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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year Commission File No.
ended March 31, 2001 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Jersey 22-1441806
------------------------ ------------------------------------
(State of incorporation) (IRS Employer Identification Number)
728 Garden Street
Carlstadt, New Jersey 07072
---------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 933-1600
Securities registered pursuant to Section 12(b) of the Act:
None
- ----------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- ----------------------------------
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 __.
The aggregate market value of the voting Common Stock (par value $.10 per share)
held by non-affiliates on June 11, 2001 was $1,945,409 using the price of the
last trade on June 11, 2001.
2,124,351 shares of Common Stock were outstanding as of June 11, 2001.
Total Pages - 42
Exhibit Index - pages 40-41
1
PART I
Item 1. Business
General
Tel-Instrument Electronics Corp. ("Tel" or the "Company") designs,
manufactures and sells test equipment to the general aviation and
commercial aviation market and to the government/military aviation
market, both domestically and internationally. The Company has been in
business since 1947.
Tel's instruments are used to test navigation and communications
equipment installed in aircraft and range in list price from $7,000 to
$60,000 per unit. Tel continues to develop new products to improve its
test instruments in anticipation of customers' needs. The development of
multifunction testers, for example, has made it easier for customers to
perform ramp tests with less training. In recent years the Company has
become the dominant supplier throughout the world for IFF
(Identification Friend or Foe) test equipment, discussed below. This was
a significant internally funded development effort which has yielded
excellent results. The Company is currently working on the next
generation of IFF test sets.
For the year ended March 31, 2001, sales increased 46% to $7,508,901 and
net income before taxes increased 189% to $1,039,117 from $358,958 (see
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations). The Company considers fiscal 2001 a milestone
year.
Management continues to be encouraged about the future as a result of
its substantial backlog, the unexpected increase in commercial sales,
efforts of its international distributors, the progress on the project
for DME/P (Precision Distance Measuring Equipment) ramp and bench
testers for Marconi Communications, Italy, the European prime
contractor, and other products under development. The backlog at March
31, 2001 exceeded $13,500,000, and includes approximately $10,900,000 in
orders from the U.S. Navy for the AN/APM 480 Test Sets. This backlog
will be shipped over the next few years.
During fiscal year 2001 the Company began shipment of the AN/APM 480 IFF
Interrogator, Transponder test set to the U.S. Navy. The Company has
received orders from the U.S. Navy for a total of 960 units. More than
125 units were shipped during fiscal year 2001, and the unit has been
favorably received by the customer. The AN/APM 480 is a militarized
avionics ramp tester used to simulate IFF Transponder/Interrogator and
TCAS (Traffic Alert and Collision Avoidance system) functions to provide
go, no-go testing of avionics test equipment installed in military
aircraft on the flightline and aircraft carrier deck.
The Company continues to actively pursue opportunities in both the
commercial and government markets, both domestically and
internationally, and new product development efforts based upon its
evaluation of these markets. The Company is also exploring opportunities
in other government and commercial markets in order to broaden the
Company's product line.
2
Item 1. Business (Continued)
General (Continued)
The table below sets forth the composition of Tel's sales for the last
three fiscal years.
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
2001 2000 1999
---- ---- ----
Commercial $3,033,281 $1,957,859 $1,753,723
Government 4,475,620 3,172,923 1,730,776
---------- ---------- ----------
Total 7,508,901 5,130,782 3,484,499
========== ========== ==========
Foreign commercial sales are made direct, through American export agents
or the Company's international distributors at a discount reflecting the
15% selling commission under written or oral, year-to-year arrangements.
For the years ended March 31, 2001, 2000 and 1999, foreign commercial
sales were 17%, 20% and 19%, respectively, of total commercial sales.
The Company has signed an exclusive distribution agreement with Muirhead
Avionics based in the United Kingdom to represent the Company in parts
of Europe. Sales to Muirhead represented approximately 3%, 5% and 10% of
total sales for the fiscal years 2001, 2000 and 1999, respectively.
In May 1999, the Company received a $396,262 order for its DME/P ramp
test units from Italy. These units were delivered in the first quarter
of fiscal year 2001. In addition, the Company received a contract for
$680,000 to develop a DME/P bench test set from this same customer.
Tel sells its products either directly or through distributors to its
many domestic commercial customers. No direct commercial customer
accounted for more than 10% of commercial sales in fiscal year 2001. One
direct domestic commercial customer accounted for 11% of commercial
sales in fiscal year 2000. There are no written agreements with
distributors who receive a 15% discount for stocking and selling these
products. Tel also gives a 5% to 10% discount to non-stocking
distributors, depending on their sales volume and promotional effort.
Independent sales representatives receive 5% to 10% commissions,
depending on their sales volume and promotional efforts. One domestic
distributor accounted for approximately 29%, 10% and 13% of commercial
sales for the years ended March 31, 2001, 2000 and 1999, respectively.
3
Item 1. Business (Continued)
General (Continued)
Set forth below is Tel's backlog at March 31, 2001, 2000, and 1999.
Commercial Government Total
---------- ---------- -----
March 31, 2001 $633,761 $13,029,317 $13,663,078
March 31, 2000 $665,072 $14,355,429 $15,020,501
March 31, 1999 $379,404 $ 2,338,011 $ 2,717,415
Tel believes that most of the backlog at March 31, 2001 will be
delivered during the next few fiscal years.
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 by the government for convenience.
Tel obtains its purchased parts from a number of suppliers. These
materials are standard in the industry and Tel foresees no difficulty in
obtaining purchased parts, as needed, at acceptable prices.
Markets and Competition
The Company operates its commercial and military business as one market,
using best commercial practice in manufacturing products for the
government.
The general aviation market consists of some 1,000 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 testing equipment is dominated by three
manufacturers, including Tel. In the general aviation and airline
market, Tel competes principally with IFR, an independent firm, and with
JC Air, a division of BF Goodrich. This market is relatively small and
highly competitive. Tel has generally been successful because of its
high quality products, prices, and responsive service. Tel also provides
customers with calibration and repair services. At this time, the
Company believes that the foreign commercial market represents a better
opportunity than the U.S. commercial market for growth. The foreign
market is larger than the domestic market and many foreign airlines are
upgrading to meet U.S. requirements. The Company has entered into
distribution arrangements with Muirhead to distribute in Europe and with
an exclusive distributor in Australia and New Zealand. Additionally, the
Company entered into an agreement with M.P.G. Instruments S.R.L.,
wherein this distributor will have the exclusive sales rights for DME/P
ramp and bench test units. The Company continues to explore additional
opportunities in other parts of the world.
4
Item 1. Business (Continued)
Markets and Competition (Continued)
Future domestic growth will depend in part on whether the U.S. Federal
Aviation Administration (FAA) implements plans to upgrade the U.S. air
traffic control system and on continuing recent trends towards more
sophisticated avionics systems, both of which would require the design
and manufacture of new test equipment. The Company continues to analyze
the needs of the market, in order to develop new and improved
instruments to meet emerging FAA requirements, and to redesign models to
add functions and reduce the cost. The Company believes its test
equipment is recognized by its customers for its quality, durability,
reliability, and affordability.
The military market is large, but is dominated by large corporations
with substantially greater resources than Tel. Tel competitively bids
for government contracts on the basis of the uniqueness of its products
and "small business set asides" (i.e., statutory provisions requiring
the military to entertain bids only from statutorily defined small
businesses), and on bids for sub-contracts from major government
suppliers.
