SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 2008 Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP
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(Exact name of Registrant as specified in its charter)
New Jersey 22-1441806
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(State of incorporation) (IRS Employer
Identification Number)
728 Garden Street
Carlstadt, New Jersey 07072
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 933-1600
Securities registered pursuant to Section 12(b) of the Act:
2,439,261 shares of Common Stock were outstanding as of July 3, 2008.
Title of Each Class Name of Exchange on Which Registered
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Common Stock $.10 par value American Stock Exchange
Indicate by checkmark if registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes No X
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Indicate by checkmark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes No X
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Indicate by checkmark 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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definition of "large accelerated filer", "accelerated filer" , and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer[ ] Accelerated filer[ ] Non-accelerated filer[ ]
Smaller reporting company X (Do not check if smaller
reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes No X
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The aggregate market value of the voting Common Stock (par value $.10 per share)
held by non-affiliates on September 30, 2007 (the last business day of our most
recently completed second fiscal quarter) was $3,937,608 using the closing price
on September 30, 2007.
PART I
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Item 1. Description of Business
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General
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Tel-Instrument Electronics Corp ("Tel" or the "Company") has been in
business since 1947, and is a leading designer and manufacturer of
avionics test and measurement solutions for the global commercial air
transport, general aviation, and government/military aerospace and
defense markets. The Company manufactures and sells instruments to
test and measure, and calibrates and repairs a wide range of airborne
navigation and communication equipment.
Tel's instruments are used to test navigation and communications
equipment installed in aircraft, both on the flight line ("ramp
testers") and in the maintenance shop ("bench testers"), and range in
list price from $7,500 to $85,000 per unit. Tel continues to develop
new products in anticipation of customers' needs and to maintain its
strong market position. Its development of multifunction testers, for
example, has made it easier for customers to perform ramp tests with
less operator training, fewer test sets, and lower product support
costs. In recent years the Company has become a major manufacturer and
supplier of IFF (Identification Friend or Foe) flight line test
equipment, and recently was awarded major military contracts, CRAFT
("Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics
Flightline Tester") and ITATS ("Intermediate Level TACAN Test Set")
(see below), incorporating new technology.
Over the last few years, the Company has won competitive awards for
two major contracts for new products, CRAFT or AN/USM-708 and ITATS or
"AN/ARM-206, from the U.S. Navy. These contracts include multi-year
production deliveries, and the Company expects that production
shipments under these programs will commence in calendar year 2009.
However, the Company has started to ship the initial pilot production
units in July 2008. If the production options are exercised in full,
these programs have an aggregate revenue value of approximately $40
million over the next few years. The products under these contracts
represent cutting edge technology, and should provide Tel with a
competitive advantage for years to come.
The AN/USM-708 or CRAFT is a key product for the Company as it
represents a cutting edge technology product, and is currently the
only IFF Mode 5 flight line test set under contract with the U.S.
Military. The AN/USM-708 contract was competitively awarded to the
Company by the United States Navy, and was recently modified to
increase the potential number of units to 1,200. This modified
contract is approximately a $27 million multi-year, firm-fixed-price,
indefinite-delivery/indefinite-quantity contract for the systems
engineering, design and integration, fabrication, testing, and
production of an AN/USM-708 test set with sonobuoy simulator
capabilities. The AN/USM-708 CRAFT unit combines advanced IFF
(including Mode 5) navigation, communication, and sonobuoy test
capabilities in a portable test set, which will utilize a flexible and
expandable digital-signal-processing-based architecture. The
engineering design is currently being finalized. These units will
undergo design validation testing in late calendar year 2008, with
production scheduled to begin in calendar year 2009.
In March 2008, the Company was awarded an additional $2.2 million
purchase order from the U.S. Navy for 83 AN/USM-719 flight line test
sets and associated documentation. The AN/USM-719 is a CRAFT variant
for IFF only. This increases the number of pilot production orders
from 15 to 98 units. These 98 units are expected to be substantially
completed during the 2008 calendar year.
Item 1. Description of Business
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General (continued)
-------------------
The contract for the AN/USM-708/AN/USM-719 is a significant milestone
for the Company, because the development of this technology, which has
been funded by the Company, will establish Tel's position as a leader
in the industry, and will meet the U.S. Navy's test requirements for
years to come. The Company believes that, given the unique nature of
this design, this product could generate sales to other military
customers. The Company has already received orders for a limited
number of units of this product for a modified CRAFT test set from
customers other than the U.S. Navy. The AN/USM-708 contract also
includes options for testing encrypted communications, which, if
exercised, could represent a major expansion in the Company's core
business.
The AN/ARM-206 or ITATS is a bench test set combining advanced digital
technology with state of the art automated testing capabilities. This
product will represent an important expansion to Tel's current product
line, and the automated testing capabilities will represent a
significant labor savings benefit to our customers. This contract has
options for approximately 180 units with a total value of over $12
million; the initial work authorization was $4.4 million. Tel is
working with an engineering sub-contractor and, as a result, this
program will entail a much lower level of Tel engineering design
effort than the AN/USM-708, and a lower gross profit margin, until the
design is completed and validated, and production orders are received
and delivered. Given the unique nature of the design, this unit could
also generate significant sales to other military customers, both
domestically and overseas.
Tel's earlier models ("Legacy Products") have also been selling well
and the Company was recently awarded two large contracts from the U.S.
Army for the T-30D and the T-47N.
In January, 2004, the Company acquired privately held Innerspace
Technology, Inc. ("ITI"). ITI has been in the marine instrumentation
systems business for over 30 years designing, manufacturing and
distributing a variety of shipboard and underwater instruments to
support hydrographers, oceanographers, researchers, engineers,
geophysicists, and surveyors worldwide. As a result of the lack of
growth in this business, and the anticipated growth of the avionics
business, the Company has decided to terminate this business and focus
on the avionics segment. As a result, in fiscal year 2008, the Company
treated ITI as discontinued operations, and wrote-off the remaining
assets of this division (see Notes to the Consolidated Financial
Statements). No plans have yet been finalized as to the disposition of
the ITI assets or business.
Competition
The Company manufactures and sells commercial and military products as
a single avionics business, and its designs and products cross both
markets.
The general aviation market consists of some 1,000 avionics repair and
maintenance service shops, at private and commercial airports in the
United States, which purchase test equipment to assist in the repair
of aircraft electronics. The commercial aviation market consists of
approximately 80 domestic and foreign commercial airlines.
The civilian market for avionic test equipment is dominated by two
manufacturers, Tel and Aeroflex, which is substantially larger than
Tel. This market is relatively small and highly competitive. Tel has
been successful because of its high quality, new technology, user
friendly products and competitive prices.
2
Item 1. Description of Business
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General (continued)
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Competition (continued)
-----------------------
The military market is large and is dominated by large corporations
with substantially greater resources than the Company, including
Aeroflex. Tel competitively bids for government contracts on the basis
of the uniqueness of its products and "small business set asides"
(i.e., statutory provisions requiring the military to entertain bids
only from statutorily defined small businesses), and on bids for
sub-contracts from major government suppliers. There are a limited
number of competitors who are qualified to bid for "small business set
asides." The military market consists of many independent purchasing
agencies and offices. The process of awarding contracts is heavily
regulated by the Department of Defense.
In recent years the Company has won several large, competitively bid
contracts from the government and has become an important supplier for
the U.S. Military, as well as the NATO countries, for flight line IFF
test equipment. The AN/USM-708 program, discussed above, involves a
new generation of technology, including the next generation of IFF
testing, and is expected to allow the Company to continue to be a
major supplier of avionics test equipment to the military for years to
come. Tel believes its new technology will also allow it to increase
sales to the commercial market in the future.
Marketing and Distribution
--------------------------
Domestic commercial sales are made throughout the U.S. to commercial
airlines and general aviation businesses directly or through
distributors. No direct commercial customer accounted for more than
10% of commercial sales in fiscal years 2008 and 2007. Domestic
distributors receive a 15%-20% discount for stocking, selling, and, in
some cases, providing product calibration and repairs. Tel gives a 5%
to 15% discount to non-stocking distributors, and to independent sales
representatives, depending on their sales volume and promotional
effort. Avionics International and Aero Express, independent domestic
distributors, accounted for 14% and 12%, and 6% and 12% of commercial
sales, respectively, for the years ended March 31, 2008 and 2007,
respectively. Dallas Avionics, an independent domestic distributor,
accounted for 10% and 16% of total commercial sales for the years
ended March 31, 2008 and 2007, respectively. The loss of any of one
these distributors would not have a material adverse effect on the
Company or its operations.
Marketing to the U.S. Government is made directly by employees of the
Company or through independent sales representatives, who receive
similar commissions to the commercial distributors. For the years
ended March 31, 2008 and 2007, sales to the U.S. Government, including
shipments through the government's logistics center, represented
approximately 45% and 27%, respectively, of net avionics sales. One
direct government customer (Boeing Corp.) accounted for 13% of
government sales in fiscal year 2007. No direct government customers
represented over 10% of government sales for fiscal year 2008.
International sales are made throughout the world to government and
commercial customers, direct, through American export agents, or
through the Company's overseas distributors at a discount reflecting a
20% to 22% selling commission, under written or oral, year-to-year
arrangements. The Company has an exclusive distribution agreement with
Muirhead Avionics and Accessories, Ltd, based in the United Kingdom,
to represent the Company in parts of Europe, and with Milspec Services
in Australia and New Zealand. Muirhead accounted for approximately 6%
and 4% of commercial sales for the years ended March 31, 2008 and
2007, respectively. In addition, Muirhead sells to government
customers.
3
Item 1. Description of Business
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General (continued)
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Marketing and Distribution (continued)
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Tel also sells its products through exclusive distributors in Spain,
Portugal, and the Far East and is exploring distribution in other
areas. For the years ended March 31, 2008 and 2007 total international
sales were 20% and 19%, respectively, of total sales. Additionally,
the Company has an agreement with M.P.G. Instruments s.r.l., based in
Italy, wherein this distributor has the exclusive sales rights for
DME/P ramp and bench test units. For the fiscal year ended March 31,
2007, sales to M.P.G. Instruments s.r.l represented 13% of total
domestic and foreign government sales. The Company continues to
explore additional marketing opportunities in other parts of the
world, including the Far East. The Company has no material assets
overseas.
Tel also provides customers with calibration and repair services.
Future domestic market growth, if any, will be affected in part by
whether the U.S. Federal Aviation Administration (FAA) implements
plans to upgrade the U.S. air traffic control system and by continuing
recent industry trends towards more sophisticated avionics systems,
both of which would require the design and manufacture of new test
equipment. The weak financial condition of the commercial airline
industry also impacts growth in this segment. The military market is
affected by additional requirements by the Department of Defense. The
Company believes its test equipment is recognized by its customers for
its quality, durability, reliability, affordability, and by its
advanced technology.
Backlog
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Set forth below is Tel's avionics backlog at March 31, 2008 and 2007.
Commercial Government Total
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March 31, 2008 $ 61,500 $ 7,144,235 $ 7,205,735
March 31, 2007 $ 660,027 $ 8,863,006 $ 9,523,033
Tel believes that most of its backlog at March 31, 2008 will be
delivered during the next two fiscal years. The decrease in government
backlog is mostly attributed to percentage of completion revenues on
the $4.4 million order for the ITATS program, which converts orders to
sales more rapidly. The decrease in commercial backlog is due to the
timing of orders from domestic distributors and that most commercial
orders are filled in less than 12 months. All of the backlog is
pursuant to purchase orders and all of the government contracts are
fully funded. However, government contracts are always susceptible to
termination for convenience by the government. Historically, the
Company obtains orders which are required to be filled in less than 12
months, and therefore, these anticipated orders are not reflected in
the backlog.
During the first quarter of fiscal year 2009, the Company received
three large orders totaling approximately $1.3 million for its T-30D
and T-47N products, and an order for approximately $994,000 to upgrade
125 AN/APM-480's to T-47N's.
Suppliers
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Tel obtains its purchased parts from a number of suppliers. These
materials are standard in the industry, and the Company foresees no
difficulty in obtaining purchased parts, as needed, at acceptable
prices.
4
Item 1. Description of Business
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General (continued)
-------------------
Patents and Environmental Laws
------------------------------
Tel has no patents or licenses which are material to its business, and
there are no material costs incurred to comply with environmental
laws.
