due in February 2003,
secured by inventory, accounts receivable and
certain equipment. 470 796
Note payable, interest adjustable May 2001 and
2006 at the prior five year Treasury Index average
plus 2.5% (7.25% at April 30, 2001), 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
$997,000 at April 30, 2001. 1,141 1,164
In connection with the purchase of DCI, the
Company issued a four year promissory note to
the stockholders of DCI totaling $1,248,000 with
interest payable at 8%, due in semi-annual
payments of $156,000 commencing July 31, 2000 to
February 1, 2004. The note is subordinated to
all other borrowings of the Company. Pursuant
to the bank's line of credit agreement, payments
under this obligation have been deferred as
discussed below. 1,248 1,248
During 2000, the Company issued a convertible
subordinated debenture in the amount of $500,000,
with a conversion price of $3.00 per common share,
and a warrant granting the holder the right to
purchase 45,635 shares of the Company's stock for
$150,596 ($3.30 per share). The subordinated debt
is convertible into 166,667 shares of common stock
at the option of the subordinated debt holder. The
common stock purchase warrant was valued at
$50,000 using the Black-Scholes option pricing
model. Accordingly, the subordinated debenture has
been discounted by $50,000 which results in an
effective interest rate of 13%. The debenture has
a stated interest rate of 10% and is due February
7, 2005. Pursuant to the bank's line of credit
agreement, interest payments under this obligation
have been deferred as discussed below. 450 450
--------- ----------
Total long-term debt 5,611 6,050
Less current portion 1,755 679
--------- -------
$ 3,856 $ 5,371
========= =======
The aggregate amount of principal to be paid on the long-term debt during
each of the next five years ending April 30 is as follows (in thousands):
Year
2002 $1,755
2003 531
2004 534
2005 226
2006 229
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
performance ratios and minimum levels of tangible net worth. At April 30, 2001,
the Company was in default of its tangible net worth covenant. Pursuant to an
event of default, the bank has the right to demand repayment of all amounts
outstanding under its credit agreements, although it has not yet expressed its
intent to do so. Accordingly, the Company has classified the note payable to
bank of $470,000 as part of the current portion of long-term debt in the
accompanying consolidated balance sheet.
The Company was in default of certain bank covenants at April 30, 2000. As
a result, on July 15, 2000, the Company and the bank amended the line of credit
agreement. Pursuant to the terms of the amended agreement, the Company is
prohibited from making principal and interest payments to the holders of
subordinated debt. Accordingly, the second through fifth quarterly payments of
interest, and the semi-annual payments of principal (totaling $100,000 and
$312,000, respectively) have not been made to the former stockholders of DCI on
the $1,248,000 subordinated debt, which is an event of default under terms of
the $1,248,000 promissory note.
The Company's bank and the former DCI stockholders entered into a
subordination agreement that eliminates the subordinated debt holders ability to
declare an event of default and accelerate repayment of the debt until all bank
borrowings are repaid. The Company intends to utilize a portion of the proceeds
to be received from the asset sale described in Note 3 to retire the existing
line of credit with the bank and pay the past due interest and principal
payments to the subordinated debt holders, which will remedy the existing
default. Accordingly, the subordinated debt scheduled for repayment after April
30, 2002 has been classified as long-term in the accompanying consolidated
balance sheet.
In addition, the second through fifth quarterly payments of interest
(totaling $50,000) have not been made to the holder of the $500,000 subordinated
debenture which is a default under terms of this subordinated debenture. As a
result of this default, the subordinated debt holder has the right to demand
repayment of the $500,000 of subordinated debt, although such right has not been
exercised. Accordingly, this subordinated debt has been classified as current in
the accompanying consolidated balance sheet.
