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, 2007
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Jersey 22-1441806
---------------------- --------------------
(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:
2,241,861 shares of Common Stock were outstanding as of July 6, 2007.
Title of Each Class Name of Exchange on Which Registered
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
----- -----
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 .
----- -----
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act).
Yes No X
----- -----
The aggregate market value of the voting Common Stock (par value $.10 per share)
held by non-affiliates on September 30, 2006 was $2,886,456 using the closing
price on September 30, 2006.
Total Pages - 65; Exhibit Index - pages 59-60
1
PART I
------
Item 1. Description of Business
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General
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, measure, calibrate, and repair 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
and ITATS (see below), incorporating new technology.
Tel is in a transitional phase between the end of deliveries pursuant
to its multi-year AN/APM-480 contract, and the commencement of
production deliveries under its new multi-year Navy contracts (CRAFT -
AN/USM-708 and ITATS - AN/ARM-206).
The AN/USM-708 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 awarded the Company by the United States Navy is a
$17.3 million multi-year, firm-fixed-price,
indefinite-delivery/indefinite-quantity contract for the systems
engineering, design and integration, fabrication, testing, and
production of a Communications/Navigation (COMM/NAV) Radio Frequency
(RF) Avionics Flightline Tester ("CRAFT") with sonobuoy simulator
capabilities. The AN/USM-708 CRAFT unit combines advanced navigation,
communication, Mode 5 IFF 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 being completed, and fabrication of 15 prototype units will begin
shortly. These units will undergo design validation testing in late
2007, with production scheduled to begin late in calendar year 2008.
This contract currently has production options totaling 750 units,
which, if exercised, would generate approximately $14 million in
revenues over a several year period. The contract for the AN/USM-708
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,
given the unique nature of the design, this unit could generate sales
to other military customers. The Company has already received orders
for a limited number of units 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.
2
Item 1. Description of Business
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General (continued)
-------------------
The AN/ARM-206 Intermediate Level TACAN Test Set (ITATS) 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 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 will be working with an engineering sub-contractor and,
as a result, this program will entail a much lower level of Tel
engineering effort than the AN/USM-708. This contract and the current
AN/USM-708 contract, represents a solid base for the future profitable
growth of the Company. The AN/ARM-206 program, which was temporarily
interrupted by a GAO protest, is proceeding on schedule and the
Company successfully completed its Preliminary Design Review (PDR)
with the U.S. Navy in May 2007. Given the unique nature of the design,
this unit could also generate significant sales to other military
customers, both domestically and overseas.
In January, 2004, the Company acquired privately held Innerspace
Technology, Inc. ("ITI"). References to the Company or Tel include ITI
unless the context requires otherwise (see Note 16 to the Notes to
Consolidated Financial Statements - Segment Information).
ITI is a leading designer and manufacturer of marine instrumentation
systems, including depth sounders and tide gauges, and is a systems
integrator to support hydrographers, oceanographers, researchers,
engineers, geophysicists, and surveyors worldwide with components,
complete turnkey systems, and equipment rentals. To assist in
providing a full-function system for its customers, ITI sells Trimble
Global Positioning (GPS) products as part of its systems offerings.
A depth sounder is an instrument that uses an acoustic transmitter and
receiver to map the contour of the sea floor, and ITI offers these
products with both single and dual frequency operation, and at unit
prices ranging from approximately $5,000 to $20,000.
ITI's sales have not grown as expected and the Company is closely
monitoring its performance, and is evaluating its future potential.
Marketing and Distribution
--------------------------
Domestic commercial sales are made directly or through distributors.
No direct commercial customer accounted for more than 10% of
commercial sales in fiscal years 2007, 2006, and 2005. 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 12%, 9%, and 10%, and 12%, 7%, and 15% of
commercial sales, respectively, for the three years ended March 31,
2007, 2006, and 2005. Dallas Avionics, an independent domestic
distributor, accounted for 16% of total commercial sales for the years
ended March 31, 2007 and 2006, respectively. The loss of any of one
these distributors would not have a material adverse effect on the
Company or its operations.
3
Item 1. Description of Business
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General (continued)
-------------------
Marketing and Distribution (continued)
--------------------------------------
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 distributors. For the years ended March 31,
2007, 2006, and 2005, sales to the U.S. Government, including
shipments through the government's logistics center, represented
approximately 27%, 47%, and 37%, 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 years 2006 and
2005.
International sales are made 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 4%, 17%, and 20% of commercial sales in the years ended
March 31, 2007, 2006 and 2005, respectively. In addition, Muirhead
sells to the government segment. For the year ended March 31, 2006,
sales to Milspec represented approximately 11% of government sales.
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, 2007, 2006, and 2005, total
international sales were 19%, 20%, and 18%, 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 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 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
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,
and affordability.
Most ITI sales of marine products are made directly to customers. In
fiscal 2007 only the U.S. Government (20%) accounted for over 10% of
total sales. In fiscal year 2006, one customer, Sevenson Environmental
Services represented 18% percent of total sales. No one customer
accounted for 10% or more of ITI's sales for fiscal 2005. ITI's
products are recognized in the market for their quality, reliability,
and affordability.
4
Item 1. Description of Business
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General (continued)
-------------------
Backlog
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Set forth below is Tel's avionics backlog at March 31, 2007, 2006, and
2005.
Commercial Government Total
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March 31, 2007 $ 660,027 $ 8,863,006 $ 9,523,033
March 31, 2006 $ 100,600 $ 3,091,793 $ 3,192,393
March 31, 2005 $ 567,095 $ 5,603,658 $ 6,170,753
ITI's backlog was $22,305, $39,065 and $65,315, respectively, at March
31, 2007, 2006, and 2005.
Tel believes that most of its backlog at March 31, 2007 will be
delivered during the next two fiscal years. The increase in the
backlog from fiscal year 2006 to 2007 is due to the initial orders on
the ITATS program ($4.4 million) and the order from the Royal
Australian Air Force (through our distributor) for the T-47NC Test Set
($615,000). Commercial backlog increased as a result of long-term
orders from the Company's distributors. Reduction in backlog from
fiscal year 2005 to 2006 is primarily a result of having completed
delivery of the 50 T-47NH units to the Royal Australian Air Force
($694,350), and the T-36M and T-47NH to the U.S. Army ($1,815,000).
Commercial backlog declined from 2005 to 2006 as a result of the
continuing financial difficulties in the commercial airline industry.
Historically, commercial and government orders received by the
Company, other than for larger programs, like the AN/APM-480 or
AN/USM-708, are received and shipped within the year and, as such, are
not reflected in year-end backlog.
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.
Suppliers
---------
Tel and ITI obtain 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.
Competition
-----------
The Company manufactures and sells commercial and military products as
a single avionics business, and its designs and products cross
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 operator market
consists of approximately 80 domestic and foreign commercial airlines.
The civilian market for avionic test equipment is dominated by two
manufacturers, including Tel and Aeroflex. This market is relatively
small and highly competitive. Tel has been successful because of its
high quality, user friendly products and competitive prices.
5
Item 1. Description of Business
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General (continued)
-------------------
Competition (continued)
-----------------------
The military market is large and is dominated by large corporations
with substantially greater resources than the Company. 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.
In recent years the Company 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.
The market for marine instrumentation systems is small and is
dominated by five major manufacturers, including Innerspace
Technology, Inc. (wholly owned by Tel), Odom Hydrographic Systems,
Inc., Knudsen Engineering Limited, Simrad AS (a division of
Kongsberg), and Reson AS. There are approximately another five
companies that compete on a smaller scale.
Patents
-------
Tel has no patents or licenses which are material to its business.
Engineering, Research, and Development
--------------------------------------
In the fiscal years ended March 31, 2007, 2006, and 2005, Tel spent
$2,580,381 $2,534,497, and $2,186,828, 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.
Engineering, research, and development expenditures in fiscal 2007
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,
improvements to the multi-function commercial bench tester (TB-2100),
and the incorporation of other product enhancements in existing
designs. The Company owns all of these designs.
Personnel
---------
At July 6, 2007, Tel had 19 full-time employees in manufacturing,
materials management, and quality assurance, 13 in administration and
sales, and 12 in engineering, research and development, none of whom
belongs to a union. The Company also utilized 2 part-time individuals
in manufacturing and 2 in administration. From time to time, the
Company also employs independent contractors to support its
manufacturing, engineering, and sales organizations. At July 6, 2007,
the Company utilized 4 outside contractors in manufacturing, 4 in
sales, and 6 in engineering. We believe we have been successful in
attracting skilled and experienced management and scientific
personnel.
6
Item 1A. Risk Factors
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The statements contained in this Report on Form 10-K that are not
purely historical are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including and without limitations, statements
regarding the Company's expectations, hopes, beliefs, anticipations,
commitments, intentions and strategies regarding the future.
Forward-looking statements include, but are not limited to, statements
contained in "Item 1. Business" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations." Actual
results could differ from those projected in any forward-looking
statements for the reasons, among others, detailed below. The Company
believes that many of the risks detailed here are part of doing
business in the industry in which the Company competes and will likely
be present in all periods reported. The forward-looking statements are
made as of the date of this Report on Form 10-K and the Company
assumes no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those
projected in the forward-looking statements. You should carefully
consider these factors that could materially affect the Company's
business, financial condition or future results. The risks described
below are not the only risks facing the Company.
Additional risks and uncertainties not currently known or deemed to be
immaterial also may materially adversely affect the business,
financial condition and/or operating results.
