UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP
----------------------------------------------------
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1441806
---------------------- -------------------------
(State of Incorporation) (I.R.S. Employer ID Number)
728 Garden Street, Carlstadt, New Jersey 07072
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 201-933-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,321,831 shares of Common stock, $.10 par value as of February 9, 2007.
TEL-INSTRUMENT ELECTRONICS CORPORATION
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TABLE OF CONTENTS
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PAGE
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
December 31, 2006 and March 31, 2006 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2006 and 2005 3
Notes to Condensed Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits 16
Signatures 16
Certifications
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
December 31, 2006 March 31, 2006
----------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $1,270,423 $1,934,541
Accounts receivable, net 991,161 1,049,578
Inventories, net 1,830,940 2,102,280
Taxes receivable 82,488 82,488
Prepaid expenses and other 132,262 138,041
Deferred income tax benefit 802,929 720,082
---------- ----------
Total current assets 5,110,203 6,027,010
Property, plant, and equipment, net 676,455 775,065
Other assets 327,689 314,507
Deferred income tax benefit 196,000 --
---------- ----------
Total assets $6,310,347 $7,116,582
========== ==========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party $ 50,000 $ 50,000
Notes payable - other 29,000 29,000
Accounts payable 269,397 288,525
Deferred revenues 52,284 59,202
Accrued payroll, vacation pay, and payroll taxes 315,682 391,062
Accrued expenses 516,047 906,852
---------- ----------
Total current liabilities 1,232,410 1,724,641
Convertible notes payable - related party - non-current portion 100,000 100,000
Deferred revenues 80,875 80,875
Deferred taxes - long-term 43,000 43,000
---------- ----------
Total liabilities 1,456,285 1,948,516
---------- ----------
Stockholders' equity:
Common stock, par value $.10 per share; 2,321,831
and 2,279,381 issued and outstanding as of
December 31, 2006, and March 31, 2006, respectively 232,183 227,941
Additional paid-in capital 4,326,519 4,251,180
Retained earnings 295,360 688,945
---------- ----------
Total stockholders' equity 4,854,062 5,168,066
---------- ----------
Total liabilities and stockholders' equity $6,310,347 $7,116,582
========== ==========
See accompanying notes to condensed consolidated financial
statements.
1
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $ 2,269,148 $ 3,008,995 $ 6,161,548 $ 9,254,415
Cost of sales 1,005,243 1,478,538 3,020,905 4,612,456
----------- ----------- ----------- -----------
Gross margin 1,263,905 1,530,457 3,140,643 4,641,959
Operating expenses:
Selling, general & administrative 730,200 743,894 2,002,289 2,416,742
Amortization of intangibles -- 21,549 -- 64,647
Engineering, research, & development 606,889 609,842 1,821,989 1,881,942
----------- ----------- ----------- -----------
Total operating expenses 1,337,089 1,375,285 3,824,278 4,363,331
Income (loss) from operations (73,184) 155,172 (683,635) 278,628
Other income (expense):
Interest income 10,195 6,683 35,449 13,073
Interest expense (2,269) (4,436) (6,803) (11,407)
----------- ----------- ----------- -----------
Income (loss) before taxes (65,258) 157,419 (654,989) 280,294
Provision (benefit) for income taxes (25,805) 70,875 (261,404) 128,486
----------- ----------- ----------- -----------
Net income (loss) $ (39,453) $ 86,544 $ (393,585) $ 151,808
=========== =========== =========== ===========
Basic income per common share $ (0.02) $ 0.04 $ (0.17) $ 0.07
Diluted income per common share $ (0.02) $ 0.04 $ (0.17) $ 0.07
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,307,969 2,229,244 2,296,466 2,204,476
Diluted 2,307,969 2,296,385 2,296,466 2,271,617
See accompanying notes to condensed consolidated financial statements.
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2006 December 31,2005
----------------- ----------------
Cash flows from operating activities
Net income (loss) $ (393,585) $ 151,808
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes (278,847) 116,194
Depreciation 194,941 205,862
Amortization of intangibles -- 64,646
Non-cash stock-based compensation -- 43,230
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 58,417 (378,066)
Decrease in inventories 271,340 740,008
Decrease (increase) in prepaid expenses and other 5,779 (53,568)
Increase in other assets (13,182) (10,855)
Decrease in accounts payable (19,128) (112,642)
Decrease in deferred revenues (6,918) (5,660)
Decrease in accrued payroll, vacation pay,
and payroll taxes (75,380) (10,810)
Decrease in accrued expenses (390,805) (122,994)
----------- -----------
Net cash (used in) provided by operations (647,368) 627,153
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (96,331) (170,106)
----------- -----------
Net cash used in investing activities (96,331) (170,106)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 79,581 134,695
Repayment of capitalized lease obligations -- (2,323)
----------- -----------
Net cash provided by financing activities 79,581 132,372
----------- -----------
Net increase (decrease) in cash and cash equivalents (664,118) 589,419
Cash and cash equivalents at beginning of period 1,934,541 826,959
----------- -----------
Cash and cash equivalents at end of period $ 1,270,423 $ 1,416,378
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 3,375 $ 84,847
=========== ===========
Taxes paid $ 14,170 $ 12,038
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
TEL-INSTRUMENT ELECTRONICS CORP
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1 Basis of Presentation
------ ---------------------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position of
Tel-Instrument Electronics Corp as of December 31, 2006, the results of
operations for the three and nine months ended December 31, 2006 and December
31, 2005, and statements of cash flows for the nine months ended December 31,
2006 and December 31, 2005. These results are not necessarily indicative of the
results to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. The March 31, 2006 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2006.
Note 2 Accounts Receivable
------ -------------------
The following table sets forth the components of accounts receivable:
December 31, 2006 March 31, 2006
----------------- --------------
Commercial $ 454,532 $ 548,083
Government 576,692 542,489
Allowance for Bad Debts (40,063) (40,994)
----------- -----------
Total $ 991,161 $ 1,049,578
=========== ===========
Note 3 Inventories
------ -----------
Inventories consist of:
December 31, 2006 March 31, 2006
----------------- --------------
Purchased Parts $ 1,197,944 $ 1,409,502
Work-in-Process 851,187 723,782
Finished Goods 95,539 212,100
Less: Reserve for Obsolescence (313,730) (243,104)
----------- -----------
Total $ 1,830,940 $ 2,102,280
=========== ===========
4
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 4 Earnings Per Share
------ ------------------
The Company's basic income (loss) per common share is based on net income (loss)
for the relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per common share is based
on net income (loss), divided by the weighted average number of common shares
outstanding during the period, including common share equivalents, such as
outstanding stock options. Common share equivalents are not included in the
calculation for the three and nine months ended December 31, 2006 since the
effect would be antidilutive.
Three Months Ended Three Months Ended
------------------ ------------------
December 31, 2006 December 31, 2005
----------------- -----------------
Basic net income (loss) per share computation:
Net income (loss) for common stockholders $ (39,453) $ 86,544
Weighted-average common shares outstanding 2,307,969 2,229,244
Basic net income (loss) per share for common stockholders $ (0.02) $ 0.04
Diluted net income (loss) per share computation
Net income (loss) for common stockholders $ (39,453) $ 86,544
Weighted-average common shares outstanding 2,307,969 2,229,244
Incremental shares attributable to the assumed exercise of
outstanding stock options (exercise price below market) -- 67,141
Total adjusted weighted-average shares 2,307,969 2,296,385
Diluted net income (loss) per share for common stockholders $ (0.02) $ 0.04
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2006 December 31, 2005
----------------- -----------------
Basic net income (loss) per share computation:
Net income (loss) for c7ommon stockholders $ (393,585) $ 151,808
Weighted-average common shares outstanding 2,296,466 2,204,476
Basic net income (loss) per share for common stockholders $ (0.17) $ 0.07
Diluted net income (loss) per share computation
Net income (loss) for common stockholders $ (393,585) $ 151,808
Weighted-average common shares outstanding 2,296,466 2,204,476
Incremental shares attributable to the assumed exercise of
outstanding stock options (exercise price below market) -- 67,141
Total adjusted weighted-average shares 2,296,466 2,271,617
Diluted net income (loss) per share for common stockholders $ (0.17) $ 0.07
5
TEL-INSTRUMENT ELECTRONICS CORP
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 5 Stock Options
------ -------------
Effective April 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified
prospective method. SFAS 123R requires the measurement of stock-based
compensation based on the fair value of the award on the date of grant. Under
the modified prospective method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption. The Company recognizes compensation cost on
awards on a straight-line basis over the vesting period, typically four years.
The impact to the Company for the nine months ended December 31, 2006 was not
material. Prior to the adoption of SFAS 123R, the Company accounted 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 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
estimates the fair value of each option using the Black Scholes option-pricing
model with the following weighted-average assumptions: expected dividend yield
of 0.0%, risk-free interest rate of 5%, volatility at 50% and an expected life
of 5 years for 2007 and 2006.
Compensation costs based on the fair market value at the grant date for its
332,900 outstanding stock options under SFAS No. 123 are set forth below:
Three Months Ended Three Months Ended
------------------ ------------------
December 31, 2006 December 31, 2005
----------------- -----------------
Net income (loss) - as reported $ (39,453) $ 86,544
Add: Stock-based compensation expense included
in reported net income, net of taxes -- --
Less fair value of stock options (16,996) (18,088)
-------- --------
Net income (loss) - pro forma (56,449) 68,456
======== ========
Basic earnings (loss) per share - as reported (0.02) 0.04
Basic earnings (loss) per share - pro forma (0.02) 0.03
Diluted earnings (loss) per share - as reported (0.02) 0.04
Diluted earnings (loss) per share - pro forma (0.02) 0.03
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2006 December 31, 2005
----------------- -----------------
Net income (loss) - as reported $ ( 393,585) $ 151,808
Add: Stock-based compensation expense included
in reported net income, net of taxes -- 25,960
Less fair value of stock options (50,488) (54,265)
-------- --------
Net income (loss) - pro forma (444,073) 123,503
======== ========
Basic earnings (loss) per share - as reported (0.17) 0.07
Basic earnings (loss) per share - pro forma (0.19) 0.06
Diluted earnings (loss) per share - as reported (0.17) 0.07
Diluted earnings (loss) per share - pro forma (0.19) 0.05
6
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
Note 6 Segment Information
------ -------------------
Information is presented for the Company's three reportable activities, avionics
government, avionics commercial, and marine systems. There are no inter-segment
revenues.
The Company is organized primarily on the basis of its avionics and marine
instrument products. The avionics government market consists primarily of the
design, manufacture, and sale of test equipment to U.S. and foreign governments
and militaries, either direct or through distributors. The avionics commercial
market consists primarily of the design, manufacture, and sales of test
equipment to domestic and foreign airlines, to commercial distributors, and to
general aviation repair and maintenance shops. The avionics commercial market
also includes sales related to repairs and calibration which have a lower gross
margin. The Company primarily develops and designs test equipment for the
avionics industry and, as such, the Company's products and designs cross
segments. The marine instrumentation systems segment primarily consists of the
design, manufacture, and sale of different products to hydrographic,
oceanographic researchers, engineers, geophysicists, and surveyors.
The table below presents information about sales and gross margin. Costs of
sales include certain allocation factors for indirect costs. Additionally,
administrative expenses have been allocated between avionics and marine systems.
