-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LLK0f/X4qHEPH90f541lVIiSGZNOFOzsqRiwEu00e+e+TBrsBqayOVM6EJxiT5YA atpUjrwSWWpwlylIToXAXg== 0001108890-08-000161.txt : 20080714 0001108890-08-000161.hdr.sgml : 20080714 20080714165811 ACCESSION NUMBER: 0001108890-08-000161 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080714 DATE AS OF CHANGE: 20080714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEL INSTRUMENT ELECTRONICS CORP CENTRAL INDEX KEY: 0000096885 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 221441806 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31990 FILM NUMBER: 08951173 BUSINESS ADDRESS: STREET 1: 728 GARDEN ST CITY: CARLSTADT STATE: NJ ZIP: 07072 BUSINESS PHONE: 2019331600 MAIL ADDRESS: STREET 1: 728 GARDEN ST CITY: CARLSTADT STATE: NJ ZIP: 07072 10-K 1 telinstrument10k033108.txt PERIOD ENDED 03-31-08 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 2008 Commission File No. 33-18978 TEL-INSTRUMENT ELECTRONICS CORP ---------------------------------------------------- (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: 2,439,261 shares of Common Stock were outstanding as of July 3, 2008. 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, a non-accelerated filer, or a small reporting company. See definition of "large accelerated filer", "accelerated filer" , and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer[ ] Accelerated filer[ ] Non-accelerated filer[ ] Smaller reporting company X (Do not check if smaller reporting company) Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes No X ----- ----- The aggregate market value of the voting Common Stock (par value $.10 per share) held by non-affiliates on September 30, 2007 (the last business day of our most recently completed second fiscal quarter) was $3,937,608 using the closing price on September 30, 2007. PART I ------ 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 manufactures and sells instruments to test and measure, and calibrates and repairs a wide range of airborne navigation and communication equipment. Tel's instruments are used to test navigation and communications equipment installed in aircraft, both on the flight line ("ramp testers") and in the maintenance shop ("bench testers"), and range in list price from $7,500 to $85,000 per unit. Tel continues to develop new products in anticipation of customers' needs and to maintain its strong market position. Its development of multifunction testers, for example, has made it easier for customers to perform ramp tests with less operator training, fewer test sets, and lower product support costs. In recent years the Company has become a major manufacturer and supplier of IFF (Identification Friend or Foe) flight line test equipment, and recently was awarded major military contracts, CRAFT ("Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline Tester") and ITATS ("Intermediate Level TACAN Test Set") (see below), incorporating new technology. Over the last few years, the Company has won competitive awards for two major contracts for new products, CRAFT or AN/USM-708 and ITATS or "AN/ARM-206, from the U.S. Navy. These contracts include multi-year production deliveries, and the Company expects that production shipments under these programs will commence in calendar year 2009. However, the Company has started to ship the initial pilot production units in July 2008. If the production options are exercised in full, these programs have an aggregate revenue value of approximately $40 million over the next few years. The products under these contracts represent cutting edge technology, and should provide Tel with a competitive advantage for years to come. The AN/USM-708 or CRAFT is a key product for the Company as it represents a cutting edge technology product, and is currently the only IFF Mode 5 flight line test set under contract with the U.S. Military. The AN/USM-708 contract was competitively awarded to the Company by the United States Navy, and was recently modified to increase the potential number of units to 1,200. This modified contract is approximately a $27 million multi-year, firm-fixed-price, indefinite-delivery/indefinite-quantity contract for the systems engineering, design and integration, fabrication, testing, and production of an AN/USM-708 test set with sonobuoy simulator capabilities. The AN/USM-708 CRAFT unit combines advanced IFF (including Mode 5) navigation, communication, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. The engineering design is currently being finalized. These units will undergo design validation testing in late calendar year 2008, with production scheduled to begin in calendar year 2009. In March 2008, the Company was awarded an additional $2.2 million purchase order from the U.S. Navy for 83 AN/USM-719 flight line test sets and associated documentation. The AN/USM-719 is a CRAFT variant for IFF only. This increases the number of pilot production orders from 15 to 98 units. These 98 units are expected to be substantially completed during the 2008 calendar year. Item 1. Description of Business - ------- ----------------------- General (continued) ------------------- The contract for the AN/USM-708/AN/USM-719 is a significant milestone for the Company, because the development of this technology, which has been funded by the Company, will establish Tel's position as a leader in the industry, and will meet the U.S. Navy's test requirements for years to come. The Company believes that, given the unique nature of this design, this product could generate sales to other military customers. The Company has already received orders for a limited number of units of this product for a modified CRAFT test set from customers other than the U.S. Navy. The AN/USM-708 contract also includes options for testing encrypted communications, which, if exercised, could represent a major expansion in the Company's core business. The AN/ARM-206 or ITATS is a bench test set combining advanced digital technology with state of the art automated testing capabilities. This product will represent an important expansion to Tel's current product line, and the automated testing capabilities will represent a significant labor savings benefit to our customers. This contract has options for approximately 180 units with a total value of over $12 million; the initial work authorization was $4.4 million. Tel is working with an engineering sub-contractor and, as a result, this program will entail a much lower level of Tel engineering design effort than the AN/USM-708, and a lower gross profit margin, until the design is completed and validated, and production orders are received and delivered. Given the unique nature of the design, this unit could also generate significant sales to other military customers, both domestically and overseas. Tel's earlier models ("Legacy Products") have also been selling well and the Company was recently awarded two large contracts from the U.S. Army for the T-30D and the T-47N. In January, 2004, the Company acquired privately held Innerspace Technology, Inc. ("ITI"). ITI has been in the marine instrumentation systems business for over 30 years designing, manufacturing and distributing a variety of shipboard and underwater instruments to support hydrographers, oceanographers, researchers, engineers, geophysicists, and surveyors worldwide. As a result of the lack of growth in this business, and the anticipated growth of the avionics business, the Company has decided to terminate this business and focus on the avionics segment. As a result, in fiscal year 2008, the Company treated ITI as discontinued operations, and wrote-off the remaining assets of this division (see Notes to the Consolidated Financial Statements). No plans have yet been finalized as to the disposition of the ITI assets or business. Competition The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets. The general aviation market consists of some 1,000 avionics repair and maintenance service shops, at private and commercial airports in the United States, which purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines. The civilian market for avionic test equipment is dominated by two manufacturers, Tel and Aeroflex, which is substantially larger than Tel. This market is relatively small and highly competitive. Tel has been successful because of its high quality, new technology, user friendly products and competitive prices. 2 Item 1. Description of Business - ------- ----------------------- General (continued) ------------------- Competition (continued) ----------------------- The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex. Tel competitively bids for government contracts on the basis of the uniqueness of its products and "small business set asides" (i.e., statutory provisions requiring the military to entertain bids only from statutorily defined small businesses), and on bids for sub-contracts from major government suppliers. There are a limited number of competitors who are qualified to bid for "small business set asides." The military market consists of many independent purchasing agencies and offices. The process of awarding contracts is heavily regulated by the Department of Defense. In recent years the Company has won several large, competitively bid contracts from the government and has become an important supplier for the U.S. Military, as well as the NATO countries, for flight line IFF test equipment. The AN/USM-708 program, discussed above, involves a new generation of technology, including the next generation of IFF testing, and is expected to allow the Company to continue to be a major supplier of avionics test equipment to the military for years to come. Tel believes its new technology will also allow it to increase sales to the commercial market in the future. Marketing and Distribution -------------------------- Domestic commercial sales are made throughout the U.S. to commercial airlines and general aviation businesses directly or through distributors. No direct commercial customer accounted for more than 10% of commercial sales in fiscal years 2008 and 2007. Domestic distributors receive a 15%-20% discount for stocking, selling, and, in some cases, providing product calibration and repairs. Tel gives a 5% to 15% discount to non-stocking distributors, and to independent sales representatives, depending on their sales volume and promotional effort. Avionics International and Aero Express, independent domestic distributors, accounted for 14% and 12%, and 6% and 12% of commercial sales, respectively, for the years ended March 31, 2008 and 2007, respectively. Dallas Avionics, an independent domestic distributor, accounted for 10% and 16% of total commercial sales for the years ended March 31, 2008 and 2007, respectively. The loss of any of one these distributors would not have a material adverse effect on the Company or its operations. Marketing to the U.S. Government is made directly by employees of the Company or through independent sales representatives, who receive similar commissions to the commercial distributors. For the years ended March 31, 2008 and 2007, sales to the U.S. Government, including shipments through the government's logistics center, represented approximately 45% and 27%, respectively, of net avionics sales. One direct government customer (Boeing Corp.) accounted for 13% of government sales in fiscal year 2007. No direct government customers represented over 10% of government sales for fiscal year 2008. International sales are made throughout the world to government and commercial customers, direct, through American export agents, or through the Company's overseas distributors at a discount reflecting a 20% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics and Accessories, Ltd, based in the United Kingdom, to represent the Company in parts of Europe, and with Milspec Services in Australia and New Zealand. Muirhead accounted for approximately 6% and 4% of commercial sales for the years ended March 31, 2008 and 2007, respectively. In addition, Muirhead sells to government customers. 3 Item 1. Description of Business - ------- ----------------------- General (continued) ------------------- Marketing and Distribution (continued) -------------------------------------- Tel also sells its products through exclusive distributors in Spain, Portugal, and the Far East and is exploring distribution in other areas. For the years ended March 31, 2008 and 2007 total international sales were 20% and 19%, respectively, of total sales. Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. For the fiscal year ended March 31, 2007, sales to M.P.G. Instruments s.r.l represented 13% of total domestic and foreign government sales. The Company continues to explore additional marketing opportunities in other parts of the world, including the Far East. The Company has no material assets overseas. Tel also provides customers with calibration and repair services. Future domestic market growth, if any, will be affected in part by whether the U.S. Federal Aviation Administration (FAA) implements plans to upgrade the U.S. air traffic control system and by continuing recent industry trends towards more sophisticated avionics systems, both of which would require the design and manufacture of new test equipment. The weak financial condition of the commercial airline industry also impacts growth in this segment. The military market is affected by additional requirements by the Department of Defense. The Company believes its test equipment is recognized by its customers for its quality, durability, reliability, affordability, and by its advanced technology. Backlog ------- Set forth below is Tel's avionics backlog at March 31, 2008 and 2007. Commercial Government Total ---------- ---------- ----- March 31, 2008 $ 61,500 $ 7,144,235 $ 7,205,735 March 31, 2007 $ 660,027 $ 8,863,006 $ 9,523,033 Tel believes that most of its backlog at March 31, 2008 will be delivered during the next two fiscal years. The decrease in government backlog is mostly attributed to percentage of completion revenues on the $4.4 million order for the ITATS program, which converts orders to sales more rapidly. The decrease in commercial backlog is due to the timing of orders from domestic distributors and that most commercial orders are filled in less than 12 months. All of the backlog is pursuant to purchase orders and all of the government contracts are fully funded. However, government contracts are always susceptible to termination for convenience by the government. Historically, the Company obtains orders which are required to be filled in less than 12 months, and therefore, these anticipated orders are not reflected in the backlog. During the first quarter of fiscal year 2009, the Company received three large orders totaling approximately $1.3 million for its T-30D and T-47N products, and an order for approximately $994,000 to upgrade 125 AN/APM-480's to T-47N's. Suppliers --------- Tel obtains its purchased parts from a number of suppliers. These materials are standard in the industry, and the Company foresees no difficulty in obtaining purchased parts, as needed, at acceptable prices. 