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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, 2003 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 9, 2003 was $2,630,505 using the price of the
last trade on June 10, 2002.
2,137,801 shares of Common Stock were outstanding as of June 9, 2003.
Total Pages - 53
Exhibit Index - pages 47-49
PART I
Item 1. Business
General
Tel-Instrument Electronics Corp ("Tel" or the "Company") is a leading
designer and manufacturer of avionics test and measurement solutions for
the global commercial air transport, general aviation, and
government/military aerospace and defense markets. The company provides
instruments to test, measure, calibrate, and repair a wide range of
airborne navigation and communication equipment.
Tel's instruments are used to test navigation and communications equipment
installed in aircraft, both on the flight line ("ramp testers") and in the
maintenance shop ("bench testers"), and range in list price from $7,900 to
$85,000 per unit. Tel continues to develop new products in anticipation of
customers' needs. Its 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 manufacturer and
supplier of IFF (Identification Friend or Foe) flight line test equipment,
discussed below. The Company is currently working on the next generation
of IFF test sets in anticipation of U.S. and NATO requirements for more
sophisticated IFF testing.
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 in military aircraft, on the flight line and aircraft carrier
deck. The Company has begun development of the next generation of more
sophisticated IFF testers in anticipation that the U.S. Navy will issue a
contract in the future to upgrade these units. Although there is no
assurance that the Company will receive any such sales contracts which may
be issued by the U.S. Navy, the Company believes that it is well
positioned to obtain such contracts.
Over the last 6 years, the Company has significantly improved its
financial condition, increased revenues, pre-tax profits, and cash
balance, firmly established itself as one of the leading suppliers in the
avionics test equipment industry, and improved its market position.
For the year ended March 31, 2003, revenues increased 22% to $11,861,387
and income before taxes increased 8% to $1,706,786. Deliveries of the
AN/APM-480 IFF Transponder Test Set to the U.S. Navy continued and
accounted for 49% of total sales for the year end March 31, 2003. In
August 1997, the Company received notice that it was awarded a major
contract from the U.S. Navy, which included options for up to 1,300 units.
In February 2003, the U.S. Navy exercised the remaining options for
$1,450,000. The Company has thus received orders for all 1,300 units under
the contract. The Company has shipped 923 units through March 31, 2003 and
expects shipments under this contract to continue until the fourth quarter
of fiscal year 2004. The Company continues to invest heavily in new
product development to meet the expected demands of its customers and
remain one of the leaders in the industry. The Company recently introduced
the TR-220, a multi-function ramp test set, which is being favorably
received by the marketplace.
2
Item 1. Business
General (Continued)
While the Company remained profitable in fiscal year 2003, administrative
and engineering expenses increased over the prior year as the company
developed new products, and strengthened its management team with the
addition of a new chief operating officer (COO) along with additions to
its sales and marketing team and its engineering group.
The Company continues actively to pursue opportunities in both the
commercial and government markets, both domestic and international, and
expends substantial amounts to develop new and improved products. The
Company has been actively responding to customer requests by adapting its
product designs or developing new products. Exploration of opportunities
in other government and commercial markets also continues in an attempt to
broaden the Company's product line.
The Company continues its efforts with Semaphore Capital Advisors LLC to
pursue growth through acquisitions and alliances of compatible businesses
or technologies.
The table below sets forth the composition of Tel's sales for the last
three fiscal years.
Commercial Government Total
---------- ---------- -----
March 31, 2003 $2,486,205 $9,375,182 $11,861,387
March 31, 2002 $1,981,298 $7,749,783 $ 9,731,081
March 31, 2001 $3,033,281 $4,475,620 $ 7,508,901
The Company has an exclusive distribution agreement with Muirhead Avionics
and Accessories, Ltd, based in the United Kingdom, to represent the
Company in parts of Europe. Tel also sells its products through exclusive
distributors in Australia, New Zealand, Spain, and Portugal, and is
exploring distribution in other areas.
Foreign commercial sales are made direct, through American export agents,
or the Company's international distributors at a discount reflecting the
20% selling commission under written or oral, year-to-year arrangements.
For the years ended March 31, 2003, 2002, and 2001, foreign commercial
sales were 24%, 20%, and 17%, respectively, of total commercial sales.
During fiscal year 2003 foreign government sales included $786,000 for the
DME/P bench test sets sold to its Italian customer, representing 8% of
government sales for fiscal year 2003.
Domestic commercial sales are made directly or through distributors. No
direct commercial customer accounted for more than 10% of commercial sales
in fiscal years
3
Item 1. Business (Continued)
General (Continued)
2003, 2002, and 2001. There are no written agreements with domestic
distributors, who receive a 15%-20% discount for stocking, selling and, in
some cases, supporting these products. Tel gives a 5% to 10% discount to
non-stocking distributors, and independent sales representatives,
depending on their sales volume and promotional effort. One domestic
distributor (Avionics International) accounted for approximately 13%, 19%,
and 29% of commercial sales for the years ended March 31, 2003, 2002, and
2001, respectively. In addition, another domestic distributor (Aero
Express) which began working with the Company during fiscal year 2003
accounted for 26% of commercial sales for fiscal year 2003.
Set forth below is Tel's backlog at March 31, 2003, 2002, and 2001.
Commercial Government Total
---------- ---------- -----
March 31, 2003 $869,930 $ 6,072,504 $ 6,942,434
March 31, 2002 $186,690 $ 8,346,557 $ 8,533,247
March 31, 2001 $633,761 $13,029,317 $13,663,078
Tel believes that most of the backlog at March 31, 2003 will be delivered
during the next 12-18 months.
Reduction in backlog is a result of having delivered approximately 71% of
the 1,300 units ordered by the U.S. Navy for the AN/APM-480 IFF test sets.
Historically, orders received by the Company are received and shipped
within the year and, as such, are not reflected within the above schedule.
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 manufactures and sells commercial and military products as the
same avionics business, using best commercial practice in manufacturing
products for the government.
Civilian Markets
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.
4
Item 1. Business (Continued)
Markets and Competition (continued)
The civilian market for avionic test equipment is dominated by three
manufacturers, including Tel, IFR, a division of Aeroflex, Inc., and JC
Air, a division of Goodrich Corporation. This market is relatively small
and highly competitive. Tel has been successful because of its high
quality products, competitive prices, and responsive service.
Tel also provides customers with calibration and repair services.
The Company has entered into distribution arrangements with Muirhead to
distribute in parts of Europe and with Milspec Services 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 marketing opportunities in other parts of
the world.
Future domestic market 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, 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.
Military Markets
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. The military market consists of many independent purchasing
agencies.
Tel has increased its efforts to obtain such subcontracts and 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 for the U.S.
Military as well as throughout the NATO countries for flight line IFF test
equipment. The Company is currently working on the next generation of IFF
test sets.
Tel has no patents or licenses which are material to its business.
Engineering, Research and Development
In the fiscal years ended March 31, 2003, 2002, and 2001, Tel spent
$1,601,493, $1,521,219, and $1,047,305, respectively, on the engineering,
research and development of new and improved products. None of these
amounts was sponsored by customers. Tel's management believes that
continued and increased expenditures for engineering, research and
development are necessary to enable Tel to expand its sales and profits.
5
Item 1. Business (Continued)
Engineering, Research and Development (continued)
The increase in expenditures is the result of an increase in staff and an
increase in the Company's development efforts. Engineering, research and
development expenditures in 2003 were directed to the next generation of
IFF test sets, the development of a multi-function commercial bench
tester, and to new products for other targeted markets, such as the T-36C,
TR-220, and T-47S. The Company owns all of these designs.
Personnel
At June 9, 2003, Tel had 26 employees in manufacturing, materials
management, and quality assurance, 11 in administration and sales, and 12
in research and development, none of whom belongs to a union. While the
job market is tight for technical personnel, Tel has generally been able
to add personnel as required. At June 9, 2003, the Company utilized 10
part-time individuals in manufacturing and several part-time consultants
on an as needed basis.
Item 2. Properties
The Company leases 19,564 square feet in Carlstadt, New Jersey as its
manufacturing plant and administrative offices, pursuant to a ten-year
lease expiring in February, 2011 (see Note 11 to the Financial
Statements). 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
The Company has appealed the U.S. Army's award of a significant contract
to another contractor. The Company believes it has a meritorious claim,
but no opinion can be given about the outcome of the appeal which is
pending in the United States Court of Federal Appeals.
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, 2003, the
Company's Common Stock had the high and low closing prices of $2.50 and
$1.70, respectively. These quotations reflect inter-dealer prices, without
retail markup or commission, and may not necessarily represent actual
transactions. On June 9, 2003, the bid was $2.30 and the ask was $2.50.