Because of the larger size of the military market, in contrast to the
civilian market, Tel has been increasing its efforts to obtain military
contracts and sub-contracts. Tel has increased its concentration on
meeting end user needs by modifying commercial designs to satisfy
special government/military requirements. This approach has enabled Tel
to sell the T-30D, T-36M, T-48I, T-47 family, and T-49 family to
government agencies and prime contractors.
In recent years the Company has become the dominant supplier throughout
the world for IFF test equipment. This was a significant internally
funded development effort which has yielded excellent results. The
Company is currently working on the next generation of IFF test sets.
Tel's ability to compete in both the civil and the military aviation
market has been restricted in the past because of limited financial
resources. Tel has no patents or licenses which are material to its
business.
Research and Development
In the fiscal years ended March 31, 2001, 2000 and 1999, Tel spent
$1,047,305, $1,051,833, and $1,204,077, respectively, on the research
and development of new and improved products. None of these amounts was
sponsored by customers. Tel's management believes that continued and
increased expenditures for research and development are necessary to
enable Tel to expand its sales and generate profits.
The decrease in expenditures in fiscal years 2001 and 2000 is associated
with certain resources being directed towards revenue-processing
activities and, therefore, included in cost of sales. Engineering,
research and development expenditures in 2001 were directed
5
Item 1. Business (Continued)
Research and Development (Continued)
primarily toward finalization of a design of a universal test set, a
commercial bench test, and new products for other targeted markets, such
as the, T-47S, T-36M, and T-47N. The Company has also begun work on the
next generation of IFF test sets. The Company owns all of these designs.
Personnel
At June 11, 2001, Tel had twenty-nine employees in manufacturing,
materials management, and quality assurance, nine in administration and
sales, and ten in research and development, none of whom belongs to a
union. While the job market is tight, especially for technical
personnel, Tel has generally been able to add personnel as required. The
Company also uses several part-time consultants on an as needed basis.
Item 2. Properties
During the fourth quarter of fiscal year 2001, the Company expanded its
facilities and increased its manufacturing capacity by adding the lower
level of the building to its lease. The Company now 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. Tel is unaware of any environmental problems in
connection with its location and, because of the nature of its
manufacturing activities, does not anticipate such problems.
Item 3. Pending Legal Proceedings
There are no material pending legal proceedings.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
There has been no established public trading market for Registrant's
Common Stock. Subsequent to the public offering of the Company's Common
Stock in December 1988, the Common Stock has traded sporadically in the
over-the-counter market. During the fiscal year ended March 31, 2001,
the Company's Common Stock had the high and low bids of $2.625 and
$1.00, respectively. These quotations reflect inter-dealer prices,
without retail markup or commission and may not necessarily represent
actual transactions. On June 11, 2001, the bid was $1.70 and the ask was
$1.95.
Approximate Number of Equity Security Holders
Number of Record
Holders as of
Title of Class March 31, 2001
-------------- --------------
Common Stock, par value 812
$.10 per share
Dividends
Registrant has not paid dividends on its Common Stock and does not
expect to pay such dividends in the foreseeable future.
7
Item 6. Selected Financial Data
TEL-INSTRUMENT ELECTRONICS CORP.
SUMMARY OF FINANCIAL INFORMATION
Years Ended March 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Net revenues $7,508,901 $5,130,782 $3,484,499 $3,959,242 $3,165,674
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of sales 3,704,572 2,489,769 1,559,992 1,559,542 1,325,659
Selling, general and administrative 1,622,881 1,165,844 920,547 909,505 854,093
Engineering, research and development 1,047,305 1,051,833 1,204,077 902,250 486,884
---------- ---------- ---------- ---------- ----------
6,374,758 4,707,446 3,684,616 3,371,297 2,666,636
---------- ---------- ---------- ---------- ----------
Income (loss) from operations 1,134,143 423,336 (200,117) 587,945 499,038
Other expenses, net (95,026) (64,378) (44,149) (68,847) (57,954)
---------- ---------- ---------- ---------- ----------
Diluted income/(loss) before income taxes 1,039,117 358,958 (244,266) 519,098 441,084
Benefit from income taxes 295,888 241,595 97,585 58,719 340,200
---------- ---------- ---------- ---------- ----------
Net income (loss) $1,335,005 $ 600,553 $(146,681) $ 577,817 $ 781,284
========== ========== ========== ========== ==========
Diluted income/(loss) per common share $ 0.63 $ 0.28 $ (0.07) $ 0.28 $ 0.41
========== ========== ========== ========== ==========
Years Ended March 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $1,766,360 $ 921,130 $ 507,582 $ 864,061 $ 440,978
Total assets 5,934,646 3,932,765 2,218,508 1,941,141 1,648,066
Long-term debt 218,345 301,682 266,486 300,000 365,000
Stockholders' equity 2,862,348 1,522,047 919,093 1,060,068 455,254
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 1995.
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.
Results of Operations 2001 Compared to 2000
Overview
For the year ended March 31, 2001 sales increased 46% to $7,508,901 and
net income before taxes increased 189% to $1,039,117 from $358,958.
During fiscal year 2001 the Company began shipments of the AN/APM-480
IFF (Identification, Friend or Foe) Transponder Set Test Sets (TSTS) to
the U.S. Navy. The Company has received orders from the U.S. Navy for a
total of 960 units. A total of 128 units were shipped during fiscal year
2001 under this contract. The unit has been favorably received by the
customer. The AN/APM 480 is a militarized avionics ramp tester used to
simulate IFF Transponder/Interrogator and TCAS functions to provide
accurate go, no-go testing of avionics test equipment installed in
military aircraft on the flightline and aircraft carrier deck.
During the current fiscal year, the Company began shipment to a major
freight carrier (through a domestic distributor) of T-30D ILS
(Instrument Landing System) and T-49C TCAS commercial test sets. The
total order exceeds $900,000, and the Company shipped approximately
$600,000 of this order during fiscal year 2001, and expects to ship the
balance of this order during the first half of fiscal year 2002. In
addition, during the current fiscal year the Company shipped all of the
T-76 DME/P ramp test sets under the contract, totaling approximately
$400,000, with Marconi Communications through our Italian intermediary,
M.P.G. Instruments s.r.l.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations 2001 Compared to 2000 (Continued)
DME/P is directed solely to the European market. The Company continues its
efforts to complete the DME/P bench test sets under a contract with Marconi
Communications in the amount of $680,000.
The Company continues to actively pursue opportunities in both the
commercial and government markets, both domestically and internationally,
and new product development efforts based upon its evaluation of these
markets. The Company is also exploring opportunities in other government and
commercial markets in order to broaden the Company's product base.
Sales
Total sales increased $2,378,119 (46.4%) to $7,508,901 for the year ended
March 31, 2001 as compared to the year ended March 31, 2000.
Government sales increased $1,302,697 (41.1%) for the year ended March 31,
2001 as compared to the prior fiscal year. Government sales increased as a
result of the shipment of the AN/APM-480 IFF test sets to the U.S. Navy, the
T-36M and the T-76 DME/P ramp test sets. These increases were partially
offset by lower foreign sales of the T-47 family of IFF test sets and of
sales of the T-49CF military TCAS units
Commercial sales increased $1,075,422 (54.9%) to $3,033,281 for the fiscal
year ended March 31, 2001 as compared to the fiscal year ended March 31,
2000. The increase in commercial sales is primarily attributed to the
shipment of commercial test sets to a major freight carrier and an increase
in ILS and TCAS test set shipments. There is no assurance that commercial
sales will continue to grow at the current rate.