4 Item 1. Description of Business - ------- ----------------------- General (continued) ------------------- Patents and Environmental Laws ------------------------------ Tel has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws. Engineering, Research, and Development -------------------------------------- In the fiscal years ended March 31, 2008 and 2007 Tel spent $2,790,961 and $2,427,839, respectively, on the engineering, research, and development of new and improved products. None of these amounts was sponsored by customers. Tel's management believes that continued significant expenditures for engineering, research, and development are necessary to enable Tel to expand its products, sales, and profits, and to remain competitive. However, the current level of engineering expenses is projected to decline as the development phase of the AN/USM-708 program ends. Engineering, research, and development expenditures in fiscal 2008 were directed primarily to the continued development of the new AN/USM-708 (CRAFT) next generation multi-function test set for the U.S. Navy, including the next generation of IFF testing sets, and the incorporation of other product enhancements in existing designs. The Company owns all of these designs. Personnel --------- At July 3, 2008, Tel had 23 full-time employees in manufacturing, materials management, and quality assurance, 15 in administration and sales, including customer services and product support, and 13 in engineering, research and development, none of whom belongs to a union. The Company also utilized 1 part-time individual in manufacturing and 1 in administration. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. At July 3, 2008, the Company utilized 3 independent consultants in sales, and 4 in engineering. Tel has been successful in attracting skilled and experienced management and scientific personnel. Item 2. Properties - ------- ---------- The Company leases 19,564 square feet in Carlstadt, New Jersey as its manufacturing plant and administrative offices, pursuant to a ten-year lease expiring in February, 2011 (see Note 10 to the Notes to the Consolidated Financial Statements). The current facilities are adequate for the Company's needs, currently and for the near future. Tel is unaware of any environmental problems in connection with its location and, because of the nature of its manufacturing activities, does not anticipate such problems. Item 3. Pending Legal Proceedings - ------- ------------------------- 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. 5
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. On June 30, 2008, the closing share price on the Amex was $4.15. The following table sets forth the high and low per share sale prices for our common stock for the periods indicated as reported for fiscal years 2008 and 2007 by the Amex: Fiscal Year Ended March 31, High Low ----------------------- ------ ----- 2007 ---- First Quarter 3.49 1.95 Second Quarter 3.07 1.86 Third Quarter 3.20 2.20 Fourth Quarter 3.60 2.91 2008 ---- First Quarter 3.85 3.50 Second Quarter 3.80 3.35 Third Quarter 4.24 3.65 Fourth Quarter 4.24 3.68 During fiscal year 2008, the Company issued 63,400 shares of common stock upon exercise of stock options granted pursuant to its 1998, 2003 and 2006 Employee Stock Option Plans for an aggregate $138,345 which was added to working capital. All of the shares were issued pursuant to our S-8 Registration Statement filed on August 18, 2005. See Note 13 to the Notes to the Consolidated Financial Statements and Item 11, Executive Compensation, for information on the Company's Employee Stock Option Plans of 1998, 2003 and 2006. In each of fiscal year 2008 and 2007 Mr. Harold K. Fletcher, CEO, converted a $50,000 convertible note due into 20,000 shares of common stock at $2.50 per share. These shares were sold pursuant to Section 4(2) of the Securities Act of 1933, and are restricted. These conversions reduced the Company's liabilities by $50,000 each year. The following table provides information as of March 31, 2008 regarding compensation plans under which equity securities of the Company are authorized for issuance. ----------------------------- ----------------------- ----------------------- ------------------------------- Number of securities Weighted average Number of options remaining Plan category to be issued upon exercise price of available for future exercise of options options issuance under Equity Compensation Plans ----------------------------- ----------------------- ----------------------- ------------------------------- Equity Compensation Plans approved by shareholders 348,300 $3.33 179,370 ----------------------------- ----------------------- ----------------------- ------------------------------- Equity Compensation Plans not approved by -- -- -- shareholders ----------------------------- ----------------------- ----------------------- ------------------------------- Total 348,300 $3.33 179,370 ----------------------------- ----------------------- ----------------------- ------------------------------- Approximate number of equity holders ------------------------------------ Number of Holders Title of Class of record as of March 31, 2008 --------------------------------------------------------------------- Common Stock, par value $.10 per share 279 Dividends --------- Registrant has not paid dividends on its Common Stock and does not expect to pay such dividends in the foreseeable future. 6
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- 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 Critical Accounting Policies noted below. The Company's fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company's fiscal year ending on March 31. As previously discussed, the Company's avionics business is conducted in the Government, Commercial and General aviation markets (see Note 15 of Notes to Financial Statements for segment financial information). In January 2004, the Company completed its acquisition of ITI, a company selling products to the marine industry, and ITI's financial statements have been consolidated with the Company's financial statements since then. As a result of the lack of growth in this business, and the anticipated growth of the avionics business, the Company has decided to divest itself of this business and focus on the avionics' segment. As a result, in fiscal year 2008, the Company treated ITI as a discontinued operation. The financial statements have been restated to segregate the Company's discontinued ITI business, and include a charge to write-off the remaining assets of ITI (see Note 11 to the Consolidated Financial Statements). 7 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations --------------------- Overview -------- In fiscal year 2008, the Company's revenues increased substantially, but it still incurred a significant, but reduced, loss from continuing operations due to continuing high engineering expenditures for the CRAFT products (AN/USM-719 and AN/USM-708), a substantially lower gross profit margin on the documentation and testing phase of the ITATS (AN/ARM-206) program, and the fourth quarter write-down of Tel's investment in its ITI subsidiary. Tel is anticipating a return to profitable operations in fiscal year 2009 due primarily to a strong increase in projected sales from the two recent large IDIQ ("Indefinite Delivery/Indefinite Quantity") contracts with the Army and the previously announced $2.2 million AN/USM-719 IFF test set order from the U.S. Navy. In addition, the Company continues to sell its legacy products and pursue business in the commercial market. Engineering expenses are also projected to decline as the development phase of the AN/USM-708 program nears completion. With respect to the new Army contracts, Tel was successful in recently winning a competitively bid five year IDIQ contract from the U.S. Army for 57 to 590 units of T-30D Navigation test sets with a maximum contract value of $3.2 million, and a five year IDIQ contract from the U.S. Army for 56 to 156 units of T-47N IFF test sets, with a maximum contract value of $2.7 million. First shipments under both contracts began in the first quarter of fiscal year 2009. Tel is also planning to deliver 83 units of AN/USM-719 IFF test sets to the U.S. Navy in fiscal year 2009. Significant additional growth is expected in fiscal year 2010 when substantial production deliveries of the AN/USM-719, AN/USM-708, and AN/ARM-206 are expected to commence in volume. Over the last several years, Tel has aggressively invested in revitalizing its product line with three cutting edge products now nearing completion, including two variants of CRAFT listed above, and the AN/ARM-206 TACAN bench test set. The CRAFT products are still the only Mode 5 flight line test sets under contract with the U.S. Military. Tel continues to work to finalize the AN/USM-708 product, with the Navy technical evaluation process scheduled to commence later this year. To date, the Navy has exercised CRAFT production options for 98 pilot production units out of a maximum IDIQ contract of 1,200 units. The AN/ARM-206 TACAN Test Set design combines advanced digital technology with state of the art automated testing capabilities. This product will represent an important expansion to Tel's current product line and its automated testing capabilities will represent a significant benefit to our customers. This IDIQ contract is for up to 180 units with a maximum contract value of $12 million. 8 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Results of Operations 2008 Compared to 2007 ------------------------------------------- Sales ----- Net sales increased $4,232,583 (60.4%) to $11,235,524 for the fiscal year ended March 31, 2008 as compared to the fiscal year ended March 31, 2007. Sales from the Company's traditional products increased substantially over the same period in the prior year as a result of an increase in government spending for the Company's products and increased marketing efforts for these contracts. In addition, in fiscal year 2008, the Company recognized $2,500,000 of revenues on a percentage-of-completion basis under the ITATS contract. Avionics government sales increased $3,546,321 (78.8%) to $8,049,120 for the year ended March 31, 2008 as compared to the year ended March 31, 2007 largely as a result of revenues of approximately $2,500,116 from the ITATS contract, which are recognized on a percentage-of-completion basis, and a net increase in sales from several legacy products due to the award of new contracts from the government. Avionics commercial sales increased from prior year by $686,262 (27.4%) to $3,186,404. This increase is mostly attributed to an increase in sales of the TR-220 Multi-Function Test set ($333K), as a result of efforts of the Company's domestic distributors, as well as an increase in repair and parts sales ($312K). The weak financial condition of the commercial airline industry continues to limit significant growth in this segment in addition to increased competition. Gross Margin ------------ Gross margin increased $946,259 (24.6%) to $4,797,770 for the year ended March 31, 2008 as compared to the prior fiscal year. The increase in gross margin is attributed to the increase in volume. The gross margin percentage for the year ended March 31, 2008 was 42.7% as compared to 55.0% for the year ended March 31, 2007. The decrease in gross profit percentage is primarily attributed to the lower gross profit percentage (10.5%) on the current ITATS contract discussed above. The gross profit margin (10.5%) for this contract is significantly less than the Company's historical gross margin due to the use of an outside subcontractor in the documentation and design phase, prototype development, and the competitiveness of the bidding process. During the third quarter of the prior fiscal year, the Company reversed its remaining enhancement liability of approximately $125,000 relating to its upgrade liability for the completed Navy AN/APM-480 contract, which also favorably impacted the gross margin percentage in that fiscal year. The reversal was made because the Company's contractual obligation and liability ended at that time. 9 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Results of Operations 2008 Compared to 2007 (continued) ------------------------------------------------------- Operating Expenses ------------------ Selling, general and administrative expenses decreased $101,769 (4.0%) to $2,469,585 for the year ended March 31, 2008 as compared to the year ended March 31, 2007, primarily as a result of lower group insurance costs ($81K), recruitment ($60K) and professional fees ($76K) partially offset by higher salaries for marketing and sales ($98K), attributed mostly to the addition of a new Director of Business Development and an increase in outside sales commissions ($53K). Engineering, research and development expenses increased $362,122 (15.0%) to $2,790,961 for fiscal year 2008 as compared to the prior fiscal year. This increase is primarily attributed to additional contract engineering services used on the CRAFT program. Interest, net ------------- Interest income decreased as a result of lower cash balances. Interest expense increased as a result of the increased borrowings associated with the line of credit and the loan against the cash surrender value of the keyman life insurance policy. Loss from Continuing Operations before Income Taxes --------------------------------------------------- As a result of the above, the Company incurred a loss from continuing operations before income taxes of $488,357 for the year ended March 31, 2008 as compared to a loss from continuing operations before income taxes of $1,113,960 for the year ended March 31, 2007. Income Taxes for Continuing Operations -------------------------------------- An income tax benefit in the amount of $157,752 was recorded for the year ended March 31, 2008 as a result of the loss before taxes from continuing operations for the year ended March 31, 2008 as compared to an income tax benefit of $464,242 for the year ended March 31, 2007 as a result of the loss before taxes from continuing operations for the year ended March 31, 2007. Loss from Operations of Discontinued Operations, net of taxes ------------------------------------------------------------- Loss from operations of discontinued operations decreased $970 (1%) to $100,280 for the fiscal year ended March 31, 2008 as compared to loss of $99,310 for the prior year, primarily as a result of lower engineering expenses, offset by an increase in taxes. Loss on Disposal of Discontinued Operations, net of taxes --------------------------------------------------------- In March 2008, the Company wrote-off all the assets of this division, including inventories and property, plant and equipment in the amount of $150,897, net of $77,735 of taxes. 