6. OPERATING LEASES
The Company leases certain operating facilities and equipment under
long-term non-cancelable operating leases. Rent expense under all operating
leases was $66,000 and $82,000 for the years ended April 30, 2001 and 2000,
respectively. Total future minimum lease payments due under noncancellable
operating leases are as follows (in thousands):
Year
2002 $63
2003 35
2004 2
7. STOCK OPTIONS AND WARRANTS
The Company has reserved 475,000 shares of common stock for issuance to
employees and consultants of the Company pursuant to the Company's 1991 stock
option plan (the Plan). 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, 2001 and 2000, options to purchase 229,000 and 304,000 shares,
respectively, were vested and exercisable. Information with respect to options
granted under the Plan is as follows:
Shares Price
- -------------------------------------------------------------------
Outstanding at April 30, 1999 317,250 $0.34 -$ 8.75
Granted 50,000 2.25
Exercised -- --
Canceled --- ---
------------
Outstanding at April 30, 2000 367,250 0.34 - 8.75
Granted 51,000 1.50 - 2.13
Exercised --- ---
Canceled 91,500 5.25 - 8.75
-------------
Outstanding at April 30, 2001 326,750 $0.34 - $6.00
============ ============
The following table summarizes information about stock options
outstanding at April 30, 2001:
- ------------------------------------------------------ -----------------------
Options outstanding Options exercisable
- ------------------------------------------------------ -----------------------
Weighted-
Number average Number Weighted-
Range of outstanding remaining Weighted- exercisable average
exercise at April contractual average at April 30, exercise
prices 30, 2001 life exercise price 2001 price
- ------------------------------------------------------ -----------------------
$0.34 155,750 .8 years $0.34 155,750 $0.34
$1.50 - $6.00 171,000 7.4 years $3.12 73,334 $4.43
------- --------
$0.34 - $6.00 326,750 4.3 years $1.79 229,084 $1.65
======= =======
The per share weighted-average fair value of stock options granted during
2001 and 2000 was $1.49 and $1.38, respectively, on the date of grant using the
Black-Scholes _ option-pricing model with the following
weighted-average assumptions:
2001 2000
Expected years until exercise 5 5
Risk-free interest rate 5.75% 6.54%
Expected stock volatility 66.6% 66.2%
Expected dividend yield 0% 0%
Because the Company applies APB Opinion No. 25 in accounting for its
plans, no compensation expense has been recognized in connection with stock
options issued to employees in the financial statements. Had the Company
recorded compensation expense based on the fair value method under FAS No. 123,
the Company's net loss and loss per share would have been been approximately
$256,000 or $.10 per share in 2001 and approximately $1,338,000 or $.58 per
share in 2000.
In February 2000, the Company sold 198,413 shares of common stock through
a private placement in exchange for total proceeds of $500,000.
In March 2001, the Company sold 56,667 shares of common stock at market
price to certain officers for notes receivable totaling $85,000. As of April 30,
2001, notes receivable from officers amounting to $19,000 were
outstanding and accordingly, such amount has been reflected as a reduction to
stockholders' equity at April 30, 2001.
In connection with financing the acquisition of DCI in February 2000, the
Company issued $500,000 face amount of convertible subordinated debt and a
warrant that allows the holder to purchase up to an aggregate of 45,635 shares
of common stock exercisable at a per share price of $3.30 through February 2010.
The Company has reserved 212,302 additional shares of common stock for future
issuance pursuant to the convertible subordinated debt and the outstanding
warrant.
8. 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,
2001 and 2000 are as follows (in thousands):
2001 2000
---- ----
Deferred tax assets:
Current:
Net operating loss carry forward $ 820 $ 508
Alternative minimum tax and research and
development credit carry forward 163 122
Warranty accrual 21 58
Other accrued expenses 161 313
Other 179 27
------- --------
1,344 1,028
Non-current:
Basis differences in acquired assets 142 118
Asset impairment and amortization of
intangibles 332 410
------- --------
Total deferred tax assets 1,818 1,556
Deferred tax liabilities:
Non-current:
Basis differences in acquired assets (438) (325)
------- --------
Total deferred tax liabilities (438) (325)
------- --------
Net deferred tax asset 1,380 1,231
Valuation allowance (1,380) (1,231)
------- --------
$ --- $ ---
======= ========
The income tax expense for the years ended April 30, 2001 and 2000 is as
follows (in thousands):
2001 2000
---- ----
Current $ 117 $ ---
Deferred --- ---
------ ------
Total $ 117 $ ---
===== ======
The income tax expense (benefit) differs from amounts computed at the
statutory federal income tax rate as follows (in thousands):
2001 2000
---- ----
Benefit at statutory rate $ (33) $ (449)
State income tax, net of federal income tax effect (7) (66)
Noncreditable foreign income taxes, net of federal
and state benefit (46) ---
Permanent differences, principally goodwill and
other nondeductible expenses (63) ---
Valuation allowance 149 359
Effect of IRS examination --- 156
Foreign tax provision 117 ---
--------- ---
$ 117 $ ---
============ ==========
The increase in the valuation allowance is primarily due to the
generation of additional net operating loss carryforwards during 2001 for which
no tax benefit has been recognized due to the uncertainty of utilization. At
April 30, 2001, the Company has available net operating loss carryforwards of
approximately $2.1 million which will begin to expire in fiscal year 2020.
9. FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash,
accounts receivable, accounts payable, notes payable and long-term debt, as
reported in the accompanying consolidated balance sheets,
approximates fair value.
The Company periodically enters 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
Company had no significant forward exchange contracts during the years ended
April 30, 2001 and April 30, 2000.
10. SEGMENT INFORMATION
The Company operates two business segments. Its navaids unit designs,
manufactures and installs ground-based radio navigation and landing systems
(navaids) and airfield lighting. Its EMS unit manufactures custom liquid crystal
display devices, panel instrument and heat seal equipment. In addition, it
provides contract electronic manufacturing services.
The Company evaluates performance based upon operating income(loss).
Administrative functions such as executive, finance, human resources and quality
control are centralized and allocated between the operating
segments. The operating segments do not share manufacturing or distribution
services, but the electronic component manufacturing unit does perform certain
contract manufacturing services for the navaids unit. These services are valued
at a price which approximates market value and all intercompany transactions
have been eliminated.
The costs of operating the manufacturing plants are accounted for
discreetly within each segment, as are the Company's property and equipment,
inventory and accounts receivable.
Summary financial information for the two reportable segments is as
follows (in thousands):
Year ended April 30, 2001
Electronic
Manufacturing
Navaids Services Intersegment Total
Sales $15,078 $ 7,183 $ (545) $ 21,716
Interest expense 769 254 --- 1,023
Depreciation and
amortization expense 432 297 --- 729
Operating income (loss) 660 267 (1) 926
Segment assets 12,110 9,010 (70) 21,050
Expenditures for long-lived
assets 142 180 --- 322
Year ended April 30, 2000
Electronic
Manufacturing
Navaids Services Intersegment Total
Sales $13,483 $ 1,792 $ (147) $ 15,128
Interest expense 287 90 --- 377
Depreciation and
amortization expense 310 103 --- 413
Operating income (loss) (1,163) 228 (17) (952)
Segment assets 16,344 8,254 (2,790) 21,808
Expenditures for long-lived
assets 377 112 --- 489
As discussed in Note 3, the Company has agreed to sell substantially all
of the assets and operations of its navaids unit. The closing of the
transaction, which is subject to approval by the Company's stockholders, is
expected to occur during the second quarter of fiscal 2002.
The Company had sales to two customers in 2001 and one customer in 2000
which accounted for 23% and 15% of total sales, respectively.
The Company's export sales primarily relate to its navaids unit. The
Company's export sales to foreign customers by primary geographic region and in
total are set forth below (in thousands):
2001 2000
---- ----
Asia $ 5,135 $ 3,880
Africa and the Middle East 415 1,611
South America 833 1,134
North America 3,031 1,938
Europe 1,096 2,182
Australia 104 216
----- --------
$ 10,614 $ 10,961
========= ========
11. 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. Qualified employees are 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 annual compensation. 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 contribution invested in common stock of the
Company. Additionally, the Company may make discretionary contributions to the
plan. For the years ended April 30, 2001 and 2000, Company contributions to the
plans amounted to approximately $92,000 and $71,000, respectively.
12. CONTINGENCY
The Company is a defendant in litigation brought by a customer of the
Company that filed a petition alleging unjust enrichment by the Company as a
result of the customer's default for non-payment under terms of a contract
entered into in 1994. The plaintiff seeks damages of approximately $140,000 plus
interest since 1994. The trial court has granted the Company
summary judgment on all claims brought by the plaintiff, and the plaintiff has
filed a notice of its intention to appeal that decision. The Company believes it
has meritorious defenses and is continuing to vigorously defend this claim.
Presently, counsel for the Company is unable to estimate the range of possible
loss, if any, which could result from this claim. Accordingly, no provision for
any liability has been made in the accompanying consolidated financial
statements.
Airport Systems International, Inc.
