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Share Name | Share Symbol | Market | Type |
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Elecsys Corp | AMEX:ASY | AMEX | Ordinary Share |
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended July 31, 2008. ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to ______________. Commission File Number 0-22760 ELECSYS CORPORATION (Exact name of registrant as specified in its charter) Kansas 48-1099142 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 846 N. Mart-Way Court Olathe, Kansas 66061 (Address of principal executive offices) (913) 647-0158 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer ( ) Accelerated filer ( ) Non-accelerated filer ( ) Smaller reporting company (X) Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $0.01 par value - 3,290,437 shares outstanding as of September 5, 2008. Page 1
ELECSYS CORPORATION AND SUBSIDIARIES FORM 10-Q Quarter Ended July 31, 2007 INDEX Page PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements Condensed Consolidated Statements of Operations - Three months ended July 31, 2008 and 2007 (Unaudited) 3 Condensed Consolidated Balance Sheets - July 31, 2008 (Unaudited) and April 30, 2008 4 Condensed Consolidated Statements of Stockholders' Equity - Three months ended July 31, 2008 (Unaudited) and the year ended April 30, 2008 5 Condensed Consolidated Statements of Cash Flows - Three months ended July 31, 2008 and 2007 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 22 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 30 ITEM 4T. Controls and Procedures 30 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 31 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 ITEM 3. Defaults Upon Senior Securities 31 ITEM 4. Submission of Matters to a Vote of Security Holders 31 ITEM 5. Other Information 31 ITEM 6. Exhibits 31 Signatures 32 Exhibit Index 33 Page 2
PART I - FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements. Elecsys Corporation and Subsidiaries Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three months ended ----------------------------------------- July 31, 2008 July 31, 2007 ------------------- ------------------ Sales $5,564 $4,787 Cost of products sold 3,613 3,272 ------------------- ------------------ Gross margin 1,951 1,515 Selling, general and administrative expenses 1,655 1,161 ------------------- ------------------ Operating income 296 354 Financial income (expense): Interest expense (117) (102) Other income, net -- 14 ------------------- ------------------ (117) (88) ------------------- ------------------ Income before income taxes 179 266 Income tax expense 70 92 ------------------- ------------------ Net income $109 $174 =================== ================== Net income per share information: Basic $0.03 $0.05 Diluted $0.03 $0.05 Weighted average common shares outstanding: Basic 3,287 3,285 Diluted 3,458 3,479 See Notes to Condensed Consolidated Financial Statements. Page 3
Elecsys Corporation and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share data) July 31, 2008 April 30, 2008 --------------- ---------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $301 $357 Accounts receivable, less allowances of $305 and $303, respectively 3,132 3,757 Inventories, net 6,104 6,207 Prepaid expenses 115 75 Deferred taxes 779 781 --------------- ---------------- Total current assets 10,431 11,177 Property and equipment, at cost: Land 1,737 1,737 Building and improvements 3,395 3,395 Equipment 3,502 3,490 --------------- ---------------- 8,634 8,622 Accumulated depreciation (2,380) (2,249) --------------- ---------------- 6,254 6,373 Goodwill 1,492 1,544 Intangible assets, net 1,884 1,927 Other assets, net 76 77 --------------- ---------------- Total assets $20,137 $21,098 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,402 $2,051 Accrued expenses 2,075 2,042 Income taxes payable 253 564 Note payable to bank 3,723 3,836 Current maturities of long-term debt 315 309 --------------- ---------------- Total current liabilities 7,768 8,802 Deferred taxes 314 311 Long-term debt, less current maturities 3,789 3,870 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; issued and outstanding - none -- -- Common stock, $.01 par value, 10,000,000 shares authorized; issued and outstanding - 3,290,437 at July 31, 2008 and 3,285,437 at April 30, 2008 33 33 Additional paid-in capital 9,159 9,117 Accumulated deficit (926) (1,035) --------------- ---------------- Total stockholders' equity 8,266 8,115 --------------- ---------------- Total liabilities and stockholders' equity $20,137 $21,098 =============== ================ See Notes to Condensed Consolidated Financial Statements. Page 4
Elecsys Corporation and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity (In thousands) Common Common Additional Total Stock Stock Paid-In Accumulated Stockholders' (# of shares) ($) Capital Deficit Equity Balance at April 30, 2007 3,285 $33 $9,031 $(1,723) $7,341 Net income -- -- -- 688 688 Share-based compensation expense -- -- 86 -- 86 --------------- ----------- ------------ --------------- ---------------- Balance at April 30, 2008 3,285 33 9,117 (1,035) 8,115 Net income -- -- -- 109 109 Exercise of stock options 5 -- 25 -- 25 Share-based compensation expense -- -- 17 -- 17 --------------- ----------- ------------ --------------- ---------------- Balance at July 31, 2008 (unaudited) 3,290 $33 $9,159 $(926) $8,266 =============== =========== ============ =============== ================ See Notes to Condensed Consolidated Financial Statements. Page 5
Elecsys Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three months ended July 31, ---------------------------------- 2008 2007 --------------- --------------- Cash Flows from Operating Activities: Net income $109 $174 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Share-based compensation expense 17 17 Depreciation 137 124 Amortization 43 13 Provision for doubtful accounts 9 23 Deferred income taxes 5 5 Changes in operating assets and liabilities: Accounts receivable 616 (998) Inventories 103 (561) Accounts payable (649) 285 Accrued expenses 33 10 Income taxes payable (311) -- Other (39) 52 --------------- --------------- Net cash provided by (used in) operating activities 73 (856) --------------- --------------- Cash Flows from Investing Activities: Purchases of property and equipment (18) (112) Proceeds from sale of property and equipment -- -- Change in goodwill for purchase price adjustments 52 (3) --------------- --------------- Net cash (used in) investing activities 34 (115) --------------- --------------- Cash Flows from Financing Activities: Borrowings on note payable to bank 1,267 2,094 Principal payments on note payable to bank (1,380) (1,262) Proceeds from exercise of stock options 25 -- Principal payments on long-term debt (75) (67) --------------- --------------- Net cash provided by (used in) financing activities (163) 765 --------------- --------------- Net (decrease) in cash and cash equivalents (56) (206) Cash and cash equivalents at beginning of period 357 503 --------------- --------------- Cash and cash equivalents at end of period $301 $297 =============== =============== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $116 $102 Cash paid during the period for income taxes 376 -- See Notes to Condensed Consolidated Financial Statements. Page 6