Changes in the Spending Priorities of the Federal Government
------------------------------------------------------------
In fiscal year 2007, approximately 27% of the Company's revenues were
related to products purchased by the U.S. Government. The Company's
business depends upon continued federal government expenditures on
defense, aerospace, and other programs that the Company supports. In
addition, foreign military sales are affected by U.S. Government
regulations. There can be no assurance that the U.S. defense and
military budget will continue to grow, and/or funds be allocated to
the types of products that the Company manufactures. The Company has
two significant contracts with the U.S. Navy that are important to the
growth of the Company. The terms of defense contracts with the U.S.
Government generally permit the government to terminate such
contracts, with or without cause, at any time. The Company has not
experienced any such terminations in the last five years, and has no
reason to believe its two new contracts will be terminated. Any
unexpected termination of a significant contract with the U.S.
Government can adversely affect the future financial condition and
results of operations of the Company.
Airline Industry Concerns
-------------------------
Several of the Company's aviation customers filed for bankruptcy
protection during fiscal years 2007 and 2006. The aviation industry
continues to struggle with the cost of security and higher fuel
prices, and the Company's commercial sales have declined over the last
three years. Additional bankruptcy filings and continued financial
difficulties in the aviation industry could have a material adverse
impact on the Company's operating results and financial condition.
Commercial backlog has increased significantly over prior years
because of long-term orders from distributors.
7
Item 1A. Risk Factors (continued)
-------- ------------------------
New Products
------------
The successful operation of the Company depends on its ability to
anticipate market needs and develop and introduce new products and
product enhancements that respond to technological changes or evolving
industry standards on a timely and cost-effective basis. The Company
must continue to develop leading-edge products and introduce them to
the market quickly in order to be successful. The Company's failure to
produce technologically competitive products in a cost-effective
manner and on a timely basis could harm the business, financial
condition and results of operations. The Company believes the products
it is making under its new contracts with the U.S. Navy are new
technologies that respond to market needs.
Financial Results
-----------------
As more fully discussed under Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"), the Company is
in a transitional phase between the end of its long-term AN/APM-480
contract and the commencement of deliveries under its new multi-year
AN/USM-708 contract. As a result, revenues declined in 2007 and the
Company sustained a loss. However, at March 31, 2007, new contracts
and new orders have significantly increased the backlog over the last
fiscal year, and management believes working capital is adequate to
fund its plans over the next year (see Management's Discussion and
Analysis). Deliveries under CRAFT and ITATS should commence in late
calendar year 2008. Financial results are dependent upon delivery of
its new products in a timely and compliant manner. The Company expects
to meet its commitment.
Item 1B. Unresolved Staff Comments
-------- -------------------------
None.
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 12 to the
Notes to the Consolidated Financial Statements). The Avionics and
Marine Divisions are both located in this facility, which is
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.
8
PART II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
------- --------------------------------------------------------------------
The Common Stock, $.10 par value, of the Registrant ("Common
Stock") is traded on the American Stock Exchange and its symbol is
TIK. The Company was listed on the American Stock Exchange and
started trading on February 10, 2004 at an opening price of $3.00
per share. Prior to that date, the Tel shares had traded
sporadically in the Over-The-Counter ("OTC") market. On July 6,
2007, the closing share price on the Amex was $3.70.
The following table sets forth the high and low per share sale
prices for our common stock for the periods indicated as reported
for 2006 and 2007 by the Amex:
Fiscal Year High Low
---------------------- ---------- ----------
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
2006
First Quarter 4.48 3.22
Second Quarter 4.20 3.60
Third Quarter 3.75 3.29
Fourth Quarter 4.00 3.25
During fiscal year 2007, the Company issued 42,450 shares of common
stock upon exercise of stock options granted pursuant to its 1998 and
2003 Employee Stock Option Plans for an aggregate $79,581 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 14
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 2007 and 2006 Mr. Harold K. Fletcher, CEO, converted each $50,000
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.
Approximate number of equity holders
------------------------------------
Number of Holders
of Record as of
Title of Class March 31, 2007
-------------------------------------------------------------
Common Stock, par value
$.10 per share 284
Dividends
---------
Registrant has not paid dividends on its Common Stock and does not
expect to pay such dividends in the foreseeable future.
9
Item 6. Selected Financial Data
-----------------------
TEL-INSTRUMENT ELECTRONICS CORP.
SUMMARY OF FINANCIAL INFORMATION
--------------------------------
Years Ended March 31,
----------------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 7,666,587 $ 11,196,059 $ 10,511,284 $ 10,704,029 $ 11,861,387
Cost of sales 3,685,528 5,729,736 5,030,088 4,977,537 5,738,729
------------ ------------ ------------ ------------ ------------
Gross margin 3,981,059 5,466,323 5,481,196 5,726,492 6,122,658
Operating expenses:
Selling, general and administrative 2,698,829 3,196,773 3,183,577 2,958,179 2,803,498
Amort. and impairment of intangibles -- 326,851 86,196 17,958 --
Engineering, research & development 2,580,381 2,534,497 2,186,828 2,152,515 1,601,493
------------ ------------ ------------ ------------ ------------
5,279,210 6,058,121 5,456,601 5,128,652 4,404,991
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (1,298,151) (591,798) 24,595 597,840 1,717,667
Interest, net 33,722 8,927 (10,878) (4,047) (10,881)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (1,264,429) (582,871) 13,717 593,793 1,706,786
Income tax expense (benefit) (515,401) (188,335) 42,625 230,883 702,796
------------ ------------ ------------ ------------ ------------
Net (loss) income (749,028) (394,536) (28,908) $ 362,910 $ 1,003,990
============ ============ ============ ============ ============
Basic (loss) income per common share ($ 0.33) ($ 0.18) ($ 0.01) $ 0.17 $ 0.47
============ ============ ============ ============ ============
Diluted (loss) income per common share ($ 0.33) ($ 0.18) ($ 0.01) $ 0.16 $ 0.47
============ ============ ============ ============ ============
Years Ended March 31,
-----------------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 3,121,343 $ 4,302,369 $ 4,127,991 $ 3,767,150 $ 4,154,887
Total assets 6,127,842 7,116,582 7,670,730 7,392,501 7,311,177
Long-term debt 50,000 100,000 150,000 -- 71,069
Stockholders' equity 4,554,252 5,168,066 5,327,177 5,287,693 4,907,874
10
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
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
-------
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 Statement of 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.
The Company's avionics business is conducted in the Government,
Commercial and General aviation markets (see Note 16 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.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Overview 2007
-------------
In fiscal year 2007, revenues declined, and the Company sustained a
net loss, primarily due to the lower revenues. Sales in the prior
fiscal year were higher due to the shipment of the T-36M and the T-47N
with the U.S. Army and shipment of the T-47N to Royal Australian Air
Force, through our distributor, as well as the final shipments of the
AN/APM-480 to the U.S. Navy and sales of the T-760. The delay in
government contract awards contributed to this decline in revenues as
well as the continued financial difficulties in the commercial airline
industry and the increased competition. Over the last two years the
Company won competitive awards from the U.S. Navy for two multi-year
contracts for the AN/UPM-708 (CRAFT) and the AN/ARM-206 (ITATS). These
contracts include multi-year deliveries, commencing late in calendar
year 2008, and have an aggregate value of approximately $30 million.
The products under these contracts represent cutting edge technology,
and should provide Tel with a competitive advantage for years to come
(see Item 1. Description of Business).
The Company's backlog at March 31, 2007 has significantly increased to
approximately $9.5 million, including $4.4 million attributed to the
AN/ARM-206 (ITATS) contract. The gross profit on the $4.4 million
initial portion of the ITATS contract will be significantly less than
Tel's historical gross profit due to the use of an engineering
subcontractor, and the competitiveness of the bidding process. Design
validation for the AN/USM-708 is not expected to begin until late in
2007, with shipments to begin late in calendar year 2008. Commercial
backlog also increased as a result of orders from the Company's
distributors.
A substantial part of the Company's business comes from orders that
are filled in less than a year, and therefore, are not reflected in
the backlog. The Company has recently hired a new Director of Business
Development to pursue these opportunities as well as long-term
government contracts.
Research and development expenditures will continue to remain high in
order to support the two new large contract awards previously
discussed. The Company has been able to partially offset the research
and development expenditures by implementing a Profit Improvement
Plan, which resulted in substantial reductions in operating expenses.
As a consequence of this temporary significant decline in revenues
exceeding operating costs, operating profits, working capital,
stockholders' equity, and cash have declined for the current fiscal
year. However, the Company believes that it has adequate liquidity,
resources and backlog to fund operating plans during this interval,
and until deliveries of its new units commence.
In December 2006, the Company received an order for 50 T-47N Test Sets
from the Royal Australian Air Force (through the Company's
distributor) for approximately $600,000 which was delivered in the
first quarter of fiscal year 2008. The Company is also participating
in several military solicitations in fiscal year 2008.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 2007 Compared to 2006
-------------------------------------------
Sales
-----
Consolidated net sales decreased $3,529,472 (31.5%) to $7,666,587 for
the fiscal year ended March 31, 2007 as compared to the fiscal year
ended March 31, 2006
Sales of avionics products declined $3,253,783 (31.7%) to $7,002,941
for fiscal year 2007 as compared to fiscal year 2006. Avionics
commercial decreased from prior year by $429,895 (14.6%) to
$2,500,142. This decrease is mostly attributed to a decline in sales
of the TR-220 line of Multi-Function Test sets, partially offset by an
increase in revenues from repairs and part sales. The weak financial
condition of the commercial airline industry continues to limit growth
in this segment in addition to increased competition.
