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 Six Months Ended
October 31, October 31,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ----------- ----------- ------------
Sales $5,602 $5,596 $10,389 $9,458
Cost of products sold 3,806 3,936 7,078 6,484
------------ ----------- ----------- ------------
Gross margin 1,796 1,660 3,311 2,974
Selling, general and administrative expenses 1,656 1,170 2,817 2,151
------------ ----------- ----------- ------------
Operating income 140 490 494 823
Financial income (expense):
Interest expense (127) (89) (229) (120)
Other income, net 3 2 17 6
------------ ----------- ----------- ------------
(124) (87) (212) (114)
------------ ----------- ----------- ------------
Net income before income taxes 16 403 282 709
Income tax expense 6 162 98 299
------------ ----------- ----------- ------------
Net income $10 $241 $184 $410
============ =========== =========== ============
Net income per share information:
Basic $0.00 $0.07 $0.06 $0.13
Diluted $0.00 $0.07 $0.05 $0.12
Weighted average common shares outstanding:
Basic 3,285 3,240 3,284 3,240
Diluted 3,458 3,417 3,467 3,410
See Notes to Consolidated Financial Statements.
Page 3
Elecsys Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
October 31, 2007 April 30, 2007
------------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $460 $503
Accounts receivable, less allowances of $247
and $126, respectively 3,214 2,966
Inventories 6,203 4,686
Prepaid expenses 51 99
Deferred taxes 781 767
------------------- -----------------
Total current assets 10,709 9,021
Property and equipment, at cost:
Land 1,737 1,737
Building and improvements 3,392 3,392
Equipment 3,234 3,005
------------------- -----------------
8,363 8,134
Accumulated depreciation (2,056) (1,806)
------------------- -----------------
6,307 6,328
Goodwill 90 82
Intangible assets, net 3,073 351
Other assets, net 78 71
------------------- -----------------
Total assets $20,257 $15,853
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,660 $2,050
Accrued expenses 1,969 708
Notes payable to bank 3,437 1,525
Current maturities of long-term debt 297 192
------------------- -----------------
Total current liabilities 8,363 4,475
Long-term liabilities:
Deferred taxes 303 312
Long-term debt, less current maturities 4,028 3,725
------------------- -----------------
4,331 4,037
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding - 3,284,937 33 33
Additional paid-in capital 9,069 9,031
Accumulated deficit (1,539) (1,723)
------------------- -----------------
Total stockholders' equity 7,563 7,341
------------------- -----------------
Total liabilities and stockholders' equity $20,257 $15,853
=================== =================
See Notes to Consolidated Financial Statements.
Page 4
Elecsys Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
Common Additional Total
Stock Common Paid-In Accumulated Stockholders'
(# of shares) Stock ($) Capital Deficit Equity
-------------- ----------- ------------ --------------- ----------------
Balance at April 30, 2006 3,240 $32 $8,926 $(2,769) $6,189
Net income -- -- -- 1,046 1,046
Exercise of stock options 45 1 50 -- 51
Share-based compensation expense -- -- 55 -- 55
-------------- ----------- ------------ --------------- ----------------
Balance at April 30, 2007 3,285 33 9,031 (1,723) 7,341
Net income -- -- -- 184 184
Share-based compensation expense -- -- 38 -- 38
-------------- ----------- ------------ --------------- ----------------
Balance at October 31, 2007 (unaudited) 3,285 $33 $9,069 $(1,539) $7,563
============== =========== ============ =============== ================
See Notes to Consolidated Financial Statements.
Page 5
Elecsys Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended October 31,
----------------------------------
2007 2006
--------------- ---------------
Cash Flows from Operating Activities:
Net income $184 $410
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Share-based compensation expense 38 25
Depreciation 255 210
Amortization 79 18
Provision for doubtful accounts 57 6
Loss on disposal of assets -- 9
Deferred income taxes (23) 279
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable (1,617) (1,381)
Inventories (452) (1,067)
Accounts payable (232) 1,673
Accrued expenses (439) 16
Other, net 41 (157)
--------------- ---------------
Net cash provided by (used in) operating activities (2,109) 41
--------------- ---------------
Cash Flows from Investing Activities:
Proceeds from disposal of property and equipment -- 1
Purchases of property and equipment (234) (4,969)
Acquisition, net of cash acquired (12) --
Goodwill increase related to acquisition costs (8) (14)
Costs incurred for intangible assets -- --
--------------- ---------------
Net cash (used in) investing activities (254) (4,982)
--------------- ---------------
Cash Flows from Financing Activities:
Borrowings on long-term debt 550 4,180
Principal payments on long-term debt (142) (24)
Net borrowings on notes payable to bank 1,912 2,166
Principal payments on notes payable to bank -- (1,826)
--------------- ---------------
Net cash provided by financing activities 2,320 4,496
--------------- ---------------
Net (decrease) in cash and cash equivalents (43) (445)
Cash and cash equivalents at beginning of period 503 688
--------------- ---------------
Cash and cash equivalents at end of period $460 $243
=============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $228 $89
Cash paid during the period for income taxes -- 19
Page 6
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Land and building transferred to assets held for sale $-- $1,411
Acquisition of assets and assumed liabilities:
Receivables 882 --
Inventories 1,065 --
Intangibles 2,731 --
Accounts payable (772) --
Accounts payable due to Elecsys Corporation (2,194) --
Accrued expenses (1,700) --
---------------
Total cash paid in acquisition, net of cash acquired $12 --
===============
See Notes to Consolidated Financial Statements.
