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
Forfor the fiscal year ended March 31, 20082009 Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Jersey 22-1441806
---------------------- ------------------------------------------------------
(State of incorporation) (IRS Employer Identification Number)
728 Garden Street
Carlstadt, New Jersey 07072
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 933-1600
Securities registered pursuant to Section 12(b) of the Act:
2,439,261 shares of Common Stock were outstanding as of July 3, 2008.
Title of Each Class Name of Exchange on Which Registered
- ------------------- ------------------------------------
Common Stock $.10 par value American Stock Exchange
Indicate by checkmark if registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes No X
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Indicate by checkmark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes No X
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Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
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[filer [ ] Accelerated filer[filer [ ]
Non-accelerated filer[filer [ ] Smaller reporting company X[X]
(Do not check if smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes No X
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The aggregate market value of the voting Common Stock (par value $.10 per share)
held by non-affiliates on September 30, 20072008 (the last business day of our most
recently completed second fiscal quarter) was $3,937,608$4,449,200 using the closing price
on September 30, 2007.2008.
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
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Item 1. Description of Business
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General
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Tel-Instrument Electronics Corp ("Tel" or the "Company") has been
in business since 1947, and is a leading designer and
manufacturer of avionics test and measurement solutions for the
global commercial air transport, general aviation, and
government/military aerospace and defense markets. The Company
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. In recent years theThe Company has
become a major manufacturer and supplier of IFF (Identification
Friend or Foe) flight line test equipment and recentlyover the last few
years was awarded the following major military contracts,contracts:
o CRAFT ("Communications/"Communications/Navigation (COMM/NAV) Radio
Frequency (RF) Avionics FlightlineFlight line Tester")
(AN/USM-708 and AN/USM-719) with the U.S. Navy
o ITATS ("Intermediate Level TACAN Test Set")
(see below), incorporating new technology.
Over the last few years, the Company has won competitive awards for
two major contracts for new products, CRAFT or AN/USM-708 and ITATS or
"AN/ARM-206, from(AN/ARM-206) with the U.S. Navy.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 these programs willof 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 2009.
However, the Company has started to ship the initial pilot production
units in July 2008.2010. If the production options are exercised in
full, these programs have an aggregate revenue value of
approximately $40$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 cutting edgenew generation technology product, and is currently the
only IFF Mode 5 flight line test set under contract with the U.S.
Military.product. The AN/USM-708
and AN/USM-719 contract was competitively awarded to the Company
by the United States Navy, and was recently modified to
increase the potential numberincludes a maximum delivery of
1,200 units, to 1,200.if all options are exercised. This modified contract is
approximately a $27 million multi-year, firm-fixed-price,
indefinite-delivery/indefinite-quantity contract for the systems
engineering, design and integration, fabrication, testing, and
production of an AN/USM-708 test set with sonobuoy simulator
capabilities. The AN/USM-708 CRAFT unit combines advanced IFF
(including Mode 5) navigation, communication, and sonobuoy test
capabilities in a portable test set, which will utilize a
flexible and expandable digital-signal-processing-based
architecture. The
engineering design is currently being finalized. These units will undergo design validation testing in late calendar year 2008,
with production scheduled to begin in calendar year 2009.
In2010. The
Company believes that the core technology in the AN/USM-708 can
be the foundation for additional products.
Item 1. Description of Business
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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. These 98The Company shipped 61 of these units
in fiscal year 2009 and the remaining units are expected to be
substantially
completedshipped during the 2008 calendarfirst 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.
Item 1. Description of Business
- ------- -----------------------
General (continued)
-------------------
The contract for the AN/USM-708/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 this product forthe 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 representprovide a significant labor savings benefit to
our customers. This contract has options for approximately 180
units with a total value of over $12 million; the initial work
authorization was $4.4 million. Tel is working with an
engineering sub-contractor and, as a result, this program will
entail a much lower level of Tel engineering design effort than
the AN/USM-708, and a lower gross profit margin, until the design
is completed and validated, and production orders are received
and delivered. Given the unique nature of the design, this unit
could also generate significant sales to other military
customers, both domestically and overseas. Tel's earlier models ("Legacy Products")The Company and its
subcontractor have also been selling wellmade 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 recently awarded two large contracts froma 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 T-30DArmy'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
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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 T-47N.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 hashad been in the marine
instrumentation systems business for over 30 years designing,
manufacturing and distributing a variety of shipboard and
underwater instruments to support hydrographers, oceanographers,
researchers, engineers, geophysicists, and surveyors worldwide.
As a result of the lack of growth in this business, and the
anticipated growth of the avionics business, the Company has decided
to terminate this business and focus its resources on the
avionics segment. As a result, in fiscal yearyears 2008 and 2009, the
Company treated ITI as discontinued operations, and in 2008,
wrote-off the remaining assets of this division (see NotesNote 11 to
the Consolidated Financial Statements). No plans have yet been finalized asThe Company is currently
in the process of liquidating this operation, which is expected
to be completed in the disposition of
the ITI assets or business.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 smallnarrow
and highly competitive. Tel has been successful because of its
high quality, new technology, user friendly products and
competitive prices. 2
Item 1. DescriptionHowever, in recent years commercial airlines
have experienced financial difficulties, and, as a result of
Business
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General (continued)
-------------------
Competition (continued)
-----------------------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 uniquenessengineering quality of
3
Item 1. Description of Business
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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 20082009 and 2007.2008.
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 14%4% and 12%14%, and 6%8% and 12%6% of
commercial sales, respectively, for the years ended March 31,
20082009 and 2007,2008, respectively. Dallas Avionics, an independent
domestic distributor, accounted for 10%1% and 16%10% of total
commercial sales for the years ended March 31, 20082009 and 2007,2008,
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, 20082009 and 2007,2008, sales to the U.S.
Government, including shipments through the government's
logistics center, represented approximately 45%67% and 27%45%,
respectively, of net avionics sales. OneThe U.S. Military has a
number of separate purchasing sites. No direct government
customer (Boeing Corp.) accounted for 13% of
government sales in fiscal year 2007. No direct government customers represented over 10% of government sales for fiscal
yearyears 2009 and 2008.
International sales are made throughout the world to government
and commercial customers, direct,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 6%7% and 4%6% of commercial sales for the years ended
March 31, 20082009 and 2007,2008, respectively. In addition, Muirhead
sells to government customers.
34
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, 20082009 and 20072008 total
international avionics sales were 20%15% and 19%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, 2007,2009, sales
to M.P.G. Instruments s.r.l represented 13%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 byof 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, 20082009 and
2007.2008.
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
March 31, 2007 $ 660,027 $ 8,863,006 $ 9,523,033
Tel believes that most of its backlog at March 31, 20082009 will be
delivered during the next two fiscal years. The decreaseincrease in
government backlog is mostly attributed to percentage of completion revenuesthe first delivery
order related to the $44 million Indefinite Quantity/Indefinite
Delivery (IDIQ) award from the U.S. Army on the $4.4TS-4530 IFF test
set program. The first delivery order is for $5.1 million order forand
entails the ITATS program, which converts ordersdelivery 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 sales more rapidly. The decrease in commercial backlog is due to the
timing of orders from domestic distributors and that most commercial
orders are filled in less than 12 months.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.
During the first quarter of fiscal year 2009, the Company received
three large orders totaling approximately $1.3 million for its T-30D
and T-47N products, and an order for approximately $994,000 to upgrade
125 AN/APM-480's to T-47N's.
Suppliers
---------
Tel obtains its purchased parts from a number of suppliers. These
materials are standard in the industry, and the Company foresees
no difficulty in obtaining purchased parts, as needed, at
acceptable prices.
45
Item 1. Description of Business
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General (continued)
-------------------
Patents and Environmental Laws
------------------------------
Tel has no patents or licenses which are material to its
business, and there are no material costs incurred to comply with
environmental laws.
Engineering, Research, and Development
--------------------------------------
In the fiscal years ended March 31, 20082009 and 20072008, Tel spent
$2,790,961$2,948,356 and $2,427,839,$2,790,961, respectively, on the engineering,
research, and development of new and improved products. None of
these amounts was sponsored by customers. Tel's management believes that continued
significant expenditures for engineering, research, and development
are necessary to enable Tel to expand its products, sales, and
profits, and to remain competitive. However, the current level of
engineering expenses is projected to decline as the development phase
of the AN/USM-708 program ends.
Engineering, research,
and development expenditures in fiscal 2008year 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 July 3, 2008,June 22, 2009, Tel had 23twenty-four full-time employees in
manufacturing, materials management, and quality assurance,
15fourteen in administration and sales, including customer services
and product support, and 13fifteen in engineering, research and
development, none of whom belongs to a union. The Company also
utilized 1one part-time individual in
manufacturing and 1 in administration. From time to
time, the Company also employs independent contractors to support
its manufacturing, engineering, and sales organizations. At July 3, 2008,June
22, 2009, the Company utilized 3four independent consultants in
sales, and 4six in engineering. Tel has been successful in
attracting skilled and experienced management and scientific
personnel.
Item 2. Properties
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The Company leases 19,564 square feet in Carlstadt, New Jersey as
its manufacturing plant and administrative offices, pursuant to a
ten-year lease expiring in February, 2011 (see Note 10 to the
Notes to the Consolidated Financial Statements). The current
facilities are adequate for the Company's needs, currently and
for the near future. Tel is unaware of any environmental problems
in connection with its location and, because of the nature of its
manufacturing activities, does not anticipate such problems.
6
Item 3. Pending Legal Proceedings
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ThereOn 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 no material pendingwithout
merit. However, Tel anticipates that it will incur legal proceedings.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.
57
PART II
- -------
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
- ------- --------------------------------------------------------------------------------------------------------------------------------
Matters
-------
The Common Stock, $.10 par value, of the Registrant ("Common
Stock") is traded on the AmericanNew York Stock Exchange Amex and its
symbol is TIK. On
June 30, 2008, the closing share price on the Amex was $4.15. The following table sets forth the high and low
per share sale prices for our common stock for the periods
indicated as reported for fiscal years 20082009 and 20072008 by the Amex:
Fiscal Year
Ended March 31, High Low
---------------------------------------------------- ------ -----
20072009
----
First Quarter 3.49 1.954.19 3.59
Second Quarter 3.07 1.864.15 3.70
Third Quarter 3.20 2.203.85 2.18
Fourth Quarter 3.60 2.914.35 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 2008,2009, the Company issued 63,40030,500 shares of
common stock upon exercise of stock options granted pursuant to
its 1998, 2003 and 2006 Employee Stock Option Plans for an
aggregate $138,345$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 20082009 and 20072008 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, 20082009
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
Plan category exercise of options options issuance under Equity
of options Compensation Plans
----------------------------- ----------------------- ----------------------- -------------------------------
Equity Compensation Plans
approved by shareholders
348,300 $3.33 179,370338,050 $3.56 159,120
----------------------------- ----------------------- ----------------------- -------------------------------
Equity Compensation Plans
not approved by
shareholders -- -- --
shareholders
----------------------------- ----------------------- ----------------------- -------------------------------
Total 348,300 $3.33 179,370338,050 $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, 2008
---------------------------------------------------------------------2009
-------------- ------------------------------
Common Stock, par value $.10 per share 279272
Dividends
---------
Registrant has not paid dividends on its Common Stock and does
not expect to pay such dividends in the foreseeable future.
