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, 2006 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
---------------------------------------- ----------
(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:
2,291,881 shares of Common Stock were outstanding as of June 26, 2006.
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|
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, 2005 was $4,348,301 using the closing
price on September 30, 2005.
Total Pages - 64; Exhibit Index - pages 58-59
PART I
Item 1. Description of Business
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 provides 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.
In fiscal year 2006, the Company completed deliveries under its major
multi-year contract with the U.S. Navy for AN/APM-480 test sets. In March
2005, the U.S. Navy awarded the Company a $17,344,853 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.
This contract is expected to be completed in March 2010. The CRAFT
combines advanced navigation, communication, and sonobuoy test
capabilities in a portable test set, which will utilize a flexible and
expandable digital-signal-processing-based architecture. The contract was
subsequently amended to include the next generation of IFF testing, and
this test set has been designated as the AN/USM-708.
A significant portion of the Company's current engineering efforts is
devoted to the development of the AN/USM-708 technology. This contract
currently has production options totaling 750 units, which if exercised,
would result in deliveries beginning in early calendar year 2008. The
Company believes the AN/USM-708 technology is a significant advance on
current products in the marketplace and will form the basis for a new
family of test instruments for government and commercial markets, and
which will diversify and modernize Tel's product line and could lead to
additional sales (See Management's Discussion of Financial Condition and
Results of Operations).
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 17 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.
2
Item 1. Description of Business
General (continued)
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. In fiscal year 2006 the
Company made improvements to its tide gauge, upgraded its sounder with the
Windows operating system which will allow for improvements to instrument
function and operator user friendliness, and developed a new Hydrographic
Survey System, which incorporates the depth sounder, global positioning
system (GPS), and survey software in one self-contained unit. The product
improvement process delayed the introduction of new products, which
adversely affected sales in fiscal year 2006, but the Company hopes that
these product improvements will help to increase sales in fiscal year
2007.
Since this division has not met revenue expectations, the Company has
reviewed the operations of this division, scaled back costs, and charged
to operations the remaining unamortized intangible assets ($240,655) in
fiscal year 2006. Marketing efforts have been focused on major customers,
and on a recently identified U.S. Army requirement for a portable,
multi-function system.
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 2006, 2005, and 2004. 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 9%, 10%, and 8%, and 7%, 15%, and 26% of commercial sales,
respectively, for the three years ended March 31, 2006, 2005, and 2004.
The loss of either of these distributors would not have a material adverse
effect on the Company or its operations.
Marketing to the U.S. Government is made directly by employees of the
Company or through independent sales representatives, who receive similar
commissions. For the years ended March 31, 2006, 2005, and 2004, sales to
the U.S. Government, including shipments through the the government's
logistics center, represented approximately 47%, 37%, and 44%,
respectively, of net avionics sales.
International sales are made direct, through American export agents, or
through the Company's overseas distributors at a discount reflecting a 20%
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 17%, 20%, and 20% of commercial sales
in the years ended March 31, 2006, 2005 and 2004, respectively. 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, 2006, 2005, and
2004, total international sales were 20%, 18%, and 18%, respectively, of
total avionics sales. Additionally, the Company entered into an agreement
with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor
3
Item 1. Description of Business
General (continued)
Marketing and Distribution (continued)
has the exclusive sales rights for DME/P ramp and bench test units. 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 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.
Backlog
Set forth below is Tel's avionics backlog at March 31, 2006, 2005, and
2004.
Commercial Government Total
---------- ---------- -----
March 31, 2006 $100,600 $3,091,793 $3,192,393
March 31, 2005 $567,095 $5,603,658 $6,170,753
March 31, 2004 $496,156 $2,922,491 $3,418,647
ITI's backlog at March 31, 2006 was $39,065 as compared to $65,315 at
March 31, 2005.
Tel believes that most of its backlog at March 31, 2006 will be delivered
during the next two fiscal years. 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 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.
4
Item 1. Description of Business
General (continued)
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 three
manufacturers, including Tel, IFR and JC Air, and both IFR and JC Air are
now divisions of Aeroflex. This market is relatively small and highly
competitive. Tel has been successful because of its high quality, user
friendly products and competitive prices.
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. The
Company is able to compete based upon its reputation in the industry, the
quality of its products, which the Company has just improved (see
discussion above), and its responsive service.
Patents
Tel has no patents or licenses which are material to its business.
5
Item 1. Description of Business
General (continued)
Engineering, Research, and Development
In the fiscal years ended March 31, 2006, 2005, and 2004, Tel spent
$2,534,497, $2,186,828, and $2,152,515, 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 2006 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 June 10, 2006, Tel had 25 full-time employees in manufacturing,
materials management, and quality assurance, 13 in administration and
sales, and 14 in engineering, research and development, none of whom
belongs to a union, and several part-time employees and consultants. While
the job market is tight for technical personnel, Tel has generally been
able to add personnel as required.
Item 1A. Risk Factors
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.
6
Item 1A. Risk Factors (continued)
Changes in the Spending Priorities of the Federal Government
In fiscal year 2006, approximately 47% 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. In addition, 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. 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 2006 and 2005. 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 the continued financial
difficulties in the aviation industry could have a material adverse impact
on the Company's operating results and financial condition.
New Products
The successful operation of the Company depends on our 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.
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. Furthermore, sales of its marine systems have not grown as
expected. As a result, consolidated revenues have declined since fiscal
year 2003, and the Company has sustained losses in the last two fiscal
years. As discussed in the MD&A, the Company has adopted a transitional
profit improvement plan, and is actively bidding for new contracts.
Production deliveries under its new AN/USM-708 multi-year contract do not
commence until calendar year 2008. During the last three years working
capital has increased to approximately $4.3 million, and cash has
increased to approximately $1.9 million. See MD&A for further discussion.
7
Item 2. Properties
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 13 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
There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
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 June 12, 2006, the closing share price on the Amex was $2.06.
The following table sets forth the high and low per share sale prices for
our common stock for the periods indicated as reported for 2005 and 2006
by the Amex:
Fiscal Year High Low
------------- ---- ---
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
2005
First Quarter 5.00 3.60
Second Quarter 3.64 2.74
Third Quarter 3.64 2.74
Fourth Quarter 6.29 3.15
During fiscal year 2006, the Company issued 66,550 shares of common stock
upon exercise of stock options granted pursuant to its 1998 and 2003
Employee Stock Option Plans for an aggregate $134,695 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 15 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 and 2003.