UNAUDITED FINANCIAL STATEMENTS
The following unaudited financial statements of Airport Systems
International, Inc. ("ASII") are derived from the consolidated financial
statements of the Company and reflect the operating results and net assets of
ASII. These financial statements should be read in conjunction with the
consolidated financial statements of Elecsys Corporation, related notes and
other financial information included in this Proxy Statement.
The unaudited financial statements presented include the statement of net
assets as of April 30, 2001 and 2000 and the related statements of operations
and cash flows for the years then ended.
Airport Systems International, Inc.
Statements of Net Assets
(In thousands)
Unaudited
April 30,
2001 2000
---- ----
ASSETS:
Current assets:
Accounts receivable, less allowances of
$42 in 2001 and $47 in 2000 $ 4,805 $ 4,716
Inventories 5,402 6,237
Other current assets 43 125
---------- ----------
Total current assets 10,250 11,078
Property and equipment, at cost (Note 2):
Land 224 224
Building and improvements 1,279 1,279
Equipment 2,222 2,068
---------- ----------
3,725 3,571
Accumulated depreciation and amortization (2,155) (1,964)
---------- ----------
1,570 1,607
---------- ----------
Total assets $ 11,820 $ 12,685
========== ==========
Airport Systems International, Inc.
Statements of Net Assets
(In thousands)
Unaudited
April 30,
2001 2000
---- ----
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable $ 1,189 $ 1,438
Accrued expenses 1,364 1,293
Customer deposits 217 1,083
Current portion of long-term debt (Note 2) 26 20
---------- ---------
Total current liabilities 2,796 3,834
Long-term debt, less current portion
(Note 2) $ 1,115 1,144
---------
Total liabilities 3,911 4,978
---------- ---------
Net Assets $ 7,909 $ 7,707
========== =========
See accompanying notes.
Airport Systems International, Inc.
Statements of Operations
(In thousands)
Unaudited
Year Ended April 30,
2001 2000
---- ----
Sales $ 15,078 $ 13,483
Cost of products sold 10,921 9,967
-------- ---------
Gross margin 4,157 3,516
Selling, general and administrative
expenses 3,415 3,848
Research and development expenses 82 831
-------- ---------
Operating income (loss) 660 (1,163)
Other income (expense):
Interest expense (769) (287)
Other income, net --- 3
-------- ---------
Loss before income taxes (109) (1,447)
Income tax expense 117 ---
-------- ---------
Net income (loss) $ (226) $ (1,447)
======== =========
See accompanying notes.
Airport Systems International, Inc.
Statements of Cash Flows
(In thousands)
Unaudited
Year ended April 30,
2001 2000
Operating Activities:
Net income (loss) $ (226) $(1,447)
Adjustments to reconcile net income (loss)
to net cash provided by used in operating
activities:
Depreciation and amortization 191 268
Changes in operating assets and
liabilities
Accounts receivable, net (89) 1,252
Inventories 835 (2,290)
Other current assets 82 (92)
Accounts payable (249) 353
Accrued expenses and customer
deposits (795) 654
-------- -------
Net cash used in operating activities (251) (1,302)
Investing Activities:
Purchases of property and equipment (154) (339)
-------- -------
Net cash used in investing activities (154) (339)
Statements of Cash Flows (continued)
Year Ended April 30,
2001 2000
---- ----
Financing Activities:
Principal payments on long-term debt $ (27) $ (29)
Financing transfers (to) from parent (432) 1,670
--------- --------
Net cash provided by financing activities 405 1,641
--------- --------
Cash and cash equivalents at beginning of year --- ---
--------- --------
Cash and cash equivalents at end of year $ --- $ ---
========= ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $ 567 $ 162
========= ========
Income taxes $ 117 $ ------
========= ========
See accompanying notes.
Airport Systems International, Inc.
Notes to Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been derived from the accounts
of Airport Systems International, Inc. (ASII), a wholly-owned subsidiary of
Elecsys Corporation (the "Company"). ASII designs,
manufactures and installs ground-based radio navigation and landing systems
(navaids) and airfield lighting.
On June 18, 2001, the Company entered into a sales agreement for the sale
of substantially all of the assets and the transfer of certain liabilities of
its ASII subsidiary to ASI Newco, Inc. The accompanying statement of net assets
reflects the assets to be sold and liabilities to be transferred, as
contemplated in the agreement.