68
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Forward Looking Statements
--------------------------
A number of the statements made by the Company in this report may
be regarded as "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1965.
Forward-looking statements include, among others, statements
concerning the Company's outlook, pricing trends and forces
within the industry, the completion dates of capital projects, expected
sales growth, cost reduction strategies and their results,
long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that
are not historical facts.
All predictions as to future results contain a measure of
uncertainty and accordingly, actual results could differ
materially. Among the factors that could cause a difference are
changes in the general economy; changes in demand for the
Company's products or in the costs and availability of its raw
materials; the actions of competitors; the success of our
customers, technological change; changes in employee relations;
government regulations; litigation, including its inherent
uncertainty; difficulties in plant operations and materials
transportation; environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the
Company's filings with the Securities and Exchange Commission.
General
-------
Management's discussion and analysis of results of operations and
financial condition is intended to assist the reader in the
understanding and assessment of significant changes and trends
related to the results of operations and financial position of
the Company together with its subsidiary. This discussion and
analysis should be read in conjunction with the consolidated
financial statements and accompanying financial notes, and with
the Critical Accounting Policies noted below. The Company's
fiscal year begins on April 1 and ends on March 31. Unless
otherwise noted, all references in this document to a particular
year shall mean the Company's fiscal year ending on March 31.
As previously discussed, the Company's avionics business is
conducted in the Government, Commercial and General aviation
markets (see Note 15 of Notes to Financial Statements for segment
financial information). In January 2004, the Company completed
its acquisition of ITI, a company selling products to the marine
industry, and ITI's financial statements have beenwere consolidated with
the Company's financial statements since then. As a result of the
lack of growth in this business, and the anticipated growth of
the avionics business, the Company has decided to divest itself of
this businessITI and focus on the avionics' segment. As a result, in fiscal
yearyears 2009 and 2008, the Company treated ITI as a discontinued
operation. The financial statements have been restated to segregateprepared
segregating the Company's discontinued ITI business, and includefiscal
year 2008 also includes a charge to write-off the remaining
assets of ITI (see Note 11 to the Consolidated Financial
Statements).
79
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
Overview
--------
InFor the fiscal year 2008,ended March 31, 2009, the Company's revenues increased substantially,
but it still incurredCompany 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 significant, but reduced, loss from continuing
operations due to continuing high engineering expenditurescompetitive 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 CRAFT products (AN/USM-719 and AN/USM-708), a substantially lower
gross profit margin on the documentation and testing phase of the
ITATS (AN/ARM-206) program, and the fourth quarter write-down of Tel's
investment in its ITI subsidiary.
Tel is anticipating a return to profitable operations in fiscal year
2009 due primarily to a strong increase in projected sales from the
two recent large IDIQ ("Indefinite Delivery/Indefinite Quantity")
contracts with the Army and the previously announced $2.2 million
AN/USM-719TS-4530 IFF test set, orderwith 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. In addition,Navy, the Company continues to sell its legacy productsCRAFT and pursue business inITATS programs, with an aggregate
maximum value of approximately $40 million.
These contracts have required and will require over the commercial market. Engineering expenses are also projected to
decline as thenext
fiscal year substantial engineering and development phasecosts.
Delivery of the AN/USM-708 program nears
completion.
With respect toUSM-719 unit, a derivative of the new Army contracts, Tel was successful in recently
winning a competitively bid five year IDIQ contract from the U.S. Army
for 57 to 590 units of T-30D Navigation test sets with a maximum
contract value of $3.2 million, and a five year IDIQ contract from the
U.S. Army for 56 to 156 units of T-47N IFF test sets, with a maximum
contract value of $2.7 million. First shipments under both contractsCRAFT
AN/USM-708, began in the first quarter of fiscalcalendar year 2009. Tel is also planning
to deliver 83 units of AN/USM-719 IFF test sets to the U.S. Navy in
fiscal year 2009. Significant additional growth is expected in fiscal
year 2010 when substantial2008. The Company believes
that production deliveries of the ITATS unit, the AN/USM-719,
AN/USM-708,ARM-206,
should commence in the third quarter of the current fiscal year,
and AN/ARM-206 areproduction 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 commencemarkedly improve in volume.
Over the last several years,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 aggressively investedbeen working on this project.
In March, Aeroflex filed an action against Tel and two of its
employees in revitalizingthe Civil Court in Wichita, Kansas, making
substantially the same allegations that it made in its product line with three cutting edge products now
nearing completion, including two variantsProtest 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 CRAFT listed above,the technology involved and the AN/ARM-206 TACAN bench test set. The CRAFT productsArmy's detailed and
emphatic refutation of Aeroflex's allegations, Tel believes that
Aeroflex's claims are still the
only Mode 5 flight line test sets under contractwithout merit. However, Tel anticipates
that it will incur legal fees in connection with the U.S.
Military. Tel continueslitigation,
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 workthe
Financial Statements). The Company believes that it has adequate
liquidity, backlog and borrowing resources to finalizefund operating
plans for at least the AN/USM-708 product,
with the Navy technical evaluation process scheduled to commence later
this year. To date, the Navy has exercised CRAFT production options
for 98 pilot production units out of a maximum IDIQ contract of 1,200
units. The AN/ARM-206 TACAN Test Set design combines advanced digital
technology with state of the art automated testing capabilities. This
product will represent an important expansion to Tel's current product
line and its automated testing capabilities will represent a
significant benefit to our customers. This IDIQ contract is for up to
180 units with a maximum contract value of $12 million.
8next twelve months.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 20082009 Compared to 20072008
-------------------------------------------
Sales
-----
Net sales increased $4,232,583 (60.4%$1,840,418 (16.4%) to $11,235,524$13,075,942 for the
fiscal year ended March 31, 20082009 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, 2007. Sales from the Company's traditional products increased
substantially over the same period in2009 as compared
to the prior fiscal year, primarily as a result of an
increaseincreased
shipments of the T-47N, a negotiated billing to the government in
government spendingthe amount of $406,000 for additional work previously performed
and expensed on the Company's products and
increased marketing efforts for these contracts. In addition, in
fiscal year 2008,CRAFT program, the Company recognized $2,500,000 of revenues on a
percentage-of-completion basisfirst shipments under the
ITATS contract.
Avionics government sales increased $3,546,321 (78.8%) to $8,049,120
forCRAFT program of the year ended March 31, 2008 as comparedAN/USM-719, the initial shipments of the
TR-420, and the shipment of T-47G test sets to the year ended March
31, 2007 largelyCanadian Air
Force (through our distributor in Canada), as a resultwell as increases
in other legacy products, partially offset by lower shipments of
the T-30CM and AN/APM-480 and lower revenues of approximately $2,500,116 from the ITATS
contract, which are recognized on a
percentage-of-completion basis, and a net increase in sales from
several legacy products due to the award of new contracts from the
government.program.
Avionics commercial sales increaseddecreased from prior year by $686,262
(27.4%$1,101,236
(34.6%) to $3,186,404.$2,085,167. This increasedecrease is mostly attributed to
an
increasedecreases in sales of the TR-220 Multi-Function Test set ($333K),and the
T-36C, as a result of efforts of the Company's domestic distributors, as well as
an increase in repair and parts sales ($312K). Thecontinued weak financial condition of
the commercial airline industry continues to limit
significant growth in this segment in addition to increased
competition.industry.
Gross Margin
------------
Gross margin increased $946,259 (24.6%$1,365,575 (28.5%) to $4,797,770$6,163,345 for the
fiscal year ended March 31, 20082009 as compared to the prior fiscal
year. The increase in gross margin is primarily attributed to the
increase in volume.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, 20082009 was
42.7%47.1% as compared to 55.0%42.7% for the fiscal year ended March 31,
2007. The decrease in
gross profit percentage is primarily attributed2008.
Operating Expenses
------------------
Selling, general and administrative expenses increased $421,778
(17.1%) to $2,891,363 for the lower gross
profit percentage (10.5%) on the current ITATS contract discussed
above. The gross profit margin (10.5%) for this contract is
significantly less than the Company's historical gross margin duefiscal year ended March 31, 2009 as
compared to
the use of an outside subcontractor in the documentation and design
phase, prototype development, and the competitiveness of the bidding
process. During the third quarter of the prior fiscal year, 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
Company reversed its remaining enhancement liability of approximately
$125,000 relating to its upgrade liability for the completed Navy
AN/APM-480 contract, which also favorably impacted the gross margin
percentage in thatprior fiscal year. The reversal was made becauseThis increase is mostly attributed to efforts
related to the Company's contractual obligation and liability ended at that time.
9CRAFT program.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 20082009 Compared to 20072008 (continued)
-------------------------------------------------------
Operating Expenses
------------------
Selling, general and administrative expenses decreased $101,769 (4.0%)
to $2,469,585 for the year ended March 31, 2008 as compared to the
year ended March 31, 2007, primarily as a result of lower group
insurance costs ($81K), recruitment ($60K) and professional fees
($76K) partially offset by higher salaries for marketing and sales
($98K), attributed mostly to the addition of a new Director of
Business Development and an increase in outside sales commissions
($53K).
Engineering, research and development expenses increased $362,122
(15.0%) to $2,790,961 for fiscal year 2008 as compared to the prior
fiscal year. This increase is primarily attributed to additional
contract engineering services used on the CRAFT program.
Interest, net
---------------------------
Interest income decreased as a result of lower 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.
LossIncome (Loss) from Continuing Operations before Income Taxes
---------------------------------------------------------------------------------------------------------------
As a result of the above, the Company incurredrecorded 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 as compared to a loss from continuing operations before
income taxes of $1,113,960 for the year ended March 31, 2007.2008.
Income Taxes for Continuing Operations
--------------------------------------
An income tax benefitprovision in the amount of $157,752$151,228 was recorded
for the fiscal year ended March 31, 2008 as a result of the loss before taxes from
continuing operations for the year ended March 31, 20082009 as compared to an income
tax benefit of $464,242$157,752 for the year ended March 31, 2007 as
a result ofprior fiscal year. The change is
due to the lossincome before taxes from continuing operations for the
year ended March 31, 2007.