Gross Margin
Gross margin increased $1,163,316 (44.0%) for the fiscal year ended March
31, 2001 as compared to the prior fiscal year. The increase in gross margin,
for the most part, is attributed to the higher volume. However, gross
margin, as a percentage of sales, was reduced by the introduction of new
products, such as the AN/APM 480 and the T-76, and the associated learning
curve in building these new and more sophisticated products, and lower gross
profit on the AN/APM 480 contract. The gross margin percentage for the
fiscal year ended March 31, 2001 was 50.7% as compared to 51.5% for the
fiscal year ended March 31, 2000.
Operating Expenses
Selling, general and administrative expenses increased $457,037 (39.2%) for
the year ended March 31, 2001 as compared to the prior fiscal year. This
increase is attributed to higher sales and marketing expenses, and an
increase in accrued compensation expense.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations 2001 Compared to 2000 (Continued)
Engineering, research and development expenses decreased $4,528 for the year
ended March 31, 2001 as compared to last year. Similar to the previous
fiscal year, certain resources were directed towards revenue-producing
activities and, therefore, not included in engineering, research and
development expenses. However, the Company continued to develop new products
and provide a foundation for the future, including work on a universal test
set and beginning work on the next generation of IFF test sets. The Company
expects company-funded development expenses to increase when the work for
these contracts has been completed.
Income Taxes
For the year ended March 31, 2001, the Company, in accordance with FASB 109,
recorded a net tax benefit of $295,888, which represents (1) the effective
federal and state tax rate on the Company's net income before taxes, and (2)
reduction of its deferred tax valuation allowance and other items and
credited this amount to benefit from income taxes. For the year ended March
31, 2000, the Company recorded a net tax benefit of $241,595, which
represents (1) the effective federal and state tax rate on the Company's net
income before taxes and (2) reduced its valuation allowance and other items
in the amount of $385,000 and credited this amount to benefit from income
taxes. The Company currently does not have a significant federal tax
liability (see Note 9 to the Financial Statements).
Results of Operations 2000 Compared to 1999
Overview
For the year ended March 31, 2000, sales increased 47% to $5,130,782 and net
income before taxes increased to $358,958.
The Company has completed the design and testing for the U.S. Navy IFF
(Identification, Friend or Foe) Transponder Set Test Sets ("AN/APM 480").
The company has received orders from the U.S. Navy for a total of 963 units
of the AN/APM 480 with a value totaling over $12,500,000. The contract with
the U.S. Navy includes options for up to 1,300 units against which the 963
have been ordered, the remainder of which the U.S. Navy can exercise, on
behalf of all U.S. military services, through calendar year 2001. However,
there can be no assurance that the U.S. Navy will exercise any additional of
its purchase options under this contract. The Company began shipping these
units in June 2000. The units under this contract will be shipped over the
next few fiscal years. These orders represent a significant milestone for
the company and also represent the successful culmination of a major Company
funded research and development effort.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations 2000 Compared to 1999 (continued)
In January 2000, the Company received from Marconi Communications, through
its Italian intermediary, M.P.G. Instruments s.r.l., a contract in the
amount of $680,000 for DME/P Bench Test Sets. This contract is incremental
to the contract received in May 1999 for DME/P Ramp Test Sets in the amount
of $396,262. At this time, DME/P is directed solely to the European market.
The Company will design and build the Bench Test Set and expects to begin
delivering these units in calendar year 2001. The order for the DME/P Ramp
Test Sets was delivered in the first quarter of fiscal year 2001.
The Company's backlog at March 31, 2000 exceeds $15,000,000. This backlog is
deliverable over the next few years.
Sales
Total sales increased $1,646,283 (47.2%) for the year ended March 31, 2000
as compared to the year ended March 31, 1999.
Government sales increased $1,442,147 (83.3%) for the year ended March 31,
2000 as compared to the prior fiscal year. The increase in government sales
is attributed to the sales of the T-47 family of IFF test sets to both
domestic and international customers, including the T-47CC which
incorporates a directional antenna and the T-47N which includes an
interrogator test function. Government sales also increased as a result of
sales of the T-49CF which incorporates collision avoidance test scenarios
required by the U.S. Air Force. Government sales were also positively
affected by revenues associated with the documentation and test portion of
the U.S. Navy AN/APM 480 contract and revenues associated with completion of
certain milestones for the Company's Precision DME Bench Test Set.
Commercial sales increased $204,136 (11.6%) for the year ended March 31,
2000 as compared to the prior fiscal year. There is no assurance that the
positive trend of fiscal year 2000 will continue. However, in June 2000, the
Company received a substantial order from a major freight carrier through
its domestic distributor for commercial test sets with a sales value
exceeding $900,000. The commercial backlog at June 12, 2000 is approximately
$1,600,000. The increase is sales in both the commercial and government
segments is also attributed to the efforts of our international
distributors.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations 2000 Compared to 1999 (Continued)
Gross Margin
Gross margin increased $716,506 (37.2%) for fiscal year 2000 as compared to
fiscal year 1999. The increase in gross margin dollars, for the most part,
is attributed to the higher volume. Gross margin, as a percentage of sales,
has been negatively affected as a result of the introduction of new products
and the associated learning curve in building these more sophisticated
products. The gross margin percentage for the fiscal year ended March 31,
2000 was 51.5% as compared to 55.2% for the fiscal year ended March 31,
1999. The gross margin percentage was lower in the current fiscal year as a
result of the increase in sales to distributors (sales to distributors are
sold at a discount from standard list prices). In addition, the lower gross
margin percentage is attributed to the lower gross profit on revenues
associated with the documentation and test portion of the U.S. Navy
contract.
Operating Expenses
Selling, general and administrative expenses increased $245,297 (26.6%) for
the year ended March 31, 2000 as compared to the prior fiscal year. This
increase is attributed to higher sales and marketing expenses, an increase
in salaries, and the addition to staff of a Director of Finance. In March
2000, the Company hired a Director of Business Development to oversee its
marketing and sales activities.
Engineering, research and development expenses decreased $152,244 (12.6%)
for the year ended March 31, 2000 as compared to the same period last year.
The decrease is associated with certain resources being directed towards
revenue-producing activities and, therefore, not included in research and
development expense. However, the Company continued its development efforts
which were directed primarily toward the finalization of the design of the
AN/APM 480 IFF test sets for the U.S. Navy, the T-36M, and the upgrading of
additional products, such as the T-49CF, T-47CC, and the T-47N.
Income Taxes
For the year ended March 31, 2000, the Company, in accordance with FASB 109,
recorded a net tax benefit of $241,595, which represents (1) the effective
federal and state tax rate on the Company's net income before taxes and (2)
reduced its valuation allowance and other items in the amount of $385,000
and credited this amount to benefit from income taxes. For the year ended
March 31, 1999, the Company recorded a deferred income tax benefit of
$97,585, which represents the effective federal and state tax rate on the
Company's net loss before taxes of $244,266. The Company currently does not
have any federal tax liability. (See Note 9 to Notes to Financial
Statements).
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Liquidity and Capital Resources
Working capital increased $845,230 (92%) during fiscal year 2001 to
$1,766,360 as compared to $921,130 at March 31, 2000. For the year ended
March 31, 2001, the Company generated cash from operations in the amount of
$725,864 as compared to using $96,775 in the prior fiscal year. This
increase in cash from operations is primarily attributed to the improvement
in the Company's operating income as a result of the higher sales volume and
an increase in deferred expense. These increases were partially offset by
increases in accounts receivable and inventory.
The Company has a credit line in the amount of $600,000 from Summit Bank.
The line of credit bears an interest rate of 1% above the lender's
prevailing base rate, which is payable monthly, based upon the outstanding
balance. At March 31, 2001, the Company had borrowed $250,000 against its
line of credit. The line of credit is collateralized by substantially all of
the assets of the Company and expires in June 2001. The credit facility
requires the Company to maintain certain financial covenants. As of March
31, 2001, the Company was in compliance with all financial covenants. The
Company has begun to re-negotiate this line of credit with Summit Bank.
