The contract for the AN/USM-708 and AN/USM-719 is a significant milestone for the Company, because the development of this proprietary technology, which has been funded by the Company, will establish Tel’s position as a leader in the industry, and will meet the U.S. Navy’s test requirements for years to come. The Company believes that, given the unique nature of this design, this product could generate sales to other military customers. The Company has already received orders for a limited number of units of the TR-420, a modified CRAFT test set, from customers other than the U.S. Navy.  The AN/USM-708 contract also includes options for units testing encrypted communications and advanced data link functions, which, if exercised, would represent a major expansion in the Company’s core business. The Company believes that the core technology in the AN/USM-708 can be the foundation for additional military and commercial products. In May 2011, the U.S. Navy evaluated the CRAFT AN/USM- 708 and found it suitable for use in the fleet.

The Company has received pilot production orders and shipped 248 units of the AN/USM-719 (IFF only) totaling approximately $5.2 million. In addition, the Company has received orders for 182 units of the AN/USM-708 under this contract, totaling approximately $4.2 million of which 41 units have been shipped and the balance is expected to be shipped in fiscal 2012.million. The Company has also received orders for approximately $4.7 million for testing, documentation and qualification units. On April 8, 2011, the Company received an order from the U.S. Navy for an additional 732 units of the AN/USM-708 totaling approximately $16.2 million but the Navy has recently informed themillion. The Company thatreceived the production release isduring 2012 and produced and invoiced 173 of these units. Most of the CRAFT 719 and 708 units are being delayedheld at the Company in a “ship-in-place” arrangement pending receipt of athe required frequency allocation fromform the FAA. The NavyFAA which is working cooperatively with TIC on this issue and we expectexpected to have this resolvedbe secured in the next 60 days.2013 fiscal year.

 

The AN/ARM-206 or ITATS is a bench test set combining advanced digital technology with state of the art automated testing capabilities. This product will represent an important expansion to Tel’s current product line, and the automated testing capabilities will provide a significant labor savings benefit to our customers. This contract with the U.S. Navy has options for approximately 148 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 has not required as much Tel engineering design effort as needed for the AN/USM-708. Given the unique nature of the design, this unit could also generate significant sales to other military customers, both domestically and overseas. In June 2010, the Company received a production order for 101102 units amounting to approximately $5.3 million, although a production release has not yet been issued. During technical evaluation the U.S. Navy determined that the product needed enhancements to adequately meet the U.S Navy’s requirements. Many of these enhancements represent changes in scope for the product, and changes in scope requested by the government are generally paid for by the government.

In July 2011, the Company secured a $599,000 contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from U.S. Navy technical evaluation testing.  The CompanyAN/ARM-206 ITATS program is proceeding well with the enhancements funded by the U.S. Navy last year now substantially complete and the platform verification substantially completed by the U.S. Navy. TIC is in the process of performing final negotiationsbench level verification testing on these units and expects to modifysecure a production release on the contract to incorporate the Navy’s requested product enhancements, and it102 unit U.S. Navy production delivery order later this summer. It is expected that the contract modificationthis product will be finalized by the end of July 2011.  As a result of the additional development work to be concluded,enter full rate production deliveries are not expected to commence for 9-12 months.this calendar year.

In February 2009, the Company was awarded a five year firm fixed price indefinite-delivery/indefinite-quantity (IDIQ) contract by the U.S. Army Aviation and Missile Command with a maximum dollar value of approximately $44 million, depending on the number of units purchased (see Item 3, Pending Legal Proceedings).

The Company’s win of the critical TS-4530A Mode 5 Army program represents a major event for our future. This award, in conjunction with our Navy CRAFT Mode 5 program, provides TEL with undisputed market leadership in the Mode 5 Identification Friend or Foe (“IFF”) business and should provide a robustconstant revenue stream for some years to come.many years. The Company has already received approximately $21.6$22.5 million in delivery orders on the TS-4530A program out of a maximum contract value of approximately $44 million. In contrast to the multi-year CRAFT program, this is an accelerated development program that takes full advantage of the significant investment that the Company has made in its proprietary Mode 5 technology.

 

 

This contract includes an initial order for pre--productionpre-production of 20 Mode 5 conversion kits for the Army’s existing TS-4530 IFF test sets and 20 new Mode 5 test sets. In the fourth quarter of fiscal year 2011, the Company shipped and Army accepted 6 kits and 7 test sets.sets, which have been delivered. The IDIQ portion of the contract will entail the production of up to 2,980 Mode 5 conversion kits and up to 1,980 new production test sets. The Company has already received production orders for 2,409 Mode 5 conversion kits and 520621 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”) and Automatic Dependent Surveillance - Broadcast (“ADS-B”) test functionality functionality.

The productTS-4530A program has been essentially complete from a design standpoint, and TIC is currently in the process of scheduling the final production assurance audit with the U.S. Army testing which is scheduledrequired prior to be completed in the next several months. Volumecommencement of full rate production. TIC and the U.S. Army are working together to secure a full production ofrelease on this program. The Company hopes to secure this production release during the TS-4530A is currently scheduled to begin in the thirdsecond quarter of the current fiscal year subject to receiptyear. The TS-4530A program is a critical program with almost $20 million of required regulatory approvals.booked production orders which will help drive TIC’s revenues growth and profitability (See Management’s Discussion and Analysis of Financial Condition and Results of Operations).