Approximate number of equity holders
Number of Holders
of Record as of
Title of Class March 31, 2006
-------------- --------------
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,
--------------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Statement of Operations Data:
Sales $ 11,196,059 $ 10,511,284 $ 10,704,029 $ 11,861,387 $ 9,731,081
Cost of sales 5,729,736 5,030,088 4,977,537 5,738,729 4,684,147
------------ ------------ ------------ ------------ ------------
Gross Margin 5,466,323 5,481,196 5,726,492 6,122,658 5,046,934
Operating costs and expenses:
Selling, general and administrative 3,196,773 3,183,577 2,958,179 2,803,498 1,858,843
Amortization of intangibles 326,851 86,196 17,958 -- --
Engineering, research & development 2,534,497 2,186,828 2,152,515 1,601,493 1,521,219
------------ ------------ ------------ ------------ ------------
6,058,121 5,456,601 5,128,652 4,404,991 3,380,062
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (591,798) 24,595 597,840 1,717,667 1,666,872
Interest, net 8,927 (10,878) (4,047) (10,881) (81,183)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (582,871) 13,717 593,793 1,706,786 1,585,689
Income tax expense (benefit) (188,335) 42,625 230,883 702,796 557,999
------------ ------------ ------------ ------------ ------------
Net (loss) income (394,536) (28,908) $ 362,910 $ 1,003,990 $ 1,027,690
============ ============ ============ ============ ============
Basic (loss) income per common share ($0.18) ($0.01) $ 0.17 $ 0.47 $ 0.48
============ ============ ============ ============ ============
Diluted (loss) income per common share ($0.18) ($0.01) $ 0.16 $ 0.47 $ 0.48
============ ============ ============ ============ ============
Years Ended March 31,
--------------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $ 4,302,369 $ 4,127,991 $ 3,767,150 $ 4,154,887 $ 3,154,081
Total assets 7,116,582 7,670,730 7,392,501 7,311,177 6,233,572
Long-term debt 100,000 150,000 -- 71,069 152,183
Stockholders' equity 5,168,066 5,327,177 5,287,693 4,907,874 3,900,794
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 17 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 2006
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 the
commencement of production deliveries under its previously announced
multi-year AN/USM-708 contract. The Navy technical evaluation process for
AN/USM-708 (CRAFT) is scheduled to begin in April 2007 and product
deliveries are currently expected to begin at the start of the 2008
calendar year.
While consolidated sales increased modestly in fiscal year 2006 as
compared to fiscal year 2005, the Company had a substantial loss for the
year. For the quarter ended March 31, 2006 expenses included approximately
$300,000 related to impairment of intangibles and restructuring charges
associated with its ITI subsidiary, and increased engineering costs,
mostly attributable to the CRAFT program. Sales in the fourth quarter were
below Company target as were the quarterly amounts reported for each of
the first three quarters of the current fiscal year. In addition,
competitive pressures caused the Company to lower prices on certain
products, thereby lowering gross profit.
Near-to-mid-term commercial and military orders are below expectations.
The timing of government orders, increased competition, and the continued
financial difficulties within the commercial airline industry have
contributed to the decline in business. The Company continues to pursue
all opportunities. However, absent success on several large pending
contracts, Tel's annual sales are expected to remain below recent levels
for at least the first two quarters of the 2007 fiscal year. Research and
development expenditures are expected to remain high through the first
three quarters of fiscal year 2007.
In recognition of the challenging business outlook, on March 31, 2006 the
Company adopted a transitional profit improvement plan for Tel and ITI
which management believes will reduce costs substantially. This includes
selected layoffs, a reduction in operating expenses, modifications to
employee benefits, and further integration of ITI's operations into Tel.
While the near-term competitive and economic situation remains difficult
for both the avionics and marine system markets, management remains
optimistic about the Company's prospects. Tel has upgraded its management
team and engineering staff over the last several years and the new digital
technology incorporated into the AN/USM-708 could have applications
outside of Tel's traditional avionics business.
At March 31, 2006, the Company had available cash of about $1.9 million,
an unused Bank line of credit of $1.75 million and positive working
capital of over $4 million. As such, the Company believes it has
sufficient working capital to fund its operating plans at least for the
next twelve months (See Liquidity and Capital Resources).
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.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations 2006 Compared to 2005 (continued)
Sales (continued)
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.
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 Income
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.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations 2005 Compared to 2004
Sales
Total sales decreased $192,745 (1.8%) for the year ended March 31, 2005 as
compared to the year ended March 31, 2004. Sales of all avionics products
declined $851,302 (8.1%) in 2005 as compared to the prior year. This was
partially offset by an increase in sales from the marine systems division
of $658,557, as a result of a having a full year of sales for 2005 as
compared to only 2 1/2 months sales in 2004.
Avionics commercial sales decreased $847,670 (21.8%) for 2005 primarily as
a result of a unique marketing opportunity in 2004 with regards to a sales
promotion which did not continue into 2005. Government avionics sales
increased slightly.
Gross Margin
Gross margin decreased $245,296 (4.3%) for 2005. Gross margin on avionics
products declined $511,913 (9%), primarily as a result of the lower
commercial sales volume. Gross margin on avionics products for the year
ended March 31, 2005 was 53.2% of sales, as compared to 53.8% for the year
ended March 31, 2004. Gross margin on marine system product increased
$266,617, as a result of having a full year of sales for 2005. Gross
margin on marine system products was 39.1% for the year ended March 31,
2005, as compared to 32.9% for the prior year, due to manufacturing
efficiencies on higher volume and increased prices.
Operating Expenses
Selling, general and administrative expenses ("SG&A) increased $225,398
(7.6%), and is mostly attributable to a full year's expenses, for the
marine systems division, and the planned additional marketing costs for
this division. This increase was partially offset by lower SG&A for the
avionics division, due to lower recruitment/relocation costs, consulting
expenses, and professional fees which were partially offset by an increase
in commission expense.
Engineering, research and development expenses increased $34,313 (1.6%)
due to a full year's expenses for marine systems division and the planned
development costs for this division; increases in salaries and materials
for the avionics division due to increased employment were partially
offset by lower outside contractor expenditures.
Amortization of Intangibles
Amortization of intangibles increased to $86,196 for the fiscal year 2005
as compared to $17,958 for fiscal year 2004, as a result of having a full
year of amortization in 2005.
Income Taxes
Income taxes decreased from $230,883 in 2004 to $42,625 in 2005 as a
result of the lower profit. The state taxes in 2005 are New Jersey state
taxes on the avionics business. Under New Jersey law, ITI's losses cannot
be applied to reduce the state taxes on the avionics business.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations 2005 Compared to 2004 (continued)
Net Income
As a result of the above, the Company incurred a net loss of $28,908 for
the year ended March 31, 2005 as compared to net income of $363,910 for
the year ended March 31, 2004
Liquidity and Capital Resources
At March 31, 2006, the Company had positive working capital of $4,302,369
as compared to $4,127,991 at March 31, 2005. For the year ended March 31,
2006, the Company generated $1,213,105 from operations as compared to
using $371,462 of cash for operating activities in the prior year. This
increase in cash from operations is primarily attributed to the decreases
in inventories and accounts receivable.
For the year ended March 31, 2006, the Company used $208,895 in investing
activities as compared to using $278,354 in fiscal year 2005. The decrease
is attributed to lower purchases of capital equipment. Cash provided from
financing activities was $103,372 in fiscal year 2005 as compared to using
$33,053 in fiscal year 2005. This increase is primarily attributed to the
increase in proceeds from the exercise of employee stock options.
The Company has a line of credit in the amount of $1,750,000 from Bank of
America, 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, 2006,
the Company had no outstanding balance. The line of credit is
collateralized by substantially all of the assets of the Company. As of
March 31, 2006, the Company was in compliance with all financial covenants
required by the credit agreement. The line of credit expires at September
30, 2006, and the Company anticipates, although no assurance can be given,
that it will be renewed as it has been the last four years.
Based upon the backlog, which was approximately $3,200,000 at March 31,
2006, 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, 2006.
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 evenly over
the life of the contract.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies (continued)
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.
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.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Contractual Obligations and Commitments
At March 31, 2006, the Company's contractual obligations and commitments
to make future payments are as follows:
Payment Due by Period
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
----- ------ --------- --------- -------
Note Payable - Other $ 29,000 $ 29,000 $ -- $ -- $ --
Long-Term Debt Obligations 150,000 50,000 100,000 -- --
Capital Lease Obligations -- -- -- -- --
Operating Leases 754,806 167,893 444,177 142,736 --
Purchase Commitments (1) 715,567 715,567 -- --
Interest on long-term obligations 20,587 8,587 12,000 -- --
Total Contractual Obligations $1,669,960 $971,047 $556,177 $142,736 $ --
(1) Purchase commitments consist primarily of obligations to purchase
certain raw materials to be utilized in the ordinary course of business.