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
December 31, 2006 Gov't Comm'l. Total Systems Items Total
----------------- ----- ------- ----- ------- ----- -----
Net sales $1,405,585 $ 691,843 $2,097,428 $ 171,720 -- $2,269,148
Cost of sales 482,116 407,237 889,353 115,890 -- 1,005,243
---------- ---------- ---------- ---------- ---------- ----------
Gross margin 923,469 284,606 1,208,075 55,830 -- 1,263,905
Engineering, research, and
development -- -- 557,493 49,396 -- 606,889
Selling, general, and admin. -- -- 349,028 39,493 341,679 730,200
Amort. of intangibles -- -- -- --
Interest expense, net -- -- (7,926) -- -- (2,247)
---------- ---------- ---------- ---------- ---------- ----------
Total expenses -- -- 898,595 88,889 341,679 1,329,163
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
Taxes -- -- $ 309,480 $ (33,059) $ (341,679) $ (65,258)
========== ========== ========== ========== ========== ==========
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
December 31, 2005 Gov't Comm'l. Total Systems Items Total
----------------- ----- ------- ----- ------- ----- -----
Net sales $2,136,714 $ 699,118 $2,835,832 $ 173,173 -- $3,008,995
Cost of sales 904,016 443,688 1,347,704 130,834 -- 1,478,538
---------- ---------- ---------- ---------- ---------- ----------
Gross margin 1,232,698 255,430 1,488,128 42,329 -- 1,530,457
---------- ---------- ---------- ---------- ---------- ----------
Engineering, research,& dev. -- -- 562,066 47,776 -- 609,842
Selling, general, and admin. -- -- 297,325 84,189 362,380 743,894
Interest expense, net -- -- -- -- 21,549 21,549
Amort. of intangibles -- -- (2,394) 147 - (2,247)
---------- ---------- ---------- ---------- ---------- ----------
Total expenses -- -- 856,997 132,112 383,929 1,373,038
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
Taxes -- -- $ 631,131 $ (89,783) $ (383,929) $ 157,419
========== ========== ========== ========== ========== ==========
7
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 6 Segment Information (continued)
------ -------------------------------
Nine Months Ended Avionics Avionics Avionics Marine Corporate
----------------- -------- -------- -------- ------ ---------
December 31, 2006 Gov't Comm'l. Total Systems Items Total
----------------- ----- ------- ----- ------- ---- -----
Net sales $3,651,501 $1,933,401 $5,584,902 $ 576,646 -- $6,161,548
Cost of sales 1,435,052 1,167,653 2,602,705 418,200 -- 3,020,905
---------- ---------- ---------- ---------- ---------- ----------
Gross margin 2,216,449 765,748 2,982,197 158,446 -- 3,140,643
---------- ---------- ---------- ---------- ---------- ----------
Engineering, research, and
development -- -- 1,673,444 148,545 -- 1,821,989
Selling, general, and admin. -- -- 964,340 125,545 912,404 2,002,289
Amort. of intangibles -- -- -- -- -- --
Interest expense, net -- -- (28,646) -- -- (28,646)
---------- ---------- ---------- ---------- ---------- ----------
Total expenses -- -- 2,609,138 274,090 912,404 3,795,632
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
Taxes -- -- $ 373,059 $ (115,644) $ (912,404) $ (654,989)
========== ========== ========== ========== ========== ==========
Nine Months Ended Avionics Avionics Avionics Marine Corporate
----------------- -------- -------- -------- ------ ---------
December 31, 2005 Gov't Comm'l. Total Systems Items Total
----------------- ----- ------- ----- ------- ----- -----
Nat sales $ 6,342,122 $ 2,178,542 $ 8,520,664 $ 733,751 -- $ 9,254,415
Cost of sales 2,715,682 1,405,629 4,121,311 491,145 -- 4,612,456
----------- ----------- ----------- ----------- ----------- -----------
Gross margin 3,626,440 772,913 4,399,353 242,606 4,641,959
----------- ----------- ----------- ----------- ----------- -----------
Engineering, research,& dev. -- -- 1,741,557 140,385 -- 1,881,942
Selling, general, and admin. -- -- 1,045,601 261,554 1,109,587 2,416,742
Amort. of intangibles -- -- -- -- 64,647 64,647
Interest expense, net -- -- (1,813) 147 -- (1,666)
----------- ----------- ----------- ----------- ----------- -----------
Total expenses -- -- 2,785,345 402,086 1,174,234 4,361,665
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
Taxes -- -- $ 1,614,008 $ (159,480) $(1,174,234) $ 280,294
=========== =========== =========== =========== =========== ===========
8
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 7 New Accounting Pronouncements
------ -----------------------------
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140". SFAS
No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets". SFAS No. 155 will become effective for the Company's fiscal year
beginning after September 15, 2006. The adoption of SFAS No. 155 will not have
material impact on the Company's financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48
establishes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact the adoption of this interpretation will have on its future consolidated
financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." This Bulletin provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a material assessment.