10 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Results of Operations 2008 Compared to 2007 (continued) ------------------------------------------------------- Net Loss -------- As a result of the loss from continuing operations, the loss from discontinued operations, and the loss on disposal of division, as discussed above, the Company incurred a net loss of $581,782 for the year ended March 31, 2008 as compared to a net loss of $749,028 for the year ended March 31, 2007. The loss for 2008 is affected by the write-off of discontinued operations, net of the tax benefit of the write-off of ITI. Liquidity and Capital Resources ------------------------------- At March 31, 2008, the Company had working capital of $2,681,511 as compared to $3,121,343 at March 31, 2007. For the year ended March 31, 2008, the Company used $445,954 of cash to fund operating activities as compared to using $1,470,495 of net cash to fund operating activities in the prior year. This decrease in cash used in operating activities is primarily attributed to the lower operating loss from continuing operations and an increase in accounts payable and accrued expenses offset partially by an increase in accounts receivable and unbilled government receivables. The cash balance at March 31, 2008 was $469,906 as compared to $655,836 at March 31, 2007. For the year ended March 31, 2008, the Company used $228,321 in investing activities as compared to using $108,791 in fiscal year 2007. The increase is attributed to the increased purchases of capital equipment. Cash provided by financing activities was $488,345 in fiscal year 2008 as compared to $300,581 in fiscal year 2007. This increase is primarily attributed to the increased borrowings from the line of credit in the amount of $350,000 in fiscal year 2008,offset partially from borrowings on a loan from a life insurance policy in fiscal year 2007. In addition, cash provided by financing activities increased from the additional proceeds from the exercise of employee stock options. At March 31, 2008 the Company had an outstanding loan balance of $350,000 on which it currently pays 5.75% interest. The line of credit is collateralized by substantially all of the assets of the Company. The bank extended the credit agreement until September 30, 2008, and the new agreement includes a new borrowing base calculation tied to working capital. As of March 31, 2008, remaining availability under this modified line was approximately $425,000 based upon eligible receivables and inventories at March 31, 2008. During the first quarter of fiscal year 2009, the Company borrowed an additional $200,000, net against the line to fund inventories for the orders currently in the Company's backlog. During the first quarter, the Company started shipping against these orders, and the Company's cash balance at June 30, 2008 was approximately $870,000, with an outstanding loan balance of $550,000. The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material capital expenditure requirements. There was no significant impact on the Company's operations as a result of inflation for the year ended March 31, 2008. 11 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Critical Accounting Policies ---------------------------- In preparing the financial statements and accounting for the underlying transactions and balances, the Company applies its accounting policies as disclosed in Note 2 of our Notes to Consolidated Financial Statements. The Company's accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include: Revenue recognition - revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists. Revenues for repairs and calibrations of the Company's products are recognized when the units are shipped. Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. All expenses related to this contract are charged to cost of sales. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. Inventory reserves - inventory reserves or write-downs are estimated for excess, slow-moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. These estimates are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. Warranty reserves - warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty/enhancement costs have historically been within our expectations and the provisions established, future warranty/enhancement costs could be in excess of our warranty/enhancement reserves. A significant increase in these costs could adversely affect operating results for the current period and any future periods these additional costs materialize. Warranty/enhancement reserves are adjusted from time to time when actual warranty/enhancement claim experience differs from estimates. Accounts receivable - the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results. 12 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Critical Accounting Policies (continued) ---------------------------------------- Income taxes - deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that such tax rate changes are enacted. Off Balance Sheet Arrangements ------------------------------ The Company is not party to any off-balance sheet arrangements that may affect its financial position or its results of operations New Accounting Pronouncements ----------------------------- In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value Measurements." This SFAS defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS No. 123. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144. The Company does not expect that the partial adoption of SFAS No. 157 on April 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis will have a material impact on the Company's financial statements. The Company is in the process of analyzing the potential impact of SFAS No. 157 relating to its planned April 1, 2009 adoption of the remainder of the standard. 13 Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- New Accounting Pronouncements (continued) ----------------------------------------- In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. Management anticipates the adoption of SFAS No. 159 will not have a material impact on its future financial statements. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160").SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements within equity, but separate from the parent's equity. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 will be effective beginning April 1, 2009. Management anticipates that the adoption of SFAS 160 will not have a material impact on the Company's future financial statements. In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 "Accounting for Nonrefundable Payments for Goods and Services to be Used in Future Research and Development Activities" (ETIF 07-04), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services performed. The statement is effective for fiscal years beginning after December 15, 2007. Management anticipates that the adoption of EITF Issue No. 07-3 will not have a material impact on the Company's future financial statements. In December 2007, the FASB issued SFAS No 141(R), "Business Combinations." This statement provides new accounting guidance and disclosure requirements for business combinations. SFAS No 141(R) is effective for business combinations which occur in the first fiscal year beginning on or after December 15, 2008. The Company does not currently expect the adoption of SFAS No. 141(R) to have a material impact. In December 2007, the FASB finalized the provisions of the Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This EITF Issue provides guidance on and requires financial statement disclosures for collaborative arrangements that involve joint operating activities with one or more third parties.. EITF Issue No. 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the effect of EITF Issue No. 07-1 on its financial statements, but it is not expected to be material. 14 Item 8. Financial Statements and Supplementary Data - ------- ------------------------------------------- Pages ----- (1) Financial Statements: Report of Independent Registered Public Accounting Firm 16 Consolidated Balance Sheets - March 31, 2008 and 2007 17 Consolidated Statements of Operations - Years Ended 18 March 31, 2008 and 2007 Consolidated Statements of Changes in Stockholders' 19 Equity - Years Ended March 31, 2008 and 2007 Consolidated Statements of Cash Flows - Years Ended 20 March 31, 2008 and 2007 Notes to Consolidated Financial Statements 21- 40 (2) Financial Statement Schedule: II - Valuation and Qualifying Accounts 41 15 Report of Independent Registered Public Accounting Firm - ------------------------------------------------------- The Board of Directors and Stockholders of Tel-Instrument Electronics Corp Carlstadt, New Jersey We have audited the accompanying consolidated balance sheets of Tel-Instrument Electronics Corp and subsidiary (the "Company") as of March 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended March 31, 2008. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tel-Instrument Electronics Corp and subsidiary as of March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2008 in conformity with accounting principles generally accepted in the United States . Also, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP ---------------------------------- BDO Seidman, LLP Woodbridge, New Jersey July 9, 2008 16
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Balance Sheets March 31, March 31, ASSETS 2008 2007 ----------- ----------- Current assets: Cash $ 469,906 $ 655,836 Accounts receivable, net of allowance for doubtful accounts of $31,206 and $34,544 1,223,753 982,214 Unbilled government receivables 1,100,323 -- Inventories, net 2,075,542 2,123,336 Taxes receivable 44,612 28,776 Prepaid expenses and other 96,834 98,053 Assets of discontinued operations -- 337,306 Deferred income tax asset 531,975 395,756 ----------- ----------- Total current assets 5,542,945 4,621,277 Equipment and leasehold improvements, net 532,240 495,929 Deferred income tax asset - non-current 900,221 800,000 Non-current assets of discontinued operations -- 129,318 Other assets 142,069 81,318 Total assets $ 7,117,475 $ 6,127,842 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 350,000 $ -- Convertible note payable - related party 50,000 50,000 Accounts payable 928,367 372,106 Deferred revenues 55,014 115,409 Accrued expenses - vacation pay, payroll and payroll withholdings 348,683 353,727 Accrued expenses - related parties 41,925 74,999 Accrued expenses - other 1,087,445 533,693 ----------- ----------- Total current liabilities 2,861,434 1,499,934 Convertible note payable - related party -- 50,000 Deferred revenues 43,818 23,656 ----------- ----------- Total liabilities 2,905,252 1,573,590 ----------- ----------- Commitments Stockholders' equity Common stock, par value $.10 per share, 2,428,261 and 2,341,861 issued and outstanding 242,816 234,186 Additional paid-in capital 4,611,272 4,380,149 Accumulated deficit (641,865) (60,083) ----------- ----------- Total stockholders' equity 4,212,223 4,554,252 ----------- ----------- Total liabilities and stockholders' equity $ 7,117,475 $ 6,127,842 =========== =========== The accompanying notes are an integral part of the financial statements 17
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Statements of Operations For the years ended March 31, ----------------------------- 2008 2007 ---- ---- Net sales $ 11,235,524 $ 7,002,941 Cost of sales 6,437,754 3,151,430 ------------ ------------ Gross margin 4,797,770 3,851,511 ------------ ------------ Operating expenses: Selling, general and administrative 2,469,585 2,571,354 Engineering, research and development 2,790,961 2,427,839 ------------ ------------ Total operating expenses 5,260,546 4,999,193 ------------ ------------ Loss from continuing operations (462,776) (1,147,682) Other income/(expense): Interest income 16,461 42,692 Interest expense (37,542) (2,220) Interest expense - related parties (4,500) (6,750) ------------ ------------ Loss from continuing operations before income taxes (488,357) (1,113,960) Income tax benefit (157,752) (464,242) ------------ ------------ Loss from continuing operations, net of income taxes (330,605) (649,718) ------------ ------------ Discontinued operations: Loss from operations of discontinued operations, adjusted for applicable income tax benefit (100,280) (99,310) Loss on disposal of division, adjusted for applicable income tax benefit (150,897) -- ------------ ------------ Loss from discontinued operations, net of income taxes (251,177) (99,310) ------------ ------------ Net loss $ (581,782) $ (749,028) ============ ============ Loss from continuing operations, net of income taxes: Basic and diluted loss per common share $ (0.14) $ (0.29) ============ ============ Loss from discontinued operations, net of income taxes: Basic and diluted loss per common share $ (0.11) $ (0.04) ============ ============ Net loss Basic and diluted loss per common share $ (0.25) $ (0.33) ============ ============ Weighted average number of shares outstanding Basic and diluted 2,375,577 2,303,858 ============ ============ The accompanying notes are an integral part of the financial statements. 18