Pursuant to the asset sale agreement, the assets and liabilities that will
be retained by the Company and excluded from the sales agreement include cash
accounts, inter-company balances with the Company, certain deposits and prepaid
expenses, short term notes payable, and certain accrued expenses.
The statement of operations generally represents the amounts reported in
the financial statements of ASII, as adjusted for the following items:
- Elimination of salaries and fringe benefits of executive officers
who will remain with the Company subsequent to closing; and
- Elimination of general and administrative expenses not directly
related to the conduct of ASII business.
Use of Estimates
The preparation of ASII's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
Concentration of Credit Risk
Financial instruments which potentially subject ASII to concentrations of
credit risk consist primarily of trade receivables and derivative financial
instruments which were not material in 2001 and 2000. ASII grants credit to
customers who meet ASII's pre-established credit requirements. ASII generally
requires foreign customers to issue letters of credit, which secure payment of
their accounts receivable balances. Credit losses are provided for in ASII's
consolidated financial statements and have been within management's
expectations.
Revenue Recognition
ASII generates revenues pursuant to contracts with its customers, most of
which are less than one year in duration. Revenue on these contracts is
principally recognized using the percentage of completion, units of delivery
method.
Inventories
Inventories are stated at the lower of last in, first out (LIFO) cost, or
market. At April 30, 2001 and 2000, cost of these LIFO inventories exceeded
current cost by approximately $634,000 and $685,000.
Inventories are summarized by major classification as follows (in
thousands):
April 30,
2001 2000
Raw materials $3,170 $3,231
Work-in-process 1,821 1,220
Finished goods 411 1,786
------ ------
$5,402 $6,237
========= ========
Property and Equipment
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Description Years
Building and improvements 30
Equipment 5-8
Income Taxes
ASII accounts for income taxes using the liability method. ASII incurred
foreign income taxes of $117,000 during 2001 resulting from the completion of a
contract in a foreign country. No other income tax related amounts have been
reflected on ASII's consolidated financial statements pursuant to the asset sale
agreement.
Advertising Costs
ASII expenses advertising costs as incurred. Advertising expense
charged to operations amounted to $10,000 and $11,000 for the years ended April
30, 2001 and 2000, respectively.
Letters of Credit
ASII has outstanding secured and unsecured letters of credit totaling
$1,932,000 and $2,146,000 at April 30, 2001 and 2000, respectively.
2. LONG-TERM DEBT
Long-term debt as of April 30, 2001 and 2000 consisted of the following
(in thousands):
April 30,
2001 2000
Note payable, interest adjustable May 2001 and
2006 at the prior five year Treasury Index average
plus 2.5% (7.25% at April 30, 2001), 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
$997,000 at April 30, 2001. $ 1,141 $ 1,164
Less current portion 26 20
------- ---------
$ 1,115 $ 1,144
========= =========
The aggregate amount of principal to be paid on the long-term debt during each
of the next five years ending April 30 is as follows (in thousands):
Year
2002 $26
2003 28
2004 30
2005 32
2006 35
3. OPERATING LEASES
ASII leases certain operating facilities and equipment under long-term
noncancellable operating leases. Rent expense under all operating leases was
$66,000 and $82,000 for the years ended April 30, 2001 and 2000,
respectively. The above leases are not included in the asset sale
agreement. Future minimum lease payments on these leases which will be retained
by ASII are as follows:
Year
2002 $63
2003 35
2004 2
4. FINANCIAL INSTRUMENTS
The carrying value of ASII's financial instruments, including cash,
accounts receivable, accounts payable, and long-term debt, as reported in the
accompanying statements of net assets, approximates fair value.
5. SEGMENT INFORMATION
ASII operates in one segment, and designs, manufactures and installs
ground-based radio navigation and landing systems (navaids) and airfield
lighting.
ASII had sales to two customers in 2001 and one customer in 2000 which
accounted for 23% and 15% of total sales, respectively.