Elecsys Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements July 31, 2008 (Unaudited) 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Elecsys Corporation (the "Company") is a publicly traded holding company with three wholly owned subsidiaries, DCI, Inc. ("DCI"), NTG, Inc. ("NTG"), and Radix Corporation ("Radix"). DCI provides electronic design and manufacturing services for original equipment manufacturers ("OEMs") in the aerospace, transportation, communications, safety, security and other industrial product markets. DCI has specialized expertise and capabilities to design and efficiently manufacture custom electronic assemblies which integrate a variety of innovative display and interface technologies. NTG designs, markets, and provides remote monitoring solutions for the gas and oil pipeline industry as well as other industries that require remote monitoring. Radix develops, designs and markets ultra-rugged handheld computers, peripherals and portable printers. The markets served by its products include utilities, transportation logistics, traffic and parking enforcement, route accounting/deliveries, and inspection and maintenance. The Company's sales are made primarily to customers within the United States, but also include customers in Canada and several other international markets. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, DCI, Radix and NTG. All significant intercompany balances and transactions have been eliminated in consolidation. Comprehensive Income The Company has no components of other comprehensive income, therefore comprehensive income equals net income. Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP, establishes guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FASB Staff Position No. SFAS 157-2 was issued in February 2008. SFAS 157-2 delayed the application of SFAS 157 for non-financial assets and non-financial liabilities, except items that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The Company is required to adopt SFAS 157 in the first quarter of fiscal year 2010. The Company believes that the financial impact, if any, of adopting SFAS 157 will Page 7
not result in a material impact to its financial statements. In February 2007, the FASB issued SFAS No. 159 ("SFAS 159"), The Fair Value Option for Financial Assets and Financial Liabilities. Under SFAS 159, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex hedge accounting provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, are not met. The Company adopted SFAS 159 as of May 1, 2008 and it did not result in a material impact to its financial statements. In December 2007, the FASB issued SFAS No. 160 ("SFAS 160"), Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for the Company in its fiscal year beginning May 1, 2009. The Company does not believe the adoption of this statement will have a material impact on its financial position and results of operations. In December 2007, the FASB issued SFAS No. 141R ("SFAS 141R"), Business Combinations. SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for the Company's fiscal year beginning May 1, 2009. The Company does not believe the adoption of this statement will have a material impact on its financial position and results of operations. Revenue Recognition The Company derives revenue from the manufacture of production units of electronic assemblies, liquid crystal displays, remote monitoring equipment and ultra-rugged handheld computers and peripherals. The Company also derives revenue from repairs and non-warranty services, engineering design services, remote monitoring services and maintenance contracts. Production and repaired units are billed to the customer after they are shipped. Remote monitoring services and maintenance contracts are billed and the revenue recognized at the end of the month after the services or maintenance periods are completed. For customers that utilize the Company's engineering design services, the customer is billed and revenue is recognized after the design services or tooling have been completed. The Company requires our customers to provide a binding purchase order to verify the manufacturing services to be provided. Typically, the Company does not have any post-shipment obligations that would include customer acceptance requirements. Radix does provide training and installation services to its customers and those services are billed and the revenue recognized at the end of the month after the services are completed. Revenue recognized is net of sales taxes remitted to the government. Page 8
Accounts Receivable Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition and credit history, and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The majority of the customer accounts are considered past due after the invoice becomes older than the customer's credit terms (30 days for the majority of customers). Interest is not charged on past due accounts for the majority of our customers. Inventory Valuation Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market value. The Company's industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as other market considerations. Provisions for estimated excess and obsolete inventory are based on quarterly reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from the customers. Inventories are reviewed in detail on a quarterly basis utilizing a 24-month time horizon. Individual part numbers that have not had any usage in a 24-month time period are examined by manufacturing personnel for obsolescence, excess and fair value. Parts that are not identified for common use or are unique to a former customer or application are categorized as obsolete and are discarded as part of the quarterly inventory write-down. If actual market conditions or customers' product demands are less favorable than those projected, additional inventory write-downs may be required. The reserve balance is analyzed for adequacy along with the inventory review each quarter. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: Description Years Building and improvements 39 Equipment 3-8 Computers and software 3 Goodwill Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. The Company does not amortize goodwill, but rather reviews its carrying value for impairment annually (April 30), and whenever an impairment indicator is identified. The Company performs its annual impairment test at year-end and uses an outside valuation firm. The goodwill impairment test involves a two-step approach. The first step is to identify if potential impairment of goodwill exists. If impairment of goodwill is determined to exist, the second step of the goodwill impairment test measures the amount of the impairment using a fair value-based approach. Page 9
Intangible Assets Intangible assets consist of patents, trademarks, copyrights, customer relationships and capitalized software. Intangible assets are amortized over their estimated useful lives using the straight-line method. Impairment of Long-Lived Intangible Assets Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets. If the sum of the expected future cash flows is less than the carrying amount, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes ("SFAS 109") as clarified by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred income tax assets, the Company considers whether it is "more likely than not," according to the criteria of SFAS 109, that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. FIN 48 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. Warranty Reserve The Company has established a warranty reserve for rework, product warranties and customer refunds. The Company provides a limited warranty for a period of one year from the date of receipt of products by customers and standard warranties require the Company to repair or replace defective products at no cost to the customer or refund the customer's purchase price. The warranty reserve is based on historical experience and analysis of specific known and potential warranty issues. The product warranty liability reflects management's best estimate of probable liability under the product warranties. Page 10