The guidance in this Bulletin must be applied to financial reports covering the
first fiscal year ending after November 15, 2006. The adoption of SAB-108 did
not have material impact on the Company's financial statements.
Also in September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements." This SFAS defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement applies to accounting
pronouncements that require or permit fair value measurements, except for
share-based payments transactions under SFAS No. 123. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. As SFAS No. 157 does not require any new fair value
measurements or measurements of previously computed fair values, the Company
does not believe adoption of this Statement will have a material effect on its
future financial statements.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
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 and statements as to future matters contain a measure of
uncertainty and accordingly, actual results could differ materially and
adversely. 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 cost and
availability of its raw materials; the actions of its 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 previous 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 included in our Form 10-K for the year
ended March 31, 2006. 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 the customer, provided title and risk of loss is transferred to
the customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under service contracts are recognized when the services are
performed.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
Since 2001, the Company had a contract with the U.S. Navy for the delivery of
test equipment (AN/APM-480). The AN/APM-480 is a catalog product, which the
Company also sells to civilian and other government customers. While the Company
sells this product to the U.S. Navy, the proprietary rights to the technology
are retained by the Company. Since the AN/APM-480 was a significant product, and
the Company's premier IFF test set, the Company continued to improve the product
to meet the needs of its other customers, to increase product performance, and
to improve the manufacturing process. Further, although the AN/APM-480 was
accepted and used by the Navy, since it was in substantial compliance with the
specification, there were limited areas where the AN/APM-480 did not operate at
maximum performance according to the specification. Since U.S. Navy was a
significant customer and because of these minor specification issues, the
Company agreed in fiscal year 2002 to provide enhancements at no additional cost
to the customer.
Beginning in fiscal year 2002, the Company began to accrue the cost of these
enhancements as the original units were shipped in order to properly match the
revenues with the expenses. The Company considers this accrual similar to a
warranty expense, and recorded the liability and the expense to cost of sales.
The enhancements made, and to be made to the product, the Company believes, are
relatively insignificant. The Company has shipped and been paid for all 1,300
units (approximately $18,200,000 in revenues) through the fiscal year ended
March 31, 2006, and the cost of these enhancements is less than 3% of the
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
revenues. The customer continues to use the original product in the field
because the enhancements are not essential to the unit to perform the major
functions of the delivered products. The Company continued to ship the units in
accordance with the original contract, and was paid. Revenue was recognized
because Tel substantially completed and fulfilled the terms specified in the
original contract, the Navy took delivery and the Armed Forces are using the
product in the field. In the case of these enhancements, there was no obligation
to perform any enhancements at the time the original contract was signed in
2000, and when the first shipments were made in our fiscal year ended March 31,
2001.
The costs, estimated to be approximately $480 per unit are for labor and
material, based upon our experience manufacturing the product, and our standard
costing information. The Company is charged the costs of performing the
enhancement to the accrued liability as the units were shipped. Effective
December 31, 2006, the Company's obligation to complete the enhancements on the
remaining units (approximately 200) has been satisfied. In the future, the cost
of any upgrades will be invoiced to the customer. As such, the Company reversed
its remaining liability for the upgrade during the current quarter to cost of
sales. This reversal improved the Company's gross margin.
Warranty/enhancement reserves - warranty/enhancement reserves are based upon
historical rates and specific items that are identifiable and can be estimated
at time of sale. While warranty/enhancement costs have historically been within
our expectations and the provisions established, future warranty/enhancement
costs could be in excess of our warranty/enhancement reserves. A significant
increase in these costs could adversely affect our operating results for the
period and the periods these additional costs materialize. Warranty/enhancement
reserves are adjusted from time to time when actual warranty/enhancement claim
experience differs from estimates.