During fiscal year 2003, the Company issued 2,450 shares of common stock
upon exercise of stock option grants pursuant to its 1998 Stock Option
Plan (see Note 13 to the Financial Statements). All of the shares were
issued pursuant to the exemption from registration requirements pursuant
to Section 4(2) of the Securities Act of 1933 as amended.
Approximate Number of Equity Security Holders
Number of Holders
on Record as of
Title of Class March 31, 2003
-------------- -----------------
Common Stock, par value 807
$.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.
Item 6. Selected Financial Data
TEL-INSTRUMENT ELECTRONICS CORP.
SUMMARY OF FINANCIAL INFORMATION
Years Ended March 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Income Data:
Sales $ 11,861,387 $ 9,731,081 $ 7,508,901 $ 5,130,782 $ 3,484,499
Cost of sales 5,738,729 4,684,147 3,704,572 2,489,769 1,559,992
------------ ----------- ----------- ----------- -----------
Gross Margin $ 6,122,658 $ 5,046,934 $ 3,804,329 $ 2,641,013 $ 1,924,507
Operating costs and expenses:
Selling, general and administrative 2,803,498 1,858,843 1,622,881 1,165,844 920,547
Engineering, research & development 1,601,493 1,521,219 1,047,305 1,051,833 1,204,077
------------ ----------- ----------- ----------- -----------
4,404,941 3,380,062 2,670,186 2,217,677 2,124,624
Income (loss) from operations 1,717,667 1,666,872 1,134,143 423,336 (200,117)
------------ ----------- ----------- ----------- -----------
Other expenses, net (10,881) (81,183) (95,026) (64,378) (44,149)
------------ ----------- ----------- ----------- -----------
Diluted income/(loss) before income taxes 1,706,786 1,585,689 1,039,117 358,958 (244,266)
Income tax expense (benefit) 702,796 557,999 (295,888) (241,595) (97,585)
------------ ----------- ----------- ----------- -----------
Net income (loss) $ 1,003,990 $ 1,027,690 $ 1,335,005 $ 600,553 ($146,681)
============ =========== =========== =========== ===========
Diluted income/(loss) per common share $ 0.47 $ 0.48 $ 0.63 $ 0.28 ($0.07)
============ =========== =========== =========== ===========
Years Ended March 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $4,154,887 $3,154,081 $1,766,360 $ 921,130 $ 507,582
Total assets 7,311,177 6,233,572 5,934,646 3,932,765 2,218,508
Long-term debt 71,069 152,183 218,345 301,682 266,486
Stockholders' equity 4,907,874 3,900,794 2,862,348 1,522,047 919,093
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.
Critical Accounting Policies
In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies as disclosed
in Note 2 of our Notes to Financial Statements. The Company's accounting
policies that require a higher degree of judgment and complexity used in
the preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment to,
or acceptance by customer provided title and risk of loss is transferred
to the customer. Provisions, when appropriate, are made where the right to
return exists. Revenues under service contracts are recognized when the
services are performed.
Property and equipment - property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets over
periods ranging from three to eight years. Useful lives are estimated at
the time the asset is acquired and are based upon historical experience
with similar assets as well as taking into account anticipated
technological or other changes. Leasehold improvements are amortized over
the term of the lease or the useful life of the asset, whichever is
shorter.
Inventory reserves - inventory reserves or write-downs are estimated for
excess, slow-moving and obsolete inventory as well as inventory whose
carrying value is in excess of net realizable value.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies (continued)
These estimates are based on current assessments about future demands,
market conditions and related management initiatives. If market conditions
and actual demands are less favorable than those projected by management,
additional inventory write-downs may be required.
Warranty reserves - warranty reserves are based upon historical rates and
specific items that are identifiable and can be estimated at time of sale.
While warranty costs have historically been within our expectations and
the provisions established, future warranty costs could be in excess of
our warranty reserves. A significant increase in these costs could
adversely affect our operating results for the period and the periods
these additional costs materialize. Warranty reserves are adjusted from
time to time when actual warranty claim experience differs from estimates.
Accounts receivable - the Company performs ongoing credit evaluations of
its customers and adjusts credit limits based on customer payment and
current credit worthiness, as determined by review of their current credit
information. The Company continuously monitors credits and payments from
its customers and maintains provision for estimated credit losses based on
its historical experience and any specific customer issues that have been
identified. While such credit losses have historically been within our
expectation and the provision established, the Company cannot guarantee
that it will continue to receive positive results.
Income taxes - deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be
in effect when such differences are expected to reverse. The measurement
of deferred tax assets is reduced, if necessary, by a valuation allowance
for any tax benefit which is not more likely than not to be realized. The
effect on deferred tax assets and liabilities of a change in tax rate is
recognized in the period that such tax rate changes are enacted.
Results of Operations 2003 Compared to 2002
Overview
In fiscal year 2003 the Company continued the six-year growth in sales and
income before taxes. Net income in 2002 was affected by a lower effective
tax rate as a result of higher tax credits. See discussion under "Income
Taxes" for fiscal year 2002.
For the year ended March 31, 2003 sales increased 21.9% to $11,861,387 and
net income before taxes increased 7.6% to $1,706,786. Deliveries of the
AN/APM 480 IFF Transponder Test Set to the U.S. Navy continued and
accounted for 49% of total sales
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 2003 Compared to 2002
Overview (continued)
for the year ended March 31, 2003. In February 2003, the U.S. Navy
exercised the remaining options for additional units valued at $1,450,000.
The Company has received orders for all 1,300 units under the contract and
has shipped 923 units through March 31, 2003. Shipments under this
contract should continue until the fourth quarter of fiscal year 2004.
This program firmly established the Company as one of the leading
suppliers in the avionics test equipment industry, and improved its market
position.
The Company continues to invest heavily in new product development to meet
the expected demands of its customers and remain one of the leaders in the
industry. The Company continues its work on the next generation of IFF
test sets in anticipation of U.S. and NATO requirements for more
sophisticated IFF testing and believes that most of the AN/APM-480's will
need to be upgraded in the future to accommodate this more sophisticated
IFF testing. The Company recently introduced the TR-220, a Multi-Function
ramp test set, and the T-36C Nav/Comm ramp test set, into the commercial
market. The T-47S and the T-47G Multi-Function ramp testers were
introduced into the military market. The Company also continues
development of a new bench test set.
Exploration of opportunities in other government and commercial markets
continues in an attempt to broaden the Company's product line, and
continues with Semaphore Capital Advisors LLC to pursue acquisitions and
alliances of compatible businesses or technologies.
Sales
The growth in sales continued in fiscal year 2003. For the year ended
March 31, 2003, net sales increased $2,130,306 (21.9%) as compared to the
year ended March 31, 2002. Government sales increased $1,625,399 (20.9%)
to $9,375,182 as compared to $7,749,783 for the prior fiscal year. The
increase in government sales is mainly attributed to the shipment of the
AN/APM-480 to the U.S. Navy, which accounted for 49% of the total sales
for the current fiscal year as compared to 54% of total sales for the
previous fiscal year. Government sales also increased as a result of sales
of the AN/APM-480 to other customers and the shipment of the DME/P bench
test sets ($786,000) to its Italian customer. These increases were
partially offset by a decline in sales in the Company's other government
products.
Commercial sales increased $504,907 (25.5%) to $2,486,205 for the fiscal
year ended
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 2003 Compared to 2002
Sales (continued)
March 31, 2003 as compared to $1,981,298 for the fiscal year ended March
31, 2002. This increase is primarily the result of an increase in sales of
the Company's T-49C Transponder/TCAS ramp test set, as a result of a sales
promotion and the introduction of the TR-220 Multi-Function test set.
However, the commercial market remains weak, primarily as a result of the
weak financial position of most commercial airlines.
Gross Margin
Gross margin dollars increased $1,075,724 (21.3%) for the fiscal year
ended March 31, 2003 as compared to the same period last year. This
increase, for the most part, is attributed to the increase in sales
volume, higher prices for some units of the AN/APM-480, and, to a lesser
extent, to production efficiencies obtained as a result of the higher
volume, partially offset by a slight increase in manufacturing overhead
and an increase in warranty costs. Gross margin as a percentage of sales
was also slightly lower due to the lower gross profit on the T-760 DME/P
bench test sets and the increase in warranty costs. The gross margin
percentage for the fiscal year ended March 31, 2003 was 51.6% as compared
to 51.9% for the fiscal year ended March 31, 2002.