Loss from Operations of Discontinued Operations, net of taxes
-------------------------------------------------------------
Loss from operations of discontinued operations decreased $970 (1%) to
$100,280 for the fiscal year ended March
31, 20082009 as compared to a loss of $99,310before 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 lowerthe
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 offset by an increase in taxes.
Loss on Disposal of Discontinued Operations, netNet of taxesTaxes
---------------------------------------------------------
In March 2008, the Company wrote-off all the assets of this division,ITI,
including inventories and property, plant and equipment in the
amount of $150,897, net of $77,735 of taxes.
1013
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Results of Operations 20082009 Compared to 20072008 (continued)
-------------------------------------------------------
Net Loss
--------Income (Loss)
-----------------
As a result of the lossnet income from continuing operations and the
lossnet income from discontinued operations, and the loss on disposal of division, as
discussed above, the Company incurredrecorded 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 as compared to a net loss of $749,028 for
the year ended March 31, 2007. The loss for 2008 is affected by the
write-off of discontinued operations, net of the tax benefit of the
write-off of ITI.2008.
Liquidity and Capital Resources
-------------------------------
At March 31, 2008,2009, the Company had working capital of $2,681,511$3,284,115
as compared to $3,121,343$2,681,511 at March 31, 2007.2008. For the year ended
March 31, 2008,2009, the Company used $445,954generated $12,639 of cash to fundfrom
operating activities as compared to using $1,470,495$445,954 of net cash to
fund operating activities in the prior year. This decreaseincrease in
cash used inprovided by operating activities is primarily attributed to
the lowerCompany generating an operating loss from
continuing operationsprofit for the year and an increasethe
decrease in unbilled receivables as compared to the prior fiscal
year, mostly offset by the decrease in accounts payable and accrued
expenses offset partially by an increase in accounts receivable and
unbilled government receivables.payable. The cash
balance at March 31, 20082009 was $469,906$601,887 as compared to $655,836$469,906 at
March 31, 2007.2008.
For the year ended March 31, 2008,2009, the Company used $228,321$121,046 in
investing activities as compared to using $108,791$228,321 in fiscal year
2007.2008. The increasedecrease is attributed to the increased purchases ofa decline in capital equipment.asset
purchases.
Cash provided by financing activities was $240,388 in fiscal year
2009 as compared to $488,345 in fiscal year 2008
as compared to $300,581 in fiscal year 2007.2008. This increasedecrease
is primarily attributed to the increasedlower new borrowings from the line of
credit in the amount of $350,000 in fiscal year 2008,offset partially
from borrowings onand a loan from a life insurance policydecrease in fiscal year
2007. In addition, cash provided by financing activities increased
from the additional proceeds from the exercise of employee stock
options.options partially offset by proceeds from a loan on the cash
surrender value of a life insurance policy.
At March 31, 20082009 the Company had an outstanding loan balance of
$350,000$450,000 on which it currently pays 5.75%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, 2008,2009, and the new agreement includes a new expanded
borrowing base calculation tied to
working capital.base. As of March 31, 2008,2009, remaining availability
under this modified line was approximately $425,000$637,000 based upon
eligible receivables and inventories at March 31, 2008. During2009. In the
first quarter of the current fiscal year 2009, the Company borrowed andid not make
any additional $200,000, net againstborrowings, and the lineremaining 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 inventories for the orders
currently in the Company's backlog. During the first quarter, the
Company started shipping againstupfront costs of these
orders, and the Company's cash
balance at June 30, 2008 was approximately $870,000, with an
outstanding loan balance of $550,000.programs.
The Company believes that it has adequate liquidity, backlog and
borrowing resources and backlog to fund operating plans for at least the next
twelve months. Currently, the Company has no material capital
expenditure requirements.
There was no significant impact on the Company's operations as a
result of inflation for the year ended March 31, 2008.
112009.
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 isare transferred to the customer. Provisions, when
appropriate, are made where the right to return exists.
Revenues foron repairs and calibrations of the Company's products are recognized whenat the units
are shipped.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. All expenses relatedRevenues
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 thisdate 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
charged to costrequired, any changes from prior estimates are recognized by
recording adjustments in the current period for the
inception-to-date effect of sales.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/enhancementwarranty costs have historically
been within our expectations and the provisions established,
future warranty/enhancementwarranty costs could be in excess of our warranty/enhancementwarranty
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/enhancementWarranty reserves are
adjusted from time to time when actual warranty/enhancementwarranty 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.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
Critical Accounting Policies (continued)
----------------------------------------
Income taxes - deferred tax assets 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 willare expected to be in effect when such differences are
expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax
benefit which is not more likely than not to be realized. The effect onIn
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 liabilitiesfuture 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 change in tax rate is recognizedcharge 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 rate changes are enacted.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
New Accounting Pronouncements
-----------------------------
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157
"Fair Value Measurements." This SFAS defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements.
This statement applies to accounting pronouncements that require or
permit fair value measurements, except for share-based payment
transactions under SFAS No. 123. This statement is effective for
financial statements issued for fiscal years beginning after November
15, 2007.
In February 2008, FASB Staff Position ("FSP") FAS No. 157-2,
"Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was
issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to
fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least
annually). Examples of items within the scope of FSP No. 157-2 are
nonfinancial assets and nonfinancial liabilities initially measured at
fair value in a business combination (but not measured at fair value
in subsequent periods), and long-lived assets, such as property, plant
and equipment and intangible assets measured at fair value for an
impairment assessment under SFAS No. 144.
The Company does not expect that the partial adoption of SFAS No. 157
on April 1, 2008 with respect to financial assets and financial
liabilities recognized or disclosed at fair value in the financial
statements on a recurring basis will have a material impact on the
Company's financial statements. The Company is in the process of
analyzing the potential impact of SFAS No. 157 relating to its planned
April 1, 2009 adoption of the remainder of the standard.
1316
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations (continued)
---------------------------------
New Accounting Pronouncements
(continued)
-----------------------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Liabilities, including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to
choose, at specified election dates, to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and
losses shall be reported on items for which the fair value option has
been elected in earnings at each subsequent reporting date. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects
to apply the provisions of SFAS No. 157. Management anticipates the
adoption of SFAS No. 159 will not have a material impact on its future
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in consolidated Financial Statements -- an amendment of ARB
No. 51 ("SFAS 160").SFAS 160 requires that ownership interests in
subsidiaries held by parties other than the parent, and the amount of
consolidated net income, be clearly identified, labeled, and presented
in the consolidated financial statements within equity, but separate
from the parent's equity. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the
former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 will be effective beginning April 1, 2009. Management
anticipates that the adoption of SFAS 160 will not have a material
impact on the Company's future financial statements.
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3
"Accounting for Nonrefundable Payments for Goods and Services to be
Used in Future Research and Development Activities" (ETIF 07-04),
requiring that nonrefundable advance payments for future research and
development activities be deferred and capitalized. Such amounts
should be expensed as the related goods are delivered or the related
services performed. The statement is effective for fiscal years
beginning after December 15, 2007. Management anticipates that the
adoption of EITF Issue No. 07-3 will not have a material impact on the
Company's future financial statements.
In December 2007, the FASB issued SFASSFAC No 141(R), "Business
Combinations." This statement provides new accounting guidance
and disclosure requirements for business combinations. SFAS No
141(R) is effective for business combinations which occur in the
first fiscal year beginning on or after December 15, 2008. The
Company does not
currently expect the adoption of SFAS No. 141(R) towill not have a material
impact.
In December 2007,significant impact on the
FASB finalizedCompany's consolidated financial statements or financial
position, but the provisionsnature and magnitude of the Emerging
Issues Task Force (EITF) Issuespecific 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.
07-1, "Accounting161, "Disclosures about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133" ("SFAS
161"), which modifies and expands the disclosure requirements for
Collaborative
Arrangements." This EITF Issue provides guidance onderivative 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
financial statementquantitative disclosures for collaborative arrangements that
involve joint operating activities with one or more third parties..
EITF Issue No. 07-1about 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 DecemberNovember 15,
2008. SFAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company
is
currently assessingadopted this standard effective January 1, 2009. The
implementation of this standard did not have a material impact on
the effectdisclosures 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 EITF IssueFinancial Instruments.
This FSP amends FASB Statement No. 07-1 on its107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair
value of financial statements, but it is not expectedinstruments 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 be material.
14require 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 1619
Consolidated Balance Sheets - March 31, 2009 and 2008 and 2007 1720
Consolidated Statements of Operations - Years Ended
18
March 31, 2009 and 2008 and 200721
Consolidated Statements of Changes in Stockholders'
19
Equity - Years Ended March 31, 2009 and 2008 and 200722
Consolidated Statements of Cash Flows - Years Ended
20
March 31, 2009 and 2008 and 200723
Notes to Consolidated Financial Statements 21- 4024 - 45
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts 41
1546
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, 20082009 and 20072008 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two
years in the period ended March 31, 2008.2009. 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, and schedule, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements and schedule. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Tel-Instrument Electronics Corp and subsidiary as of March 31, 20082009
and 2007,2008, and the results of their operations and their cash flows for
each of the two years in the period ended March 31, 20082009 in conformity
with accounting principles generally accepted in the United States .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
July 9, 2008
16June 29, 2009
19
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Balance Sheets
ASSETS March 31, March 31,
ASSETS2009 2008 2007
----------- -----------
Current assets:
Cash $ 469,906601,887 $ 655,836469,906
Accounts receivable, net of allowance for doubtful accounts
of $40,304 and $31,206 and $34,5441,516,698 1,223,753 982,214
Unbilled government receivables 1,265,470 1,100,323 --
Inventories, net 2,206,546 2,075,542 2,123,336
Taxes receivable -- 44,612 28,776
Prepaid expenses and other 90,509 96,834 98,053
Assets of discontinued operations -- 337,306
Deferred income tax asset 461,631 531,975 395,756
----------- -----------
Total current assets 6,142,741 5,542,945 4,621,277
Equipment and leasehold improvements, net 437,974 532,240 495,929
Deferred income tax asset - non-current 852,413 900,221 800,000
Non-current assets of discontinued operations -- 129,318
Other assets 72,261 142,069
81,318----------- -----------
Total assets $ 7,117,4757,505,389 $ 6,127,8427,117,475
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 350,000450,000 $ --350,000
Convertible note payable - related party 50,000-- 50,000
Accounts payable 456,343 928,367 372,106
Deferred revenues 21,891 55,014 115,409
Accrued expenses - vacation pay, payroll and payroll withholdings 326,202 348,683 353,727
Accrued expenses - related parties 44,053 41,925 74,999
Accrued expenses - other 1,560,137 1,087,445 533,693
----------- -----------
Total current liabilities 2,858,626 2,861,434 1,499,934
Convertible note payable - related party -- 50,000
Deferred revenues 43,243 43,818 23,656
----------- -----------
Total liabilities 2,901,869 2,905,252 1,573,590
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock, 4,000,000 shares authorized, par value $.10 per share,
2,478,761 and 2,428,261 and 2,341,861shares issued and outstanding 247,876 242,816 234,186
Additional paid-in capital 4,801,272 4,611,272 4,380,149
Accumulated deficit (445,628) (641,865) (60,083)
----------- -----------
Total stockholders' equity 4,603,520 4,212,223 4,554,252
----------- -----------
Total liabilities and stockholders' equity $ 7,117,4757,505,389 $ 6,127,8427,117,475
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements
1720
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Operations
For the years ended March 31,
-----------------------------
2009 2008
2007
---- ---------------- ------------
Net sales $ 11,235,52413,075,942 $ 7,002,94111,235,524
Cost of sales 6,912,597 6,437,754 3,151,430
------------ ------------
Gross margin 6,163,345 4,797,770 3,851,511
------------ ------------
Operating expenses:
Selling, general and administrative 2,891,363 2,469,585 2,571,354
Engineering, research and development 2,948,356 2,790,961 2,427,839
------------ ------------
Total operating expenses 5,839,719 5,260,546 4,999,193
------------ ------------
LossIncome (loss) from continuing operations 323,626 (462,776) (1,147,682)
Other income/(expense):
Interest income 4,206 16,461 42,692
Interest expense (44,140) (37,542) (2,220)
Interest expense - related parties (2,250) (4,500) (6,750)
------------ ------------
LossIncome (loss) from continuing operations before income taxes 281,442 (488,357)
(1,113,960)
Income tax benefitProvision (benefit) for income taxes 151,228 (157,752) (464,242)
------------ ------------
LossIncome (loss) from continuing operations, net of income taxes 130,214 (330,605) (649,718)
------------ ------------
Discontinued operations:
LossIncome (loss) from operations of discontinued operations,
adjusted for applicable income tax provision or benefit 66,023 (100,280) (99,310)
Loss on disposal of division, adjusted for applicable
income tax benefit -- (150,897) --
------------ ------------
LossIncome (loss) from discontinued operations, net of income taxes 66,023 (251,177) (99,310)
------------ ------------
Net lossIncome (loss) $ 196,237 $ (581,782)
$ (749,028)
============ ============
LossIncome (loss) from continuing operations, net of income taxes:
Basic and diluted lossincome (loss) per common share $ (0.14)0.05 $ (0.29)(0.14)
============ ============
LossIncome (loss) from discontinued operations, net of income taxes:
Basic and diluted lossincome (loss) per common share $ (0.11)0.03 $ (0.04)(0.11)
============ ============
Net lossincome (loss)
Basic and diluted lossincome (loss) per common share $ (0.25)0.08 $ (0.33)(0.25)
============ ============
Weighted average number of shares outstanding
Basic and diluted2,448,607 2,375,577
2,303,858============ ============
Diluted 2,448,607 2,375,577
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
1821
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Changes in Stockholders' Equity
(Accumulated
Common Stock Additional Deficit)
# of Shares Paid-In Retained
Issued Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
Balances at April 1, 2006 2,279,411 227,9412007 2,341,861 $ 4,251,180234,186 $ 688,9454,380,149 $ 5,168,066(60,083) $ 4,554,252
Net loss -- -- -- (749,028) (749,028)(581,782) (581,782)
Non-cash stock-based compensation -- -- 5,63339,708 -- 5,63339,708
Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000
Issuance of common stock in connection
with the exercise of stock options 42,450 4,245 75,336 -- 79,581
----------- ----------- ----------- ----------- -----------
Balances at March 31, 2007 2,341,861 234,186 4,380,149 (60,083) 4,554,252
Net loss -- -- -- (581,782) (581,782)
Non-cash stock-based compensation -- -- 39,708 -- 39,708
Issuance of common stock for compensation 3,000 300 11,400 -- 11,700
Conversion of notes payable to common stock 20,000 2,000 48,000 -- 50,000
Issuance of common stock in connection
with the exercise of stock options 63,400 6,330 132,015 -- 138,345
----------- ----------- ----------- ----------- -----------
Balances at March 31, 2008 2,428,261 242,816 4,611,272 (641,865) 4,212,223
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 $ 242,816247,876 $ 4,611,2724,801,272 $ (641,865)(445,628) $ 4,212,2234,603,520
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
1922
TEL-INSTRUMENT ELECTRONICS CORP
Consolidated Statements of Cash Flows
For the years ended March 31,
-----------------------------
2009 2008
2007
---- --------------- -----------
Cash flows from operating activities:
Net lossincome (loss) $ (581,782)196,237 $ (749,028)(581,782)
Adjustments to reconcile net lossincome (loss) to net cash
used inProvided by (used in) operating activities:
Deferred income taxes 102,326 (157,752)
(518,713)
Loss(Income) loss from discontinued operations 150,897(66,023) 251,177
Allowance for doubtful accounts 9,650 --
Depreciation and amortization 186,691 192,010 258,609
Issuance of stock for compensation --
11,700 --
Provision for inventory obsolescence 80,000 158,370
Increase72,972 60,000
Decrease (increase) in cash surrender value of life insurance3,711 (59,446)
(15,803)insurance
Non-cash stock-based compensation
54,064 39,708 5,633
Changes in assets and liabilities:
(Increase) decreaseIncrease in accounts receivable (302,595) (241,539) 67,364
Increase in unbilled government receivablereceivables (165,147) (1,100,323) --
Increase in inventories (32,206) (516,732)
(Increase) decrease(175,355) (12,206)
Decrease (increase) in taxes receivable 44,612 (15,836)
53,712
(Increase) decreaseDecrease (increase) in prepaid expenses and other 4,844 (86)
38,980
Increase(Decrease) increase in accounts payable (472,024) 556,261 83,620
Decrease in deferred revenues (33,698) (40,233)
(1,012)
Increase (decrease) in accrued expenses 452,339 515,634 (335,495)
Decrease in net assets of discontinued operations 237,039 --100,035 136,759
----------- -----------
Net cash used inprovided by (used in) operating activities 12,639 (445,954) (1,470,495)
----------- -----------
Cash flows from investing activities:
Acquisition of equipment (121,046) (228,321) (108,791)
----------- -----------
Net cash used in investing activities (121,046) (228,321)
(108,791)----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 72,810 138,345 79,581
Proceeds from line of credit 350,000 --350,000
Repayment of note payableline of credit (250,000) -- (29,000)
Proceeds from loan on life insurance -- 250,000
policy
Payment of capitalized lease obligations --67,578 --
----------- -----------
policy
Net cash provided by financing activities 240,388 488,345 300,581
----------- -----------
Net decreaseincrease (decrease) in cash 131,981 (185,930) (1,278,705)
Cash, beginning of year 469,906 655,836 1,934,541
----------- -----------
Cash, end of year $ 469,906601,887 $ 655,836469,906
=========== ===========
Supplemental cash flow information:
Taxes paid $ --20,790 $ 21,882--
=========== ===========
Interest paid $ 43,54927,116 $ 5,69543,549
=========== ===========
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.
2023
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 avionicsavionics' segment. As a
result, in fiscal yearyears 2009 and 2008, the Company treated ITI as a
discontinued operations,operation. The financial statements have been prepared
segregating the Company's discontinued ITI business, and has
written-offfiscal year
2008 also includes a charge to write-off the remaining assets of this division.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.
As discussed in the Notes 1 and 12, the consolidated financial statements
have been restated to classify the marine system division as discontinued
operations. Prior year amounts have been reclassified to conform with the
2008 presentation.
Revenue Recognition:
Revenues are recognized at the time of shipment to, or acceptance by
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
(approximatelyrepresent approximately 8% of revenues)revenues for the year ended March 31,
2009. These revenues are recognizedfor 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 ITATS programIntermediate 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.
All expenses relatedRevenues 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 thisestimate 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 charged to costrequired, any changes
from prior estimates are recognized by recording adjustments in the
current period for the inception-to-date effect of sales.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. 21
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements
2. Summary of Significant Accounting Policies
Revenue Recognition (continued):(See Note
4).
Shipping and handling costs charged to customers are not material. The
revenuesclassified as
sales, and relatedthe shipping and handling costs incurred are included in
selling,
general and administrative expenses.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.
The debt to related party has an interest rate that approximates current
market rates and therefore the carrying value approximates market.
Concentrations of Credit Risk:
Cash held in banks: The Company maintains its cash balances in U.S.
Financial Institutions, and amounts at times exceed the Federal Deposit
Insurance Company limits.
Accounts Receivable: The Company's avionics customer base is primarily
comprised of airlines, distributors, and the U.S. Government. As of
March 31, 2008,2009, 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.
22
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost.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 $31,171$3,095 and $30,741$31,171 for the years ended
March 31, 2009 and 2008, and 2007,
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 dilutiveanti-dilutive effects of common stock equivalents.
23
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Accounting for Income Taxes:
Despite the Company's belief that its tax return positions are
consistent with applicable tax laws, one or more positions may be
challenged by taxing authorities. Settlement of any challenge can
result in no change, a complete disallowance, or some partial
adjustment reached through negotiations or litigation.
Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Accordingly, deferredDeferred 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. The effect onIn 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 liabilitiesfuture 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 change in tax rate is recognizedcharge 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 rate changes
are enacted.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, 20082009 and 20072008 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, 20082009 and 2007.
24
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)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 14.13.
Long-Lived Assets:
The Company follows SFAS No. 144, "Accountingassesses 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 Impairment or
Disposalyears ended March 31,
2009 and 2008, respectively.
28
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Long-Lived Assets." The standard provides accounting and
reporting requirements for the impairment of all long-lived assets.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.
Reclassification: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.
25
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Warranty Reserves:
Warranty reserves are based upon historical rates and specific items
that are identifiable and can be estimated at time of sale. While
warranty costs have historically been within the Company's expectations
and the provisions established, future warranty costs could be in
excess of the Company's warranty reserves. A significant increase in
these costs could adversely affect the Company's operating results for
the period and the periods these additional costs materialize. Warranty
reserves are adjusted from time to time when actual warranty claim
experience differs from estimates.
Risks and Uncertainties:
The Company's operations are subject to a number of risks, including
but not limited to changes in the general economy, demand for the
Company's products, the success of its customers, research and
development results, reliance on the government and commercial markets,
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.
New Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements." This SFAS defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This statement applies
to accounting pronouncements that require or permit fair value
measurements, except for share-based payment transactions under SFAS No.
123. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007.
In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2
defers the effective date of SFAS No. 157 to fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis
(at least annually). Examples of items within the scope of FSP No. 157-2
are nonfinancial assets and nonfinancial liabilities initially measured at
fair value in a business combination (but not measured at fair value in
subsequent periods), and long-lived assets, such as property, plant and
equipment and intangible assets measured at fair value for an impairment
assessment under SFAS No. 144.