Based upon the current backlog, its existing credit line, and cash balance,
the Company believes that it has sufficient working capital to fund its
operating plans for the next twelve months. At present, the Company does not
anticipate significant long-term needs for capital outside its normal
operating activities. There was no significant impact on the Company's
operations as a result of inflation for the fiscal year ended March 31,
2001.
14
Item 8. Financial Statements and Supplementary Data
Pages
-----
(1) Financial Statements:
Report of Independent Accountants 16
Balance Sheets - March 31, 2001 and 2000 17
Statements of Operations - Years Ended
March 31, 2001, 2000 and 1999 18
Statements of Changes in Stockholders'
Equity - Years Ended March 31,
2001, 2000 and 1999 19
Statements of Cash Flows - Years Ended
March 31, 2001, 2000 and 1999 20
Notes to Financial Statements 21-35
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts 36
Financial statement schedules not included in this annual report on Form 10-K
have been omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
15
Report of Independent Accountants
To the Stockholders and Board of Directors of Tel-Instrument Electronics
Corp.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of
Tel-Instrument Electronics Corp. (the "Company") at March 31, 2001 and 2000,
and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule included in the
accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which 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 examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
June 13, 2001
16
TEL-INSTRUMENT ELECTRONICS CORP.
Balance Sheets
ASSETS March 31, 2001 March 31, 2000
-------------- --------------
Current assets:
Cash $ 433,438 $ 172,836
Accounts receivable, net of allowance for doubtful
accounts of $11,598 at March 31,
2001 and 2000, respectively 1,264,383 1,099,425
Inventories, net 2,351,648 1,486,885
Prepaid expenses and other current assets 43,568 56,020
Deferred income tax benefit - current 527,276 215,000
---------- ----------
Total current assets 4,620,313 3,030,166
Office and manufacturing equipment, net 674,656 350,872
Other assets 35,354 28,628
Deferred income tax benefit 604,323 523,099
---------- ----------
Total assets $5,934,646 $3,932,765
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 200,000 $ 150,000
Convertible subordinated note - related party 15,000 15,000
Line of credit 250,000 250,000
Capitalized lease obligations - current portion 77,826 56,376
Accounts payable 942,173 746,863
Deferred revenues 267,630 176,193
Accrued payroll, vacation pay and deferred wages 535,850 350,286
Accrued expenses - related parties 196,973 132,912
Taxes payable 63,215 --
Other accrued expenses 305,286 231,406
---------- ----------
Total current liabilities 2,853,953 2,109,036
Convertible note payable - related party 150,000 200,000
Capitalized lease obligations - excluding current portion 68,345 101,682
---------- ----------
Total liabilities 3,072,298 2,410,718
Stockholders' equity
Common stock, par value $.10 per share, 2,124,351 and 2,113,290
issued and outstanding as of March 31, 2001 and 2000, respectively 212,438 211,332
Additional paid-in capital 3,932,111 3,927,921
Accumulated deficit (1,282,201) (2,617,206)
---------- ----------
Total Stockholders' equity 2,862,348 1,522,047
---------- ----------
Total liabilities and stockholders' equity $5,934,646 $3,932,765
========== ==========
The accompanying notes are an integral part of the financial statements
17
TEL-INSTRUMENT ELECTRONICS CORP.
Statements of Operations
For the years ended March 31,
2001 2000 1999
---- ---- ----
Sales - commercial, net $3,033,281 $1,957,859 $1,753,723
Sales - government, net 4,475,620 3,172,923 1,730,776
---------- ---------- ----------
Total Sales 7,508,901 5,130,782 3,484,499
Cost of sales 3,704,572 2,489,769 1,559,992
---------- ---------- ----------
Gross margin 3,804,329 2,641,013 1,924,507
Operating expenses:
Selling, general and administrative 1,622,881 1,165,844 920,547
Engineering, research and development 1,047,305 1,051,833 1,204,077
---------- ---------- ----------
Total operating expenses 2,670,186 2,217,677 2,124,624
---------- ---------- ----------
Income (loss) from operations 1,134,143 423,336 (200,117)
Other income/(expense):
Interest income 23,877 9,682 8,637
Interest expense (78,478) (37,136) (16,736)
Interest expense - related parties (40,425) (36,924) (36,050)
---------- ---------- ----------
Income (loss) before income taxes 1,039,117 358,958 (244,266)
Benefit from income taxes 295,888 241,595 97,585
---------- ---------- ----------
Net income (loss) $1,335,005 $ 600,553 $ (146,681)
========== ========== ==========
Income (loss) per common share:
Basic $ 0.63 $ 0.28 $ (0.07)
========== ========== ==========
Diluted $ 0.63 $ 0.28 $ (0.07)
========== ========== ==========
Weighted average number of shares outstanding
Basic 2,115,134 2,110,983 2,101,264
========== ========== ==========
Diluted 2,117,686 2,146,402 2,101,264
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
18
TEL-INSTRUMENT ELECTRONICS CORP.
Statements Of Changes In Stockholders' Equity
Common Stock
Number of Shares Additional
-------------------------------------------- Paid-In Accumulated
Authorized Issued Amount Capital Deficit Total
---------- ------ ------ ------- ------- -----
Balances March 31, 1998 4,000,000 2,094,735 $ 209,476 $ 3,921,670 $(3,071,078) $ 1,060,068
Net loss (146,681) (146,681)
Issuance of common stock in connection
with the exercise of stock options 15,222 1,522 4,184 5,706
--------- --------- ----------- ----------- ------------ -----------
Balances March 31, 1999 4,000,000 2,109,957 $ 210,998 $ 3,925,854 $(3,217,759) $ 919,093
Net income 600,553 600,553
Issuance of common stock in connection
with the exercise of stock options 3,333 334 2,067 2,401
--------- --------- ----------- ----------- ------------ -----------
Balances March 31, 2000 4,000,000 2,113,290 $ 211,332 $ 3,927,921 $(2,617,206) $ 1,522,047
Net income 1,335,005 1,335,005
Issuance of common stock in connection
with the exercise of stock options 11,061 1,106 4,190 5,296
--------- --------- ----------- ----------- ------------ -----------
Balances March 31, 2001 4,000,000 2,124,351 $ 212,438 $ 3,932,111 $(1,282,201) $ 2,862,348
========= ========= =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
19
TEL-INSTRUMENT ELECTRONICS CORP.