Engineering, Research, and Development
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In the fiscal years ended March 31, 2008 and 2007 Tel spent $2,790,961
and $2,427,839, respectively, on the engineering, research, and
development of new and improved products. None of these amounts was
sponsored by customers. Tel's management believes that continued
significant expenditures for engineering, research, and development
are necessary to enable Tel to expand its products, sales, and
profits, and to remain competitive. However, the current level of
engineering expenses is projected to decline as the development phase
of the AN/USM-708 program ends.
Engineering, research, and development expenditures in fiscal 2008
were directed primarily to the continued development of the new
AN/USM-708 (CRAFT) next generation multi-function test set for the
U.S. Navy, including the next generation of IFF testing sets, and the
incorporation of other product enhancements in existing designs. The
Company owns all of these designs.
Personnel
---------
At July 3, 2008, Tel had 23 full-time employees in manufacturing,
materials management, and quality assurance, 15 in administration and
sales, including customer services and product support, and 13 in
engineering, research and development, none of whom belongs to a
union. The Company also utilized 1 part-time individual in
manufacturing and 1 in administration. From time to time, the Company
also employs independent contractors to support its manufacturing,
engineering, and sales organizations. At July 3, 2008, the Company
utilized 3 independent consultants in sales, and 4 in engineering. Tel
has been successful in attracting skilled and experienced management
and scientific personnel.
Item 2. Properties
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The Company leases 19,564 square feet in Carlstadt, New Jersey as its
manufacturing plant and administrative offices, pursuant to a ten-year
lease expiring in February, 2011 (see Note 10 to the Notes to the
Consolidated Financial Statements). The current facilities are
adequate for the Company's needs, currently and for the near future.
Tel is unaware of any environmental problems in connection with its
location and, because of the nature of its manufacturing activities,
does not anticipate such problems.
Item 3. Pending Legal Proceedings
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There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
5
PART II
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Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
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The Common Stock, $.10 par value, of the Registrant ("Common Stock")
is traded on the American Stock Exchange and its symbol is TIK. On
June 30, 2008, the closing share price on the Amex was $4.15. The
following table sets forth the high and low per share sale prices for
our common stock for the periods indicated as reported for fiscal
years 2008 and 2007 by the Amex:
Fiscal Year
Ended March 31, High Low
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2007
----
First Quarter 3.49 1.95
Second Quarter 3.07 1.86
Third Quarter 3.20 2.20
Fourth Quarter 3.60 2.91
2008
----
First Quarter 3.85 3.50
Second Quarter 3.80 3.35
Third Quarter 4.24 3.65
Fourth Quarter 4.24 3.68
During fiscal year 2008, the Company issued 63,400 shares of common
stock upon exercise of stock options granted pursuant to its 1998,
2003 and 2006 Employee Stock Option Plans for an aggregate $138,345
which was added to working capital. All of the shares were issued
pursuant to our S-8 Registration Statement filed on August 18, 2005.
See Note 13 to the Notes to the Consolidated Financial Statements and
Item 11, Executive Compensation, for information on the Company's
Employee Stock Option Plans of 1998, 2003 and 2006.
In each of fiscal year 2008 and 2007 Mr. Harold K. Fletcher, CEO,
converted a $50,000 convertible note due into 20,000 shares of common
stock at $2.50 per share. These shares were sold pursuant to Section
4(2) of the Securities Act of 1933, and are restricted. These
conversions reduced the Company's liabilities by $50,000 each year.
The following table provides information as of March 31, 2008
regarding compensation plans under which equity securities of the
Company are authorized for issuance.
----------------------------- ----------------------- ----------------------- -------------------------------
Number of securities Weighted average Number of options remaining
Plan category to be issued upon exercise price of available for future
exercise of options options issuance under Equity
Compensation Plans
----------------------------- ----------------------- ----------------------- -------------------------------
Equity Compensation Plans
approved by shareholders
348,300 $3.33 179,370
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Equity Compensation Plans
not approved by -- -- --
shareholders
----------------------------- ----------------------- ----------------------- -------------------------------
Total 348,300 $3.33 179,370
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Approximate number of equity holders
------------------------------------
Number of Holders
Title of Class of record as of March 31, 2008
---------------------------------------------------------------------
Common Stock, par value
$.10 per share 279
Dividends
---------
Registrant has not paid dividends on its Common Stock and does not
expect to pay such dividends in the foreseeable future.
6
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
---------------------
Forward Looking Statements
--------------------------
A number of the statements made by the Company in this report may be
regarded as "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1965.
Forward-looking statements include, among others, statements
concerning the Company's outlook, pricing trends and forces within the
industry, the completion dates of capital projects, expected sales
growth, cost reduction strategies and their results, long-term goals
of the Company and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty
and accordingly, actual results could differ materially. Among the
factors that could cause a difference are changes in the general
economy; changes in demand for the Company's products or in the costs
and availability of its raw materials; the actions of competitors; the
success of our customers, technological change; changes in employee
relations; government regulations; litigation, including its inherent
uncertainty; difficulties in plant operations and materials
transportation; environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the
Company's filings with the Securities and Exchange Commission.
General
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Management's discussion and analysis of results of operations and
financial condition is intended to assist the reader in the
understanding and assessment of significant changes and trends related
to the results of operations and financial position of the Company
together with its subsidiary. This discussion and analysis should be
read in conjunction with the consolidated financial statements and
accompanying financial notes, and with the Critical Accounting
Policies noted below. The Company's fiscal year begins on April 1 and
ends on March 31. Unless otherwise noted, all references in this
document to a particular year shall mean the Company's fiscal year
ending on March 31.
As previously discussed, the Company's avionics business is conducted
in the Government, Commercial and General aviation markets (see Note
15 of Notes to Financial Statements for segment financial
information). In January 2004, the Company completed its acquisition
of ITI, a company selling products to the marine industry, and ITI's
financial statements have been consolidated with the Company's
financial statements since then. As a result of the lack of growth in
this business, and the anticipated growth of the avionics business,
the Company has decided to divest itself of this business and focus on
the avionics' segment. As a result, in fiscal year 2008, the Company
treated ITI as a discontinued operation. The financial statements have
been restated to segregate the Company's discontinued ITI business,
and include a charge to write-off the remaining assets of ITI (see
Note 11 to the Consolidated Financial Statements).
7
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
---------------------
Overview
--------
In fiscal year 2008, the Company's revenues increased substantially,
but it still incurred a significant, but reduced, loss from continuing
operations due to continuing high engineering expenditures for the
CRAFT products (AN/USM-719 and AN/USM-708), a substantially lower
gross profit margin on the documentation and testing phase of the
ITATS (AN/ARM-206) program, and the fourth quarter write-down of Tel's
investment in its ITI subsidiary.
Tel is anticipating a return to profitable operations in fiscal year
2009 due primarily to a strong increase in projected sales from the
two recent large IDIQ ("Indefinite Delivery/Indefinite Quantity")
contracts with the Army and the previously announced $2.2 million
AN/USM-719 IFF test set order from the U.S. Navy. In addition, the
Company continues to sell its legacy products and pursue business in
the commercial market. Engineering expenses are also projected to
decline as the development phase of the AN/USM-708 program nears
completion.
With respect to the new Army contracts, Tel was successful in recently
winning a competitively bid five year IDIQ contract from the U.S. Army
for 57 to 590 units of T-30D Navigation test sets with a maximum
contract value of $3.2 million, and a five year IDIQ contract from the
U.S. Army for 56 to 156 units of T-47N IFF test sets, with a maximum
contract value of $2.7 million. First shipments under both contracts
began in the first quarter of fiscal year 2009. Tel is also planning
to deliver 83 units of AN/USM-719 IFF test sets to the U.S. Navy in
fiscal year 2009. Significant additional growth is expected in fiscal
year 2010 when substantial production deliveries of the AN/USM-719,
AN/USM-708, and AN/ARM-206 are expected to commence in volume.
Over the last several years, Tel has aggressively invested in
revitalizing its product line with three cutting edge products now
nearing completion, including two variants of CRAFT listed above, and
the AN/ARM-206 TACAN bench test set. The CRAFT products are still the
only Mode 5 flight line test sets under contract with the U.S.
Military. Tel continues to work to finalize the AN/USM-708 product,
with the Navy technical evaluation process scheduled to commence later
this year. To date, the Navy has exercised CRAFT production options
for 98 pilot production units out of a maximum IDIQ contract of 1,200
units. The AN/ARM-206 TACAN Test Set design combines advanced digital
technology with state of the art automated testing capabilities. This
product will represent an important expansion to Tel's current product
line and its automated testing capabilities will represent a
significant benefit to our customers. This IDIQ contract is for up to
180 units with a maximum contract value of $12 million.
8
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 2008 Compared to 2007
-------------------------------------------
Sales
-----
Net sales increased $4,232,583 (60.4%) to $11,235,524 for the fiscal
year ended March 31, 2008 as compared to the fiscal year ended March
31, 2007. Sales from the Company's traditional products increased
substantially over the same period in the prior year as a result of an
increase in government spending for the Company's products and
increased marketing efforts for these contracts. In addition, in
fiscal year 2008, the Company recognized $2,500,000 of revenues on a
percentage-of-completion basis under the ITATS contract.
Avionics government sales increased $3,546,321 (78.8%) to $8,049,120
for the year ended March 31, 2008 as compared to the year ended March
31, 2007 largely as a result of revenues of approximately $2,500,116
from the ITATS contract, which are recognized on a
percentage-of-completion basis, and a net increase in sales from
several legacy products due to the award of new contracts from the
government.
Avionics commercial sales increased from prior year by $686,262
(27.4%) to $3,186,404. This increase is mostly attributed to an
increase in sales of the TR-220 Multi-Function Test set ($333K), as a
result of efforts of the Company's domestic distributors, as well as
an increase in repair and parts sales ($312K). The weak financial
condition of the commercial airline industry continues to limit
significant growth in this segment in addition to increased
competition.
Gross Margin
------------
Gross margin increased $946,259 (24.6%) to $4,797,770 for the year
ended March 31, 2008 as compared to the prior fiscal year. The
increase in gross margin is attributed to the increase in volume. The
gross margin percentage for the year ended March 31, 2008 was 42.7% as
compared to 55.0% for the year ended March 31, 2007. The decrease in
gross profit percentage is primarily attributed to the lower gross
profit percentage (10.5%) on the current ITATS contract discussed
above. The gross profit margin (10.5%) for this contract is
significantly less than the Company's historical gross margin due to
the use of an outside subcontractor in the documentation and design
phase, prototype development, and the competitiveness of the bidding
process. During the third quarter of the prior fiscal year, the
Company reversed its remaining enhancement liability of approximately
$125,000 relating to its upgrade liability for the completed Navy
AN/APM-480 contract, which also favorably impacted the gross margin
percentage in that fiscal year. The reversal was made because the
Company's contractual obligation and liability ended at that time.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 2008 Compared to 2007 (continued)
-------------------------------------------------------
Operating Expenses
------------------
Selling, general and administrative expenses decreased $101,769 (4.0%)
to $2,469,585 for the year ended March 31, 2008 as compared to the
year ended March 31, 2007, primarily as a result of lower group
insurance costs ($81K), recruitment ($60K) and professional fees
($76K) partially offset by higher salaries for marketing and sales
($98K), attributed mostly to the addition of a new Director of
Business Development and an increase in outside sales commissions
($53K).
Engineering, research and development expenses increased $362,122
(15.0%) to $2,790,961 for fiscal year 2008 as compared to the prior
fiscal year. This increase is primarily attributed to additional
contract engineering services used on the CRAFT program.
Interest, net
-------------
Interest income decreased as a result of lower cash balances. Interest
expense increased as a result of the increased borrowings associated
with the line of credit and the loan against the cash surrender value
of the keyman life insurance policy.
Loss from Continuing Operations before Income Taxes
---------------------------------------------------
As a result of the above, the Company incurred a loss from continuing
operations before income taxes of $488,357 for the year ended March
31, 2008 as compared to a loss from continuing operations before
income taxes of $1,113,960 for the year ended March 31, 2007.