2629
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued):
The Company does not expect that the partial adoption of SFAS No. 157 on
April 1, 2008 with respect to financial assets and financial liabilities
recognized or disclosed at fair value in the financial statements on a
recurring basis will have a material impact on the Company's financial
statements. The Company is in the process of analyzing the potential impact
of SFAS No. 157 relating to its planned April 1, 2009 adoption of the
remainder of the standard.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities, including an amendment of FASB Statement
No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at
specified election dates, to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at
fair value. Unrealized gains and losses shall be reported on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of SFAS No. 157. Management anticipates
the adoption of SFAS No. 159 will not have a material impact on the
Company's future financial statements.Pronouncements:
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS
160").SFAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income,
be clearly identified, labeled, and presented in the consolidated financial
statements within equity, but separate from the parent's equity. It also
requires once a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair
value. Sufficient disclosures are required to clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 will be effective beginning April 1, 2009.
Management anticipates that the adoption of SFAS 160 will not have a
material impact on the Company's future financial statements.
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3
"Accounting for Nonrefundable Payments for Goods and Services to be Used in
Future Research and Development Activities" (ETIF 07-04), requiring that
nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts should be expensed as
the related goods are delivered or the related services performed. The
statement is effective for fiscal years beginning after December 15, 2007.
Management anticipates that the adoption of EITF Issue No. 07-3 will not
have a material impact on the Company's future financial statements.
27
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements (continued):
In December 2007, the FASB issued SFASSFAC No 141(R), "Business
Combinations." This statement provides new accounting guidance and
disclosure requirements for business combinations. SFAS No 141(R) is
effective for business combinations which occur in the first fiscal
year beginning on or after December 15, 2008. The Company does not currently expect the adoption of SFAS
No. 141(R) towill not have a material impact.
In December 2007,significant impact on the FASB finalizedCompany's consolidated
financial statements or financial position, but the provisionsnature and
magnitude of the Emerging Issues
Task Force (EITF) Issuespecific 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. 07-1, "Accounting161,
"Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133" ("SFAS 161"), which modifies and
expands the disclosure requirements for Collaborative
Arrangements." This EITF Issue provides guidancederivative 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 financial
statementquantitative disclosures for collaborative arrangements that involve joint
operating activities with one or more third parties. EITF Issue No. 07-1about 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 DecemberNovember
15, 2008. SFAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company
is currently assessingadopted this standard effective January 1, 2009. The implementation of
this standard did not have a material impact on the effectdisclosures 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 EITF
IssueFinancial Instruments. This FSP amends
FASB Statement No. 07-1 on its107, Disclosures about Fair Value of Financial
Instruments, to require disclosures about fair value of financial
statements, but it is not expectedinstruments 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 be
material.
3. Accounts Receivablerequire 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
---------
2008 2007
---- ----
Government $ 647,063 $ 678,688
Commercial 607,896 338,070
Less: Allowance for doubtful accounts (31,206) (34,544)
------------ ------------
$ 1,223,753 $ 982,214
============ ============
28
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
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)
4. Inventories
Inventories consist of:
March 31,
---------
2008 2007
---- ----
Purchased parts $ 1,246,733 $ 1,086,085
Work-in-process 881,472 1,140,776
3,782 3,782
Finished goods 224,284 127,291
Less: Allowance for obsolete inventory (276,947) (230,816)
----------- -----------
$ 2,075,542 $ 2,123,336
=========== ===========
Work-in-process inventory includes $310,917 and $387,269 for government
contracts at March 31, 2008 and 2007, respectively.
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
March 31,
---------
2008 2007
---- ----
Leasehold Improvements $ 506,311 $ 506,311
Machinery and equipment 1,542,373 1,357,464
Automobiles 16,514 16,514
Sales equipment 501,490 458,079
Assets under capitalized leases 367,623 367,623
Less: Accumulated depreciation &
amortization (2,402,071) (2,210,062)
----------- -----------
$ 532,240 $ 495,929
=========== ===========
29
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
6. Accrued Expenses
Accrued vacation pay, payroll and payroll withholdings consist of the
following:
March 31,
---------
2008 2007
---- ----
Accrued vacation pay $ 238,040 $ 233,010
Accrued payroll and payroll withholdings 110,643 120,717
----------- -----------
$ 348,683 $ 353,727
Accrued vacation pay, payroll and payroll withholdings includes $88,570 and
$81,780 at March 31, 2008 and 2007, respectively, which is due to officers.
Accrued expenses - other consist of the following:
March 31,
---------
2008 2007
---- ----
Accrued consulting $ 115,199 $ 194,050
Accrued outside contractor costs 667,733 --
Accrued commissions 95,371 19,400
Accrued audit and tax preparation fees 88,400 76,000
Accrued - other 120,742 244,243
----------- -----------
$ 1,087,445 $ 533,693
=========== ===========
Accrued expenses - related parties consists of the following:
March 31,
---------
2008 2007
---- ----
Professional fees to non-employee
officer and stockholder $ 16,226 $ 26,276
Reimbursemnt of expenses due to
the Company's President 9,000 --
Interest and other expenses due to
Company's Chairman/CEO 16,699 48,723
----------- -----------
$ 41,925 $ 74,999
=========== ===========
30
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
7. Line of Credit
The Company has a line of credit from a bank, which expires September 30,
2008. The agreement includes a borrowing base calculation tied to accounts
receivable and inventories. Interest on any outstanding balances is payable
monthly at an annual interest rate of one-half of one percent (0.5%) above
the lender's prevailing base rate. The Company's interest rate was 5.75%
and 8.75% at March 31, 2008 and 2007 respectively. The line is
collateralized by substantially all of the assets of the Company. The
credit facility requires the Company to maintain certain financial
covenants. As of March 31, 2008 and March 31, 2007, the Company was in
compliance with all financial covenants. At March 31, 2008 and 2007, the
Company had outstanding balances of $350,000 and $-0-, respectively. As of
March 31, 2008, the remaining availability under this line is approximately
$429,000, based upon receivables and inventories at March 31, 2008.
The Company borrowed an additional $200,000 in May 2008 and another
$200,000 in June 2008 and also repaid $200,000 in June.
31
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
8. Income Taxes
Income tax (benefit) provision:
March 31, March 31,
--------- ---------
2008 2007
---- ----
Current:
Federal $ -- $ --
State and local 3,851 3,312
----------- -----------
Total current tax provision 3,851 3,312
----------- -----------
Deferred:
Federal (137,363) (367,298)
State and local (24,240) (100,256)
----------- -----------
Total deferred tax benefit (161,603) (467,554)
----------- -----------
Total benefit $ (157,752) $ (464,242)
=========== ===========
The components of the Company's deferred taxes at March 31, 2008 and 2007
are as follows:
March 31, March 31,
--------- ---------
2008 2007
---- ----
Deferred tax assets:
Net operating loss carryforwards & credits $1,062,000 $ 822,000
Discontinued operations 91,000 --
Allowance for doubtful accounts 12,000 14,000
Reserve for inventory obsolescence 111,000 139,000
Inventory capitalization 47,000 78,000
Deferred payroll and accrued interest 20,000 50,000
Vacation accrual 95,000 93,000
Warranty/Enhancement reserve 15,000 8,000
Deferred revenues 40,000 44,000
Non-compete agreement 25,000 27,000
Depreciation 18,000 --
---------- ----------
Deferred tax asset 1,536,000 1,275,000
Less valuation allowance 104,000 79,000
---------- ----------
Deferred tax asset, net $1,432,000 $1,196,000
========== ==========
Deferred tax asset - current $ 532,000 $ 396,000
Deferred tax asset - long-term 900,000 800,000
---------- ----------
Total $1,432,000 $1,196,000
========== ==========
The recognized deferred tax asset is based upon the expected utilization of
its benefit from the reversal of tax asset temporary differences. The
Company has net operating loss ("NOL") carryforwards of approximately
$3,334,000 at March 31, 2008. These carryforward losses are available to
32
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
offset future taxable income, and begin to expire in the year 2024. A
valuation allowance has been recorded against certain state net operating
loss carryforwards, since management does not believe that the realization
of these NOL's is more likely than not.
The foregoing amounts are management's estimates and the actual results
could differ from those estimates. Future profitability in this competitive
industry depends on continually obtaining and fulfilling new profitable
sales agreements and modifying products. The inability to obtain new
profitable contracts or the failure of the Company's engineering
development efforts could reduce estimates of future profitability, which
could affect the Company's ability to realize the deferred tax assets.
A reconciliation of the income tax benefit at the statutory Federal tax
rate of 34% to the income tax benefit recognized in the financial
statements is as follows:
March 31, March 31,
--------- ---------
2008 2007
---- ----
Income tax benefit - statutory rate $ (166,041) $ (378,746)
Income tax expenses - state and local,
net of federal benefit (15,998) (67,171)
Non-deductible expenses 24,071 10,591
Other 216 (28,916)
----------- -----------
Income tax benefit $ (157,752) $ (464,242)
=========== ===========
9. Related Party Transactions
On March 31, 1997, the Company's Chairman/CEO renegotiated the terms of
the non-current note payable-related party. This note, along with
$250,000 of other accrued expenses due to the Company's Chairman/CEO,
were converted into seven $50,000 convertible subordinated notes (the
"Notes") totaling $350,000. The Notes were serially due in consecutive
years beginning March 31, 1999 with the last note due March 31, 2005.
In November 2002 the Company paid and redeemed $100,000 of the
previously matured and extended Notes. The Notes bore interest at a
rate of 10% per annum, payable semi-annually on the last day of
September and March of each year. Effective October 1, 2003, the
interest rate was changed to 4.5%. The Company iswas required to prepay
the outstanding balance of the Notes and any accrued interest thereon,
if the Company sellssold all or substantially all of its assets. The Notes
can be convertedwere convertible into newly issued common shares of the Company at the
conversion price of $2.50 per share. The conversion price, which
excludedexceeded the market price of the stock at the time the Notes were
issued, shallwas 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.
33
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
9. Related Party Transactions (Continued)
In May 2004, the Company and its Chairman/CEO renegotiated the terms of
the Notes payable-related party. The Notes now becomebecame serially due in
consecutive years beginning March 31, 2005. The interest rate remains
at 4.5%. On March 31, 20082009 and 2007,2008, respectively, each of the $50,000
notes
due were converted into common stock. Each $50,000 note due was converted into 20,000 shares of the Company's common
stock at $2.50 per share. The total principal amount outstanding was
$50,000$-0- and $100,000$50,000 at March 31, 20082009 and 2007,2008, respectively. Interest
expense amounted to $4,500$2,250 and $8,970$4,500 for the years ended March 31,
20082009 and 2007,2008, respectively.