 

The Company manufactures and sells commercial and military products as a single avionics business, and its designs and products cross both markets.

 

The general aviation market consists of some 1,000 avionics repair and maintenance service shops, at private and commercial airports in the United States, which purchase test equipment to assist in the repair of aircraft electronics. The commercial aviation market consists of approximately 80 domestic and foreign commercial airlines.

 

The civilian market for avionic test equipment is dominated by two designers and manufacturers, Tel and Aeroflex, which is substantially larger than Tel.  This market is relatively narrow and highly competitive.  Tel has been successful because of its high quality, new technology, user friendly products and competitive prices.  In recent years commercial airlines have experienced financial difficulties, and, as a result of this, sales of avionics test equipment to airlines have been weak.

 

The military market is large and is dominated by large corporations with substantially greater resources than the Company, including Aeroflex.  Tel competitively bids for government contracts on the basis of the engineering quality and innovation of 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 U.S. Department of Defense.

 

 

In recent years, the Company has won several large, competitively bid contracts from the military and has become an important supplier for the U.S. Military, as well as the NATO countries, of flight line IFF test equipment. The CRAFT AN/USM-708 program, discussed above,previously, involves a new generation of technology, including the next generation of IFF testing, and is expected to enable 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.

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 20112012 and 2010.2011.  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.  The loss of any one of these distributors would not have a material adverse effect on the Company or its operations. Commercial sales represented 19%15% and 24%19% of total sales, respectively, for the fiscal years ended March 31, 20112012 and 2010.2011. One domestic distributor represented 13% of commercial sales for the fiscal year ended March 31, 2012. No distributor represented more than 10% of commercial sales during these periods.fiscal year 2011.

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, 20112012 and 2010,2011, sales to the U.S. Government, including shipments through the government’s logistics centers, represented approximately 70%66% and 50%70%, respectively, of total sales. The U.S. Military has a number of separate purchasing sites. No directother government customer represented over 10% of government sales for fiscal years 20112012 and 2010.2011.

International sales are made throughout the world to government and commercial customers, directly, through American export agents, or through the Company’s overseas distributors at a discount reflecting a 20% to 22% selling commission, under written or oral, year-to-year arrangements. The Company has an exclusive distribution agreement with Muirhead Avionics and Accessories, Ltd (“Muirhead”), based in the United Kingdom, to represent the Company in parts of Europe, and with Milspec Services in Australia and New Zealand.  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, 20112012 and 20102011 total international avionics sales were 14%11% and 17%14%, respectively, of total sales.  Additionally, the Company has an agreement with M.P.G. Instruments s.r.l., based in Italy, wherein this distributor has the exclusive sales rights for DME/P ramp and bench test units. For the fiscal year ended March 31, 2010, sales to M.P.G. Instruments s.r.l represented 5% of total domestic and foreign government sales. For the fiscal year ended March 31, 2011, sales to M.P.G. Instruments s.r.l were less than 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. No international distributor accounted for more than 5% of total sales for the fiscal years ended March 31, 2102 and 2011.  The Company has no material assets overseas.

 

Tel also provides customers with calibration and repair services. Repairs and calibrations accounted for 10%7% and 13%10% of total sales for the years ended March 31, 20112012 and 2010,2011, respectively.

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 regulations 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. Military contracts are awarded and implemented by extensive government regulation. The Company believes its test equipment is recognized by its customers for its quality durability, reliability, affordability, and by its advanced technology.

Set forth below is Tel’s avionics backlog at March 31, 20112012 and 2010.2011.

 

Tel has no patents or licenses which are material to its business, and there are no material costs incurred to comply with environmental laws.

 

In the fiscal years ended March 31, 20112012 and 2010,2011, Tel spent $3,256,306$2,794,478, and $3,756,023,$3,256,306, respectively, on the engineering, research, and development of new and improved products.  None of these amounts were sponsored by customers. Engineering, research, and development expenditures in fiscal year 20112012 were made primarily to the T-4530A program and the continued developmentcompletion of the new AN/USM-708 (“CRAFT”) next generation multi-function test set for the U.S. Navy, including the next generation of IFF test 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.

In April 2011, the Company entered into a new lease to relocate to a larger (approximately 27,000 square feet), more modern facility in nearby East Rutherford, NJ. The lease is for a five year period with a five year option in a new, one-story facility that will allow for a rapid ramp-up in production volume to support the Company’s customer delivery commitments. The Company does not expectcommitments (see Note 12 of the Notes to the Consolidated Financial Statements). Tel is unaware of any significant disruptionenvironmental problems in connection with its location and, because of the nature of its manufacturing operations or extraordinary expense as a result of the move.activities, does not anticipate such problems.

 

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 central basis 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.

In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011 and2011.

In May 2012 the Company does not anticipate aKansas Supreme Court reversed the decision for some time.of the lower court only as regards to jurisdiction. Tel remainscontinues to remain confident as to the outcome of this appeal andlitigation.

Other than the matter outlined above, we are currently not involved in any potential follow-on litigation.litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, our common stock in which an adverse decision could have a material effect.

 

 

The Common Stock, $.10$0.10 par value, of the Registrant (“Common Stock”) is traded on the NYSE Amex and its symbol is TIK.  The following table sets forth the high and low per share sale prices for our common stock for the periods indicated as reported for fiscal years 20112012 and 20102011 by the NYSE Amex: