10-K 1 telinstrument10k033109.txt PERIOD ENDED 03-31-09 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, 2009 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: 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. [X] 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, 2008 (the last business day of our most recently completed second fiscal quarter) was $4,449,200 using the closing price on September 30, 2008. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 2,478,761 shares of Common Stock were outstanding as of June 25, 2009. 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 designs, 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. The Company has become a major manufacturer and supplier of IFF (Identification Friend or Foe) flight line test equipment and over the last few years was awarded the following major military contracts: o CRAFT "Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester") (AN/USM-708 and AN/USM-719) with the U.S. Navy o ITATS ("Intermediate Level TACAN Test Set") (AN/ARM-206) with the U.S. Navy o TS-4530 IFF test set with the U.S. Army Aviation and Missile Command. These contracts include multi-year production deliveries of products designed and developed by Tel using Tel's proprietary, next generation technology. Delivery of the AN/USM-719, derivative of the AN/USM-708, began in calendar year 2008. The Company expects that production shipments under of the AN/ARM-206 to commence in the fourth quarter of calendar year 2009, and shipments of the TS-4530 IFF Test set and the AN/USM-708 to begin in calendar year 2010. If the production options are exercised in full, these programs have an aggregate revenue value of approximately $84 million over the next few years. Substantial revenues from these contracts are not expected in the fiscal year ended March 31, 2010. 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 new generation technology product. The AN/USM-708 and AN/USM-719 contract was competitively awarded to the Company by the United States Navy, and includes a maximum delivery of 1,200 units, if all options are exercised. This 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. These units will undergo design validation testing with production scheduled to begin in calendar year 2010. The Company believes that the core technology in the AN/USM-708 can be the foundation for additional products. Item 1. Description of Business ------- ----------------------- General (continued) ------------------- As part of the CRAFT program, 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 testing IFF only. This increases the number of contractual pilot production orders from 15 to 98 units. The Company shipped 61 of these units in fiscal year 2009 and the remaining units are expected to be shipped during the first half of fiscal year 2010. It is expected that additional delivery orders for the AN/USM-719 will be exercised by the U.S. Navy in the current fiscal year. The contract for the AN/USM-708 and 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 the TR-420, a modified CRAFT test set, from customers other than the U.S. Navy. The AN/USM-708 contract also includes options for units 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 provide 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. The Company and its subcontractor have made substantial progress on this program, and the Company expects to begin production shipment in the fourth quarter of calendar year 2009. In February 2009, the Company was awarded a five year firm fixed price indefinite-delivery/indefinite-quantity (IDIQ) contract by the U.S. Army Aviation and Missile Command with a maximum dollar value of approximately $44 million, depending on the number of units purchased. This contract entails production of at least 20 Mode 5 conversion kits for the Army's existing TS-4530 IFF test sets and 20 new Mode 5 test sets. The IDIQ portion of the contract will entail the production quantity of up to 2,980 Mode 5 conversion kits and a quantity of up to 1,980 new production test sets. These Mode 5 conversion kits and new IFF test sets will incorporate Tel's proprietary electronics and IFF technology in addition to Mode S Enhanced Surveillance ("EHS") test functionality. Tel has received three Delivery Orders on this IDIQ contract from the Army in the amount of $8.8 million. Production deliveries are expected to begin in calendar year 2010. In March 2009, Aeroflex, Inc., an unsuccessful bidder on the $44 million Army IFF contract, protested this award to the General Accounting Office ("GAO"), and in accordance with federal regulations, the Army instructed Tel to suspend its efforts on the contract until the matter was resolved by the GAO. Thereafter, the Army filed a response, rejecting Aeroflex's allegations and agreeing with Tel that Tel's proposal is based on 2 Item 1. Description of Business ------- ----------------------- General (continued) ------------------- its own proprietary technology and does not involve or use Aeroflex's technology. In April 2009, Aeroflex withdrew its GAO protest and the Army lifted its stop work order. Aeroflex also filed a civil lawsuit against Tel, making the same allegations that Tel used Aeroflex's technology to win the award. Most of the material allegations in the civil lawsuit were raised by Aeroflex in its protest of this award to the Government Accountability Office and were rejected by the Army. Tel believes the unsubstantiated allegations in the civil law suit have no merit as evidenced by the Army response to the GAO. Tel has refuted each allegation in papers filed with the Court. While Tel is confident as to the ultimate outcome of this litigation, defending these claims is likely to entail substantial legal expenditures. The Company will provide additional clarification when further information is available. See Item 3, Pending Legal Proceedings. The Company also expects that additional new products will be developed from these new technologies that will upgrade the current product line, which the Company continues to market and sell, and which sales continue to support the Company's efforts. In January, 2004, the Company acquired privately held Innerspace Technology, Inc. ("ITI"). ITI had 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 decided to terminate this business and focus its resources on the avionics segment. As a result, in fiscal years 2008 and 2009, the Company treated ITI as discontinued operations, and in 2008, wrote-off the remaining assets of this division (see Note 11 to the Consolidated Financial Statements). The Company is currently in the process of liquidating this operation, which is expected to be completed in the current fiscal year. 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 designers and manufacturers, Tel and Aeroflex, which is substantially larger than Tel. This market is relatively narrow and highly competitive. Tel has been successful because of its high quality, new technology, user friendly products and competitive prices. However, in recent years commercial airlines have experienced financial difficulties, and, as a result of this, sales of avionics test equipment to airlines have declined. 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 engineering quality of 3 Item 1. Description of Business ------- ----------------------- General (continued) ------------------- Competition (continued) ----------------------- its products, competitive price, 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 2009 and 2008. 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 4% and 14%, and 8% and 6% of commercial sales, respectively, for the years ended March 31, 2009 and 2008, respectively. Dallas Avionics, an independent domestic distributor, accounted for 1% and 10% of total commercial sales for the years ended March 31, 2009 and 2008, 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, 2009 and 2008, sales to the U.S. Government, including shipments through the government's logistics center, represented approximately 67% and 45%, respectively, of net avionics sales. The U.S. Military has a number of separate purchasing sites. No direct government customer represented over 10% of government sales for fiscal years 2009 and 2008. International sales are made throughout the world to government and commercial customers, directly, 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 ("Muirhead"), 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 7% and 6% of commercial sales for the years ended March 31, 2009 and 2008, respectively. In addition, Muirhead sells to government customers. 4 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, 2009 and 2008 total international avionics sales were 15% and 20%, respectively, of total avionics 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, 2009, sales to M.P.G. Instruments s.r.l represented 5% 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 of 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, 2009 and 2008. Commercial Government Total ---------- ---------- ----- March 31, 2009 $ 53,400 $11,339,621 $11,393,021 March 31, 2008 $ 61,500 $ 7,144,235 $ 7,205,735 Tel believes that most of its backlog at March 31, 2009 will be delivered during the next two fiscal years. The increase in government backlog is mostly attributed to the first delivery order related to the $44 million Indefinite Quantity/Indefinite Delivery (IDIQ) award from the U.S. Army on the TS-4530 IFF test set program. The first delivery order is for $5.1 million and entails the delivery of Mode 5 conversion kits, new production test sets, and related testing and documentation. Shipment of a limited number of conversion kits and production units is scheduled in the fourth quarter of this calendar year with significant shipments expected to begin next calendar year. 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. 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. 5 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, 2009 and 2008, Tel spent $2,948,356 and $2,790,961, respectively, on the engineering, research, and development of new and improved products. None of these amounts was sponsored by customers. Engineering, research, and development expenditures in fiscal year 2009 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. 