Avionics government sales decreased $2,823,888 (38.5%) to $4,502,799
for the year ended March 31, 2007 as compared to the year ended March
31, 2006. In the prior fiscal year, the Company had contracts for
shipment of the T-36M and the T-47N with the U.S. Army and shipment of
the T-47N to Royal Australian Air Force, through our distributor, as
well as the final shipments of the AN/APM-480 to the U.S. Navy and
sales of the T-760, which accounted for the higher sales in fiscal
2006. The delay in contract awards (discussed above) contributed to
this decline in revenues.
Marine systems sales decreased $275,689 (29.3%) to $663,646 for the
year ended March 31, 2007 as compared to the year ended March 31,
2006, primarily as a result of lower sales of specialty systems to the
dredging industry.
Gross Margin
------------
Gross margin decreased $1,485,264 (27.2%) to $3,981,059 for the year
ended March 31, 2007 as compared to the prior fiscal year. This
decrease is primarily attributed to the lower sales volume, although
gross margin percent improved as a result of the change in product
mix, and improved efficiency. During the current fiscal year, the
Company reversed it remaining liability of approximately $151,000
relating to its upgrade liability (see Critical Accounting Policies -
Revenue Recognition).
Operating Expenses
------------------
Selling, general and administrative expenses decreased $497,944
(15.6%) to $2,698,829 for the year ended March 31, 2007 as compared to
the year ended March 31, 2006, resulting primarily from lower
commission ($209K), and professional and consulting expenses ($105K)
in the avionics division, and a decrease in marketing and sales
expenses for the marine systems division ($256K).
Engineering, research and development expenses increased $45,884
(1.8%) to $2,580,381 for fiscal year 2007 as compared to the prior
fiscal year. Research and development efforts were mostly related to
the CRAFT program.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ----------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 2007 Compared to 2006 (continued)
-------------------------------------------------------
Income Taxes
------------
An income tax benefit in the amount of $515,401 was recorded for the
year ended March 31, 2007 as a result of the loss before taxes as
compared to an income tax benefit of $188,335 for the year ended March
31, 2006. These amounts represent the effective federal and state tax
rate of approximately 40% on the Company's net loss before taxes
Net Loss
--------
As a result of the above, the Company incurred a net loss of $749,028
for the year ended March 31, 2007 as compared to a net loss of
$394,536 for the year ended March 31, 2006.
Results of Operations 2006 Compared to 2005
-------------------------------------------
Sales
-----
Consolidated sales increased $684,775 (6.5%) for the year ended March
31, 2006 as compared to the year ended March 31, 2005. Avionics sales
increased $548,855 (5.7%) and sales from the marine systems' division
increased $135,920 (16.9%) for the same period, primarily as a result
of the introduction of its 456W, the upgraded sounder with a Windows
operating system, and increased sales efforts.
Avionics government sales increased $665,126 (10%) for the year ended
March 31, 2006 as compared to the prior year. An increase in the sales
of the T-47N as a result of contracts with the U.S. Military and the
Royal Australian Air Force was offset by declines in the Company's
other government products, including the T-30CM, T-36M and the
AN/APM-480. Avionics commercial sales decreased $116,271 (3.8%) for
the same period primarily as a result of lower pricing due to more
intense competition and lower repair and calibration sales.
Gross Margin
------------
Gross margin decreased $14,873 for the year ended March 31, 2006
as compared to the year ended March 31, 2005. Gross margin on
avionics products decreased $770 for the same period, even though
sales increased. The increase in sales volume was offset by lower
prices due to more intense competition, change in product mix, and
lower gross margin on billings related to the documentation
activities for the CRAFT program. Gross margin on avionics
products for the year ended March 31, 2006 was 50.4% as compared
to 53.2% for the year ended March 31, 2005. Gross margin on marine
system products decreased $15,643 for the same period. The
increase in sales was offset by a change in sales mix.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 2006 Compared to 2005 (continued)
-------------------------------------------------------
Operating Expenses
------------------
Selling, general and administrative expenses increased modestly by
$13,196 for the year ended March 31, 2006 as compared to the year
ended March 31, 2005. Lower marketing consulting fees, travel
expenses, legal costs and advertising expenditures were mostly offset
by the addition of a program manager for the AN/USM-708 program, an
increase in outside commission expenses, higher administrative
consulting expenses, and termination pay related to the marine systems
division.
Engineering, research, and development expenses increased $347,669
(15.9%) for the year ended March 31, 2006 as compared to the year
ended March 31, 2005. Expenditures for AN/USM-708, including
additional personnel, materials and consulting fees, and additional
costs associated with the enhancement of the TB-2100 account for most
of this increase.
Amortization and Impairment of Intangibles
------------------------------------------
In March 2006, the Company recognized an impairment loss and charged
to operations (included in amortization expense) the remaining
unamortized value of its acquired intangible assets in the amount of
$240,655 relating to its marine systems division.
Income Taxes
------------
For the year ended March 31, 2006, the Company had a tax benefit of
$188,335 as a result of the loss for the year. The Company had a
provision for income taxes of $42,625 in fiscal year 2005.
Net Loss
--------
As a result of the above, the Company incurred a net loss of $394,536
for the year ended March 31, 2006 as compared to a net loss of $28,908
for the year ended March 31, 2005.
Liquidity and Capital Resources
-------------------------------
At March 31, 2007, the Company had working capital of $3,121,343 as
compared to $4,302,369 at March 31, 2006. For the year ended March 31,
20007, the Company used $1,454,692 in operating activities as compared
to providing $1,213,105 from operations in the prior year. This
decrease in cash from operations is primarily attributed to the
operating loss and the increase in inventories. The cash balance at
March 31, 2007 was $655,836.
For the year ended March 31, 2007, the Company used $124,594 in
investing activities as compared to using $208,895 in fiscal year
2006. The decrease is attributed to lower purchases of capital
equipment. Cash provided by financing activities was $300,581 in
fiscal year 2007 as compared to $103,372 in fiscal year 2006. This
increase is primarily attributed to the proceeds of $250,000 from the
loan on a keyman life insurance policy on the Company's CEO on which
the Company is beneficiary. The insurance policy has a face value of
$599,000. The Company borrowed from the insurance policy due to the
lower interest rate. Repayment terms are at the discretion of the
Company. This was offset partially by lower proceeds from the exercise
of employee stock options.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
The Company has a line of credit in the amount of $1,750,000 from a
bank, that bears an interest rate of 0.5% above the lender's
prevailing base rate, which is payable monthly on any outstanding
balance. The Company does not pay fees to maintain this open line. At
March 31, 2007, the Company had no outstanding balance. In April 2007,
the Company borrowed $250,000. The line of credit is collateralized by
substantially all of the assets of the Company. As of March 31, 2007,
the Company was in compliance with all financial covenants required by
the credit agreement. The line of credit expires at September 30,
2007, and the Company anticipates, although no assurance can be given,
that it will be renewed as it has been in each of the last four years.
Based upon the backlog, which was approximately $9,500,000 at March
31, 2007, its existing credit line, and cash balance, the Company
believes it has sufficient working capital to fund its operating plans
at least for the next twelve months. Currently, the Company has no
material capital expenditure requirements. The Company maintains its
cash balances primarily in a money market account for use in
operations. There was no significant impact on the Company's
operations, as a result of inflation for the year ended March 31,
2007.
Critical Accounting Policies
----------------------------
In preparing our 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 under service contracts are
recognized when the services are performed.
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/enhancement reserves - warranty/enhancement 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.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Critical Accounting Policies (continued)
----------------------------------------
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.
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 Items
-----------------------
The Company is not party to any off-balance sheet items that have not
already been appropriately disclosed in these financial statements.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations
---------------------
Contractual Obligations and Commitments
At March 31, 2007, the Company's contractual obligations and
commitments to make future payments are as follows:
Payment Due by Period
More than 5
Total Less than 1 year 1-3 Years 3-5 Years years
Long-Term Debt Obligations 100,000 50,000 50,000 - -
Operating Leases 603,828 162,396 441,432 - -
Purchase Commitments (1) 852,979 850,319 2,660 - -
Interest on long-term obligations 6,750 4,500 2,250 - -
Total Contractual Obligations $1,563,557 $ 1,067,215 $ 496,342 $ - $ -
(1) Purchase commitments consist primarily of obligations to purchase
certain raw materials to be utilized in the ordinary course of
business. See Notes 11, and 12 to the Financial Statements.
Borrowings
----------
See Note 7 to Notes to Consolidated Financial Statements.
In April the Company borrowed $250,000 against its line of credit with
the bank.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
-------- ----------------------------------------------------------
The Company, at this time, is generally not exposed to financial
market risks, including changes in interest rates, foreign currency
exchange rates, and marketable equity security prices.
18
Item 8. Financial Statements and Supplementary Data
------- ------------------------------------------- Pages
-----
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm 20
Consolidated Balance Sheets - March 31, 2007 and 2006 21
Consolidated Statements of Operations - Years Ended 22
March 31, 2007, 2006 and 2005
Consolidated Statements of Changes in Stockholders' 23
Equity - Years Ended March 31,
2007, 2006 and 2005
Consolidated Statements of Cash Flows - Years Ended 24
March 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements 25 - 44
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts 45
19
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, 2007 and 2006 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended March 31, 2007. 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, 2007
and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2007 in
conformity with accounting principles generally accepted in the United
States of America.