See Notes 8, 12, and 13 to the Financial Statements.
Borrowings
See Note 7 to Notes to Consolidated Financial Statements.
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.
17
Item 8. Financial Statements and Supplementary Data
Pages
-----
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm 19
Consolidated Balance Sheets - March 31, 2006 and 2005 20
Consolidated Statements of Operations - Years Ended 21
March 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders' 22
Equity - Years Ended March 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows - Years Ended 23
March 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements 24-46
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts 47
18
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, 2006 and 2005 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended March 31, 2006. 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, 2006 and
March 31, 2005, and the results of their operations and their cash flows
for each of the three years in the period ended March 31, 2006 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
Woodbridge, New Jersey
May 25, 2006
19
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Balance Sheets
ASSETS March 31, 2006 March 31, 2005
-------------- --------------
Current assets:
Cash and cash equivalents $1,934,541 $ 826,959
Accounts receivable, net of
allowance for doubtful
accounts of $40,994 and $46,206 at
March 31, 2006 and 2005, respectively 1,049,578 1,610,519
Inventories, net 2,102,280 2,926,011
Taxes receivable 82,488 125,674
Prepaid expenses and other
current assets 138,041 124,946
Deferred income tax benefit 720,082 583,560
---------- ----------
Total current assets 6,027,010 6,197,669
Equipment and leasehold
improvements, net 775,065 844,075
Intangible assets, net -- 326,851
Other assets 314,507 302,135
---------- ----------
Total assets $7,116,582 $7,670,730
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable -
related party - current portion $ 50,000 $ 50,000
Convertible subordinated note payable-
related party -- 7,500
Notes payable - other 29,000 58,000
Capitalized lease obligations -- 2,323
Accounts payable 288,525 481,146
Deferred revenues 59,202 88,991
Accrued payroll, vacation pay and
payroll withholdings 391,062 353,704
Accrued expenses - related parties 58,059 60,024
Other accrued expenses 848,793 967,990
---------- ----------
Total current liabilities 1,724,641 2,069,678
Deferred revenues 80,875 80,875
Deferred taxes 43,000 43,000
Convertible note payable - related party 100,000 150,000
---------- ----------
Total liabilities 1,948,516 2,343,553
---------- ----------
Commitments
Stockholders' equity
Common stock, par value $.10 per share,
2,279,381 and 2,187,831 issued and
outstanding as of March 31, 2006 and
2005, respectively 227,941 218,786
Additional paid-in capital 4,251,180 4,024,910
Retained earnings 688,945 1,083,481
---------- ----------
Total stockholders' equity 5,168,066 5,327,177
========== ==========
Total liabilities and stockholders' equity $7,116,582 $7,670,730
========== ==========
The accompanying notes are an integral part of the financial statements
20
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Operations
For the years ended March 31,
------------------------------------------------
2006 2005 2004
---- ---- ----
Net sales $ 11,196,059 $ 10,511,284 $ 10,704,029
Cost of sales 5,729,736 5,030,088 4,977,537
------------ ------------ ------------
Gross margin 5,466,323 5,481,196 5,726,492
Operating expenses:
Selling, general and administrative 3,196,773 3,183,577 2,958,179
Amortization and impairment of intangibles 326,851 86,196 17,958
Engineering, research and development 2,534,497 2,186,828 2,152,515
------------ ------------ ------------
Total operating expenses 6,058,121 5,456,601 5,128,652
------------ ------------ ------------
Income (loss) from operations (591,798) 24,595 597,840
Other income/(expense):
Interest income 23,386 11,851 23,572
Interest expense (2,684) (10,954) (4,388)
Interest expense - related parties (11,775) (11,775) (23,231)
------------ ------------ ------------
Income (loss) before income taxes (582,871) 13,717 593,793
Income tax (benefit) expense (188,335) 42,625 230,883
------------ ------------ ------------
Net income (loss) $ (394,536) $ (28,908) $ 362,910
============ ============ ============
Income (loss) per common share:
Basic $ (0.18) $ (0.01) $ 0.17
============ ============ ============
Diluted $ (0.18) $ (0.01) $ 0.16
============ ============ ============
Weighted average number of shares outstanding
Basic 2,204,476 2,157,729 2,142,416
============ ============ ============
Diluted 2,204,476 2,157,729 2,257,575
============ ============ ============
The accompanying notes are an integral part of the financial statements.
21
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Changes in Stockholders' Equity
Common Stock
Number of Shares Additional
----------------------- Paid-In Retained
Authorized Issued Amount Capital Earnings Total
---------- ------ ------ ------- -------- -----
Balances at April 1, 2003 4,000,000 2,135,801 $ 213,583 $ 3,944,812 $ 749,479 $ 4,907,874
Net income -- -- -- -- 362,910 362,910
Issuance of common stock in connection
with the exercise of stock options -- 8,350 835 16,074 -- 16,909
--------- --------- ----------- ----------- ----------- -----------
Balances at March 31, 2004 4,000,000 2,144,151 214,418 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 2,187,831 218,786 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 2,279,381 $ 227,941 $ 4,251,180 $ 688,945 $ 5,168,066
========= ========= =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
22
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Cash Flows
For the years ended March 31,
-----------------------------
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (394,536) $ (28,908) $ 362,910
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Deferred income taxes (136,522) (34,748) (56,000)
Depreciation 267,022 285,500 269,658
Amortization and impairment of intangibles 326,851 86,196 17,958
Provision for inventory obsolescence 122,685 29,742 28,085
Non-cash stock-based compensation 43,230 -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 560,941 (343,614) 780,342
Decrease (increase) in inventories 701,046 (753,710) 106,979
Decrease (increase) in taxes receivable 43,186 65,795 (161,195)
Increase in prepaid expenses and other assets (14,584) (22,907) (53,036)
(Decrease) increase in accounts payable (192,621) 134,977 (211,713)
Decrease in taxes payable -- -- (103,924)
(Decrease) increase in deferred revenues, and other
accrued expenses (113,593) 210,215 (168,292)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,213,105 (371,462) 811,772
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (198,012) (261,689) (238,000)
Acquisition of business, including acquisition costs -- -- (545,921)
Increase in cash surrender value of life insurance (10,883) (16,665) (17,692)
------------ ------------ ------------
Net cash used in investing activities (208,895) (278,354) (801,613)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 134,695 68,392 16,909
Repayment of convertible notes payable - related party -- (50,000) --
Repayment of note payable (29,000) (29,000) --
Repayment of loan on life insurance policy -- -- (172,426)
Payment of capitalized lease obligations (2,323) (22,445) (24,938)
------------ ------------ ------------
Net cash provided by (used in) financing activities 103,372 (33,053) (180,455)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,107,582 (682,869) (170,296)
Cash and cash equivalents, beginning of year 826,959 1,509,828 1,680,124
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,934,541 $ 826,959 $ 1,509,828
============ ============ ============
Supplemental information:
Taxes paid $ 23,388 $ -- $ 552,000
============ ============ ============
Interest paid $ 20,517 $ 98,314 $ 27,252
============ ============ ============
Notes payable in connection with acquisition of business $ -- $ -- $ 87,000
============ ============ ============
Notes converted into equity $ 57,500 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of the financial statements.
23
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-Instrument 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 privately held Innerspace
Technology, Inc. ("ITI" or "The Company"). 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. The Company
acquired Innerspace Technology, Inc. on January 16, 2004, and financial
statements have been consolidated as of this date.
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.
