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, 2007
[ ] 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
-------------------------------------- --------
(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.7
Yes X No
----- -----
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes No X
----- -----
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,401,031 shares of Common stock, $.10 par value as of February 4, 2008.
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
TABLE OF CONTENTS
-----------------
PAGE
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
December 31, 2007 and March 31, 2007 (audited) 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 2007 and 2006 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2007 and 2006 3
Notes to Condensed Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16-17
Part II Other Information
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits 18
Signatures 18
Certifications 19-21
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
December 31, 2007 March 31, 2007
----------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 699,097 $ 655,836
Accounts receivable, net 2,405,060 982,214
Inventories, net 2,081,607 2,460,642
Taxes receivable 28,776 28,776
Prepaid expenses and other 77,330 98,053
Deferred income tax benefit 494,375 395,756
----------- -----------
Total current assets 5,786,245 4,621,277
Property, plant, and equipment, net 511,465 625,247
Other assets 83,748 81,318
Deferred income tax benefit 800,000 800,000
----------- -----------
Total assets $ 7,181,458 $ 6,127,842
=========== ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party $ 50,000 $ 50,000
Line of credit 350,000 --
Accounts payable 817,659 372,106
Deferred revenues 95,136 115,409
Accrued payroll, vacation pay, and payroll taxes 246,432 353,727
Accrued expenses 963,220 608,692
----------- -----------
Total current liabilities 2,522,447 1,499,934
Convertible note payable - related party - non-current portion 50,000 50,000
Deferred revenues 38,755 23,656
----------- -----------
Total liabilities 2,611,202 1,573,590
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $.10 per share; 2,401,031
and 2,341,861 issued and outstanding as of
December 31, 2007, and March 31, 2007, respectively 240,103 234,186
Additional paid-in capital 4,532,686 4,380,149
Accumulated deficit (202,533) (60,083)
----------- -----------
Total stockholders' equity 4,570,256 4,554,252
----------- -----------
Total liabilities and stockholders' equity $ 7,181,458 $ 6,127,842
=========== ===========
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, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006
------------- ------------- ------------- -------------
Net sales $ 3,244,939 $ 2,269,148 $ 9,294,238 $ 6,161,548
Cost of sales 1,892,682 1,005,243 5,432,977 3,020,905
----------- ----------- ----------- -----------
Gross margin 1,352,257 1,263,905 3,861,261 3,140,643
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 704,711 730,200 1,934,263 2,002,289
Engineering, research and development 700,418 606,889 2,147,142 1,821,989
----------- ----------- ----------- -----------
Total operating expenses 1,405,129 1,337,089 4,081,405 3,824,278
----------- ----------- ----------- -----------
Loss from operations (52,872) (73,184) (220,144) (683,635)
Interest income (expense):
Interest income 4,698 10,195 14,380 35,449
Interest expense (11,711) (2,269) (31,456) (6,803)
----------- ----------- ----------- -----------
Loss before taxes (59,885) (65,258) (237,220) (654,989)
Income tax benefit (23,926) (25,805) (94,770) (261,404)
----------- ----------- ----------- -----------
Net loss $ (35,959) $ (39,453) $ (142,450) $ (393,585)
=========== =========== =========== ===========
Basic and diluted loss per common share $ (0.02) $ (0.02) $ (0.06) $ (0.17)
Weighted average shares outstanding
Basic and diluted 2,387,681 2,307,969 2,364,571 2,296,466
See accompanying notes to condensed consolidated financial statements.
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2007 December 31,2006
----------------- ----------------
Cash flows from operating activities
Net loss $ (142,450) $ (393,585)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes (98,619) (278,847)
Depreciation 179,731 194,941
Non-cash stock-based compensation 27,654 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,422,846) 58,417
Decrease in inventories 379,035 271,340
Decrease in prepaid expenses and other 20,723 5,779
Increase in other assets (2,430) (13,182)
Increase (decrease) in accounts payable 445,553 (19,128)
Decrease in deferred revenues (5,174) (6,918)
Decrease in accrued payroll, vacation pay,
and payroll taxes (107,295) (75,380)
Increase (decrease) in accrued expenses 354,528 (390,805)
----------- -----------
Net cash used in operating activities (371,590) (647,368)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (65,949) (96,331)
----------- -----------
Net cash used in investing activities (65,949) (96,331)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 130,800 79,581
Proceeds from borrowings from line of credit 350,000 --
----------- -----------
Net cash provided by financing activities 480,800 79,581
----------- -----------
Net increase (decrease) in cash and cash equivalents 43,261 (664,118)
Cash and cash equivalents at beginning of period 655,836 1,934,541
----------- -----------
Cash and cash equivalents at end of period $ 699,097 $ 1,270,423
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 24,809 $ 3,375
=========== ===========
Taxes paid $ 3,849 $ 14,170
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
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, 2007, the results of
operations for the three and nine months ended December 31, 2007 and December
31, 2006, and statements of cash flows for the nine months ended December 31,
2007 and December 31, 2006. 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, 2007 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, 2007.