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 13, 2007
20
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Balance Sheets
ASSETS March 31, 2007 March 31, 2006
Current assets: -------------- --------------
Cash and cash equivalents $ 655,836 $ 1,934,541
Accounts receivable, net of allowance for doubtful accounts
of $34,544 and $40,994 982,214 1,049,578
Inventories, net 2,460,642 2,102,280
Taxes receivable 28,776 82,488
Prepaid expenses and other 98,053 138,041
Deferred income tax benefit 395,756 720,082
----------- -----------
Total current assets 4,621,277 6,027,010
Equipment and leasehold improvements, net 625,247 775,065
Deferred income tax benefit - non-current 800,000 --
Other assets 81,318 314,507
----------- -----------
Total assets $ 6,127,842 $ 7,116,582
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable - related party $ 50,000 $ 50,000
Notes payable - other -- 29,000
Accounts payable 372,106 288,525
Deferred revenues 115,409 59,202
Accrued expenses - payroll, vacation pay and payroll withholdings 353,727 391,062
Accrued expenses - related parties 74,999 58,059
Accrued expenses - other 533,693 848,793
Total current liabilities 1,499,934 1,724,641
Deferred revenues 23,656 80,875
Deferred taxes -- 43,000
Convertible note payable - related party 50,000 100,000
----------- -----------
Total liabilities 1,573,590 1,948,516
----------- -----------
Commitments -- --
Stockholders' equity
Common stock, par value $.10 per share, 2,341,861 and 2,279,411
issued and outstanding 234,186 227,941
Additional paid-in capital 4,380,149 4,251,180
(Accumulated deficit) retained earnings (60,083) 688,945
----------- -----------
Total stockholders' equity 4,554,252 5,168,066
----------- -----------
Total liabilities and stockholders' equity $ 6,127,842 $ 7,116,582
=========== ===========
The accompanying notes are an integral part of the financial statements
21
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Operations
For the years ended March 31,
-----------------------------
2007 2006 2005
---- ---- ----
Net sales $ 7,666,587 $ 11,196,059 $ 10,511,284
Cost of sales 3,685,528 5,729,736 5,030,088
------------ ------------ ------------
Gross margin 3,981,059 5,466,323 5,481,196
Operating expenses:
Selling, general and administrative 2,698,829 3,196,773 3,183,577
Amortization and impairment of intangibles -- 326,851 86,196
Engineering, research and development 2,580,381 2,534,497 2,186,828
------------ ------------ ------------
Total operating expenses 5,279,210 6,058,121 5,456,601
------------ ------------ ------------
Income (loss) from operations (1,298,151) (591,798) 24,595
Other income/(expense):
Interest income 42,692 23,386 11,851
Interest expense (2,220) (2,684) (10,954)
Interest expense - related parties (6,750) (11,775) (11,775)
Income (loss) before income taxes (1,264,429) (582,871) 13,717
Income tax (benefit) expense (515,401) (188,335) 42,625
------------ ------------ ------------
Net loss $ (749,028) $ (394,536) $ (28,908)
============ ============ ============
Basic and diluted loss per common share $ (0.33) $ (0.18) $ (0.01)
============ ============ ============
Weighted average number of shares outstanding
Basic and diluted 2,303,858 2,204,476 2,157,729
============ ============ ============
The accompanying notes are an integral part of the financial statements.
22
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Changes in Stockholders' Equity
Common Stock (Accumulated
Number of Shares Additional Deficit)
------------------------- Paid-In Retained
Authorized Issued Amount Capital Earnings Total
----------- ----------- ----------- ----------- ----------- -----------
Balances at April 1, 2004 4,000,000 2,144,181 $ 214,418 $ 3,960,886 $ 1,112,389 $ 5,287,693
Net loss -- -- -- -- (28,908) (28,908)
Issuance of common stock in connection
with the exercise of stock options -- 43,680 4,368 64,024 -- 68,392
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2005 4,000,000 2,187,861 218,786 4,024,910 1,083,481 5,327,177
Net loss -- -- -- -- (394,536) (394,536)
Non-cash stock-based compensation -- -- -- 43,230 -- 43,230
Conversion of notes payable to common stock 25,000 2,500 55,000 -- 57,500
Issuance of common stock in connection
with the exercise of stock options -- 66,550 6,655 128,040 -- 134,695
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2006 4,000,000 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 4,000,000 2,341,861 $ 234,186 $ 4,380,149 $ (60,083) $ 4,554,252
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
23
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Cash Flows
For the years ended March 31,
-----------------------------
2007 2006 2005
---- ---- ----
Cash flows from operating activities:
Net loss $ (749,028) $ (394,536) $ (28,908)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Deferred income taxes (518,713) (136,522) (34,748)
Depreciation 258,609 267,022 285,500
Amortization and impairment of intangibles -- 326,851 86,196
Provision for inventory obsolescence 158,370 122,685 29,742
Non-cash stock-based compensation 5,633 43,230 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 67,364 560,941 (343,614)
Decrease (increase) in inventories (516,732) 701,046 (753,710)
Decrease in taxes receivable 53,712 43,186 65,795
Decrease (increase) in prepaid expenses and other 38,980 (14,584) (22,907)
(Decrease) increase in accounts payable 83,620 (192,621) 134,977
(Decrease) increase in deferred revenues (1,012) (29,789) 125,203
(Decrease) increase in accrued expenses (335,495) (83,804) 85,012
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,454,692) 1,213,105 (371,462)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (108,791) (198,012) (261,689)
Increase in cash surrender value of life insurance (15,803) (10,883) (16,665)
----------- ----------- -----------
Net cash used in investing activities (124,594) (208,895) (278,354)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 79,581 134,695 68,392
Repayment of convertible notes payable - related party -- -- (50,000)
Repayment of note payable (29,000) (29,000) (29,000)
Proceeds from loan on life insurance policy 250,000 -- --
Payment of capitalized lease obligations -- (2,323) (22,445)
----------- ----------- -----------
Net cash provided by (used in) financing activities 300,581 103,372 (33,053)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,278,705) 1,107,582 (682,869)
Cash and cash equivalents, beginning of year 1,934,541 826,959 1,509,828
----------- ----------- -----------
Cash and cash equivalents, end of year $ 655,836 $ 1,934,541 $ 826,959
=========== =========== ===========
Supplemental information:
Taxes paid $ 21,882 $ 23,388 $ --
=========== =========== ===========
Interest paid $ 5,695 $ 20,517 $ 98,314
=========== =========== ===========
Notes converted into common stock $ 50,000 $ 57,500 $ --
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
24
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 to 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 designing, manufacturing and distributing a variety of shipboard and
underwater instruments to support hydrographers, oceanographers,
researchers, engineers, geophysicists, and surveyors worldwide.
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.
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 under service contracts, which consist of repairs and calibrations
of the Company's products (approximately 9% of revenues), are recognized
when the services are performed.
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.
Since 2001, the Company had a contract with the U.S. Navy for the delivery
of test equipment (AN/APM-480), which ended in fiscal year 2006. The
AN/APM-480 is a catalog product, which the Company also sells to civilian
and other government customers. While the Company sells this product to the
U.S. Navy, the proprietary rights to the technology are retained by the
Company. Since the AN/APM-480 was a significant product, and the Company's
premier IFF (Identification, Friend or Foe) test set, the Company continued
to improve the product to meet the needs of its other customers, to
25
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies
Revenue Recognition (continued):
increase product performance, and to improve the manufacturing process.
Further, although the AN/APM-480 was accepted and used by the Navy, since
it was in substantial compliance with the specification, there were limited
areas where the AN/APM-480 did not operate at maximum performance according
to the specification. Since the U.S. Navy was a significant customer and
because of these minor specification issues, the Company agreed in fiscal
year 2002 to provide enhancements at no additional cost to the customer.
Beginning in fiscal year 2002, the Company began to accrue the cost of
these enhancements as the units were shipped in order to properly match the
revenues with the expenses. The Company considers this accrual similar to a
warranty expense, and recorded the liability and the expense to cost of
sales. The enhancements made to the product, the Company believes, are
relatively insignificant. The Company has shipped and has been paid for all
units (approximately $18,200,000 in revenues) through the fiscal year ended
March 31, 2007, and the cost of these enhancements was approximately 3% of
the revenues. The customer continues to use the original product in the
field, because the enhancements are not essential to the unit to perform
the major functions of the delivered products. The Company continued to
ship the units in accordance with the original contract, and was paid,
subsequent to the time the Company agreed to perform the enhancements.
Revenue was recognized because the Company substantially completed and
fulfilled the terms specified in the original contract, the Navy took
delivery and the Armed Forces are using the product in the field. In the
case of these enhancements, there was no obligation to perform any
enhancements at the time the original contract was signed in 2000, and when
the first shipments were made in the Company's fiscal year ended March 31,
2001.
The costs, estimated to be approximately $480 per unit are for labor and
material, based upon the Company's experience manufacturing the product,
and standard costing information. The Company charged the costs of
performing the enhancement to the accrued liability as the units are
shipped. Effective December 31, 2006, the Company's obligation to complete
the enhancements on the remaining units (approximately 200) was satisfied.
In the future, the cost of any upgrades will be invoiced to the customer.
As such, the Company reversed its remaining liability of $151,019 for the
upgrade during the third quarter of fiscal year 2007 to cost of sales.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
26
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Financial Instruments:
The carrying amounts of cash and cash equivalents 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. The Company's
marine systems customer base consists primarily of engineering and
surveying companies, distributors and federal and state agencies. As of
March 31, 2007, the Company believes it has no significant risk related to
its concentration within its accounts receivable. (See Note 13 to
Consolidated Financial Statements).
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.
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost. Depreciation and
amortization is 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.