Shipping and handling costs charged to customers are not material.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
During fiscal year 2006, the Company had a contract with the U.S. Navy for
the delivery of test equipment (AN/APM-480). 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 increase product
performance, and to improve the
24
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies
Revenue Recognition:
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 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. The Company recorded the liability and the expense
to cost of sales. The enhancements made, and to be made to the product,
the Company believes, are relatively insignificant. The Company has
shipped and has been paid for all 1,300 units (approximately $18,200,000
in revenues) through the fiscal year ended March 31, 2006, and the cost of
these enhancements is 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, after 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 is charging costs of
performing the enhancement to the accrued liability as the units are
shipped. As of March 31, 2006, 587 units of the total 1,300 units have
been upgraded.
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.
25
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:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade 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,
2006, the Company believes it has no significant risk related to its
concentration within its accounts receivable. (See Note 14 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.
Engineering, Research and Development Costs:
Engineering, research and development costs are expensed as incurred.
26
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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 and diluted net income (loss) per share available to common
stockholders is presented in conformity with SFAS No. 128, "Earnings per
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.
Stock Option Plans:
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 and 148, "Accounting for
Stock-Based Compensation" ("SFAS 123 and 148"). Under SFAS 123 and 148 the
Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made since 1996 as if the
fair-value-based method as defined in SFAS No. 123 had been applied. The
Company plans to adopt the fair value based method prescribed by SFAS 123R
for the fiscal year ended March 31, 2007.
27
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Stock Option Plan (continued):
The per share weighted-average fair value of stock options granted for the
years 2006, 2005, and 2004 was $1.81, $1.56, and $1.10, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 5% in 2006, 3.5% in 2005 and 2004, volatility
factor of 50%, and an expected life of 5 years. Had the Company 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
are based upon the applicable value for the vested options for each year.
2006 2005 2004
---- ---- ----
Net income (loss) - as reported $ (394,536) $ (28,908) $ 362,910
Stock-based compensation expense
included in reported net loss,
net of taxes 25,960 -- --
Fair value of stock options (73,397) (63,170) (51,056)
----------- ---------- ---------
Net income (loss) - pro forma $ (441,973) $ (92,078) $ 311,854
=========== ========== =========
Basic earnings (loss) per
share - as reported $ (0.18) $ (0.01) $ 0.17
Basic earnings (loss) per
share - pro forma (0.20) (0.04) 0.15
Diluted earnings (loss) per
share - as reported (0.18) (0.01) 0.16
Diluted earnings (loss) per
share - pro forma (0.20) (0.04) 0.14
28
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
1. 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
(including discontinued operations) and it also extends the reporting
requirements for discontinued operations of APB 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," to all components of an entity.
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 Reserve:
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.
29
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 a major contract with the U.S. Government, which like all
government contracts, is subject to termination.
New Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised 2004) (FAS 123R), "Share-based Payment". FAS
123R replaces FASB Statement No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." FAS 123, as originally issued in 1995,
established as preferable a fair-value based method of accounting for
share-based payment transactions with employees. The approach to
accounting for share-based payments in FAS 123R is similar to the
fair-value approach permitted in FAS 123, however, 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values, and the current pro forma disclosure is no longer an alternative
to financial statement recognition. In April 2005, the effective date for
FAS 123R was delayed until the first fiscal year beginning after June 15,
2005. The Company plans to adopt the fair value based method prescribed by
SFAS No. 123R for the fiscal year ended March 31, 2007. (See above for pro
forma disclosure.)
On December 16, 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets", which is an amendment to APB Opinion No. 29. It
states that the exchanges on nonmonetary assets should be measured based
on the fair value of the assets exchanged. Further, FSAS No. 153
eliminates the narrow exception for nonmonetary exchanges of similar
productive assets and replaces it with a broader exception for exchanges
of nonmonetary assets that do not have "commercial substance". SFAS No.
153 is effective for financial statements for fiscal years beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges incurred during fiscal years beginning after the date that this
statement is issued. Management believes the adoption of this Statement
will not have an effect on the consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires retrospective application as the
required method for reporting a change in accounting principle, unless
impracticable or a pronouncement includes specific transition provisions.
SFAS No. 154 also requires that a change in depreciation, amortization or
depletion method for long-lived, nonfinancial assets be accounted for as a
change in accounting estimate effected by a change in accounting
principle. This statement carries forward the guidance in APB Opinion No.
20, "Accounting
30
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued):
Changes," for the reporting of the correction of an error and a change in
accounting estimate. SFAS No. 154 is effective beginning January 1, 2006.
SFAS No. 154 is not expected to have a significant impact on our financial
position, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and
140". SFAS No. 155 resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets". SFAS No. 155 will become
effective for the Company's fiscal year after September 15, 2006. The
impact of SFAS No. 155 will depend upon the nature and extent of any new
derivative instruments entered into after the effective date.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-An Amendment of FASB No. 140", with respect to the
accounting for separately recognized servicing assets and servicing
liabilities. This statement does not currently apply to the Company.
3. Accounts Receivable
The following table sets forth the components of accounts receivable:
March 31,
---------
2006 2005
---- ----
Government $ 548,083 $1,013,771
Commercial 542,489 642,954
Less: Allowance for doubtful accounts (40,994) (46,206)
---------- ----------
$1,049,578 $1,610,519
========== ==========
31
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
4. Inventories
Inventories consist of:
March 31,
---------
2006 2005
---- ----
Purchased parts $1,409,502 $1,452,080
Work-in-process 723,782 1,532,535
Finished goods 212,100 112,036
Less: Reserve for obsolescence (243,104) (170,640)
---------- ----------
$2,102,280 $2,926,011
========== ==========
Work-in-process inventory includes $482,507 and $923,037 for government
Contract contracts at March 31, 2006 and 2005, respectively.
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
March 31,
---------
2006 2005
---- ----
Leasehold Improvements $ 495,826 $ 495,826
Machinery and equipment 1,325,456 1,186,181
Automobiles 16,514 16,514
Sales equipment 489,871 453,304
Rental assets 168,029 145,858
Assets under capitalized leases 367,623 367,623
Less: Accumulated depreciation &
amortization (2,088,254) (1,821,231)
---------- ----------
$ 775,065 $ 844,075
========== ==========
6. Accrued Expenses
Accrued payroll, vacation pay and payroll withholdings consist of the
following:
March 31,
---------
2006 2005
---- ----
Accrued vacation pay $ 231,054 $ 205,806
Accrued salary and payroll withholdings 160,008 147,898
---------- ----------
$ 391,062 $ 353,704
========== ==========
Accrued payroll, vacation pay and payroll withholdings includes $66,885
and $66,221 at March 31, 2006 and 2005, respectively, which is due to
officers.
32
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
6. Accrued Expenses (continued)
Other accrued expenses consist of the following:
March 31,
---------
2006 2005
---- ----
Accrued consulting $ 132,332 $ 51,811
Accrued commissions 124,629 178,611
Enhancement liability 350,581 512,956
Accrued - other 241,251 224,612
---------- ----------
$ 848,793 $ 967,990
========== ==========
The reconciliation of the changes to the enhancement liability (see Note
2, Revenue Recognition) is as follows:
Balance at April 1, 2003 $ 441,738
Fiscal 2004 accrual 63,626
----------
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
==========
Accrued expenses - related parties consists of the following:
March 31,
---------
2006 2005
---- ----
Interest and professional fees to
non-employee officer stockholder $ 23,518 $ 32,443
Interest and other expenses due to
Company's Chairman/President 34,541 27,581
-------- --------
$ 58,059 $ 60,024
======== ========
33
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 8.25% and 6.25% at
March 31, 2006 and 2005, respectively, and the Company has paid no
interest, due to no borrowings, during these periods. 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, 2006 and March 31, 2005, the Company was in compliance with all
financial covenants and had no outstanding borrowings, and made no
borrowings during fiscal years 2006, 2005, and 2004. The line of credit
currently expires at September 30, 2006. The Company has renewed its line
of credit with the bank annually since 2002.
