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 June 30, 2008
[ ] 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. Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting company. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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:
2,439,261 shares of Common stock, $.10 par value as of August 6, 2008.
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
June 30, 2008 and March 31, 2008 1
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2008 and 2007 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2008 and 2007 3
Notes to Condensed Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 10-15
Item 4(T). Controls and Procedures 15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Unregistered sales of Equity Securities and Use of Proceeds 16
Item 6. Exhibits 16
Signatures 16
Certifications
i
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, March 31,
2008 2008
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 874,417 $ 469,906
Accounts receivable, net 1,323,748 1,223,753
Unbilled government receivables 1,351,180 1,100,323
Inventories, net 1,945,008 2,075,542
Taxes receivable 44,612 44,612
Prepaid expenses and other 75,482 96,834
Deferred income tax asset 503,360 531,975
----------- -----------
Total current assets 6,117,807 5,542,945
Equipment and leasehold improvements, net 502,193 532,240
Deferred income tax asset - non-current 900,221 900,221
Other assets 142,628 142,069
----------- -----------
Total assets $ 7,662,849 $ 7,117,475
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Line of credit 550,000 350,000
Accounts payable 793,920 928,367
Deferred revenues 77,828 55,014
Accrued payroll, vacation pay and payroll taxes 330,559 348,683
Accrued expenses 1,518,588 1,129,370
----------- -----------
Total current liabilities 3,320,895 2,861,434
Deferred revenues 49,170 43,818
----------- -----------
Total liabilities 3,370,065 2,905,252
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,439,261
and 2,428,261 issued and outstanding as of June 30,
2008 and March 31, 2008, respectively 243,926 242,826
Additional paid-in capital 4,647,712 4,611,262
Accumulated deficit (598,854) (641,865)
----------- -----------
Total stockholders' equity 4,292,784 4,212,223
----------- -----------
Total liabilities and stockholders' equity $ 7,662,849 $ 7,117,475
=========== ===========
See accompanying notes to condensed consolidated financial statements
1
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended
--------------------------
June 30, June 30,
2008 2007
----------- -----------
Net sales $ 3,551,975 $ 2,955,739
Cost of sales 2,063,046 1,742,437
----------- -----------
Gross margin 1,488,929 1,213,302
Operating expenses:
Selling, general and administrative 708,358 555,987
Engineering, research and development 735,151 772,747
----------- -----------
Total operating expenses 1,443,509 1,328,734
----------- -----------
Income (loss) from continuing operations 45,420 (115,432)
Interest income (expense):
Interest income 390 3,161
Interest expense (11,519) (8,946)
----------- -----------
Income (loss) from continuing operations
before income taxes 34,291 (121,217)
Income tax provision (benefit) 13,700 (49,475)
----------- -----------
Net income (loss) from continuing
operations, net of income taxes 20,591 (71,742)
Income (loss) from discontinued operations,
net of income taxes 22,420 (11,632)
----------- -----------
Net income (loss) $ 43,011 $ (83,374)
=========== ===========
Income (loss) from continuing operations, net of income taxes:
Basic income (loss) per common share $ 0.01 $ (0.03)
=========== ===========
Diluted income (loss) per common share $ 0.01 $ (0.03)
=========== ===========
Income (loss) from discontinued operations, net of income taxes:
Basic income (loss) per common share $ 0.01 $ (0.01)
=========== ===========
Diluted income (loss) per common share $ 0.01 $ (0.01)
=========== ===========
Net Income (loss):
Basic income (loss) per common share $ 0.02 $ (0.04)
=========== ===========