Shipping and Handling Costs Shipping and handling costs that are billed to our customers are recognized as revenues in the period that the product is shipped. Shipping and handling costs that are incurred by the Company are recognized as cost of sales in the period that the product is shipped. 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, DCI, Inc., NTG, Inc. and Radix Corporation. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2008 are not necessarily indicative of the results that may be expected for the year ending April 30, 2009. The balance sheet at April 30, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company' annual report on Form 10-KSB for the year ended April 30, 2008. 3. ACQUISITIONS OF ASSETS Radix. On September 18, 2007, the Company, through its newly formed and wholly owned subsidiary, Radix Corporation, acquired the assets and assumed certain liabilities of Radix International Corporation and its subsidiary. The Company made the strategic decision to grow through expansion into the specialized niche of rugged mobile computing. The Company, through Radix, acquired approximately $4.50 million in assets, including accounts receivable and inventory, as well as all of the intellectual property and intangible assets owned by Radix International Corporation and its subsidiary. In the transaction, Radix assumed accounts payable due to DCI, assumed an additional amount of approximately $2.2 million in liabilities, and incurred acquisition costs of approximately $50,000. The transaction also includes performance related contingent consideration based on the annual revenues of the acquired business over the next five years. The total performance related contingency is limited to approximately $2.2 million and is subject to certain conditions that may impact the total amount to be paid. The acquisition has been accounted for as a purchase and, accordingly, the accompanying financial statements include the results of operations of Radix, from the date of the acquisition. Page 11
The purchase price was initially allocated based on the fair value of the assets acquired and, subsequent to the acquisition date, there have been additional purchase price adjustments leading to the following allocation for the assets purchased and liabilities assumed (in thousands): Assets acquired: Receivables $783 Inventories 614 Goodwill 1,403 Intangibles (customer list, trade names/trade secrets, and technology) 1,705 ---------- 4,505 Liabilities assumed: Accounts payable to outside vendors (611) Accounts payable to DCI, Inc. (a subsidiary of Elecsys Corporation) (2,262) Accrued expenses (1,620) ---------- (4,493) ---------- Cost of acquisition, net of cash acquired $12 ========== The purchase price in excess of the fair value of the tangible assets acquired has been allocated to intangibles and goodwill. The Company engaged an independent third party valuation expert to assist in the allocation of the excess purchase price to the various specific separately identifiable intangibles. The final valuation report allocated the $1,705,000 in intangible valuation to customer relationships ($950,000), trade names ($530,000) and technology ($225,000). These assets were determined by the valuation expert to have a useful life of 15 years. Amortization expense for the acquired intangible assets is estimated to be approximately $114,000 in each of the next fifteen fiscal years. Page 12
The following table sets forth the unaudited pro forma results of operations of the Company for the three-month periods ended July 31, 2008 and 2007 as if the Company had acquired the assets and assumed certain liabilities of Radix International Corporation and subsidiary at the beginning of the respective periods. The pro forma information contains the actual operating results of the Company and Radix with the results prior to September 18, 2007, for Radix, adjusted to include pro forma impact of (i) the elimination of intercompany sales and gross margin in inventory as of the periods presented; (ii) additional interest expense associated with the financing arrangement entered into by the Company on September 25, 2007 in connection with the transaction; (iii) additional expense as a result of estimated amortization of identifiable intangible assets; and (iv) an adjustment to income tax expense for the tax effect of the above adjustments. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions occurred at the beginning of the respective periods or that may be obtained in the future (in thousands, except per share data). Three Months Ended July 31, ------------------------------------------------------------------------------- 2008 2007 ------------------------------------- -------------------------------------- Pro Forma Pro Pro Forma Pro Reported Adjustments Forma Reported Adjustments Forma ------------------------------------- -------------------------------------- Sales $5,564 $ -- $5,564 $4,787 $645 $5,432 Net income (loss) 109 -- 109 174 (276) (102) Basic earnings per share $0.03 $0.03 $0.05 $(0.03) Diluted earnings per share $0.03 $0.03 $0.05 $(0.03) AMCI. On December 19, 2006, the Company announced that its NTG subsidiary had acquired the product lines, technology, customer base and intellectual property of Advanced Monitoring & Control, Inc. ("AMCI") for approximately $90,000. The purchase price also included a pending patent application. The entire purchase price was allocated to the customer list. AMCI was a competitor of NTG in the business of remote monitoring of oil and gas pipelines as well as other various remote monitoring applications. The employees of AMCI became employees of NTG upon completion of the transaction. Total acquired intangible assets consist of the following (in thousands): July 31, 2008 April 30, 2008 ---------------------------- ----------------------------- Gross Gross Intangible Asset Carrying Accumulated Carrying Accumulated Description Company Amount Amortization Amount Amortization ---------------------------- ----------- ---------- -------------- ----------- -------------- Patents, trademarks and copyrights NTG $352 $(129) $352 $(120) Customer relationships NTG 90 (29) 90 (24) Customer relationships Radix 950 (58) 950 (42) Trade name Radix 530 (33) 530 (24) Technology Radix 225 (14) 225 (10) ---------- -------------- ----------- -------------- $2,147 $(263) $2,147 $(220) ========== ============== =========== ============== Amortization expense for the three-month periods ended July 31, 2008 and 2007 was approximately $43,000 and $13,000, respectively. Page 13
Estimated amortization expense for the next five fiscal years ending April 30 is as follows (in thousands): Year Amount ---------------- ---------------- 2009 $128 2010 166 2011 166 2012 161 2013 149 Thereafter 1,116 4. INVENTORY Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) method. Inventories, net of reserves of approximately $377,000, for the periods ended July 31, 2008 and April 30, 2008, respectively, are summarized by major classification as follows (in thousands): July 31, 2008 April 30, 2008 ------------------ --------------------- Raw material $4,365 $4,725 Work-in-process 1,225 959 Finished goods 514 523 ------------------ --------------------- $6,104 $6,207 ================== ===================== 5. STOCK OPTION PLAN At July 31, 2007, the Company had an equity-based compensation plan from which stock-based compensation awards are granted to eligible employees and consultants of the Company. According to the terms of the Company's 1991 stock option plan (the "Plan") for which the Company originally reserved 675,000 shares of common stock, both incentive stock options and non-qualified stock options to purchase common stock of the Company may be granted to key employees, directors and consultants to the Company, at the discretion of the Board of Directors. Incentive stock options may not be granted at prices that 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, but have not been granted at less than market value on the date of grant. Generally, these options become exercisable and vest over one to five years and expire within 10 years of the date of grant. The Plan also provides for accelerated vesting if there is a change in control of the Company. As of July 31, 2008, options to purchase approximately 311,250 shares were outstanding of which 254,583 are vested and exercisable. Prior to May 1, 2006, the Company accounted for its equity-based compensation plan under the recognition and measurement provision of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS Page 14