8. Capitalized Lease Obligations
The Company has entered into lease agreements for equipment that meet the
requirements for capitalization. The related obligations are also recorded
in the accompanying balance sheets and are based upon the present value of
the future minimum lease payments with interest rates ranging from 9% to
18%. The net book value of equipment acquired under capitalized lease
obligations amounted to $12,582 and $38,986, respectively, at March 31,
2006 and 2005. As of March 31, 2006 and 2005, accumulated amortization
under capital leases were $355,041 and $328,687, respectively.
As of March 31, 2006 all capital lease obligations have been paid. Total
unpaid lease payments at March 31, 2005 were $2,323.
34
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
9. Intangible Assets
Intangible assets consists of intellectual property, customer lists, and
non-compete agreements acquired and are carried at cost less accumulated
amortization (see Note 10). Amortization is computed using the
straight-line method over the estimated useful life of the respective
assets, five years. The Company has adopted 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
has accounted for its intangibles in accordance with SFAS 144. Under this
standard, 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 components of intangible assets are as follows:
March 31,
---------
2006 2005
---- ----
Intellectual property $ 294,005 $ 294,005
Customer list 50,000 50,000
Non-compete agreement 87,000 87,000
--------- ---------
Total cost of intangible assets 431,005 431,005
Accumulated amortization and impairment 431,005 104,154
--------- ---------
Net $ -0- $ 326,851
========= =========
35
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
10. Acquisition
On January 16, 2004, the Company acquired Innerspace Technology, Inc.
("ITI") for $547,000, including a note and employment agreements with
principals. Additionally, the Company recorded $85,971 in costs associated
with the acquisition, including legal and investment banking fees. ITI has
been in 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. The acquisition was recorded under the purchase
method, whereby ITI's net assets were recorded at estimated fair value and
its operations have been reflected in the statement of operations since
the acquisition date. The allocation of the purchase price was as follows:
Assets:
Accounts receivable $ 80,432
Inventories 75,000
Other current assets 6,446
Property, plant and equipment 173,000
Intangible assets 431,005
----------
Total assets 765,883
==========
Liabilities:
Accounts payable 54,666
Deferred tax liability 57,600
Other accrued expenses 20,646
----------
Total liabilities 132,912
----------
Net investment $ 632,971
==========
The following table represents the unaudited consolidated pro forma
results of operations for the year ended March 31, 2004 as if the
acquisition occurred on April 1, 2003.
Year Ended
March 31, 2004
--------------
Net sales $ 11,386,000
Income before taxes 416,000
Net income 249,808
Basic income per common share 0.12
Diluted income per common share 0.11
36
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
11. Income Taxes
Income tax (benefit) expense:
March 31, March 31, March 31,
--------- --------- ---------
2006 2005 2004
---- ---- ----
Current:
Federal $ (60,971) $ 24,165 $220,482
State and Local 18,754 53,208 66,401
--------- -------- --------
Total Current Tax Provision (Benefit) (42,217) 77,373 286,883
--------- -------- --------
Deferred:
Federal (124,597) (30,048) (47,600)
State and Local (21,521) (4,700) (8,400)
--------- -------- --------
Total (benefit) expense $(188,335) $ 42,625 $230,883
========= ======== ========
The components of the Company's deferred taxes at March 31, 2006 and 2005
are as follows:
March 31, March 31,
--------- ---------
2006 2005
---- ----
Deferred tax assets:
Net operating loss & alternative min
tax carryforwards/credits& credits $ 171,000 $ 115,000
Allowance for doubtful accounts 16,000 18,000
Reserve for inventory obsolescence 98,000 68,000
Inventory capitalization 66,000 59,000
Deferred payroll and accrued interest 70,000 94,000
Non-deductible intangible amortization -- (104,000)
Vacation accrual 92,000 82,000
Enhancement reserve 154,000 208,000
Deferred revenues 55,000 55,000
Covenant not to compete 30,000 5,000
Depreciation (10,000) (33,000)
---------- ----------
Deferred tax asset 742,000 567,000
Less valuation allowance 65,000 26,000
---------- ----------
Deferred tax asset, net $ 677,000 $ 541,000
========== ==========
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
$313,000 at March 31, 2006. 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 carryforwrds, since management does not believe that the realization
of these NOL's is more likely than not.
37
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
11. 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 expense 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,
--------- --------- ---------
2006 2005 2004
---- ---- ----
Income tax expense (benefit)- statutory rate $(198,074) $ 4,664 $201,889
Income tax expenses - state and local,
net of federal benefit (3,380) 32,015 38,280
Federal income tax credit -- -- (14,000)
Non-deductible expenses 15,047 12,452 13,308
Other (1,928) (6,506) (8,594)
--------- -------- --------
Income tax provision (benefit) $(188,335) $ 42,625 $230,883
========= ======== ========
12. 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.
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, 2006, the $50,000 note due was converted into common
stock. The total principal amount outstanding was $150,000 and $200,000 at
March 31, 2006 and 2005, respectively.
38
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
12. Related Party Transactions (Continued)
The Company has obtained legal services from a non-employee
officer/stockholder with the related fees amounting to $111,858, $149,259,
and $157,302 for the years ended March 31, 2006, 2005, and 2004,
respectively. The Company obtained management and marketing services from
a director/stockholder with the related fees amounting to $81,700,
$97,400, and $98,700 for the years ended March 31, 2006, 2005, and 2004,
respectively.
As of March 31, 2000, the Company had outstanding a $15,000 convertible
subordinated note-related party. In March 2002 the holder of this note
converted $7,500 into common stock. In March 2006, the holder of this note
converted the remaining $7,500 into common stock at $1.50 per share. This
note accrued interest semi-annually at a rate of 7%. The subordinated note
was for past professional fees and services provided by an
officer/stockholder of the Company.
13. Commitments
The Company leases 19,654 square feet of 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 an agreement to lease equipment for use in
the operations of the business under operating leases.
The following is a schedule of future minimum rental payments for
operating leases subsequent to the year ended March 31, 2006.
Years Ended March 31,
---------------------
2007 $168,000
2008 145,000
2009 147,000
2010 152,000
2011 143,000
--------
$755,000
========
Total rent expense, including real estate taxes, was approximately
$236,000, $237,000, and $200,000 for the years ended March 31, 2006, 2005
and 2004, respectively.
39
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
14. Significant Customer Concentrations
For the years ended March 31, 2006, 2005, and 2004, sales to the U.S.
Government represented approximately 47%, 37%, and 44%, 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 9%, 10%, and 8% of commercial avionics sales
for the years ended March 31, 2006, 2005, and 2004, respectively.
Additionally, another domestic distributor (Aero Express) accounted for
7%, 15% and 26% of commercial avionics sales for the years ended March 31,
2006, 2005, and 2004, respectively. Another international distributor
accounted for 17%, 20%, and 20% of commercial avionics sales for the years
three ended March 31, 2006, 2005 and 2004, respectively. For the marine
systems division 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, 2006, two individual customer balances represented 34% and
15%, respectively, of the Company's outstanding receivables. As of March
31, 2005, no individual customer represented over 10% of the Company's
outstanding receivables. Receivables from the U.S. Government represented
approximately 1% and 34%, respectively, of total receivables for the
fiscal years ended March 31, 2006 and 2005.