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, engineering, research, and development expenses are projected to increase in fiscal year 2010 as a result of efforts associated with the recently awarded TS-4530 IFF test set program. Personnel --------- At June 22, 2009, Tel had twenty-four full-time employees in manufacturing, materials management, and quality assurance, fourteen in administration and sales, including customer services and product support, and fifteen in engineering, research and development, none of whom belongs to a union. The Company also utilized one part-time individual in administration. From time to time, the Company also employs independent contractors to support its manufacturing, engineering, and sales organizations. At June 22, 2009, the Company utilized four independent consultants in sales, and six 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. 6 Item 3. Pending Legal Proceedings ------- ------------------------- On March 24, 2009, Aeroflex Wichita, Inc. ("Aeroflex") filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the "Aeroflex Action"), alleging that the Company and its two employees misappropriated Aeroflex's proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the "Award"), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex's petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex's trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The gravamen of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award. In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the award with the Government Accounting Office ("GAO"). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex's proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex's allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest. The Aeroflex civil claim is currently in the jurisdiction phase and it is expected that a decision will be made on the appropriate venue sometime this summer. Based, among other things, on Tel's knowledge of the technology involved and the Army's detailed and emphatic refutation of Aeroflex's allegations, Tel believes that Aeroflex's claims are without merit. However, Tel anticipates that it will incur legal fees in connection with the litigation, and these costs will have an adverse effect on its results of operations for the fiscal year ending March 31, 2010. 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. 7
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 New York Stock Exchange Amex and its symbol is TIK. 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 2009 and 2008 by the Amex: Fiscal Year Ended March 31, High Low ----------------------------- ------ ----- 2009 ---- First Quarter 4.19 3.59 Second Quarter 4.15 3.70 Third Quarter 3.85 2.18 Fourth Quarter 4.35 3.00 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 2009, the Company issued 30,500 shares of common stock upon exercise of stock options granted pursuant to its 1998, 2003 and 2006 Employee Stock Option Plans for an aggregate $72,810 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 2009 and 2008 Mr. Harold K. Fletcher, CEO, converted a $50,000 convertible note due into 20,000 shares of common stock at a conversion price of $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, 2009 regarding compensation plans under which equity securities of the Company are authorized for issuance. ----------------------------- ----------------------- ----------------------- ------------------------------- Number of securities Weighted average Number of options remaining to be issued upon exercise price of available for future Plan category exercise options issuance under Equity of options Compensation Plans ----------------------------- ----------------------- ----------------------- ------------------------------- Equity Compensation Plans approved by shareholders 338,050 $3.56 159,120 ----------------------------- ----------------------- ----------------------- ------------------------------- Equity Compensation Plans not approved by shareholders -- -- -- ----------------------------- ----------------------- ----------------------- ------------------------------- Total 338,050 $3.56 159,120 ----------------------------- ----------------------- ----------------------- ------------------------------- See section on Equity Compensation Plan Information Approximate number of equity holders ------------------------------------ Number of Holders Title of Class of record as of March 31, 2009 -------------- ------------------------------ Common Stock, par value $.10 per share 272 Dividends --------- Registrant has not paid dividends on its Common Stock and does not expect to pay such dividends in the foreseeable future. 8
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 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 were 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 decided to divest itself of ITI and focus on the avionics' segment. As a result, in fiscal years 2009 and 2008, the Company treated ITI as a discontinued operation. The financial statements have been prepared segregating the Company's discontinued ITI business, and fiscal year 2008 also includes a charge to write-off the remaining assets of ITI (see Note 11 to the Consolidated Financial Statements). 9 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations --------------------- Overview -------- For the fiscal year ended March 31, 2009, the Company reported substantial increases in sales and profits over the prior fiscal year and substantial improvements in its gross margin percentage, working capital and shareholder equity. In February 2009, the Company won a competitive bid and was awarded a five-year firm fixed price indefinite delivery/indefinite quantity ("IDIQ") by the U.S. Army Aviation and Missile Command for the TS-4530 IFF test set, with a maximum dollar value of $44,046,866, depending on the number of units purchased. In the last three years, as previously reported, the Company also won two large competitive bid contracts from the U.S. Navy, the CRAFT and ITATS programs, with an aggregate maximum value of approximately $40 million. These contracts have required and will require over the next fiscal year substantial engineering and development costs. Delivery of the AN/USM-719 unit, a derivative of the CRAFT AN/USM-708, began in calendar year 2008. The Company believes that production deliveries of the ITATS unit, the AN/ARM-206, should commence in the third quarter of the current fiscal year, and production deliveries of the main CRAFT unit (AN/ARM-708)) and the TS 4530 Test set and kits should begin in calendar year 2010. The products developed under these contracts represent new generation technology, which should provide the Company with a competitive edge for years to come. Because of the continuing decline in commercial sales, the difficult economic environment, delays in several major government orders, and the temporarily high new product engineering costs, the Company expects that sales and profits in the first half of the current fiscal year will decline materially, until substantial production and delivery of the new products commence. The financial situation for the Company is expected to markedly improve in the second half of the current fiscal year and the Company expects to be profitable in the next fiscal year. After the Company was awarded the Army contract for the TS-4530 program, discussed above, Aeroflex Wichita, Inc. a competing bidder, ("Aeroflex") filed a protest with the General Accounting Office ("GAO') alleging that Tel won the award by using Aeroflex's proprietary technology. Tel denied Aeroflex's allegations and the Army filed two extensive statements with the GAO refuting each of Aeroflex's allegations and explaining that Tel used only Tel's own, new generation proprietary technology. On April 6, 2009, Aeroflex withdrew its Protest, and shortly thereafter, the Army withdrew its prior statutory stop work order. Since then Tel has been working on this project. In March, Aeroflex filed an action against Tel and two of its employees in the Civil Court in Wichita, Kansas, making substantially the same allegations that it made in its Protest to the GAO. Tel denied those allegations and is contesting the claim in the Kansas court. Based, among other things, on Tel's knowledge of the technology involved and the Army's detailed and emphatic refutation of Aeroflex's allegations, Tel believes that Aeroflex's claims are without merit. However, Tel anticipates that it will incur legal fees in connection with the litigation, and these costs will have an adverse effect on its results of operations for the fiscal year ending March 31, 2010. 10 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Overview (continued) -------------------- At March 31, 2009, the Company had an outstanding loan balance of $450,000 on its line of credit, an increase over the prior year. The Company's credit agreement has been renewed annually since 2002 and now expires on September 29, 2009. As of March 31, 2009, there was an additional amount of approximately $637,000 available under this Agreement, based upon defined eligible receivables and inventories at that time. (see Note 7 to the Financial Statements). The Company believes that it has adequate liquidity, backlog and borrowing resources to fund operating plans for at least the next twelve months. 