123). The Company did not recognize the value of stock-based compensation issued to employees and directors in its Consolidated Statements of Operations prior to May 1, 2006, as all options granted under its equity-based compensation plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Effective May 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified-prospective-transition method. Under this transition method, compensation cost recognized in the first quarter of fiscal year 2007 includes compensation costs for all share-based payments granted prior to May 1, 2006, but not yet vested as of May 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to April 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model, which uses the following weighted-average assumptions for the three-month periods ended July 31, 2008 and 2007. Three Months Ended Three Months Ended July 31, 2008 July 31, 2007 -------------------------- --------------------------- Risk-free interest rate 1.71% 4.85% Expected life, in years 6 6 Expected volatility 37.96% 51.32% Dividend yield 0.0% 0.0% Forfeiture rate 5.00% 5.00% The Company uses historical data to estimate option exercises and employee terminations used in the model. Expected volatility is based on monthly historical fluctuations of the Company's common stock using the closing market value for the number of months of the expected term immediately preceding the grant. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a bond with a similar term. The Company receives a tax deduction for certain stock option exercises and disqualifying stock dispositions generally for the excess of the price at which the options are sold over the exercise prices of the options. In accordance with SFAS 123R, the Company reports any tax benefit from the exercise of stock options as financing cash flows. For the three-month periods ended July 31, 2008 and 2007, there were no exercises of stock options which triggered tax benefits, therefore net cash flow used in financing activities was unchanged as a result of the adoption of SFAS 123R. At July 31, 2008, there was approximately $104,000 of unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted-average period of 1.38 years. Page 15
The following table represents stock option activity for the three-month period ended July 31, 2008: Weighted- Weighted- Number Average Average of Exercise Remaining Shares Price Contract Life ------------- -------------- -------------------- Outstanding options at April 30, 2008 324,750 $2.53 5.34 Years Granted (10,000) 5.63 Exercised (5,000) 4.94 Forfeited 18,500 5.47 ------------- -------------- -------------------- Outstanding options at July 31, 2008 311,250 $2.42 4.81 Years ============= ============== ==================== Outstanding exercisable at July 31, 2008 254,583 $1.87 4.16 Years ============= ============== ==================== Shares available for future stock option grants to employees, officers, directors and consultants of the Company under the existing Plan were 42,000 at July 31, 2008. At July 31, 2008 the aggregate intrinsic value of options outstanding was approximately $1,379,000, and the aggregate intrinsic value of options exercisable was approximately $1,268,000. The Company recognized share-based compensation expense of $17,000 for the three-month periods ended July 31, 2008 and 2007. The weighted-average fair value of the options granted in the three-month period ended July 31, 2008 was $2.09 per option. The following table summarizes information about stock options outstanding at July 31, 2008: Options Outstanding Options Exercisable ------------------ ------------------- ------------------ ---------------- ----------------- Weighted- Number Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise at July 30, Contractual Exercise at July 31, Exercise Prices 2008 Life Price 2008 Price --------------------- ------------------ ------------------- ------------------ ---------------- ----------------- $0.81 96,250 3.74 years $0.81 96,250 $0.81 $1.25 - $1.50 47,500 4.04 years $1.25 47,500 $1.25 $2.13 - $2.25 51,000 1.52 years $2.25 51,000 $2.25 $3.25 - $3.99 85,000 7.31 years $3.67 58,333 $3.66 $5.63 - $5.90 20,000 7.69 years $5.75 -- -- $6.30 10,000 9.09 years $6.30 -- -- $7.30 1,500 0.16 years $7.30 1,500 $7.30 ------------------ ---------------- $0.81 - $7.30 311,250 4.81 years $2.42 254,583 $1.87 ================== ================ Page 16
6. NET INCOME PER SHARE The following table presents the calculation of basic and diluted income per share (in thousands): Three Months Ended ------------------------------------------- July 31, 2008 July 31, 2007 ------------------- -------------------- Numerator: Net income $109 $174 =================== ==================== Denominator: Weighted average common shares outstanding - basic 3,287 3,285 Effect of dilutive options outstanding 171 194 ------------------- -------------------- Weighted average common shares outstanding - diluted 3,458 3,479 =================== ==================== 7. PLEDGED ASSETS, NOTES PAYABLE AND LONG-TERM DEBT As of July 31, 2008, the Company had multiple credit agreements with a regional lender based in Kansas City, Missouri. These credit agreements include an operating line of credit, an additional asset-backed long-term note related to the Company's acquisition of assets and assumption of certain liabilities of Radix International Corporation, a long-term mortgage secured by approximately 74,000 square feet of land adjacent to the Company's production and headquarters in Olathe, Kansas, and long-term financing for the facility. The Company has an operating line of credit that provides the Company and its subsidiaries with short-term financing for their working capital requirements. On August 14, 2008, the Company and its financial institution renewed the $6,000,000 agreement. The line of credit accrues interest at the prime rate (5.0% at August 14, 2008) and has an interest rate floor of 5.50%. The line of credit is secured by accounts receivable and inventory, expires on August 13, 2009, and has a borrowing capacity calculated as a specified percentage of accounts receivable and inventory. The line of credit contains various covenants, including certain financial performance covenants pertaining to the maintenance of debt to net worth and minimum net worth ratios. As of July 31, 2008, and under the former line of credit agreement, the Company was in violation of its minimum tangible net worth covenant as a result of acquiring a significant amount of intangible assets in the Radix transaction. The Company received a waiver of the covenant from its financial institution for the period ended July 31, 2008. Upon the renewal of the line of credit agreement, which lowered the tangible net worth covenant, the Company was no longer in violation of the covenant on August 14, 2008. There were $3,723,000 and $2,357,000 in borrowings outstanding on the credit facility as of July 31, 2008 and 2007, respectively. Page 17