Foreign sales were $2,197,019, $1,938,346, and $1,961,314 for the years
ended March 31, 2006, 2005, and 2004, respectively. All other sales were
to customers located in the U.S.
15. 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 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.
40
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
15. 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, and is subject to shareholder approval. This Plan is expected to be
submitted to the shareholders at the next Annual Meeting
A summary of the status of the Company's stock option plans for the fiscal
years 2006, 2005, and 2004 and changes during the years are presented
below: (in number of options):
Average
Number of Exercise
Options Price
--------- --------
Outstanding options at April 1, 2003 243,250 $1.95
Options granted 102,450 $2.32
Options exercised (8,350) $2.03
Options canceled/forfeited (18,050) $1.82
Outstanding options at March 31,2004 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
Remaining options available for grant were 227,670 and 53,170 as of March
31, 2006 and 2005, respectively.
41
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
15. Stock Option Plans (continued)
As of March 31, 2006, the Company had the following options outstanding:
Number of Weighted Average Options Exercisable
Options Exercise Remaining Contract
Outstanding Price Contract Life (years) At March 31, 2006
----------- -------- --------------------- -----------------
2,000 $ 4.2500 4.2 -0-
1,500 4.1900 4.0 300
2,000 4.1000 4.3 -0-
2,000 3.9700 3.9 400
1,500 3.9500 4.9 -0-
1,000 3.8500 5.0 -0-
3,000 3.8500 4.4 -0-
3,000 3.8500 4.1 600
2,000 3.8000 4.3 -0-
2,000 3.8000 4.1 400
15,000 3.7800 4.4 -0-
2,000 3.7600 3.9 400
18,000 3.7500 3.2 7,200
15,000 3.7400 3.7 3,000
1,500 3.7000 4.6 -0-
2,000 3.7000 3.2 400
1,500 3.7000 3.1 600
1,500 3.6200 3.0 600
3,000 3.6000 3.3 600
1,500 3.5800 4.6 -0-
44,000 3.5500 4.9 -0-
2,000 3.5500 3.8 400
1,500 3.5000 4.7 -0-
2,000 3.5000 3.5 400
2,000 3.5000 3.4 400
1,500 3.4900 3.2 300
3,000 3.4000 4.7 -0-
45,250 3.4000 3.7 16,416
2,000 3.4000 3.5 400
1,500 3.3000 4.8 -0-
2,000 3.3000 4.1 400
4,000 3.1900 3.1 1,600
1,500 3.1900 3.0 600
1,500 3.1500 2.9 600
1,500 3.1000 2.8 600
16,000 3.0500 2.8 6,400
2,000 2.9500 3.6 400
1,500 2.9000 2.7 600
1,500 2.850 3.6 300
1,500 2.750 3.4 300
1,500 2.5500 2.7 600
3,000 2.5000 2.2 1,200
40,250 2.4000 2.6 16,100
1,500 2.4000 2.2 600
35,000 2.3100 1.4 21,000
42
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
15. Stock Option Plan (continued)
Number of Weighted Average
Options Exercise Remaining Options Exercisable
Outstanding Price Contract Life (years) At March 31, 2006
----------- -------- --------------------- -------------------
1,500 2.3000 2.4 600
3,000 2.2500 1.4 1,800
1,500 2.2500 2.4 600
3,000 2.2500 1.2 1,800
2,000 2.1500 2.6 800
1,500 2.1000 2.4 600
17,900 2.0900 0.7 17,900
1,500 2.0500 1.9 900
19,200 2.0000 1.7 11,520
1,200 1.8500 1.8 720
10,000 1.8300 0.2 10,000
1,500 1.8200 2.1 900
24,250 1.8000 0.2 24,250
1,500 1.8000 2.4 600
8,800 1.7100 0.6 8,800
1,500 1.5000 1.9 900
------- -------
399,850 166,806
======= =======
As of March 31, 2006, 2005, and 2004, 166,806, 141,230, and 112,450,
respectively, of options were outstanding, vested, and exercisable.
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.
16. Net Income (Loss) Per Share Attributable to Common Stockholders
Fiscal Years Ended
March 31, 2006 March 31, 2005 March 31, 2004
-------------- -------------- --------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common
Stockholders $ (394,536) $ (28,908) $ 362,910
Weighted-average common shares outstanding 2,204,476 2,157,729 2,142,416
Basic net income (loss) per share
attributable to common stockholders $ (0.18) $ (0.01) $ 0.17
Diluted net income (loss) per
share computation:
Net income (loss) attributable to common
Stockholders $ (394,536) $ (28,908) $ 362,910
Weighted-average common shares outstanding 2,204,476 2,157,729 2,142,416
Incremental shares attributable to the assumed
exercise of outstanding options -- -- 115,159
Total adjusted weighted-average common shares 2,204,476 2,157,729 2,257,575
Diluted net income (loss) per share
attributable to common stockholders $ (0.18) $ (0.01) $ 0.16
Incremental shares of 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 2006 and 2005,
respectively, as their effect would have been anti-dilutive due to the
losses incurred in these period. All shares attributable to options were
included in 2004.
43
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
17. Segment Information
Information is presented for the Company's three reportable segments,
avionics government, avionics commercial, and marine systems. Marine
systems information includes information beginning January 16, 2004, the
date of acquisition. 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.
The Company's marketing 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 system 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:
Corporate/
Avionics Avionics Avionics Marine Reconciling
2006 Government Commercial Total Systems Items Total
---- ---------- ---------- ----- ------- ----------- -----
Revenues $ 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
Development 2,337,696 196,801 2,534,497
Selling, general, and admin. 1,366,207 416,612 1,413,954 3,196,773
Amortization and impairment
of intangibles -- -- 326,851 326,851
Interest(income)expense net (9,074) 147 -- (8,927)
------------ ---------- ------------ -----------
Income (loss) before income
taxes $ 1,472,836 $ (314,902) $ (1,740,805) $ (582,871)
------------ ---------- ------------ -----------
Segment Assets $ 1,030,590 $ 471,075 $ 610,984 $ 5,003,933 $ 7,116,582
============ ============ ========== ============ ===========
44
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
17. Segment Information (Continued)
Corporate/
Avionics Marine Reconciling
2005 Government Commercial Total Systems Items Total
---- ---------- ---------- ----- ------- ----------- -----
Revenues $ 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
------------ ---------- ----------- -----------
Segment Assets $ 1,936,808 $ 1,037,012 $ 505,981 $ 4,190,929 $ 7,670,730
============ ============ ========== =========== ===========
Corporate/
Avionics Marine Reconciling
2004 Government Commercial Total Systems Items Total
---- ---------- ---------- ----- ------- ----------- -----
Revenues $ 6,665,193 $ 3,893,978 10,559,171 $ 144,858 $ -- $ 10,704,029
Cost of Sales 2,833,579 2,046,784 4,880,363 97,174 -- 4,977,537
------------ ------------ ------------ ---------- ----------- -----------
Gross Margin 3,831,614 1,847,194 5,678,808 47,684 -- 5,726,492
------------ ------------ ------------ ---------- -----------
Engineering, research, and 2,115,927 36,588 2,152,515
Development
Selling, general, and admin. 1,369,624 75,140 1,513,415 2,958,179
Amortization of intangibles 17,958 17,958
Interest expense, net 4,047 -- -- 4,047
------------ ---------- ----------- -----------
Income (loss) before income
taxes $ 2,189,210 $ (64,044) $(1,531,373) $ 593,793
------------ ---------- ----------- -----------
Segment Assets $ 1,362,304 $ 1,311,323 $ 231,066 $ 4,487,808 $ 7,392,501
============ ============ ========== =========== ===========
Foreign sales were $2,197,019, $1,938,346, and $1,961,314 for the years
ended March 31, 2006, 2005, and 2004, respectively. All other sales were
to customers located in the U.S.