Operating Expenses
Selling, general and administrative expenses increased $944,655 (50.8%)
for the fiscal year ended March 31, 2003 as compared to the fiscal year
ended March 31, 2002. This increase is attributed to a higher level of
sales and marketing activities, and the additions of a Director of
Business Development, a Customer Support Manager, and a new sales
representative. Selling, general and administrative expenses also
increased as a result of higher travel expenses, legal and audit fees, and
investment-banking services. Some of these additional expenses are
non-recurring. The Company also strengthened its staff with the addition
of a new Chief Operating Officer (COO), and fiscal year 2003 expenses
include salary, recruitment, and relocation costs for the COO. The
addition of these personnel will add to the Company's expenses, but
management believes these additions are necessary for the Company to
continue its growth and diversification and to provide for an orderly
succession of key personnel.
Engineering, research and development expenses increased $80,274 (5.3%)
for the same period. The higher level of expenditures is associated with
an increase in research and development activities, including the
development of the TR-220 Multi-Function ramp test set, enhancements of
existing products, including the T-36C, T-47G, and the T-49C, as well as
continued effort on the next generation of IFF test sets. Fiscal year 2002
expenses were lower as a result of a customer funded program. These costs
were charged to cost of sales in fiscal year 2003 when the program was
completed.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 2003 Compared to 2002
Income Taxes
Income taxes increased $144,797 for the fiscal year ended March 31, 2003
as compared to the same period last year. This increase is a result of an
improvement in the Company's income and the change in deferred taxes. The
provision for income taxes represents the effective federal and state tax
rate on the Company's income before taxes. The Company has used up all its
net operating loss carryforward and will pay federal taxes this fiscal
year.
Results of Operations 2002 Compared to 2001
Overview
For the year ended March 31, 2002 sales increased 29.6% to $9,731,081 and
net income before taxes increased 52.6% to $1,585,689 from $1,039,117.
During fiscal year 2002 shipments of the AN/APM-480 IFF Transponder Set
Test (TSTS) to the U.S. Navy represented 54% of total sales. The company
has received orders for 1,059 units and there are 241 units remaining
subject to the U.S. Navy's option under the contract. Any options not
exercised by February 11, 2003 will then expire. A total of 520 have been
shipped and revenue recognized as of March 31, 2002. The balance of the
units ordered by the U.S. Navy should be shipped within the next 12-18
months. The Company increased research and development expenditures in
order to develop new products for future sales including the T-47S test
set, a commercial bench test set, and new products for other targeted
markets. The Company also continues work on the next generation of IFF
test sets. As a result of the continuing improvement in operating results,
the Company's financial position has significantly improved.
The Company continues to actively pursue avionics test opportunities in
both the commercial and government markets, both domestically and
internationally, and is also exploring opportunities in other government
and commercial markets in order to broaden the Company's product and
market base.
Sales
Sales increased $2,222,180 (29.6%) to $9,731,081 for the year ended March
31, 2002 compared to the year ended March 31, 2001. This continued the
growth of sales over the last five years.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 2002 Compared to 2001
Sales (continued)
Government sales increased $3,274,163 (73.2%) to $7,749,783 for the year
ended March 31, 2002 as compared to the prior fiscal year, primarily as a
result of the shipment of the AN/APM-480 IFF test sets to the U.S. Navy.
Commercial sales decreased $1,051,983 (34.7%) to $1,981,298 for the fiscal
year ended March 31, 2002 as compared to the fiscal year ended March 31,
2001. This decrease is primarily the result of the completion of a major
contract with a freight carrier, and the inability to replace this
contract with comparable new business due to the financial difficulties
encountered in the commercial airline industry and the consequences of the
September 11th tragedy.
Gross Margin
Gross margin increased $1,242,605 (32.7%) to $5,046,934 for the fiscal
year ended March 31, 2002 as compared to the prior fiscal year. The
increase in gross margin, for the most part, is attributed to the higher
volume and, to a lesser extent, to the production efficiencies obtained as
a result of the higher volume. Gross margin as a percentage of sales for
the fiscal year ended March 31, 2002 was 51.9% as compared to 50.7% for
the fiscal year ended March 31, 2001.
Operating Expenses
Selling, general and administrative expenses increased $235,962 (14.5%)
for the year ended March 31, 2002 as compared to the prior fiscal year, as
a result, for the most part, to an increase in sales and marketing
activities, including the addition of new personnel, an increase in
commission expenses, higher professional fees, and an increase in facility
costs associated with the Company adding the lower level of the building
to its lease.
Engineering, research and development expenses increased $473,914 (45.3%)
for the year ended March 31, 2002 as compared to last fiscal year. The
higher level of expenditures results from completing the design of the
T-47S test set, continuing development of a commercial bench test set, new
products for other targeted markets, and enhancements to existing
products. The Company has also begun work on the next generation of IFF
test sets.
Income Taxes
For the year ended March 31, 2002, the Company recorded a provision for
income taxes of $557,999, which represents primarily the effective federal
and state tax rate on the Company's net income before taxes. For the year
ended March 31, 2001, the Company, in accordance with FASB 109, recorded a
net tax benefit of $295,888, which represented: (1) the effective federal
and state tax rate on the Company's net income before taxes, and (2)
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 2002 Compared to 2001
Income Taxes (continued)
the reduction of its deferred tax valuation allowance and other items and
credited this amount to benefit from income taxes. The Company does not
for fiscal year 2002 and did not for fiscal year 2001 have a significant
federal tax liability (see Note 9 to the Financial Statements).
Although income before taxes was $546,572 higher in fiscal year 2002, than
in fiscal year 2001, income after taxes declined in fiscal year 2002 as a
result of crediting the 2001 tax provision, which included a benefit from
a change in the valuation allowance in accordance with FASB 109.
Tel has used up its net operating losses through March 31, 2002 and has,
therefore, not paid significant federal income taxes. Tel will begin to
pay federal income taxes in fiscal year 2003.
Liquidity and Capital Resources
At March 31, 2003, the Company had positive working capital of $4,154,887
as compared to $3,154,081 at March 31, 2002. For the year ended March 31,
2003, the Company generated cash from operations in the amount of $875,568
as compared to $1,378,566 in the prior fiscal year. This decrease in cash
from operations is primarily attributed to the increase in accounts
receivable partially offset by an increase in accounts payable and taxes
payable and a reduction in inventories.
The Company increased its line of credit to $1,750,000 from Fleet Bank in
November 2002. The line of credit bears an interest rate of 0.5% above the
lender's prevailing base rate, which is payable monthly, based upon the
outstanding balance. The Company does not pay to maintain this open line.
At March 31, 2003, the Company had no outstanding balance. The line of
credit 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, 2003, the Company was in compliance
with all financial covenants. The line of credit expires at September 30,
2003.
Based upon its current backlog, its existing bank line, and cash balance,
the Company believes that it has sufficient working capital to fund its
operating plans for at least the next twelve months. However, as the
Company pursues additional opportunities, the need for additional capital
may arise. The Company will evaluate its alternatives when these
opportunities arise. The Company has also retained Semaphore Capital
advisors as its investment bankers to help pursue acquisitions and
alliances and, if needed, to help raise capital. The Company maintains its
cash balance primarily in a money market account for use in operations or
in the event that it needs these funds for an acquisition. Interest on
this amount has improved over fiscal year 2002.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources (continued)
There was no significant impact on the Company's operations as a result of
inflation for the fiscal year ended March 31, 2003.
In January 2003, the FASB issued FASB interpretation No. 46. Consolidation
of Variable Interest Entities ("FIN 46"). FIN 46 provides new guidance of
the consolidation of variable interest entities for which the voting
interest model is difficult to apply. Many variable interest entities have
commonly been referred to as special-purpose entities or off-balance sheet
structures. The new guidance, however, applies to a larger population of
entities. The company believes that the adoption of FIN 46 will not have a
material impact on the Company's financial position or results of
operations.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
The Company, at this time, is generally not exposed to financial market
risks, including changes in interest rates, foreign currency exchange
rates, and marketable equity security prices.
Item 8. Financial Statements and Supplementary Data
Pages
-----
(1) Financial Statements:
Report of Independent Certified Public 17
Accountants - BDO Seidman, LLP
Report of Independent Accountants - 18
PricewaterhouseCoopers, LLP
Balance Sheets - March 31, 2003 and 2002 19
Statements of Income - Years Ended 20
March 31, 2003, 2002 and 2001
Statements of Changes in Stockholders' 21
Equity - Years Ended March 31,
2003, 2002 and 2001
Statements of Cash Flows - Years Ended 22
March 31, 2003, 2002 and 2001
Notes to Financial Statements 23-37
(2) Financial Statement Schedule:
II - Valuation and Qualifying Accounts 38
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.