Income Taxes for Continuing Operations
--------------------------------------
An income tax benefit in the amount of $157,752 was recorded for the
year ended March 31, 2008 as a result of the loss before taxes from
continuing operations for the year ended March 31, 2008 as compared to
an income tax benefit of $464,242 for the year ended March 31, 2007 as
a result of the loss before taxes from continuing operations for the
year ended March 31, 2007.
Loss from Operations of Discontinued Operations, net of taxes
-------------------------------------------------------------
Loss from operations of discontinued operations decreased $970 (1%) to
$100,280 for the fiscal year ended March 31, 2008 as compared to loss
of $99,310 for the prior year, primarily as a result of lower
engineering expenses, offset by an increase in taxes.
Loss on Disposal of Discontinued Operations, net of taxes
---------------------------------------------------------
In March 2008, the Company wrote-off all the assets of this division,
including inventories and property, plant and equipment in the amount
of $150,897, net of $77,735 of taxes.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 2008 Compared to 2007 (continued)
-------------------------------------------------------
Net Loss
--------
As a result of the loss from continuing operations, the loss from
discontinued operations, and the loss on disposal of division, as
discussed above, the Company incurred a net loss of $581,782 for the
year ended March 31, 2008 as compared to a net loss of $749,028 for
the year ended March 31, 2007. The loss for 2008 is affected by the
write-off of discontinued operations, net of the tax benefit of the
write-off of ITI.
Liquidity and Capital Resources
-------------------------------
At March 31, 2008, the Company had working capital of $2,681,511 as
compared to $3,121,343 at March 31, 2007. For the year ended March 31,
2008, the Company used $445,954 of cash to fund operating activities
as compared to using $1,470,495 of net cash to fund operating
activities in the prior year. This decrease in cash used in operating
activities is primarily attributed to the lower operating loss from
continuing operations and an increase in accounts payable and accrued
expenses offset partially by an increase in accounts receivable and
unbilled government receivables. The cash balance at March 31, 2008
was $469,906 as compared to $655,836 at March 31, 2007.
For the year ended March 31, 2008, the Company used $228,321 in
investing activities as compared to using $108,791 in fiscal year
2007. The increase is attributed to the increased purchases of capital
equipment.
Cash provided by financing activities was $488,345 in fiscal year 2008
as compared to $300,581 in fiscal year 2007. This increase is
primarily attributed to the increased borrowings from the line of
credit in the amount of $350,000 in fiscal year 2008,offset partially
from borrowings on a loan from a life insurance policy in fiscal year
2007. In addition, cash provided by financing activities increased
from the additional proceeds from the exercise of employee stock
options.
At March 31, 2008 the Company had an outstanding loan balance of
$350,000 on which it currently pays 5.75% interest. The line of credit
is collateralized by substantially all of the assets of the Company.
The bank extended the credit agreement until September 30, 2008, and
the new agreement includes a new borrowing base calculation tied to
working capital. As of March 31, 2008, remaining availability under
this modified line was approximately $425,000 based upon eligible
receivables and inventories at March 31, 2008. During the first
quarter of fiscal year 2009, the Company borrowed an additional
$200,000, net against the line to fund inventories for the orders
currently in the Company's backlog. During the first quarter, the
Company started shipping against these orders, and the Company's cash
balance at June 30, 2008 was approximately $870,000, with an
outstanding loan balance of $550,000.
The Company believes that it has adequate liquidity, borrowing
resources and backlog to fund operating plans for at least the next
twelve months. Currently, the Company has no material capital
expenditure requirements.
There was no significant impact on the Company's operations as a
result of inflation for the year ended March 31, 2008.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Critical Accounting Policies
----------------------------
In preparing the financial statements and accounting for the
underlying transactions and balances, the Company applies its
accounting policies as disclosed in Note 2 of our Notes to
Consolidated Financial Statements. The Company's accounting policies
that require a higher degree of judgment and complexity used in the
preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment
to, or acceptance by customer provided title and risk of loss is
transferred to the customer. Provisions, when appropriate, are made
where the right to return exists. Revenues for repairs and
calibrations of the Company's products are recognized when the units
are shipped.
Due to the unique nature of the ITATS program wherein a significant
portion of this contract will not be delivered over a year, revenues
under this contract are recognized on a percentage-of-completion
basis, which recognizes sales and profit as they are earned, rather
than at the time of shipment. All expenses related to this contract
are charged to cost of sales. The Company also receives progress
billings on this program, which is a funding mechanism by the
government to assist contractors on long-term contracts prior to
delivery.
Inventory reserves - inventory reserves or write-downs are estimated
for excess, slow-moving and obsolete inventory as well as inventory
whose carrying value is in excess of net realizable value. These
estimates are based on current assessments about future demands,
market conditions and related management initiatives. If market
conditions and actual demands are less favorable than those projected
by management, additional inventory write-downs may be required.
Warranty reserves - warranty reserves are based upon historical rates
and specific items that are identifiable and can be estimated at time
of sale. While warranty/enhancement costs have historically been
within our expectations and the provisions established, future
warranty/enhancement costs could be in excess of our
warranty/enhancement reserves. A significant increase in these costs
could adversely affect operating results for the current period and
any future periods these additional costs materialize.
Warranty/enhancement reserves are adjusted from time to time when
actual warranty/enhancement claim experience differs from estimates.
Accounts receivable - the Company performs ongoing credit evaluations
of its customers and adjusts credit limits based on customer payment
and current credit worthiness, as determined by review of their
current credit information. The Company continuously monitors credits
and payments from its customers and maintains provision for estimated
credit losses based on its historical experience and any specific
customer issues that have been identified. While such credit losses
have historically been within our expectation and the provision
established, the Company cannot guarantee that it will continue to
receive positive results.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Critical Accounting Policies (continued)
----------------------------------------
Income taxes - deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates and
laws that will be in effect when such differences are expected to
reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefit which is not
more likely than not to be realized. The effect on deferred tax assets
and liabilities of a change in tax rate is recognized in the period
that such tax rate changes are enacted.
Off Balance Sheet Arrangements
------------------------------
The Company is not party to any off-balance sheet arrangements that
may affect its financial position or its results of operations
New Accounting Pronouncements
-----------------------------
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157
"Fair Value Measurements." This SFAS defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements.
This statement applies to accounting pronouncements that require or
permit fair value measurements, except for share-based payment
transactions under SFAS No. 123. This statement is effective for
financial statements issued for fiscal years beginning after November
15, 2007.
In February 2008, FASB Staff Position ("FSP") FAS No. 157-2,
"Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was
issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to
fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least
annually). Examples of items within the scope of FSP No. 157-2 are
nonfinancial assets and nonfinancial liabilities initially measured at
fair value in a business combination (but not measured at fair value
in subsequent periods), and long-lived assets, such as property, plant
and equipment and intangible assets measured at fair value for an
impairment assessment under SFAS No. 144.
The Company does not expect that the partial adoption of SFAS No. 157
on April 1, 2008 with respect to financial assets and financial
liabilities recognized or disclosed at fair value in the financial
statements on a recurring basis will have a material impact on the
Company's financial statements. The Company is in the process of
analyzing the potential impact of SFAS No. 157 relating to its planned
April 1, 2009 adoption of the remainder of the standard.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
New Accounting Pronouncements (continued)
-----------------------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Liabilities, including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to
choose, at specified election dates, to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and
losses shall be reported on items for which the fair value option has
been elected in earnings at each subsequent reporting date. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects
to apply the provisions of SFAS No. 157. Management anticipates the
adoption of SFAS No. 159 will not have a material impact on its future
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in consolidated Financial Statements -- an amendment of ARB
No. 51 ("SFAS 160").SFAS 160 requires that ownership interests in
subsidiaries held by parties other than the parent, and the amount of
consolidated net income, be clearly identified, labeled, and presented
in the consolidated financial statements within equity, but separate
from the parent's equity. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the
former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 will be effective beginning April 1, 2009. Management
anticipates that the adoption of SFAS 160 will not have a material
impact on the Company's future financial statements.
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3
"Accounting for Nonrefundable Payments for Goods and Services to be
Used in Future Research and Development Activities" (ETIF 07-04),
requiring that nonrefundable advance payments for future research and
development activities be deferred and capitalized. Such amounts
should be expensed as the related goods are delivered or the related
services performed. The statement is effective for fiscal years
beginning after December 15, 2007. Management anticipates that the
adoption of EITF Issue No. 07-3 will not have a material impact on the
Company's future financial statements.
In December 2007, the FASB issued SFAS No 141(R), "Business
Combinations." This statement provides new accounting guidance and
disclosure requirements for business combinations. SFAS No 141(R) is
effective for business combinations which occur in the first fiscal
year beginning on or after December 15, 2008. The Company does not
currently expect the adoption of SFAS No. 141(R) to have a material
impact.
In December 2007, the FASB finalized the provisions of the Emerging
Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative
Arrangements." This EITF Issue provides guidance on and requires
financial statement disclosures for collaborative arrangements that
involve joint operating activities with one or more third parties..
EITF Issue No. 07-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The Company is
currently assessing the effect of EITF Issue No. 07-1 on its financial
statements, but it is not expected to be material.
14
Item 8. Financial Statements and Supplementary Data
------- -------------------------------------------
Pages
-----
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm 16
Consolidated Balance Sheets - March 31, 2008 and 2007 17
Consolidated Statements of Operations - Years Ended 18
March 31, 2008 and 2007
Consolidated Statements of Changes in Stockholders' 19
Equity - Years Ended March 31,
2008 and 2007
Consolidated Statements of Cash Flows - Years Ended 20
March 31, 2008 and 2007
Notes to Consolidated Financial Statements 21- 40
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts 41
15
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders of
Tel-Instrument Electronics Corp
Carlstadt, New Jersey
We have audited the accompanying consolidated balance sheets of
Tel-Instrument Electronics Corp and subsidiary (the "Company") as of March
31, 2008 and 2007 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended March 31, 2008. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes consideration of internal control over reporting as a basis
for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we
express no opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements
and schedule, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tel-Instrument Electronics Corp and subsidiary as of March 31, 2008 and
2007, and the results of their operations and their cash flows for each of
the two years in the period ended March 31, 2008 in conformity with
accounting principles generally accepted in the United States .
Also, in our opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein.
/s/ BDO Seidman, LLP
----------------------------------
BDO Seidman, LLP
Woodbridge, New Jersey
July 9, 2008
16
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Balance Sheets
March 31, March 31,
ASSETS 2008 2007
----------- -----------
Current assets:
Cash $ 469,906 $ 655,836
Accounts receivable, net of allowance for doubtful accounts
of $31,206 and $34,544 1,223,753 982,214
Unbilled government receivables 1,100,323 --
Inventories, net 2,075,542 2,123,336
Taxes receivable 44,612 28,776
Prepaid expenses and other 96,834 98,053
Assets of discontinued operations -- 337,306
Deferred income tax asset 531,975 395,756
----------- -----------
Total current assets 5,542,945 4,621,277
Equipment and leasehold improvements, net 532,240 495,929
Deferred income tax asset - non-current 900,221 800,000
Non-current assets of discontinued operations -- 129,318
Other assets 142,069 81,318
Total assets $ 7,117,475 $ 6,127,842
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 350,000 $ --
Convertible note payable - related party 50,000 50,000
Accounts payable 928,367 372,106
Deferred revenues 55,014 115,409
Accrued expenses - vacation pay, payroll and payroll withholdings 348,683 353,727
Accrued expenses - related parties 41,925 74,999
Accrued expenses - other 1,087,445 533,693
----------- -----------
Total current liabilities 2,861,434 1,499,934
Convertible note payable - related party -- 50,000
Deferred revenues 43,818 23,656
----------- -----------
Total liabilities 2,905,252 1,573,590
----------- -----------
Commitments
Stockholders' equity
Common stock, par value $.10 per share, 2,428,261 and 2,341,861
issued and outstanding 242,816 234,186
Additional paid-in capital 4,611,272 4,380,149
Accumulated deficit (641,865) (60,083)
----------- -----------
Total stockholders' equity 4,212,223 4,554,252
----------- -----------
Total liabilities and stockholders' equity $ 7,117,475 $ 6,127,842
=========== ===========
The accompanying notes are an integral part of the financial statements
17
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Operations
For the years ended March 31,
-----------------------------
2008 2007
---- ----
Net sales $ 11,235,524 $ 7,002,941
Cost of sales 6,437,754 3,151,430
------------ ------------
Gross margin 4,797,770 3,851,511
------------ ------------
Operating expenses:
Selling, general and administrative 2,469,585 2,571,354
Engineering, research and development 2,790,961 2,427,839
------------ ------------
Total operating expenses 5,260,546 4,999,193
------------ ------------
Loss from continuing operations (462,776) (1,147,682)
Other income/(expense):
Interest income 16,461 42,692
Interest expense (37,542) (2,220)
Interest expense - related parties (4,500) (6,750)
------------ ------------
Loss from continuing operations before income taxes (488,357) (1,113,960)
Income tax benefit (157,752) (464,242)
------------ ------------
Loss from continuing operations, net of income taxes (330,605) (649,718)
------------ ------------
Discontinued operations:
Loss from operations of discontinued operations,
adjusted for applicable income tax benefit (100,280) (99,310)
Loss on disposal of division, adjusted for applicable
income tax benefit (150,897) --
------------ ------------
Loss from discontinued operations, net of income taxes (251,177) (99,310)
------------ ------------
Net loss $ (581,782) $ (749,028)
============ ============
Loss from continuing operations, net of income taxes:
Basic and diluted loss per common share $ (0.14) $ (0.29)
============ ============
Loss from discontinued operations, net of income taxes:
Basic and diluted loss per common share $ (0.11) $ (0.04)
============ ============
Net loss
Basic and diluted loss per common share $ (0.25) $ (0.33)
============ ============
Weighted average number of shares outstanding
Basic and diluted 2,375,577 2,303,858
============ ============
The accompanying notes are an integral part of the financial statements.