Statements Of Cash Flows
Increase (Decrease) In Cash
For the years ended March 31,
-----------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,335,005 $ 600,553 $ (146,681)
Adjustments to reconcile net income to cash
provided by operating activities:
Deferred income taxes (393,500) (241,595) (97,585)
Depreciation and amortization 129,887 70,303 41,907
Provision for losses on accounts receivable -- (3,987) (479)
Provision for inventory obsolescence 28,672 14,504 (6,000)
Changes in assets and liabilities:
Increase in accounts receivable (164,958) (456,717) (263,736)
Increase in inventories (893,435) (787,689) (324,670)
Decrease (increase) in prepaid expenses and other assets 10,726 (21,545) (16,521)
Increase in accounts payable 195,310 444,428 233,822
Increase in taxes payable 63,215 -- --
Increase in deferred revenues, and accrued
accrued expenses 414,942 284,970 158,367
----------- ----------- -----------
Net cash provided by (used in) operating
activities 725,864 (96,775) (421,576)
----------- ----------- -----------
Cash flows from investing activities:
Additions to office and manufacturing equipment (396,057) (125,948) (67,044)
Increase in cash surrender value of life insurance (5,000) (24,494) (31,460)
----------- ----------- -----------
Net cash used in investing activities (401,057) (150,442) (98,504)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from loan on insurance policy -- 129,456 --
Proceeds from exercise of warrants and options 5,296 2,401 5,706
Proceeds from drawing on line of credit -- 250,000 50,000
Repayment of line of credit (50,000)
Repayment of capitalized lease obligations (69,501) (32,421) (290)
----------- ----------- -----------
Net cash (used in) provided by financing activities (64,205) 349,436 5,416
----------- ----------- -----------
Net increase (decrease) in cash 260,602 102,219 (514,664)
Cash - beginning of year 172,836 70,617 585,281
----------- ----------- -----------
Cash - end of year $ 433,438 $ 172,836 $ 70,617
=========== =========== ===========
Supplemental information:
Taxes paid $ 34,157 $ -- $ --
=========== =========== ===========
Interest paid $ 80,730 $ 68,744 $ 21,700
=========== =========== ===========
Assets acquired through capitalized leases $ 57,614 $ 164,326 $ 26,443
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
20
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To 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 designs, manufactures, and markets
avionic test equipment for the general and commercial aviation markets and
for the government/military aviation markets. The Company's instruments
are used to test navigation and communication equipment installed in
aircraft. The Company sells its equipment to both the domestic and
international markets.
2. Summary of Significant Accounting Policies
Revenue Recognition:
Revenues are recognized at the time of shipment provided title and risk of
loss is transferred to the customer. Provisions, when appropriate, are
made where the right to return exists. Revenues under service contracts
are recognized when the services are performed. The
percentage-of-completion method is used on long-term contracts.
The Company adopted Staff Accounting Bulletin No. 101, "Revenue
Recognition Financial Statements" (SAB101) in fiscal year 2001. SAB101
summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
adoption of SAB101 did not have a material impact on its financial
position or statement of operations. Shipping and handling costs charged
to customers were not material.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheet.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents are carried at
cost which approximates market value.
Financial Instruments:
The carrying amounts of cash and cash equivalents and other current assets
and liabilities approximate fair value due to the short-term maturity of
these investments. The Company does not determine an estimated fair value
for its related party debt, since such debt does not have a readily
determinable market.
21
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customer base is primarily comprised of
airlines, distributors, and the U.S. Government. As of March 31, 2001, the
Company believes it has no risk related to its concentration within its
accounts receivable. (See Note 12 to Financial Statements).
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis. 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.
Office and Manufacturing Equipment:
Office and manufacturing equipment are stated at cost. Depreciation and
amortization is provided on a straight-line basis over periods ranging
from 3 to 10 years.
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.
Leasehold improvements are amortized over the term of the lease or the
useful life of the asset, whichever is shorter.
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.
Research and Development Costs:
Research and development costs are expensed as incurred.
Income/(Loss) Per Common Share:
The Company's basic income (loss) per share is based on net income (loss)
for the relevant period, divided by the weighted average number of common
shares outstanding during the period. Diluted income per share is based on
net income for the relevant period, divided by the weighted average number
of common shares outstanding during the period, including common share
equivalents, such as outstanding stock options and warrants which totaled
2,552 and 35,419 for fiscal years 2001 and 2000, respectively using the
treasury stock method. Common share equivalents, such as outstanding stock
options and warrants, are not included in the calculation for the fiscal
year 1999, since the effect would be antidilutive.
22
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
Accounting for Income Taxes:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax
benefit which is not expected to be realized. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in the period
that such tax rate changes are enacted.
Stock Option Plan:
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123 the Company provides pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made since fiscal 1996 as if the fair-value-based method as
defined in SFAS No. 123 has been applied.
Long-Lived Assets To Be Disposed Of:
In accordance with SFAS No. 121, the Company reviews long-lived assets for
impairment whenever events or changes in business circumstances occur that
indicate that the carrying amount of the assets may not be recoverable.
The Company assesses the recoverability of long-lived assets held and to
be used based on undiscounted cash flows, and measures the impairment, if
any, using discounted cash flows.
Comprehensive Income:
On June 7, 1997 the FASB issued SFAS No.130 "Reporting Comprehensive
Income". SFAS No. 130 establishes standards of reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS No.
130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS No. 130 in fiscal 1999 and
this adoption had no effect on the Company's financial statements.
23
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
Segments:
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standard 131 ("SFAS 131") Disclosures about Segments of an Enterprise and
Related Information. SFAS 131, supersedes FAS 14, Financial Reporting for
Segments of a Business Enterprise, replacing the "industry segment"
approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosure about
products and services, geographical areas, and major customers. The
adoption of SFAS 131 did not affect the Company's result of operations or
financial position, but did affect the disclosure of segment information
(see Note 14 to Financial Statements).
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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, and inventory and
accounts receivable valuations.
Risks and Uncertainties:
The Company's operations are subject to a number of risks, including but
not limited to changes in the general economy, demand for the Company's
products, the success of its customers, research and development results,
reliance on the government markets and the renewal of its line of credit.
The Company has a major contract with the U.S. Navy, which like all
government contracts, is subject to termination.
Reclassification:
Certain prior years amounts have been reclassified to conform to the
current year presentation.
24
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
3. Accounts Receivable
The following tabulation sets forth the components of accounts receivable:
March 31,
---------------------------
2001 2000
---------- ----------
Government $ 883,767 $ 765,814
Commercial 392,214 345,209
Less: Allowance for doubtful accounts (11,598) (11,598)
---------- ----------
$1,264,383 $1,099,425
========== ==========
4. Inventories
Inventories consist of:
March 31,
----------------------------
2001 2000
---------- ----------
Purchased parts $1,072,191 $ 921,185
Work-in-process 1,352,252 609,824
Less: Reserve for obsolescence (72,795) (44,124)
---------- ----------
$2,351,648 $1,486,885
========== ==========
Work-in-process inventory includes $1,102,205 and $397,507 for government
contracts at March 31, 2001 and 2000 respectively.
14. Office and Manufacturing Equipment
Office and manufacturing equipment consists of the following:
March 31,
---------------------------
2001 2000
--------- ---------
Leasehold Improvements $ 312,583 $ 54,640
Machinery and equipment 749,598 644,899
Sales equipment 183,853 150,438
Assets under capitalized leases 248,383 190,769
Less: Accumulated depreciation and
Amortization (819,761) (689,874)
--------- ---------
$ 674,656 $ 350,872
========= =========
25
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
6. Accrued Expenses
Accrued payroll, vacation pay and deferred wages consists of the
following:
March 31,
---------------------------
2001 2000
---------- ----------
Accrued profit sharing $334,626 $ 149,790
Accrued vacation pay 113,437 92,585
Accrued salary and payroll taxes 47,266 32,392
Deferred salary and wages and interest 40,521 75,519
-------- ---------
$535,850 $ 350,286
======== =========
Other accrued expenses of $305,286 and $231,406 at March 31, 2001 and
2000, respectively, consist primarily of interest, professional service
costs for legal, accounting, and independent sales representative
commissions, and of product related costs, such as warranty.
7. Line of Credit
The Company has a line of credit of $600,000, maturing in June 2001.
Interest is payable monthly at an interest rate of 1% above the lender's
prevailing base rate. As of March 31, 2001, the Company was paying 8% on
the outstanding balance. 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, 2001, the company is
in compliance with all financial covenants. At March 31, 2001 and 2000,
the Company had an outstanding balance of $250,000.