16
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders of
Tel-Instrument Electronics Corp
Carlstadt, New Jersey
We have audited the accompanying balance sheet of Tel-Instrument
Electronics Corp as of March 31, 2003 and the related statements of
income, stockholders' equity and cash flows for the year then ended. We
have also audited the schedule listed in the accompanying index. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tel-Instrument
Electronics Corp as of March 31, 2003, and the results of its operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
May 30, 2003
17
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, 2002 and
March 31, 2001, and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 2002, 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 our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
June 13, 2002
18
TEL-INSTRUMENT ELECTRONICS CORP
Balance Sheets
ASSETS March 31, 2003 March 31, 2002
-------------- --------------
Current assets:
Cash and cash equivalents $1,680,124 $ 1,198,191
Accounts receivable, net of allowance for doubtful
accounts of $36,598 at March 31, 2003 and 2002 1,966,815 937,849
Inventories, net 2,262,147 2,481,680
Prepaid expenses and other current assets 42,587 47,956
Deferred income tax benefit - current 535,448 669,000
---------- -----------
Total current assets 6,487,121 5,334,676
Equipment and leasehold improvements, net 726,594 822,010
Other assets 97,462 76,886
---------- -----------
Total assets $7,311,177 $ 6,233,572
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 200,000 $ 250,000
Convertible subordinated note - related party 7,500 7,500
Capitalized lease obligations - current portion 28,637 108,845
Accounts payable 503,216 212,126
Deferred revenues 51,203 518,103
Accrued payroll, vacation pay and payroll withholdings 436,630 399,437
Accrued expenses - related parties 115,455 149,370
Income taxes payable 103,924 37,356
Other accrued expenses 885,669 497,858
---------- -----------
Total current liabilities 2,332,234 2,180,595
Convertible note payable - related party 50,000 100,000
Capitalized lease obligations - excluding current portion
21,069 52,183
---------- -----------
Total liabilities 2,403,303 2,332,778
Commitments and contingencies -- --
Stockholders' equity
Common stock, par value $.10 per share, 2,135,801 and 2,133,351
issued and outstanding as of March 31, 2003 and 2002, respectively 213,583 213,338
Additional paid-in capital 3,944,812 3,941,967
Retained earnings (accumulated deficit) 749,479 (254,511)
---------- -----------
Total stockholders' equity 4,907,874 3,900,794
---------- -----------
Total liabilities and stockholders' equity $7,311,177 $ 6,233,572
========== ===========
The accompanying notes are an integral part of the financial statements
19
TEL-INSTRUMENT ELECTRONICS CORP
Statements of Income
For the years ended March 31,
-----------------------------
2003 2002 2001
---- ---- ----
Sales - commercial, net $ 2,486,205 $ 1,981,298 $ 3,033,281
Sales - government, net 9,375,182 7,749,783 4,475,620
------------ ----------- -----------
Total Sales 11,861,387 9,731,081 7,508,901
Cost of sales 5,738,729 4,684,147 3,704,572
------------ ----------- -----------
Gross margin 6,122,658 5,046,934 3,804,329
Operating expenses:
Selling, general and administrative 2,803,498 1,858,843 1,622,881
Engineering, research and development 1,601,493 1,521,219 1,047,305
------------ ----------- -----------
Total operating expenses 4,404,991 3,380,062 2,670,186
------------ ----------- -----------
Income from operations 1,717,667 1,666,872 1,134,143
Other income/(expense):
Interest income 48,509 15,103 23,877
Interest expense (17,832) (52,361) (78,478)
Interest expense - related parties (41,558) (43,925) (40,425)
------------ ----------- -----------
Income before income taxes 1,706,786 1,585,689 1,039,117
Income tax expense (benefit) 702,796 557,999 (295,888)
------------ ----------- -----------
Net income $ 1,003,990 $ 1,027,690 $ 1,335,005
============ =========== ===========
Income per common share:
Basic $ 0.47 $ 0.48 $ 0.63
============ =========== ===========
Diluted $ 0.47 $ 0.48 $ 0.63
============ =========== ===========
Weighted average number of shares outstanding
Basic 2,135,597 2,127,782 2,115,134
============ =========== ===========
Diluted 2,139,681 2,159,986 2,117,686
============ =========== ===========
The accompanying notes are an integral part of the financial statements.
20
TEL-INSTRUMENT ELECTRONICS CORP
Statements Of Changes In Stockholders' Equity
Common Stock
Number of Shares Additional
---------------------------------- Paid-In Retained
Authorized Issued Amount Capital Earnings Total
---------- ------ ------ ------- -------- -----
Balances at 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 at March 31, 2001 4,000,000 2,124,351 212,438 3,932,111 (1,282,201) 2,862,348
Net income 1,027,690 1,027,690
Issuance of common stock upon conversion
of convertible subordinated note 5,000 500 7,000 7,500
Issuance of common stock in connection
with the exercise of stock options 4,000 400 2,856 3,256
--------- --------- -------- ---------- ----------- ----------
Balances at March 31, 2002 4,000,000 2,133,351 213,338 3,941,967 (254,511) 3,900,794
Net Income 1,003,990 1,003,990
Issuance of common stock in connection
with the exercise of stock options 2,450 245 2,845 3,090
--------- --------- -------- ---------- ----------- ----------
Balances at March 31, 2003 4,000,000 2,135,801 $213,583 $3,944,812 $ 749,479 $4,907,874
========= ========= ======== ========== =========== ==========
The accompanying notes are an integral part of the financial statements.
21
TEL-INSTRUMENT ELECTRONICS CORP
Statements of Cash Flows
For the years ended March 31,
-----------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 1,003,990 $ 1,027,690 $ 1,335,005
Adjustments to reconcile net income to cash
provided by operating activities:
Deferred income taxes 133,551 462,599 (393,500)
Depreciation 247,677 210,489 129,887
Provision for losses on accounts receivable -- 25,000 --
Provision for inventory obsolescence 27,500 12,517 28,672
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,028,966) 301,534 (164,958)
Decrease (increase) in inventories 192,033 (142,549) (893,435)
Decrease (increase) in prepaid expenses and other assets 17,936 (21,837) 10,726
Increase (decrease) in accounts payable 291,090 (730,047) 195,310
Increase (decrease) in taxes payable 66,568 (25,859) 63,215
(Decrease) increase in deferred revenues, and other
accrued expenses (75,811) 259,029 414,942
----------- ----------- -----------
Net cash provided by operating
activities 875,568 1,378,566 725,864
----------- ----------- -----------
Cash flows from investing activities:
Additions to equipment and leasehold improvements (152,261) (238,603) (396,057)
Increase in cash surrender value of life insurance (33,142) (24,083) (5,000)
----------- ----------- -----------
Net cash used in investing activities (185,403) (262,686) (401,057)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants and options 3,090 3,256 5,296
Repayment of convertible notes payable (100,000) -- --
Repayment of line of credit -- (250,000) --
Repayment of capitalized lease obligations (111,322) (104,383) (69,501)
----------- ----------- -----------
Net cash used in financing activities (208,232) (351,127) (64,205)
----------- ----------- -----------
Net increase in cash and cash equivalents 481,933 764,753 260,602
Cash and cash equivalents, beginning of year 1,198,191 433,438 172,836
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,680,124 $ 1,198,191 $ 433,438
=========== =========== ===========
Supplemental information:
Taxes paid $ 488,029 $ 140,314 $ 34,157
=========== =========== ===========
Interest paid $ 104.423 $ 69,757 $ 80,730
=========== =========== ===========
Assets acquired through capitalized leases $ -- $ 119,240 $ 57,614
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
22
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 is a leading designer and manufacturer of
avionics test and measurement instruments for the global, commercial air
transport, general aviation, and government/military aerospace and defense
markets. Tel-Instrument provides instruments to test, measure, calibrate,
and repair a wide range of airborne navigation and communication
equipment. The Company sells its equipment to both domestic and
international markets.
2. Summary of Significant Accounting Policies
Revenue Recognition:
Revenues are recognized at the time of shipment to, or acceptance by
customer provided title and risk of loss is transferred to the customer.
Provisions, when appropriate, are made where the right to return exists.
Revenues under service contracts are recognized when the services are
performed.
Shipping and handling costs charged to customers are not material.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
Cash and Cash Equivalents:
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.
23
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
2. Summary of Significant Accounting Policies (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, 2003, the
Company believes it has no significant 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.