18
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Changes in Stockholders' Equity
(Accumulated
Common Stock Additional Deficit)
# of Shares Paid-In Retained
Issued Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
Balances at April 1, 2006 2,279,411 227,941 $ 4,251,180 $ 688,945 $ 5,168,066
Net loss -- -- -- (749,028) (749,028)
Non-cash stock-based compensation -- -- 5,633 -- 5,633
Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000
Issuance of common stock in connection
with the exercise of stock options 42,450 4,245 75,336 -- 79,581
----------- ----------- ----------- ----------- -----------
Balances at March 31, 2007 2,341,861 234,186 4,380,149 (60,083) 4,554,252
Net loss -- -- -- (581,782) (581,782)
Non-cash stock-based compensation -- -- 39,708 -- 39,708
Issuance of common stock for compensation 3,000 300 11,400 -- 11,700
Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000
Issuance of common stock in connection
with the exercise of stock options 63,400 6,330 132,015 -- 138,345
----------- ----------- ----------- ----------- -----------
Balances at March 31, 2008 2,428,261 $ 242,816 $ 4,611,272 $ (641,865) $ 4,212,223
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
19
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Cash Flows
For the years ended March 31,
-----------------------------
2008 2007
---- ----
Cash flows from operating activities:
Net loss $ (581,782) $ (749,028)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes (157,752) (518,713)
Loss from discontinued operations 150,897 --
Depreciation and amortization 192,010 258,609
Issuance of stock for compensation 11,700 --
Provision for inventory obsolescence 80,000 158,370
Increase in cash surrender value of life
insurance (59,446) (15,803)
Non-cash stock-based compensation 39,708 5,633
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (241,539) 67,364
Increase in unbilled government receivable (1,100,323) --
Increase in inventories (32,206) (516,732)
(Increase) decrease in taxes receivable (15,836) 53,712
(Increase) decrease in prepaid expenses and other (86) 38,980
Increase in accounts payable 556,261 83,620
Decrease in deferred revenues (40,233) (1,012)
Increase (decrease) in accrued expenses 515,634 (335,495)
Decrease in assets of discontinued operations 237,039 --
----------- -----------
Net cash used in operating activities (445,954) (1,470,495)
----------- -----------
Cash flows from investing activities:
Acquisition of equipment (228,321) (108,791)
----------- -----------
Net cash used in investing activities (228,321) (108,791)
Cash flows from financing activities:
Proceeds from exercise of stock options 138,345 79,581
Proceeds from line of credit 350,000 --
Repayment of note payable -- (29,000)
Proceeds from loan on life insurance -- 250,000
policy
Payment of capitalized lease obligations -- --
----------- -----------
Net cash provided by financing activities 488,345 300,581
----------- -----------
Net decrease in cash (185,930) (1,278,705)
Cash, beginning of year 655,836 1,934,541
----------- -----------
Cash, end of year $ 469,906 $ 655,836
=========== ===========
Supplemental cash flow information:
Taxes paid $ -- $ 21,882
=========== ===========
Interest paid $ 43,549 $ 5,695
=========== ===========
Supplemental non-cash information
Notes converted into common stock $ 50,000 $ 50,000
=========== ===========
The accompanying notes are an integral part of the financial statements.
20
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements
1. Business, Organization, and Liquidity
Business and Organization
Tel-Instrument Electronics Corp ("Tel" or the "Company") has been in
business since 1947. The Company is a leading designer and manufacturer of
avionics test and measurement instruments for the global, commercial air
transport, general aviation, and government/military defense markets. Tel
provides instruments to test, measure, calibrate, and repair a wide range
of airborne navigation and communication equipment. The Company sells its
equipment in both domestic and international markets.
In January, 2004, the Company acquired Innerspace Technology, Inc. ("ITI").
ITI has been in the marine instrumentation systems business for over 30
years manufacturing and distributing a variety of shipboard and underwater
instruments to hydrographers, oceanographers, researchers, engineers,
geophysicists, and surveyors worldwide. As a result of the lack of growth
in this business, and the anticipated growth of the avionics business, the
Company decided to focus on the avionics segment. As a result, in fiscal
year 2008, the Company treated ITI as discontinued operations, and has
written-off the remaining assets of this division.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, and include
the Company and its wholly-owned subsidiary. All significant inter-company
accounts and transactions have been eliminated.
As discussed in the Notes 1 and 12, the consolidated financial statements
have been restated to classify the marine system division as discontinued
operations. Prior year amounts have been reclassified to conform with the
2008 presentation.
Revenue Recognition:
Revenues are recognized at the time of shipment to, or acceptance by
customer, provided title and risk of loss is transferred to the customer.
Provisions, when appropriate, are made where the right to return exists.
Revenues for repairs and calibrations of the Company's products
(approximately 8% of revenues) are recognized when the units are shipped.
Due to the unique nature of the ITATS program wherein a significant portion
of this contract will not be delivered for over a year, revenues under this
contract are recognized on a percentage-of-completion basis, which
recognizes sales and profit as they are earned, rather than at the time of
shipment. All expenses related to this contract are charged to cost of
sales. The Company also receives progress billings on this program, which
is a funding mechanism by the government to assist contractors on long-term
contracts prior to delivery.
21
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies
Revenue Recognition (continued):
Shipping and handling costs charged to customers are not material. The
revenues and related shipping and handling costs are included in selling,
general and administrative expenses.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues
Financial Instruments:
The carrying amounts of cash and other current assets and liabilities
approximate fair value due to the short-term maturity of these investments.
The debt to related party has an interest rate that approximates current
market rates and therefore the carrying value approximates market.
Concentrations of Credit Risk:
Cash held in banks: The Company maintains its cash balances in U.S.
Financial Institutions, and amounts at times exceed the Federal Deposit
Insurance Company limits.
Accounts Receivable: The Company's avionics customer base is primarily
comprised of airlines, distributors, and the U.S. Government. As of March
31, 2008, the Company believes it has no significant risk related to its
concentration within its accounts receivable.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. Inventories are written down if the
estimated net realizable value is less than the recorded value. The Company
reviews the carrying cost of inventories by product to determine the
adequacy of reserves for obsolescence. In accounting for inventories, the
Company must make estimates regarding the estimated realizable value of
inventory. The estimate is based, in part, on the Company's forecasts of
future sales and age of inventory. In accordance with industry practice,
service parts inventory is included in current assets, although service
parts are carried for established requirements during the serviceable lives
of the products and, therefore, not all parts are expected to be sold
within one year.
22
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost. Depreciation and
amortization are provided on a straight-line basis over periods ranging
from 3 to 8 years.
Leasehold improvements are amortized over the term of the lease or the
useful life of the asset, whichever is shorter.
Maintenance, repairs, and renewals that do not materially add to the value
of the equipment nor appreciably prolong its life are charged to expense as
incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in the Statements of Operations.
Engineering, Research and Development Costs:
Engineering, research and development costs are expensed as incurred.
Advertising Expenses:
Advertising expenses consist primarily of costs for direct advertising. The
Company expenses all advertising costs as incurred, and classifies these
costs under selling, general and administrative expenses, which amounted to
$31,171 and $30,741 for the years ended March 31, 2008 and 2007,
respectively.
Net Income (Loss) Per Common Share:
Basic net income (loss) per share attributable to common stockholders is
computed by dividing net income (loss) by the weighted-average number of
common shares outstanding during the period. Diluted income per share is
computed by dividing net income by the weighted-average number of common
shares outstanding during the period, including common stock equivalents,
such as stock options using the treasury stock method. Diluted loss per
share is computed by dividing net loss by the weighted-average number of
common shares outstanding during the period and excludes the dilutive
effects of common stock equivalents.
23
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Accounting for Income Taxes:
Despite the Company's belief that its tax return positions are consistent
with applicable tax laws, one or more positions may be challenged by taxing
authorities. Settlement of any challenge can result in no change, a
complete disallowance, or some partial adjustment reached through
negotiations or litigation.
Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. Accordingly, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using enacted tax rates and laws
that are expected to be in effect when such differences are expected to
reverse. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefit which is not more likely than
not to be realized. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in the period that such tax rate changes
are enacted.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement No. 109 ("FIN No. 48"),
effective April 1, 2007. FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN No. 48 requires that the Company determine whether the benefits
of its tax positions are more-likely-than-not of being sustained upon audit
based on the technical merits of the tax position. The Company recognizes
the impact of an uncertain income tax position taken on its income tax
return at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax
position is not recognized if it has less than a 50% likelihood of being
sustained. The implementation of FIN No.48 had no impact on the Company's
results of operations or financial position.
Interest and penalties related to income tax matters, if applicable, will
be recognized as income tax expense. During the years ended March 31, 2008
and 2007 the Company did not incur any expense related to interest or
penalties for income tax matters, and no such amounts were accrued as of
March 31, 2008 and 2007.
24
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Stock-based Compensation:
Effective April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"),
utilizing the modified prospective method. SFAS 123R requires the
measurement of stock-based compensation based on the fair value of the
award on the date of grant. The Company estimates the fair value of each
option granted using the Black-Scholes option-pricing model.
Additional information and disclosure on our adoption of SFAS No. 123R are
provided in Note 14.
Long-Lived Assets:
The Company follows SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The standard provides accounting and
reporting requirements for the impairment of all long-lived assets.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. The most significant estimates include income
taxes, percentage-of- completion sales recognition, warranty claims,
inventory and accounts receivable valuations.
Reclassification:
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information.
The Company continuously monitors credit limits for and payments from its
customers and maintains provision for estimated credit losses based on its
historical experience and any specific customer issues that have been
identified. While such credit losses have historically been within the
Company's expectation and the provision established, the Company cannot
guarantee that this will continue.
25
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Warranty Reserves:
Warranty reserves are based upon historical rates and specific items that
are identifiable and can be estimated at time of sale. While warranty costs
have historically been within the Company's expectations and the provisions
established, future warranty costs could be in excess of the Company's
warranty reserves. A significant increase in these costs could adversely
affect the Company's operating results for the period and the periods these
additional costs materialize. Warranty reserves are adjusted from time to
time when actual warranty claim experience differs from estimates.
Risks and Uncertainties:
The Company's operations are subject to a number of risks, including but
not limited to changes in the general economy, demand for the Company's
products, the success of its customers, research and development results,
reliance on the government and commercial markets and the renewal of its
line of credit. The Company has major contracts with the U.S. Government,
which like all government contracts are subject to termination.
New Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements." This SFAS defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This statement applies
to accounting pronouncements that require or permit fair value
measurements, except for share-based payment transactions under SFAS No.
123. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007.
In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2
defers the effective date of SFAS No. 157 to fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis
(at least annually). Examples of items within the scope of FSP No. 157-2
are nonfinancial assets and nonfinancial liabilities initially measured at
fair value in a business combination (but not measured at fair value in
subsequent periods), and long-lived assets, such as property, plant and
equipment and intangible assets measured at fair value for an impairment
assessment under SFAS No. 144.