The following table is a summary of the Company's long-term debt and related current maturities (in thousands): July 31, April 30, 2008 2008 ------------- ------------- Industrial revenue bonds, Series 2006A, 5-year adjustable interest rate based on the yield on 5-year United States Treasury Notes, plus .45% (5.50% as of July 31, 2007), due in monthly principal and interest payments beginning October 1, 2006 through maturity on September 1, 2026, secured by real estate. $3,480 $3,508 Note payable with an adjustable interest rate of 7.94%, due in monthly principal and interest payments beginning December 15, 2006 through maturity on November 15, 2016, secured by real estate. 212 217 Note payable with a fixed interest rate of 9.00%, due in monthly principal and interest payments beginning October 25, 2007 through maturity on September 25, 2010, secured by accounts receivable and inventory. 412 454 ------------- ------------- 4,104 4,179 Less current maturities 315 309 ------------- ------------- Total long-term debt $3,789 $3,870 ============= ============= The approximate 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 Amount ---------------- ---------------- 2009 $234 2010 334 2011 235 2012 158 2013 167 Thereafter 2,661 ---------------- $3,789 ================ Page 18
8. SEGMENT REPORTING The Company operates three reportable business segments: DCI, Inc., NTG, Inc. and Radix Corporation. DCI produces custom electronic assemblies which integrate a variety of interface technologies, such as custom liquid crystal displays, light emitting diode displays, and keypads, and also provides repair services and engineering design services. NTG designs, markets, and provides remote monitoring services. The Company's Radix subsidiary develops, designs and markets ultra-rugged handheld computers, peripherals and portable printers. The following table presents business segment revenues, income (loss), and total assets for the three-month periods ended July 31, 2008 and 2007 (in thousands). Three Months Ended July 31, 2008 ----------------------------------------------------------------------------------------- DCI NTG Radix Unallocated Eliminations Total ---------- --------- --------- -------------- --------------- ---------- Sales: External customers $3,319 $781 $1,464 $ -- $ -- $5,564 Intersegment 1,270 -- -- -- (1,270) -- ---------- --------- --------- -------------- --------------- ---------- Total sales $4,589 $781 $1,464 $ -- $(1,270) $5,564 ========== ========= ========= ============== =============== ========== Depreciation and amortization expenses $120 $23 $37 $ -- $ -- $180 ========== ========= ========= ============== =============== ========== Segment income (loss) before income tax expense $559 $30 $(38) $(195) $(177) $179 ========== ========= ========= ============== =============== ========== Capital expenditures $5 $1 $12 $ -- $ -- $18 ========== ========= ========= ============== =============== ========== Goodwill and Intangible assets $ -- $374 $3,004 $ -- $ -- $3,378 ========== ========= ========= ============== =============== ========== Total assets $20,307 $1,452 $6,099 $5,010 $(12,731) $20,137 ========== ========= ========= ============== =============== ========== Page 19
Three Months Ended July 31, 2007 -------------------------------------------------------------------------- DCI NTG Unallocated Eliminations Total ----------- ---------- ------------- --------------- ---------- Sales: External $4,436 $351 $-- $ -- $4,787 Intersegment 156 -- -- (156) -- ----------- ---------- ------------- --------------- ---------- Total sales $4,592 $351 $-- $(156) $4,787 =========== ========== ============= =============== ========== Depreciation and amortization expenses $116 $21 $ -- $ -- $137 =========== ========== ============= =============== ========== Segment income (loss) before income tax expense $516 $(89) $(168) $ 7 $266 =========== ========== ============= =============== ========== Capital expenditures $111 $1 $ -- $ -- $112 =========== ========== ============= =============== ========== Goodwill and intangible assets $ -- $424 $ -- $ -- $424 =========== ========== ============= =============== ========== Total assets $17,692 $877 $4,560 $(6,027) $17,102 =========== ========== ============= =============== ========== The following table reconciles total revenues to the products and services offered by the Company (in thousands). July 31, 2008 July 31, 2007 ------------------ -------------------- Products and services: Electronic manufacturing services $3,165 $4,315 Remote monitoring solutions 781 351 Rugged mobile computing 1,464 -- Engineering services 79 94 Other 75 27 ------------------ -------------------- Total sales $5,564 $4,787 ================== ==================== Page 20
9. WARRANTY The Company provides a limited warranty for a period of one year from the date of a customer's receipt of its products. The Company's standard warranties require the Company to repair or replace defective products at no cost to the customer or refund the customer's purchase price. The Company's product warranty liability reflects management's best estimate of probable liability under product warranties. Management determines the liability based on known product failures (if any), historical experience, and other currently available evidence. The following table presents changes in the Company's warranty liability, which is included in accrued expenses on the balance sheets (in thousands): Three Months Ended July 31, ------------------------------ 2008 2007 ------------ ------------- Warranty reserve balance at beginning of period $122 $85 Expense accrued 16 22 Warranty costs incurred (29) (27) ------------ ------------- Warranty reserve balance at end of period $109 $80 ============ ============= Page 21
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. Overview Elecsys is a publicly traded company that provides electronic design and manufacturing services, custom liquid crystal displays ("LCDs"), ultra-rugged mobile computing devices, and wireless remote monitoring solutions to numerous industries worldwide. We operate our business through three wholly-owned subsidiaries, DCI, Inc. ("DCI"), Radix Corporation ("Radix") and NTG, Inc. ("NTG"). DCI provides electronic design and manufacturing services for original equipment manufacturers ("OEMs") in the aerospace, transportation, communications, safety, security and other industrial product markets. DCI has specialized expertise and capabilities to design and efficiently manufacture custom electronic assemblies which integrate a variety of specialized interface technologies, such as custom LCDs, keypads, and touchscreens with circuit boards and other electronic components. DCI seeks to become an extension of the OEM's organization by providing key expertise that enables rapid development and manufacture of electronic products from product conception through volume production. Radix designs, develops, and implements ultra-rugged handheld computing solutions for tough environments where data integrity is paramount. Its field-proven products, which include handheld computers, printers, peripherals, and application software, are deployed in over 70 countries in applications that include utilities, transportation logistics, traffic and parking enforcement, route accounting/deliveries, and inspection and maintenance. Radix has built a reputation for reliability and support over its lengthy history. Our flexibility to custom configure