Equipment and Leasehold Improvements:
Office and manufacturing equipment are stated at cost. Depreciation and
amortization is provided on a straight-line basis over periods ranging
from 3 to 8 years.
Leasehold improvements are amortized over the term of the lease or the
useful life of the asset, whichever is shorter.
Maintenance, repairs, and renewals that do not materially add to the value
of the equipment nor appreciably prolong its life are charged to expense
as incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in the Statements of Operations.
Engineering, Research and Development Costs:
Engineering, research and development costs are expensed as incurred.
Income Per Common Share:
The Company's basic 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. 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 using the treasury stock
method. Incremental shares of 189,000, 13,200 and 74,650 related to stock
options were excluded from the diluted earnings per share calculation for
the years ended March 31, 2003, 2002 and 2001, respectively, since they
were antidilutive.
24
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
2. Summary of Significant Accounting Policies (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 more likely than not to be realized. The effect on
deferred tax assets and liabilities of a change in tax rate is recognized
in the period that such tax rate changes are enacted.
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 and 148, "Accounting for
Stock-Based Compensation" ("SFAS 123 and 148"). Under SFAS 123 and 148 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 had been applied.
The Company did not plan to adopt the fair value based method prescribed
by SFAS No. 123.
The per share weighted-average fair value of stock options granted for the
years 2003, 2002, and 2001 were $1.01, $1.67, and $2.02, 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 3.5% in 2003 and 5% in 2002 and 2001,
volatility factor of 50% in 2003 and 135% in 2002 and 2001, and an
expected life of 5 years. 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 pro forma amounts are indicated below:
2003 2002 2001
---- ---- ----
Net income - as reported $ 1,003,990 $ 1,027,690 $ 1,335,005
Less fair value of stock options (47,044) (55,316) (27,000)
---------- ---------- -----------
Net income - pro forma 956,946 972,374 1,308,005
========== ========== ===========
Basic earnings per share - as reported 0.47 0.48 0.63
Basic earnings per share - pro forma 0.45 0.46 0.62
Diluted earnings per share - as reported 0.47 0.48 0.63
Diluted earnings per share - pro forma 0.45 0.45 0.62
25
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Long-Lived Assets To Be Disposed Of:
The company follows SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The standard provides accounting and reporting
requirements for the impairment of all long-lived assets (including
discontinued operations) and it also extends the reporting requirements
for discontinued operations of APB 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," to all components of an entity. The primary purpose of SFAS
No. 144 is to establish guidelines to create a consistent accounting model
for the impairment of long-lived assets to be disposed of and to clarify
some implementation issues of SFAS No. 121. No impairment losses have been
recorded through March 31, 2003.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
that management make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The most significant estimates include income
taxes, warranty claims, inventory and accounts receivable valuations.
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information.
The Company continuously monitors credits and payments from its customers
and maintains provision for estimated credit losses based on its
historical experience and any specific customer issues that have been
identified. While such credit losses have historically been within our
expectation and the provision established, the Company cannot guarantee
that it will continue to receive positive results.
Warranty Reserve:
Warranty reserves are based upon historical rates and specific items that
are identifiable and can be estimated at time of sale. While warranty
costs have historically been within our expectations and the provisions
established, future warranty costs could be in excess of our warranty
reserves. A significant increase in these costs could adversely affect our
operating results for the period and the periods these additional costs
materialize. Warranty reserves are adjusted from time to time when actual
warranty claim experience differs from estimates.
26
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
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.
New Accounting Pronouncements:
In January 2003, the FASB issued FASB interpretation No. 46. Consolidation
of Variable Interest Entities ("FIN 46"). FIN 46 provides new guidance of
the consolidation of variable interest entities for which the voting
interest model is difficult to apply. Many variable interest entities have
commonly been referred to as special-purpose entities or off-balance sheet
structures. The new guidance, however, applies to a larger population of
entities. The company believes that the adoption of FIN 46 will not have a
material impact on the Company's financial position or results of
operations.
27
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
3. Accounts Receivable
The following table sets forth the components of accounts receivable:
March 31,
---------
2003 2002
---- ----
Government $ 1,448,337 $ 735,757
Commercial 555,076 238,690
Less: Allowance for doubtful accounts (36,598) (36,598)
----------- ---------
$ 1,966,815 $ 937,849
=========== =========
4. Inventories
Inventories consist of:
March 31,
---------
2003 2002
---- ----
Purchased parts $ 1,074,442 $ 913,917
Work-in-process 1,289,578 1,584,701
Finished goods 10,940 68,375
Less: Reserve for obsolescence (112,813) (85,313)
----------- -----------
$ 2,262,147 $ 2,481,680
=========== ===========
Work-in-process inventory includes $770,081 and $1,390,960 for government
contracts at March 31, 2003 and 2002, respectively.
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
March 31,
---------
2003 2002
---- ----
Leasehold Improvements $ 347,737 $ 328,372
Machinery and equipment 988,314 900,710
Automobiles 16,514 16,514
Sales equipment 272,478 239,041
Assets under capitalized leases 367,623 367,623
Less: Accumulated depreciation (1,266,072) (1,030,250)
------------ ------------
$ 726,594 $ 822,010
============ ============
28
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
6. Accrued Expenses
Accrued payroll, vacation pay and payroll withholdings consist of the
following:
March 31,
---------
2003 2002
---- ----
Accrued profit sharing $212,743 $223,876
Accrued vacation pay 160,779 123,432
Accrued salary and payroll taxes 63,108 52,129
-------- --------
$436,630 $399,437
======== ========
Accrued payroll, vacation pay and payroll withholdings includes $146,834
and $41,450 at March 31, 2003 and 2002, respectively, which is due to
officers.
Other accrued expenses consist of the following:
March 31,
---------
2003 2002
---- ----
Accrued commissions $160,791 $101,350
Accrued legal 37,996 --
Accrued audit fees 63,000 40,025
Warranty reserve 460,180 143,945
Accrued - other 163,702 212,538
-------- --------
$885,669 $497.858
======== ========
Accrued expenses - related parties consists of the following:
March 31,
---------
2003 2002
---- ----
Interest and professional fees to
non-employee officer stockholder $ 20,611 $ 19,571
Consulting fees due to director/stockholder -- 8,942
Interest and other expenses due to
Company's Chairman/President 94,844 120,857
-------- --------
$115,455 $149,370
======== ========
29
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
7. Line of Credit
The Company has a line of credit in the amount of $1,750,000, maturing on
September 30, 2003. Interest is payable monthly at an annual interest rate
of one-half of one percent (0.5%) above the lender's prevailing base rate.
The Company's interest rate was 5% and 5.25% at March 31, 2003 and 2002,
respectively. The line is collateralized by substantially all of the
assets of the Company. The credit facility requires the Company to
maintain certain financial covenants. As of March 31, 2003 and March 31,
2002, the Company was in compliance with all financial covenants and had
no outstanding borrowings.
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 9% to 18%. The net book
value of equipment acquired under capitalized lease obligations amounted
to $161,906 and $236,387 respectively, at March 31, 2003 and 2002. As of
March 31, 2003 and 2002, accumulated amortization under capital leases
were $205,717 and $131,236, respectively.
Commitments under these leases for the years subsequent to March 31, 2003
are as follows:
2004 $ 33,185
2005 20,860
--------
Total minimum lease payments 54,045
Less amounts representing interest (4,339)
--------
Present value of net minimum lease payments 49,706
Less current portion (28,637)
--------
Long-term capital lease obligation $ 21,069
========
30
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
9. Income Taxes
Income tax expense (benefit):
March 31, March 31, March 31,
2003 2002 2001
---- ---- ----
Current:
Federal $392,654 $ (1,695) $ 38,955
State and Local 182,508 96,441 59,155
-------- --------- ---------
Total Current Tax Provision 575,162 94,746 98,110
-------- --------- ---------
Deferred:
Federal 105,981 457,241 (397,998)
State and Local 21,653 6,012 4,000
-------- --------- ---------
Total Expense (Benefit) $702,796 $ 557,999 $(295,888)
======== ========= =========
The components of the Company's deferred taxes at March 31, 2003 and 2002
are as follows:
March 31, March 31,
2003 2002
---- ----
Deferred tax assets:
AMT carryforwards and credits $ 21,000 $252,000
Asset reserves 77,000 49,000
Deferred wages and accrued interest 186,000 189,000
Provision for estimated expenses 251,000 179,000
-------- --------
Total deferred tax asset $535,000 $669,000
======== ========
The recognized deferred tax asset is based upon the expected utilization
of its benefit from the reversal of tax asset temporary differences.