26
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued):
The Company does not expect that the partial adoption of SFAS No. 157 on
April 1, 2008 with respect to financial assets and financial liabilities
recognized or disclosed at fair value in the financial statements on a
recurring basis will have a material impact on the Company's financial
statements. The Company is in the process of analyzing the potential impact
of SFAS No. 157 relating to its planned April 1, 2009 adoption of the
remainder of the standard.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities, including an amendment of FASB Statement
No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at
specified election dates, to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at
fair value. Unrealized gains and losses shall be reported on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of SFAS No. 157. Management anticipates
the adoption of SFAS No. 159 will not have a material impact on the
Company's future financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS
160").SFAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income,
be clearly identified, labeled, and presented in the consolidated financial
statements within equity, but separate from the parent's equity. It also
requires once a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair
value. Sufficient disclosures are required to clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 will be effective beginning April 1, 2009.
Management anticipates that the adoption of SFAS 160 will not have a
material impact on the Company's future financial statements.
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3
"Accounting for Nonrefundable Payments for Goods and Services to be Used in
Future Research and Development Activities" (ETIF 07-04), requiring that
nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts should be expensed as
the related goods are delivered or the related services performed. The
statement is effective for fiscal years beginning after December 15, 2007.
Management anticipates that the adoption of EITF Issue No. 07-3 will not
have a material impact on the Company's future financial statements.
27
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued):
In December 2007, the FASB issued SFAS No 141(R), "Business Combinations."
This statement provides new accounting guidance and disclosure requirements
for business combinations. SFAS No 141(R) is effective for business
combinations which occur in the first fiscal year beginning on or after
December 15, 2008. The Company does not currently expect the adoption of
SFAS No. 141(R) to have a material impact.
In December 2007, the FASB finalized the provisions of the Emerging Issues
Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative
Arrangements." This EITF Issue provides guidance and requires financial
statement disclosures for collaborative arrangements that involve joint
operating activities with one or more third parties. EITF Issue No. 07-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company is currently assessing the effect of EITF
Issue No. 07-1 on its financial statements, but it is not expected to be
material.
3. Accounts Receivable
The following table sets forth the components of accounts receivable:
March 31,
---------
2008 2007
---- ----
Government $ 647,063 $ 678,688
Commercial 607,896 338,070
Less: Allowance for doubtful accounts (31,206) (34,544)
------------ ------------
$ 1,223,753 $ 982,214
============ ============
28
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
4. Inventories
Inventories consist of:
March 31,
---------
2008 2007
---- ----
Purchased parts $ 1,246,733 $ 1,086,085
Work-in-process 881,472 1,140,776
3,782 3,782
Finished goods 224,284 127,291
Less: Allowance for obsolete inventory (276,947) (230,816)
----------- -----------
$ 2,075,542 $ 2,123,336
=========== ===========
Work-in-process inventory includes $310,917 and $387,269 for government
contracts at March 31, 2008 and 2007, respectively.
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
March 31,
---------
2008 2007
---- ----
Leasehold Improvements $ 506,311 $ 506,311
Machinery and equipment 1,542,373 1,357,464
Automobiles 16,514 16,514
Sales equipment 501,490 458,079
Assets under capitalized leases 367,623 367,623
Less: Accumulated depreciation &
amortization (2,402,071) (2,210,062)
----------- -----------
$ 532,240 $ 495,929
=========== ===========
29
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
6. Accrued Expenses
Accrued vacation pay, payroll and payroll withholdings consist of the
following:
March 31,
---------
2008 2007
---- ----
Accrued vacation pay $ 238,040 $ 233,010
Accrued payroll and payroll withholdings 110,643 120,717
----------- -----------
$ 348,683 $ 353,727
Accrued vacation pay, payroll and payroll withholdings includes $88,570 and
$81,780 at March 31, 2008 and 2007, respectively, which is due to officers.
Accrued expenses - other consist of the following:
March 31,
---------
2008 2007
---- ----
Accrued consulting $ 115,199 $ 194,050
Accrued outside contractor costs 667,733 --
Accrued commissions 95,371 19,400
Accrued audit and tax preparation fees 88,400 76,000
Accrued - other 120,742 244,243
----------- -----------
$ 1,087,445 $ 533,693
=========== ===========
Accrued expenses - related parties consists of the following:
March 31,
---------
2008 2007
---- ----
Professional fees to non-employee
officer and stockholder $ 16,226 $ 26,276
Reimbursemnt of expenses due to
the Company's President 9,000 --
Interest and other expenses due to
Company's Chairman/CEO 16,699 48,723
----------- -----------
$ 41,925 $ 74,999
=========== ===========
30
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
7. Line of Credit
The Company has a line of credit from a bank, which expires September 30,
2008. The agreement includes a borrowing base calculation tied to accounts
receivable and inventories. Interest on any outstanding balances is payable
monthly at an annual interest rate of one-half of one percent (0.5%) above
the lender's prevailing base rate. The Company's interest rate was 5.75%
and 8.75% at March 31, 2008 and 2007 respectively. The line is
collateralized by substantially all of the assets of the Company. The
credit facility requires the Company to maintain certain financial
covenants. As of March 31, 2008 and March 31, 2007, the Company was in
compliance with all financial covenants. At March 31, 2008 and 2007, the
Company had outstanding balances of $350,000 and $-0-, respectively. As of
March 31, 2008, the remaining availability under this line is approximately
$429,000, based upon receivables and inventories at March 31, 2008.
The Company borrowed an additional $200,000 in May 2008 and another
$200,000 in June 2008 and also repaid $200,000 in June.
31
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
8. Income Taxes
Income tax (benefit) provision:
March 31, March 31,
--------- ---------
2008 2007
---- ----
Current:
Federal $ -- $ --
State and local 3,851 3,312
----------- -----------
Total current tax provision 3,851 3,312
----------- -----------
Deferred:
Federal (137,363) (367,298)
State and local (24,240) (100,256)
----------- -----------
Total deferred tax benefit (161,603) (467,554)
----------- -----------
Total benefit $ (157,752) $ (464,242)
=========== ===========
The components of the Company's deferred taxes at March 31, 2008 and 2007
are as follows:
March 31, March 31,
--------- ---------
2008 2007
---- ----
Deferred tax assets:
Net operating loss carryforwards & credits $1,062,000 $ 822,000
Discontinued operations 91,000 --
Allowance for doubtful accounts 12,000 14,000
Reserve for inventory obsolescence 111,000 139,000
Inventory capitalization 47,000 78,000
Deferred payroll and accrued interest 20,000 50,000
Vacation accrual 95,000 93,000
Warranty/Enhancement reserve 15,000 8,000
Deferred revenues 40,000 44,000
Non-compete agreement 25,000 27,000
Depreciation 18,000 --
---------- ----------
Deferred tax asset 1,536,000 1,275,000
Less valuation allowance 104,000 79,000
---------- ----------
Deferred tax asset, net $1,432,000 $1,196,000
========== ==========
Deferred tax asset - current $ 532,000 $ 396,000
Deferred tax asset - long-term 900,000 800,000
---------- ----------
Total $1,432,000 $1,196,000
========== ==========
The recognized deferred tax asset is based upon the expected utilization of
its benefit from the reversal of tax asset temporary differences. The
Company has net operating loss ("NOL") carryforwards of approximately
$3,334,000 at March 31, 2008. These carryforward losses are available to
32
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
offset future taxable income, and begin to expire in the year 2024. A
valuation allowance has been recorded against certain state net operating
loss carryforwards, since management does not believe that the realization
of these NOL's is more likely than not.
The foregoing amounts are management's estimates and the actual results
could differ from those estimates. Future profitability in this competitive
industry depends on continually obtaining and fulfilling new profitable
sales agreements and modifying products. The inability to obtain new
profitable contracts or the failure of the Company's engineering
development efforts could reduce estimates of future profitability, which
could affect the Company's ability to realize the deferred tax assets.
A reconciliation of the income tax benefit at the statutory Federal tax
rate of 34% to the income tax benefit recognized in the financial
statements is as follows:
March 31, March 31,
--------- ---------
2008 2007
---- ----
Income tax benefit - statutory rate $ (166,041) $ (378,746)
Income tax expenses - state and local,
net of federal benefit (15,998) (67,171)
Non-deductible expenses 24,071 10,591
Other 216 (28,916)
----------- -----------
Income tax benefit $ (157,752) $ (464,242)
=========== ===========
9. Related Party Transactions
On March 31, 1997, the Company's Chairman/CEO renegotiated the terms of the
non-current note payable-related party. This note, along with $250,000 of
other accrued expenses due to the Company's Chairman/CEO, were converted
into seven $50,000 convertible subordinated notes (the "Notes") totaling
$350,000. The Notes were serially due in consecutive years beginning March
31, 1999 with the last note due March 31, 2005.
In November 2002 the Company paid and redeemed $100,000 of the previously
matured and extended Notes. The Notes bore interest at a rate of 10% per
annum, payable semi-annually on the last day of September and March of each
year. Effective October 1, 2003, the interest rate was changed to 4.5%. The
Company is required to prepay the outstanding balance of the Notes and any
accrued interest thereon, if the Company sells all or substantially all of
its assets. The Notes can be converted into newly issued common shares of
the Company at the conversion price of $2.50 per share. The conversion
price, which excluded the market price of the stock at the time the Notes
were issued, shall be adjusted for any stock dividends, stock issuances or
capital reorganizations. The Notes may be redeemed by the Company prior to
maturity upon giving written notice of not less than 30 days or more than
60 days at a redemption price equal to 120% of the principal if redeemed
two years or more prior to the maturity date or 110% of the principal if
redeemed more than one year, but less than two years prior to the maturity
date.
33
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
9. Related Party Transactions (Continued)
In May 2004, the Company and its Chairman/CEO renegotiated the terms of the
Notes payable-related party. The Notes now become serially due in
consecutive years beginning March 31, 2005. The interest rate remains at
4.5%. On March 31, 2008 and 2007, respectively, each of the $50,000 notes
due were converted into common stock. Each $50,000 note due was converted
into 20,000 shares of the Company's common stock at $2.50 per share. The
total principal amount outstanding was $50,000 and $100,000 at March 31,
2008 and 2007, respectively. Interest expense amounted to $4,500 and $8,970
for the years ended March 31, 2008 and 2007, respectively.
The Company has obtained legal services from a non-employee
officer/stockholder with the related fees amounting to $79,935 and $93,179
for the years ended March 31, 2008 and 2007, respectively. The Company
obtained management and marketing services from a
director/officer/stockholder with the related fees amounting to $85,090 and
$68,973 for the years ended March 31, 2008 and 2007, respectively.
10. Commitments
The Company leases manufacturing and office space under an operating lease
agreement expiring in February 2011. Under terms of the lease, the Company
pays all real estate taxes and utility costs for the premises.
In addition, the Company has agreements to lease equipment for use in the
operations of the business under operating leases.
The following is a schedule of approximate future minimum rental payments
for operating leases subsequent to the year ended March 31, 2008.
Years Ended March 31,
2009 $ 164,000
2010 152,000
2011 143,000
---------
$ 459,000
=========
Total rent expense, including real estate taxes, was approximately $250,000
and $227,000 for the years ended March 31, 2008 and 2007, respectively.
The Company sponsors a 401K plan in which employee contributions on a
pre-tax basis are supplemented by matching contributions by the Company.
The Company charged to operations $11,526 and $10,295 as its matching
contribution to the Company's 401k Plan for the years ended March 31, 2008
and 2007, respectively.
34
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
11. Discontinued Operations
The Board of Directors has approved discontinuing the Company's marine
systems division. As a result, the consolidated financial statements
present the marine systems division as a discontinued operation.
The Company wrote-off fixed assets of approximately $77,000 and inventories
of approximately $151,000 in 2008.
The Company's decision to discontinue its marine operations was based
primarily on the historical losses sustained and management's intent to
focus on its avionics business
The following tables reflects sales, costs and expenses, and loss from
discontinued operations, net of taxes for the years ended March 31, 2008
and 2007, respectively.