solutions tailored to specific requirements has provided opportunities to expand our product offerings into new industries. NTG designs, markets, and provides remote monitoring solutions for the oil and gas pipeline industry as well as other industries that require remote monitoring. NTG's wireless remote monitoring devices utilize the existing cellular and satellite infrastructure and its Watchdog CP Web Monitor to provide full time, wireless status monitoring and alarm notification regarding the performance of multiple types of systems over the internet. This highly reliable network, combined with its internet-based front-end, provides NTG's customers with active monitoring and control of a large population of field-deployed remote monitoring devices. On August 14, 2008, the Company renewed its $6,000,000 operating line of credit. This line of credit provides the Company and its subsidiaries with short-term financing for working capital requirements, is secured by accounts receivable and inventory, and expires on August 13, 2009. The Company's borrowing capacity under this line is calculated as a specified percentage of accounts receivable and inventory. The line of credit accrues interest at the prime rate (5.0% at August 14, 2008) and contains an interest rate floor of 5.5%. The loan agreement has various covenants, including certain financial performance covenants pertaining to the maintenance of debt to net worth and minimum net worth ratios. Page 22
Results of Operations Three Months Ended July 31, 2008 Compared With Three Months Ended July 31, 2007. The following table sets forth, for the periods presented, certain statement of operations data (in thousands) of the Company: Three Months Ended ----------------------------------------------------- July 31, 2008 July 31, 2007 ------------- ------------- Sales $5,564 100.0% $4,787 100.0% Cost of products sold 3,613 64.9% 3,272 68.4% ------------ ------------ ------------ ---------- Gross margin 1,951 35.1% 1,515 31.6% Selling, general and administrative expenses 1,655 29.8% 1,161 24.2% ------------ ------------ ------------ ---------- Operating income 296 5.3% 354 7.4% Interest expense (117) (2.1%) (102) (2.1%) Other income, net -- 0.0% 14 0.1% ------------ ------------ ------------ ---------- Income before income taxes 179 3.2% 266 5.6% Income tax expense 70 1.3% 92 1.9% ------------ ------------ ------------ ---------- Net income $109 1.9% $174 3.7% Net income per share - basic $0.03 $0.05 ============ ============ Net income per share - diluted $0.03 $0.05 ============ ============ Sales for the three months ended July 31, 2008 were approximately $5,564,000, an increase of $777,000, or 16.2%, from $4,787,000 for the comparable period of fiscal 2008. DCI. Sales at DCI were approximately $4,589,000, a slight decrease of $3,000, or 0.1%, from $4,592,000 from the prior year. The sales from the first quarter of the prior year included $697,000 in sales to the former Radix Corporation. External sales reported at DCI no longer include sales made to our Radix subsidiary after September 18, 2007. Overall, sales to outside customers at DCI, excluding sales to both NTG and Radix in both comparable periods, were $3,319,000 for the three-month period ended July 31, 2008, a decrease of $421,000, or 11.3%, from the $3,740,000 for the three-month period ended July 31, 2007. The decrease in sales at DCI to outside customers resulted from lower bookings during the preceding quarters. We expect sales volumes to outside customers at DCI to remain at or near the current levels during the next fiscal quarter, and we expect to increase sales in the second half of the 2009 fiscal year. This expectation is based upon scheduled shipments to customers currently recorded in our backlog, combined with anticipated future bookings, and additional sales and marketing investments made at DCI. Radix. Sales at the Company's newest subsidiary, Radix, totaled approximately $1,464,000 since the beginning of the fiscal year. The revenues were mainly the result of sales of rugged hand held computer hardware and peripherals as well as maintenance contract revenues. We anticipate a significant increase in revenue in the next quarter as a result of the $2.6 million order announced in July that is scheduled to be delivered by the end of October. This order is the Page 23
initial phase of a larger project that could generate similar orders over the next few years. Revenues for the second half of the fiscal year are expected to show significant increases over the preceding year. NTG. Sales volumes at NTG were $781,000 for the three-month period ended July 31, 2008 an increase of $430,000, or 123%, from the first quarter of fiscal 2008. The increase in sales at NTG resulted from shipments of new products of $505,000, equipment upgrades and repairs of $206,000 during the period and network messaging service revenues which totaled $70,000 for the period. Sales at NTG are expected to continue increasing over the next few quarters as compared to the current period and should equal or show increases to the comparable quarters of fiscal 2008 due to continued strong demand for our WatchdogCP products and our initiative to market our products internationally. Total consolidated backlog at July 31, 2008 was approximately $7,969,000, a decrease of approximately $2,614,000, or 24.7%, from a total backlog of $10,583,000 on July 31, 2007 and an increase of $2,803,000 from a total backlog of $5,166,000 on April 30, 2008. As of July 31, 2007, the backlog of orders at DCI included approximately $3,174,000 in orders from the former Radix International Corporation that are no longer reported in consolidated backlog. The amount of total consolidated backlog at July 31, 2008, includes purchase orders in place from our customers at each of the three subsidiaries that are scheduled for shipment in future periods but excludes any intercompany purchase orders. The following table presents total backlog by subsidiary (in thousands): July 31, 2008 April 30, 2008 July 31, 2007 ------------------- --------------------- ------------------- DCI, Inc. $6,600 $7,888 $9,514 NTG, Inc. 88 108 1,134 Radix Corporation 3,962 589 -- Less intercompany backlog (2,681) (3,419) (65) ------------------- --------------------- ------------------- Total $7,969 $5,166 $10,583 =================== ===================== =================== Gross margin for the three-month period ended July 31, 2008, was 35.1% of sales, or $1,951,000, compared to 31.5% of sales, or $1,515,000, for the three-month period ended July 31, 2007. The increase in gross margin of approximately $436,000 is primarily the result of increased sales volumes at NTG and the additional sales from Radix. DCI. DCI's gross margin was approximately $1,398,000, or 30.5%, for the period as compared to approximately $1,327,000, or 28.9%, for the comparable period of the prior year primarily as a result of product mix to its outside customers. The gross margin for intercompany sales to Radix and NTG of $177,00 and $7,000 for the three months ended July 31, 2008 and 2007, respectively, are included in DCI's gross margins for the periods presented and are excluded from the reported consolidated gross margins. Radix. The gross margin at Radix for the fiscal quarter was approximately $432,000, or 29.5%. The gross margin in the three-month period ended April 30, 2008 was $475,000 or 34.2%. The resulting decrease in gross margin percentage was the result of product mix between sales of handheld computer models and peripherals. NTG. The gross margin at NTG was approximately $298,000, or 38.2%, for the three-month Page 24