31
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 sales agreements and modifying products. The inability to
obtain new profitable contracts or the failure of the Company's
engineering development efforts could reduce estimates of future
profitability, which could affect the Company's ability to realize the
deferred tax assets.
A reconciliation of the income tax expense at the statutory Federal tax
rate of 34% to the income tax expense recognized in the financial
statements is as follows:
March 31, March 31, March 31,
2003 2002 2001
---- ---- ----
Income tax expense - statutory rate $ 580,307 $ 539,134 $ 353,300
Income tax expenses - state and local,
net of federal benefit 134,746 67,619 41,682
Change in valuation allowance -- -- (724,901)
Federal income tax credit (3,000) (30,000) (16,000)
Other (9,257) (18,754) 50,031
--------- --------- ---------
Income tax provision (benefit) $ 702,796 $ 557,999 $(295,888)
========= ========= =========
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 November 2002 the Company paid and redeemed $100,000 of the previously
matured and extended notes. As of March 31, 2003 and 2002 the total
principal amount of outstanding notes amounted to $250,000 and $350,000,
respectively. In April 2003, Notes, which were scheduled to mature through
March 31, 2003, were extended to September 30, 2003. 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.
32
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
10. Related Party Transactions (Continued)
Tel has obtained professional services from a non-employee
officer/stockholder with the related fees amounting to $110,072, $66,834,
and $57,966 for the years ended March 31, 2003, 2002, and 2001,
respectively. Additionally, Tel obtained professional services from a
director/stockholder with the related fees amounting to $95,600, $88,300,
and $77,500 for fiscal years 2003, 2002, and 2001, respectively.
As of March 31, 2000, the Company had outstanding $15,000 convertible
subordinated note-related party. In March 2002 the holder of this note
converted $7,500 into common stock. The holder also extended the maturity
date of the remaining $7,500 until September 30, 2003. This note accrues
interest semi-annually at a rate of 7%. The subordinate note is for past
professional fees and services provided by 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. Commitments and Contingencies
The Company leases 19,654 square feet of manufacturing and office space
under an agreement expiring in February 2011. Under terms of the lease,
the Company pays all real estate taxes and utility costs for the premises.
In addition, the Company has 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,
2003.
2004 $ 130,935
2005 132,165
2006 134,652
2007 138,694
2008 142,855
2009 and thereafter 441,432
33
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
11. Commitments and Contingencies (Continued)
Total rent expense, including real estate taxes, was approximately
$167,000, $159,000, and $97,000 for the years ended March 31, 2003, 2002
and 2001, respectively.
12. Significant Customer Concentrations
For the year ended March 31, 2003, 2002, and 2001, sales to the U.S.
Government represented approximately 59%, 63%, and 34%, respectively of
total sales. No other individual customer represented over 10% of sales
for the years ended March 31, 2003 and 2002. For the year ended March 31,
2001, one U.S. distributor represented 12% of total sales. This
distributor accounted for 13%, 19%, and 20% of commercial sales for the
years ended March 31, 2003, 2002, and 2001, respectively. Additionally,
another domestic distributor accounted for 26% of commercial sales for the
year ended March 31, 2003. No other customers represented over 10% of
government or commercial sales for the fiscal years ended March 31, 2003,
2002, and 2001. As of March 31, 2003 one individual account balance
represented 19% of the Company's outstanding receivables. As of March 31,
2002, two individual account balances represented 20% and 17% of the
Company's outstanding accounts receivable. Receivables from the U.S.
Government, including unbilled revenues, represented approximately 48% and
39%, respectively, of total receivables for the fiscal years ended March
31, 2003 and 2002.
Foreign sales are based on the country in which the customer is located.
Foreign sales were approximately $2,004,961, $1,007,000, and $1,717,000
for the years ended March 31, 2003, 2002, and 2001, respectively. All
other sales were to customers located in the U.S.
13. Stock Option Plan
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 shareholders approved the Plan at the
December 1998 annual meeting. The Plan, which has a term of ten years from
the date of adoption is administered by the Board of Directors or by a
committee appointed by the Board of Directors. The selection of
participants, allotment of shares, and other conditions related to the
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.
In May 2003, the Board of Directors of the Company adopted the 2003 Stock
Option Plan which reserves for issuance up to 250,000 shares of its common
stock and is similar to the 1998 Plan.
34
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
13. Stock Option Plan (continued)
A summary of the status of the Company's stock option plans for the fiscal
years 2003, 2002, and 2001 and changes during the years are presented
below: (in number of options):
March 31, March 31, March 31,
2003 2002 2001
---- ---- ----
Held at beginning of year 165,700 82,650 85,311
Granted 117,200 94,900 8,400
Exercised (2,450) (4,000) (11,061)
Canceled or expired (46,000) (7,850) --
-------- -------- -------
Held at end of year 234,450 165,700 82,650
======== ======== =======
The average exercise price of options granted was $2.14, $1.89, and $2.28
for the years ended March 31, 2003, 2002, and 2001, respectively.
Remaining options available for grant were 10,550 and 126,350 as of March
31, 2003 and 2002, respectively.
As of March 31, 2003, the Company had the following options outstanding:
Number of Weighted Average
Options Exercise Remaining Options Exercisable
Outstanding Price Contract Life (years) At March 31, 2003
----------- -------- --------------------- ------------------
5,000 $ 2.3750 0.2 5,000
35,000 2.3100 4.4 -0-
8,400 2.2800 2.6 3,360
3,000 2.2500 4.2 600
35,000 2.1000 4.4 -0-
25,400 2.0900 3.7 5,080
19,200 2.0000 4.7 -0-
11,400 1.8400 1.7 6,840
44,250 1.8000 3.2 17,650
3,200 1.6600 1.2 3,200
42,650 1.5265 1.7 25,590
2,000 1.3750 .1 2,000
----- ------
234,450 69,320
======= ======
For the years ended March 31, 2003 2002 and 2001, 69,320, 47,350, and
22,720, respectively, of options were outstanding, vested, and
exercisable.
35
TEL-INSTRUMENT ELECTRONICS CORP
Notes To Financial Statements (Continued)
14. Segment Information
Information has been presented for 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 directly 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.
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.
36
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:
Corporate/
2003 Reconciling
---- Government Commercial Items Total
---------- ---------- ----------- -----
Revenues $9,375,182 $2,375,182 $ -- $11,861,387
Cost of Sales 4,491,743 1,246,980 -- 5,738,729
---------- ---------- ----------- -----------
Gross Margin 4,883,439 1,239.219 -- 6,122,658
---------- ---------- ----------- -----------
Engineering, research, and 1,601,493 1,601,493
development
Selling, general, and administrative 2,803,498 2,803,498
Interest expense, net 10,881 10,881
-----------
Income before income taxes $ 1,706,786
===========
Segment Assets $2,213,752 $1,037,976 $4,146,484 $ 7,311,177
========== ========== ========== ===========
Corporate/
2002 Reconciling
---- Government Commercial Items Total
---------- ---------- ----------- -----
Revenues $7,749,783 $1,981,298 $ -- $ 9,731,081
Cost of Sales 3,745,720 938,427 -- 4,684,147
---------- ---------- ----------- -----------
Gross Margin 4,004,063 1,042,871 -- 5,046,934
---------- ---------- ----------- -----------
Engineering, research, and
development 1,521,219 1,521,219
Selling, general, and administrative 1,858,843 1,858,843
Interest expense, net 81,183 81,183
-----------
Income before income taxes $ 1,585,689
===========
Segment Assets $2,126,717 $ 395,833 $ 3,461,245 $6,233,572
========== ========== =========== ==========
Corporate/
2001 Reconciling
---- 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 1,047,305 1,047,305
development
Selling, general, and administrative 1,622,881 1,622,881
Interest expense, 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
========== ========== =========== ===========
37
TEL-INSTRUMENT ELECTRONICS CORP
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Deductions Balance
Beginning Costs and at
Description of Period Expenses End of
Period
Year ended March 31, 2003:
Allowance for doubtful
accounts $ 36,598 $ -- $ -- $ 36,598
========= ========= ======== =========
Allowance for obsolete
inventory $ 85,313 $ 27,500 $ -- $ 112,813
========= ========= ======== =========
Year ended March 31, 2002:
Allowance for doubtful
accounts $ 11,598 $ 25,000 $ -- $ 36,598
========= ========= ======== =========
Allowance for obsolete
inventory $ 72,795 $ 95,000 $ 82,482(1) $ 85,313
========= ========= ======== =========
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.