Diluted income (loss) per common share $ 0.02 $ (0.04)
=========== ===========
Weighted average shares outstanding:
Basic 2,433,381 2,342,581
Diluted 2,512,692 2,342,581
See accompanying notes to condensed consolidated financial statements
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Three Months ended
----------------------
June 30, June 30,
2008 2007
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 43,011 $ (83,374)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes 28,615 (55,465)
Depreciation 44,480 60,076
Non-cash stock-based compensation 12,220 7,501
Changes in assets and liabilities:
Increase in accounts receivable (99,995) (280,471)
Increase in unbilled government receivables (250,857) (708,919)
Decrease in inventories 155,377 284,876
Decrease (increase) in prepaid expenses & other 21,352 (5,997)
Increase in other assets (559) (2,514)
(Decrease) increase in accounts payable (134,447) 77,432
(Decrease) increase in accrued payroll, vacation pay
and payroll taxes (18,124) 6,657
Increase (decrease) in deferred revenues 28,166 (13,332)
Increase in accrued expenses 389,218 157,478
--------- ---------
Net cash provided by (used in) operating activities 218,457 (556,052)
--------- ---------
Cash flows from investing activities:
Purchases of equipment (39,276) (3,534)
--------- ---------
Net cash used in investing activities (39,276) (3,534)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of stock options 25,330 6,750
Proceeds from borrowings from line of credit, net 200,000 250,000
--------- ---------
Net cash provided by financing activities 225,330 256,750
--------- ---------
Net increase (decrease) in cash and cash equivalents 404,511 (302,836)
Cash and cash equivalents at beginning of period 469,906 655,836
--------- ---------
Cash and cash equivalents at end of period $ 874,417 $ 353,000
========= =========
Taxes paid $ -- $ --
========= =========
Interest paid $ 4,357 $ --
========= =========
See accompanying notes to condensed consolidated financial statements
3
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
Note 1 Basis of Presentation
------ ---------------------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Tel-Instrument Electronics Corp. as of June 30, 2008, the
results of operations for the three months ended June 30, 2008 and June 30,
2007, and statements of cash flows for the three months ended June 30, 2008 and
June 30, 2007. 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, 2008 balance sheet included herein was
derived from the audited financial statements included in the Company's annual
report on Form 10-K as of that date. 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, 2008.
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 based on actual expenses incurred. 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. See
Critical Accounting Policies - Revenue Recognition.
Note 3 Accounts Receivable, net
------ ------------------------
Accounts receivable, net consist of:
June 30, 2008 March 31, 2008
------------- --------------
Commercial $ 342,946 $ 647,063
Government 1,012,008 607,896
Less: Allowance for doubtful accounts (31,206) (31,206)
------------ ------------
$ 1,323,748 $ 1,223,753
============ ============
Note 4 Inventories, net
------ ----------------
Inventories, net consist of: June 30, 2008 March 31, 2008
------------- --------------
Purchased parts $ 1,252,596 $ 1,246,733
Work-in-process 910,184 881,472
Finished goods 74,175 224,284
Less: Reserve for obsolescence (291,947) (276,947)
------------ ------------
$ 1,945,008 $ 2,075,542
============ ============
4
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 5 Earnings Per Share
------ ------------------
SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings per
share ("basic EPS") and diluted earnings per share ("diluted EPS").
The Company's basic and diluted 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. Diluted loss per share for the period ended
June 30, 2007 does not include common stock equivalents, as these shares would
be anti-dilutive.