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Statements of Changes in Stockholders' Equity (Accumulated Common Stock Additional Deficit) # of Shares Paid-In Retained Issued Amount Capital Earnings Total ----------- ----------- ----------- ----------- ----------- Balances at April 1, 2006 2,279,411 227,941 $ 4,251,180 $ 688,945 $ 5,168,066 Net loss -- -- -- (749,028) (749,028) Non-cash stock-based compensation -- -- 5,633 -- 5,633 Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000 Issuance of common stock in connection with the exercise of stock options 42,450 4,245 75,336 -- 79,581 ----------- ----------- ----------- ----------- ----------- Balances at March 31, 2007 2,341,861 234,186 4,380,149 (60,083) 4,554,252 Net loss -- -- -- (581,782) (581,782) Non-cash stock-based compensation -- -- 39,708 -- 39,708 Issuance of common stock for compensation 3,000 300 11,400 -- 11,700 Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000 Issuance of common stock in connection with the exercise of stock options 63,400 6,330 132,015 -- 138,345 ----------- ----------- ----------- ----------- ----------- Balances at March 31, 2008 2,428,261 $ 242,816 $ 4,611,272 $ (641,865) $ 4,212,223 =========== =========== =========== =========== =========== The accompanying notes are an integral part of the financial statements. 19
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Statements of Cash Flows For the years ended March 31, ----------------------------- 2008 2007 ---- ---- Cash flows from operating activities: Net loss $ (581,782) $ (749,028) Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes (157,752) (518,713) Loss from discontinued operations 150,897 -- Depreciation and amortization 192,010 258,609 Issuance of stock for compensation 11,700 -- Provision for inventory obsolescence 80,000 158,370 Increase in cash surrender value of life insurance (59,446) (15,803) Non-cash stock-based compensation 39,708 5,633 Changes in assets and liabilities: (Increase) decrease in accounts receivable (241,539) 67,364 Increase in unbilled government receivable (1,100,323) -- Increase in inventories (32,206) (516,732) (Increase) decrease in taxes receivable (15,836) 53,712 (Increase) decrease in prepaid expenses and other (86) 38,980 Increase in accounts payable 556,261 83,620 Decrease in deferred revenues (40,233) (1,012) Increase (decrease) in accrued expenses 515,634 (335,495) Decrease in assets of discontinued operations 237,039 -- ----------- ----------- Net cash used in operating activities (445,954) (1,470,495) ----------- ----------- Cash flows from investing activities: Acquisition of equipment (228,321) (108,791) ----------- ----------- Net cash used in investing activities (228,321) (108,791) Cash flows from financing activities: Proceeds from exercise of stock options 138,345 79,581 Proceeds from line of credit 350,000 -- Repayment of note payable -- (29,000) Proceeds from loan on life insurance -- 250,000 policy Payment of capitalized lease obligations -- -- ----------- ----------- Net cash provided by financing activities 488,345 300,581 ----------- ----------- Net decrease in cash (185,930) (1,278,705) Cash, beginning of year 655,836 1,934,541 ----------- ----------- Cash, end of year $ 469,906 $ 655,836 =========== =========== Supplemental cash flow information: Taxes paid $ -- $ 21,882 =========== =========== Interest paid $ 43,549 $ 5,695 =========== =========== Supplemental non-cash information Notes converted into common stock $ 50,000 $ 50,000 =========== =========== The accompanying notes are an integral part of the financial statements. 20
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 1. Business, Organization, and Liquidity Business and Organization Tel-Instrument Electronics Corp ("Tel" or the "Company") has been in business since 1947. The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets. Tel provides instruments to test, measure, calibrate, and repair a wide range of airborne navigation and communication equipment. The Company sells its equipment in both domestic and international markets. In January, 2004, the Company acquired Innerspace Technology, Inc. ("ITI"). ITI has been in the marine instrumentation systems business for over 30 years manufacturing and distributing a variety of shipboard and underwater instruments to hydrographers, oceanographers, researchers, engineers, geophysicists, and surveyors worldwide. As a result of the lack of growth in this business, and the anticipated growth of the avionics business, the Company decided to focus on the avionics segment. As a result, in fiscal year 2008, the Company treated ITI as discontinued operations, and has written-off the remaining assets of this division. 2. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated. As discussed in the Notes 1 and 12, the consolidated financial statements have been restated to classify the marine system division as discontinued operations. Prior year amounts have been reclassified to conform with the 2008 presentation. Revenue Recognition: Revenues are recognized at the time of shipment to, or acceptance by customer, provided title and risk of loss is transferred to the customer. Provisions, when appropriate, are made where the right to return exists. Revenues for repairs and calibrations of the Company's products (approximately 8% of revenues) are recognized when the units are shipped. Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment. All expenses related to this contract are charged to cost of sales. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. 21 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 2. Summary of Significant Accounting Policies Revenue Recognition (continued): Shipping and handling costs charged to customers are not material. The revenues and related shipping and handling costs are included in selling, general and administrative expenses. Payments received prior to the delivery of units or services performed are recorded as deferred revenues Financial Instruments: The carrying amounts of cash and other current assets and liabilities approximate fair value due to the short-term maturity of these investments. The debt to related party has an interest rate that approximates current market rates and therefore the carrying value approximates market. Concentrations of Credit Risk: Cash held in banks: The Company maintains its cash balances in U.S. Financial Institutions, and amounts at times exceed the Federal Deposit Insurance Company limits. Accounts Receivable: The Company's avionics customer base is primarily comprised of airlines, distributors, and the U.S. Government. As of March 31, 2008, the Company believes it has no significant risk related to its concentration within its accounts receivable. Inventories: Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company's forecasts of future sales and age of inventory. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year. 22 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) Equipment and Leasehold Improvements: Office and manufacturing equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over periods ranging from 3 to 8 years. Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter. Maintenance, repairs, and renewals that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Statements of Operations. Engineering, Research and Development Costs: Engineering, research and development costs are expensed as incurred. Advertising Expenses: Advertising expenses consist primarily of costs for direct advertising. The Company expenses all advertising costs as incurred, and classifies these costs under selling, general and administrative expenses, which amounted to $31,171 and $30,741 for the years ended March 31, 2008 and 2007, respectively. Net Income (Loss) Per Common Share: Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including common stock equivalents, such as stock options using the treasury stock method. Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period and excludes the dilutive effects of common stock equivalents. 23 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) Accounting for Income Taxes: Despite the Company's belief that its tax return positions are consistent with applicable tax laws, one or more positions may be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Accordingly, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that such tax rate changes are enacted. The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 ("FIN No. 48"), effective April 1, 2007. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires that the Company determine whether the benefits of its tax positions are more-likely-than-not of being sustained upon audit based on the technical merits of the tax position. The Company recognizes the impact of an uncertain income tax position taken on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. The implementation of FIN No.48 had no impact on the Company's results of operations or financial position. Interest and penalties related to income tax matters, if applicable, will be recognized as income tax expense. During the years ended March 31, 2008 and 2007 the Company did not incur any expense related to interest or penalties for income tax matters, and no such amounts were accrued as of March 31, 2008 and 2007. 24 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) Stock-based Compensation: Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified prospective method. SFAS 123R requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model. Additional information and disclosure on our adoption of SFAS No. 123R are provided in Note 14. Long-Lived Assets: The Company follows SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The standard provides accounting and reporting requirements for the impairment of all long-lived assets. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include income taxes, percentage-of- completion sales recognition, warranty claims, inventory and accounts receivable valuations. Reclassification: Certain prior year amounts have been reclassified to conform to the current year presentation. Accounts Receivable: The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credit limits for and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within the Company's expectation and the provision established, the Company cannot guarantee that this will continue. 25 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) Warranty Reserves: Warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within the Company's expectations and the provisions established, future warranty costs could be in excess of the Company's warranty reserves. A significant increase in these costs could adversely affect the Company's operating results for the period and the periods these additional costs materialize. Warranty reserves are adjusted from time to time when actual warranty claim experience differs from estimates. Risks and Uncertainties: The Company's operations are subject to a number of risks, including but not limited to changes in the general economy, demand for the Company's products, the success of its customers, research and development results, reliance on the government and commercial markets and the renewal of its line of credit. The Company has major contracts with the U.S. Government, which like all government contracts are subject to termination. New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value Measurements." This SFAS defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS No. 123. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144. 26 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) New Accounting Pronouncements (continued): The Company does not expect that the partial adoption of SFAS No. 157 on April 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis will have a material impact on the Company's financial statements. The Company is in the process of analyzing the potential impact of SFAS No. 157 relating to its planned April 1, 2009 adoption of the remainder of the standard. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. Management anticipates the adoption of SFAS No. 159 will not have a material impact on the Company's future financial statements. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160").SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements within equity, but separate from the parent's equity. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 will be effective beginning April 1, 2009. Management anticipates that the adoption of SFAS 160 will not have a material impact on the Company's future financial statements. In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 "Accounting for Nonrefundable Payments for Goods and Services to be Used in Future Research and Development Activities" (ETIF 07-04), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services performed. The statement is effective for fiscal years beginning after December 15, 2007. Management anticipates that the adoption of EITF Issue No. 07-3 will not have a material impact on the Company's future financial statements. 27 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) New Accounting Pronouncements (continued): In December 2007, the FASB issued SFAS No 141(R), "Business Combinations." This statement provides new accounting guidance and disclosure requirements for business combinations. SFAS No 141(R) is effective for business combinations which occur in the first fiscal year beginning on or after December 15, 2008. The Company does not currently expect the adoption of SFAS No. 141(R) to have a material impact. In December 2007, the FASB finalized the provisions of the Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This EITF Issue provides guidance and requires financial statement disclosures for collaborative arrangements that involve joint operating activities with one or more third parties. EITF Issue No. 