Note 2 Revenue Recognition - Percentage-of-Completion - ITATS
------ ------------------------------------------------------
Due to the unique nature of the ITATS (Intermediate Level TACAN Test Set -
AN/ARM-206) program wherein a significant portion of this contract will not be
delivered for over a year, revenues under this contract are recognized on a
percentage-of-completion basis. All expenses related to this contract are
charged to cost of sales, and revenues are derived based on the incurred costs.
The Company also receives progress billings on this program, which is a funding
mechanism by the government to assist contractors on long-term contracts prior
to delivery. See Critical Accounting Policies - Revenue Recognition.
Note 3 Accounts Receivable
------ -------------------
Accounts receivable, net, consist of:
December 31, 2007 March 31, 2007
----------------- --------------
Commercial $ 342,346 $ 338,070
Government 962,535 678,688
Unbilled Government Receivables * 1,133,980 --
Allowance for Doubtful Accounts (33,801) (34,544)
------------ ------------
Total $ 2,405,060 $ 982,214
============ ============
* Unbilled government receivables represents the sales
accrued on a percentage-of-completion basis less amounts
invoiced to the government.
Note 4 Inventories
------ -----------
Inventories, net, consist of:
December 31, 2007 March 31, 2007
----------------- --------------
Purchased Parts $ 1,425,478 $ 1,414,558
Work-in-Process 1,012,105 1,171,998
Finished Goods 76,965 220,896
Less: Reserve for Obsolescence (a) (432,941) (346,810)
------------ ------------
Total $ 2,081,607 $ 2,460,642
============ ============
(a) Reserve primarily relates to purchased parts
4
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 5 Loss Per Share
------ --------------
The Company's basic and diluted loss per common share is based on the net loss
for the relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted loss per common share for the periods
ended December 31, 2007 and 2006 does not include common stock equivalents, as
the effect would be antidilutive.
Three Months Ended Three Months Ended
------------------ ------------------
December 31, 2007 December 31, 2006
----------------- -----------------
Basic net loss per share computation:
Net loss attributable to common stockholders $ (35,959) $ (39,453)
Weighted-average common shares outstanding 2,387,681 2,307,969
Basic net loss per share attributable to common stockholders $ (0.02) $ (0.02)
Diluted net loss per share computation
Net loss attributable to common stockholders $ (35,959) $ (39,453)
Weighted-average common shares outstanding 2,387,681 2,307,969
Incremental shares attributable to the assumed exercise of
outstanding stock options -- --
Total adjusted weighted-average shares 2,387,681 2,307,969
Diluted net loss per share attributable to common stockholders $ (0.02) $ (0.02)
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2007 December 31, 2006
----------------- -----------------
Basic net loss per share computation:
Net loss attributable to common stockholders $ (142,450) $ (393,585)
Weighted-average common shares outstanding 2,364,571 2,296,466
Basic net loss per share attributable to common stockholders $ (0.06) $ (0.17)
Diluted net loss per share computation
Net loss attributable to common stockholders $ (142,450) $ (393,585)
Weighted-average common shares outstanding 2,364,571 2,296,466
Incremental shares attributable to the assumed exercise of
outstanding stock options -- --
Total adjusted weighted-average shares 2,364,571 2,296,466
Note 6 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.