26
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
8. Capitalized Lease Obligations
The Company has entered into lease commitments for equipment that meet the
requirements for capitalization. The equipment has been capitalized and
shown in office and manufacturing equipment in the accompanying balance
sheets. The related obligations are also recorded in the accompanying
balance sheets and are based upon the present value of the future minimum
lease payments with interest rates ranging from 11% to 18%. The net book
value of equipment acquired under capitalized lease obligations amounted
to $177,134 and $166,690 respectively, at March 31, 2001 and 2000. As of
March 31, 2001 and 2000, accumulated amortization under capital leases was
$71,250 and $24,079, respectively.
Commitments under these leases for the years subsequent to March 31, 2001
are as follows:
2002 $ 90,526
2003 60,730
2004 43,631
2005 19,428
--------
Total minimum lease payments 214,315
Less amounts representing interest 68,144
--------
Present value of net minimum lease payments 146,171
Less current portion 77,826
--------
Long-term capital lease obligation $ 68,345
========
27
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
9. Income Taxes
The benefit for income taxes is comprised of the following:
March 31, March 31, March 31,
2001 2000 1999
--------- --------- ---------
Current:
Federal $ 38,955 $ -- $ --
State and Local 59,155 -- --
--------- --------- ---------
Total Current Tax Provision $ 98,110 $ -- $ --
========= ========= =========
Deferred:
Federal $(397,998) $(220,595) $ (99,585)
State and Local 4,000 (21,000) 2,000
--------- --------- ---------
Total Benefit $(295,888) $(241,595) $ (97,585)
========= ========= =========
The components of the Company's deferred taxes at March 31, 2001 and 2000
are as follows:
March 31, March 31,
2001 2000
---------- ----------
Net operating loss
carryforwards and credits $ 685,000 $1,090,000
Asset reserves 34,000 22,000
Deferred wages and accrued interest 250,000 190,000
Provision for estimated expenses 163,000 161,000
---------- ----------
Deferred tax asset 1,132,000 1,463,000
Less, valuation allowance -- 724,901
---------- ----------
Deferred tax asset $1,132,000 $ 738,099
========== ==========
As of March 31, 2001, the Company has Federal tax net operating loss
carryforwards of approximately $1,435,000, which begin to expire in 2004.
The recognized deferred tax asset is based upon the expected utilization
of its net operating loss carryforwards before they expire and benefit
from the reversal of tax asset temporary differences.
28
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
9. Income Taxes (Continued)
The foregoing amounts are management's estimates and the actual results
could differ from those estimates. Future profitability in this
competitive industry depends on continually obtaining and fulfilling new
profitable purchase agreements and modifying products. The inability to
obtain new profitable contracts or the failure of the Company's
engineering development efforts could reduce estimates of future
profitability, which could affect the Company's ability to realize the
deferred tax assets.
A reconciliation of the income tax expense at the statutory Federal tax
rate of 34% to the income tax expense recognized in the financial
statements is as follows:
2001 2000 1999
---- ---- ----
Income tax expense - statutory rate $ 353,300 $ 122,403 $ (83,050)
Income tax expenses - state and local,
net of federal benefit 41,682 (13,860) 1,320
Change in valuation allowance (724,901) (320,595) 116,415
Federal income tax credit (16,000) (30,000) (128,000)
Other 50,031 457 (4,270)
---------- --------- ---------
Income tax benefit recognized in the
financial statements $(295,888) $(241,595) $ (97,585)
========= ========= =========
10. Related Party Transactions
On March 31, 1997, the Company's Chairman/President renegotiated the terms
of the non-current note payable-related party. This note, along with
$250,000 of other accrued expenses due to the Company's
Chairman/President, were converted into seven $50,000 convertible
subordinated notes (the "Notes") totaling $350,000. The Notes are due in
consecutive years beginning March 31, 1999 with the last note due March
31, 2005. In April 2001, Notes which were scheduled to mature on March 31,
1999, March 31, 2000 and March 31, 2001 were extended to September 30,
2001. The Notes bear interest at a rate of 10% 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 Notes and any
accrued interest thereon, if the Company sells all or substantially all of
its assets. The Notes can be converted into newly issued common shares of
the Company at the conversion price of $2.50 per share. The conversion
prices shall be adjusted for any stock dividends, stock issuances or
capital reorganizations. The Notes may be redeemed by the Company prior to
maturity upon giving written notice of not less than 30 days or more than
60 days at a redemption price equal to 120% of the principal if redeemed
two years or more prior to the maturity date or 110% of the principal if
redeemed more than one year, but less than two years prior to the maturity
date.
29
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
10. Related Party Transactions (Continued)
Accrued payroll, vacation pay and deferred wages and related interest
includes $72,461 and $77,074 at March 31, 2001 and 2000, respectively,
which is due to officers of the Company.
Accrued expenses-related parties includes interest and professional fees
of approximately $90,000 and $65,000 due to a non-employee
officer/stockholder of the Company at March 31, 2001 and 2000,
respectively. Accrued expenses - related parties includes professional
fees of approximately $4,000 and $8,000 to a director/stockholder of the
Company at March 31, 2001 and 2000 respectively. In addition, accrued
expense - related parties includes $103,000 and $60,000 respectively at
March 31, 2001 and 2000 for interest and other expenses due to the
Company's Chairman/President. Tel has obtained professional services from
a non-employee officer/stockholder with the related fees amounting to
$57,966, $42,464 and $46,164 for the years ended March 31, 2001, 2000 and
1999, respectively. Additionally, Tel obtained professional services from
a director/stockholder with the related fees amounting to $77,500, $84,000
and $76,500 for fiscal years 2001, 2000 and 1999, respectively.
The Company's $30,000 convertible subordinated note-related party matured
on March 31, 1997. The Company renegotiated such note and satisfied
$15,000 of this obligation and extended the maturity date of the remaining
$15,000 until September 30, 2001. This note accrues interest semi-annually
at a rate of 7%. The subordinate note is for past professional fees and
services converted into a note payable due to an officer/stockholder of
the Company. The notes are convertible to common stock at the option of
the holder at $1.50 per share, at any time prior to maturity.
11. Leases
The Company rents its office space and manufacturing facility under a
lease agreement. In March, 2001, the Company expanded its facility by
leasing the entire building, thereby increasing its facility to 19,564
square feet from 11,164. The lease expires in February, 2011. Under terms
of the lease, the Company pays all real estate taxes and utility costs for
the premises.
In addition, the Company has an agreement to lease equipment for use in
the operations of the business under operating leases.
The following is a schedule of future minimum rental payments for
operating leases for the five years subsequent to the year ended March 31,
2001.
2002 $ 129,936
2003 124,836
2004 126,928
2005 130,829
2006 134,652
2007 and thereafter 722,981
30
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
11. Leases (Continued)
Total rent expense, including real estate taxes, was approximately
$97,000, $101,000, and $83,000 for the years ended March 31, 2001, 2000
and 1999, respectively.
12. Significant Customer Concentrations
For the fiscal year ended March 31, 2001, one customer represented 12% of
total sales or 29% of commercial sales. This customer did not represent
over 10% of sales for fiscal 2000 and 1999. For the fiscal year ended
March 31, 2000, one customer represented over 12% of total sales which
included commercial sales of approximately $35,000 and government sales of
$587,000. This customer did not represent over 10% of sales for either
fiscal 2001 or 1999. For the fiscal year ended March 31, 1999, one
customer represented over 10% of total sales which included commercial
sales of approximately $77,000 and government sales of $288,000. This
customer did not represent over 10% of sales for either fiscal 2001 or
2000. As of March 31, 2001, two individual account balances represented
16% and 10% of the Company's outstanding accounts receivable. As of March
31, 2000, two individual account balances represent 12% and 11% of the
Company's accounts receivable. Receivables from the U.S. Government,
including unbilled revenues, represented approximately 28% and 26%,
respectively, of total receivables for the fiscal years ended March 31,
2001 and 2000.