38
TEL-INSTRUMENT ELECTRONICS CORP
Item 19. Changes in and Disagreements with Accountant on Accounting and
Financial Disclosure
On December 11, 2002, the Board of Directors of the Company, upon
recommendation of its Audit Committee, appointed BDO Seidman, LLP as its
new independent auditors. In connection with its audits for the prior two
fiscal years, there were no disagreements, with its previous auditors,
PricewaterhuseCoopers, LLP. Form 8K has been filed with SEC as required.
PART III
Item 10. Directors and Executive Officers of the Registrant
Year First
Elected a
Name (age) Position Director
---------- -------- ----------
Harold K. Fletcher (1) Chairman of the Board, 1982
(78) President and Chief Executive
Officer since 1982.
George J. Leon (2) Director; Investment 1986
(59) Manager and beneficiary of
the George Leon Family Trust
(investments) since 1986.
Robert J. Melnick Director and Vice President since 1999; 1998
(68) Marketing and Management Consultant
for the Company since 1991.
Jeff C. O'Hara (1) (2) Director; Financial Consultant from 1998
(45) 2001, Chief Financial Officer
from 1999-2000 of Alarm Security
Group; Independent Financial Consultant
from 1996 to 1998.
Robert H. Walker (2) Director; Retired Executive Vice 1984
(67) 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
(2) Members of the Audit Committee and Compensation Committee
39
TEL-INSTRUMENT ELECTRONICS CORP
Item 10. Directors and Executive Officers of the Registrant (Continued)
Director Compensation
Directors who are not employees or officers of the Company receive $1,250
in cash and options, at the then market price, to purchase 1,000 shares
for each in-person meeting and $625 in cash and options to purchase 500
shares for each formal telephonic meeting.
Officers
--------
Donald S. Bab Secretary and General Counsel since 1982.
(67)
Charles R. Palanzo Chief Operating Officer and Vice President since
(42) August 2002. Founder and Director of Product
Development for High Velocity Systems, Inc.
from 1998 to 2002.
Joseph P. Macaluso Principal Accounting Officer since August 2002.
(51) Director-Finance and Administration for the
Company since February 1999. Chief Financial
Officer of Electro Catheter Corp from 1987-1999.
Item 11. Executive Compensation
The following table and accompanying notes set forth information
concerning compensation for the fiscal years ended March 31, 2003, 2002,
and 2001.
Stock (1) Other
Name and Principal Position Year Salary Options Compensation
------------------------------------------------------------------------------------------------
Harold K. Fletcher 2003 $147,000 35,000 options $26,000
Chairman of the Board 2002 $140,000 $24,000
President and Chief 2001 $130,000 $22,400
Executive Office
Stock (1) Other
Name and Principal Position Year Salary Options Compensation
------------------------------------------------------------------------------------------------
Charles R. Palanzo (2) 2003 $130,000 35,000 options $87,100(3)
Chief Operating Officer 2002 -- -- --
2001 -- -- --
(1) Represents bonus based on the Company's profitability. Fiscal year
2003 bonus is estimated. See Note 10 of Notes to the Financial
Statements.
(2) Mr. Palanzo started with the company in August 2002 at an annual
salary of $130,000.
(3) Moving expenses
40
TEL-INSTRUMENT ELECTRONICS CORP
Executive Compensation (continued)
Stock Option Grants
The following table sets forth information regarding grants of stock options
during fiscal year 2003.
Stock Option Grants in last Fiscal Year
Grant Date
Individual Grants Value
------------------------------------------------------------------------ -----------------
% of Total
Options
Number of Granted to Exercise
Securities Underlying Employees in Price Expiration Grant Date
Name Options Granted Fiscal Year Per Share Date Present Value ($)
- ---- --------------------- ------------ --------- ---------- -----------------
Harold K. Fletcher 35,000(1) 30 $2.31 8/19/07 34,300(2)
Charles R. Palanzo 35,000(1) 30 $2.10 8/19/07 36,400(2)
(1) The stock options granted to Mr. Fletcher and Mr. Palanzo on August 19,
2002 were Incentive Stock options granted pursuant to the Company's 1998
Stock Plan. Such options become exercisable at a rate of 20%, 20%, 20%,
and 40% on August 19, 2003, August 19, 2004, August 19, 2005, and August
19, 2006, respectively.
(2) The fair value of these options on the date of grant was estimated using
the Black-Scholes option-pricing model with the following assumptions
volatility of 50%; risk-free interest rate of 3.5%, expected life of 5
years; and no future dividends. The dollar amount in this column is not
intended to forecast potential future appreciation, if any, of the
Company's Common Shares.
Aggregate Option Exercises and Year-End Option Table
The following table provides information on option exercises during the fiscal
year 2003 by the named executive officers and the value of each of their
respective unexercised options at March 31, 2003.
Aggregated Option Exercises in Last Fiscal Year and FY-end Option Values
(A) (B) (C) (D) (E)
Value of
Number of Unexercised
Unexercised Options In-the-Money Options
FY-End (#) FY-End (#) (1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
---- --------------- ------------ ------------- -------------
Harold K. Fletcher -- -- -0-/35,000 -0-/-0-
Charles R. Palanzo -- -- -0-/35,000 -0-/-0-
(1) Calculated on the basis of fair market value of the underlying securities
at March 31, 2003 less the exercise price.
41
TEL-INSTRUMENT ELECTRONICS CORP
Compensation Committee Interlock and Insider Participation
During the last fiscal year, Messrs. Leon, O'Hara, and Walker served as
members of the Compensation Committee of the Board of Directors. None of the
members was or has been an officer or employee of the Company. Mr. O'Hara is the
son-in-law of Mr. Fletcher.
Compensation Committee Report
Overview
The Compensation Committee approves or endorses all compensation paid or awarded
to senior executives. The Committee is made up only of non-employee directors
who do not participate in any of the compensation plans they administer (see
Director Compensation).
The Company's success depends on developing, motivating, and retaining
executives who have the skills and expertise to lead our organization. Our
executive compensation program is designed to help achieve these objectives. It
is comprised of the following three main components:
o Competitive base salaries
o Short-term rewards
o Long-term incentives
Competitive Base Salaries
Each year we evaluate the Company's salary structure based on salaries
paid by competitive companies; the Company's business performance, and general
financial and economic factors. Specific weights are not given to these factors.
Within the salary structure so determined, we determine individual executive
salaries based on individual performance, level of responsibility, contribution
to Company results, and experience. Based on this analysis, the Committee
recommends the CEO's salary to the Board of Directors and endorses salaries for
other senior executives.
Short-Term Rewards
The company has a key man incentive compensation program. Each year the
Committee determines upon a percentage of operating profits to be distributed
among senior employees. The percentage determined is based on the general
performance of the company and the amount of operating profits available for
shareholders and for reinvestment in the business.
42
TEL-INSTRUMENT ELECTRONICS CORP
Compensation Committee Interlock and Insider Participation (continued)
The percentage of operating profits so determined is then distributed to
senior employees and to a category entitled "other", based on (a) the amount of
the employee's base salary, (b) his contribution to the Company, (c) the results
of that contribution, (d) an estimated amount of "special effort" on behalf of
the Company, (e) his technical expertise, leadership, and management skills, and
(f) the level of the overall compensation paid employees performing similar work
in competitive companies.
A small portion of the overall incentive compensation is paid to "other"
employees upon the recommendation of the CEO, based on the foregoing criteria
and special circumstances for the fiscal year.
Long-Term Rewards
We grant long-term incentive awards with a view toward long-term corporate
performance and to develop and retain qualified employees.
We use stock options as long-term incentive awards, granted pursuant to
the Company's Incentive Stock Option Plans that also provide the employee with
tax benefits. The options generally have an exercise price equal to the market
price at the time of grant, have a number of limitations and generally have a
five-year duration, with 20% of the awarded options vesting each successive year
during the life of the option. See Note 13 of Notes to Financial Statements for
more information on the Stock Option Plans.
The number of options granted to an employee is based on individual
performance and level of responsibility. For this purpose, the Committee
measures performance the same way as described above for short-term awards. The
Committee and the Board also consider the total outstanding shares and options,
in determining the maximum number of options to grant in any year.
The company does not have required levels for equity holdings of senior
management.
CEO Compensation
Within the framework described above, the Committee determines the CEO's
compensation by considering his contributions to the Company's business, the
difficulty and progress of the business, the amount of revenues and profit
earned, the return to shareholders, and his experience. The Committee does not
think narrow quantitative measures or formulas are sufficient for determining
the CEO's compensation. The Committee does not give specific weights to the
factors considered, but the primary factors are the CEO's contributions and
business results.