As a result of adopting SFAS 123(R), loss before taxes includes $11,162 and $-0-
for three months ended December 31, 2007 and 2006, respectively, and $27,654 and
$-0- for the nine months ended December 31, 2007, and 2006, respectively. 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,
which required supplemental disclosure, but did not impact the financial
statements. The Company estimates the fair value of each option granted using
the Black Scholes option-pricing model with the following weighted-average
assumptions: expected dividend yield of 0.0%, risk-free interest rate 2.91% to
5.0%, volatility at 43.25% to 56.94%, and an expected life of 5 years for the
nine months ended December 31, 2007; expected dividend yield of 0.0%, risk-free
interest rate of 5%, volatility at 50% and an expected life of 5 years for the
nine months ended December 31, 2006. Based on an analysis of historical
information, the Company has applied a forfeiture rate of 15%.
5
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 7 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, 2007 Gov't Comm'l. Total Systems Items Total
----------------- ----- ------- ----- ------- ----- -----
Net sales $ 2,467,835 $ 620,500 $ 3,088,335 $ 156,604 $ 3,244,939
Cost of sales 1,398,171 377,935 1,776,106 116,576 1,892,682
----------- ----------- ----------- ----------- -----------
Gross margin 1,069,664 242,565 1,312,229 40,028 1,352,257
----------- ----------- ----------- ----------- -----------
Engineering, research, and
development 644,959 55,459 700,418
Selling, general, and admin. 349,724 31,547 323,440 704,711
Interest expense, net 7,013 -- -- 7,013
----------- ----------- ----------- -----------
Total expenses 1,001,696 87,006 323,440 1,412,142
----------- ----------- ----------- -----------
Income (loss) before
taxes $ 310,533 $ (46,978) $ (323,440) $ (59,885)
=========== =========== =========== ===========
Segment assets at 12/31/07 $ 3,277,641 $ 805,754 $ 4,083,995 $ 409,919 $ 2,688,144 $ 7,181,458
=========== =========== =========== =========== =========== ===========
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
Interest income, net (7,926) -- -- (7,926)
----------- ----------- ----------- -----------
Total expenses 898,595 88,889 341,679 1,329,163
----------- ----------- ----------- -----------
Income (loss) before
taxes $ 309,480 $ (33,059) $ (341,679) $ (65,258)
=========== ========== ========== ===========
6
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 7 Segment Information (continued)
------ -------------------------------
Nine Months Ended Avionics Avionics Avionics Marine Corporate
----------------- -------- -------- -------- ------ ---------
December 31, 2007 Gov't Comm'l. Total Systems Items Total
----------------- ----- ------- ----- ------- ----- -----
Net sales $ 6,512,652 $ 2,376,113 $ 8,888,765 $ 405,473 $ 9,294,238
Cost of sales 3,789,365 1,365,660 5,155,025 277,952 5,432,977
----------- ----------- ----------- ----------- -----------
Gross margin 2,723,287 1,010,453 3,733,740 127,521 3,861,261
----------- ----------- ----------- ----------- -----------
Engineering, research, and
Development 2,016,053 131,089 2,147,142
Selling, general, and admin. 956,754 108,192 869,317 1,934,263
Interest expense, net 17,076 -- -- 17,076
----------- ----------- ----------- -----------
Total expenses 2,989,883 239,281 869,317 4,098,481
----------- ----------- ----------- -----------
Income (loss) before
taxes $ 743,857 $ (111,760) $ (869,317) $ (237,220)
=========== =========== =========== ===========
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
Interest income, net (28,646) -- -- (28,646)
----------- ----------- ----------- -----------
Total expenses 2,609,138 274,090 912,404 3,795,632
----------- ----------- ----------- -----------
Income (loss) before
taxes $ 373,059 $ (115,644) $ (912,404) $ (654,989)
=========== =========== =========== ===========
7
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 8 New Accounting Pronouncements
------ -----------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements." This SFAS defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement applies to accounting
pronouncements that require or permit fair value measurements, except for
share-based 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.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans -- An Amendment of FASB
Statements No. 87, 88, 106, and 132R." This standard requires an employer to:
(a) recognize in its statement of financial position an asset for a plan's over
funded status or a liability for a plan's underfunded status; (b) measure a
plan's assets and its obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions); and (c) recognize
changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur. Those changes will be reported in comprehensive
income. This Statement is not applicable to the Company at this time.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities, including an amendment of FASB Statement No.
115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified
election dates, to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value.
Unrealized gains and losses shall be reported on items for which the fair value
option has been elected in earnings at each subsequent reporting date. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157"). The
Company believes that the adoption of SFAS 159 will not have a material impact
on the Company's financial position or results of operations.