45
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
18. Quarterly Results of Operations (Unaudited)
Quarterly consolidated data for the years ended March 31, 2006 and 2005 is
as follows:
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 profit 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)
Diluted earnings (loss) per share 0.01 0.02 0.04 (0.25)
Quarter Ended
----------------------------------------------------------------------
FY 2005 June 30 September 30 December 31 March 31
Net sales $ 2,812,800 $ 2,238,950 $ 2,782,090 $ 2,677,444
Gross profit 1,477,560 1,212,539 1,549,686 1,241,411
Income (loss) before taxes 87,517 (131,777) 69,771 (11,794)
Net Income (loss) 52,554 (79,133) 42,046 (44,375)
Diluted earnings (loss) per share 0.02 (0.04) 0.02 (0.01)
Revenues in the fourth quarter of fiscal year 2006 were substantially lower than
quarterly amounts reported for the first three quarters of the current fiscal
year and also the previous year 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. With respect to existing
business, commercial sales remain depressed and several medium-sized military
orders have been delayed. Expenses include approximately $300,000 in accounting
and restructuring charges associated with its ITI subsidiary. Research and
Development costs remained high due to the cost of finalizing the design for the
new AN/USM-708 (CRAFT) next generation multi-function test set for the U.S. Navy
46
TEL-INSTRUMENT ELECTRONICS CORP
Schedule II - Valuation and Qualifying Accounts
Balance
Balance at Charged to at
Beginning Costs and End of the
Description of the Year Expenses Deductions Year
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
======== ======== ======== ========
Year ended March 31, 2004:
Allowance for doubtful
Accounts $ 36,598 $ 5,000(1) $ -- $ 41,598
======== ======== ======== ========
Allowance for obsolete
Inventory $112,813 $ 28,085 $ -- $140,898
======== ======== ======== ========
(1) Amount related to acquired company.
47
TEL-INSTRUMENT ELECTRONICS CORP
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has had no disagreements with its auditors as defined in Item
304 of Regulation S-K.
Item 9a. Controls and Procedures
The Company adopted disclosure controls and procedures, as called for by
the recently adopted legislation and rules of the Securities and Exchange
Commission. Under Rules promulgated by the SEC, disclosure controls and
procedures are defined 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, 2006 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, 2006 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.
48
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
(80) President and Chief Executive
Officer since 1982.
George J. Leon (2) (3) Director; Investment 1986
(62) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.
Robert J. Melnick Director; Vice 1998
(72) President since 1999;
Marketing and Management Consultant
for the Company since 1991.
Jeffrey C. O'Hara, CPA (1) (2) (3) Director; Vice President since 1998
(48) 2005; 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.
49
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; Mr. O'Hara withdrew as a formal
member of the committee at the end of fiscal year 2004. Mr.
Rice was appointed to the committee in 2004.
(3) Member of the Compensation Committee. Mr. O'Hara withdrew as a
formal member of the committee at the end of fiscal year 2004.
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.
Beneficial Ownerships Reporting Compliance
Registrant became subject for the first time to the reporting requirements
under Section 16 of the Securities Exchange Act of 1934 on February 10,
2004, and as of March 31, 2006, 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.
50
TEL-INSTRUMENT ELECTRONICS CORP
Item 10. Directors and Executive Officers of the Registrant (Continued
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.
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 2005 non-employee
directors received the following compensation pursuant to this plan.
Cash Compensation Stock Options
----------------- -------------
George J. Leon $ 9,375 7,500
Jeffrey C. O'Hara (1) $ 2,500 2,500
Robert A. Rice $ 8,125 6,500
Robert H. Walker $ 9,375 7,500
(1) Effective August 2005 Mr. O'Hara became Vice President and Director of
Operations of the Company, and was, therefore, no longer considered an
outside director.
Other Officers
Donald S. Bab Secretary and General Counsel since 1982.
(70)
Joseph P. Macaluso Principal Accounting Officer since August 2002.
(54) Director - Finance and Administration for the
Company since February 1999. Chief Financial
Officer of Electro-Catheter Corp from 1987-1999.
51
Item 11. Executive Compensation
The following table and accompanying notes set forth information
concerning compensation for the fiscal years ended March 31, 2006, 2005,
and 2004.
Stock (2) Other
Name and Principal position(1) Year Salary Options Compensation
------------------------------ ---- ------ ------- ------------
Harold K. Fletcher 2006 $159,000 -- --
Chairman of the Board 2005 $154,400 15,000 options(3) --
President and Chief 2004 $154,400 -- $13,000
Executive Officer
Jeffrey C. O'Hara(4) 2006 $75,600(4) 15,000 options(3) --
Vice President 2005 -- -- --
2004 -- -- --
(1) Robert J. Melnick, Vice President and director, serves pursuant to a
consulting contract that provided $81,700, $97,400, and $98,700 in
compensation for each of the fiscal years 2006, 2005, and 2004,
respectively, and has received options to purchase 10,000 shares of
common stock exercisable at the market price on the date of grant.
(2) Represents bonus based on the Company's profitability. See Note 12
of Notes to Consolidated Financial Statements for related party
transactions. The Company also pays medical and life insurance
premiums for all its employees, which are not included above.
(3) The options are exercisable at 110% of the market price on the date
of grant. Options are exercisable 20% at each of the first, second
and third anniversary of the grant and 40% at the fourth year.
(4) Mr. O'Hara is employed at annual salary of $108,000 per annum.
(5) Employee stock options, see Note 15 to Notes to Consolidated
Financial Statements.
Stock Option Grants
The following table sets forth information regarding grants of stock options to
executive officers during 2006.
Individual Grants Grant Date Value
---------------------------------------------------------------------------- ----------------
% of Total
Options
Number of Granted to Exercise
Securities Underlying Employees in Price Expiration Grant Date
Name Options Granted Fiscal Year Per Share Date Present Value ($)
---- --------------------- ------------- -------- ---------- -----------------
Jeffrey C. O'Hara 15,000(1) 17 $3.78 8/15/10 28,157(2)
(1) The stock options granted to Mr. O'Hara on August 15, 2005 were
Incentive Stock options granted pursuant to the Company's 2003 Stock
Plan. Such options become exercisable cumulatively at a rate of 20%,
20%, 20%, and 40% on August 15, 2006, August 15, 2007, August 15,
2008, and August 15, 2009, respectively. Mr. O'Hara was also granted
options for 2,000 shares as an outside director prior to becoming
Vice President and Director of Operations.
(2) The fair value of these options on the date of grant was estimated
using the Black-Scholes option-pricing model with the following
assumptions volatility of 50%; risk-free interest rate of 5%,
expected life of 5 years; and no future dividends. The dollar amount
in this column is not intended to forecast potential future
appreciation, if any, of the Company's Common Shares.
52
Item 11. Executive Compensation (Continued)
Aggregate Options Held and Year-End Option Table
The following table provides information on options held (no option were
exercised) during 2006 by the named executive officers and the value of each of
their respective unexercised options at March 31, 2006.
Aggregated Option Held in Last Fiscal Year and FY-end Option
(A) (B) (C) (D) (E)
Number of Value of Unexercised
Unexercised Options In-the-Money Options
FY-End (#) FY-End ($) (1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
---- --------------- ------------ ------------- -------------
Harold K. Fletcher -- -- 24,000/26,000 $15,640/$22,890
Jeffrey C. O'Hara -- -- 13,880/32,120 $9,952/$15,138
(1) Calculated on the basis of fair market value of the underlying securities
at March 31, 2006 less the exercise price.