Page 7
Elecsys Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
October 31, 2007
(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
industries. DCI has specialized expertise and capabilities to integrate custom
electronic assemblies with 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 was created as a wholly owned subsidiary to acquire the
assets and assume certain liabilities of Radix International Corporation and its
subsidiary. The transaction closed on September 18, 2007 and the results from
operations since September 18, 2007 and its resulting financial condition are
included in the Company's consolidated financial statements. 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.
A majority of the Company's sales are made to customers within the United
States, but its customer base also includes customers in Canada and several
other international markets.
Comprehensive Income
The Company has no components of other comprehensive income; therefore
comprehensive income equals net income.
Recent Accounting Pronouncements
As of May 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement 109 ("FIN 48"), which clarified the accounting
for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and
a measurement attribute for financial statement recognition of tax positions
taken or expected to be taken in a tax return. It is management's responsibility
to determine whether it is "more-likely-than-not" that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. As of May
1, 2007, the Company had no unrecognized tax benefits which needed to be
adjusted for. As of October 31, 2007, management had reviewed the income tax
positions taken or expected to be taken for the open tax years and determined
that our income tax positions are appropriately stated and supported for all
open years
Page 8
and that the adoption of FIN 48 did not have a material effect on the Company's
financial statements for the six months ended October 31, 2007. Open tax years
are April 30, 2003, 2004, 2005 and 2006.
The Company would recognize interest and penalties accrued on unrecognized
tax benefits as well as interest received from favorable tax settlements within
income tax expense. At the adoption date of May 1, 2007, the Company recognized
no interest or penalties related to uncertain tax positions. As of October 31,
2007, the Company recorded no accrued interest or penalties related to uncertain
tax positions. Management expects no significant change in the amount of
unrecognized tax benefit, accrued interest or penalties within the next 12
months.
In September 2006, the FASB issued Statement 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 guidance requiring
use of fair value, establishes a framework for measuring fair value, and expands
disclosure about such fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing the
impact of SFAS 157 but it does not believe the adoption will have a significant
impact on its financial position and results of operations.
On February 15, 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. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. If the Company adopts this standard, it does
not expect it to have a material effect on its financial statements.
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.
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, and whenever an impairment indicator is identified. The
Company performs its annual impairment test 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.
Page 9
Intangible assets
Intangible assets consist of patents, trademarks, copyrights, customer
relationships and capitalized software. Intangible assets are amortized over
their estimated 5 year (in the case of customer relationships) or 10 year (for
all other) 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.
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.
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 30 days. 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
Page 10
reviews of inventory quantities on hand and the latest forecasts of product
demand and production requirements from our 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 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.
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 the customer receives the product 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.
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. Radix, the Company's
wholly owned subsidiary, acquired the assets and assumed certain liabilities of
Radix International Corporation and its subsidiary on September 18, 2007. 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-QSB 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 and
six-month periods ended October 31, 2007 are not necessarily indicative of the
results that may be expected for the year ending April 30, 2008.
The balance sheet at April 30, 2007 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, 2007.
Page 11
3. ACQUISITION OF ASSETS
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 of Salt Lake
City, Utah. The Company made the strategic decision to grow through expansion
into the specialized niche of rugged mobile computing. The Company acquired
approximately $4.7 million in tangible 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,
the Company's new subsidiary assumed accounts payable due to the Company's DCI
subsidiary, assumed an additional amount of approximately $2.5 million in
liabilities, and incurred acquisition costs of approximately $25,000. The
transaction also includes performance related compensation based on the annual
revenues of the acquired business over the next five years. The total
performance related compensation 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 the
Company's new subsidiary, Radix Corporation, from the date of the acquisition.
The purchase price was allocated as follows (in thousands):
Assets acquired:
Receivables $882
Inventories 1,065
Intangibles, including goodwill, non-compete agreements and other 2,731
-----------
4,678
Liabilities assumed:
Accounts payable to outside vendors (772)
Accounts payable to DCI, Inc. (A subsidiary of Elecsys Corporation) (2,194)
Accrued expenses (1,700)
-----------
(4,666)
-----------
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 on a preliminary basis. The Company
has engaged an independent third part valuation expert to assist in the
allocation of the excess purchase price to the various specific separately
identifiable intangibles. This may include product designs, tooling and
software, customer lists, non-compete agreements with the former company's
executives and owners, and contracts with business partners worldwide. The
useful lives of these intangible assets will be determined by the third part
valuation expert and will be appropriately amortized over their useful lives.
The valuation report is expected to be completed during the fiscal third
quarter.
Page 12
Amortization expense for the intangible assets is estimated to be approximately
$300,000 in each of the next five fiscal years.