The Company has obtained legal services from a non-employee
officer/stockholder with the related fees amounting to $79,935$84,948 and
$93,179$79,935 for the years ended March 31, 20082009 and 2007,2008, respectively. The
Company obtained management and marketing services from a
director/officer/stockholder with the related fees amounting to $85,090$73,370
and $68,973$85,090 for the years ended March 31, 20082009 and 2007,2008, 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.
The following is a schedule of approximate future minimum rental payments
for operating leases subsequent to the year ended March 31, 2008.
Years Ended March 31,
2009 $ 164,000
2010 152,000
2011 143,000
---------
$ 459,000
=========
Total rent expense, including real estate taxes, was approximately $250,000
and $227,000 for the years ended March 31, 2008 and 2007, respectively.
The Company sponsors a 401K plan in which employee contributions on a
pre-tax basis are supplemented by matching contributions by the Company.
The Company charged to operations $11,526 and $10,295 as its matching
contribution to the Company's 401k Plan for the years ended March 31, 2008
and 2007, respectively.
3436
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
TheIn 2008, the Board of Directors has approved discontinuing the Company's
marine systems division. As a result, the consolidated financial
statements present the marine systems division as a discontinued
operation.
The Company wrote-off fixed assets of approximately $77,000 and
inventories of approximately $151,000 in 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 lossincome
(loss) from discontinued operations, net of taxes for the years ended
March 31, 20082009 and 2007,2008, respectively.
---------------------------------------------------------------------------- ---------------- --------------
2009 2008 2007
---------------------------------------------------------------------------- ---------------- --------------
Discontinued Operations:
---------------------------------------------------------------------------- ---------------- --------------
Sales $ 543,917250,707 $ 663,646543,917
---------------------------------------------------------------------------- ---------------- --------------
Costs and expenses 150,672 672,476
814,114--------- ---------
---------------------------------------------------------------------------- ---------------- --------------
LossIncome (loss) from operations of discontinued operations 100,035 (128,559) (150,469)
---------------------------------------------------------------------------- ---------------- --------------
LossIncome (loss) from operations of discontinued operations , net of
provision for income tax (100,280) (99,310)of $34,012 for 2009 and benefit of $28,279 and $51,159 for 66,023 (100,280)
2008 and 2007, respectively--------- ---------
---------------------------------------------------------------------------- ---------------- --------------
Loss on disposal of discontinued operations before income taxes -- (228,632)
-----------
---------------------------------------------------------------------------- ---------------- --------------
Income tax benefit -- (77,735)
----------- ---------
---------------------------------------------------------------------------- ---------------- --------------
Net loss on disposal of discontinued operations -- (150,897)
----------- ---------
---------------------------------------------------------------------------- ---------------- --------------
Net lossIncome (loss) from discontinued operations $ 66,023 $(251,177)
$(99,310)========= =========
---------------------------------------------------------------------------- ---------------- --------------
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 reflectspresents 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
reported assets and liabilities for
discontinued operations asUnited States.
As of March 31, 2007:
-------------------------------------------------- -------------
Inventories $337,306
-------------------------------------------------- -------------
Fixed assets $129,318
-------------------------------------------------- -------------
352009 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)
12. Significant Customer Concentrations
For the years ended March 31, 2008 and 2007, sales to the U.S. Government
represented approximately 45% and 27%, respectively of avionics net sales.
No other individual customer represented over 10% of avionics net sales for
these years. One domestic distributor (Avionics International) accounted
for 14%, and 12% of commercial avionics net sales for the years ended March
31, 2008 and 2007, respectively. Additionally, another domestic distributor
(Aero Express) accounted for 6% and 12% of commercial avionics net sales
for the years ended March 31, 2008 and 2007, respectively. Dallas Avionics,
another independent domestic distributor, accounted for 10% and 16% of
total commercial net sales for the years ended March 31, 2008 and 2007,
respectively. One direct government customer (Boeing Corp.) accounted for
13% of government net sales in fiscal year 2007. No direct government
customers represented over 10% of government net sales for fiscal year
2008. An international distributor (M.P.G. Instruments) accounted for 5%
and 13%, respectively, of total government net sales for the years ended
March 31, 2008 and 2007. No other customer or distributor accounted for
more than 10% of commercial or government net sales.
Foreign net sales were $2,300,464 and $1,467,314 for the years ended March
31, 2008 and 2007, respectively. All other sales were to customers located
in the U.S.
As of March 31, 2008, one individual customer balance represented 14% of
the Company's outstanding receivables. As of March 31, 2007, two individual
customer balances represented 45% and 10%, respectively, of the Company's
outstanding receivables. Receivables from the U.S. Government represented
approximately 33% and 10%, respectively, of total receivables for the
fiscal years ended March 31, 2008 and 2007.
13. Stock Option Plans
In May 2003, the Board of Directors adopted the 1998 Stock Option Plan
("the Plan") which reserved for issuance options to purchase up to 250,000
shares of its Common Stock. The stockholders approved the Plan at the
November 2003 annual meeting. The Plan, which has a term of ten years from
the date of adoption is administered by the Board of Directors or by a
committee appointed by the Board of Directors. The selection of
participants, allotment of shares, and other conditions related to the
grant of options, to the extent not set forth in the Plan, are determined
by the Board of Directors. Options granted under the Plan are exercisable
up to a period of 5 years from the date of grant at an exercise price which
is not less than the fair market value of the common stock at the date of
grant, except to a stockholder owning 10% or more of the outstanding
36
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
13. Stock Option Plans (continued)
common stock of the Company, as to which the exercise price must be not
less than 110% of the fair market value of the common stock at the date of
grant. Options are exercisable, on a cumulative basis, 20% at or after each
of the first, second, and third anniversary of the grant and 40% after the
fourth year anniversary.
In March 2006, the Board of Directors of the Company adopted the 2006 Stock
Option Plan which reserves for issuance options to purchase up to 250,000
shares of its common stock and is similar to the 2003 Plan. The
stockholders approved this plan at the December 2006 annual meeting.
The fair value of each option awarded is estimated on the date of grant
using the Black-Scholes option valuation model that uses the assumptions
noted in the following table. Expected volatilities are based on historical
volatility of the Company's stock, and other factors. The expected life of
the options granted represents the period of time from date of grant to
expiration (5 years). The risk-free interest rate is based on the U.S.
Treasury yield in effect at the time of grant. The per share
weighted-average fair value of stock options granted for the years 2008 and
2007 was $1.77 and $1.81, respectively, on the date of grant using the
Black Scholes option-pricing model with the following assumptions:
---------- ---------- --------------- ----------------- ---------
Year Dividend Risk-free Volatility Life
Yield Interest rate
---------- ---------- --------------- ----------------- ---------
2008 0.0% 2.1%-5.0% 40.42% - 57.3% 5 years
---------- ---------- --------------- ----------------- ---------
2007 0.0% 4.50%-4.77% 54.24% - 58.03% 5 years
---------- ---------- --------------- ----------------- ---------
37
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
13. Stock Option 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 2008ended March 31, 2009 and 20072008 and changes during the years
are presented below: (in number of options):
Average Aggregate
------- ---------
Number of Average Exercise Remaining Intrinsic
--------- ---------------- --------- ---------
Options Price Contractual Term Value
------- ----- ---------------- -----
Outstanding options at April 1, 2006 399,850 $2.892007 387,650 $3.08
Options granted 65,500 $3.18
Options exercised (42,450) $1.87
Options canceled/forfeited (35,250) $2.59
Outstanding options at March 31, 387,650 $3.08
2007
Options granted 65,50070,500 $3.75
Options exercised (63,400) $2.19
Options canceled/forfeited (41,450) $3.45
2.6 years $211,649
Outstanding options at March 31, 348,300 $3.332008 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
2008Outstanding 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
March 31, 2007: 173,800 $2.79 1.6 years $144,834
Remaining options available for grant were 179,370159,120 and 203,420174,370 as of
March 31, 20082009 and 2007,2008, respectively.
The total intrinsic value of options exercised during the years ended
March 31, 2009 and 2008 was $45,465 and 2007 was $95,870, and $22,486, respectively. Cash
received from the exercise of stock options for the years ended March
31, 2009 and 2008 was $72,810 and 2007$138,345, respectively.
For the years ended March 31, 2009 and 2008, the unamortized
compensation expense for stock options was $138,345$181,393 and $79,581,$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 and 35,888 are attributable to the assumed exercise
of outstanding options and have been excluded from the calculation of
diluted net loss per share for fiscal yearsyear 2008, and 2007, respectively, as their effect would
have been anti-dilutive due to the losses incurred in thesethis period.