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.
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 is expected to be submitted to the shareholders
at the next Annual Meeting.
Additionally, the Company has individual employment agreements with ten
individuals for the grant of 65,000 stock options with a weighted average
exercise of $3.06 per share. These option grants have been approved by the
directors, but not by the shareholders, and were included as consideration for
their employment.
53
Item 11. Executive Compensation (Continued)
Equity Compensation Plan Information (continued)
The following table provides information as of March 31, 2006 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 356,350 $2.81 21,170
--------------------------------------------------------------------------------------------------
Equity Compensation Plans
not approved by
shareholders 43,500 $3.56 206,500
--------------------------------------------------------------------------------------------------
Total 399,850 $2.89 227,670
--------------------------------------------------------------------------------------------------
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. None 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, 2006, 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 540,102 (2) 23.4%
728 Garden Street
Carlstadt, NJ 07072
George J. Leon, Director 325,147 (3) 14.2%
116 Glenview
Toronto, Ontario, Canada M4R1P8
Robert J. Melnick, Director 39,600 (4) 1.7%
57 Huntington Road
Basking Ridge, NJ 07920
Jeffrey C. O'Hara, Director 127,980 (5) 5.6%
853 Turnbridge Circle
Naperville, IL 60540
Robert A. Rice 77,500 (6) 3.4%
5 Roundabout Lane
Cape Elizabeth, ME 04107
Robert H. Walker, Director 45,263 (7) 2.0%
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 1,263,139 (8) 53.3%
as a Group (8 persons)
55
TEL-INSTRUMENT ELECTRONICS CORP
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
(1) The class includes 2,279,381 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 24,000
subject to currently exercisable stock options.
(3) Includes 308,267 shares owned by the George Leon Family Trust, of
which Mr. Leon is trustee and a beneficiary, and 14,480 shares
subject to currently exercisable stock options. Mr. Leon disclaims
beneficial ownership of the shares owned by the trust.
(4) Includes 6,000 shares subject to currently exercisable stock options
(5) Includes 13,880 shares subject to currently exercisable stock
options.
(6) Includes 1,500 shares subject to currently exercisable stock options
(7) Includes 14,480 shares subject to currently exercisable stock
options.
(8) Includes 88,840 shares subject to currently exercisable options held
by all executive officers and directors of the Company (including
those individually named above).
Item 13. Certain Relationships and Related Transactions
The disclosures required by this item are contained in Note 12 to Notes to
Consolidated Financial Statements included on pages 35 and 36 of this
document.
56
TEL-INSTRUMENT ELECTRONICS CORP
Item 14. Principal Accountant Fees and Services
For the fiscal years ended March 31, 2006 and 2005, professional services
were performed by BDO Seidman, LLP, the Company's independent registered
public accountant. Fees paid for those years were as follows:
2006 2005
---- ----
Audit Fees $83,000 $73,000
Audit-Related Fees -- 2,800
------- -------
Total Audit and Audit-Related Fees 83,000 75,800
Tax Fees -- --
All Other Fees -- --
------- -------
Total $83,000 $75,800
======= =======
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. Fees of $2,800 were paid in 2005. No fees were paid in
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 ending March 31, 2006, 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.
57
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 19
Consolidated Balance Sheets - March 31, 2006 and 2005 20
Consolidated Statements of Income - Years Ended 21
March 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders' 22
Equity - Years Ended March 31, 2006,
2005 and 2004
Consolidated Statements of Cash Flows - Years Ended 23
March 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements 24-46
(2) Financial Statement Schedule 47
II - Valuation and Qualifying Accounts
58
TEL-INSTRUMENT ELECTRONICS CORP
Item 15. Exhibits and Financial Statement Schedules (continued)
c.) Exhibits identified in parentheses below on file with the Securities
and Exchange Commission, are incorporated herein by reference as
exhibits hereto.
--------------------------------------------------------------------------------
* (3.1) Tel-Instrument Electronics Corp's Certificate of
Incorporation, as amended.
--------------------------------------------------------------------------------
* (3.2) Tel-Instrument Electronics Corp's By-Laws, as amended.
--------------------------------------------------------------------------------
* (3.3) Tel-Instrument Electronics Corp's Restated Certificate of
Incorporation dated November 8, 1996.
--------------------------------------------------------------------------------
* (4.1) Specimen of Tel-Instrument Electronics Corp's Common Stock
Certificate.
--------------------------------------------------------------------------------
* (10.1) 7%, $30,000 Convertible Subordinated Note dated March 31,
1992 between Registrant and Donald S. Bab.
--------------------------------------------------------------------------------
* (10.2) Distributor Agreement with Muirhead Avionics & Accessories
Ltd.
--------------------------------------------------------------------------------
* (10.3) Naval Air Warfare Center Aircraft Division Contract No.
N68335-97-D-0060
--------------------------------------------------------------------------------
* (10.4) Lease dated March 1, 2001 by and between Registrant and 210
Garibaldi Group.
--------------------------------------------------------------------------------
* (10.5) Agreement with Semaphore Capital Advisors dated November
28, 2001 and amendment dated as of June 1, 2002.
--------------------------------------------------------------------------------
* (10.6) 10% convertible subordinated note between Registrant and
Harold K. Fletcher.
--------------------------------------------------------------------------------
* (10.7) 1998 stock option plan and option agreement.
--------------------------------------------------------------------------------
(*) (10.8) Purchase agreement between Registrant and Innerspace
Technology
--------------------------------------------------------------------------------
* (10.9) Agreement between Registrant and Semaphore Capital Advisors,
LLC
--------------------------------------------------------------------------------
* (10.10) 2003 Stock Option Plan
--------------------------------------------------------------------------------
(23.1) Consent of Independent Registered Public Accounting Firm
--------------------------------------------------------------------------------
(31.1) Certification by CEO pursuant to Rule 15d-14 under the
Securities Exchange Act.
--------------------------------------------------------------------------------
(31.2) Certification by CFO pursuant to Rule 15d-14 under the
Securities Exchange Act.
--------------------------------------------------------------------------------
(32.1) Certification by CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
--------------------------------------------------------------------------------
(32.2) Certification by CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
--------------------------------------------------------------------------------
* Incorporated by reference to Registration 33-18978 dated November 7, 1988.
The Company will furnish to a stockholder, upon request, any exhibit at
cost.
59
TEL-INSTRUMENT ELECTRONICS CORP
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
(Registrant)
Dated: July 11, 2006 By: /s/ Harold K. Fletcher
-----------------------
President and Director
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated and by signature hereto.
Signature Title Date
--------- ----- ----
/s/ Harold K. Fletcher Director July 11, 2006
-------------------------
/s/ Harold K. Fletcher
/s/ Joseph P. Macaluso Principal Accounting Officer July 11, 2006
-------------------------
/s/ Joseph P. Macaluso
/s/ George J. Leon Director July 11, 2006
-------------------------
/s/ George J. Leon
/s/ Robert J. Melnick Director July 11, 2006
-------------------------
/s/ Robert J. Melnick
/s/ Jeffrey C. O'Hara Director July 11, 2006
-------------------------
/s/ Jeffrey C. O'Hara
/s/ Robert A. Rice Director July 11, 2006
-------------------------
/s/ Robert A. Rice
/s/ Robert H. Walker Director July 11, 2006
-------------------------
/s/ Robert H. Walker
60