Inventory reserves - inventory reserves or write-downs are estimated for excess,
slow-moving and obsolete inventory as well as inventory whose carrying value is
in excess of net realizable value. These estimates are based on current
assessments about future demands, market conditions and related management
initiatives. While reserves have historically been within expectation, if market
conditions and actual demands are less favorable than those projected by
management, additional reserves or inventory write-downs may be required.
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. These amounts are periodically
evaluated. The deferred tax asset 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.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Overview
--------
As previously reported, the Company is in a transition phase between the
conclusion of deliveries under its previous AN/APM-480 multi-year contract with
the U.S. Navy and commencement of deliveries under its new multi-year contract
to deliver the AN/USM-708 units. This interval in deliveries and sales, as well
as the timing of government orders, increased competition, and the continued
financial difficulties within the commercial airline industry contributed to the
decline in business. As such, the revenues were down significantly for the three
and nine-month periods ended December 31, 2006 as compared to the previous
fiscal year. Currently, the backlog approximates $9.5 million, including ITATS
(Intermediate Level TACAN Test Set) ($4.4 million) (see below). Commercial and
military orders continue to be below expectations.
Research and development expenditures will continue to remain high in order to
support the two new large contract awards discussed below. The Company has been
able to partially offset the research and development expenditures by
implementing a Profit Improvement Plan, which resulted in substantial
reductions.
As a consequence of this temporary significant decline in revenues exceeding
operating costs, operating profits, working capital, stockholders' equity, and
cash have declined for the first nine months of the current fiscal year..
However, the Company has working capital of approximately $3.9 million, cash in
excess of $1 million, and an unused credit line of $1.75 million, and believes
that it has adequate liquidity, resources and backlog to fund operating plans
during this interval, and until deliveries of its new units commence in calendar
2008.
Although sales have declined in current periods for reasons discussed above, the
Company has received significant government contract awards (see below), and it
is expected, if the orders are received against these contracts that shipments
on the CRAFT (Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics
Flightline Tester) will begin in calendar year 2008.
In March 2005, the Company was awarded a $17.3 million multi-year,
firm-fixed-price, indefinite-delivery/indefinite-quantity contract for the
systems engineering, design and integration, fabrication, testing, and
production of a CRAFT unit with sonobuoy simulator capabilities, since
designated the AN/USM-708. The AN/USM-708 CRAFT unit combines advanced
navigation, communication, Mode 5 IFF ("Identification, Friend or Foe"), and
sonobuoy test capabilities in a portable test set, which will utilize a flexible
and expandable digital-signal-processing-based architecture. The engineering
design is being completed, and fabrication of 15 prototype units will begin
shortly. These units will undergo design validation testing beginning in the
summer of 2007, with full rate production to begin in summer of 2008. This
contract currently has production options totaling 750 units, which if
exercised, would generate approximately $14 million in revenues over a several
year period. The contract for the AN/USM-708 is a significant milestone for the
Company, because the development of this technology will establish the Company's
position as a leader in the industry, and will meet the U.S. Navy's test
requirements for years to come. The Company will continue to fund the
development of this product. The Company believes, given the unique nature of
the design, this unit could generate sales to other military customers. The
Company has already received orders for a limited number of units for a modified
CRAFT test set from customers other than the U.S. Navy. The AN/USM-708 contract
also includes optional requirements for testing encrypted communications, which,
if exercised, could represent a major expansion in the Company's core business.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Overview (continued)
--------------------
In July 2006, Tel was awarded a second major US Navy contract for an
Intermediate Level TACAN Test Set (ITATS). This contract has options for
approximately 180 units with a total value of over $12 million; the initial work
authorization was $4.4 million. Tel will be working with two designated
sub-contractors and, as a result, this program will not entail the same level of
Tel engineering effort as the AN/USM-708. In January 2007, the Company was
notified by the U.S. Navy that the protest previously filed with General
Accountability Office by an unsuccessful bidder for this project was dismissed.
As such, work on this program will commence, but deliveries will not begin until
calendar year 2009. Given the unique nature of the design, this unit could also
generate significant sales to other military customers, both domestically and
overseas.