11 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Results of Operations 2009 Compared to 2008 ------------------------------------------- Sales ----- Net sales increased $1,840,418 (16.4%) to $13,075,942 for the fiscal year ended March 31, 2009 as compared to the previous fiscal year. Increased shipments of the T-47N, the first shipments under the CRAFT program of the AN/USM-719, and the initial shipments of the TR-420 were partially offset by lower sales associated with the ITATS program, and a decline in commercial sales, especially the TR-220. Avionics government sales increased $2,941,654 (36.5%) to $10,990,774 for the fiscal year ended March 31, 2009 as compared to the prior fiscal year, primarily as a result of increased shipments of the T-47N, a negotiated billing to the government in the amount of $406,000 for additional work previously performed and expensed on the CRAFT program, the first shipments under the CRAFT program of the AN/USM-719, the initial shipments of the TR-420, and the shipment of T-47G test sets to the Canadian Air Force (through our distributor in Canada), as well as increases in other legacy products, partially offset by lower shipments of the T-30CM and AN/APM-480 and lower revenues from the ITATS program. Avionics commercial sales decreased from prior year by $1,101,236 (34.6%) to $2,085,167. This decrease is mostly attributed to decreases in sales of the TR-220 Multi-Function Test set and the T-36C, as a result of the continued weak financial condition of the commercial airline industry. Gross Margin ------------ Gross margin increased $1,365,575 (28.5%) to $6,163,345 for the fiscal year ended March 31, 2009 as compared to the prior fiscal year. The increase in gross margin is primarily attributed to the increase in volume and higher gross profit percentage resulting from a change in the sales mix. The increase in gross profit dollars is also attributed to a negotiated billing to the government in the amount of $406,000 for additional work previously performed and expensed on the CRAFT program. The gross margin percentage for the fiscal year ended March 31, 2009 was 47.1% as compared to 42.7% for the fiscal year ended March 31, 2008. Operating Expenses ------------------ Selling, general and administrative expenses increased $421,778 (17.1%) to $2,891,363 for the fiscal year ended March 31, 2009 as compared to the prior fiscal year, primarily as a result of an increase in salary and other payroll related expenses ($254K), and an increase in sales commissions to independent representatives ($235K). Engineering, research and development expenses increased $157,395 (5.6%) to $2,948,356 for fiscal year 2009 as compared to the prior fiscal year. This increase is mostly attributed to efforts related to the CRAFT program. 12 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Results of Operations 2009 Compared to 2008 (continued) ------------------------------------------------------- Interest, net -------------- Interest income decreased as a result of lower average cash balances. Interest expense increased as a result of the cumulative increased borrowings associated with the line of credit and the loan against the cash surrender value of the keyman life insurance policy. Income (Loss) from Continuing Operations before Income Taxes ------------------------------------------------------------ As a result of the above, the Company recorded income from continuing operations before income taxes of $281,442 for the fiscal year ended March 31, 2009 as compared to a loss from continuing operations before income taxes of $488,357 for the fiscal year ended March 31, 2008. Income Taxes for Continuing Operations -------------------------------------- An income tax provision in the amount of $151,228 was recorded for the fiscal year ended March 31, 2009 as compared to an income tax benefit of $157,752 for the prior fiscal year. The change is due to the income before taxes for the fiscal year ended March 31, 2009 as compared to a loss before taxes for the fiscal year ended March 31, 2008. Net Income (Loss) from Continuing Operations, Net of Taxes ---------------------------------------------------------- As a result of the above, the Company recorded net income from continuing operations, net of taxes, of $130,214 for the fiscal year ended March 31, 2009 as compared to a net loss from continuing operations, net of taxes of $330,605 for the fiscal year ended March 31, 2008. Income (Loss) from Operations of Discontinued Operations, Net of --------------------------------------------------------- ------ Taxes ----- For the fiscal year ended March 31, 2009, the Company recorded income from discontinued operations, net of taxes, of $66,023 as compared to a loss from discontinued operations, net of taxes of $100,280 for the prior fiscal year, primarily as a result of the reclassification of certain allocated fixed costs to continuing operations and sales of products that were written-off in 2008, and the termination of marketing and engineering expenses Loss on Disposal of Discontinued Operations, Net of Taxes --------------------------------------------------------- In March 2008, the Company wrote-off all the assets of ITI, including inventories and property, plant and equipment in the amount of $150,897, net of $77,735 of taxes. 13 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Results of Operations 2009 Compared to 2008 (continued) ------------------------------------------------------- Net Income (Loss) ----------------- As a result of the net income from continuing operations and the net income from discontinued operations, the Company recorded net income of $196,237 for the fiscal year ended March 31, 2009 as compared to a net loss of $581,782 for the fiscal year ended March 31, 2008. Liquidity and Capital Resources ------------------------------- At March 31, 2009, the Company had working capital of $3,284,115 as compared to $2,681,511 at March 31, 2008. For the year ended March 31, 2009, the Company generated $12,639 of cash from operating activities as compared to using $445,954 of net cash to fund operating activities in the prior year. This increase in cash provided by operating activities is primarily attributed to the Company generating an operating profit for the year and the decrease in unbilled receivables as compared to the prior fiscal year, mostly offset by the decrease in accounts payable. The cash balance at March 31, 2009 was $601,887 as compared to $469,906 at March 31, 2008. For the year ended March 31, 2009, the Company used $121,046 in investing activities as compared to using $228,321 in fiscal year 2008. The decrease is attributed to a decline in capital asset purchases. Cash provided by financing activities was $240,388 in fiscal year 2009 as compared to $488,345 in fiscal year 2008. This decrease is primarily attributed to lower new borrowings from the line of credit and a decrease in proceeds from the exercise of stock options partially offset by proceeds from a loan on the cash surrender value of a life insurance policy. At March 31, 2009 the Company had an outstanding loan balance of $450,000 on which it currently pays 3.75% 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, 2009, and the new agreement includes a new expanded borrowing base. As of March 31, 2009, remaining availability under this modified line was approximately $637,000 based upon eligible receivables and inventories at March 31, 2009. In the first quarter of the current fiscal year the Company did not make any additional borrowings, and the remaining availability was approximately $450,000 at June 25, 2009. On certain government contracts the Company has been granted progress payments from the government, which allows the Company to bill and collect a portion of its incurred costs on long-term programs, thus helping to fund the upfront costs of these programs. The Company believes that it has adequate liquidity, backlog and borrowing resources 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, 2009. 14 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 are transferred to the customer. Provisions, when appropriate, are made where the right to return exists. Revenues on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at this time that the work is completed. 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. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. 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. Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of goods sold. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. 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 costs have historically been within our expectations and the provisions established, future warranty costs could be in excess of our warranty 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 reserves are adjusted from time to time when actual warranty claim experience differs from estimates. 15 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- Critical Accounting Policies (continued) ---------------------------------------- Accounts receivable - the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. For the year ended March 31, 2009 approximately 67% of the Company's sales were to the U.S. Government. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that it will continue to receive positive results. Income taxes - deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are taxable only when the valuation change is realized. 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. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets 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 16 Item 7. Management's Discussion and Analysis of Financial Condition and ------- --------------------------------------------------------------- Results of Operations (continued) --------------------------------- New Accounting Pronouncements In December 2007, the FASB issued SFAC 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 adoption of SFAS 141(R) will not have a significant impact on the Company's consolidated financial statements or financial position, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date. In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted this standard effective January 1, 2009. The implementation of this standard did not have a material impact on the disclosures related to the Company's consolidated financial statements. In April 2009, the FASB issued FSP FAS FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. The Company will make the disclosures required by this statement. 17 Item 8. Financial Statements and Supplementary Data ------- ------------------------------------------- Pages ----- (1) Financial Statements: Report of Independent Registered Public Accounting Firm 19 Consolidated Balance Sheets - March 31, 2009 and 2008 20 Consolidated Statements of Operations - Years Ended March 31, 2009 and 2008 21 Consolidated Statements of Changes in Stockholders' Equity - Years Ended March 31, 2009 and 2008 22 Consolidated Statements of Cash Flows - Years Ended March 31, 2009 and 2008 23 Notes to Consolidated Financial Statements 24 - 45 (2) Financial Statement Schedule: II - Valuation and Qualifying Accounts 46 18 Report of Independent Registered Public Accounting Firm ------------------------------------------------------- The Board of Directors and Stockholders of Tel-Instrument Electronics Corp Carlstadt, New Jersey We have audited the accompanying consolidated balance sheets of Tel-Instrument Electronics Corp and subsidiary (the "Company") as of March 31, 2009 and 2008 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended March 31, 2009. 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, 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, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2009 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidation financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP ----------------------------- BDO Seidman, LLP Woodbridge, New Jersey June 29, 2009 19
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Balance Sheets ASSETS March 31, March 31, 2009 2008 ----------- ----------- Current assets: Cash $ 601,887 $ 469,906 Accounts receivable, net of allowance for doubtful accounts of $40,304 and $31,206 1,516,698 1,223,753 Unbilled government receivables 1,265,470 1,100,323 Inventories, net 2,206,546 2,075,542 Taxes receivable -- 44,612 Prepaid expenses and other 90,509 96,834 Deferred income tax asset 461,631 531,975 ----------- ----------- Total current assets 6,142,741 5,542,945 Equipment and leasehold improvements, net 437,974 532,240 Deferred income tax asset - non-current 852,413 900,221 Other assets 72,261 142,069 ----------- ----------- Total assets $ 7,505,389 $ 7,117,475 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 450,000 $ 350,000 Convertible note payable - related party -- 50,000 Accounts payable 456,343 928,367 Deferred revenues 21,891 55,014 Accrued expenses - vacation pay, payroll and payroll withholdings 326,202 348,683 Accrued expenses - related parties 44,053 41,925 Accrued expenses - other 1,560,137 1,087,445 ----------- ----------- Total current liabilities 2,858,626 2,861,434 Deferred revenues 43,243 43,818 ----------- ----------- Total liabilities 2,901,869 2,905,252 ----------- ----------- Commitments and contingencies Stockholders' equity Common stock, 4,000,000 shares authorized, par value $.10 per share, 2,478,761 and 2,428,261 shares issued and outstanding 247,876 242,816 Additional paid-in capital 4,801,272 4,611,272 Accumulated deficit (445,628) (641,865) ----------- ----------- Total stockholders' equity 4,603,520 4,212,223 ----------- ----------- Total liabilities and stockholders' equity $ 7,505,389 $ 7,117,475 =========== =========== The accompanying notes are an integral part of the consolidated financial statements 20
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Statements of Operations For the years ended March 31, ----------------------------- 2009 2008 ------------ ------------ Net sales $ 13,075,942 $ 11,235,524 Cost of sales 6,912,597 6,437,754 ------------ ------------ Gross margin 6,163,345 4,797,770 ------------ ------------ Operating expenses: Selling, general and administrative 2,891,363 2,469,585 Engineering, research and development 2,948,356 2,790,961 ------------ ------------ Total operating expenses 5,839,719 5,260,546 ------------ ------------ Income (loss) from continuing operations 323,626 (462,776) Other income/(expense): Interest income 4,206 16,461 Interest expense (44,140) (37,542) Interest expense - related parties (2,250) (4,500) ------------ ------------ Income (loss) from continuing operations before income taxes 281,442 (488,357) Provision (benefit) for income taxes 151,228 (157,752) ------------ ------------ Income (loss) from continuing operations, net of income taxes 130,214 (330,605) ------------ ------------ Discontinued operations: Income (loss) from operations of discontinued operations, adjusted for applicable income tax provision or benefit 66,023 (100,280) Loss on disposal of division, adjusted for applicable income tax benefit -- (150,897) ------------ ------------ Income (loss) from discontinued operations, net of income taxes 66,023 (251,177) ------------ ------------ Net Income (loss) $ 196,237 $ (581,782) ============ ============ Income (loss) from continuing operations, net of income taxes: Basic and diluted income (loss) per common share $ 0.05 $ (0.14) ============ ============ Income (loss) from discontinued operations, net of income taxes: Basic and diluted income (loss) per common share $ 0.03 $ (0.11) ============ ============ Net income (loss) Basic and diluted income (loss) per common share $ 0.08 $ (0.25) ============ ============ Weighted average number of shares outstanding Basic 2,448,607 2,375,577 ============ ============ Diluted 2,448,607 2,375,577 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. 21
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, 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 Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000 Issuance of common stock for compensation 3,000 300 11,400 -- 11,700 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 Net income -- -- -- 196,237 196,237 Non-cash stock-based compensation -- -- 54,064 -- 54,064 Tax benefit of stock options exercised -- -- 18,186 -- 18,186 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 30,500 3,060 69,750 -- 72,810 ----------- ----------- ----------- ----------- ----------- Balances at March 31, 2009 2,478,761 $ 247,876 $ 4,801,272 $ (445,628) $ 4,603,520 =========== =========== =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 22
TEL-INSTRUMENT ELECTRONICS CORP Consolidated Statements of Cash Flows For the years ended March 31, ----------------------------- 2009 2008 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 196,237 $ (581,782) Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Deferred income taxes 102,326 (157,752) (Income) loss from discontinued operations (66,023) 251,177 Allowance for doubtful accounts 9,650 -- Depreciation and amortization 186,691 192,010 Issuance of stock for compensation -- 11,700 Provision for inventory obsolescence 72,972 60,000 Decrease (increase) in cash surrender value of life 3,711 (59,446) insurance Non-cash stock-based compensation 54,064 39,708 Changes in assets and liabilities: Increase in accounts receivable (302,595) (241,539) Increase in unbilled government receivables (165,147) (1,100,323) Increase in inventories (175,355) (12,206) Decrease (increase) in taxes receivable 44,612 (15,836) Decrease (increase) in prepaid expenses and other 4,844 (86) (Decrease) increase in accounts payable (472,024) 556,261 Decrease in deferred revenues (33,698) (40,233) Increase in accrued expenses 452,339 515,634 Decrease in net assets of discontinued operations 100,035 136,759 ----------- ----------- Net cash provided by (used in) operating activities 12,639 (445,954) ----------- ----------- Cash flows from investing activities: Acquisition of equipment (121,046) (228,321) ----------- ----------- Net cash used in investing activities (121,046) (228,321) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 72,810 138,345 Proceeds from line of credit 350,000 350,000 Repayment of line of credit (250,000) -- Proceeds from loan on life insurance 67,578 -- ----------- ----------- policy Net cash provided by financing activities 240,388 488,345 ----------- ----------- Net increase (decrease) in cash 131,981 (185,930) Cash, beginning of year 469,906 655,836 ----------- ----------- Cash, end of year $ 601,887 $ 469,906 =========== =========== Supplemental cash flow information: Taxes paid $ 20,790 $ -- =========== =========== Interest paid $ 27,116 $ 43,549 =========== =========== Supplemental non-cash information Notes converted into common stock $ 50,000 $ 50,000 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 23
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 1. Business, Organization, and Liquidity Business and Organization Tel-Instrument Electronics Corp ("Tel" or the "Company") has been in business since 1947. The Company is a leading designer and manufacturer of avionics test and measurement instruments for the global, commercial air transport, general aviation, and government/military defense markets. Tel 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 divest itself of this business in 2008 and focus on the avionics' segment. As a result, in fiscal years 2009 and 2008, the Company treated ITI as a discontinued operation. The financial statements have been prepared segregating the Company's discontinued ITI business, and fiscal year 2008 also includes a charge to write-off the remaining assets of ITI (see Note 11 to the Consolidated Financial Statements). 2. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, and include the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated. Revenue Recognition: Revenues are recognized at the time of shipment to, or acceptance by the 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 represent approximately 8% of revenues for the year ended March 31, 2009. These revenues are for units that are periodically returned for annual calibrations and/or for repairs after the warranty period has expired. The Company does not recognize any revenue from repairs and calibrations when the units are originally shipped. Revenues on repairs and calibrations are recognized at time the repaired or calibrated unit is shipped as it is at this time that the work is completed. The 24 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) Revenue Recognition (continued): Company's terms are F.O.B. Plant, and as such, delivery has occurred, and revenue recognized, when picked up and acknowledged by a common carrier. Due to the unique nature of the Intermediate Level TACAN Test Set ("ITATS") contract, 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. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. 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. (See Note 4). Shipping and handling costs charged to customers are classified as sales, and the shipping and handling costs incurred are included in cost of sales. Payments received prior to the delivery of units or services performed are recorded as deferred revenues Fair Value of 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. 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, 2009, the Company believes it has no significant risk related to its concentration within its accounts receivable. 25 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) Unbilled Government Receivables: Unbilled government receivables represent unbilled costs and accrued profits primarily related to revenues on long-term contracts that have been recognized on a percentage-of-completion basis for accounting purposes, but not yet billed to customers. As revenues are recognized, performance-based payments and progress payments are charged as an offset to the related receivables balance. Inventories: Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the Company's forecasts of future sales and age of inventory. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year. Equipment and Leasehold Improvements: Office and manufacturing equipment are stated at cost, net of accumulated depreciation. 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 advertising costs amounted to $3,095 and $31,171 for the years ended March 31, 2009 and 2008, respectively. 26 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) 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 anti-dilutive effects of common stock equivalents. 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. Deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are taxable only when the valuation change is realized. 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. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets. 27 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements 2. Summary of Significant Accounting Policies (Continued) Accounting for Income Taxes (continued): 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, 2009 and 2008 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, 2009 and 2008. 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 13. Long-Lived Assets: The Company assesses the recoverability of the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future, undiscounted cash flows expected to be generated by an asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment losses have been recognized for the years ended March 31, 2009 and 2008, respectively. 28 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) 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. Reclassifications: 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. 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, litigation, 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. 29 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (continued) New Accounting Pronouncements: In December 2007, the FASB issued SFAC 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 adoption of SFAS 141(R) will not have a significant impact on the Company's consolidated financial statements or financial position, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date. In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted this standard effective January 1, 2009. The implementation of this standard did not have a material impact on the disclosures related to the Company's consolidated financial statements. In April 2009, the FASB issued FSP FAS FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. The Company will make disclosures required by this statement. 30
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 3. Accounts Receivable The following table sets forth the components of accounts receivable: March 31, --------- 2009 2008 ---- ---- Government $ 1,199,989 $ 647,063 Commercial 357,013 607,896 Less: Allowance for doubtful accounts (40,304) (31,206) ------------ ------------ $ 1,516,698 $ 1,223,753 ============ ============ 4. Inventories Inventories consist of: March 31, --------- 2009 2008 ---- ---- Purchased parts $ 1,534,184 $ 1,246,733 Work-in-process 918,038 881,472 Finished goods 104,243 224,284 Less: Allowance for obsolete inventory (349,919) (276,947) ------------ ------------ $ 2,206,546 $ 2,075,542 ============ ============ Work-in-process inventory includes $328,162 and $310,917 for government contracts at March 31, 2009 and 2008, respectively. 31
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 5. Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following: March 31, --------- 2009 2008 ---- ---- Leasehold Improvements $ 506,311 $ 506,311 Machinery and equipment 1,584,475 1,542,373 Automobiles 16,514 16,514 Sales equipment 544,270 501,490 Assets under capitalized leases 367,623 367,623 Less: Accumulated depreciation & amortization (2,581,219) (2,402,071) ------------ ------------ $ 437,974 $ 532,240 ============ ============ Depreciation and amortization expense for the years ended March 31, 2009 and 2008 was $186,691 and $192,010, respectively. 6. Accrued Expenses Accrued vacation pay, payroll and payroll withholdings consist of the following: March 31, --------- 2009 2008 ---- ---- Accrued vacation pay $ 210,615 $ 238,040 Accrued payroll and payroll withholdings 115,587 110,643 ------------ ------------ $ 326,202 $ 348,683 ============ ============ Accrued vacation pay, payroll and payroll withholdings includes $84,534 and $88,570 at March 31, 2009 and 2008, respectively, which is due to officers. 32
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 6. Accrued Expenses (continued) Accrued expenses - other consist of the following: March 31, --------- 2009 2008 ---- ---- Accrued consulting $ 128,118 $ 115,199 Accrued outside contractor costs 856,615 667,733 Accrued commissions 255,359 95,371 Accrued audit and tax preparation fees -- 88,400 Accrued - other 320,045 120,742 ------------ ------------ $ 1,560,137 $ 1,087,445 ============ ============ Accrued expenses - related parties consists of the following: March 31, 2009 2008 Professional fees to non-employee officer and stockholder $ 17,314 $ 16,226 Reimbursement of expenses due to the Company's President 2,500 9,000 Interest and other expenses due to Company's Chairman/CEO 24,239 16,699 ------------ ------------ $ 44,053 $ 41,925 ============ ============ 7. Line of Credit The Company has a line of credit from a bank, which expires September 30, 2009. 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 3.75% and 5.75% at March 31, 2009 and 2008, respectively. The Company pays no fees on the unused portion. 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, 2009 and March 31, 2008, the Company was in compliance with all financial covenants. At March 31, 2009 and 2008, the Company had outstanding balances of $450,000 and $350,000, respectively. As of March 31, 2009, the remaining availability under this line is approximately $637,000, based upon receivables and inventories at March 31, 2009. 33
. TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 8. Income Taxes Income tax provision (benefit): March 31, March 31, --------- --------- 2009 2008 ---- ---- Current: Federal $ -- $ -- State and local 48,902 3,851 ------------ ------------ Total current tax provision 48,902 3,851 ------------ ------------ Deferred: Federal 89,705 (137,363) State and local 12,621 (24,240) ------------ ------------ Total deferred tax benefit 102,326 (161,603) ------------ ------------ Total provision (benefit) $ 151,228 $ (157,752) ============ ============ The components of the Company's deferred taxes at March 31, 2009 and 2008 are as follows: March 31, March 31, --------- --------- 2009 2008 ---- ---- Deferred tax assets: Net operating loss carryforwards & credits $ 930,000 1,062,000 Discontinued operations 64,000 91,000 Allowance for doubtful accounts 16,000 12,000 Reserve for inventory obsolescence 140,000 111,000 Inventory capitalization 45,000 47,000 Deferred payroll and accrued interest 16,000 20,000 Vacation accrual 84,000 95,000 Warranty reserve 26,000 15,000 Deferred revenues 26,000 40,000 Stock options 21,000 -- Non-compete agreement 23,000 25,000 Depreciation 18,000 18,000 ------------ ------------ Deferred tax asset 1,409,000 1,536,000 Less valuation allowance 95,000 104,000 ------------ ------------ Deferred tax asset, net $ 1,314,000 1,432,000 ============ ============ Deferred tax asset - current $ 462,000 532,000 Deferred tax asset - long-term 852,000 900,000 ------------ ------------ Total $ 1,314,000 1,432,000 ============ ============ 34
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 8. Income Taxes (Continued) 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 $2,256,000 at March 31, 2009, of which approximately $254,000 is subject to limitations under Section 382 of the Internal Revenue Code. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2024. A valuation allowance has been recorded against certain state net operating loss carryforwards, since management does not believe that the realization of these NOL's is more likely than not. 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, --------- --------- 2009 2008 ---- ---- Income tax expense (benefit) - statutory rate $ 95,691 $ (166,041) Income tax expenses - state and local, net of federal benefit 40,605 (15,998) Non-deductible expenses 10,940 24,071 Other 3,992 216 ----------- ----------- Income tax expense (benefit) $ 151,228 $ (157,752) 35