In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 "Accounting
for Nonrefundable Payments for Goods and Services to be Used in Future Research
and Development Activities" (EITF 07-04), requiring that nonrefundable advance
payments for future research and development activities be deferred and
capitalized. Such amounts should be expenses as the related goods are delivered
or the related services performed. The statement is effective for fiscal years
beginning after December 15, 2007. This EITF is not applicable to the Company at
this time.
8
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 8 New Accounting Pronouncements (continued)
------ -----------------------------------------
In June 2007, the FASB ratified Issue No. 06-11 "Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards (ETIF 06-11), which requires
entities to record tax benefits on dividends or dividend equivalents that are
charged to retained earnings for certain share-based awards to additional
paid-in capital. In a share-based payment arrangement, employees may receive
dividends or dividend equivalents on awards of nonvested equity shares,
nonvested equity share units during the vesting period, and share options until
the exercise date. Generally, the payment of such dividends can be treated as
deductible compensation for tax purposes. The amount of tax benefits recognized
in additional paid-in capital should be included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based payment awards.
EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and
interim periods within those years. Since the Company declares no dividends,
this EITF is not applicable to the Company at this time.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160").
SFAS 160 requires that ownership interests in subsidiaries held by parties other
than the parent, and the amount of consolidated net income, be clearly
identified, labeled, and presented in the consolidated financial statements
within equity, but separate from the parent's equity. It also requires once a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary be initially measured at fair value. Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
will be effective for the Trust beginning January 1, 2009. The Company has no
noncontrolling interest in subsidiaries; therefore SFAS 160 is not applicable to
the Company at this time.
In December 2007, the FASB issued FASB 141(R), "Business Combinations" of which
the objective is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. The new standard
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information they need to evaluate and
understand the nature and financial effect of the business combination. This
Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual meeting period
beginning on or after December 15, 2008. An entity may not apply it before that
date. The Company will apply SFAS 141(R) on future business combinations.
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, 2007. 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.
Due to the unique nature of the ITATS program wherein a significant portion of
this contract will not be delivered for over a year, revenues under this
contract are recognized on a percentage-of-completion basis, which recognizes
sales and profit as they are earned, rather than at the time of shipment. All
expenses related to this contract are charged to cost of sales. The Company also
receives progress billings on this program, which is a funding mechanism by the
government to assist contractors on long-term contracts prior to delivery.
Shipping and handling costs charged to customers are not material. The revenues
and related shipping and handling costs are included in selling, general and
administrative expenses.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues.
Inventory reserves - inventory reserves or write-downs (primarily for purchased
parts) 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.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that this will continue.
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.
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.
General
-------
Management's discussion and analysis of results of operations and financial
condition is intended to assist the reader in the understanding and assessment
of significant changes and trends related to the results of operations and
financial position of the Company together with its subsidiary. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and accompanying notes in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2007.
The Company's avionics business is conducted in the Government and Commercial
and General Aviation markets (see Note 7 of Notes to Financial Statements for
segment financial information). The Company's subsidiary Innerspace Technology,
Inc. ("ITI") sells products to the marine industry, and ITI's financial
statements have been consolidated with the Company's financial statements.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Overview
--------
For the nine months ended December 31, 2007, total revenues increased
approximately 51% to over $9 million, and the loss before taxes decreased from
approximately $655,000 to $237,000, though the Company's gross margin percentage
declined (see below). The increase in gross margin dollars, associated with the
increase in revenues, was offset partially by an 18% increase in engineering,
research and development expenditures, primarily associated with the AN/USM-708
Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline
Tester ("CRAFT") program. Sales from the Company's traditional products
increased substantially for the nine months ended December 31, 2007 over the
same period in the prior year as a result of an increase in government spending
for the Company's products and increased marketing efforts for these contracts.
Major sales increases are as follows:
o In fiscal year 2007, the Company was awarded the AN/ARM-206
Intermediate Level TACAN Test Set (ITATS) contract for $4.4 million.
Since this contract has a long duration, revenues under this contract
have been recognized on a percentage-of-completion basis. For the
first nine months of fiscal year 2008, revenues under this contract
were approximately $2,039,000. However, the gross profit margin (9.7%)
for this contract is significantly less than the Company's historical
gross profit margin due to use of an engineering subcontractor, and
the competitiveness of the bidding process.
o The shipment of T-47N test sets to the Royal Australian Air Force
(through the Company's distributor) for approximately $600,000.
o The shipment of T-30CM test sets under a contract from the U.S. Navy
for approximately $255,000.