---------------------------------------------------------------------------- ---------------- --------------
2008 2007
---------------------------------------------------------------------------- ---------------- --------------
Discontinued Operations:
---------------------------------------------------------------------------- ---------------- --------------
Sales $ 543,917 $ 663,646
---------------------------------------------------------------------------- ---------------- --------------
Costs and expenses 672,476 814,114
---------------------------------------------------------------------------- ---------------- --------------
Loss from operations of discontinued operations (128,559) (150,469)
---------------------------------------------------------------------------- ---------------- --------------
Loss from operations of discontinued operations , net of income tax (100,280) (99,310)
benefit of $28,279 and $51,159 for 2008 and 2007, respectively
---------------------------------------------------------------------------- ---------------- --------------
Loss on disposal of discontinued operations before income taxes (228,632) --
---------------------------------------------------------------------------- ---------------- --------------
Income tax benefit (77,735) --
---------------------------------------------------------------------------- ---------------- --------------
Net loss on disposal of discontinued operations (150,897) --
---------------------------------------------------------------------------- ---------------- --------------
Net loss from discontinued operations $(251,177) $(99,310)
---------------------------------------------------------------------------- ---------------- --------------
The following table reflects the reported assets and liabilities for
discontinued operations as of March 31, 2007:
-------------------------------------------------- -------------
Inventories $337,306
-------------------------------------------------- -------------
Fixed assets $129,318
-------------------------------------------------- -------------
35
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
12. Significant Customer Concentrations
For the years ended March 31, 2008 and 2007, sales to the U.S. Government
represented approximately 45% and 27%, respectively of avionics net sales.
No other individual customer represented over 10% of avionics net sales for
these years. One domestic distributor (Avionics International) accounted
for 14%, and 12% of commercial avionics net sales for the years ended March
31, 2008 and 2007, respectively. Additionally, another domestic distributor
(Aero Express) accounted for 6% and 12% of commercial avionics net sales
for the years ended March 31, 2008 and 2007, respectively. Dallas Avionics,
another independent domestic distributor, accounted for 10% and 16% of
total commercial net sales for the years ended March 31, 2008 and 2007,
respectively. One direct government customer (Boeing Corp.) accounted for
13% of government net sales in fiscal year 2007. No direct government
customers represented over 10% of government net sales for fiscal year
2008. An international distributor (M.P.G. Instruments) accounted for 5%
and 13%, respectively, of total government net sales for the years ended
March 31, 2008 and 2007. No other customer or distributor accounted for
more than 10% of commercial or government net sales.
Foreign net sales were $2,300,464 and $1,467,314 for the years ended March
31, 2008 and 2007, respectively. All other sales were to customers located
in the U.S.
As of March 31, 2008, one individual customer balance represented 14% of
the Company's outstanding receivables. As of March 31, 2007, two individual
customer balances represented 45% and 10%, respectively, of the Company's
outstanding receivables. Receivables from the U.S. Government represented
approximately 33% and 10%, respectively, of total receivables for the
fiscal years ended March 31, 2008 and 2007.
13. Stock Option Plans
In May 2003, the Board of Directors adopted the 1998 Stock Option Plan
("the Plan") which reserved for issuance options to purchase up to 250,000
shares of its Common Stock. The stockholders approved the Plan at the
November 2003 annual meeting. The Plan, which has a term of ten years from
the date of adoption is administered by the Board of Directors or by a
committee appointed by the Board of Directors. The selection of
participants, allotment of shares, and other conditions related to the
grant of options, to the extent not set forth in the Plan, are determined
by the Board of Directors. Options granted under the Plan are exercisable
up to a period of 5 years from the date of grant at an exercise price which
is not less than the fair market value of the common stock at the date of
grant, except to a stockholder owning 10% or more of the outstanding
36
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
13. Stock Option Plans (continued)
common stock of the Company, as to which the exercise price must be not
less than 110% of the fair market value of the common stock at the date of
grant. Options are exercisable, on a cumulative basis, 20% at or after each
of the first, second, and third anniversary of the grant and 40% after the
fourth year anniversary.
In March 2006, the Board of Directors of the Company adopted the 2006 Stock
Option Plan which reserves for issuance options to purchase up to 250,000
shares of its common stock and is similar to the 2003 Plan. The
stockholders approved this plan at the December 2006 annual meeting.
The fair value of each option awarded is estimated on the date of grant
using the Black-Scholes option valuation model that uses the assumptions
noted in the following table. Expected volatilities are based on historical
volatility of the Company's stock, and other factors. The expected life of
the options granted represents the period of time from date of grant to
expiration (5 years). The risk-free interest rate is based on the U.S.
Treasury yield in effect at the time of grant. The per share
weighted-average fair value of stock options granted for the years 2008 and
2007 was $1.77 and $1.81, respectively, on the date of grant using the
Black Scholes option-pricing model with the following assumptions:
---------- ---------- --------------- ----------------- ---------
Year Dividend Risk-free Volatility Life
Yield Interest rate
---------- ---------- --------------- ----------------- ---------
2008 0.0% 2.1%-5.0% 40.42% - 57.3% 5 years
---------- ---------- --------------- ----------------- ---------
2007 0.0% 4.50%-4.77% 54.24% - 58.03% 5 years
---------- ---------- --------------- ----------------- ---------
37
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
13. Stock Option Plan (continued)
A summary of the status of the Company's stock option plans for the fiscal
years 2008 and 2007 and changes during the years are presented below: (in
number of options):
Average Aggregate
Number of Average Exercise Remaining Intrinsic
Options Price Contractual Term Value
------- ----- ---------------- -----
Outstanding options at April 1, 2006 399,850 $2.89
Options granted 65,500 $3.18
Options exercised (42,450) $1.87
Options canceled/forfeited (35,250) $2.59
Outstanding options at March 31, 387,650 $3.08
2007
Options granted 65,500 $3.75
Options exercised (63,400) $2.19
Options canceled/forfeited (41,450) $3.45 2.6 years $211,649
Outstanding options at March 31, 348,300 $3.33 2.6 years $217,440
2008
Vested Options:
March 31, 2008: 168,130 $3.11 1.7 years $142,172
March 31, 2007: 173,800 $2.79 1.6 years $144,834
Remaining options available for grant were 179,370 and 203,420 as of March
31, 2008 and 2007, respectively.
The total intrinsic value of options exercised during the years ended March
31, 2008 and 2007 was $95,870 and $22,486, respectively. Cash received from
the exercise of stock options for the years ended March 31, 2008 and 2007
was $138,345 and $79,581, respectively.
14. Net Loss Per Share
Incremental shares of 66,143 and 35,888 are attributable to the assumed
exercise of outstanding options and have been excluded from the calculation
of diluted net loss per share for fiscal years 2008 and 2007, respectively,
as their effect would have been anti-dilutive due to the losses incurred in
these period.
38
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
15. Segment Information
As a result of the classification of its marine systems division as
discontinued operations in accordance with FAS No. 131, "Disclosures about
Segments of an Enterprise and related information", the Company determined
it has two reportable segments for continuing operations - avionics
government and avionics commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products.
The avionics government segment consists primarily of the design,
manufacture, and sale of test equipment to the U.S. and foreign governments
and militaries either directly or through distributors. The avionics
commercial segment consists of design, manufacture, and sale of test
equipment to domestic and foreign airlines, directly or through commercial
distributors, and to general aviation repair and maintenance shops. The
Company develops and designs test equipment for the avionics industry and
as such, the Company's products and designs cross segments.
Management evaluates the performance of its segments and allocates
resources to them based on gross margin. The Company's general and
administrative costs and sales and marketing expenses are not segment
specific. As a result, all operating expenses are not managed on a segment
basis. Net interest includes expenses on debt and income earned on cash
balances, both maintained at the corporate level. Segment assets include
accounts receivable and work-in-process inventory. Asset information, other
than accounts receivable and work-in-process inventory, is not reported,
since the Company does not produce such information internally. All
long-lived assets are located in the U.S.
The table below presents information about reportable segments within the
avionics business for the years ending March 31:
-------------------------------- --------------- --------------- -------------- -------------- ----------------
2008 Avionics Avionics Avionics Corporate/
Government Commercial Total Reconciling Total
Items
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Net sales $ 8,049,120 $ 3,186,404 $11,235,524 $ -- $11,235,524
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Cost of Sales 4,623,345 1,814,409 6,437,754 -- 6,437,754
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Gross Margin 3,425,775 1,371,995 4,797,770 -- 4,797,770
----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Engineering, research, and 2,790,961 2,790,961
Development
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Selling, general, and admin. 1,336,197 1,133,388 2,469,585
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Interest expense, net -- 25,581 25,581
----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Income (loss) before income
taxes from continuing
operations 670,612 (1,158,969) (488,357)
----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Segment Assets $ 3,326,947 $ 1,103,807 $ 4,430,754 $ 2,686,721 $ 7,117,475
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
39
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
15. Segment Information (continued)
-------------------------------- --------------- --------------- ------------- -------------- ----------------
2007 Avionics Corporate/
Government Commercial Total Reconciling Total
Items
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Net sales $ 4,502,799 $ 2,500,142 $ 7,002,941 $ -- $ 7,002,941
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Cost of Sales 1,731,674 1,419,756 3,151,430 -- 3,151,430
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Gross Margin 2,771,125 1,080,386 3,851,511 -- 3,851,511
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Engineering, research, and 2,427,839 2,427,839
Development
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Selling, general, and admin. 1,332,547 1,238,807 2,571,354
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Interest income, net -- (33,722) (33,722)
----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Income (loss) before income
taxes from continuing
operations 91,125 (1,205,085) (1,113,960)
----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Segment Assets $ 2,740,699 $ 863,246 $ 3,603,945 $ 2,523,897 $ 6,127,842
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
16. Quarterly Results of Operations (Unaudited)
Quarterly consolidated data for the years ended March 31, 2008 and 2007 is
as follows:
Quarter Ended
-------------
FY 2008 June 30 September 30 December 31 March 31
------- ------- ------------ ----------- --------
Net sales $ 2,955,739 $ 2,844,692 $ 3,088,334 $ 2,346,759
Gross margin 1,213,302 1,233,209 1,324,729 1,026,530
Loss from continuing
operations before taxes (121,217) (2,132) (18,857) (346,151)
(Loss) income from continuing
operations after taxes (71,742) 884 (8,883) (291,107)
Discontinued operations,
net of taxes (11,632) (24,001) (27,076) (65,850)
Loss on disposal of assets,
net of taxes -- -- -- (150,897)
Net loss (83,374) (23,117) (35,959) (507,854)
Basic and diluted loss per share (0.04) ( 0.01) (0.02) (0.21)
Quarter Ended
-------------
FY 2007 June 30 September 30 December 31 March 31
------- ------- ------------ ----------- --------
Net sales $ 1,643,618 $ 1,843,857 $ 2,097,427 $ 1,418,039
Gross margin 787,876 1,011,247 1,220,573 831,815
Loss from continuing
operations before taxes (381,743) (136,823) (37,595) (557,799)
Loss from continuing
operations after taxes (225,083) (82,081) (21,194) (321,360)
Discontinued operations,
net of taxes (46,071) (897) (18,259) (34,083)
Net loss (271,154) (82,978) (39,453) (355,443)
Basic and diluted loss per share (0.12) (0.04) (0.02) (0.14)
40
TEL-INSTRUMENT ELECTRONICS CORP
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Deductions Balance
Beginning Costs and at
Description of the Year Expenses End of the
Year
Year ended March 31, 2008:
Allowance for doubtful
Accounts $ 34,544 $ -- $ (3,338) $ 31,206
========== ========== ========== ==========
Allowance for obsolete
Inventory $ 230,816 $ 60,000 $ (13,869) $ 276,947
========== ========== ========== ==========
Year ended March 31, 2007:
Allowance for doubtful
Accounts $ 40,994 $ -- $ (6,450) $ 34,544
========== ========== ========== ==========
Allowance for obsolete
Inventory $ 177,110 $ 108,370 $ (54,664) $ 230,816
========== ========== ========== ==========
41
TEL-INSTRUMENT ELECTRONICS CORP
Item 9a(T). Controls and Procedures
----------- -----------------------
Evaluation of disclosure controls and procedures.