In December 2006, the Company received an order for 50 T-47N Test Sets from the
Royal Australian Air Force (through the Company's distributor) for approximately
$600,000 to be delivered in the first six months of the next fiscal year.
Results of Operations
---------------------
Sales
-----
Total sales decreased $739,847 (24.6%) to $2,269,148 and $3,092,867 (33.4%) to
$6,161,548, respectively, for the three and nine months ended December 31, 2006
as compared to the same periods in the prior year.
Sales of avionics products declined $738,404 (26%) to 2,097,428 and $2,935,762
(34.4%) to $5,585,902, for the three and nine months ended December 31, 2006,
respectively, as compared to the same periods in the prior fiscal year. Avionics
commercial sales decreased from prior year by $7,275 (1%) to $691,843, and
$245,141 (11.2%) to $1,933,401, respectively, for the same periods. This
decrease is mostly attributed to a decline in sales of the TR-220 line of
Multi-Function Test sets, partially offset by an increase in revenues from
repairs and part sales. The weak financial condition of the commercial airline
industry continues to limit significant growth in this segment in addition to
increased competition.
Avionics government sales decreased $731,127 (34.2%) to $1,405,585 for the three
months ended December 31, 2006 as compared to the prior year. In the prior
fiscal year, the Company had contracts for shipment of the T-36M and the T-47N
with the U.S. Army and shipment of the T-47N to Royal Australian Air Force,
through our distributor, as well as the final shipments of the AN/APM-480 to the
U.S. Navy and sales of the T-760, which accounted for the higher sales in fiscal
2006. The delay in contract awards (discussed above) contributed to this decline
in revenues. In the third quarter of the current fiscal year, these decreases
were partially offset by sales of the TR-401 Multi-Function test set and in
increase in sales of the T-47N overseas. Avionics government sales decreased
$2,690,621 (42.4%) to $6,651,501 for the nine months ended December 31, 2006 as
compared to the same period in the prior fiscal year. As noted above, the
Company had contracts for shipment of the T-36M and the T-47N and also was
making the final shipments on the AN/APM-480, which accounted for the higher
sales in fiscal 2006.
Marine systems sales decreased $1,453 (1%) to $171,720 and $157,105 (21.4%) to
$576,646, respectively, for the same periods, primarily as a result of lower
sales of specialty systems to the dredging industry.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations (continued)
---------------------------------
Gross Margin
------------
Gross margin decreased $266,552 (17.4%) to $1,263,905 and $1,501,316 (32.3%) to
$3,140,643 for the three and nine months ended December 31, 2006, respectively,
as compared to the same periods last year. This decrease is primarily attributed
to the lower sales volume. During the current quarter, the Company reversed it
remaining liability of approximately $125,000 relating to its upgrade liability
(see Critical Accounting Policies - Revenue Recognition above), which was
partially offset by approximately $80,000 for a provision for slow-moving and
obsolete inventory.
Operating Expenses
------------------
Selling, general and administrative expenses decreased $13,694 (1.8%) to 730,200
for the three months ended December 31, 2006 as compared to the three months
ended December 31, 2005, resulting primarily from lower commission, and
professional and consulting expenses in the avionics division, and a decrease in
marketing and sales expenses for the marine systems division, offset mostly by
an increase in recruitment expenses for a Director of Business Development for
the avionics division. For the nine months ended December 31, 2006, selling,
general and administrative expenses decreased $414,453 (17.1%) to $2,002,289 as
compared to the nine months ended December 31, 2005, resulting primarily from
lower commission, and professional and consulting expenses in the avionics
division, and a decrease in marketing and sales expenses for the marine systems
division.
Engineering, research and development expenses decreased $2,953 (0.5%) to
$606,889 and $59,953 (3.2%) to $1,821,989 for the three and nine months ended
December 31, 2006, respectively, as compared to the same periods in the prior
fiscal year. Research and development efforts were mostly related to the CRAFT
program.
Income Taxes
------------
An income tax benefit in the amount of $261,404 was recorded for the nine months
ended December 31, 2006 as a result of the loss before taxes as compared to a
provision for income taxes in the amount of $128,486 for the nine months ended
December 31, 2005. These amounts represent the effective federal and state tax
rate of approximately 40% on the Company's net income (loss) before taxes.