Engineering expenditures should decline after CRAFT is completed, and gross
margin on ITATS should also improve when the Company gets into production.
Over the last few years, the Company has won competitive awards for two major
contracts, CRAFT and ITATS, from the U.S. Navy. These contracts include
multi-year production deliveries, and the Company expects that shipments under
these programs will commence early in calendar year 2009. If the production
options are exercised in full, these programs have an aggregate revenue value of
approximately $30 million. The products under these contracts represent cutting
edge technology, and should provide Tel with a competitive advantage for years
to come.
Research and development expenditures will continue to remain high for the next
several quarters to support the CRAFT program (AN/USM-708). Despite ongoing
changes in the Mode 5 technology and limited Government Funded Equipment ("GFE")
availability for design validation, Tel has successfully demonstrated Mode 5
testing capability to the U.S. Navy and is preparing to ship several IFF/Mode 5
prototype variants of the AN/USM-708 to other military services later this
calendar year. The AN/USM-708 engineering hardware design has been largely
completed and the fabrication of 15 pilot production units is now in process.
The Company still has to finalize some non-IFF software and conduct systems
integration testing. These units are currently scheduled to undergo design
validation testing and U.S. Navy TECHEVAL this summer with production currently
scheduled to begin late in the 2008 calendar year or early 2009. The Navy has
options for up to 750 AN/USM-708 units which, if exercised, would add about $14
million to Tel's backlog and to projected revenues over a several year period.
The Company has also responded to a solicitation to the Navy to possibly
purchase up to 450 additional units on a sole source basis. Given the unique
nature of the design, this unit could also generate significant sales to other
military customers, both domestically and overseas.
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 150 units with a total value of over $12 million; the initial work
authorization was $4.4 million. Tel is working with an engineering
sub-contractor on this project and this program entails substantially less Tel
engineering effort than the AN/USM-708. The development work remains on schedule
with pilot production expected to take place this summer and production expected
to commence following Navy TECHEVAL. Given the unique nature of the design, this
unit could also generate significant sales to other military customers, both
domestically and overseas.
Sales of marine products in our subsidiary ITI continue to decline. Although the
Company reduced expenses pursuant to its profit improvement plan, current sales
volume remains inadequate to cover existing expenses. ITI's sales have not grown
as expected and the Company is closely monitoring its performance, and is
evaluating its future.
While the near-term competitive and economic situation remains difficult for the
avionics markets, management remains optimistic about the Company's prospects
and improving results, primarily as a result of the two major programs discussed
above, the increase in commercial sales, the increase in government sales as the
result of the award of contracts for the Company's standard products, as well as
the anticipated reduction in costs discussed above. Tel has significantly
upgraded its management team and engineering staff over the last several years,
and the new digital technology incorporated into the AN/USM-708 and AN/ARM-206
units could have applications outside of Tel's traditional avionics business as
well as increasing opportunities in regular markets.
At December 31, 2007, the Company had positive working capital of $3,263,798, as
compared to $3,121,343 at March 31, 2007, principally as a result of the
increase in accounts receivable. The Company's credit agreement with Bank of
America remains at $1,750,000, against which $350,000 has been drawn down. The
bank has agreed to extend the credit agreement until September 30, 2008, and the
new agreement includes a new borrowing base calculation tied to working capital.
As of December 31, 2007, remaining availability under this modified line is
approximately $677,000. Based upon its working capital, backlog, and credit
agreement, management believes the Company has adequate funding for its
operations for at least the next twelve months. (See Liquidity and capital
Resources)
The amounts received from the exercise of stock options partially offset the
reduction in cash and stockholders' equity caused by the Company's net loss for
the period.
At December 31, 2007, the Company's revenue backlog was approximately $5.8
million as compared to approximately $9.5 million at December 31, 2006. These
amounts do not include any production options for CRAFT or ITATS. Historically,
commercial and government orders received by the Company, other than for larger
programs like the CRAFT and ITATS, are received and shipped within the year and,
as such, backlog is not completely indicative of future sales activity.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations
---------------------
Sales
-----
Total net sales increased $975,791 (43%) to $3,244,939 and $3,132,690 (50.8%) to
$9,294,238, respectively, for the three and nine months ended December 31, 2007
as compared to the same periods in the prior fiscal year. Sales from the
Company's traditional products increased substantially for the nine months ended
December 31, 2007 over the same period in the prior year as a result of an
increase in government spending for the Company's products and increased
marketing efforts for these contracts.