ASII's export sales to foreign customers by primary geographic region and
in total are set forth below (In thousands):
2001 2000
Asia $ 5,135 $ 3,880
Africa and the Middle East 415 1,611
South America 833 1,134
North America 3,031 1,938
Europe 1,096 2,182
Australia 104 216
--------- --------
$ 10,614 $ 10,961
========= ========
6. EMPLOYEE BENEFIT PLAN
ASII utilizes a defined contribution employee benefit plan which covers
substantially all full-time employees who have attained age 21 and completed six
months of service. Qualified employees are entitled to make voluntary
contributions to the plan of up to 15% of their annual compensation subject to
Internal Revenue Code maximum limitations. ASII 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 ASII's contribution into mutual funds
and money market funds, with the remaining 50% of ASII's contribution invested
in common stock of Elecsys. Additionally, ASII may make
discretionary contributions to the plan. For the years ended April 30, 2001 and
2000, ASII contributions to the plan amounted to approximately $50,000 and
$65,000, respectively.
7. CONTINGENCY
In fiscal 2000, a customer of ASII filed a petition alleging unjust
enrichment by ASII as a result of the customer's default for non-payment under
terms of a contract entered into in 1994. The plaintiff seeks damages of
approximately $140,000 plus interest since 1994. The trial court has granted
ASII summary judgment on all claims brought by the plaintiff, and the plaintiff
has filed a notice of its intention to appeal that decision. ASII believes it
has meritorious defenses and is continuing to vigorously defend this claim.
Presently, counsel for ASII is unable to estimate the range of possible loss, if
any, which could result from this claim. Accordingly, no provision for any
liability has been made in the accompanying financial statements.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEET
The following Unaudited Pro Forma Consolidated Financial Information is
based on the historical financial data of the Company as adjusted to give effect
to the sale of certain assets and transfer of certain liabilities of the navaids
business (Transaction) as detailed in the Asset Purchase Agreement. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect
to the Transaction as if it had taken place at the beginning of the earliest
period presented. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet at April 30, 2001 treats the Transaction as if it had taken place on that
date.
The Company condensed purchased the stock of DCI on February 7, 2000. As a
result, the Unaudited Pro Forma Consolidated Statement of Operations for the
year-ended April 30, 2000 reflects the operating results of DCI for the period
from February 7, 2000 to April 30, 2000.
The unaudited pro forma adjustments are based upon
available information and certain assumptions that we believe are reasonable
under the circumstances. The Unaudited Pro Forma Condensed Consolidated
Financial Statements do not purport to represent what our results of operations
or financial condition would actually have been had the Transaction in fact
occurred on such date, nor do they purport to project our results of operations
or financial condition for any future period or date. The information set forth
below should be read together with the other information contained in the
Company's 2000 Form 10-KSB and the July 31, 2000 and October 31, 2000 and
January 31, 2001 Forms 10-QSB.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended
April 30, 2000 (all amounts in thousands, except per share data)
-------------------------------------------------
Description Historical ASII AdjustmentNotes Proforma
-------------------------------------------------
Sales $ 15,128 $(13,483) $ 147 (1) $ 1,792
Cost of products sold 10,793 (9,967) 110 (1) 936
-------------------------------- -----------
Gross margin 4,335 (3,516) 37 856
Selling, general and 4,456 (3,848) 189 (2) 797
administrative expenses
Research and development 831 (831) - -
expenses
-------------------------------------------------
Operating income (loss) (952) 1,163 (152) 59
Other income (expense)
Interest expense (377) 287 18 (3) (72)
Other income, net 9 (3) - 6
-------------------------------- -----------
Income (loss) before income
taxes (1,320) 1,447 18 (7)
Income tax provision (benefit) - - - (4) -
-------------------------------- -----------
Net income (loss) $(1,320) $ 1,447 $ (134) $ (7)
================================ ===========
Basic and diluted loss per $ (0.57) $ (--)
share
=========== ===========
Basic and diluted weighted
average shares outstanding 2,311 2,311
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS
Year Ended April 30, 2001
(in thousands, except per share data)
-----------------------------------------------
Description Historical ASII AdjustmentNotes Proforma
-----------------------------------------------
Sales $ 21,716 $(15,078) $ 545 (1) $7,183
Cost of goods sold 14,951 (10,921) 409 (1) 4,439
-------------------------------- ---------
Gross margin 6,765 (4,157) 136 2,744
Selling, general and
administrative expenses 5,757 (3,415) 452 (2) 2,794
Research and development 82 (82) - -
-------------------------------- ---------
Operating income (loss) 926 (660) (316) (50)
Other income (expense)
Interest expense (1,023) 769 21 (3) (233)
Interest income 1 - - 1
-------------------------------- ---------
Loss before income taxes (96) (109) (295) (282)
Income tax provision (benefit) 117 (117) - (4) -
-------------------------------- ---------
Net loss $ (213) $ (226) $ (295) $(282)
================================ =========
Basic and diluted loss per share $ (0.08) $(0.11)
======== =======
Basic and diluted weighted
average shares outstanding 2,588 2,588
Notes to Pro Forma Condensed Consolidated Statements of Operations
(1) Adjustment to record Intercompany sales by DCI to ASII, which were
previously eliminated in consolidation.