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the effect of EITF Issue No. 07-1 on its financial statements, but it is not expected to be material. 3. Accounts Receivable The following table sets forth the components of accounts receivable: March 31, --------- 2008 2007 ---- ---- Government $ 647,063 $ 678,688 Commercial 607,896 338,070 Less: Allowance for doubtful accounts (31,206) (34,544) ------------ ------------ $ 1,223,753 $ 982,214 ============ ============ 28 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 4. Inventories Inventories consist of: March 31, --------- 2008 2007 ---- ---- Purchased parts $ 1,246,733 $ 1,086,085 Work-in-process 881,472 1,140,776 3,782 3,782 Finished goods 224,284 127,291 Less: Allowance for obsolete inventory (276,947) (230,816) ----------- ----------- $ 2,075,542 $ 2,123,336 =========== =========== Work-in-process inventory includes $310,917 and $387,269 for government contracts at March 31, 2008 and 2007, respectively. 5. Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following: March 31, --------- 2008 2007 ---- ---- Leasehold Improvements $ 506,311 $ 506,311 Machinery and equipment 1,542,373 1,357,464 Automobiles 16,514 16,514 Sales equipment 501,490 458,079 Assets under capitalized leases 367,623 367,623 Less: Accumulated depreciation & amortization (2,402,071) (2,210,062) ----------- ----------- $ 532,240 $ 495,929 =========== =========== 29 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 6. Accrued Expenses Accrued vacation pay, payroll and payroll withholdings consist of the following: March 31, --------- 2008 2007 ---- ---- Accrued vacation pay $ 238,040 $ 233,010 Accrued payroll and payroll withholdings 110,643 120,717 ----------- ----------- $ 348,683 $ 353,727 Accrued vacation pay, payroll and payroll withholdings includes $88,570 and $81,780 at March 31, 2008 and 2007, respectively, which is due to officers. Accrued expenses - other consist of the following: March 31, --------- 2008 2007 ---- ---- Accrued consulting $ 115,199 $ 194,050 Accrued outside contractor costs 667,733 -- Accrued commissions 95,371 19,400 Accrued audit and tax preparation fees 88,400 76,000 Accrued - other 120,742 244,243 ----------- ----------- $ 1,087,445 $ 533,693 =========== =========== Accrued expenses - related parties consists of the following: March 31, --------- 2008 2007 ---- ---- Professional fees to non-employee officer and stockholder $ 16,226 $ 26,276 Reimbursemnt of expenses due to the Company's President 9,000 -- Interest and other expenses due to Company's Chairman/CEO 16,699 48,723 ----------- ----------- $ 41,925 $ 74,999 =========== =========== 30 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 7. Line of Credit The Company has a line of credit from a bank, which expires September 30, 2008. The agreement includes a borrowing base calculation tied to accounts receivable and inventories. Interest on any outstanding balances is payable monthly at an annual interest rate of one-half of one percent (0.5%) above the lender's prevailing base rate. The Company's interest rate was 5.75% and 8.75% at March 31, 2008 and 2007 respectively. The line is collateralized by substantially all of the assets of the Company. The credit facility requires the Company to maintain certain financial covenants. As of March 31, 2008 and March 31, 2007, the Company was in compliance with all financial covenants. At March 31, 2008 and 2007, the Company had outstanding balances of $350,000 and $-0-, respectively. As of March 31, 2008, the remaining availability under this line is approximately $429,000, based upon receivables and inventories at March 31, 2008. The Company borrowed an additional $200,000 in May 2008 and another $200,000 in June 2008 and also repaid $200,000 in June. 31 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 8. Income Taxes Income tax (benefit) provision: March 31, March 31, --------- --------- 2008 2007 ---- ---- Current: Federal $ -- $ -- State and local 3,851 3,312 ----------- ----------- Total current tax provision 3,851 3,312 ----------- ----------- Deferred: Federal (137,363) (367,298) State and local (24,240) (100,256) ----------- ----------- Total deferred tax benefit (161,603) (467,554) ----------- ----------- Total benefit $ (157,752) $ (464,242) =========== =========== The components of the Company's deferred taxes at March 31, 2008 and 2007 are as follows: March 31, March 31, --------- --------- 2008 2007 ---- ---- Deferred tax assets: Net operating loss carryforwards & credits $1,062,000 $ 822,000 Discontinued operations 91,000 -- Allowance for doubtful accounts 12,000 14,000 Reserve for inventory obsolescence 111,000 139,000 Inventory capitalization 47,000 78,000 Deferred payroll and accrued interest 20,000 50,000 Vacation accrual 95,000 93,000 Warranty/Enhancement reserve 15,000 8,000 Deferred revenues 40,000 44,000 Non-compete agreement 25,000 27,000 Depreciation 18,000 -- ---------- ---------- Deferred tax asset 1,536,000 1,275,000 Less valuation allowance 104,000 79,000 ---------- ---------- Deferred tax asset, net $1,432,000 $1,196,000 ========== ========== Deferred tax asset - current $ 532,000 $ 396,000 Deferred tax asset - long-term 900,000 800,000 ---------- ---------- Total $1,432,000 $1,196,000 ========== ========== The recognized deferred tax asset is based upon the expected utilization of its benefit from the reversal of tax asset temporary differences. The Company has net operating loss ("NOL") carryforwards of approximately $3,334,000 at March 31, 2008. These carryforward losses are available to 32 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 8. Income Taxes (Continued) offset future taxable income, and begin to expire in the year 2024. A valuation allowance has been recorded against certain state net operating loss carryforwards, since management does not believe that the realization of these NOL's is more likely than not. The foregoing amounts are management's estimates and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products. The inability to obtain new profitable contracts or the failure of the Company's engineering development efforts could reduce estimates of future profitability, which could affect the Company's ability to realize the deferred tax assets. A reconciliation of the income tax benefit at the statutory Federal tax rate of 34% to the income tax benefit recognized in the financial statements is as follows: March 31, March 31, --------- --------- 2008 2007 ---- ---- Income tax benefit - statutory rate $ (166,041) $ (378,746) Income tax expenses - state and local, net of federal benefit (15,998) (67,171) Non-deductible expenses 24,071 10,591 Other 216 (28,916) ----------- ----------- Income tax benefit $ (157,752) $ (464,242) =========== =========== 9. Related Party Transactions On March 31, 1997, the Company's Chairman/CEO renegotiated the terms of the non-current note payable-related party. This note, along with $250,000 of other accrued expenses due to the Company's Chairman/CEO, were converted into seven $50,000 convertible subordinated notes (the "Notes") totaling $350,000. The Notes were serially due in consecutive years beginning March 31, 1999 with the last note due March 31, 2005. In November 2002 the Company paid and redeemed $100,000 of the previously matured and extended Notes. The Notes bore interest at a rate of 10% per annum, payable semi-annually on the last day of September and March of each year. Effective October 1, 2003, the interest rate was changed to 4.5%. The Company is required to prepay the outstanding balance of the Notes and any accrued interest thereon, if the Company sells all or substantially all of its assets. The Notes can be converted into newly issued common shares of the Company at the conversion price of $2.50 per share. The conversion price, which excluded the market price of the stock at the time the Notes were issued, shall be adjusted for any stock dividends, stock issuances or capital reorganizations. The Notes may be redeemed by the Company prior to maturity upon giving written notice of not less than 30 days or more than 60 days at a redemption price equal to 120% of the principal if redeemed two years or more prior to the maturity date or 110% of the principal if redeemed more than one year, but less than two years prior to the maturity date. 33 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 9. Related Party Transactions (Continued) In May 2004, the Company and its Chairman/CEO renegotiated the terms of the Notes payable-related party. The Notes now become serially due in consecutive years beginning March 31, 2005. The interest rate remains at 4.5%. On March 31, 2008 and 2007, respectively, each of the $50,000 notes due were converted into common stock. Each $50,000 note due was converted into 20,000 shares of the Company's common stock at $2.50 per share. The total principal amount outstanding was $50,000 and $100,000 at March 31, 2008 and 2007, respectively. Interest expense amounted to $4,500 and $8,970 for the years ended March 31, 2008 and 2007, respectively. The Company has obtained legal services from a non-employee officer/stockholder with the related fees amounting to $79,935 and $93,179 for the years ended March 31, 2008 and 2007, respectively. The Company obtained management and marketing services from a director/officer/stockholder with the related fees amounting to $85,090 and $68,973 for the years ended March 31, 2008 and 2007, respectively. 10. Commitments The Company leases manufacturing and office space under an operating lease agreement expiring in February 2011. Under terms of the lease, the Company pays all real estate taxes and utility costs for the premises. In addition, the Company has agreements to lease equipment for use in the operations of the business under operating leases. The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended March 31, 2008. Years Ended March 31, 2009 $ 164,000 2010 152,000 2011 143,000 --------- $ 459,000 ========= Total rent expense, including real estate taxes, was approximately $250,000 and $227,000 for the years ended March 31, 2008 and 2007, respectively. The Company sponsors a 401K plan in which employee contributions on a pre-tax basis are supplemented by matching contributions by the Company. The Company charged to operations $11,526 and $10,295 as its matching contribution to the Company's 401k Plan for the years ended March 31, 2008 and 2007, respectively. 34
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 11. Discontinued Operations The Board of Directors has approved discontinuing the Company's marine systems division. As a result, the consolidated financial statements present the marine systems division as a discontinued operation. The Company wrote-off fixed assets of approximately $77,000 and inventories of approximately $151,000 in 2008. The Company's decision to discontinue its marine operations was based primarily on the historical losses sustained and management's intent to focus on its avionics business The following tables reflects sales, costs and expenses, and loss from discontinued operations, net of taxes for the years ended March 31, 2008 and 2007, respectively. ---------------------------------------------------------------------------- ---------------- -------------- 2008 2007 ---------------------------------------------------------------------------- ---------------- -------------- Discontinued Operations: ---------------------------------------------------------------------------- ---------------- -------------- Sales $ 543,917 $ 663,646 ---------------------------------------------------------------------------- ---------------- -------------- Costs and expenses 672,476 814,114 ---------------------------------------------------------------------------- ---------------- -------------- Loss from operations of discontinued operations (128,559) (150,469) ---------------------------------------------------------------------------- ---------------- -------------- Loss from operations of discontinued operations , net of income tax (100,280) (99,310) benefit of $28,279 and $51,159 for 2008 and 2007, respectively ---------------------------------------------------------------------------- ---------------- -------------- Loss on disposal of discontinued operations before income taxes (228,632) -- ---------------------------------------------------------------------------- ---------------- -------------- Income tax benefit (77,735) -- ---------------------------------------------------------------------------- ---------------- -------------- Net loss on disposal of discontinued operations (150,897) -- ---------------------------------------------------------------------------- ---------------- -------------- Net loss from discontinued operations $(251,177) $(99,310) ---------------------------------------------------------------------------- ---------------- -------------- The following table reflects the reported assets and liabilities for discontinued operations as of March 31, 2007: -------------------------------------------------- ------------- Inventories $337,306 -------------------------------------------------- ------------- Fixed assets $129,318 -------------------------------------------------- ------------- 35