period ended July 31, 2008 as compared to approximately $181,000 for the three-month period ended July 31, 2007. The increase in gross margin at NTG was due to the increased sales volumes with NTG's products, including new equipment sales and equipment upgrades. We expect that consolidated gross margins over the next few quarters will remain in the range of 30% to 35%. Selling, general and administrative ("SG&A") expenses increased $494,000, or 42.5%, to $1,655,000 for the three-month period ended July 31, 2008 from $1,161,000 in the three-month period ended July 31, 2007. SG&A expenses were 29.8% of sales for the fiscal first quarter of 2009 as compared to 24.2% of sales for the comparable period for fiscal 2008. DCI. SG&A expenses at DCI increased $8,000 from the prior year period to $732,000 for the current period. The minor 1.1% change in DCI's SG&A expenses included increases in personnel and personnel-related expenses of $65,000 mostly offset by decreases in travel, sales commissions, support engineering expenses and other administration costs that totaled approximately $57,000. Radix. SG&A expenses at Radix were approximately $461,000 during the period, which was the primary contributing factor to the overall increase in Elecsys operating expenses for the period. Radix was not a part of the Company during the quarter ending July 31, 2007. NTG. SG&A expenses at NTG decreased $1,000 from the prior year period. The SG&A expenses at NTG are indicative of the stabilized and consistent levels of expenses required to support NTG's sales, marketing and customer support efforts required at their current level of sales and number of customers. Elecsys Corporation. Corporate expenses were approximately $26,000 higher than for the corresponding fiscal 2007 quarter as a result of higher accounting and consulting expenses primarily as a result to comply with the requirements of the Sarbanes-Oxley Act of 2002. Excluding the effects of only having a partial year of expenses at Radix in the previous fiscal year as a result of the timing of the Radix acquisition, we anticipate that our SG&A expenses will continue at or near their present levels. We will continue to invest in the growth at DCI and will intensify our investment in product development, marketing, and sales at both NTG and Radix. Interest expense was $117,000 and $102,000 for the three-month periods ended July 31, 2008 and 2007, respectively. This increase of $15,000 was the direct result of interest expense on our operating line of credit during the period due to an increase in the average amount outstanding on the line of credit. The line of credit was utilized during the period to pay operating expenses, including accounts payable, income taxes and debt payments. As of July 31, 2008, there was $3,723,000 outstanding on the line of credit and an additional $4,104,000 in outstanding long-term borrowings. We plan to continue to utilize the operating line of credit over the next few quarters and anticipate that the amount of outstanding borrowings will remain stable as our business continues to grow. Income tax expense totaled $70,000 for the three-month period ended July 31, 2008 as compared to $92,000 for the three-month period ended July 31, 2007. Income tax expense for the three-month period ended July 31, 2008 was based on a 39% blended tax rate for both federal and state taxes. As a result of the above factors, net income was $109,000, or $0.03 per diluted share, for Page 25
the three-month period ended July 31, 2008 as compared to net income of $174,000, or $0.05 per diluted share, reported for the three-month period ended July 31, 2007. Liquidity and Capital Resources Cash and cash equivalents decreased $56,000 to $301,000 as of July 31, 2008 compared to $357,000 at April 30, 2008. This decrease was primarily the result of cash used for payments of accounts payable and income taxes slightly offset by decreases in inventory and collections of receivables. Operating activities. Our consolidated working capital increased approximately $287,000 for the three-month period ended July 31, 2008. The increase was due to an overall reduction in current assets, with reductions in accounts receivable from collections and a slight decrease in inventories, offset by a larger decrease in current liabilities as a result of payments for accounts payable, taxes and debt. Operating cash receipts totaled approximately $6,189,000 and $3,789,000 during the three-month periods ended July 31, 2008 and 2007, respectively. The increase is the result of the increase in sales for the current period in combination with the reduction in receivables as compared to the prior year. Total cash disbursements for operations which include purchases of inventory and operating expenses, were approximately $6,116,000 for the three-month period ended July 31, 2008 and $4,645,000 for the three-month period ended July 31, 2007. The Company utilizes its line of credit when necessary in order to pay suppliers and meet operating cash requirements. Investing activities. Cash provided by investing activities of $34,000 during the three-month period ended July 31, 2008. Purchases of equipment totaled approximately $18,000 while during the three-month period ended July 31, 2007, purchases of equipment totaled $112,000. Financing activities. For the three-month period ended July 31, 2008, total borrowings on our operating line of credit were $1,267,000 which were primarily used to finance the operations of DCI, Radix and NTG. Payments on the line of credit and long-term debt were $1,455,000 for the first fiscal quarter. Also included in the Company's financing activities for the quarter was $25,000 of cash provided by the exercise of stock options. For the three-month period ended July 31, 2007, the cash used in financing activities included payments of long-term debt principal of $67,000, line of credit payments of $1,262,000, and borrowings on the line of credit of $2,094,000. As of July 31, 2008, there were $3,723,000 borrowings outstanding on the operating line of credit. The Company renewed its $6,000,000 operating line of credit on August 14, 2008. The line of credit is secured by accounts receivable and inventory and is available for working capital. It expires on August 13, 2009 and its borrowing capacity is calculated as a specified percentage of accounts receivable and inventory. The line of credit accrues interest at the prime rate (5.5% at August 14, 2008) and contains an interest rate floor of 5.5%. The loan also contains various covenants, including certain financial performance covenants pertaining to the maintenance of debt to net worth and minimum net worth ratios. Although there can be no assurances, we believe that existing cash, the cash expected to Page 26