(2) This adjustment to selling, general and administrative expenses reflects
certain general and administrative expenses allocated to ASII but not
directly related to the operational activities of ASII.
(3) Interest expense was adjusted to reflect the elimination interest expense
on the term note payable to bank and elimination of additional default
interest incurred.
Pro Forma interest expense consisted of the following:
Interest Expense
-----------------------------------------
Year-ended April 30
--------------------------------
Debt Instrument 2001 2000(a)
--------------- ---- ----
Industrial Revenue
Bond $ 105 $ 37
Subordinated debt 128 35
------- -----
Total $ 233 $ 72
======= =====
(a) Represents interest for the period from February 7, 2000, through
April 30, 2000.
(4) No income tax provision or benefit was recorded due to net operating
loss carry forwards available to the Company. The income tax provision
shown in the historical financial information for the year ended April 30,
2001 reflects the payment of foreign tax obligations related to a contract
completed by ASII and was therefore eliminated for purpose of the pro
forma presentation.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At April 30, 2001
(in thousands)
----------------------------------------------
Historical ASII Adjust- Notes Proforma
ments
----------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 26 $ - $ 2,463 (1) $ 2,489
Accounts receivable, net 5,828 (4,805) - 1,023
Inventories, net 7.444 (5,402) - 2,042
Other current assets 260 (43) - 217
------------------------------ ----------
Total current assets 13,558 (10,250) 2,463 5,771
Property and equipment, at cost 6,677 (3,725) - 2,952
Accumulated depreciation and
amortization (2,511) 2,155 - (356)
------------------------------ ----------
4,166 (1,570) - 2,596
Restricted cash 1,153 - - 1,153
Cost in excess of net assets
acquired, net 2,014 - - 2,014
Other assets 159 - - 159
------------------------------ ----------
Total assets $21,050 ($11,820) $2,463 $11,693
============================== ==========
Liabilities and Stockholders'
Equity
Current liabilities:
Accounts payable $ 1,751 $(1,189) $ - $ 562
Accrued expenses and
customer deposits 2,237 (1,581) (150) (1) 506
Notes payable to bank 5,241 - (5,241) (1) -
Current portion of long-term debt 1,755 (26) (782) (1) 947
------------------------------ ----------
Total current liabilities 10,984 (2,796) (6,173) 2,015
Long-term debt, less current portion 3,856 (1,115) - 2,741
Net assets sold - (7,909) 7,909 -
Stockholders' equity 6,210 - 727 (2) 6,937
------------------------------ ----------
Total liabilities and stockholders'
equity $21,050 (11,820) ($2,463) $11,693
============================== ==========
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(All amounts in thousands)
(1) Cash received from the sale is:
Purchase Price (a) $7,700
Adjustment to the Purchase Price (a)
Final Closing Net Asset Value (b) 7,182
Target Net Asset Value 6,046
-------
Adjustment (a) 1,136 1,136
-------
Cash proceeds 8,836
Uses of Cash Proceeds:
Retire notes payable to bank (5,241)
Retire term note payable to bank (470)
Payment of sub-debt principle
payments in arrears (312)
Payment of sub-debt interest in arrears (150)
Estimated transaction costs (200)
Net cash received $2,463
======
(a) As set out in the Asset Purchase
Agreement
(b) Net assets of ASII as of April 30,
2001 less adjustment of $727,000 to
the net assets as agreed to in the
Asset Purchase Agreement.
(2) Represents the estimated after-tax gain from the sale as follows:
Total proceeds $8,836
Net assets sold (7,909)
Estimated transaction costs (200)
------
Estimated gain $ 727
======