As of March 31, 2008, management performed, with the
participation of our Chief Executive Officer and Principal
Accounting Officer, an evaluation of the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15(e)
and 15d-15(e) of the Securities and Exchange Act of 1934. Our
disclosure controls and procedures are designed to ensure that
information required to be disclosed in the report we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosures. Based on the evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as
of March 31, 2008, such disclosure controls and procedures were
effective.
Management's Annual Report on Internal Control Over Financial
Reporting.
Tel's management is responsible for establishing and maintaining
an adequate system of internal control over financial reporting,
as defined in Rule 13a-15(f) of the Exchange Act. The company's
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in
accordance with Generally Accepted Acounting Principles ("GAAP").
Because of its inherent limitations, a system of internal control
over financial reporting can provide only reasonable assurance
and may not prevent or detect misstatements. Also, projection of
any evaluation of effectiveness to future periods is subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management has conducted, with the participation of our Chief
Executive Officer and our Principal Accounting Officer, an
assessment of the effectiveness of our internal control over
financial reporting as of March 31, 2008. Management's assessment
of internal control over financial reporting used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control over Financial
Reporting - Guidance for Smaller Public Companies. Based on this
evaluation, Management concluded that our system of internal
control over financial reporting was effective as of March 31,
2008, based on these criteria.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal
control over financial reporting. Management's report was not
subject to attestation of the Company's registered public
accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only
management's report in this annual report.
42
Item 9a(T). Controls and Procedures (continued)
----------- -----------------------------------
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting identified in connection with the evaluation as of
March 31, 2008 by the Chief Executive Officer and Principal
Accounting Officer, required by paragraph (d) of Exchange Act
Rules 13a-15 or 15d-15 that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely
to materially affect our internal controls over financial
reporting.
Item 9b. None.
--------
43
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
-------- --------------------------------------------------
Year First
Elected a
Name (age) Position Director
---------- -------- --------
Harold K. Fletcher (1) Chairman of the Board, 1982
(82) President and Chief Executive
Officer since 1982.
George J. Leon (2) (3) Director; Investment 1986
(64) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.
Robert J. Melnick Director; 1998
(74) Vice President since 1999;
Marketing and Management
Consultant for the Company
since 1991.
Jeffrey C. O'Hara, CPA (1) Director; President since 1998
(50) August 2007; Vice President
since 2005 COO since June 2006;
Financial Consultant from 2001;
Chief Financial Officer
from 1999-2000 of Alarm
Security Group.
Robert A. Rice (2) (3) Director; President and 2004
(52) Owner of Spurwink Cordage,
Inc since 1998 (textile
manufacturing).
Robert H. Walker (2) (3) Director; Retired Executive 1984
(72) Vice President, Robotic Vision
Systems, Inc. (design and
manufacture of robotic vision
systems) 1983-1998.
Marc A. Mastrangelo Vice President - Operations,
since May 2008, Vice President -
Manufacturing, since August 2007,
Director - Manufacturing, since
January 2004
44
TEL-INSTRUMENT ELECTRONICS CORP
Item 10. Directors and Executive Officers of the Registrant (Continued)
-------- --------------------------------------------------------------
All directors serve until the next annual shareholders' meeting and
until their successors are duly elected and qualified.
(1) Mr. O'Hara is the son-in-law of Mr. Fletcher
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Audit Committee
---------------
The Board of Directors established a separately designated standing
Audit Committee in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934. The Audit Committee is comprised of
Messrs. Walker (chairman), Leon, and Rice. Messrs. Walker, Leon, and
Rice are independent, as that term is defined under the Securities
Exchange Act of 1934, and Mr. Walker is a financial expert as defined
in that act. As noted above, Mr. Walker served as director and
Executive Vice President of Robotic Vision Systems, Inc., a reporting
company, and as its principal financial officer for over 15 years.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
As of March 31, 2008, the end of the last fiscal year, all officers,
directors and 10% beneficial owners, known to the Company, had timely
filed required forms reporting beneficial ownership of Company
securities, based solely on review of Filed Forms 3 and 4.
Code of Ethics
--------------
The Board of Directors has adopted a written Code of Ethics that
applies to all of the Company's officers and employees, including the
Chief Executive Officer and the Principal Accounting Officer. A copy
of the Code of Ethics is available to anyone requesting a copy without
cost by writing to the Company, attention Joseph P. Macaluso.
45
Item 11. Executive Compensation
-------- ----------------------
The following table presents information regarding compensation of our principal
executive officer, and the two most highly compensated executive officers other
than the principal executive officer for services rendered during fiscal years
2008 and 2007.
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Name and Principal Year Salary ($) Incentive Option All Other Total
Position (1) ($) (2) Awards ($) Compensation $ ($)
(3) (4)
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Harold K. Fletcher, CEO 2008 159,000 -0- -0- 7,613 166,613
(6)
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
2007 159,000 -0- -0- 7,337 166,337
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Jeffrey C. O'Hara, 2008 113,500 -0- 26,175 14,425 154,100
President
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
2007 108,000 -0- -0- 13,345 121,345
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Marc A. Mastrangelo, 2008 123,000 -0- -0- 26,049 (5) 149,049
Vice President -
Operations
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
2007 115,900 -0- 10,847 13,449 140,196
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
(1) The amounts shown in this column represent the dollar value of base cash
salary earned by each executive officer.
(2) No incentive compensation was made to the NEO's in 2008 and 2007, and
therefore no amounts are shown.
(3) Amounts in this column represent the fair value required by FASB 123R to be
included in our financial statements for all options granted during that
year.
(4) The amounts shown in this column represent amounts for medical and life
insurance as well as the Company's match in the 401(k) Plan.
(5) Includes stock issued in lieu of compensation with a fair value of $11,700.
(6) The Company previously issued several $50,000 convertible principal amount
notes to Mr. Fletcher, with due dates in consecutive fiscal years. At March
31, 2008, one of these $50,000 face amount notes remained outstanding, and
is due March 31, 2009. The Note bears interest at a rate of 4.5% per annum,
payable semi-annually on the last day of September and March of each year.
The Company is required to prepay the outstanding balance of the Note and
any accrued interest thereon, if the Company sells all or substantially all
of its assets. The Note can be converted into newly issued common shares of
the Company at the conversion price of $2.50 per share. The conversion
prices shall be adjusted for any stock dividends, stock issuances or
capital reorganizations. The Note may be redeemed by the Company prior to
maturity upon giving written notice of not less than 30 days or more than
60 days at a redemption price equal to 120% of the principal if redeemed
two years or more prior to the maturity date or 110% of the principal if
redeemed more than one year, but less than two years prior to the maturity
date. On March 31, 2008 and 2007, respectively, similar $50,000 notes due
were converted into common stock. Each $50,000 note due was converted into
20,000 shares of the Company's common stock at $2.50 per share, which
exceeded the market price of the stock at date notes were executed. The
total principal amount of notes outstanding was $50,000 and $100,000 at
March 31, 2008 and 2007, respectively. For the fiscal year ended March 31,
2008, Mr. Fletcher received $4,500 in interest related to the notes.
(7) Mr. O'Hara serves pursuant to an employment agreement which was amended
January 1, 2008 and provides for an annual salary of $130,000, and for Mr.
O'Hara to receive 15,000 stock options.
(8) Robert J. Melnick, Vice President and director, serves pursuant to a
consulting contract that provided $85,090 and $68,973 in compensation for
the fiscal years ended March 31, 2008 and 2007, respectively.
46
Item 11. Executive Compensation (continued)
-------- ----------------------------------
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2008
------------------------------------------------------
The following table sets forth information on stock options granted during or
for the 2008 fiscal year to our named executive officers.
---------------------- ----------- ----------- ----------- --------------------- -------------------- -----------------------
All Other
Stock:
Number All Other Option Exercise or Base
of Shares Awards: Number of Price of Option Grant date Fair
Approval Grant of Stock Shares of Stock Awards value of option
Name Date Date (#) (#) ($/Share) Awards ($)
---------------------- ----------- ----------- ----------- --------------------- -------------------- -----------------------
Jeffrey C. O'Hara 09/17/07 09/17/07 -0- 15,000 $3.70 $26,175
---------------------- ----------- ----------- ----------- --------------------- -------------------- -----------------------
The exercise price of the options granted approximated the market value at the
date of grant of the shares underlying such options. The estimated fair value of
the shares underlying such options was determined utilizing the methodology
described in Note 13 of the notes to the consolidated financial statements.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
The following table sets forth the outstanding stock option equity grants awards
held by named executive officers at the end of the 2008 fiscal year. The option
exercise price set forth in the table is based on the closing price on the date
of grant.
Number of Securities Number of Securities
Name Underlying Unexercised Underlying Unexercised
---- Options(#) Options (#) Option Exercise Option Expiration
Exercisable Unexercisable (1) Price ($) Date
----------- ----------------- --------- ----
Harold K. Fletcher 9,000 6,000 $3.74 12/08/09
Jeffrey C. O'Hara 7,000 -0- $1.80 - $2.90 5/09/08 - 12/17/08
7,100 2,400 $2.75 - $3.70 1/15/09 - 12/8/09
7,900 10,600 $3.55 - $4.25 1/28/10 - 8/15/10
-0- 15,000 $3.70 9/17/12
Robert J. Melnick 6,000 4,000 $3.40 12/08/09
Marc A. Mastrangelo 16,000 -0- $3.05 1/20/09
1,800 1,200 $3.40 12/08/09
1,600 2,400 $3.40 2/28/11
7,900 10,600 $3.55 1/24/12
(1) Options are exercisable, on a cumulative basis, 20% at or after each of the
first, second, and third anniversary of the grant and 40% after the fourth year
anniversary.
47
OPTIONS EXERCISED AND STOCK VESTED DURING FISCAL YEAR 2008
----------------------------------------------------------
The following table sets forth the number of shares acquired upon exercising
options awards by our named executive officers ("NEOs")during fiscal year 2008.
---------------------------- ----------------------- ------------------
Number of shares
acquired on Value realized
Name excercise on exercise (1)
---------------------------- ----------------------- ------------------
Jeffrey C. O'Hara 7,800 $13,435
---------------------------- ----------------------- ------------------
(1) Value stated calculated by subtracting the exercise price from the market
value at time of exercise.
Options granted to NEOs are consistent with the terms of options granted to
other employees pursuant to the Employee Stock Option Plans (see Note 13 of the
notes to the consolidated financial statements). Mr. O'Hara's employment
agreement provides for the grant of 15,000 options. Mr. O'Hara was granted an
additional 15,000 stock options in fiscal year 2008 upon assuming the role of
President. No other NEOs were awarded any stock options in fiscal year 2008.
Options granted to NEOs may be tax sheltered to the grantee, and their cost
constitutes a current charge to the Company (see Notes 2 and 13 to the Financial
Statements).
Incentive Plan
The Company has a key man incentive compensation program. Each year the
Committee determines a percentage of operating profits to be distributed among
senior employees, including NEOs. The percentage determined is based on the
general performance of the Company, and the amount of operating profits
available for shareholders and for reinvestment in the business. This element of
compensation provides an incentive for short-term performance.
The percentage of operating profits so determined is then distributed to senior
employees, including NEOs and to a category entitled "other", based on (a) the
amount of the employee's base salary, (b) his contribution to the Company, (c)
the results of that contribution, (d) an estimated amount of his "special
effort" on behalf of the Company, (e) his technical expertise, leadership, and
management skills, and (f) the level of the overall compensation paid employees
performing similar work in competitive companies. No incentive awards have been
made to the NEOs the last three fiscal years.
Other Benefits
The Company sponsors the Tel-Instrument Electronics Corp 401(k) Plan (the
"Plan"), a tax qualified Code Section 401(k) retirement savings plan, for the
benefit of its employees, including its NEOs. The Plan encourages savings for
retirement by enabling participants to make contributions on a pre-tax basis and
to defer taxation on earnings on funds contributed to the Plan. The Company
makes matching contributions to the Plan. All NEOs can make contributions to the
Plan. The NEOs also participate in group health and life benefits generally on
the same terms and conditions that apply to other employees.
48
Director Compensation
---------------------
Directors who are not employees or officers of the Company receive $1,250 in
cash and options, at the then market price, to purchase 1,000 shares of common
stock for attendance at each in-person meeting and $625 in cash and options to
purchase 500 shares for attendance at each formal telephonic meeting of the
Board or of a standing committee. During fiscal year 2008 non-employee directors
received the following compensation pursuant to this plan.