27
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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
$30,741, $57,526 and $125,696 for the years ended March 31, 2007, 2006, and
2005, respectively.
Intangible Assets:
Intangible assets consist primarily of purchased intangible assets in
connection with the acquisition of ITI. Purchased intangible assets
primarily include existing and core technology, non-compete agreements, and
customer lists. Intangible assets are amortized using the straight-line
method over 5 years (see Note 9 to Consolidated Financial Statements).
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 income by the weighted-average number of
common shares outstanding during the period and excludes the dilutive
effects of common stock equivalents.
Accounting for 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.
28
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. Under the modified prospective method, the
provisions of SFAS 123R apply to all unvested awards at the date of
adoption and granted after the date of adoption. The Company recognizes
compensation cost on awards on a straight-line basis over the vesting
period, typically four years. Prior to the adoption of SFAS 123R, the
Company accounted for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
The Company estimates the fair value of each option using the Black-Scholes
option-pricing model. As a result of adopting SFAS 123(R) on April 1, 2006,
the loss before income taxes for fiscal year 2007 was charged with $5,633.
Had the Company prior to April 1, 2006 determined compensation cost based
on the fair market value at the grant date for its stock options under SFAS
No. 123R, the pro forma amounts indicated below would have been included in
the financial statements based upon the applicable value for the vested
options for each year.
Fiscal Fiscal
Year Year
2006 2005
---- ----
Net loss - as reported $(394,536) $ (28,908)
Stock-based compensation expense
included in reported net loss, net of taxes 25,960 --
Fair value of stock options, net of taxes (73,397) (63,170)
--------- ---------
Net loss - pro forma $(441,973) $ (92,078)
========= =========
Basic loss per share - as reported $ (0.18) $ (0.01)
Basic loss per share - pro forma (0.20) (0.04)
Diluted loss per share - as reported (0.18) (0.01)
Diluted loss per share - pro forma (0.20) (0.04)
29
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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, enhancement liability, warranty claims, inventory and accounts
receivable valuations.
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.
Warranty/Enhancement Reserves:
Warranty/enhancement 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 the Company's
expectations and the provisions established, future warranty/enhancement
costs could be in excess of the Company's warranty/enhancement 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/enhancement reserves are adjusted from time to time
when actual warranty/enhancement claim experience differs from estimates.
30
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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 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 June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes."
FIN 48 establishes 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. This interpretation also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The adoption
of FIN 48 is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
Also 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 payments transactions under SFAS No.
123. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007. As SFAS No. 157 does not require
any new fair value measurements or measurements of previously computed fair
values, the Company does not believe adoption of this Statement will have a
material effect on its future financial statements.
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 "Fair Value
Measurements" ("SFAS No. 157"). The Company is currently assessing the
impact that SFAS No. 159 will have on its future financial statements.
31
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
3. Accounts Receivable
The following table sets forth the components of accounts receivable:
March 31,
---------
2007 2006
---- ----
Government $ 678,688 $ 548,083
Commercial 338,070 542,489
Less: Allowance for doubtful accounts (34,544) (40,994)
----------- -----------
$ 982,214 $ 1,049,578
----------- -----------
4. Inventories
Inventories consist of:
March 31,
---------
2007 2006
---- ----
Purchased parts $ 1,414,558 $ 1,409,502
Work-in-process 1,171,998 723,782
Finished goods 220,896 212,100
Less: Allowance for obsolete inventory (346,810) (243,104)
----------- -----------
$ 2,460,642 $ 2,102,280
=========== ===========
Work-in-process inventory includes $387,269 and $482,507 for government
contracts at March 31, 2007 and 2006, respectively.
32
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
March 31,
---------
2007 2006
---- ----
Leasehold Improvements $ 513,826 $ 495,826
Machinery and equipment 1,381,758 1,325,456
Automobiles 16,514 16,514
Sales equipment 529,519 489,871
Rental assets 161,153 168,029
Assets under capitalized leases 367,623 367,623
Less: Accumulated depreciation & amortization (2,345,146) (2,088,254)
------------- -------------
$ 625,247 $ 775,065
============= =============
6. Accrued Expenses
Accrued payroll, vacation pay and payroll withholdings consist of the
following:
March 31,
---------
2007 2006
---- ----
Accrued vacation pay $ 233,010 $ 231,054
Accrued payroll and payroll withholdings 120,717 160,008
------------- -------------
$ 353,727 $ 391,062
============= =============
Accrued payroll, vacation pay and payroll withholdings includes $81,780 and
$66,885 at March 31, 2007 and 2006, respectively, which is due to officers.
33
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
6. Accrued Expenses (continued)
Accrued expenses - other consist of the following:
March 31,
---------
2007 2006
---- ----
Accrued consulting $ 194,050 $ 132,332
Accrued commissions 19,400 124,629
Accrued audit and tax preparation fees 76,000 71,000
Enhancement liability - 350,581
Accrued - other 244,243 170,251
---------- ----------
$ 533,693 $ 848,793
========== ==========
The reconciliation of the changes to the enhancement liability
(see Note 2, Revenue Recognition) is as follows:
Balance at March 31, 2004 505,364
Fiscal 2005 accrual 29,825
Fiscal 2005 usage (22,233)
------------
Balance at March 31, 2005 512,956
Fiscal 2006 accrual 6,218
Fiscal 2006 usage (168,593)
------------
Balance at March 31, 2006 350,581
Fiscal 2007 accrual reversal (see Note 2) (151,019)
Fiscal 2007 usage (199,562)
------------
Balance at March 31, 2007 $ -0-
============
Accrued expenses - related parties consists of the following:
March 31,
---------
2007 2006
---- ----
Interest and professional fees to
non-employee officer stockholder $ 26,276 $ 23,518
Interest and other expenses due to
Company's Chairman/President 48,723 34,541
------------ ------------
$ 74,999 $ 58,059
============ ============
34
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
7. Line of Credit
The Company has a line of credit in the amount of $1,750,000 from Bank of
America. 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 8.75% and 8.25% at
March 31, 2007 and 2006 respectively, and the Company has paid no interest.
The Company pays no fee to maintain the line of credit. 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, 2007 and March 31, 2006, the Company was in
compliance with all financial covenants and had no outstanding borrowings,
and made no borrowings during fiscal years 2007, 2006, and 2005. The line
of credit currently expires at September 30, 2007. The Company has renewed
its line of credit with the bank annually since 2002.
In April 2007, the Company borrowed $250,000.
8. Capitalized Lease Obligations
The Company entered into lease agreements for equipment that meet the
requirements for capitalization. The net book value of equipment acquired
under capitalized lease obligations amounted to $-0- and $12,582,
respectively, at March 31, 2007 and 2006. As of March 31, 2007 and 2006,
accumulated amortization under capital leases were $367,623 and $355,041,
respectively. As of March 31, 2007 all capital lease obligations have been
paid.
9. Intangible Assets
Intangible assets consist of intellectual property, customer lists, and
non-compete agreements acquired and are carried at cost less accumulated
amortization. Amortization is computed using the straight-line method over
the estimated useful life of the respective assets, five years. The Company
follows Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 142
and SFAS 144 provide guidance on the financial accounting and reporting of
intangible assets. The Company reviews intangibles for impairment whenever
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. Factors which are considered important that
could trigger an impairment include, but are not limited to,
underperformance relative to projected future operating results,
competition, and negative industry or economic trends. In March 2006, the
Company recognized an impairment loss and charged to operations (included
in amortization expense) the remaining unamortized value of its acquired
intangible assets in the amount of $240,655 relating to its marine systems
division. The impairment was caused by the underperformance of this
operating subsidiary and its negative cash flows.
The intangible assets were fully amortized at March 31, 2007 and 2006.
35
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
10. Income Taxes
Income tax (benefit) expense:
March 31, March 31, March 31,
--------- --------- ---------
2007 2006 2005
---- ---- ----
Current:
Federal $ -- $ (60,971) $ 24,165
State and local 3,312 18,754 53,208
------------ ------------ ------------
Total current tax provision (benefit) 3,312 (42,217) 77,373
------------ ------------ ------------
Deferred:
Federal (397,398) (124,597) (30,048)
State and local (121,315) (21,521) (4,700)
------------ ------------ ------------
Total deferred tax benefit (518,713) (146,118) (34,748)
------------ ------------ ------------
Total (benefit) expense $ (515,401) $ (188,335) $ 42,625
============ ============ ============
The components of the Company's deferred taxes at March 31, 2007 and 2006
are as follows:
March 31, March 31,
--------- ---------
2007 2006
---- ----
Deferred tax assets:
Net operating loss carryforwards & credits $ 822,000 171,000
Allowance for doubtful accounts 14,000 16,000
Reserve for inventory obsolescence 139,000 98,000
Inventory capitalization 78,000 66,000
Deferred payroll and accrued interest 50,000 70,000
Vacation accrual 93,000 92,000
Warranty/Enhancement reserve 8,000 154,000
Deferred revenues 44,000 55,000
Non-compete agreement 27,000 30,000
Depreciation -- (10,000)
------------ ------------
Deferred tax asset 1,275,000 742,000
Less valuation allowance 79,000 65,000
------------ ------------
Deferred tax asset, net $ 1,196,000 677,000
============ ============
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
$1,953,000 at March 31, 2007. These carryforward losses are available to
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.