43
TEL-INSTRUMENT ELECTRONICS CORP
Compensation Committee Interlock and Insider Participation (continued)
In determining the CEO's total compensation, the Committee considered Mr.
Fletcher's level of responsibility, his leadership, and his overall contribution
as CEO. The Committee also considers the Company's financial resources in
determining the CEO's overall compensation.
Summary
The Compensation Committee is responsible for seeing that the Company's
compensation program serves the best interests of its shareholders. The
Committee's determination also considers compensation paid other CEO's in
comparable corporations.
In the opinion of the Committee, the Company continues to have an
appropriate and competitive compensation program, which has served the Company
and shareholders well. The combination of base salary, short-term bonuses, and
emphasis on long term incentives provides a balanced and stable foundation for
effective executive leadership.
George J. Leon, Chair
Jeff C. O'Hara
Robert H. Walker
44
TEL-INSTRUMENT ELECTRONICS CORP
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company
with respect to the beneficial ownership as of March 31, 2003, by (i) all
persons who are beneficial owners of five percent (5%) or more of the
Company's Common Stock, (ii) each director and nominee, (iii) the Named
Executive Officers, and (iv) all current directors and executive officers
as a group.
Number of Shares Percentage
Name and Address Beneficially Owned of Class (1)
---------------- ------------------ ------------
5% Holders
----------
Rice Family 134,500(9) 6.3%
Henry Partners LP 152,500(9) 7.1%
John Hamilton 106,672(9) 5.0%
Named Directors and Officers
----------------------------
Harold K. Fletcher, Director 496,102(2) 23.2%
728 Garden Street
Carlstadt, New Jersey 07072
George J. Leon, Director 310,477(3) 14.5%
116 Glenview
Toronto, Ontario
Canada M4R1P8
Robert J. Melnick, Director 30,808(4) 1.4%
57 Huntington Road
Basking Ridge, New Jersey 07920
Jeff C. O'Hara, Director 107,480(5) 5.0%
853 Turnbridge Circle
Naperville, IL 60540
Robert H. Walker, Director 30,943(6) 1.4%
27 Vantage Court
Port Jefferson, NY 11777
Donald S. Bab, Secretary 74,474(7) 3.5%
330 Madison Avenue
New York, New York 10017
All Officers and Directors 1,117,097(8) 51.5%
as a Group (9 persons)
(1) The class includes 2,135,801 shares outstanding. The common stock
deemed to be owned by the named parties, includes stock which is not
outstanding but subject to currently exercisable options
45
TEL-INSTRUMENT ELECTRONICS CORP
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
held by the individual named is deemed to be outstanding for the
purpose of determining the percentage of all outstanding stock
owned.
(3) Includes 24,681 shares owned by Mr. Fletcher's wife, and 4,254
shares owned by his son. Mr. Fletcher disclaims beneficial ownership
of the shares owned by his wife and son.
(4) Includes 308,267 shares owned by the George Leon Family Trust, of
which Mr. Leon is trustee and a beneficiary, and 2,210 shares
subject to currently exercisable stock option. Mr. Leon disclaims
beneficial ownership of the shares owned by the trust.
(5) Includes 10,808 shares subject to currently exercisable stock
options
(6) Includes 2,080 shares subject to currently exercisable stock
options.
(7) Includes 2,560 shares subject to currently exercisable stock
options.
(8) Includes 3,840 shares subject to currently exercisable stock
options. Mr. Bab also has a convertible debenture in the amount of
$7,500 that is convertible into common stock at $1.50 per share.
(9) Includes 31,498 shares subject to currently exercisable options held
by all executive offices and directors of the Company (including
those individually named above).
(10) The Company is exempt from the shareholder reporting requirements of
the Securities Exchange Act of 1934, and therefore, these totals are
Company estimates.
Item 13. Certain Relationships and Related Transactions
The disclosures required by this item are contained in Note 10 to the
Notes Financial Statements included on pages 32 and 33 of this document.
46
TEL-INSTRUMENT ELECTRONICS CORP
Item 14. Controls and Procedures
The Company adopted disclosure controls and procedures, as called for by
the recently adopted legislation and rules of the Securities and Exchange
Commission. Under rules promulgated by the S.E.C., disclosure controls and
procedures are defined as "those controls or other procedures of the
issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the commission's rules and forms." The Chief
Executive Officer and the Principal Accounting Officer of the Company
evaluated the Company's disclosure controls and procedures at May 30,
2003, and concluded that they are effective.
Furthermore, there were no significant changes in the Company's internal
controls, or in other factors that could significantly affect these
controls after May 30, 2003, the date of the evaluation by the Chief
Executive Officer and the Principal Accounting Officer.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a.) The following documents are filed as a part of this report:
Pages
-----
(1) Financial Statements:
Report of Independent Certified Public Accountants
- BDO Seidman, LLP 17
Report of Independent Accountants
- PricewaterhouseCoopers LLP 18
Balance Sheets - March 31, 2003 and 2002 19
Statements of Operations - Years Ended 20
March 31, 2003, 2002 and 2001
Statements of Changes in Stockholders' 21
Equity - Years Ended March 31, 2003,
2002 and 2001
Statements of Cash Flows - Years Ended 22
March 31, 2003, 2002 and 2001
Notes to Financial Statements 23-37
(2) Financial Statement 38
II - Valuation and Qualifying Accounts
47
TEL-INSTRUMENT ELECTRONICS CORP
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
b.) Reports on Form 8-K.
Report on Form 8-KA regarding changes in certifying auditors was
submitted on November 20, 2002 under Item 4.
Report on Form 8-K regarding changes in certifying auditors was
submitted on November 20, 2002 under Item 4.
Report on Form 8-K regarding changes in certifying auditors was
submitted on December 11, 2002 under Item 4.
c.) Exhibits identified in parentheses below on file with the Securities
and Exchange Commission, are incorporated herein by reference as
exhibits hereto.
* (3.1) Tel-Instrument Electronics Corp's Certificate of
Incorporation, as amended.
* (3.2) Tel-Instrument Electronics Corp's By-Laws, as
amended.
* (3.3) Tel-Instrument Electronics Corp's Restated
Certificate of Incorporation dated November 8, 1996.
* (4.1) Specimen of Tel-Instrument Electronics Corp's Common
Stock Certificate.
(10.1) 7%, $30,000 Convertible Subordinated Note dated March
31, 1992 between Registrant and Donald S. Bab.
(10.2) Distributor Agreement with Muirhead Avionics &
Accessories Ltd.
(10.3) Naval Air Warfare Center Aircraft
Division Contract No.
N68335-97-D-0060
(10.4) Lease dated March 1, 2001 by and between Registrant
and 210 Garibaldi Group.
(10.5) Agreement with Semaphore Capital Advisors dated
November 28, 2001 and amendment dated as of June 1,
2002.
* Incorporated by reference to Registration 33-18978 dated November 7, 1988.
48
TEL-INSTRUMENT ELECTRONICS CORP
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
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.
(10.6) 10% convertible subordinated note between Registrant
and Harold K. Fletcher.
(10.7) 1998 stock option plan and option agreement.
(23.1) Consent of PricewaerhouseCoopers, LLP filed as an
exhibit hereto.
49
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 27, 2003 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 27, 2003
- ---------------------------
Harold K. Fletcher
/s/ Joseph P. Macaluso Principal Accounting Officer June 27, 2003
- ---------------------------
Joseph P. Macaluso
/s/ George J. Leon Director June 27, 2003
- ---------------------------
George J. Leon
/s/ Robert J. Melnick Director June 27, 2003
- ---------------------------
Robert J. Melnick
/s/ Jeff O'Hara Director June 27, 2003
- ---------------------------
Jeff O'Hara
/s/ Robert H. Walker Director June 27, 2003
- ---------------------------
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,
2002, 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.
50
Tel-Instrument Electronics Corp
CEO Certification
I, Harold K. Fletcher, certify that:
1. I have reviewed this annual report on Form 10-K of Tel-Instrument
Electronics Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us
by others within registrant, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 25, 2003 /s/ Harold K. Fletcher
----------------------
Harold K. Fletcher
Chairman and President
51
Tel-Instrument Electronics Corp
CFO Certification
I, Joseph P. Macaluso, certify that:
1. I have reviewed this annual report on Form 10-Q of Tel-Instrument
Electronics Corp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us
by others within registrant, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 25, 2003 /s/ Joseph P. Macaluso
----------------------
Joseph P. Macaluso
Principal Accounting Officer
52
Supplemental Information
The Company does not send proxy material to stockholders, but does send copies
of the report on Form 10-K, as filed with the Securities and Exchange
Commission, in connection with the shareholders annual meeting.
53