Net sales of avionics products increased $990,907 (47.2%) to $3,088,335 and
$3,303,863 (59.2%) to $8,888,765 for the three and nine months ended December
31, 2007, respectively, as compared to the same periods in the prior year.
Marine systems sales decreased $15,116 (8.8%) to $156,604 and $171,173 (29.7%)
to $405,473 for the three and nine months ended December 31, 2007, respectively,
as compared to the same periods in the prior year.
Avionics commercial sales decreased from prior year by $71,343 (10.3%) to
$620,500 for the three months ended December 31, 2007 as compared to the same
period in the prior year. This decrease is attributed to lower sales of the
TR-220 offset partially an increase in sales related to product repairs and
calibrations. Avionics commercial sales increased $442,712 (22.9%) to $2,376,113
for the nine months ended December 31, 2007 as compared to the nine months ended
December 31, 2006. This increase is mostly attributed to an increase in sales of
the TR-220 Multi-Function Test set, and the T-36C Nav/Comm, test set as a result
of efforts of the Company's domestic distributors, as well as an increase in
repair and parts sales. The weak financial condition of the commercial airline
industry continues.
Avionics government sales increased $1,062,250 (75.6%) to $2,467,835 and
$2,861,151 (78.4%) to $6,512,652, respectively, for the three and nine months
ended December 31, 2007 as compared to the same periods in the prior fiscal
year. The increase in avionics government sales for the quarter ended December
31, 2007 is largely attributable to revenues of approximately $650,000 from the
ITATS contract, which is recognized on a percentage-of-completion basis and an
increase in sales of the T-760, T-30CM, TR-100, and AN/APM-480 offset partially
a decline in sales of the TR-401. For the nine months ended December 31, 2007,
government revenues increased largely as a result of revenues of approximately
$2,039,000 from the ITATS contract, which are recognized on a
percentage-of-completion basis, and an increase in sales of the T-47N, T-30CM,
T-760 and the AN/APM-480 offset partially by lower sales of the TR-401.
Marine systems sales decreased $15,116 (8.8%) to $171,720 and $171,173 (29.7%)
to $405,473, respectively, for the same periods, primarily as a result of lower
sales of specialty systems to the dredging industry.
Gross Margin
------------
Gross margin increased $88,352 (7%) to $1,352,257 and $720,618 (22.9%) to
$3,861,261 for the three and nine months ended December 31, 2007, respectively,
as compared to the same period in the prior fiscal year. The increase in gross
margin is attributed to the increase in volume. The gross margin percentage for
the three months ended December 31, 2007 was 41.7% as compared to 55.7% for the
three months ended December 31, 2006. The gross margin percentage for the nine
months ended December 31, 2007 was 41.5% as compared to 51% for the nine months
ended December 31, 2006. The decrease in gross profit percentage is primarily
attributed to the lower gross profit percentage on the current ITATS contract
discussed above. During the third quarter of the prior fiscal year, the Company
reversed it remaining liability of approximately $125,000 relating to its
upgrade liability, which also favorably impacted the gross margin percentage in
the prior fiscal year.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations (continued)
---------------------------------
Operating Expenses
------------------
Selling, general and administrative expenses decreased $25,489 (3.5%) to
$704,711 and $68,026 (3.4%) to $1,934,263 for the three months and nine months
ended December 31, 2007, respectively, as compared to the three and nine months
ended December 31, 2006. For the three months ended December 31, 2007 as
compared to the three months ended December 31, 2006, selling, general, and
administrative expenses decreased primarily as a result of lower recruitment and
professional fees partially offset by higher outside commissions and salaries
for avionics marketing and sales, attributed mostly to the addition of a new
Director of Business Development. For the nine months ended December 31, 2007 as
compared to the same period in the prior year, selling, general, and
administrative expenses decreased primarily as a result of reclassifying related
expenses to the CRAFT and ITATS programs, lower recruitment and professional
fees partially offset by higher salaries for avionics marketing and sales,
attributed mostly to the addition of a new Director of Business Development.