be generated from the operations of DCI, Radix and NTG, amounts available under our line of credit, and amounts available from trade credit, will be sufficient to finance our anticipated working capital needs, our capital expenditures, and our scheduled debt repayment for the foreseeable future. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We cannot assure you that actual results will not differ from those estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition. We derive revenue from the manufacture of production units of electronic assemblies, liquid crystal displays, remote monitoring equipment and ultra-rugged handheld computers and peripherals. We also derive revenue from repairs and non-warranty services, engineering design services, remote monitoring services and maintenance contracts. Production and repaired units are billed to the customer after they are shipped. Remote monitoring services and maintenance contracts are billed and the revenue recognized at the end of the month after the services or maintenance periods are completed. For customers that utilize our engineering design services, we bill the customer and recognize revenue after the design services or tooling have been completed. We require our customers to provide a binding purchase order to verify the manufacturing services to be provided. Typically, we do not have any post-shipment obligations that would include customer acceptance requirements, training, installation or other services. Inventory Valuation. Our inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market value. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as other market considerations. We make provisions for estimated excess and obsolete inventory based on our quarterly reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. We review our inventory in detail on a quarterly basis utilizing a 24-month time horizon. Individual part numbers that have not had any usage in a 24-month time period are examined by manufacturing personnel for obsolescence, excess and fair value. Parts that are not identified for common use or are unique to a former customer or application are categorized as obsolete and are discarded as part of our quarterly inventory write-down. If actual market conditions or our customers' product demands are less favorable than those projected, additional inventory write-downs may be required. The reserve balance is analyzed for adequacy along with the inventory review each quarter. Allowance for Doubtful Accounts. Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding Page 27
amounts on a monthly basis. We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition and credit history, and current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The majority of the customer accounts are considered past due after 30 days. Interest is not charged on past due accounts for the majority of our customers. Warranty Reserve. We have established a warranty reserve for rework, product warranties and customer refunds. We provide a limited warranty for a period of one year from the date of receipt of our products by our customers and our standard warranties require us to repair or replace defective products at no cost to the customer or refund the customer's purchase price. The warranty reserve is based on historical experience and analysis of specific known and potential warranty issues. The product warranty liability reflects management's best estimate of probable liability under our product warranties. Goodwill. Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. We do not amortize goodwill, but rather review its carrying value for impairment annually (April 30), and whenever an impairment indicator is identified. Our annual impairment test is performed at year-end. The goodwill impairment test involves a two-step approach. The first step is to identify if potential impairment of goodwill exists. If impairment of goodwill is determined to exist, the second step of the goodwill impairment test measures the amount of the impairment using a fair value-based approach. Intangible Assets. Intangible assets consist of patents, trademarks, copyrights, customer relationships and capitalized software. Intangible assets are amortized over their estimated useful lives using the straight-line method. Impairment of Long-Lived Intangible Assets. Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets. If the sum of the expected future cash flows is less than the carrying amount, we would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles. Forward Looking Statements This report 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, including, but not limited to, statements on strategy, operating forecasts, and our working capital requirements and availability. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such Page 28
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, an inability on the part of the Company to successfully market and grow NTG, Radix and DCI, the Company's dependence on its top customers, reliance on certain key management personnel, an inability to grow the Company's customer base, potential growth in costs and expenses, an inability to refinance the Company's existing debt on terms comparable to those now in existence, potential deterioration of business or economic conditions for the Company's customers' products, price competition from larger and better financed competitors, and the factors and conditions described in the discussion of "Results of Operations" and "Liquidity and Capital Resources" as contained in Management's Discussion and Analysis or Plan of Operation of this report, 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-Q, the annual report on Form 10-KSB, 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. Page 29
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. ITEM 4T. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on such evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Exchange Act is accumulated and communicated to our management, including those officers, to allow timely decisions regarding required disclosure. (b) Changes in internal controls. There were no significant changes in the Company's internal controls over financial reporting or in other factors that in management's estimates are reasonably likely to materially affect the Company's internal controls over financial reporting subsequent to the date of the evaluation. Page 30
PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable. ITEM 3. Defaults Upon Senior Securities Not Applicable. ITEM 4. Submission of Matters to a vote of Security Holders Not Applicable ITEM 5. Other Information Not Applicable. ITEM 6. Exhibits 10.1 Waiver Relating to Business Loan Agreement between Elecsys Corporation and Bank Midwest 10.2 Business Loan Agreement (Asset Based) dated August 14, 2008 between Elecsys Corporation and Bank Midwest N.A. 10.3 Promissory Note dated August 14, 2008 between Elecsys Corporation and Bank Midwest N.A. 31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer (Principal Executive Officer). 31.2 Rule 13a-14(a)/15d-14(a) Certification of Vice President and Chief Financial Officer (Principal Financial and Accounting Officer). 32.1 Section 1350 Certification of President and Chief Executive Officer (Principal Executive Officer). 32.2 Section 1350 Certification of Vice President and Chief Financial Officer (Principal Financial and Accounting Officer). Page 31
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELECSYS CORPORATION September 9, 2008 /s/ Karl B. Gemperli ----------------------- ----------------------------------- Date Karl B. Gemperli President and Chief Executive Officer (Principal Executive Officer) September 9, 2008 /s/ Todd A. Daniels ----------------------- ----------------------------------- Date Todd A. Daniels Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 32
EXHIBIT INDEX Item Description 10.1 Waiver Relating to Business Loan Agreement between Elecsys Corporation and Bank Midwest 10.2 Business Loan Agreement (Asset Based) dated August 14, 2008 between Elecsys Corporation and Bank Midwest N.A. 10.3 Promissory Note dated August 14, 2008 between Elecsys Corporation and Bank Midwest N.A. 31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer (Principal Executive Officer). 31.2 Rule 13a-14(a)/15d-14(a) Certification of Vice President and Chief Financial Officer (Principal Financial and Accounting Officer). 32.1 Section 1350 Certification of President and Chief Executive Officer (Principal Executive Officer). 32.2 Section 1350 Certification of Vice President and Chief Financial Officer (Principal Financial and Accounting Officer). Page 33
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