3840
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:
-------------------------------- --------------- --------------- -------------- -------------- ----------------
20082009 Avionics Avionics Avionics Corporate/
---- -------- -------- -------- ----------
Government Commercial Total Reconciling Total
---------- ---------- ----- ----------- -----
Items
-------------------------------- --------------- --------------- -------------- -------------- ---------------------
Net sales $10,990,774 $ 8,049,120 $ 3,186,404 $11,235,5242,085,168 $13,075,942 $ -- $11,235,524
-------------------------------- --------------- --------------- -------------- -------------- ----------------$13,075,942
Cost of Sales 4,623,345 1,814,409 6,437,7545,614,057 1,298,540 6,912,597 -- 6,437,7546,912,597
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Gross Margin 3,425,775 1,371,995 4,797,770$ 5,376,717 $ 786,628 6,163,345 -- 4,797,7706,163,345
=========== =========== ----------- ----------- -----------
-----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Engineering, research, and
2,790,961 2,790,961
Development
-------------------------------- --------------- --------------- -------------- -------------- ----------------development 2,948,356 -- 2,948,356
Selling, general, and admin. 1,336,197 1,133,388 2,469,585
-------------------------------- --------------- --------------- -------------- -------------- ----------------1,363,273 1,528,090 2,891,363
Interest expense, net -- 25,581 25,58142,184 42,184
----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
Income (loss) before income
taxes from continuing
operations 670,612 (1,158,969) (488,357)
----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
-------------------------------- --------------- --------------- -------------- -------------- ----------------$ 1,851,716 $(1,570,274) $ 281,442
=========== =========== ===========
Segment Assets $ 3,326,9474,517,547 $ 1,103,807471,167 $ 4,430,7544,988,714 $ 2,686,7212,516,675 $ 7,117,475
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- -------------- -------------- ----------------
397,505,389
=========== =========== =========== =========== ===========
41
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Consolidated Financial Statements (Continued)
15. Segment Information (continued)
-------------------------------- --------------- --------------- ------------- -------------- ----------------
20072008 Avionics Avionics Avionics Corporate/
---- -------- -------- -------- ----------
Government Commercial Total Reconciling Total
---------- ---------- ----- ----------- -----
Items
-------------------------------- --------------- --------------- ------------- -------------- ---------------------
Net sales $ 4,502,7998,049,120 $ 2,500,142 $ 7,002,9413,186,404 $11,235,524 $ -- $ 7,002,941
-------------------------------- --------------- --------------- ------------- -------------- ----------------$11,235,524
Cost of Sales 1,731,674 1,419,756 3,151,4304,623,345 1,814,409 6,437,754 -- 3,151,4306,437,754
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Gross Margin 2,771,125 1,080,386 3,851,511$ 3,425,775 $ 1,371,995 4,797,770 -- 3,851,5114,797,770
=========== =========== ----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Engineering, research, and
2,427,839 2,427,839
Development
-------------------------------- --------------- --------------- ------------- -------------- ----------------development 2,790,961 2,790,961
Selling, general, and admin. 1,332,547 1,238,807 2,571,354
-------------------------------- --------------- --------------- ------------- -------------- ----------------1,336,197 1,133,388 2,469,585
Interest income,expense, net -- (33,722) (33,722)25,581 25,581
----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
Income (loss) before income
taxes from continuing operations
91,125 (1,205,085) (1,113,960)
----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------
-------------------------------- --------------- --------------- ------------- -------------- ----------------$ 670,612 $(1,158,969) $ (488,357)
=========== =========== ===========
Segment Assets $ 2,740,6993,326,947 $ 863,2461,072,671 $ 3,603,9454,399,618 $ 2,523,8972,717,857 $ 6,127,842
----------- ----------- ----------- ----------- -----------
-------------------------------- --------------- --------------- ------------- -------------- ----------------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, 20082009 and 20072008
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) (291,107)(250,864)
Discontinued operations,
net of taxes (11,632) (24,001) (27,076) (65,850)(37,571)
Loss on disposal of assets,
net of taxes -- -- -- (150,897)
Net loss (83,374) (23,117) (35,959) (507,854)(439,332)
Basic and diluted loss per share (0.04) ( 0.01) (0.02) (0.21)
Quarter Ended
-------------
FY 2007 June 30(0.18)
17. Fair Value Measurements
In September 30 December 31 March 31
------- ------- ------------ ----------- --------
Net sales $ 1,643,618 $ 1,843,857 $ 2,097,427 $ 1,418,039
Gross margin 787,876 1,011,247 1,220,573 831,815
Loss from continuing
operations before taxes (381,743) (136,823) (37,595) (557,799)
Loss from continuing
operations2006, 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 taxes (225,083) (82,081) (21,194) (321,360)
Discontinued operations,
net of taxes (46,071) (897) (18,259) (34,083)
Net loss (271,154) (82,978) (39,453) (355,443)
BasicNovember 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 diluted loss per share (0.12) (0.04) (0.02) (0.14)
40the 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-INSTRUMENTTEL-INSRUMENT ELECTRONICS CORP
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Deductions Balance at
Beginning Costs and atEnd of the
Description of the Year Expenses End of the
Year
Year ended March 31, 2008:2009:
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
========== ========== ========== ==========
Year ended March 31, 2007:
Allowance for doubtful
Accounts $ 40,994 $ -- $ (6,450) $ 34,544
========== ========== ========== ==========
Allowance for obsolete
Inventory $ 177,110 $ 108,370 $ (54,664) $ 230,816
========== ========== ========== ==========
41========= ========= ========= =========
46
TEL-INSTRUMENT ELECTRONICS CORP
Item 9a(T)9A (T). Controls and Procedures
- ----------------------- -----------------------
Evaluation of disclosure controls and procedures.
As of March 31, 2008,2009, 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 RuleRules 13a-15(e) and 15d-15(e) ofunder the
Securities and Exchange Act of 1934. Our disclosure controls and
procedures are designed to ensure that information required to be
disclosed in the reportreports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosures. Based on the evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of March 31,
2008,2009, 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) ofunder the Exchange Act. The company'sCompany'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 AcountingAccounting 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, 2008.2009. 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, 2008,2009, 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.
4247
Item 9a(T).9a. Controls and Procedures (continued)
- ------------------- -----------------------------------
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting identified in connection with the evaluation as of
March 31, 2008 by the Chief Executive Officer and Principal
Accounting Officer, required by paragraph (d) of Exchange Act
Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that
have materially affected, or are reasonably likely to
materially affect our internal controls over financial
reporting.
Item 9b. None.
- --------
4348
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Year First
Elected a
Name (age) Position Director
---------- -------- --------
Harold K. Fletcher (1) Chairman of the Board, 1982
(82) President and Chief Executive
Officer since 1982.
George J. Leon (2) (3) Director; Investment 1986
(64) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.
Robert J. Melnick Director; 1998
(74) Vice President since 1999;
Marketing and Management
Consultant for the Company
since 1991.
Jeffrey C. O'Hara, CPA (1) Director; President since 1998
(50) August 2007; Vice President
since 2005 COO since June 2006;
Financial Consultant from 2001;
Chief Financial Officer
from 1999-2000 of Alarm
Security Group.
Robert A. Rice (2) (3) Director; President and 2004
(52) Owner of Spurwink Cordage,
Inc since 1998 (textile
manufacturing).
Robert H. Walker (2) (3) Director; Retired Executive 1984
(72) Vice President, Robotic Vision
Systems, Inc. (design and
manufacture of robotic vision
systems) 1983-1998.
Marc A. Mastrangelo Vice President - Operations,
since May 2008, Vice President -
Manufacturing, since August 2007,
Director - Manufacturing, since
January 2004
44
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, 2008,2009, 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 4.4 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.
4550
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
20082009 and 2007.2008.
Summary Compensation Table
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Name and Principal Year Salary ($) Incentive ($) Option All Other Total ($)
Position (1) ($) (2) Awards ($) Compensation $ ($)
(3) (4)
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Harold K. Fletcher, CEO 2008(6) 2009 159,000 6,000 -0- -0- 7,613 166,613
(6)7,372 172,372
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
20072008 159,000 -0- -0- 7,337 166,3377,613 166,613
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Jeffrey C. O'Hara, 2008 113,500 -0- 26,175 14,425 154,1002009 130,770 6,000 21,573 16,846 175,189
President
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
2007 108,0002008 113,500 -0- -0- 13,345 121,34526,175 14,425 154,100
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
Marc A. Mastrangelo, 2008 123,000 -0- -0- 26,049 (5) 149,049
Vice 2009 128,097 6,000 19,640 15,667 169,404
President - Operations
--------------------------- ------------ ------------- --------------- -------------- ------------------- ----------
2007 115,9002008 123,000 -0- 10,847 13,449 140,196-0- 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.officer ("NEO").
(2) No incentive compensation was made to the NEO's in 2008, and 2007, and therefore
no amounts are shown.
(3) Amounts in this column represent the fair value required by FASB 123R
to be included in our financial statements for all options granted
during that year.
(4) The amounts shown in this column represent amounts for medical and life
insurance as well as the Company's match in the 401(k) Plan.
(5) Includes stock issued in lieu of compensation with a fair value of $11,700.
(6) The CompanySee Note 9 to Notes to Consolidated Financial Statements for
description of notes previously issued several $50,000 convertible principal amount
notes to Mr. Fletcher, with due dates in consecutive fiscal years. At March
31, 2008, one of these $50,000 face amount notes remained outstanding, and
is due March 31, 2009. The Note bears interest at a rate of 4.5% per annum,
payable semi-annually on the last day of September and March of each year.
The Company is required to prepay the outstanding balance of the Note and
any accrued interest thereon, if the Company sells all or substantially all
of its assets. The Note can be converted into newly issued common shares of
the Company at the conversion price of $2.50 per share. The conversion
prices shall be adjusted for any stock dividends, stock issuances or
capital reorganizations. The Note may be redeemed by the Company prior to
maturity upon giving written notice of not less than 30 days or more than
60 days at a redemption price equal to 120% of the principal if redeemed
two years or more prior to the maturity date or 110% of the principal if
redeemed more than one year, but less than two years prior to the maturity
date. On March 31, 2008 and 2007, respectively, similar $50,000 notes due
were converted into common stock. Each $50,000 note due was converted into
20,000 shares of the Company's common stock at $2.50 per share, which
exceeded the market price of the stock at date notes were executed. The
total principal amount of notes outstanding was $50,000 and $100,000 at
March 31, 2008 and 2007, respectively. For the fiscal year ended March 31,
2008, Mr. Fletcher received $4,500 in interest related to the notes.Fletcher.
(7) Mr. O'Hara serves pursuant to an employment agreement which was amended
January 1, 2008 and provides for an annual salary of $130,000, and for Mr.
O'Hara to receive 15,000 stock options.
(8) Robert J. Melnick, Vice President and director, serves pursuant to a
consulting contract that provided $85,090$73,370 and $68,973$85,090 in compensation
for the fiscal years ended March 31, 2009 and 2008, and 2007, respectively.
4651
Item 11. Executive Compensation (continued)
- -------- ----------------------------------
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 20082009
- ------------------------------------------------------
The following table sets forth information on stock options granted during or
for the 20082009 fiscal year to our named executive officers.
- ----------------------------------------------- ----------- ----------- --------------------- -------------------- --------------------- -------------------- -----------------------
All Other
Stock:
Number---------------------
All Other Option Exercise or Base
of Shares---------------- ----------------
Awards: Number of Price of Option Grant date Fair
----------------- --------------- ---------------
Approval Grant of Stock Shares of Stock Awards value of option
-------- ----- --------- ------ ---------------
Name Date Date (#)Stock (#) ($/Share) Awards ($)
---- ---- ---- --------- --------- ----------
- ----------------------------------------------- ----------- ----------- --------------------- -------------------- --------------------- -------------------- --------------------------------------------
Jeffrey C. O'Hara 09/17/07 09/17/07 -0-03/02/09 03/02/09 15,000 $3.70 $26,175$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 $12,449
- ------------------------- ----------- --------------------- -------------------- --------------------- -------------------- --------------------------------------------
The exercise price of the options granted approximatedwas the fair market value at the date
of grant of the shares underlying such options. The estimated fair value of the
shares underlying such options was determined utilizing the methodology
described in Note 13 of the notes to the consolidated financial statements.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
TABLE- --------------------------------------------
The following table sets forth the outstanding stock option equity grants awards
held by named executive officers at the end of the 20082009 fiscal year. The option
exercise price set forth in the table is based on the closing price on the date
of grant.