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 12. Significant Customer Concentrations For the years ended March 31, 2008 and 2007, sales to the U.S. Government represented approximately 45% and 27%, respectively of avionics net sales. No other individual customer represented over 10% of avionics net sales for these years. One domestic distributor (Avionics International) accounted for 14%, and 12% of commercial avionics net sales for the years ended March 31, 2008 and 2007, respectively. Additionally, another domestic distributor (Aero Express) accounted for 6% and 12% of commercial avionics net sales for the years ended March 31, 2008 and 2007, respectively. Dallas Avionics, another independent domestic distributor, accounted for 10% and 16% of total commercial net sales for the years ended March 31, 2008 and 2007, respectively. One direct government customer (Boeing Corp.) accounted for 13% of government net sales in fiscal year 2007. No direct government customers represented over 10% of government net sales for fiscal year 2008. An international distributor (M.P.G. Instruments) accounted for 5% and 13%, respectively, of total government net sales for the years ended March 31, 2008 and 2007. No other customer or distributor accounted for more than 10% of commercial or government net sales. Foreign net sales were $2,300,464 and $1,467,314 for the years ended March 31, 2008 and 2007, respectively. All other sales were to customers located in the U.S. As of March 31, 2008, one individual customer balance represented 14% of the Company's outstanding receivables. As of March 31, 2007, two individual customer balances represented 45% and 10%, respectively, of the Company's outstanding receivables. Receivables from the U.S. Government represented approximately 33% and 10%, respectively, of total receivables for the fiscal years ended March 31, 2008 and 2007. 13. Stock Option Plans In May 2003, the Board of Directors adopted the 1998 Stock Option Plan ("the Plan") which reserved for issuance options to purchase up to 250,000 shares of its Common Stock. The stockholders approved the Plan at the November 2003 annual meeting. The Plan, which has a term of ten years from the date of adoption is administered by the Board of Directors or by a committee appointed by the Board of Directors. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board of Directors. Options granted under the Plan are exercisable up to a period of 5 years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a stockholder owning 10% or more of the outstanding 36 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 13. Stock Option Plans (continued) common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options are exercisable, on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. In March 2006, the Board of Directors of the Company adopted the 2006 Stock Option Plan which reserves for issuance options to purchase up to 250,000 shares of its common stock and is similar to the 2003 Plan. The stockholders approved this plan at the December 2006 annual meeting. The fair value of each option awarded is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company's stock, and other factors. The expected life of the options granted represents the period of time from date of grant to expiration (5 years). The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The per share weighted-average fair value of stock options granted for the years 2008 and 2007 was $1.77 and $1.81, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions: ---------- ---------- --------------- ----------------- --------- Year Dividend Risk-free Volatility Life Yield Interest rate ---------- ---------- --------------- ----------------- --------- 2008 0.0% 2.1%-5.0% 40.42% - 57.3% 5 years ---------- ---------- --------------- ----------------- --------- 2007 0.0% 4.50%-4.77% 54.24% - 58.03% 5 years ---------- ---------- --------------- ----------------- --------- 37
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 13. Stock Option Plan (continued) A summary of the status of the Company's stock option plans for the fiscal years 2008 and 2007 and changes during the years are presented below: (in number of options): Average Aggregate Number of Average Exercise Remaining Intrinsic Options Price Contractual Term Value ------- ----- ---------------- ----- Outstanding options at April 1, 2006 399,850 $2.89 Options granted 65,500 $3.18 Options exercised (42,450) $1.87 Options canceled/forfeited (35,250) $2.59 Outstanding options at March 31, 387,650 $3.08 2007 Options granted 65,500 $3.75 Options exercised (63,400) $2.19 Options canceled/forfeited (41,450) $3.45 2.6 years $211,649 Outstanding options at March 31, 348,300 $3.33 2.6 years $217,440 2008 Vested Options: March 31, 2008: 168,130 $3.11 1.7 years $142,172 March 31, 2007: 173,800 $2.79 1.6 years $144,834 Remaining options available for grant were 179,370 and 203,420 as of March 31, 2008 and 2007, respectively. The total intrinsic value of options exercised during the years ended March 31, 2008 and 2007 was $95,870 and $22,486, respectively. Cash received from the exercise of stock options for the years ended March 31, 2008 and 2007 was $138,345 and $79,581, respectively. 14. Net Loss Per Share Incremental shares of 66,143 and 35,888 are attributable to the assumed exercise of outstanding options and have been excluded from the calculation of diluted net loss per share for fiscal years 2008 and 2007, respectively, as their effect would have been anti-dilutive due to the losses incurred in these period. 38
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 15. Segment Information As a result of the classification of its marine systems division as discontinued operations in accordance with FAS No. 131, "Disclosures about Segments of an Enterprise and related information", the Company determined it has two reportable segments for continuing operations - avionics government and avionics commercial. There are no inter-segment revenues. The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company's products and designs cross segments. Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company's general and administrative costs and sales and marketing expenses are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level. Segment assets include accounts receivable and work-in-process inventory. Asset information, other than accounts receivable and work-in-process inventory, is not reported, since the Company does not produce such information internally. All long-lived assets are located in the U.S. The table below presents information about reportable segments within the avionics business for the years ending March 31: -------------------------------- --------------- --------------- -------------- -------------- ---------------- 2008 Avionics Avionics Avionics Corporate/ Government Commercial Total Reconciling Total Items -------------------------------- --------------- --------------- -------------- -------------- ---------------- Net sales $ 8,049,120 $ 3,186,404 $11,235,524 $ -- $11,235,524 -------------------------------- --------------- --------------- -------------- -------------- ---------------- Cost of Sales 4,623,345 1,814,409 6,437,754 -- 6,437,754 ----------- ----------- ----------- ----------- ----------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- Gross Margin 3,425,775 1,371,995 4,797,770 -- 4,797,770 ----------- ----------- ----------- ----------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- Engineering, research, and 2,790,961 2,790,961 Development -------------------------------- --------------- --------------- -------------- -------------- ---------------- Selling, general, and admin. 1,336,197 1,133,388 2,469,585 -------------------------------- --------------- --------------- -------------- -------------- ---------------- Interest expense, net -- 25,581 25,581 ----------- ----------- ----------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- Income (loss) before income taxes from continuing operations 670,612 (1,158,969) (488,357) ----------- ----------- ----------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- Segment Assets $ 3,326,947 $ 1,103,807 $ 4,430,754 $ 2,686,721 $ 7,117,475 ----------- ----------- ----------- ----------- ----------- -------------------------------- --------------- --------------- -------------- -------------- ---------------- 39
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 15. Segment Information (continued) -------------------------------- --------------- --------------- ------------- -------------- ---------------- 2007 Avionics Corporate/ Government Commercial Total Reconciling Total Items -------------------------------- --------------- --------------- ------------- -------------- ---------------- Net sales $ 4,502,799 $ 2,500,142 $ 7,002,941 $ -- $ 7,002,941 -------------------------------- --------------- --------------- ------------- -------------- ---------------- Cost of Sales 1,731,674 1,419,756 3,151,430 -- 3,151,430 ----------- ----------- ----------- ----------- ----------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- Gross Margin 2,771,125 1,080,386 3,851,511 -- 3,851,511 ----------- ----------- ----------- ----------- ----------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- Engineering, research, and 2,427,839 2,427,839 Development -------------------------------- --------------- --------------- ------------- -------------- ---------------- Selling, general, and admin. 1,332,547 1,238,807 2,571,354 -------------------------------- --------------- --------------- ------------- -------------- ---------------- Interest income, net -- (33,722) (33,722) ----------- ----------- ----------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- Income (loss) before income taxes from continuing operations 91,125 (1,205,085) (1,113,960) ----------- ----------- ----------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- Segment Assets $ 2,740,699 $ 863,246 $ 3,603,945 $ 2,523,897 $ 6,127,842 ----------- ----------- ----------- ----------- ----------- -------------------------------- --------------- --------------- ------------- -------------- ---------------- 16. Quarterly Results of Operations (Unaudited) Quarterly consolidated data for the years ended March 31, 2008 and 2007 is as follows: Quarter Ended ------------- FY 2008 June 30 September 30 December 31 March 31 ------- ------- ------------ ----------- -------- Net sales $ 2,955,739 $ 2,844,692 $ 3,088,334 $ 2,346,759 Gross margin 1,213,302 1,233,209 1,324,729 1,026,530 Loss from continuing operations before taxes (121,217) (2,132) (18,857) (346,151) (Loss) income from continuing operations after taxes (71,742) 884 (8,883) (291,107) Discontinued operations, net of taxes (11,632) (24,001) (27,076) (65,850) Loss on disposal of assets, net of taxes -- -- -- (150,897) Net loss (83,374) (23,117) (35,959) (507,854) Basic and diluted loss per share (0.04) ( 0.01) (0.02) (0.21) Quarter Ended ------------- FY 2007 June 30 September 30 December 31 March 31 ------- ------- ------------ ----------- -------- Net sales $ 1,643,618 $ 1,843,857 $ 2,097,427 $ 1,418,039 Gross margin 787,876 1,011,247 1,220,573 831,815 Loss from continuing operations before taxes (381,743) (136,823) (37,595) (557,799) Loss from continuing operations after taxes (225,083) (82,081) (21,194) (321,360) Discontinued operations, net of taxes (46,071) (897) (18,259) (34,083) Net loss (271,154) (82,978) (39,453) (355,443) Basic and diluted loss per share (0.12) (0.04) (0.02) (0.14) 40
TEL-INSTRUMENT ELECTRONICS CORP Schedule II - Valuation and Qualifying Accounts Balance at Charged to Deductions Balance Beginning Costs and at Description of the Year Expenses End of the Year Year ended March 31, 2008: Allowance for doubtful Accounts $ 34,544 $ -- $ (3,338) $ 31,206 ========== ========== ========== ========== Allowance for obsolete Inventory $ 230,816 $ 60,000 $ (13,869) $ 276,947 ========== ========== ========== ========== Year ended March 31, 2007: Allowance for doubtful Accounts $ 40,994 $ -- $ (6,450) $ 34,544 ========== ========== ========== ========== Allowance for obsolete Inventory $ 177,110 $ 108,370 $ (54,664) $ 230,816 ========== ========== ========== ========== 41
TEL-INSTRUMENT ELECTRONICS CORP Item 9a(T). Controls and Procedures - ----------- ----------------------- Evaluation of disclosure controls and procedures. As of March 31, 2008, management performed, with the participation of our Chief Executive Officer and Principal Accounting Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2008, such disclosure controls and procedures were effective. Management's Annual Report on Internal Control Over Financial Reporting. Tel's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. The company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Acounting Principles ("GAAP"). Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has conducted, with the participation of our Chief Executive Officer and our Principal Accounting Officer, an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2008. Management's assessment of internal control over financial reporting used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control over Financial Reporting - Guidance for Smaller Public Companies. Based on this evaluation, Management concluded that our system of internal control over financial reporting was effective as of March 31, 2008, based on these criteria. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation of the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. 42 Item 9a(T). Controls and Procedures (continued) - ----------- ----------------------------------- Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation as of March 31, 2008 by the Chief Executive Officer and Principal Accounting Officer, required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. Item 9b. None. - -------- 43 PART III -------- Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- Year First Elected a Name (age) Position Director ---------- -------- -------- Harold K. Fletcher (1) Chairman of the Board, 1982 (82) President and Chief Executive Officer since 1982. George J. Leon (2) (3) Director; Investment 1986 (64) Manager and beneficiary of the George Leon Family Trust (investments) since 1986. Robert J. Melnick Director; 1998 (74) Vice President since 1999; Marketing and Management Consultant for the Company since 1991. Jeffrey C. O'Hara, CPA (1) Director; President since 1998 (50) August 2007; Vice President since 2005 COO since June 2006; Financial Consultant from 2001; Chief Financial Officer from 1999-2000 of Alarm Security Group. Robert A. Rice (2) (3) Director; President and 2004 (52) Owner of Spurwink Cordage, Inc since 1998 (textile manufacturing). Robert H. Walker (2) (3) Director; Retired Executive 1984 (72) Vice President, Robotic Vision Systems, Inc. (design and manufacture of robotic vision systems) 1983-1998. Marc A. Mastrangelo Vice President - Operations, since May 2008, Vice President - Manufacturing, since August 2007, Director - Manufacturing, since January 2004 44 TEL-INSTRUMENT ELECTRONICS CORP Item 10. Directors and Executive Officers of the Registrant (Continued) - -------- -------------------------------------------------------------- All directors serve until the next annual shareholders' meeting and until their successors are duly elected and qualified. (1) Mr. O'Hara is the son-in-law of Mr. Fletcher (2) Member of the Audit Committee (3) Member of the Compensation Committee Audit Committee --------------- The Board of Directors established a separately designated standing Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee is comprised of Messrs. Walker (chairman), Leon, and Rice. Messrs. Walker, Leon, and Rice are independent, as that term is defined under the Securities Exchange Act of 1934, and Mr. Walker is a financial expert as defined in that act. As noted above, Mr. Walker served as director and Executive Vice President of Robotic Vision Systems, Inc., a reporting company, and as its principal financial officer for over 15 years. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- As of March 31, 2008, the end of the last fiscal year, all officers, directors and 10% beneficial owners, known to the Company, had timely filed required forms reporting beneficial ownership of Company securities, based solely on review of Filed Forms 3 and 4. Code of Ethics -------------- The Board of Directors has adopted a written Code of Ethics that applies to all of the Company's officers and employees, including the Chief Executive Officer and the Principal Accounting Officer. A copy of the Code of Ethics is available to anyone requesting a copy without cost by writing to the Company, attention Joseph P. Macaluso. 45