The following table sets forth the unaudited pro forma results of
operations of the Company for the periods ended October 31, 2007 and 2006 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; (iv) and 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 October 31,
-------------------------------------------------------------------------------
2007 2006
------------------------------------- --------------------------------------
Pro forma Pro forma Pro forma Pro forma
Reported adjustments Reported adjustments
----------- -------------- ---------- ------------ ------------- -----------
Sales $5,602 $754 $6,356 $5,596 $3,370 $8,966
Net income (loss) 10 (210) (200) 241 168 409
Basic Earnings per share $0.00 $(0.06) $0.07 $0.13
Diluted Earnings per share $0.00 $(0.06) $0.07 $0.12
Six Months Ended October 31,
-------------------------------------------------------------------------------
2007 2006
------------------------------------- --------------------------------------
Pro forma Pro forma Pro forma Pro forma
Reported adjustments Reported adjustments
----------- -------------- ---------- ------------ ------------- -----------
Sales $10,389 $1,399 $11,788 $9,458 $5,235 $14,693
Net income (loss) 184 (414) (230) 410 (163) 247
Basic Earnings per share $0.06 $(0.07) $0.13 $0.08
Diluted Earnings per share $0.05 $(0.07) $0.12 $0.07
4. INVENTORIES
Inventories are stated at the lower of cost or market, using the first-in,
first-out (FIFO) method. Inventories, net of reserves of approximately $324,000
and $251,000, for the periods ended October 31, 2007 and April 30, 2007,
respectively, are summarized by major classification as follows (in thousands):
October 31, 2007 April 30, 2007
---------------------- ---------------------
Raw material $4,528 $2,871
Work-in-process 1,178 1,053
Finished goods 497 762
---------------------- ---------------------
$6,203 $4,686
====================== =====================
Page 13
5. STOCK OPTION PLAN
At October 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
October 31, 2007, options to purchase approximately 310,250 shares were
outstanding of which 227,417 were 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 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.
Page 14
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 six-month periods ended October 31, 2007
and 2006.
Six Months Ended Six Months Ended
October 31, 2007 October 31, 2006
------------------------ ------------------------
Risk-free interest rate 4.16%-4.85% 5.00%
Expected life, in years 6 6
Expected volatility 50.00-51.32% 56.23%
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 and six-month period ended
October 31, 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.
The following table represents stock option activity for the six-month
period ended October 31, 2007:
Number Weighted-Average Weighted-Average
of Exercise Remaining of Exercise
Shares Price Contract Life
------------ ------------- -----------------
Outstanding options at April 30, 2007 295,750 $2.16 5.93 Years
Granted 14,500 6.61 9.78 Years
Exercised -- --
Forfeited -- --
------------
Outstanding options at October 31, 2007 310,250 $2.37 5.63 Years
============ ============= =================
Outstanding exercisable at October 31, 2007 227,417 $1.62 4.51 Years
============ ============= =================
Shares available for future stock option grants to employees, officers,
directors and
Page 15
consultants of the Company under the existing Plan were 48,500 at October 31,
2007. At October 31, 2007, the aggregate intrinsic value of options outstanding
was approximately $1,168,000, and the aggregate intrinsic value of options
exercisable was approximately $1,022,000. There were no options exercised in the
six-month period ended October 31, 2007. The Company recognized share-based
compensation expense of approximately $38,000 for the six-month period ended
October 31, 2007. The weighted-average fair value of the options granted in the
six-month period ended October 31, 2007 was $3.68 per option.
The following table summarizes information about stock options
outstanding at October 31, 2007:
Options Outstanding Options Exercisable
------------------ ------------------- ------------------ ---------------- -----------------
Number Weighted-Average Number
Range of Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices April 30, 2007 Contractual Life Exercise Price April 30, 2007 Exercise Price
--------------------- ------------------ ------------------- ------------------ ---------------- -----------------
$0.81 97,250 4.49 years $0.81 97,250 $0.81
$1.25 - $1.50 47,500 4.79 years $1.25 47,500 $1.25
$2.13 - $2.25 51,000 2.27 years $2.25 51,000 $2.25
$3.25 - $3.99 85,000 8.06 years $3.67 31,667 $3.63
$4.94 15,000 9.31 years $4.94 -- --
$6.30 10,000 9.84 years $6.30 -- --
$7.30 4,500 9.66 years $7.30 -- --
------------------ ----------------
$0.81 - $7.30 310,250 5.63 years $2.37 227,417 $1.62
================== ================
At October 31, 2007, there was approximately $157,000 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted-average period of 1.92 years.
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 Six Months Ended
October 31, October 31,
----------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------- ------------ ------------
Numerator:
Net income $10 $241 $184 $410
Denominator:
Weighted average common shares
outstanding - basic 3,285 3,240 3,285 3,240
Effect of dilutive options outstanding 173 177 182 170
------------ ------------- ------------ ------------
Weighted average common shares
outstanding - diluted 3,458 3,417 3,467 3,410
============ ============= ============ ============
Options to purchase 80,000 shares of common stock were determined to be
anti-dilutive and were not included in the computation of diluted net income per
share for the three-month and six-month periods ended October 31, 2006.
7. PLEDGED ASSETS, NOTES PAYABLE AND LONG-TERM DEBT
As of October 31, 2007, 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 new
production and headquarters in Olathe, Kansas, and long-term financing for the
facility.
The Company renewed and increased its operating line of credit to
$5,000,000 on August 15, 2007. This line of credit provides the Company and its
subsidiaries with short-term financing for their working capital requirements.
It is secured by accounts receivable and inventory and expires on August 14,
2008. Its borrowing capacity is calculated as a specified percentage of accounts
receivable and inventory. The line of credit accrues interest at the prime rate
plus .25% (8.0% at October 31, 2007) and contains various covenants, including
certain financial performance covenants pertaining to the maintenance of debt to
net worth and minimum net worth ratios. As of October 31, 2007 the Company was
in violation of its minimum tangible net worth covenant as a result of the Radix
transaction in which the amount of intangible assets was significant. The
Company received a waiver of the covenant from its financial institution for the
period ended October 31, 2007 until the end of the third fiscal quarter. There
were $3,437,000 in borrowings outstanding on the credit facility as of October
31, 2007.