36
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
10. Income Taxes (Continued)
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 provision (benefit) at the statutory
Federal tax rate of 34% to the income tax expense recognized in the
financial statements is as follows:
March 31, March 31, March 31,
--------- --------- ---------
2007 2006 2005
---- ---- ----
Income tax provision (benefit)- statutory rate $ (429,906) $ (198,074) $ 4,664
Income tax expenses - state and local, net of federal benefit (75,107) (3,380) 32,015
Change in valuation allowance (14,000) -- --
Non-deductible expenses 10,591 15,047 12,452
Other (6,979) (1,928) (6,506)
----------- ----------- -----------
Income tax provision (benefit) $ (515,401) $ (188,335) $ 42,625
=========== =========== ===========
11. Related Party Transactions
On March 31, 1997, the Company's Chairman/President 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/President,
were converted into seven $50,000 convertible subordinated notes (the
"Notes") totaling $350,000. The Notes were 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
prices 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.
37
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
11. Related Party Transactions (Continued)
In May 2004, the Company and its Chairman/President renegotiated the terms
of the Notes payable-related party. The Notes now become due in consecutive
years beginning March 31, 2005. The interest rate remains at 4.5%. On March
31, 2007 and 2006, 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 $100,000 and $150,000 at March 31, 2007
and 2006, respectively.
The Company has obtained legal services from a non-employee
officer/stockholder with the related fees amounting to $93,179, $111,858,
and $149,259 for the years ended March 31, 2007, 2006, and 2005,
respectively. The Company obtained management and marketing services from a
director/stockholder with the related fees amounting to $68,973, $81,700,
and $97,400 for the years ended March 31, 2007, 2006, and 2005,
respectively.
12. 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, 2007.
Years Ended March 31,
---------------------
2008 $ 162,000
2009 147,000
2010 152,000
2011 143,000
-----------
$ 604,000
===========
Total rent expense, including real estate taxes, was approximately
$227,000, $236,000, and $237,000 for the years ended March 31, 2007, 2006
and 2005, respectively.
38
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
13. Significant Customer Concentrations
For the years ended March 31, 2007, 2006, and 2005, sales to the U.S.
Government represented approximately 27%, 47%, and 34%, respectively of net
avionics sales. No other individual customer represented over 10% of
avionics sales for these years. One domestic distributor (Avionics
International) accounted for 12%, 9%, and 10% of commercial avionics sales
for the years ended March 31, 2007, 2006, and 2005, respectively.
Additionally, another domestic distributor (Aero Express) accounted for
12%, 7% and 15% of commercial avionics sales for the years ended March 31,
2007, 2006, and 2005, respectively. Another international distributor
accounted for 4%, 17%, and 20% of commercial avionics sales for the years
three ended March 31, 2007, 2006 and 2005, respectively. 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 years 2006 and 2005. An international
distributor (M.P.G. Instruments) accounted for 13% of total government
sales in fiscal year 2007. Foreign sales were $1,467,314, $2,197,019, and
$1,938,346 for the years ended March 31, 2007, 2006, and 2005,
respectively. All other sales were to customers located in the U.S.
For the marine systems division in fiscal year 2007, sales to the U.S.
Government represented approximately 20% of sales. In fiscal year 2006, one
customer (Sevenson Environmental Services) represented 18% of this
division's sales. No one customer accounted for 10% or more of this
division's sales in fiscal year 2005.
As of March 31, 2007, two individual customer balances represented 45% and
10%, respectively, of the Company's outstanding receivables. As of March
31, 2006, two individual customer balances represented 34% and 15%,
respectively, of the Company's outstanding receivables.. Receivables from
the U.S. Government represented approximately 10% and 1%, respectively, of
total receivables for the fiscal years ended March 31, 2007 and 2006.
14. Stock Option Plans
In June 1998, the Board of Directors adopted the 1998 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
December 1998 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 extents 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.
39
-TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
14. Stock Option Plans (continued)
In May 2003, the Board of Directors of the Company adopted the 2003 Stock
Option Plan which reserves for issuance options to purchase up to 250,000
shares of its common stock and is similar to the 1998 Plan. The
shareholders approved this plan at the November 2003 annual meeting. 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 1998 and 2003 Plans. The
shareholders 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 2007,
2006, and 2005 was $1.44, $1.81, and $1.56, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
assumptions:
---- ---------------- ------------------------- ----------------- ---------
Year Dividend Yield Risk-free Interest rate Volatility Life
---- ---------------- ------------------------- ----------------- ---------
2007 0.0% 4.50%-4.77% 54.24% - 58.03% 5 years
---- ---------------- ------------------------- ----------------- ---------
2006 0.0% 5.0% 50% 5 years
---- ---------------- ------------------------- ----------------- ---------
2005 0.0% 3.5% 50% 5 years
---- ---------------- ------------------------- ----------------- ---------
A summary of the status of the Company's stock option plans for the fiscal
years 2007, 2006, and 2005 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, 2004 319,300 $2.07
Options granted 145,750 $3.32
Options exercised (43,680) $1.57
Options canceled/forfeited (30,470) $2.34
Outstanding options at March 31, 2005 390,900 $2.57
Options granted 88,000 $3.66
Options exercised (66,550) $2.02
Options canceled/forfeited (12,500) $2.62
Outstanding options at March 31, 2006 399,850 $2.89
Options granted 59,500 $3.18
Options exercised (42,450) $1.87
Options canceled/forfeited (35,250) $2.59
Outstanding options at March 31, 2007 381,650 $3.08 2.6 years $211,649
Remaining options available for grant were 203,420 and 227,670 as of March
31, 2007 and 2006, respectively.
40
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
14. Stock Option Plan (continued)
As of March 31, 2007, 2006, and 2005, 173,800, 166,806, and 141,230,
respectively, of options were outstanding, vested, and exercisable.
The total intrinsic value of options exercised during the years ended March
31, 2007, 2006, and 2005 was $22,486, $104,146, and $69,213, respectively.
Cash received from the exercise of stock options for the years ended March
31, 2007, 2006 and 2005 was $79,581, $134,695, and $68,392, respectively.
The total intrinsic value of outstanding options at March 31, 2007 was
$211,649.
Due to the acceleration of 50,000 stock options, the Company incurred
non-cash compensation expense in the amount of $43,230 for the fiscal year
ended March 31, 2006.
15. Net Income (Loss) Per Share Attributable to Common Stockholders
Incremental shares of 58,426, 70,824 and 181,960 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 2007, 2006 and
2005, respectively, as their effect would have been anti-dilutive due to
the losses incurred in these period.
16. Segment Information
Information is presented for the Company's three reportable segments,
avionics government, avionics commercial and marine systems. There are no
inter-segment revenues.
The Company is organized primarily on the basis of its avionics and marine
instrument 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.
The marine instrumentation systems segment consists of sales to
hydrographers, oceanographers, researchers, engineers, geophysicists and
surveyors. 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.
41
-TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
16. Segment Information (continued)
The Company's selling and engineering, research and development costs are
only segment specific for total avionics and marine systems. General and
administrative expenses are not managed on a segment basis. The Company
does allocate certain expenses, such as facility costs, to the marine
systems segment. Net interest includes expenses on debt and income earned
on cash balances, both maintained at the corporate level.
The table below presents information about reportable segments within the
avionics business for the years ending March 31:
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
2007 Avionics Avionics Avionics Marine Corporate/
---- Government Commercial Total Systems Reconciling Items Total
---------- ---------- ----- ------- ----------------- -----
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Net sales $4,502,799 $ 2,500,142 7,002,941 $663,646 $ -- $ 7,666,587
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Cost of Sales 1,767,672 1,433,756 3,201,428 484,099 -- 3,685,528
========= ========= ========= ======== ===========
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Gross Margin 2,735,127 1,066,386 3,801,513 179,547 -- 3,981,059
========= ========= ========= ======== ===========
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Engineering, research, and 2,390,450 189,931 2,580,381
Development
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Selling, general, and admin. 1,297,374 162,658 1,238,797 2,698,829
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Interest(income)expense net -- -- (33,722) (33,722)
========= ======== =========== ===========
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
------------------------------- ------------- ------------ ----------- ----------- ------------------- -------------
Income (loss) before income
taxes $113,689 $(230,032) $(1,272,519) $(1,264,429)
========= ========= =========== ===========
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Segment Assets $ 3,152,513 $ 838,360 $ 97,380 $ 2,039,589 $ 6,127,842
=========== ========= ========= =========== ===========
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
2006 Avionics Marine Corporate/
---- Government Commercial Total Systems Reconciling Items Total
---------- ---------- ----- ------- ----------------- -----
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Net sales $7,326,687 $ 2,930,037 10,256,724 $ 939,335 $ -- $11,196,059
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Cost of Sales 3,165,808 1,923,251 5,089,059 640,677 -- 5,729,736
========== =========== ========== ========= ================ ===========
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Gross Margin 4,160,879 1,006,786 5,167,665 298,658 -- 5,466,323
========== =========== ========== ========= ================
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Engineering, research, and 2,337,696 196,801 2,534,497
Development
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Selling, general, and admin. 1,366,207 416,612 1,413,954 3,196,773
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Amortization of intangibles -- -- 326,851 326,851
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Interest(income)expense,net -- 147 9,074) (8,927)
========= ========= ===========
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Income (loss) before income
taxes $ 1,366,207 $(314,902) $ (1,749,879) $ (582,871)
----------- --------- ---------------- -----------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Segment Assets $2,740,699 $ 863,246 $ 610,984 $ 2,901,653 $ 7,116,582
========== ========= ========= ================ ============
------------------------------- ------------- ------------ ----------- ------------ ------------------- ------------
42
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
16. Segment Information (continued)
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
2005 Avionics Marine Corporate/
---- Government Commercial Total Systems Reconciling Items Total
---------- ---------- ----- ------- ----------------- -----
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Net sales $6,661,561 $3,046,308 9,707,869 $ 803,415 $ -- $ 10,511,284
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Cost of Sales 2,730,910 1,810,064 4,540,974 489,114 -- 5,030,088
========== ========== ========= ========= ============== ============
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Gross Margin 3,930,651 1,236,244 5,166,895 314,301 -- 5,481,196
========== ========== ========= ========= ============== ============
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Engineering, research, and 1,867,404 319,424 2,186,828
Development
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Selling, general, and admin. 1,356,812 383,216 1,443,549 3,183,577
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Amortization of intangibles -- -- 86,196 86,196
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Interest expense, net 10,621 257 -- 10,878
========= ========= ============== ============
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
Income (loss) before income
taxes $1,932,058 $(388,596) $ (1,529,745) $ 13,717
---------- --------- -------------- ------------
------------------------------- ------------- ------------ ----------- ------------ ------------------- -------------
43
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
17. Quarterly Results of Operations (Unaudited)
Quarterly consolidated data for the years ended March 31, 2007 and 2006 is
as follows:
Quarter Ended
--------------------------------------------------------
FY 2007 June 30 September 30 December 31 March 31
Net sales $ 1,765,051 $ 2,127,349 $ 2,269,148 $ 1,505,039
Gross margin 805,578 1,071,160 1,263,905 840,416
Income (loss) before taxes (451,546) (138,185) (65,258) (609,440)
Net income (loss) (271,154) (82,978) (39,453) (400,443)
Basic and diluted earnings (loss) per share
(0.12) (0.04) (0.02) (0.15)
Quarter Ended
--------------------------------------------------------
FY 2006 June 30 September 30 December 31 March 31
Net sales $ 3,150,978 $ 3,094,442 $ 3,008,995 $ 1,941,644
Gross margin 1,606,683 1,504,819 1,530,457 824,364
Income (loss) before taxes 57,991 64,884 157,419 (863,165)
Net Income (loss) 29,148 36,116 86,544 (546,344)
Basic and diluted earnings (loss) per share
0.01 0.02 0.04 (0.25)
Revenues beginning in the fourth quarter of fiscal year 2006 were substantially
lower than quarterly amounts reported for the first three quarters of fiscal
year 2006 as Tel is in a transitional phase between the end of deliveries in
fiscal year 2006, pursuant to its multi-year AN/APM-480 contract and other
government contracts, and the commencement of production deliveries under its
multi-year AN/USM-708 contract.