Number of Securities Number of Securities
-------------------- --------------------
Name Underlying Unexercised Underlying Unexercised
---- Options(#)---------- ----------------------
Unexercised Options Options (#) Option Exercise Option Expiration
Exercisable------------------- ----------- --------------- -----------------
(#) Unexercisable (1) Price ($) Date
-------------- ----------------- --------- ----
Exercisable
-----------
Harold K. Fletcher 9,000 6,00015,000 -0- $3.74 12/08/09
Jeffrey C. O'Hara 7,0007,500 -0- $1.80 - $2.90 5/09/08 - 12/17/08
7,100 2,400 $2.75$2.85 - $3.70 1/5/15/09 - 12/8/08/09
7,900 10,60018,500 -0- $3.55 - $4.25 1/28/10 - 8/15/10
-0- 15,0006,000 9,000 $3.70 9/17/12
-0- 15,000 $3.58 3/02/14
Robert J. Melnick 6,000 4,00010,000 -0- $3.40 12/08/09
-0- 2,500 $3.89 3/18/14
Marc A. Mastrangelo 16,0003,000 -0- $3.05 1/20/09
1,800 1,200 $3.40 12/08/09
2,400 1,600 $3.55 2/28/09
2,400 $3.40 2/28/11
7,900 10,600 $3.553,600 $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.
4752
OPTIONS EXERCISED AND STOCK VESTED DURING FISCAL YEAR 20082009
- ----------------------------------------------------------
The following table sets forth the number of shares acquired upon exercising
options awards by our named executive officers ("NEOs")during fiscal year 2008.
----------------------------2009.
------------------- ----------------------- -------------------------------------------
Number of shares
acquired on Value realized
Name excercise on exercise (1)
----------------------------------------------- ----------------------- -------------------------------------------
------------------- ----------------------- -------------------------
Jeffrey C. O'Hara 7,800 $13,435
----------------------------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). Mr. O'Hara's employment
agreement provides for the grant of 15,000 options. Mr. O'Hara was granted an
additional 15,000 stock options in fiscal year 2008 upon assuming the role of
President. No other NEOs were awarded any stock options in fiscal year 2008.
Options granted to NEOs may be
tax sheltered to the grantee, and their cost constitutes a current charge to the
Company (see Notes 2 and 13 to the Financial Statements).
Incentive Plan
The Company has a key man incentive compensation program. Each year the
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
have beenwere made to the NEOs for the last three fiscal years.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.
4853
Director Compensation
- ---------------------
Directors who are not employees or officers of the Company receive $1,250 in
cash and options, at the then market price, to purchase 1,000 shares of common
stock for attendance at each in-person meeting and $625 in cash and options to
purchase 500 shares for attendance at each formal telephonic meeting of the
Board or of a standing committee. During fiscal year 2008 non-employee directors
received the following compensation pursuant to this plan.
----------------- --------------------- ----------------------- ----------
Name Cash Compensation Option Awards ($)(1) Total $
----------------- --------------------- ----------------------- ----------
George J. Leon $6,875 $9,090 $15,965
----------------- --------------------- ----------------------- ----------
Robert A. Rice $7,500 $10,145 $17,645
----------------- --------------------- ----------------------- ----------
Robert H. Walker $8,125 $11,003 $19,128
----------------- --------------------- ----------------------- ----------
(1) Amounts in this column represent the fair value required by FASB 123R
included in our financial statements for all options granted during fiscal year
2008.
49
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, 2008,2009, 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 Named Executive Officers,executive officers, and (iv)
all current directors and executive officers as a group.
Number of Shares Percentage
Name and Address Beneficially Owned of Class (1)
---------------- ------------------ ------------
Named Directors and Officers
----------------------------
Harold K. Fletcher, Director 600,102626,102 (2) 26.0%25.1%
728 Garden Street
Carlstadt, NJ 07072
George J. Leon, Director 338,567343,267 (3) 14.6%13.7%
116 Glenview
Toronto, Ontario, Canada M4R1P8
Robert J. Melnick, Director 43,60047,600 (4) 1.9%
57 Huntington Road
Basking Ridge, NJ 07920
Jeffrey C. O'Hara, Director 153,600163,600 (5) 6.6%6.5%
853 Turnbridge Circle
Naperville, IL 60540
Robert A. Rice, 90,600Director 102,004 (6) 3.9%4.1%
5 Roundabout Lane
Cape Elizabeth, ME 04107
Robert H. Walker, Director 63,25367,183 (7) 2.7%
27 Vantage Court
Port Jefferson, NY 11777
Donald S. Bab, Secretary 82,034 3.6%3.3%
770 Lexington Ave.
New York, New York 10021
Marc A. Mastrangelo, 23,60010,800 (8) 1.0%0.4%
136 Poplar Avenue
Pompton Lakes, NJ 07442
All Officers and Directors 1,395,3561,442,590 (9) 58.1%55.6%
as a Group (8 persons)
Hummingbird Management, LLC 140,600 (10) 5.9%5.7%
460 Park Avenue
New York, NY 10022
5055
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
(Continued)
-----------
(1) The class includes 2,428,1312,478,761 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 9,00015,000 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
18,50018,700 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 6,00010,000 shares subject to currently
exercisable stock options
(5) Includes 22,00032,000 shares subject to currently
exercisable stock options.
(6) Includes 7,60014,900 shares subject to currently
exercisable stock options
(7) Includes 18,70019,100 shares subject to currently
exercisable stock options.
(8) Includes 20,6007,800 shares subject to currently
exercisable stock options.
(9) Includes 102,400117,500 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.
5156
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, 20082009 the Company has individual employment agreements
with nineeight individuals which provide for the grant of 79,50065,500 stock options with
a weighted average exercise of $3.19$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 348,300338,050 shares in the second column of the following
schedule.
The following table provides information as of March 31, 20082009 regarding
compensation plans under which equity securities of the Company are authorized
for issuance.
----------------------------- ----------------------- ----------------------- -----------------------
Number of options
remaining available-------------------------------
Number of securities Weighted average for future issuanceNumber of options remaining
Plan category to be issued upon exercise price of under Equity
Plan categoryavailable for future
exercise of options options issuance under Equity
Compensation Plans
----------------------------- ----------------------- ----------------------- -----------------------
----------------------------- ----------------------- ----------------------- ------------------------------------------------------
Equity Compensation Plans
approved by shareholders 348,300 $3.33 179,370*
338,050 $3.56 159,620
----------------------------- ----------------------- ----------------------- ------------------------------------------------------
Equity Compensation Plans
not approved by shareholders -- -- --
shareholders
----------------------------- ----------------------- ----------------------- ------------------------------------------------------
Total * 348,300 $3.33 179,370338,050 $3.56 159,620
----------------------------- ----------------------- ----------------------- ------------------------------------------------------
* See Discussion above.
5257
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The disclosures required by this item are contained in Note 9
to Notes to Consolidated Financial Statements included on pages 33 and 34 ofin 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, 20082009 and 2007,2008, professional
services were performed by BDO Seidman, LLP, the Company's
independent registered public accountant. Fees for those years
were as follows:
2009 2008 2007
---- ----
Audit Fees $ 102,200 $ 89,000$105,000 $102,200
Audit-Related Fees -- --
--------- ----------------- --------
Total Audit and Audit-Related Fees 105,000 102,200 89,000
Tax Fees -- --
All Other Fees -- --
--------- ----------------- --------
Total $ 102,200 $ 89,000
========= =========$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 20082009 and 2007.2008.
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.
5358
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 1619
Consolidated Balance Sheets - March 31, 2009
and 2008 and 2007 1720
Consolidated Statements of Operations -
Years Ended March 31, 2009 and 2008 and 2007 1821
Consolidated Statements of Changes in 19
Stockholders' Equity - Years Ended March 31,
2009 and 2008 and 200722
Consolidated Statements of Cash Flows - 20
Years
Ended March 31, 2009 and 2008 and 200723
Notes to Consolidated Financial Statements 21-4024 - 45
(2) Financial Statement Schedule
II - Valuation and Qualifying Accounts 41
5446
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) 7%, $30,000 Convertible Subordinated Note dated
March 31, 1992 between Registrant and Donald S.
Bab.
---- -------- ---------------------------------------------------
* (10.2) Distributor Agreement with Muirhead Avionics &
Accessories Ltd.
---- -------- ---------------------------------------------------
* (10.3) Naval Air Warfare Center Aircraft Division
Contract No. N68335-97-D-0060
---- -------- ---------------------------------------------------
* (10.4) Lease dated March 1, 2001 by and between
Registrant and 210 Garibaldi Group.
---- -------- ---------------------------------------------------
* (10.5) Agreement with Semaphore Capital Advisors dated
November 28, 2001 and amendment dated as of June
1, 2002.
---- -------- ---------------------------------------------------
* (10.6) 10% convertible subordinated note between
Registrant and Harold K. Fletcher.
---- -------- ---------------------------------------------------
* (10.7) 1998 stock option plan and option agreement.
---- -------- ---------------------------------------------------
(*) (10.8) Purchase agreement between Registrant and
Innerspace Technology
---- -------- ---------------------------------------------------
* (10.9) Agreement between Registrant and Semaphore Capital
Advisors, LLC
---- -------- ---------------------------------------------------
* (10.10) 2003 Stock Option Plan
---- -------- ---------------------------------------------------
(23.1) Consent of Independent Registered Public
Accounting Firm
---- -------- ---------------------------------------------------
(31.1) Certification by CEO pursuant to Rule 15d-14 under
the Securities Exchange Act.
---- -------- ---------------------------------------------------
(31.2) Certification by CFO pursuant to Rule 15d-14 under
the Securities Exchange Act.
---- -------- ---------------------------------------------------
(32.1) Certification by CEO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---- -------- ---------------------------------------------------
(32.2) Certification by CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---- -------- ---------------------------------------------------
* Incorporated by reference to Registration 33-18978 dated November 7, 1988.
The Company will furnish to a stockholder, upon request, any exhibit at
cost.
55
TEL-INSTRUMENT ELECTRONICS CORP
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: July 11, 2008June 29, 2009 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
PresidentChairman and Director
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated and by signature hereto.
Signature Title Date
--------- ----- ----
/s/ Harold K. Fletcher Director July 11, 2008
------------------------June 29, 2009
-----------------------
Harold K. Fletcher
/s/ Joseph P. Macaluso Principal Accounting Officer July 11, 2008
------------------------June 29, 2009
-----------------------
Joseph P. Macaluso
/s/ George J. Leon Director July 11, 2008
------------------------June 29, 2009
-----------------------
George J. Leon
/s/ Robert J. Melnick Director July 11, 2008
------------------------June 29, 2009
-----------------------
Robert J. Melnick
/s/ Jeffrey C. O'Hara President, COO and Director July 11, 2008
------------------------June 29, 2009
-----------------------
Jeffrey C. O'Hara
/s/ Robert A. Rice Director July 11, 2008
------------------------June 29, 2009
-----------------------
Robert A. Rice
/s/ Robert H. Walker Director July 11, 2008
------------------------June 29, 2009
-----------------------
Robert H. Walker
5661