----------------- --------------------- ----------------------- ----------
Name Cash Compensation Option Awards ($)(1) Total $
----------------- --------------------- ----------------------- ----------
George J. Leon $6,875 $9,090 $15,965
----------------- --------------------- ----------------------- ----------
Robert A. Rice $7,500 $10,145 $17,645
----------------- --------------------- ----------------------- ----------
Robert H. Walker $8,125 $11,003 $19,128
----------------- --------------------- ----------------------- ----------
(1) Amounts in this column represent the fair value required by FASB 123R
included in our financial statements for all options granted during fiscal year
2008.
49
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
The following table sets forth certain information known to the Company with
respect to the beneficial ownership as of March 31, 2008, by (i) all persons who
are beneficial owners of five percent (5%) or more of the Company's Common
Stock, (ii) each director and nominee, (iii) the Named Executive Officers, and
(iv) all current directors and executive officers as a group.
Number of Shares Percentage
Name and Address Beneficially Owned of Class (1)
---------------- ------------------ ------------
Named Directors and Officers
----------------------------
Harold K. Fletcher, Director 600,102 (2) 26.0%
728 Garden Street
Carlstadt, NJ 07072
George J. Leon, Director 338,567 (3) 14.6%
116 Glenview
Toronto, Ontario, Canada M4R1P8
Robert J. Melnick, Director 43,600 (4) 1.9%
57 Huntington Road
Basking Ridge, NJ 07920
Jeffrey C. O'Hara, Director 153,600 (5) 6.6%
853 Turnbridge Circle
Naperville, IL 60540
Robert A. Rice 90,600 (6) 3.9%
5 Roundabout Lane
Cape Elizabeth, ME 04107
Robert H. Walker, Director 63,253 (7) 2.7%
27 Vantage Court
Port Jefferson, NY 11777
Donald S. Bab, Secretary 82,034 3.6%
770 Lexington Ave.
New York, New York 10021
Marc A. Mastrangelo, 23,600 (8) 1.0%
136 Poplar Avenue
Pompton Lakes, NJ 07442
All Officers and Directors 1,395,356 (9) 58.1%
as a Group (8 persons)
Hummingbird Management, LLC 140,600 (10) 5.9%
460 Park Avenue
New York, NY 10022
50
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
(Continued)
-----------
(1) The class includes 2,428,131 shares outstanding plus shares
outstanding under Rule 13d-3(d)(1) under the Exchange Act. The common
stock deemed to be owned by the named parties, includes stock which is
not outstanding but subject to currently exercisable options held by
the individual named. The foregoing information is based on reports
made by the named individuals.
(2) Includes 24,681 shares owned by Mr. Fletcher's wife, and 4,254 shares
owned by his son. Mr. Fletcher disclaims beneficial ownership of the
shares owned by his wife and son. Also includes 9,000 subject to
currently exercisable stock options.
(3) Includes 299,517 shares owned by the George Leon Family Trust, of
which Mr. Leon is a beneficiary, and 18,500 shares subject to
currently exercisable stock options. Mr. Leon acts as manager of the
trust assets pursuant to an informal family, oral arrangement, and
disclaims beneficial ownership of the shares owned by the trust.
(4) Includes 6,000 shares subject to currently exercisable stock options
(5) Includes 22,000 shares subject to currently exercisable stock options.
(6) Includes 7,600 shares subject to currently exercisable stock options
(7) Includes 18,700 shares subject to currently exercisable stock options.
(8) Includes 20,600 shares subject to currently exercisable stock options.
(9) Includes 102,400 shares subject to currently exercisable options held
by all executive officers and directors of the Company (including
those individually named above).
(10 Based on Schedule 13D filed with the SEC on February 26, 2008 and
furnished to the Company.
51
Equity Compensation Plan Information
------------------------------------
In May 2003, the Board of Directors adopted the 2003 Stock Option Plan ("the
Plan") which reserves for issuance options to purchase up to 250,000 shares of
its Common Stock. The shareholders approved the Plan at the November 2003 annual
meeting. The Plan, which has a term of ten years from the date of adoption, is
administered by the Board of Directors or by a committee appointed by the Board
of Directors. The selection of participants, allotment of shares, and other
conditions related to the grant of options, to the extent not set forth in the
Plan, are determined by the Board of Directors. Options granted under the Plan
are exercisable up to a period of 5 years from the date of grant at an exercise
price which is not less than the fair market value of the common stock at the
date of grant, except to a shareholder owning 10% or more of the outstanding
common stock of the Company, as to which the exercise price must be not less
than 110% of the fair market value of the common stock at the date of grant.
Options are exercisable, on a cumulative basis, 20% at or after each of the
first, second, and third anniversary of the grant and 40% after the fourth year
anniversary.
In March 2006, the Board of Directors of the Company adopted the 2006 Stock
Option Plan which reserves for issuance options to purchase up to 250,000 shares
of its common stock and is similar to the 2003 Plan. This Plan was ratified by
the shareholders at the Annual Meeting in December 2006.
Additionally, at March 31, 2008 the Company has individual employment agreements
with nine individuals which provide for the grant of 79,500 stock options with a
weighted average exercise of $3.19 per share. These employee contracts have been
approved by the directors, and were included as consideration for their
employment. Since these options were granted under the Stock Option Plans, they
are included in the 348,300 shares in the second column of the following
schedule.
The following table provides information as of March 31, 2008 regarding
compensation plans under which equity securities of the Company are authorized
for issuance.
----------------------------- ----------------------- ----------------------- -----------------------
Number of options
remaining available
Number of securities Weighted average for future issuance
to be issued upon exercise price of under Equity
Plan category exercise of options options Compensation Plans
----------------------------- ----------------------- ----------------------- -----------------------
----------------------------- ----------------------- ----------------------- -----------------------
Equity Compensation Plans
approved by shareholders 348,300 $3.33 179,370
----------------------------- ----------------------- ----------------------- -----------------------
Equity Compensation Plans
not approved by
shareholders -- -- --
----------------------------- ----------------------- ----------------------- -----------------------
Total * 348,300 $3.33 179,370
----------------------------- ----------------------- ----------------------- -----------------------
* See Discussion above.
52
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
The disclosures required by this item are contained in Note 9 to Notes
to Consolidated Financial Statements included on pages 33 and 34 of
this report. Any corporate transaction which involves a related person
must be approved by the independent directors as being fair and
reasonable to the Corporation and its shareholders. Any such approval
would be included in the minutes of the Board of Directors. There were
no such transactions during the last fiscal year that would be
required to be reported under Item 404 of Regulation S-K promulgated
by the Securities and Exchange Commission.
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
For the fiscal years ended March 31, 2008 and 2007, professional
services were performed by BDO Seidman, LLP, the Company's independent
registered public accountant. Fees for those years were as follows:
2008 2007
---- ----
Audit Fees $ 102,200 $ 89,000
Audit-Related Fees -- --
--------- ---------
Total Audit and Audit-Related Fees 102,200 89,000
Tax Fees -- --
All Other Fees -- --
--------- ---------
Total $ 102,200 $ 89,000
========= =========
Audit Fees. This category includes the audit of the Company's
consolidated financial statements, and reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q.
It also includes advice on accounting matters that arose during, or as
a result of, the audit or the review of interim financial statements,
and services which are normally provided in connection with regulatory
filings, or in an auditing engagement.
Audit Related Fees, tax and other fees. No fees under these categories
were paid to BDO Seidman, LLP in 2008 and 2007.
Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services of Independent Auditor
The Audit Committee has established a policy which requires it to
pre-approve all audit and permissible non-audit services, including
audit-related and tax services, if any, to be provided by the
independent auditor. Pre-approval is generally provided for up to one
year and is detailed as to the particular service or category of
service to be performed, and is subject to a detailed budget. The
auditor and management are required to report periodically to the
Audit Committee regarding the extent of services performed and the
amount of fees paid to date, in accordance with the pre-approval.
53
Item 15. Exhibits and Financial Statement Schedules
-------- ------------------------------------------
a.) The following documents are filed as a part of this report:
Pages
-----
(1) Financial Statements:
Report of Independent Registered Public
Accounting Firm 16
Consolidated Balance Sheets - March 31, 2008
and 2007 17
Consolidated Statements of Operations -
Years Ended March 31, 2008 and 2007 18
Consolidated Statements of Changes in 19
Stockholders' Equity - Years Ended
March 31, 2008 and 2007
Consolidated Statements of Cash Flows - 20
Years Ended March 31, 2008 and 2007
Notes to Consolidated Financial Statements 21-40
(2) Financial Statement Schedule
II - Valuation and Qualifying Accounts 41
54
TEL-INSTRUMENT ELECTRONICS CORP
Item 15. Exhibits and Financial Statement Schedules (continued)
c.) Exhibits identified in parentheses below on file with the
Securities and Exchange Commission, are incorporated herein by
reference as exhibits hereto.
---- -------- ---------------------------------------------------
* (3.1) Tel-Instrument Electronics Corp's Certificate of
Incorporation, as amended.
---- -------- ---------------------------------------------------
* (3.2) Tel-Instrument Electronics Corp's By-Laws, as
amended.
---- -------- ---------------------------------------------------
* (3.3) Tel-Instrument Electronics Corp's Restated
Certificate of Incorporation dated November 8,
1996.
---- -------- ---------------------------------------------------
* (4.1) Specimen of Tel-Instrument Electronics Corp's
Common Stock Certificate.
---- -------- ---------------------------------------------------
* (10.1) 7%, $30,000 Convertible Subordinated Note dated
March 31, 1992 between Registrant and Donald S.
Bab.
---- -------- ---------------------------------------------------
* (10.2) Distributor Agreement with Muirhead Avionics &
Accessories Ltd.
---- -------- ---------------------------------------------------
* (10.3) Naval Air Warfare Center Aircraft Division
Contract No. N68335-97-D-0060
---- -------- ---------------------------------------------------
* (10.4) Lease dated March 1, 2001 by and between
Registrant and 210 Garibaldi Group.
---- -------- ---------------------------------------------------
* (10.5) Agreement with Semaphore Capital Advisors dated
November 28, 2001 and amendment dated as of June
1, 2002.
---- -------- ---------------------------------------------------
* (10.6) 10% convertible subordinated note between
Registrant and Harold K. Fletcher.
---- -------- ---------------------------------------------------
* (10.7) 1998 stock option plan and option agreement.
---- -------- ---------------------------------------------------
(*) (10.8) Purchase agreement between Registrant and
Innerspace Technology
---- -------- ---------------------------------------------------
* (10.9) Agreement between Registrant and Semaphore Capital
Advisors, LLC
---- -------- ---------------------------------------------------
* (10.10) 2003 Stock Option Plan
---- -------- ---------------------------------------------------
(23.1) Consent of Independent Registered Public
Accounting Firm
---- -------- ---------------------------------------------------
(31.1) Certification by CEO pursuant to Rule 15d-14 under
the Securities Exchange Act.
---- -------- ---------------------------------------------------
(31.2) Certification by CFO pursuant to Rule 15d-14 under
the Securities Exchange Act.
---- -------- ---------------------------------------------------
(32.1) Certification by CEO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---- -------- ---------------------------------------------------
(32.2) Certification by CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---- -------- ---------------------------------------------------
* Incorporated by reference to Registration 33-18978 dated November 7, 1988.
The Company will furnish to a stockholder, upon request, any exhibit at
cost.
55
TEL-INSTRUMENT ELECTRONICS CORP
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
(Registrant)
Dated: July 11, 2008 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
President and Director
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated and by signature
hereto.
Signature Title Date
--------- ----- ----
/s/ Harold K. Fletcher Director July 11, 2008
------------------------
Harold K. Fletcher
/s/ Joseph P. Macaluso Principal Accounting Officer July 11, 2008
------------------------
Joseph P. Macaluso
/s/ George J. Leon Director July 11, 2008
------------------------
George J. Leon
/s/ Robert J. Melnick Director July 11, 2008
------------------------
Robert J. Melnick
/s/ Jeffrey C. O'Hara COO and Director July 11, 2008
------------------------
Jeffrey C. O'Hara
/s/ Robert A. Rice Director July 11, 2008
------------------------
Robert A. Rice
/s/ Robert H. Walker Director July 11, 2008
------------------------
Robert H. Walker
56