Page 17
On September 18, 2007, the Company completed its acquisition of assets and
assumption of certain liabilities of Radix International Corporation. The
Company entered into a financing arrangement on September 25, 2007, to assist it
in meeting its financial obligations under the acquisition agreement. The amount
borrowed under this financial arrangement totaled $550,000 and is
cross-collateralized with the Company's inventory and accounts receivable assets
under its other credit agreements with the regional lender. The note is payable
in 36 monthly installments of $17,523.57, beginning October 25, 2007, and the
note has a fixed interest rate of 9%.
On September 5, 2006, the Company completed the purchase of its new
headquarters and production facility that was built at 846 N. Mart-Way Court in
Olathe, Kansas in the K.C. Road Business Park. The Company entered into
financing arrangements with its financial institution and the City of Olathe,
Kansas, which approved the issuance of up to $5,000,000 of Industrial Revenue
Bonds ("IRBs") for the development of the project and new capital equipment. As
part of the financing arrangement for the project, the City of Olathe holds the
legal title to the facility and land which is leased to the Company by the City
of Olathe. Upon the payment in full of the outstanding bonds, the City of Olathe
is obligated to transfer title to the Company, or its assignee, for $100.
The Company's financial institution purchased the Series A, B, and C
bonds. The Company purchased the Series D bonds and will hold the bonds until
maturity in order to benefit from the property tax abatement.
On November 1, 2006 the Company completed the sale of its Lenexa facility.
The net book value of that facility totaled approximately $1,411,000 and the
sale resulted in a gain of approximately $324,000. The proceeds from the sale
were used to repay the one-year note payable for approximately $1,453,000 that
was secured by the Company's Lenexa, Kansas facility as well as to partially pay
down the Industrial Revenue Bonds Series 2006B and the entire balance of the
Series 2006C bonds that was incurred to purchase the new facility in Olathe,
Kansas.
On November 15, 2006, the Company purchased approximately 74,000 square
feet of land adjacent to its new facility in Olathe. The property's purchase
price of $359,000 was financed with operating cash and by borrowings from the
Company's financial institution. The Company executed a 10-year adjustable
interest rate note for $240,000, which is payable in monthly installments and
accrues interest at a variable rate based on the 5-year United States Treasury
Note, plus 3.25% (7.94% as of October 31, 2007). The purchase of this land
provides for future facility expansion.
Page 18
The following table is a summary of the Company's long-term debt and
related current maturities (in thousands):
October April 30,
31, 2007 2007
-------- ----
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. $3,563 $3,617
Industrial revenue bonds, Series 2006B, fixed interest rate of 6.06%, due in
monthly principal and interest payments beginning October 1, 2006 through
maturity on September 1, 2009, secured by equipment.
-- 67
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.
225 233
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.
537 --
------------- -------------
4,325 3,917
Less current maturities 297 192
------------- -------------
Total long-term debt $4,028 $3,725
============= =============
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
---------------- ----------------
2008 $146
2009 309
2010 334
2011 235
2012 157
Thereafter 3,144
----------------
$4,325
================
Page 19
8. SEGMENT REPORTING
The Company operates three reportable business segments: Electronic
Manufacturing Solutions, Remote Monitoring Solutions and Rugged Mobile
Computing. Electronic Manufacturing Solutions ("EMS") 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. The EMS business
segment is operated under the Company's DCI, Inc. subsidiary. The Remote
Monitoring Solutions ("RMS") segment designs, markets, and provides remote
monitoring services and is operated as NTG, Inc. The Rugged Mobile Computing
("RMC") segment is operated as the Company's Radix subsidiary and began its
operations upon the acquisition of assets and liabilities on September 18, 2007.
The RMC segment 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 and six-month periods ended October 31, 2007
and 2006 (in thousands).
Three Months Ended October 31, 2007
----------------------------------------------------------------------------------------------
EMS RMS RMC Unallocated Eliminations Total
---------- ---------- ---------- ---------------- ---------------- -----------
Sales:
External customers $4,197 $821 $584 $ -- $ -- $5,602
Intersegment 765 -- -- -- (765) --
---------- ---------- ---------- ---------------- ---------------- -----------
Total sales $4,962 $821 $584 $ -- $(765) $5,602
========== ========== ========== ================ ================ ===========
Segment income
(loss) before
income tax expense $398 $25 $(131) $(148) $(128) $16
========== ========== ========== ================ ================ ===========
Three Months Ended October 31, 2006
--------------------------------------------------------------------------
EMS RMS Unallocated Eliminations Total
-------- --------- -------------- -------------- ------------
Sales:
External customers $5,413 $183 $-- $ -- $5,596
Intersegment 93 -- -- (93) --
-------- --------- -------------- -------------- ------------
Total sales $5,506 $183 $-- $(93) $5,596
======== ========= ============== ============== ============
Segment income (loss) before
income tax expense $658 $(126) $(128) $(1) $403
======== ========= ============== ============== ============
Page 20
Six Months Ended October 31, 2007
----------------------------------------------------------------------------------------------
EMS RMS RMC Unallocated Eliminations Total
---------- ---------- ---------- ---------------- ---------------- -----------
Sales:
External customers $8,633 $1,172 $584 $ -- $ -- $10,389
Intersegment 921 -- -- -- (921) --
---------- ---------- ---------- ---------------- ---------------- -----------
Total sales $9,554 $1,172 $584 $ -- $(921) $10,389
========== ========== ========== ================ ================ ===========
Segment income
(loss) before
income tax expense $914 $(64) $(131) $(316) $(121) $282
========== ========== ========== ================ ================ ===========
Total assets $18,927 $1,518 $4,743 $4,988 $(9,919) $20,257
========== ========== ========== ================ ================ ===========
Six Months Ended October 31, 2006
---------------------------------------------------------------------------
EMS RMS Unallocated Eliminations Total
---------- -------- --------------- -------------- -----------
Sales:
External customers $9,107 $351 $-- $ -- $9,458
Intersegment 192 -- -- (192) --
---------- -------- --------------- -------------- -----------
Total sales $9,299 $351 $-- $(192) $9,458
========== ======== =============== ============== ===========
Segment income (loss) before
income tax expense $1,244 $(277) $(263) $5 $709
========== ======== =============== ============== ===========
Total assets $16,450 $615 $4,504 $(5,138) $16,431
========== ======== =============== ============== ===========
The following table reconciles total revenues to the products and
services offered by the Company (in thousands).