Item 11. Executive Compensation - -------- ---------------------- The following table presents information regarding compensation of our principal executive officer, and the two most highly compensated executive officers other than the principal executive officer for services rendered during fiscal years 2008 and 2007. --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Name and Principal Year Salary ($) Incentive Option All Other Total Position (1) ($) (2) Awards ($) Compensation $ ($) (3) (4) --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Harold K. Fletcher, CEO 2008 159,000 -0- -0- 7,613 166,613 (6) --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- 2007 159,000 -0- -0- 7,337 166,337 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Jeffrey C. O'Hara, 2008 113,500 -0- 26,175 14,425 154,100 President --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- 2007 108,000 -0- -0- 13,345 121,345 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Marc A. Mastrangelo, 2008 123,000 -0- -0- 26,049 (5) 149,049 Vice President - Operations --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- 2007 115,900 -0- 10,847 13,449 140,196 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- (1) The amounts shown in this column represent the dollar value of base cash salary earned by each executive officer. (2) No incentive compensation was made to the NEO's in 2008 and 2007, and therefore no amounts are shown. (3) Amounts in this column represent the fair value required by FASB 123R to be included in our financial statements for all options granted during that year. (4) The amounts shown in this column represent amounts for medical and life insurance as well as the Company's match in the 401(k) Plan. (5) Includes stock issued in lieu of compensation with a fair value of $11,700. (6) The Company previously issued several $50,000 convertible principal amount notes to Mr. Fletcher, with due dates in consecutive fiscal years. At March 31, 2008, one of these $50,000 face amount notes remained outstanding, and is due March 31, 2009. The Note bears interest at a rate of 4.5% per annum, payable semi-annually on the last day of September and March of each year. The Company is required to prepay the outstanding balance of the Note and any accrued interest thereon, if the Company sells all or substantially all of its assets. The Note can be converted into newly issued common shares of the Company at the conversion price of $2.50 per share. The conversion prices shall be adjusted for any stock dividends, stock issuances or capital reorganizations. The Note may be redeemed by the Company prior to maturity upon giving written notice of not less than 30 days or more than 60 days at a redemption price equal to 120% of the principal if redeemed two years or more prior to the maturity date or 110% of the principal if redeemed more than one year, but less than two years prior to the maturity date. On March 31, 2008 and 2007, respectively, similar $50,000 notes due were converted into common stock. Each $50,000 note due was converted into 20,000 shares of the Company's common stock at $2.50 per share, which exceeded the market price of the stock at date notes were executed. The total principal amount of notes outstanding was $50,000 and $100,000 at March 31, 2008 and 2007, respectively. For the fiscal year ended March 31, 2008, Mr. Fletcher received $4,500 in interest related to the notes. (7) Mr. O'Hara serves pursuant to an employment agreement which was amended January 1, 2008 and provides for an annual salary of $130,000, and for Mr. O'Hara to receive 15,000 stock options. (8) Robert J. Melnick, Vice President and director, serves pursuant to a consulting contract that provided $85,090 and $68,973 in compensation for the fiscal years ended March 31, 2008 and 2007, respectively. 46
Item 11. Executive Compensation (continued) - -------- ---------------------------------- GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2008 - ------------------------------------------------------ The following table sets forth information on stock options granted during or for the 2008 fiscal year to our named executive officers. - ---------------------- ----------- ----------- ----------- --------------------- -------------------- ----------------------- All Other Stock: Number All Other Option Exercise or Base of Shares Awards: Number of Price of Option Grant date Fair Approval Grant of Stock Shares of Stock Awards value of option Name Date Date (#) (#) ($/Share) Awards ($) - ---------------------- ----------- ----------- ----------- --------------------- -------------------- ----------------------- Jeffrey C. O'Hara 09/17/07 09/17/07 -0- 15,000 $3.70 $26,175 - ---------------------- ----------- ----------- ----------- --------------------- -------------------- ----------------------- The exercise price of the options granted approximated the market value at the date of grant of the shares underlying such options. The estimated fair value of the shares underlying such options was determined utilizing the methodology described in Note 13 of the notes to the consolidated financial statements. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE The following table sets forth the outstanding stock option equity grants awards held by named executive officers at the end of the 2008 fiscal year. The option exercise price set forth in the table is based on the closing price on the date of grant. Number of Securities Number of Securities Name Underlying Unexercised Underlying Unexercised ---- Options(#) Options (#) Option Exercise Option Expiration Exercisable Unexercisable (1) Price ($) Date ----------- ----------------- --------- ---- Harold K. Fletcher 9,000 6,000 $3.74 12/08/09 Jeffrey C. O'Hara 7,000 -0- $1.80 - $2.90 5/09/08 - 12/17/08 7,100 2,400 $2.75 - $3.70 1/15/09 - 12/8/09 7,900 10,600 $3.55 - $4.25 1/28/10 - 8/15/10 -0- 15,000 $3.70 9/17/12 Robert J. Melnick 6,000 4,000 $3.40 12/08/09 Marc A. Mastrangelo 16,000 -0- $3.05 1/20/09 1,800 1,200 $3.40 12/08/09 1,600 2,400 $3.40 2/28/11 7,900 10,600 $3.55 1/24/12 (1) Options are exercisable, on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. 47
OPTIONS EXERCISED AND STOCK VESTED DURING FISCAL YEAR 2008 - ---------------------------------------------------------- The following table sets forth the number of shares acquired upon exercising options awards by our named executive officers ("NEOs")during fiscal year 2008. ---------------------------- ----------------------- ------------------ Number of shares acquired on Value realized Name excercise on exercise (1) ---------------------------- ----------------------- ------------------ Jeffrey C. O'Hara 7,800 $13,435 ---------------------------- ----------------------- ------------------ (1) Value stated calculated by subtracting the exercise price from the market value at time of exercise. Options granted to NEOs are consistent with the terms of options granted to other employees pursuant to the Employee Stock Option Plans (see Note 13 of the notes to the consolidated financial statements). Mr. O'Hara's employment agreement provides for the grant of 15,000 options. Mr. O'Hara was granted an additional 15,000 stock options in fiscal year 2008 upon assuming the role of President. No other NEOs were awarded any stock options in fiscal year 2008. Options granted to NEOs may be tax sheltered to the grantee, and their cost constitutes a current charge to the Company (see Notes 2 and 13 to the Financial Statements). Incentive Plan The Company has a key man incentive compensation program. Each year the Committee determines a percentage of operating profits to be distributed among senior employees, including NEOs. The percentage determined is based on the general performance of the Company, and the amount of operating profits available for shareholders and for reinvestment in the business. This element of compensation provides an incentive for short-term performance. The percentage of operating profits so determined is then distributed to senior employees, including NEOs and to a category entitled "other", based on (a) the amount of the employee's base salary, (b) his contribution to the Company, (c) the results of that contribution, (d) an estimated amount of his "special effort" on behalf of the Company, (e) his technical expertise, leadership, and management skills, and (f) the level of the overall compensation paid employees performing similar work in competitive companies. No incentive awards have been made to the NEOs the last three fiscal years. Other Benefits The Company sponsors the Tel-Instrument Electronics Corp 401(k) Plan (the "Plan"), a tax qualified Code Section 401(k) retirement savings plan, for the benefit of its employees, including its NEOs. The Plan encourages savings for retirement by enabling participants to make contributions on a pre-tax basis and to defer taxation on earnings on funds contributed to the Plan. The Company makes matching contributions to the Plan. All NEOs can make contributions to the Plan. The NEOs also participate in group health and life benefits generally on the same terms and conditions that apply to other employees. 48 Director Compensation - --------------------- Directors who are not employees or officers of the Company receive $1,250 in cash and options, at the then market price, to purchase 1,000 shares of common stock for attendance at each in-person meeting and $625 in cash and options to purchase 500 shares for attendance at each formal telephonic meeting of the Board or of a standing committee. During fiscal year 2008 non-employee directors received the following compensation pursuant to this plan. ----------------- --------------------- ----------------------- ---------- Name Cash Compensation Option Awards ($)(1) Total $ ----------------- --------------------- ----------------------- ---------- George J. Leon $6,875 $9,090 $15,965 ----------------- --------------------- ----------------------- ---------- Robert A. Rice $7,500 $10,145 $17,645 ----------------- --------------------- ----------------------- ---------- Robert H. Walker $8,125 $11,003 $19,128 ----------------- --------------------- ----------------------- ---------- (1) Amounts in this column represent the fair value required by FASB 123R included in our financial statements for all options granted during fiscal year 2008. 49 Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- The following table sets forth certain information known to the Company with respect to the beneficial ownership as of March 31, 2008, by (i) all persons who are beneficial owners of five percent (5%) or more of the Company's Common Stock, (ii) each director and nominee, (iii) the Named Executive Officers, and (iv) all current directors and executive officers as a group. Number of Shares Percentage Name and Address Beneficially Owned of Class (1) ---------------- ------------------ ------------ Named Directors and Officers ---------------------------- Harold K. Fletcher, Director 600,102 (2) 26.0% 728 Garden Street Carlstadt, NJ 07072 George J. Leon, Director 338,567 (3) 14.6% 116 Glenview Toronto, Ontario, Canada M4R1P8 Robert J. Melnick, Director 43,600 (4) 1.9% 57 Huntington Road Basking Ridge, NJ 07920 Jeffrey C. O'Hara, Director 153,600 (5) 6.6% 853 Turnbridge Circle Naperville, IL 60540 Robert A. Rice 90,600 (6) 3.9% 5 Roundabout Lane Cape Elizabeth, ME 04107 Robert H. Walker, Director 63,253 (7) 2.7% 27 Vantage Court Port Jefferson, NY 11777 Donald S. Bab, Secretary 82,034 3.6% 770 Lexington Ave. New York, New York 10021 Marc A. Mastrangelo, 23,600 (8) 1.0% 136 Poplar Avenue Pompton Lakes, NJ 07442 All Officers and Directors 1,395,356 (9) 58.1% as a Group (8 persons) Hummingbird Management, LLC 140,600 (10) 5.9% 460 Park Avenue New York, NY 10022 50 Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- (Continued) ----------- (1) The class includes 2,428,131 shares outstanding plus shares outstanding under Rule 13d-3(d)(1) under the Exchange Act. The common stock deemed to be owned by the named parties, includes stock which is not outstanding but subject to currently exercisable options held by the individual named. The foregoing information is based on reports made by the named individuals. (2) Includes 24,681 shares owned by Mr. Fletcher's wife, and 4,254 shares owned by his son. Mr. Fletcher disclaims beneficial ownership of the shares owned by his wife and son. Also includes 9,000 subject to currently exercisable stock options. (3) Includes 299,517 shares owned by the George Leon Family Trust, of which Mr. Leon is a beneficiary, and 18,500 shares subject to currently exercisable stock options. Mr. Leon acts as manager of the trust assets pursuant to an informal family, oral arrangement, and disclaims beneficial ownership of the shares owned by the trust. (4) Includes 6,000 shares subject to currently exercisable stock options (5) Includes 22,000 shares subject to currently exercisable stock options. (6) Includes 7,600 shares subject to currently exercisable stock options (7) Includes 18,700 shares subject to currently exercisable stock options. (8) Includes 20,600 shares subject to currently exercisable stock options. (9) Includes 102,400 shares subject to currently exercisable options held by all executive officers and directors of the Company (including those individually named above). (10 Based on Schedule 13D filed with the SEC on February 26, 2008 and furnished to the Company. 51