Engineering, research and development expenses increased $93,529 (15.4%) to
$700,418 and $325,153 (17.8%) to $2,147,142 for the three and nine months ended
December 31, 2007, respectively, as compared to the same periods in the prior
fiscal year. These increases are primarily attributed to development of the
CRAFT program.
Income Taxes
------------
An income tax benefit in the amount of $94,770 was recorded for the nine months
ended December 31, 2007 as a result of the loss before taxes as compared to an
income tax benefit for income taxes in the amount of $261,404 for the nine
months ended December 31, 2006. These amounts represent the effective federal
and state tax rate of approximately 40% on the Company's net loss before taxes.
Net Loss
--------
As a result of the above, the Company incurred net losses of $35,959 and
$142,450 for the three and nine months ended December 31, 2007 as compared to
net losses of $39,453 and $393,585 for the three and nine months ended December
31, 2006.
Liquidity and Capital Resources
-------------------------------
At December 31, 2007, the Company had working capital of $3,263,798 as compared
to $3,121,343 at March 31, 2007. For the nine months ended December 31, 2007,
the Company used $371,590 of cash for operations as compared to $647,368 for the
nine months ended December 31, 2006. This improvement in cash used for
operations is primarily attributed to the substantial increase in accounts
receivable offset partially by a lower loss for the period and a substantial
increase in accounts payable and accrued expenses.
Net cash used in investing activities decreased from $96,331 for the nine months
ended December 31, 2006 to $65,949 for the nine months ended December 31, 2007
due to lower volume of purchases of equipment.
Net cash provided by financing activities increased to $480,800 for the nine
months ended December 31, 2007 as compared to $79,581 for the nine months ended
December 31, 2006 due to the borrowing from the line of credit in the amount of
$350,000, and an increase over last year in the cash proceeds from the exercise
of stock options in the amount of $51,219. The Company has a line of credit of
$1,750,000 from Bank of America. The line of credit bears an interest rate of
0.5% above the lender's prevailing base rate, and is payable monthly based upon
the outstanding balance. The Company does not pay to maintain this open line.
15
Liquidity and Capital Resources (continued)
-------------------------------------------
At December 31, 2007 the Company had an outstanding balance of $350,000 on which
it currently pays 7.75% interest. The line of credit is collateralized by
substantially all of the assets of the Company. The line of credit expired on
September 30, 2007. The bank extended the credit agreement until September 30,
2008, and the new agreement includes a new borrowing base calculation tied to
working capital. As of December 31, 2007, remaining availability under this
modified line is approximately $677,000 based upon receivables and inventories
at December 31, 2007. The Company believes that it has adequate liquidity,
borrowing resources and backlog to fund operating plans for the at least the
next twelve months, and until deliveries of its new units commence. Currently,
the Company has no material capital expenditure requirements.
There was no significant impact on the Company's operations as a result of
inflation for the nine months ended December 31, 2007. 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, 2007.
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
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, 2007 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, 2007 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.
It should be noted that while the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, believe that the Company's
disclosure controls and procedures provide a reasonable level of assurance, they
do not expect that the disclosure controls and procedures or internal controls
will prevent all error and all fraud. A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
16
Part II Other Information
-------------------------
Item 1. Legal Proceedings
------- -----------------
None.
Item 1A. Risk Factors
-------- ------------
Information related to our risk factors are disclosed under
Item 1A to Part I of our Annual Report on Form 10-K for the
year ended March 31, 2007.
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, 2007.
Item 4 Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on December 5, 2007 (the
"Annual Meeting").
(b) Not applicable because (1) proxies were solicited pursuant to
Regulation 14; (ii) there was no solicitation in opposition to
management's nominees; and (iii) 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 1,990,463 196,144
George J. Leon 2,093,463 93,144
Robert J. Melnick 2,075,463 111,144
Jeff C. O'Hara 2,075,463 111,144
Robert A. Rice 2,086,791 99,816
Robert H. Walker 2,093,463 93,144
The shareholders also voted 2,093,647 shares in favor of ratifying the audit
committee's appointment of BDO Seidman, LLP, as the Company's independent
registered public accountants for the fiscal year ending March 31, 2008.
Shareholders owning 92,960 shares voted against this proposal.
(d) Not applicable
17
Part II Other Information (continued)
-------------------------------------
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, 2008 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
Chairman and CEO
Date: February 13, 2008 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
18