Three Months Ended Six Months Ended
October 31, October 31,
---------------------------------- -------------------------------
2007 2006 2007 2006
--------------- --------------- ------------- -------------
Products and services:
Electronic interface assemblies $4,132 $5,258 $8,447 $8,891
Remote monitoring solutions 821 183 1,172 351
Rugged mobile computing 584 -- 584 --
Engineering services 18 93 112 115
Other 47 62 74 101
--------------- --------------- ------------- -------------
Total sales $5,602 $5,596 $10,389 $9,458
=============== =============== ============= =============
9. WARRANTY
The Company provides a limited warranty for a period of one year from the
date a customer receives 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.
Page 21
The following table presents changes in the Company's warranty liability,
which is included in accrued expenses on the balance sheets (in thousands):
Six Months Ended
October 31,
--------------------------------
2007 2006
-------------- --------------
Warranty reserve balance at beginning of period $85 $82
Expense accrued 42 36
Warranty costs incurred (37) (33)
-------------- --------------
Warranty reserve balance at end of period $90 $85
============== ==============
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
Overview
We are 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 and integrates
custom electronic interface solutions for original equipment manufacturers
("OEMs") in the aerospace, transportation, communications, safety, security and
other industrial product industries. DCI has specialized expertise and
capabilities to design and efficiently manufacture custom electronic assemblies
which integrate a variety of interface technologies, such as custom LCDs, LED
displays, and keypads 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.
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 is an innovator of internet-based, wireless remote monitoring
using the existing cellular infrastructure. NTG's remote monitoring devices and
its newly updated Watchdog CP Web Monitor provide full time, wireless status
monitoring and alarm notification regarding the performance of multiple types of
systems over the internet. This low cost, highly reliable network provides
prompt notification of power outages, rectifier problems, and pipe-to-soil
potentials at test points, using the internet and e-mail back-end networks. When
combined with its internet-based front-end, NTG's customers can directly access
and control a large population of field-deployed remote monitoring devices at an
attractive cost.
Page 22
Radix designs, develops, and implements ultra-rugged handheld computing
solutions. 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.
On December 19, 2006, the Company announced that its NTG subsidiary had
acquired the product lines, technology, customer base and intellectual property,
including a pending patent application, 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.
The Company renewed and increased its operating line of credit to
$5,000,000 on August 15, 2007. This line of credit provides the Company and its
subsidiaries with short-term financing for their working capital requirements.
It is secured by accounts receivable and inventory and expires on August 14,
2008. Its borrowing capacity is calculated as a specified percentage of accounts
receivable and inventory. The line of credit accrues interest at the prime rate
plus .25% (8.0% at October 31, 2007) and contains various covenants, including
certain financial performance covenants pertaining to the maintenance of debt to
net worth and minimum net worth ratios. As of October 31, 2007 the Company was
in violation of its minimum tangible net worth covenant as a result of the Radix
transaction in which the amount of intangible assets was significant. The
Company received a waiver of the covenant from its financial institution for the
period ended October 31, 2007 until the end of the third fiscal quarter. There
were $3,437,000 in borrowings outstanding on the credit facility as of October
31, 2007.
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 of Salt Lake
City, Utah. The Company acquired approximately $4.7 million in tangible 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, the Company's new subsidiary assumed accounts
payable of $2.2 million due to the Company's DCI subsidiary, assumed an
additional amount of approximately $2.5 million in liabilities, and incurred
acquisition costs of approximately $25,000. The transaction also includes
performance related compensation based on the annual revenues of the acquired
business over the next five years. The total performance related compensation is
limited to approximately $2.2 million and is subject to certain considerations
that may impact the total amount to be paid.
Page 23
Results of Operations
Three Months Ended October 31, 2007 Compared With Three Months Ended October 31, 2006.
The following table sets forth, for the periods presented, certain
statement of operations data (in thousands) of the Company:
Three Months Ended
---------------------------------------------------------------------
October 31, 2007 October 31, 2006
---------------- ----------------
Sales $5,602 100.0% $5,596 100.0%
Cost of products sold 3,806 67.9% 3,936 70.3%
---------------- ----------------- ---------------- --------------
Gross margin 1,796 32.1% 1,660 29.7%
Selling, general and
administrative expenses 1,656 29.6% 1,170 20.9%
---------------- ----------------- ---------------- --------------
Operating income 140 2.5% 490 8.8%
Interest expense (127) (2.3%) (89) (1.6%)
Other income, net 3 0.1% 2 0.0%
---------------- ----------------- ---------------- --------------
Income from operations
before income taxes 16 0.3% 403 7.2%
Income tax expense 6 0.1% 162 2.9%
---------------- ----------------- ---------------- --------------
Net income $10 0.2% $241 4.3%
Net income per share - basic $0.00 $0.07
================ ================
Net income per share - diluted $0.00 $0.07
================ ================
Sales for the three months ended October 31, 2007 were approximately
$5,602,000, an increase of $6,000, or 0.1%, from $5,596,000 reported for the
second quarter of fiscal 2007. Sales at DCI were approximately $4,197,000, a
decrease of $1,216,000, or 22.5%, from $5,413,000 from the prior year period.