44
TEL-INSTRUMENT ELECTRONICS CORP
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Deductions Balance at
Beginning of Costs and End of the
Description the Year Expenses Year
Year ended March 31, 2007:
Allowance for doubtful
Accounts $ 40,994 $ -- $ (6,450) $ 34,544
============ ============ ============= ============
Allowance for obsolete
Inventory $ 243,104 $ 158,370 $ (54,664) $ 346,810
============ ============ ============= ============
Year ended March 31, 2006:
Allowance for doubtful
Accounts $ 46,206 $ -- $ (5,212) $ 40,994
============ ============ ============= ============
Allowance for obsolete
Inventory $ 170,640 $ 122,685 $ (50,221) $ 243,104
============ ============ ============= ============
Year ended March 31, 2005:
Allowance for doubtful
accounts $ 41,598 $ 4,608 $ -- $ 46,206
============ ============ ============= ============
Allowance for obsolete
inventory $ 140,898 $ 29,742 $ -- $ 170,640
============ ============ ============= ============
45
TEL-INSTRUMENT ELECTRONICS CORP
Item 9. Changes in and Disagreements with Accountants on Accounting and
------- ---------------------------------------------------------------
Financial Disclosure
---------------------
None.
Item 9a. Controls and Procedures
-------- -----------------------
The Company adopted disclosure controls and procedures, which are
defined under Rules promulgated by the SEC as "those controls or other
procedures of the issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports filed or
submitted by it under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the
commission's rules and forms." The Company's Chief Executive Officer
and Principal Accounting Officer evaluated the Company's Disclosure
Controls and Procedures at March 31, 2007 and have concluded that they
are effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13a-15 or
15d-15.
There were no changes in our internal control over financial reporting
identified in connection with the evaluation as of March 31, 2007 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.
--------
46
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
(81) President and Chief Executive
Officer since 1982.
George J. Leon (2) (3) Director; Investment 1986
(63) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.
Robert J. Melnick Director; 1998
(73) Vice President since 1999;
Marketing and Management
Consultant for the Company
since 1991.
Jeffrey C. O'Hara, CPA (1) Director; Vice President since 1998
(49) 2005; COO since June 2006;
Financial Consultant from
2001; Chief Financial Officer from
1999-2000 of Alarm Security Group;
Robert A. Rice (2) Director; President and 2004
(51) Owner of Spurwink Cordage, Inc since
1998 (textile manufacturing).
Robert H. Walker (2) (3) Director; Retired Executive Vice 1984
(70) President, Robotic Vision Systems, Inc.
(design and manufacture of robotic
vision systems) 1983-1998.
47
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, 2007, 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 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.
48
Item 11. Executive Compensation
-------- ----------------------
Compensation Discussion and Analysis
The following contains a description and analysis of compensation
arrangements and policies for fiscal year 2007 for the executive
officers named in the Summary Compensation table below. Such named
executive officers are referred to as "NEO's".
The main elements of our compensation program are designed to support
individual motivation and excellence, align executive interest with
the interest of shareholders and recognize business and leadership
results.
Tel is a small company and the three NEOs are critical to its business
success. As a consequence, compensation of NEOs is also based on the
overall business success of the Company as well as compensation paid
by comparable companies, as reported in industry surveys, and
available resources.
Compensation Committee
The Board of Directors established a Compensation Committee comprised
of two independent directors, Messrs. George J. Leon and Robert H.
Walker, to review compensation arrangements for NEOs and make
recommendations to the full Board. The Committee considers
recommendations from Management, except with respect to compensation
of the CEO, as well as published information on compensation for
similar positions in competitive businesses, and makes recommendations
to the Board based on the foregoing information and the compensation
criteria set forth above.
Salary
Salaries set a baseline level of compensation to NEOs, and are
intended to compensate them for carrying out duties and
responsibilities of their position and the business success of the
Company.The Compensation Committee periodically reviews salary levels
and adjusts them, as deemed necessary, but not necessarily annually.
During the review and adjustment process, the Compensation Committee
considers the matter discussed above.
The Compensation Committee reviews compensation for NEOs each year
prior to the stockholders' annual meeting.
The Compensation Committee's review of the foregoing factors is
subjective and the Committee assigns no fixed value or weight to any
specific factors when making its decisions.
Stock Options
The Board of Directors believes that stock option participation aligns
NEOs long-term interests with those of stockholders and allows them to
share appreciation in the Company's common stock. When establishing
stock option grants for NEOs, the Compensation Committee considers the
individual's motivation and performance, the Company's business
results, the level of other compensation paid, the stock and options
owned, the stock grants made to other employees pursuant to the
Company's Stock Option Plans (see Note 14 to Notes to Financial
Statements), and the impact on stockholder profits and stock values.
49
Item 11. Executive Compensation (continued)
-------- ----------------------------------
Options granted to NEOs are consistent with the terms of options
granted to other employees pursuant to the Employee Stock Option
Plans. Mr. O'Hara's employment contract provides for the grant of
15,000 options.
NEOs were not awarded any stock options in fiscal year 2007. 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 14 to
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.
CEO Performance and Compensation
Within the framework described above, the Compensation Committee
evaluates performance of the CEO and determines the CEO's salary,
bonus, and stock option grant. The Compensation Committee sets
qualitative objectives and responsibilities for the CEO consistent
with the Corporation's business model. These include creating
shareholder value through a balanced focus on long-term returns on
capital employed, earnings per share, and total shareholder return;
developing the long-term business strategy and assessing the
effectiveness and execution of that strategy against the Corporation's
financial performance; assuring the effectiveness of the Corporation's
management development and succession planning process across the
organization; ensuring that every business line develops and meets
high standards of safety, health, and environmental performance;
stewardship and enforcement on internal business controls;
communicating effectively with all the Corporation's stockholders; and
working effectively with the Board in the pursuit of all these
objectives.
50
Item 11. Executive Compensation (continued)
-------- ----------------------------------
The Compensation Committee, in consultation with the other
non-employee director, evaluates the performance of the CEO on an
ongoing basis throughout the year in the course of regular meetings
and interactions with the CEO, and during reviews of the Company's
financial and operating results. The Compensation Committee also holds
a formal meeting once a year to which all non-employee directors are
invited to review the performance of senior executives, and to review
progress on the executive's development and succession planning
program.
Compensation Committee Report
The Compensation Committee of Tel-Instrument Electronics Corp has
reviewed and discussed with management the Compensation Discussion and
Analysis immediately preceding this report. Based on this review and
discussion, the Compensation Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in
the Company's Annual report on Form 10-K for the fiscal year ended
March 31, 2007.
July 13, 2007
Compensation Committee
George J. Leon,
Chair Robert H. Walker
51
Item 11. Executive Compensation (continued)
-------- ----------------------------------
The following table presents information regarding compensation of our
principal executive officer, our chief operating officer, and our
principal accounting officer for services rendered during fiscal year
2007.