13. Stock Option Plan
The Company has a stock option plan that provides for the granting of
options to employees and directors. Activity during 2001, 2000, and 1999
is summarized below (in number of options):
2001 2000 1999
-------- ------- -------
Held at beginning of year 85,311 45,344 32,166
Granted 8,400 61,800 29,500
Exercised (11,061) (3,333) (15,222)
Canceled or expired -- (18,500) (1,100)
------- ------- -------
Held at end of year 82,650 85,311 45,344
======= ======= =======
31
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
13. Stock Option Plan (Continued)
As of March 31, 2001, the Company had the following options outstanding:
Number of Weighted Average
Options Exercise Remaining Options Exercisable
Outstanding Price Contract Life (years) At March 31, 2001
- ----------- ------------- --------------------- -------------------
5,000 $ 2.3750 2.2 3,000
8,400 2.2800 4.6 0
11,400 1.8400 3.7 2,280
3,600 1.6600 3.2 1,440
46,250 1.5265 3.7 9,280
2,000 1.3750 2.0 1,200
2,400 1.2501 1.0 1,920
3,600 .7201 0.2 3,600
------ ------
82,650 22,720
====== ======
For the years ended March 31, 2001, 2000 and 1999, 22,720, 19,151, and
15,844 of options were outstanding, vested, and exercisable.
The per share weighted-average fair value of stock options granted for the
years 2001, 2000 and 1999 were $2.02, $1.43 and $1.95 respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 5%, volatility factor of 135%, and an expected
life of 5 years. The Company applies Accounting Principles Board Opinion
No. 25 in accounting for its stock options and, accordingly, no
compensation expense has been recognized for its stock options in the
accompanying financial statements. Had the Company determined compensation
cost based on the fair market value at the grant date for its stock
options under SFAS No. 123, the Company's net income would not have been
materially affected. The pro forma amounts are indicated below:
2001 2000 1999
---- ---- ----
Net income (loss) - as reported $ 1,335,005 $ 600,553 $ (146,681)
Net income (loss) - pro forma 1,308,005 583,899 (160,135)
Basic earnings (loss) per share -
as reported 0.63 0.28 (0.07)
Basic earnings (loss) per share -
pro forma 0.62 0.28 (0.08)
Diluted earnings (loss) per share -
as reported 0.63 0.28 (0.07)
Diluted earnings (loss) per share -
pro forma 0.62 0.27 (0.08)
32
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
13. Stock Option Plan (Continued)
In June 1998, the Board of Directors of the Company adopted a new 1998
Stock Option Plan ("the Plan") which reserves for issuance up to 250,000
shares of its Common Stock. 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
purchase of options is 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 exercisable 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, at which the exercise price may not be less than 110% of the fair
value of the common stock at the date of grant. At March 31, 2001, 203,000
options for common stock are available for future grant.
14. Segment Information
In 1999, the Company adopted SFAS 131. Segment information has been
restated to present the Company's two reportable segments, government and
commercial.
The Company evaluates the performance of its segments and allocates
resources to them based on gross margin. There are no inter-segment
revenues.
The Company is organized primarily on the basis of its avionics products.
The government segment consists primarily of the sale of test equipment to
the U.S. and foreign governments and militaries either direct or through
distributors. The commercial segment consists of sales of test equipment
to domestic and foreign airlines and to commercial distributors. 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.
33
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
14. Segment Information (Continued)
The table below presents information about reportable segments for the
years ending March 31:
Reconciling
2001 Government Commercial Items Total
- ---- ---------- ---------- ------------ ----------
Revenues $4,475,620 $3,033,281 $ -- $7,508,901
Cost of Sales 2,274,152 1,430,420 -- 3,704,572
---------- ---------- ----------- ----------
Gross Margin 2,201,468 1,602,861 $3,804,329
Engineering, research,
and Development 1,047,305 1,047,305
Selling, general, and
administrative 1,622,881 1,622,881
Interest, net (95,026) (95,026)
----------- -----------
Income before income taxes 1,039,117
==========
Segment Assets $1,985,972 $ 630,663 $ 3,318,011 $5,934,646
========== ========== =========== ==========
Reconciling
2000 Government Commercial Items Total
- ---- ---------- ---------- ------------ ----------
Revenues $ 3,172,923 $1,957,859 $ -- $5,130,782
Cost of Sales 1,596,453 893,316 -- 2,489,769
----------- ---------- ----------- ----------
Gross Margin $ 1,576,470 $1,064,543 $2,641,013
Engineering, research,
and Development 1,051,833 1,051,833
Selling, general, and
administrative 1,165,844 1,165,844
Interest, net (64,378) (64,378)
----------
Income before income taxes $ 358,958
==========
Segment Assets $ 1,163,321 $ 545,928 $ 2,223,516 $3,932,765
=========== =========== =========== ==========
Reconciling
1999 Government Commercial Items Total
- ---- ---------- ---------- ------------ ----------
Revenues $ 1,730,776 $1,753,723 $ -- $3,484,499
Cost of Sales 838,734 721,258 -- 1,559,992
----------- ---------- ----------- ----------
Gross Margin $ 892,042 $1,032,465 $1,924,507
Engineering, research,
and Development 1,204,007 1,204,077
Selling, general, and
administrative 920,547 920,547
Interest, net (44,419) (44,149)
----------
Loss before income taxes $ (244,266)
==========
Segment Assets $ 728,497 $ 250,740 $ 1,239,271 $2,218,508
=========== =========== =========== ==========
34
TEL-INSTRUMENT ELECTRONICS CORP.
Notes To Financial Statements (Continued)
14. Segment Information (Continued)
The Company primarily develops and designs test equipment for the avionics
industry and as such, the Company's products and designs cross segments.
The Company's general and administrative costs and marketing strategies
are not segment specific. As a result, selling, general, and
administrative 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.
Foreign sales are based on the country in which the customer is located.
Foreign sales were approximately $1,717,000, $1,581,000 and $833,000 for
the years ended March 31, 2001, 2000, and 1999, respectively. All other
sales were to customers located in the U.S.
For the fiscal years ended March 31, 2000 and 1999, there was a domestic
commercial customer that accounted for approximately 11% of total
commercial sales in each year. One domestic distributor accounted for 29%,
10% and 13% of commercial sales for the years ended March 31, 2001, 2000,
and 1999, respectively. No end user customer accounted for more than 10%
of commercial sales for these years. Foreign commercial sales were 17%,
20% and 19% of total commercial sales for the years ended March 31, 2001,
2000 and 1999, respectively. Sales to an international distributor
accounted for approximately 12% of total sales in fiscal year 2000. Sales
to another international distributor accounted for 10% of total sales in
fiscal year 1999. For the fiscal year ended March 31, 2001, sales to these
distributors did not exceed 10% of total sales.
Sales to the U.S. Government were approximately $2,527,621, $912,000, and
$669,000 for the years ended March 31, 2001, 2000, and 1999, respectively.
35
TEL-INSTRUMENT ELECTRONICS CORP.