The sales from the prior year period included $1,564,000 in sales to the former
Radix International Corporation to help them meet the requirements of a specific
customer contract. Sales reported at DCI no longer include sales made to our
Radix subsidiary. Overall, sales to outside customers at DCI, excluding sales to
both NTG and Radix in both comparable periods, were $4,197,000 for the
three-month period ended October 31, 2007, an increase of $348,000, or 9%, from
the $3,849,000 for the three-month period ended October 31, 2006. The increase
in sales at DCI to outside customers resulted from increased shipments to
existing and new customers. We expect growth in sales to outside customers at
DCI to continue over the coming quarters. This expectation results from
scheduled shipments to customers currently recorded in our backlog as well as
anticipated future bookings. Total sales at NTG were $821,000, an increase of
$638,000, or 349%, from the second quarter of fiscal 2007. The increase in sales
at NTG resulted from shipments of new products and equipment upgrades of
$687,000 during the period and additional network messaging service revenues
which totaled
Page 24
$62,000 for the period, an increase of $40,000 as compared to the prior year
period and includes messaging services for both NTG and AMCI units in the field.
The increase in the total number of units sold during the current period was the
result of the introduction into the market of multiple new products developed by
NTG over the past year. Sales at NTG are expected to continue increasing next
quarter as a result of existing demand for both our new digital cellular and
satellite-based WatchdogCP products and requirements for technology upgrades to
existing field-deployed remote monitors. Sales at the Company's newest
subsidiary, Radix, totaled approximately $584,000 for the period that commenced
on September 18, 2007 and ended on October 31, 2007. The sales were mainly the
result of sales of rugged hand held computer hardware and peripherals as well as
maintenance contract revenues. We anticipate increasing revenues at Radix over
the next few quarters as integration efforts are completed and investments are
made in sales, marketing and support resources and initiatives.
Total consolidated backlog at October 31, 2007 was approximately
$8,097,000, a decrease of approximately $2,612,000, or 24.4%, from a total
backlog of $10,709,000 on October 31, 2006 and a decrease of $2,486,000 from a
total backlog of $10,583,000 on July 31, 2007. The amount of total consolidated
backlog at October 31, 2007, 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. As of October 31,
2007, the backlog of orders, by subsidiary, was: $6,426,000 at DCI, $1,120,000
at NTG and $551,000 at Radix. For the period ended October 31, 2006, the backlog
of orders, by subsidiary were: $10,657,000 at DCI, which included approximately
$5,017,000 in orders from the former Radix International Corporation that are no
longer reported in backlog, and $52,000 at NTG.
Gross margin can fluctuate from period to period due to a variety of
factors including, but not limited to, sales volume, product mix, and plant
efficiency. Gross margin for the three-month period ended October 31, 2007, was
32.1% of sales, or $1,796,000, compared to 29.7% of sales, or $1,660,000, for
the three-month period ended October 31, 2006. DCI's gross margin was
approximately $1,170,000, or 27.9%, for the period as compared to approximately
$1,590,000, or 28.9%, for the comparable period of the prior year. The decrease
in gross margin at DCI of $420,000 is the result of both lower sales as compared
to the previous record sales of the prior year period and product mix within the
product lines. Total gross margin at NTG was approximately $339,000, or 41.3%,
for the three-month period ended October 31, 2007 as compared to approximately
$70,000, or 38.3%, for the three-month period ended October 31, 2006. The
increase in gross margin at NTG of $269,000, was due to the increased sales of
NTG's new products and technology upgrades to existing field units as well as an
increase in messaging services. The gross margin at Radix for the three-month
period ended October 31, 2007 was approximately $286,000 or 49.0%. Radix's gross
margin was primarily the result of its product mix of sales between equipment
and maintenance and service contract revenues. At the consolidated level, we
expect that gross margins over the next few quarters will continue at or near
our historical margins of 27% - 32%.
Selling, general and administrative ("SG&A") expenses increased $486,000,
or 41.5%, to $1,656,000 in the three-month period ended October 31, 2007 from
$1,170,000 in the three-
Page 25
month period ended October 31, 2006. SG&A expenses were 29.6% of sales for the
three-month period ended October 31, 2007 as compared to 20.9% of sales for the
three-month period ended October 31, 2006. SG&A expenses at DCI decreased
$70,000 from the prior year period as a result of a number of factors which
included moving and relocation expenses of approximately $100,000 in the
previous year's period, a decrease in commissions paid to independent sales
representatives resulting from our strategic emphasis on direct sales, and a
slight decrease in support engineering expenses. These were slightly offset by
increases in personnel and personnel-related expenses in the sales and
engineering departments due to our continued growth. NTG SG&A expenses increased
$117,000 from the comparable prior year period as a result of increased
personnel costs, increased marketing and travel expenses and payments to the
AMCI sellers. Radix also had approximately $413,000 in SG&A expenses during the
period which contributed to the overall increase in operating expenses. Included
in Radix's SG&A expenses were approximately $160,000 that were specifically
related to the costs of the transaction and the move of integration,
engineering, and service operations to Olathe. These expenses are not expected
to be recurring. Corporate expenses were also $26,000 higher than the prior year
period in fiscal 2007 primarily as a result of higher professional fees. We
anticipate that our SG&A expenses will decrease slightly over the near term as
the current three-month period contained one-time moving, relocation and
transaction-related expenses related to the Radix transaction. We will continue
to invest in the continuing growth of DCI as well as intensify our investment in
product development, marketing, and sales at both NTG and Radix.
Interest expense was $127,000 and $89,000 for the three-month periods ended
October 31, 2007 and 2006, respectively. This increase of $38,000 was due to
interest expense on our operating line of credit which was the result of an
increase in the total average amount outstanding during the period. As of
October 31, 2007, there were $3,437,000 of borrowings outstanding on the line of
credit. We expect to continue utilizing the operating line of credit
periodically in the next few quarters and anticipate that the amount of
outstanding borrowings may grow as our business continues to grow and debt
financing is needed to meet operating requirements and finance our capital
investments.
As a result of the above factors, net income was $10,000 for the
three-month period ended October 31, 2007 as compared to net income of $241,000
reported for the three-month period ended October 31, 2006.
Page 26
Six Months Ended October 31, 2007 Compared With Six Months Ended October 31, 2006.
The following table sets forth, for the periods presented, certain
statement of operations data (in thousands) of the Company:
Six Months Ended
---------------------------------------------------------------------
October 31, 2007 October 31, 2006
---------------- ----------------
Sales $10,389 100.0% $9,458 100.0%
Cost of products sold 7,078 68.1% 6,484 68.6%
---------------- ----------------- ---------------- --------------
Gross margin 3,311 31.9% 2,974 31.4%
Selling, general and
administrative expenses 2,817 27.1% 2,151 22.7%
---------------- ----------------- ---------------- --------------
Operating income 494 4.8% 823 8.7%
Interest expense (229) (2.2%) (120) (1.3%)
Interest income 17 0.2% 6 0.1%
---------------- ----------------- ---------------- --------------
Income from operations
before income taxes 282 2.8% 709 7.5%
Income tax expense 98 0.9% 299 3.2%
---------------- ----------------- ---------------- --------------
Net income $ 184 1.9% $410 4.3%
Net income per share - basic $0.06 $0.13
================ ================
Net income per share - diluted $0.05 $0.13
================ ================
Sales for the six months ended October 31, 2007 were approximately
$10,389,000, an increase of $931,000, or 9.8%, from $9,458,000 for the
comparable period of fiscal 2007. Sales at DCI were approximately $8,633,000, a
decrease of $474,000, or 5.2%, from $9,107,000 from the prior year period. The
sales from the prior year period included $1,893,000 in sales to the former
Radix Corporation. Sales to the former Radix Corporation totaled approximately
$872,000 for the period from May 1, 2007 to September 17, 2007. 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 $8,633,000 for the six-month period
ended October 31, 2007, an increase of $1,419,000, or 20%, from the $7,214,000
for the six-month period ended October 31, 2006. The increase in sales at DCI to
outside customers resulted from increased shipments to existing and new
customers. We expect growth in sales volumes to outside customers at DCI to
continue over the coming quarters. This expectation results from scheduled
shipments to customers currently recorded in our backlog as well as anticipated
future bookings. Sales volumes at NTG were $1,172,000 for the six-month period
ended October 31, 2007 an increase of $821,000, or 234%, from the six-month
period ended October 31, 2006. The increase in sales at NTG resulted from
shipments of new products and equipment upgrades of $895,000 during the period
and additional network messaging service revenues which totaled $88,000 for the
period. Sales at NTG are
Page 27
expected to continue increasing next quarter as a result of anticipated demand
for both our new digital cellular and satellite-based WatchdogCP products and
requirements for technology upgrades to existing field-deployed remote monitors.
Sales at the Company's newest subsidiary, Radix, totaled approximately $584,000
since the acquisition date of September 18. 2007. The revenues were mainly the
result of sales of rugged hand held computer hardware and peripherals as well as
maintenance contract revenues. We anticipate increasing revenues at Radix over
the next few quarters as integration efforts are completed and investments are
made in sales, marketing, and support resources and initiatives.
Gross margin for the six-month period ended October 31, 2007, was 31.9% of
sales, or $3,311,000, compared to 31.4% of sales, or $2,974,000, for the
six-month period ended October 31, 2006. The increase in gross margin of
approximately $337,000, or 0.5%, is primarily the result of increased sales
volumes at NTG and the additional sales from Radix. Due to the proprietary
nature of their products, these subsidiaries generate higher gross margins than
DCI. DCI's gross margin was approximately $2,504,000, or 29.0%, for the period
as compared to approximately $2,845,000, or 30.6%, for the comparable period of
the prior year. Total gross margin at NTG was approximately $520,000, or 44.4%,
for the six-month period ended October 31, 2007 as compared to approximately
$124,000, or 35.3%, for the six-month period ended October 31, 2006. The
increase in gross margin at NTG was due to the increased sales volumes with
NTG's new products and its technology upgrades to field-deployed units as well
as an increase in messaging services, which includes the AMCI customer accounts
added as part of the AMCI asset acquisition. The gross margin at Radix for the
six-month period ended October 31, 2007 was approximately $286,000 or 49.0%.
Radix's gross margin was the result of the mix between equipment sales and
maintenance service contract revenues. We expect that consolidated gross margins
over the next few quarters will continue at or near our historical margins of
27% - 32%.
Selling, general and administrative ("SG&A") expenses increased $666,000,
to $2,817,000 in the six-month period ended October 31, 2007 from $2,151,000 in
the six-month period ended October 31, 2006. SG&A expenses were 27.1% of sales
for the six-month period ended October 31, 2007 as compared to 22.7% of sales
for the six-month period ended October 31, 2006. SG&A expenses at DCI increased
$7,000 from the prior year period. During the prior year period, DCI's SG&A
expenses included moving and relocation expenses of approximately $100,000. The
increase in SG&A expenses in the current period was mainly due to increases in
personnel and personnel-related expenses in the sales and engineering
departments that was driven by our growth. NTG SG&A expenses increased $183,000
from the comparable prior year period as a result of increased personnel costs,
increased marketing and travel expenses and payments to the AMCI sellers. Radix
also had approximately $413,000 in SG&A expenses during the period which
contributed to the overall increase in operating expenses. Included in Radix's
SG&A expenses were approximately $160,000 which were specifically related to the
costs of the transaction and the move of integration, engineering, and service
operations to Olathe. Corporate expenses were approximately $63,000 higher than
the prior year period in fiscal 2007 as a result of higher accounting and
consulting expenses. We anticipate that our SG&A expenses will decrease slightly
over the near term as the current six-month period contained moving,
Page 28
relocation and legal expenses related to the Radix transaction and are not
expected to be recurring. We will continue to invest in the continuing growth at
DCI as well as intensify our investment in product development, marketing, and
sales at both NTG and Radix.
Interest expense was $229,000 and $120,000 for the six-month periods ended
October 31, 2007 and 2006, respectively. This increase of $109,000 was the
direct result of interest expense on our operating line of credit during the
period that resulted from an increase in the average amount outstanding on the
line of credit during the period. As of October 31, 2007, there was $3,437,000
outstanding on the line of credit.
Net income was $184,000 for the six-month period ended October 31, 2007 as
compared to net income of $410,000 reported for the six-month period ended
October 31, 2006.
Liquidity and Capital Resources
Cash and cash equivalents decreased $43,000 to $460,000 as of October 31,
2007 compared to $503,000 at April 30, 2007. This decrease was the result of
cash used for new production equipment, increases in inventory, accounts payable
and accrued expenses which were partially offset by cash borrowed for the assets
and liabilities purchased as well as borrowings on our operating line of credit.
Operating activities. Our consolidated working capital decreased
approximately $2,193,000 for the six-month period ended October 31, 2007 due to
increases in inventory and current liabilities primarily associated with the
Radix transaction. Operating cash receipts during the six-month period ended
October 31, 2007 totaled over $10,140,000 while cash disbursements for
operations, which includes purchases of inventory and operating expenses, were
approximately $12,249,000. The Company utilizes its line of credit when
necessary in order to pay suppliers and meet operating cash requirements.
Investing activities. The $254,000 of cash used in investing activities
during the six-month period ended October 31, 2007 was primarily the result of
the purchases of new production equipment to increase production capacity and
improve productivity.
Financing activities. For the six-month period ended October 31, 2007, cash
provided by financing activities totaled $2,320,000 and included the addition of
a new $550,000 loan to assist the Company in meeting its obligations under the
acquisition agreement with Radix International Corporation. Also during the
six-month period ended, total borrowings on our operating line of credit were
$3,805,000 which was primarily utilized to finance the operations of DCI and
NTG. Payments on the operating line of credit during the six-month period ending
October 31, 2007 were approximately $1,893,000 which resulted in an outstanding
balance on the line of credit of $3,437,000 as of October 31, 2007.
The Company increased its operating line of credit to $5,000,000 on August
15, 2007. The line of credit is secured by accounts receivable and inventory and
is available for working
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capital. It expires on August 14, 2008 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 plus .25% (8.0% at October 31, 2007)
and contains various covenants, including certain financial performance
covenants pertaining to the maintenance of debt to net worth and minimum net
worth ratios. As of October 31, 2007 the Company was in violation of its minimum
tangible net worth covenant as a result of the Radix transaction in which the
amount of intangible assets was significant. The Company received a waiver of
the covenant from its financial institution for the period ended October 31,
2007 until the end of the third fiscal quarter. There were $3,437,000 in
borrowings outstanding on the credit facility as of October 31, 2007.
Although there can be no assurances, we believe that existing cash, the
cash expected to be generated from the operations of our subsidiaries, amounts
available under our line of credit, and amounts available from trade credit,
will be sufficient to finance our currently anticipated working capital needs,
our capital expenditures for the foreseeable future, and our scheduled debt
repayments.
The following table summarizes our contractual obligations as of October
31, 2007 (in thousands):
For Fiscal Years Ending April 30,
Total 2008 2009 2010 2011 2012 Thereafter
-------- --------- -------- ------- -------- ------- ------------
Contractual obligations:
Series A IRB Bonds
(Building debt) $3,563 $55 $115 $121 $128 $134 $3,010
Land Note 225 9 18 20 21 23 134
Radix Note 537 82 176 193 86 -- --
Interest payments 2,292 127 238 212 188 178 1,349
Operating leases 347 67 117 115 48 -- --
-------- --------- -------- ------- -------- ------- ------------
Total $6,964 $340 $664 $661 $471 $335 $4,493
======== ========= ======== ======= ======== ======= ============
Amount available at Amount owed at
Other obligations: October 31, 2007 October 31, 2007 Expiration
----------------------- ------------------- -----------------------
Line of credit $5,000,000 $3,437,000 August 14, 2008
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
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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 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.
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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, our
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 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 integrate,
market and grow NTG, Inc. and Radix Corporation, the Company's dependence on its
top five 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-QSB, 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.
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ITEM 3. 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.
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