------------------------------ ------------ ------------- ----------------- -------------------------- ------------
Name and Principal Position Salary ($) Incentive ($) Option Awards ($) All Other Compensation $ Total ($)
(1) (2) (2) (3)
------------------------------ ------------ ------------- ----------------- -------------------------- ------------
Harold K. Fletcher, CEO 159,000 -0- -0- 7,337 166,337
------------------------------ ------------ ------------- ----------------- -------------------------- ------------
Jeffrey C. O'Hara, COO 108,000 -0- -0- 13,345 121,345
------------------------------ ------------ ------------- ----------------- -------------------------- ------------
Joseph P. Macaluso, 93,000 -0- -0- 7,825 100,825
Principal Accounting Officer
------------------------------ ------------ ------------- ----------------- -------------------------- ------------
(1) The amounts shown in this column represent the dollar value of
base cash salary earned by each executive officer.
(2) No incentive or option grants were made to NEOs in 2007 and
therefore no amounts are shown in these columns.
(3) 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.
(4) Robert J. Melnick, Vice President and director, serves pursuant
to a consulting contract that provided $68,973 in compensation
for fiscal year 2007.
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2007
------------------------------------------------------
The following table sets forth information on stock options granted during or
for the 2007 fiscal year to our named executive officers. No options were
granted in fiscal year 2007.
52
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
--------------------------------------------------
The following table sets forth the Unexercisable outstanding stock option equity
grants awards held by named executive officers at the end of the 2007 fiscal
year. The option exercise price set forth in the table is based on the closing
price on the date of grant.
Number of Securities Number of Securities
Underlying Unexercised Underlying Unexercised
Options (#) Options (#) Option Exercise Option Expiration
Name Exercisable Unexercisable Price ($) Date
---- ----------- ------------- --------- ----
Harold K. Fletcher 35,000 -- $2.31 08/19/07
6,000 9,000 $3.74 12/08/09
Jeffrey C. O'Hara 6,400 -- $2.00 12/11/07
5,800 2,600 $1.50 - $2.90 1/21/08 - 12/17/08
4,500 5,000 $2.75 - $3.70 1/15/09 - 12/8/09
4,200 14,300 $3.55 - $4.25 1/28/10 - 8/15/10
Robert J. Melnick 4,000 6,000 $3.40 12/08/09
Joseph P. Macaluso 4,000 6,000 $3.40 12/08/09
53
OPTIONS EXERCISED AND STOCK VESTED DURING FISCAL YEAR 2007
----------------------------------------------------------
The following table sets forth the number of shares acquired upon exercising
options awards by our named executive officers during fiscal year 2007.
------------------- ------------------ --------------------------------
Number of shares
acquired on
Name excercise Value realized on exercise (1)
---- --------- ------------------------------
------------------- ------------------ --------------------------------
Joseph P. Macaluso 12,500 $3,125
------------------- ------------------ --------------------------------
------------------- ------------------ --------------------------------
Jeffrey C. O'Hara 3,200 $2,240
------------------- ------------------ --------------------------------
(1) Value stated calculated by subtracting the exercise price form the market
value at time of exercise.
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 $625 in cash and options to
purchase 500 shares for attendance at each formal telephonic meeting of the
Board or of a standing committee. During fiscal year 2007 non-employee directors
received the following compensation pursuant to this plan.
---------------- --------------------- ---------------------- ---------
Name Cash Compensation Option Awards ($)(1) Total $
---- ----------------- -------------------- -------
---------------- --------------------- ---------------------- ---------
George J. Leon $5,000 $4,984 $9,984
---------------- --------------------- ---------------------- ---------
Robert A. Rice $4,375 $4,155 $8,530
---------------- --------------------- ---------------------- ---------
Robert H. Walker $5,000 $4,984 $9,984
---------------- --------------------- ---------------------- ---------
(1) Amounts in this column represent the fair value required by FASB 123R to be
included in our financial statements for all options granted during fiscal
year 2007.
Compensation Committee Interlock and Insider Participation
----------------------------------------------------------
During the last fiscal year, Messrs. Leon and Walker served as members of the
Compensation Committee of the Board of Directors, neither of whom was or has
been an officer or employee of the Company, had a material business relationship
with or a loan from the Company. The Company has no compensation committee
interlocks or insider participation to report.
54
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, 2007, 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 577,102 (2) 24.7%
728 Garden Street
Carlstadt, NJ 07072
George J. Leon, Director 328,967 (3) 14.2%
116 Glenview
Toronto, Ontario, Canada M4R1P8
Robert J. Melnick, Director 41,600 (4) 1.8%
57 Huntington Road
Basking Ridge, NJ 07920
Jeffrey C. O'Hara, Director 136,600 (5) 5.9%
853 Turnbridge Circle
Naperville, IL 60540
Robert A. Rice 83,100 (6) 3.6%
5 Roundabout Lane
Cape Elizabeth, ME 04107
Robert H. Walker, Director 53,483 (7) 2.3%
27 Vantage Court
Port Jefferson, NY 11777
Donald S. Bab, Secretary 82,034 3.6%
770 Lexington Ave.
New York, New York 10021
All Officers and Directors 1,330,399 (8) 55.2%
as a Group (8 persons)
Other Officers
--------------
Joseph P. Macaluso Principal Accounting Officer since August 2002.
(55) Director - Finance and Administration for the
Company since February 1999.
55
Item 12. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
(Continued)
-----------
(1) The class includes 2,341,861 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 41,000 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 18,700 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 4,000 shares subject to currently exercisable stock options
(5) Includes 20,900 shares subject to currently exercisable stock options.
(6) Includes 4,000 shares subject to currently exercisable stock options
(7) Includes 18,700 shares subject to currently exercisable stock options.
(8) Includes 111,300 shares subject to currently exercisable options held
by all executive officers and directors of the Company (including
those individually named above).
Equity Compensation Plan Information
------------------------------------
In June 1998, the Board of Directors adopted the 1998 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 December 1998 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 May 2003, the Board of Directors of the Company adopted the 2003 Stock Option
Plan which reserves for issuance options to purchase up to 250,000 shares of its
common stock and is similar to the 1998 Plan. The shareholders approved this
plan at the November 2003 annual meeting.
56
Equity Compensation Plan Information (continued)
------------------------------------------------
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 1998 and 2003 Plans, and is subject to
shareholder approval. This Plan was ratified by the shareholders at the Annual
Meeting in December 2006. Additionally, at March 31, 2007 the Company has
individual employment agreements with eight individuals for the grant of 71,000
stock options with a weighted average exercise of $3.07 per share. These
employee contracts have been approved by the directors, but not by the
shareholders, and were included as consideration for their employment. Since
these options were granted under the Stock Option Plans, they are included in
the 381,650 shares in the second column of the following schedule.
The following table provides information as of March 31, 2007 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 381,650 $3.08 203,420
---------------------- ----------------------- ------------------------------- --------------------
Equity Compensation
Plans not approved
by shareholders -- -- --
---------------------- ----------------------- ------------------------------- --------------------
Total* 381,650 $3.08 203,420
---------------------- ----------------------- ------------------------------- --------------------
* See discussion above.
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
The disclosures required by this item are contained in Note 11 to Notes to
Consolidated Financial Statements included on pages 37 and 38 of this document.
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 (b) of Regulation S-K
promulgated by the Securities and Exchange Commission.
57
TEL-INSTRUMENT ELECTRONICS CORP
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
For the fiscal years ended March 31, 2007 and 2006, professional
services were performed by BDO Seidman, LLP, the Company's independent
registered public accountant. Fees accrued for those years were as
follows:
2007 2006
---- ----
Audit Fees $89,000 $83,000
Audit-Related Fees -- --
------- -------
Total Audit and Audit-Related Fees 89,000 83,000
Tax Fees -- --
All Other Fees -- --
------- -------
Total $89,000 $83,000
======= =======
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. No fees were paid in 2007 and 2006.
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.
Pursuant to that policy, the Audit Committee has approved, for the
fiscal year ended March 31, 2007, an aggregate of specified services,
including audit, audit-related and tax services, expected to be
rendered during the year, together with specified amounts of approved
fees to be incurred for those services.
58
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 20
Consolidated Balance Sheets - March 31, 2007 and 2006 21
Consolidated Statements of Operations - Years Ended 22
March 31, 2007, 2006 and 2005
Consolidated Statements of Changes in Stockholders' 23
Equity - Years Ended March 31, 2007,
2006 and 2005
Consolidated Statements of Cash Flows - Years Ended 24
March 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements 25 - 44
(2) Financial Statement Schedule
II - Valuation and Qualifying Accounts 45
59
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) TelInstrument Electronics Corp's Certificate of
Incorporation, as amended.
* (3.2) TelInstrument Electronics Corp's ByLaws, as
amended.
* (3.3) TelInstrument Electronics Corp's Restated
Certificate of Incorporation dated November 8,
1996.
* (4.1) Specimen of TelInstrument 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. N6833597D0060
* (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.
60
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 13, 2007 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 13, 2007
-----------------------------
/s/ Harold K. Fletcher
/s/ Joseph P. Macaluso Principal Accounting July 13, 2007
----------------------------- Officer
/s/ Joseph P. Macaluso
/s/ George J. Leon Director July 13, 2007
-----------------------------
/s/ George J. Leon
/s/ Robert J. Melnick Director July 13, 2007
-----------------------------
/s/ Robert J. Melnick
/s/ Jeffrey C. O'Hara Director July 13, 2007
-----------------------------
/s/ Jeffrey C. O'Hara
/s/ Robert A. Rice Director July 13, 2007
-----------------------------
/s/ Robert A. Rice
/s/ Robert H. Walker Director July 13, 2007
-----------------------------
/s/ Robert H. Walker
61