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts Deductions End of Year
Year ended March 31, 1999:
Allowance for doubtful
Accounts $16,064 $ 479(2) $15,585
======= ======= =======
Allowance for obsolete
Inventory $35,620 $(6,000) $29,620
======= ======= =======
Year ended March 31, 2000:
Allowance for doubtful
Accounts $15,585 (3,987) $11,598
======= ======= =======
Allowance for obsolete
Inventory $29,620 $20,500 $ 5,996(1) $44,124
======= ======= ======= =======
Year ended March 31, 2001:
Allowance for doubtful
Accounts $11,598 $11,598
======= =======
Allowance for obsolete
Inventory $44,124 $63,000 $34,329(1) $72,795
======= ======= ======= =======
(1) Amounts represent disposals of obsolete inventory.
(2) Amount represents write off of accounts receivable.
36
TEL-INSTRUMENT ELECTRONICS CORP.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No disagreements arose between the Registrant and its independent
auditors' regarding accounting and financial matters during the twelve
months preceding March 31, 2001.
PART III
Item 10. Directors and Executive Officers of the Registrant
DIRECTORS AND EXECUTIVE OFFICERS
Year First
Elected a
Name (age) Position Director
---------- -------- --------
Harold K. Fletcher (1) Chairman of the Board, 1982
(76) President and Chief
Executive Officer
since 1982.
George J. Leon Director; Investment 1986
(57) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.
Robert J. Melnick Chief Operating Officer and Vice 1998
(66) President since 1999; Marketing
and Management Consultant for the
Company since 1991.
Jeff C. O'Hara (1) Director; Financial Consultant from 1998
(43) 2001, Chief Financial Officer of
Alarm Security Group 1999-2001;
Financial Consultant from 1996 to 1998.
Chief Financial Officer of Keywell
Corporation.
Robert H. Walker Director; Retired Executive Vice 1984
(65) President, Robotic Vision
Systems, Inc. (design and
manufacture of robotic
vision systems),
1983-1998.
(1) Mr. O'Hara is the son-in-law of Mr. Fletcher
37
TEL-INSTRUMENT ELECTRONICS CORP.
Item 10. Directors and Executive Officers of the Registrant (Continued)
Officers
--------
Donald S. Bab Secretary and General Counsel since 1982.
Richard J. Wixson Vice President and Director of
Manufacturing, employed by Tel
in his present capacity since
1987.
Item 11. Executive Compensation
The following table and accompanying notes set forth information
concerning compensation for the fiscal years ended March 31, 2000, 1999,
and 1998.
Stock Other
Name and Principal Position Year Salary Options Compensation
--------------------------- ---- ------ ------- ------------
Harold K. Fletcher 2001 $130,000 --
Chairman of Board 2000 130,000 $11,700(1)
President and Chief 1999 100,000 --
Executive Officer
(1) Represents bonus based on the Company's profitability.
38
TEL-INSTRUMENT ELECTRONICS CORP.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following tables set forth, as of March 31, 2000, the number and
percentage of the outstanding shares of common stock, beneficially owned
by each director and by each beneficial owner of 5% or more of such
shares, and by all officers and directors as a group.
Number of Shares Percentage
Name and Address Beneficially Owned of Class (1)
- ---------------- ------------------ ------------
Harold K. Fletcher, Director 496,102 (2) 23.4%
728 Garden Street
Carlstadt, New Jersey 07072
George J. Leon, Director 308,747 (3) 14.5%
116 Glenview
Toronto, Ontario
Canada M4R1P8
Robert J. Melnick, Director 24,320 (4) 1.1%
57 Huntington Road
Basking Ridge, New Jersey 07920
Jeff C. O'Hara, Director 105,500 (5) 5.0%
853 Turnbridge Circle
Naperville, IL 60540
Robert H. Walker, Director 26,863 (6) 1.3%
27 Vantage Court
Port Jefferson, NY 11777
Donald S. Bab, Secretary 65,634 (7) 3.1%
330 Madison Avenue
New York, New York 10017
All Officers and Directors 1,073,286 (8) 50.2%
as a Group (7 persons)
(1) The class includes 2,124,351 shares outstanding. The common stock deemed
to be owned which is not outstanding but subject to currently exercisable
options held by the individual named is deemed to be outstanding for
determining the percentage of all outstanding stock owned.
(2) Includes 24,681 shares owned by Mr. Fletcher's wife, 4,254 shares owned by
his son, 261,295 owned by a family partnership in which Mr. Fletcher is a
partner.
39
TEL-INSTRUMENT ELECTRONICS CORP.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
Mr. Fletcher disclaims beneficial ownership of the shares owned by his
wife and son and by the partnership.
(3) Includes 300,267 shares owned by the George Leon Family Trust, of which
Mr. Leon is a beneficiary, and 3,680 shares subject to currently
exercisable stock option. Mr. Leon disclaims beneficial ownership of the
shares owned by the trust.
(4) Includes 4,320 shares subject to currently exercisable stock options
(5) Includes 320 shares subject to currently exercisable stock options.
(6) Includes 3,680 shares subject to currently exercisable stock options.
(7) Mr. Bab has a convertible debenture in the amount of $15,000 that is
convertible into common stock at $1.50 per share.
(8) Includes 12,000 shares subject to currently exercisable options held by
all executive offices and directors of the Company (including those
individually named above).
Item 13. Certain Relationships and Related Transactions
The disclosures required by this item are contained in Note 10 to the
financial statements included on pages -- and -- of this document.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
a.) The following documents are filed as a part of this report:
Pages
-----
(1) Financial Statements:
Report of Independent Accountants 16
Balance Sheets - March 31, 2001 and 2000 17
Statements of Operations - Years Ended
March 31, 2001, 2000 and 1999 18
Statements of Changes in Stockholders'
Equity/(Deficiency) - Years Ended
March 31, 2001, 2000 and 1999 19
Statements of Cash Flows - Years Ended
March 31, 2001, 2000 and 1999 20
40
TEL-INSTRUMENT ELECTRONICS CORP.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K
(Continued)
Pages
-----
Notes to Financial Statements 21- 35
(2) Financial Statement Schedule
II - Valuation and Qualifying Accounts 36
(3) Lease dated March 1, 2001 by and between
Registrant and 210 Garibaldi Group.
b.) No reports on Form 8-K were filed during the fourth quarter of 2001.
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.
* (4.2) Specimen of Tel-Instrument Electronics Corp.'s
Convertible Preferred 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
** (27.) Financial Data Schedule
* Incorporated by reference to Registration 33-18978 dated November 7,
1988.
** Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
filed.
The Company will furnish, without charge to a security holder, upon
request, copy of the documentary portions which are incorporated by
reference, and will furnish any other exhibit at cost.
41
TEL-INSTRUMENT ELECTRONICS CORP.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP.
(Registrant)
Dated: June 26, 2001 By: /s/ Harold K. Fletcher
----------------------
President and Director
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated and by
signature hereto.
Signature Title Date
--------- ----- ----
/s/ Harold K. Fletcher Director June 26, 2001
---------------------------
/s/ Harold K. Fletcher
/s/ Joseph P. Macaluso Principal Accounting Officer June 26, 2001
---------------------------
/s/ Joseph P. Macaluso
/s/ George J. Leon Director June 26, 2001
---------------------------
/s/ George J. Leon
/s/ Robert J. Melnick Director June 26, 2001
---------------------------
/s/ Robert J. Melnick
/s/ Jeff O'Hara Director June 26, 2001
---------------------------
/s/ Jeff O'Hara
/s/ Robert H. Walker Director June 26, 2001
---------------------------
/s/ Robert H. Walker
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
No annual report to security holders covering the fiscal year ended March
31, 2001, except in the form set forth in this Form 10-K, has been
prepared. No proxy statement, form of proxy, or other proxy soliciting
material has been sent to shareholders with respect to any annual or other
meeting of shareholders. No annual report or proxy material is
contemplated.
42