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 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 was required to prepay the outstanding balance of the Notes and any accrued interest thereon, if the Company sold all or substantially all of its assets. The Notes were convertible into newly issued common shares of the Company at the conversion price of $2.50 per share. The conversion price, which exceeded the market price of the stock at the time the Notes were issued, was to be adjusted for any stock dividends, stock issuances or capital reorganizations. The Notes may be redeemed by the Company prior to maturity upon giving written notice of not less than 30 days or more than 60 days at a redemption price equal to 120% of the principal if redeemed two years or more prior to the maturity date or 110% of the principal if redeemed more than one year, but less than two years prior to the maturity date. In May 2004, the Company and its Chairman/CEO renegotiated the terms of the Notes payable-related party. The Notes became serially due in consecutive years beginning March 31, 2005. The interest rate remains at 4.5%. On March 31, 2009 and 2008, respectively, each of the $50,000 notes due was converted into 20,000 shares of the Company's common stock at $2.50 per share. The total principal amount outstanding was $-0- and $50,000 at March 31, 2009 and 2008, respectively. Interest expense amounted to $2,250 and $4,500 for the years ended March 31, 2009 and 2008, respectively. The Company has obtained legal services from a non-employee officer/stockholder with the related fees amounting to $84,948 and $79,935 for the years ended March 31, 2009 and 2008, respectively. The Company obtained management and marketing services from a director/officer/stockholder with the related fees amounting to $73,370 and $85,090 for the years ended March 31, 2009 and 2008, 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. 36
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 10. Commitments (continued) The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended March 31, 2009. Years Ended March 31, 2010 $ 181,000 2011 149,000 2012 and thereafter 2,000 $ 332,000 =========== Total rent expense, including real estate taxes, was approximately $261,000 and $250,000 for the years ended March 31, 2009 and 2008, 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 $15,273 and $11,526 as its matching contribution to the Company's 401k Plan for the years ended March 31, 2009 and 2008, respectively. 11. Discontinued Operations In 2008, the Board of Directors 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 fiscal, year 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 income (loss) from discontinued operations, net of taxes for the years ended March 31, 2009 and 2008, respectively. ---------------------------------------------------------------------------- ---------------- -------------- 2009 2008 ---------------------------------------------------------------------------- ---------------- -------------- Discontinued Operations: ---------------------------------------------------------------------------- ---------------- -------------- Sales $ 250,707 $ 543,917 ---------------------------------------------------------------------------- ---------------- -------------- Costs and expenses 150,672 672,476 --------- --------- ---------------------------------------------------------------------------- ---------------- -------------- Income (loss) from operations of discontinued operations 100,035 (128,559) ---------------------------------------------------------------------------- ---------------- -------------- Income (loss) from operations of discontinued operations , net of provision for income tax of $34,012 for 2009 and benefit of $28,279 for 66,023 (100,280) 2008 --------- --------- ---------------------------------------------------------------------------- ---------------- -------------- 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) --------- --------- ---------------------------------------------------------------------------- ---------------- -------------- Income (loss) from discontinued operations $ 66,023 $(251,177) ========= ========= ---------------------------------------------------------------------------- ---------------- -------------- 37
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 12. Significant Customer Concentrations For the years ended March 31, 2009 and 2008, sales to the U.S. Government represented approximately 67% and 45%, 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 4%, and 14% of commercial avionics net sales for the years ended March 31, 2009 and 2008, respectively. No direct government customers represented over 10% of government net sales for fiscal year 2009 and 2008. No other customer or distributor accounted for more than 10% of commercial or government net sales. Foreign net sales were $1,944,239 and $2,300,464 for the years ended March 31, 2009 and 2008, respectively. All other sales were to customers located in the U.S. The following table presents net sales by U.S. and foreign countries: ----------------------------------------------------------------- ---------------------- -------------------- 2009 2008 ----------------------------------------------------------------- ---------------------- -------------------- United States $ 11,131,703 $ 8,935,060 ----------------------------------------------------------------- ---------------------- -------------------- Foreign countries 1,944,239 2,300,464 ------------ ----------- ----------------------------------------------------------------- ---------------------- -------------------- ----------------------------------------------------------------- ---------------------- -------------------- Total $ 13,075,942 $ 11,235,524 ============ ============ ----------------------------------------------------------------- ---------------------- -------------------- Net sales from any single foreign country did not comprise more than 10% of consolidated net sales. The Company had no assets outside the United States. As of March 31, 2009 and 2008, one individual customer balance represented 15% and 14%, respectively, of the Company's outstanding receivables. Receivables from the U.S. Government represented approximately 40% and 33%, respectively, of total receivables at March 31, 2009 and 2008, respectively. 13. Stock Option Plans In May 2003, the Board of Directors adopted the 2003 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 38
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 13. Stock Option Plans (continued) 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. 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 ended March 31, 2009 and 2008 was $1.42 and $1.77, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions: ---------- --------------------------- ------------------------ -------------------- ------------------ Year Dividend Yield Risk-free Interest Volatility Life rate ---------- --------------------------- ------------------------ -------------------- ------------------ 2009 0.0% 1.07%-3.16% 37.67% - 43.61% 5 years ---------- --------------------------- ------------------------ -------------------- ------------------ 2008 0.0% 2.1%-5.0% 40.42% - 57.30% 5 years ---------- --------------------------- ------------------------ -------------------- ------------------ 39
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 ended March 31, 2009 and 2008 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, 2007 387,650 $3.08 Options granted 70,500 $3.75 Options exercised (63,400) $2.19 Options canceled/forfeited (41,450) $3.45 Outstanding options at March 31, 2008 353,300 $3.34 Options granted 67,500 $3.64 Options exercised (30,500) $2.39 Options canceled/forfeited (52,250) $2.87 2.6 years $217,440 Outstanding options at March 31, 2009 338,050 $3.56 2.5 years $201,293 Vested Options: March 31, 2009: 168,130 $3.11 1.5 years $111,221 March 31, 2008: 168,130 $3.11 1.7 years $142,172 Remaining options available for grant were 159,120 and 174,370 as of March 31, 2009 and 2008, respectively. The total intrinsic value of options exercised during the years ended March 31, 2009 and 2008 was $45,465 and $95,870, respectively. Cash received from the exercise of stock options for the years ended March 31, 2009 and 2008 was $72,810 and $138,345, respectively. For the years ended March 31, 2009 and 2008, the unamortized compensation expense for stock options was $181,393 and $148,788, respectively. 14. Net Diluted Loss Per Share There are no incremental shares attributable to the assumed exercise of outstanding stock options included in the calculation of diluted income per share for the fiscal year 2009 as the use of the treasury stock method resulted in diluted earnings per share being ant-dilutive. Incremental shares of 66,143 are attributable to the assumed exercise of outstanding options and have been excluded from the calculation of diluted net loss per share for fiscal year 2008, as their effect would have been anti-dilutive due to the losses incurred in this period. 40
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: 2009 Avionics Avionics Avionics Corporate/ ---- -------- -------- -------- ---------- Government Commercial Total Reconciling Total ---------- ---------- ----- ----------- ----- Items ----- Net sales $10,990,774 $ 2,085,168 $13,075,942 $ -- $13,075,942 Cost of Sales 5,614,057 1,298,540 6,912,597 -- 6,912,597 ----------- ----------- ----------- ----------- ----------- Gross Margin $ 5,376,717 $ 786,628 6,163,345 -- 6,163,345 =========== =========== ----------- ----------- ----------- Engineering, research, and development 2,948,356 -- 2,948,356 Selling, general, and admin. 1,363,273 1,528,090 2,891,363 Interest expense, net -- 42,184 42,184 ----------- ----------- ----------- Income (loss) before income taxes from continuing operations $ 1,851,716 $(1,570,274) $ 281,442 =========== =========== =========== Segment Assets $ 4,517,547 $ 471,167 $ 4,988,714 $ 2,516,675 $ 7,505,389 =========== =========== =========== =========== =========== 41
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 15. Segment Information (continued) 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 development 2,790,961 2,790,961 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 $ 1,072,671 $ 4,399,618 $ 2,717,857 $ 7,117,475 =========== =========== =========== =========== =========== 42
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 16. Quarterly Results of Operations (Unaudited) Quarterly consolidated data for the years ended March 31, 2009 and 2008 is as follows: Quarter Ended ------------- FY 2009 June 30 September 30 December 31 March 31 ------- ------- ------------ ----------- -------- Net sales $ 3,551,975 $ 3,855,121 $ 2,915,428 $ 2,753,418 Gross margin 1,488,929 2,139,487 1,425,267 1,109,662 Income (loss) from continuing operations before taxes 34,291 650,197 22,178 (425,224) Income (loss) from continuing operations after taxes 20,591 345,832 13,317 (249,526) Discontinued operations, net of taxes 22,420 44,819 3,317 (4,533) Net income (loss) 43,011 390,651 16,634 (254,059) Basic and diluted income (loss) per share 0.02 0.16 0.01 (0.11) 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) (250,864) Discontinued operations, net of taxes (11,632) (24,001) (27,076) (37,571) Loss on disposal of assets, net of taxes -- -- -- (150,897) Net loss (83,374) (23,117) (35,959) (439,332) Basic and diluted loss per share (0.04) ( 0.01) (0.02) (0.18) 17. Fair Value Measurements In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective April 1, 2008. The FASB has also issued Staff Position (FSP) SFAS 157-2 (FSP No. 157-2), which delayed the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market 43
TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 17. Fair Value Measurements (continued) corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS 157 are as follows: Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. Cash, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated balance sheets are a reasonable estimate of their fair value due to the shot-term nature of these instruments. The carrying value of the Company's short-term borrowings is a reasonable estimate of its fair value as borrowings under the Company's credit facility have variable rates that reflect currently available terms and conditions for similar debt. As of March 31, 2009, the Company did not have any financial assets and liabilities measured at fair value on a recurring basis that would be subject to the disclosure provisions of SFAS 157. 44 TEL-INSTRUMENT ELECTRONICS CORP Notes To Consolidated Financial Statements (Continued) 18. Litigation On March 24, 2009, Aeroflex Wichita, Inc. ("Aeroflex") filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the "Aeroflex Action"), alleging that the Company and its two employees misappropriated Aeroflex's proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the "Award"), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex's petition alleges that in connection with the award, the Company and its named employees misappropriated Aeroflex's trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The gravamen of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award. In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the award with the Government Accounting Office ("GAO"). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex's proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex's allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest. The Aeroflex civil claim is currently in the jurisdiction phase and it is expected that a decision will be made on the appropriate venue sometime this summer. Based, among other things, on Tel's knowledge of the technology involved and the Army's detailed and emphatic refutation of Aeroflex's allegations, Tel believes that Aeroflex's claims are without merit. However, Tel anticipates that it will incur substantial legal fees in connection with the litigation, and these costs will have an adverse effect on its results of operations for the fiscal year ending March 31, 2010. 45
TEL-INSRUMENT ELECTRONICS CORP Schedule II - Valuation and Qualifying Accounts Balance at Charged to Deductions Balance at Beginning Costs and End of the Description of the Year Expenses Year Year ended March 31, 2009: Allowance for doubtful Accounts $ 31,206 $ 9,650 $ (552) $ 40,304 ========= ========= ========= ========= Allowance for obsolete Inventory $ 276,947 $ 72,972 $ -- $ 349,919 ========= ========= ========= ========= 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 ========= ========= ========= ========= 46
TEL-INSTRUMENT ELECTRONICS CORP Item 9A (T). Controls and Procedures ------------ ----------------------- Evaluation of disclosure controls and procedures. As of March 31, 2009, 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 Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports 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, 2009, 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) under 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 Accounting Principles ("GAAP"). Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance of such reliability 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, 2009. 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, 2009, based on these criteria. This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation of the Company's independent 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. 47 Item 9a. Controls and Procedures (continued) -------- ----------------------------------- Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. Item 9b. None. -------- 48
PART III -------- Item 10. Directors and Executive Officers of the Registrant -------- -------------------------------------------------- Year First Elected a Name (age) Position Director ---------- -------- -------- Harold K. Fletcher (1) Chairman of the Board, 1982 (83) President and Chief Executive Officer since 1982. George J. Leon (2) (3) Director; Investment 1986 (65) Manager and beneficiary of the George Leon Family Trust (investments) since 1986. Robert J. Melnick Director; 1998 (75) Vice President since 1999; Marketing and Management Consultant for the Company since 1991. Jeffrey C. O'Hara, CPA (1) Director; President since August 2007; 1998 (51) 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 (53) Owner of Spurwink Cordage, Inc since 1998 (textile manufacturing). Robert H. Walker (2) (3) Director; Retired Executive Vice 1984 (73) President, Robotic Vision Systems, Inc. (design and manufacture of robotic vision systems) 1983-1998. Marc A. Mastrangelo Vice President - Operations, since (46) May 2008, Vice President - Manufacturing, since August 2007, Director - Manufacturing, since January 2004 49
TEL-INSTRUMENT ELECTRONICS CORP Item 10. Directors and Executive Officers of the Registrant (Continued) -------- -------------------------------------------------------------- All directors serve until the next annual shareholders' meeting and until their successors are duly elected and qualified. (1) Mr. O'Hara is the son-in-law of Mr. Fletcher (2) Member of the Audit Committee (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, 2009, 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 furnished to the Company. 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. 50
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 2009 and 2008. Summary Compensation Table --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Name and Principal Year Salary ($) Incentive ($) Option All Other Total ($) Position (1) (2) Awards ($) Compensation $ (3) (4) --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Harold K. Fletcher, CEO (6) 2009 159,000 6,000 -0- 7,372 172,372 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- 2008 159,000 -0- -0- 7,613 166,613 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Jeffrey C. O'Hara, 2009 130,770 6,000 21,573 16,846 175,189 President --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- 2008 113,500 -0- 26,175 14,425 154,100 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- Marc A. Mastrangelo, Vice 2009 128,097 6,000 19,640 15,667 169,404 President - Operations --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- 2008 123,000 -0- -0- 26,049 (5) 149,049 --------------------------- ------------ ------------- --------------- -------------- ------------------- ---------- (1) The amounts shown in this column represent the dollar value of base cash salary earned by each named executive officer ("NEO"). (2) No incentive compensation was made to the NEO's in 2008, 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) See Note 9 to Notes to Consolidated Financial Statements for description of notes previously issued to Mr. Fletcher. (7) Robert J. Melnick, Vice President and director, serves pursuant to a consulting contract that provided $73,370 and $85,090 in compensation for the fiscal years ended March 31, 2009 and 2008, respectively. 51
Item 11. Executive Compensation (continued) -------- ---------------------------------- GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2009 ------------------------------------------------------ The following table sets forth information on stock options granted during or for the 2009 fiscal year to our named executive officers. ------------------------- ----------- ---------- -------------------- --------------------- --------------------- All Other Option Exercise or Base ---------------- ---------------- Awards: Number of Price of Option Grant date Fair ----------------- --------------- --------------- Approval Grant Shares of Awards value of option -------- ----- --------- ------ --------------- Name Date Date Stock (#) ($/Share) Awards ($) ---- ---- ---- --------- --------- ---------- ------------------------- ----------- ---------- -------------------- --------------------- --------------------- Jeffrey C. O'Hara 03/02/09 03/02/09 15,000 $3.58 $21,573 ------------------------- ----------- ---------- -------------------- --------------------- --------------------- Marc A. Mastrangelo 03/02/09 03/02/09 5,000 $3.58 $7,191 03/18/09 03/18/09 8,000 $3.89 $12,449 ------------------------- ----------- ---------- -------------------- --------------------- --------------------- The exercise price of the options granted was the fair market value at the date of grant of the shares underlying such options. The estimated fair value of the shares underlying such options was determined utilizing the methodology described in Note 13 of the notes to the consolidated financial statements. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END -------------------------------------------- The following table sets forth the outstanding stock option equity grants awards held by named executive officers at the end of the 2009 fiscal year. The option exercise price set forth in the table is based on the closing price on the date of grant. Number of Securities Number of Securities -------------------- -------------------- Name Underlying Underlying Unexercised ---- ---------- ---------------------- Unexercised Options Options (#) Option Exercise Option Expiration ------------------- ----------- --------------- ----------------- (#) Unexercisable (1) Price ($) Date --- ----------------- --------- ---- Exercisable ----------- Harold K. Fletcher 15,000 -0- $3.74 12/08/09 Jeffrey C. O'Hara 7,500 -0- $2.85 - $3.70 5/15/09 - 12/08/09 18,500 -0- $3.55 - $4.25 1/28/10 - 8/15/10 6,000 9,000 $3.70 9/17/12 -0- 15,000 $3.58 3/02/14 Robert J. Melnick 10,000 -0- $3.40 12/08/09 -0- 2,500 $3.89 3/18/14 Marc A. Mastrangelo 3,000 -0- $3.40 12/08/09 2,400 1,600 $3.55 2/28/09 2,400 3,600 $3.35 1/24/12 -0- 5,000 $3.58 3/02/14 -0- 8,000 $3.89 3/18/14 (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. 52
OPTIONS EXERCISED AND STOCK VESTED DURING FISCAL YEAR 2009 ---------------------------------------------------------- The following table sets forth the number of shares acquired upon exercising options awards by our named executive officers ("NEOs") during fiscal year 2009. ------------------- ----------------------- ------------------------- Number of shares acquired on Value realized Name excercise on exercise (1) ------------------- ----------------------- ------------------------- ------------------- ----------------------- ------------------------- Jeffrey C. O'Hara 9,000 $13,500 ------------------- ----------------------- ------------------------- (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). 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 Compensation 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. For the year ended March 31, 2009, each NEO will receive $6,000 under the incentive plan. No incentive awards were made to the NEOs for the year ended March 31, 2008. 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. 53
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 $625 in cash and options to purchase 500 shares for attendance at each formal telephonic meeting of the Board or of a standing committee. During fiscal year 2009 non-employee directors received the following compensation pursuant to this plan. ------------------- ---------------------- ------------------------- --------- Name Cash Compensation Option Awards ($)(1) Total $ ---- ----------------- -------------------- ------- ------------------- ---------------------- ------------------------- --------- George J. Leon $8,750 $9,334 $18,084 ------------------- ---------------------- ------------------------- --------- Robert A. Rice $8,750 $9,334 $18,084 ------------------- ---------------------- ------------------------- --------- Robert H. Walker $8,750 $9,334 $18,084 ------------------- ---------------------- ------------------------- --------- (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 2009. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management -------- -------------------------------------------------------------- The following table sets forth certain information known to the Company with respect to the beneficial ownership as of March 31, 2009, 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 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 626,102 (2) 25.1% 728 Garden Street Carlstadt, NJ 07072 George J. Leon, Director 343,267 (3) 13.7% 116 Glenview Toronto, Ontario, Canada M4R1P8 Robert J. Melnick, Director 47,600 (4) 1.9% 57 Huntington Road Basking Ridge, NJ 07920 Jeffrey C. O'Hara, Director 163,600 (5) 6.5% 853 Turnbridge Circle Naperville, IL 60540 Robert A. Rice, Director 102,004 (6) 4.1% 5 Roundabout Lane Cape Elizabeth, ME 04107 Robert H. Walker, Director 67,183 (7) 2.7% 27 Vantage Court Port Jefferson, NY 11777 Donald S. Bab, Secretary 82,034 3.3% 770 Lexington Ave. New York, New York 10021 Marc A. Mastrangelo, 10,800 (8) 0.4% 136 Poplar Avenue Pompton Lakes, NJ 07442 All Officers and Directors 1,442,590 (9) 55.6% as a Group (8 persons) Hummingbird Management, LLC 140,600 (10) 5.7% 460 Park Avenue New York, NY 10022 55 Item 12. Security Ownership of Certain Beneficial Owners and Management -------- -------------------------------------------------------------- (Continued) ----------- (1) The class includes 2,478,761 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 15,000 shares subject to currently exercisable stock options. (3) Includes 299,517 shares owned by the George Leon Family Trust, of which Mr. Leon is a beneficiary, and 18,700 shares subject to currently exercisable stock options. Mr. Leon acts as manager of the trust assets pursuant to an informal family, oral arrangement, and disclaims beneficial ownership of the shares owned by the trust. (4) Includes 10,000 shares subject to currently exercisable stock options (5) Includes 32,000 shares subject to currently exercisable stock options. (6) Includes 14,900 shares subject to currently exercisable stock options (7) Includes 19,100 shares subject to currently exercisable stock options. (8) Includes 7,800 shares subject to currently exercisable stock options. (9) Includes 117,500 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. 56
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, 2009 the Company has individual employment agreements with eight individuals which provide for the grant of 65,500 stock options with a weighted average exercise of $3.60 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 338,050 shares in the second column of the following schedule. The following table provides information as of March 31, 2009 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 * 338,050 $3.56 159,620 ----------------------------- ----------------------- ----------------------- ------------------------------- Equity Compensation Plans not approved by -- -- -- shareholders ----------------------------- ----------------------- ----------------------- ------------------------------- Total 338,050 $3.56 159,620 ----------------------------- ----------------------- ----------------------- ------------------------------- * See Discussion above. 57
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 in 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, 2009 and 2008, professional services were performed by BDO Seidman, LLP, the Company's independent registered public accountant. Fees for those years were as follows: 2009 2008 ---- ---- Audit Fees $105,000 $102,200 Audit-Related Fees -- -- -------- -------- Total Audit and Audit-Related Fees 105,000 102,200 Tax Fees -- -- All Other Fees -- -- -------- -------- Total $105,000 $102,200 ======== ======== 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 2009 and 2008. 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. 58 Item 15. Exhibits and Financial Statement Schedules -------- ------------------------------------------ a.) The following documents are filed as a part of this report: Pages ----- (1) Financial Statements: Report of Independent Registered Public Accounting Firm 19 Consolidated Balance Sheets - March 31, 2009 and 2008 20 Consolidated Statements of Operations - Years Ended March 31, 2009 and 2008 21 Consolidated Statements of Changes in Stockholders' Equity - Years Ended March 31, 2009 and 2008 22 Consolidated Statements of Cash Flows - Years Ended March 31, 2009 and 2008 23 Notes to Consolidated Financial Statements 24 - 45 (2) Financial Statement Schedule II - Valuation and Qualifying Accounts 46 59
TEL-INSTRUMENT ELECTRONICS CORP Item 15. Exhibits and Financial Statement Schedules (continued) -------- ------------------------------------------------------ c.) Exhibits identified in parentheses below on file with the Securities and Exchange Commission, are incorporated herein by reference as exhibits hereto. ------- ---------- ------------------------------------------------------------------------ * (3.1) 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) Lease dated March 1, 2001 by and between Registrant and 210 Garibaldi Group. ------- ---------- ------------------------------------------------------------------------ * (10.2) 10% convertible subordinated note between Registrant and Harold K. Fletcher. ------- ---------- ------------------------------------------------------------------------ * (10.3) Purchase agreement between Registrant and Innerspace Technology ------- ---------- ------------------------------------------------------------------------ * (10.4) Agreement between Registrant and Semaphore Capital Advisors, LLC ------- ---------- ------------------------------------------------------------------------ * (10.5) 2006 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 and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------- ---------- ------------------------------------------------------------------------ * Incorporated by reference to Registration 33-18978 dated November 7, 1988. The Company will furnish to a stockholder, upon request, any exhibit at cost. 60
TEL-INSTRUMENT ELECTRONICS CORP Signatures ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- (Registrant) Dated: June 29, 2009 By: /s/ Harold K. Fletcher -------------------------------- Harold K. Fletcher Chairman 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 June 29, 2009 ----------------------- Harold K. Fletcher /s/ Joseph P. Macaluso Principal Accounting Officer June 29, 2009 ----------------------- Joseph P. Macaluso /s/ George J. Leon Director June 29, 2009 ----------------------- George J. Leon /s/ Robert J. Melnick Director June 29, 2009 ----------------------- Robert J. Melnick /s/ Jeffrey C. O'Hara President, COO and Director June 29, 2009 ----------------------- Jeffrey C. O'Hara /s/ Robert A. Rice Director June 29, 2009 ----------------------- Robert A. Rice /s/ Robert H. Walker Director June 29, 2009 ----------------------- Robert H. Walker 61