Liquidity and Capital Resources
-------------------------------
At December 31, 2006, the Company had working capital of $3,877,793 as compared
to $4,302,369 at March 31, 2006. For the nine months ended December 31, 2006,
the Company used $647,368 of cash for operations as compared to generating
$627,153 in cash from operating activities for the nine months ended December
31, 2005. The decrease in cash used in operations is primarily attributed to the
Company's loss for the year.
The Company has a line of credit of $1,750,000 from Bank of America, which the
Company has renewed in each annual period since 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
any fees to maintain this open line. At December 31, 2006, the Company had no
outstanding balance and has not yet borrowed against this line of credit.. The
line of credit is collateralized by substantially all of the assets of the
Company, and requires the Company to maintain certain financial covenants and
expires September 30, 2007. The Company is in compliance with all financial
covenants.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Liquidity and Capital Resources (continued)
Based upon the current backlog, its existing credit line, and cash balance, the
Company believes that it has sufficient capital to fund its operating plans for
at least the next twelve months. Currently, the Company has no material capital
requirements.
There was no significant impact on the Company's operations as a result of
inflation for the nine months ended December 31, 2006. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K to the Securities and Exchange Commission for the fiscal year ended
March 31, 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------- ----------------------------------------------------------
The Company, at this time, is generally not exposed to material financial market
risks, including changes in interest rates, foreign currency exchange rates, and
marketable equity security prices.
Item 4. Controls and Procedures
------- -----------------------
The Company adopted disclosure controls and procedures, as called for by the
legislation and rules of the Securities and Exchange Commission. Under Rules
promulgated by the SEC, 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 Principal Accounting Officer evaluated
the Company's Disclosure Controls and Procedures at December 31, 2006 and have
concluded that they are effective, based on their evaluation of these controls
and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of December 31, 2006 by the Chief Executive
Officer and Principal Accounting Officer, required by paragraph (d) of Exchange
Act Rules 13a-15 or 15d-15, which occurred during Tel's last fiscal quarter and
which have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
Part II Other Information
-------------------------
Item 2 Unregistered sales of Equity Securities and Use of Proceeds
------------------------------------------------------------------
There were no unregistered sales of equity securities and there were no
repurchases of equity securities during the Company's third quarter ended
December 31, 2006.
15
Part II Other Information (continued)
-------------------------------------
Item 4 Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on December 6, 2006 (the
"Annual Meeting").
(b) Not applicable because (i) there was no solicitation in opposition to
management's nominees as listed in the Company's proxy statement pursuant
to Regulation 14; and (ii) all of such nominees who were directors,
previously reported to the Commission, were re-elected.
(c) At the Annual Meeting, the Company's shareholders voted in favor of
re-electing management's nominees for election as directors of the Company
as follows:
For Against
--- -------
Harold K. Fletcher 2,117,323 27,773
George J. Leon 2,135,323 9,773
Robert J. Melnick 2,117,323 27,773
Jeff C. O'Hara 2,117,323 27,773
Robert A. Rice 2,135,323 9,773
Robert H. Walker 2,135,323 9,773
The shareholders also voted 2,136,922 shares in favor of ratifying the audit
committee's appointment of BDO Seidman LLP, as the Company's independent
auditors for the fiscal year ending March 31, 2007. Shareholders totaling 8,166
shares voted against this proposal, and shareholders totaling 8 shares
abstained.
The shareholders also voted 2,016,339 shares in favor of ratifying the 2006
Stock Option Plan. Shareholders totaling 43,634 shares voted against this
proposal, and shareholders totaling 85,123 shares abstained.
(d) Not applicable
Item 6. Exhibits
a. Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the
Securities Exchange Act.
31.2 Certification by Principal Accounting Officer pursuant
to Rule 15d-14 under the Securities Exchange Act.
32.1 Certification by CEO and Principal Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements 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.
Date: February 13, 2007 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
Chairman and President
Date: February 13, 2007 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
16