Equity Compensation Plan Information - ------------------------------------ In May 2003, the Board of Directors adopted the 2003 Stock Option Plan ("the Plan") which reserves for issuance options to purchase up to 250,000 shares of its Common Stock. The shareholders approved the Plan at the November 2003 annual meeting. The Plan, which has a term of ten years from the date of adoption, is administered by the Board of Directors or by a committee appointed by the Board of Directors. The selection of participants, allotment of shares, and other conditions related to the grant of options, to the extent not set forth in the Plan, are determined by the Board of Directors. Options granted under the Plan are exercisable up to a period of 5 years from the date of grant at an exercise price which is not less than the fair market value of the common stock at the date of grant, except to a shareholder owning 10% or more of the outstanding common stock of the Company, as to which the exercise price must be not less than 110% of the fair market value of the common stock at the date of grant. Options are exercisable, on a cumulative basis, 20% at or after each of the first, second, and third anniversary of the grant and 40% after the fourth year anniversary. In March 2006, the Board of Directors of the Company adopted the 2006 Stock Option Plan which reserves for issuance options to purchase up to 250,000 shares of its common stock and is similar to the 2003 Plan. This Plan was ratified by the shareholders at the Annual Meeting in December 2006. Additionally, at March 31, 2008 the Company has individual employment agreements with nine individuals which provide for the grant of 79,500 stock options with a weighted average exercise of $3.19 per share. These employee contracts have been approved by the directors, and were included as consideration for their employment. Since these options were granted under the Stock Option Plans, they are included in the 348,300 shares in the second column of the following schedule. The following table provides information as of March 31, 2008 regarding compensation plans under which equity securities of the Company are authorized for issuance. ----------------------------- ----------------------- ----------------------- ----------------------- Number of options remaining available Number of securities Weighted average for future issuance to be issued upon exercise price of under Equity Plan category exercise of options options Compensation Plans ----------------------------- ----------------------- ----------------------- ----------------------- ----------------------------- ----------------------- ----------------------- ----------------------- Equity Compensation Plans approved by shareholders 348,300 $3.33 179,370 ----------------------------- ----------------------- ----------------------- ----------------------- Equity Compensation Plans not approved by shareholders -- -- -- ----------------------------- ----------------------- ----------------------- ----------------------- Total * 348,300 $3.33 179,370 ----------------------------- ----------------------- ----------------------- ----------------------- * See Discussion above. 52
TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- Item 13. Certain Relationships and Related Transactions - -------- ---------------------------------------------- The disclosures required by this item are contained in Note 9 to Notes to Consolidated Financial Statements included on pages 33 and 34 of this report. Any corporate transaction which involves a related person must be approved by the independent directors as being fair and reasonable to the Corporation and its shareholders. Any such approval would be included in the minutes of the Board of Directors. There were no such transactions during the last fiscal year that would be required to be reported under Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission. Item 14. Principal Accountant Fees and Services - -------- -------------------------------------- For the fiscal years ended March 31, 2008 and 2007, professional services were performed by BDO Seidman, LLP, the Company's independent registered public accountant. Fees for those years were as follows: 2008 2007 ---- ---- Audit Fees $ 102,200 $ 89,000 Audit-Related Fees -- -- --------- --------- Total Audit and Audit-Related Fees 102,200 89,000 Tax Fees -- -- All Other Fees -- -- --------- --------- Total $ 102,200 $ 89,000 ========= ========= Audit Fees. This category includes the audit of the Company's consolidated financial statements, and reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q. It also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, and services which are normally provided in connection with regulatory filings, or in an auditing engagement. Audit Related Fees, tax and other fees. No fees under these categories were paid to BDO Seidman, LLP in 2008 and 2007. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor The Audit Committee has established a policy which requires it to pre-approve all audit and permissible non-audit services, including audit-related and tax services, if any, to be provided by the independent auditor. Pre-approval is generally provided for up to one year and is detailed as to the particular service or category of service to be performed, and is subject to a detailed budget. The auditor and management are required to report periodically to the Audit Committee regarding the extent of services performed and the amount of fees paid to date, in accordance with the pre-approval. 53 Item 15. Exhibits and Financial Statement Schedules - -------- ------------------------------------------ a.) The following documents are filed as a part of this report: Pages ----- (1) Financial Statements: Report of Independent Registered Public Accounting Firm 16 Consolidated Balance Sheets - March 31, 2008 and 2007 17 Consolidated Statements of Operations - Years Ended March 31, 2008 and 2007 18 Consolidated Statements of Changes in 19 Stockholders' Equity - Years Ended March 31, 2008 and 2007 Consolidated Statements of Cash Flows - 20 Years Ended March 31, 2008 and 2007 Notes to Consolidated Financial Statements 21-40 (2) Financial Statement Schedule II - Valuation and Qualifying Accounts 41 54 TEL-INSTRUMENT ELECTRONICS CORP Item 15. Exhibits and Financial Statement Schedules (continued) c.) Exhibits identified in parentheses below on file with the Securities and Exchange Commission, are incorporated herein by reference as exhibits hereto. ---- -------- --------------------------------------------------- * (3.1) Tel-Instrument Electronics Corp's Certificate of Incorporation, as amended. ---- -------- --------------------------------------------------- * (3.2) Tel-Instrument Electronics Corp's By-Laws, as amended. ---- -------- --------------------------------------------------- * (3.3) Tel-Instrument Electronics Corp's Restated Certificate of Incorporation dated November 8, 1996. ---- -------- --------------------------------------------------- * (4.1) Specimen of Tel-Instrument Electronics Corp's Common Stock Certificate. ---- -------- --------------------------------------------------- * (10.1) 7%, $30,000 Convertible Subordinated Note dated March 31, 1992 between Registrant and Donald S. Bab. ---- -------- --------------------------------------------------- * (10.2) Distributor Agreement with Muirhead Avionics & Accessories Ltd. ---- -------- --------------------------------------------------- * (10.3) Naval Air Warfare Center Aircraft Division Contract No. N68335-97-D-0060 ---- -------- --------------------------------------------------- * (10.4) Lease dated March 1, 2001 by and between Registrant and 210 Garibaldi Group. ---- -------- --------------------------------------------------- * (10.5) Agreement with Semaphore Capital Advisors dated November 28, 2001 and amendment dated as of June 1, 2002. ---- -------- --------------------------------------------------- * (10.6) 10% convertible subordinated note between Registrant and Harold K. Fletcher. ---- -------- --------------------------------------------------- * (10.7) 1998 stock option plan and option agreement. ---- -------- --------------------------------------------------- (*) (10.8) Purchase agreement between Registrant and Innerspace Technology ---- -------- --------------------------------------------------- * (10.9) Agreement between Registrant and Semaphore Capital Advisors, LLC ---- -------- --------------------------------------------------- * (10.10) 2003 Stock Option Plan ---- -------- --------------------------------------------------- (23.1) Consent of Independent Registered Public Accounting Firm ---- -------- --------------------------------------------------- (31.1) Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act. ---- -------- --------------------------------------------------- (31.2) Certification by CFO pursuant to Rule 15d-14 under the Securities Exchange Act. ---- -------- --------------------------------------------------- (32.1) Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---- -------- --------------------------------------------------- (32.2) Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---- -------- --------------------------------------------------- * Incorporated by reference to Registration 33-18978 dated November 7, 1988. The Company will furnish to a stockholder, upon request, any exhibit at cost. 55 TEL-INSTRUMENT ELECTRONICS CORP Signatures ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- (Registrant) Dated: July 11, 2008 By: /s/ Harold K. Fletcher -------------------------------- Harold K. Fletcher President and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated and by signature hereto. Signature Title Date --------- ----- ---- /s/ Harold K. Fletcher Director July 11, 2008 ------------------------ Harold K. Fletcher /s/ Joseph P. Macaluso Principal Accounting Officer July 11, 2008 ------------------------ Joseph P. Macaluso /s/ George J. Leon Director July 11, 2008 ------------------------ George J. Leon /s/ Robert J. Melnick Director July 11, 2008 ------------------------ Robert J. Melnick /s/ Jeffrey C. O'Hara COO and Director July 11, 2008 ------------------------ Jeffrey C. O'Hara /s/ Robert A. Rice Director July 11, 2008 ------------------------ Robert A. Rice /s/ Robert H. Walker Director July 11, 2008 ------------------------ Robert H. Walker 56 EX-23.1 2 telinstrumentexhib231-033108.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm Tel-Instrument Electronics Corp. Carlstadt, New Jersey We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-18978) of Tel-Instrument Electronics Corp. of our report dated July 9, 2008, relating to the consolidated financial statements and schedule, which appears in this Annual Report on Form 10-K. /s/ BDO Seidman, LLP - ----------------------------- BDO Seidman, LLP Woodbridge, New Jersey July 11, 2008 EX-31.1 3 telinstrumentexhib311-033108.txt CERTIFICATION OF CEO PER SECTION 302 EXHIBIT 31.1 TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- CEO Certification ----------------- I, Harold K. Fletcher, certify that: 1. I have reviewed this annual report on Form 10-K of Tel-Instrument Electronics Corp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a) and 15(f) and 15(d)-15(f) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such control and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caiused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and d) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 11, 2008 /s/ Harold K. Fletcher ----------------------------------- Harold K. Fletcher Chairman and President EX-31.2 4 telinstrumentexhib312-033108.txt CERTIFICATION OF CFO PER SECTION 302 EXHIBIT 31.2 TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- CFO Certification ----------------- I, Joseph P. Macaluso, certify that: 1. I have reviewed this annual report on Form 10-K of Tel-Instrument Electronics Corp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a) and 15(f) and 15(d)-15(f) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such control and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caiused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and d) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 11, 2008 /s/ Joseph P. Macaluso ----------------------------------- Joseph P. Macaluso Principal Accounting Officer EX-32.1 5 telinstrumentexhib321-033108.txt CERTIFICATION OF CEO & CFO PER SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tel-Instrument Electronics Corp (the "Company"), on Form 10-K for the period ending March 31, 2008, as filed with the Securities Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, each hereby certify, pursuant to and solely for the purpose of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Harold K. Fletcher ----------------------------------- Harold K. Fletcher Chairman and President /s/ Joseph P. Macaluso ----------------------------------- Joseph P. Macaluso Principal Accounting Officer July 11, 2008 A signed original of this written statement required by Section 906 has been provided to Tel-Instrument Electronics Corp and will be retained by Tel-Instrument Electronics Corp and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----