Three Months Three Months
------------ ------------
Ended Ended
----- -----
June 30, 2008 June 30, 2007
------------- -------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ 43,011 $ (83,374)
Weighted-average common shares outstanding 2,433,381 2,342,581
Basic net income (loss) per share attributable to common stockholders $ 0.02 $ (0.04)
Diluted net income (loss) per share computation
Net income (loss) attributable to common stockholders $ 43,011 $ (83,374)
Weighted-average common shares outstanding 2,433,381 2,342,581
Incremental shares attributable to the assumed exercise of
outstanding stock options 79,311 --
Total adjusted weighted-average shares 2,512,692 2,342,581
Diluted net income (loss) per share attributable to common stockholders $ 0.02 $ (0.04)
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), operations was charged $12,220 and $7,501
for three months ended June 30, 2008 and 2007, respectively. 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 2.56% to 3.16%, volatility at 38.63% to
39.14%, and an expected life of 5 years for the three months ended June 30,
2008; expected dividend yield of 0.0%, risk-free interest rate of 4.77%,
volatility at 50.16% to 56.94%, and an expected life of 5 years for the three
months ended June 30, 2007. The Company estimates forfeiture rate based on
historical data. 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 (continued)
----------------------------------------------------------------
(Unaudited)
Note 7 Segment Information
------ -------------------
As a result of the classification of its marine systems division as discontinued
operations in accordance with FAS No. 131, "Disclosures about Segments of an
Enterprise and related information", the Company determined it has two
reportable segments for continuing operations - avionics government and avionics
commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products. The
avionics government segment consists primarily of the design, manufacture, and
sale of test equipment to the U.S. and foreign governments and militaries either
directly or through distributors. The avionics commercial segment consists of
design, manufacture, and sale of test equipment to domestic and foreign
airlines, directly or through commercial distributors, and to general aviation
repair and maintenance shops. The Company develops and designs test equipment
for the avionics industry and as such, the Company's products and designs cross
segments.
Management evaluates the performance of its segments and allocates resources to
them based on gross margin. The Company's general and administrative costs and
sales and marketing expenses are not segment specific. As a result, all
operating expenses are not managed on a segment basis. Net interest includes
expenses on debt and income earned on cash balances. Segment assets include
accounts receivable and work-in-process inventory. Asset information, other than
accounts receivable and work-in-process inventory, is not reported, since the
Company does not produce such information internally. All long-lived assets are
located in the U.S.
The table below presents information about reportable segments within the
avionics business for the periods ending June 30, 2008 and 2007:
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
June 30, 2008 Gov't Comm'l. Total Items Total
------------- ----- ------- ----- ----- -----
Net sales $ 2,960,596 $ 591,379 $ 3,551,975 $ 3,551,975
Cost of Sales 1,741,197 321,849 2,063,046 2,063,046
----------- ----------- ----------- -----------
Gross Margin 1,219,399 269,530 1,488,929 1,488,929
----------- ----------- ----------- -----------
Engineering, research, and development 735,151 735,151
Selling, general, and admin. 385,565 322,793 708,358
Interest (income) expense,net 11,129 - 11,129
----------- ----------- -----------
Total expenses 1,131,845 322,793 1,454,638
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes $ 357,084 $ (322,793) $ 34,291
=========== =========== ===========
Segment assets $ 4,058,010 $ 561,926 $ 4,619,936 $ 3,042,913 $ 7,662,849
=========== =========== =========== =========== ===========
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
June 30, 2007 Gov't Comm'l. Total Items Total
------------- ----- ------- ----- ----- -----
Net sales $ 2,060,307 $ 895,432 $ 2,955,739 $ 2,955,739
Cost of Sales 1,255,323 487,114 1,742,437 1,742,437
----------- ----------- ----------- -----------
Gross Margin 804,984 408,318 1,213,302 1,213,302
----------- ----------- ----------- -----------
Engineering, research, and development 772,747 772,747
Selling, general, and admin. 296,995 $ 258,992 555,987
Interest (income) expense ,net 5,785 - 5,785
----------- ----------- -----------
Total expenses 1,075,527 258,992 1,334,519
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes $ 137,775 $ (258,992) $ (121,217)
=========== =========== ===========
6
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 8 Income Taxes
------ ------------
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes- an Interpretation of FASB Statement No. 109, on April 1, 2007. The
Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The Company did not have any unrecognized
tax benefits and there was no effect on our financial condition or results of
operations as a result of implementing FIN 48.
The tax effect of temporary differences, primarily net operating loss
carryforwards, asset reserves and accrued liabilities, gave rise to the
Company's deferred tax asset in the accompanying June 30, 2008 and March 31,
2008 consolidated balance sheets. Deferred income taxes are recognized for the
tax consequence of such temporary differences at the enacted tax rate expected
to be in effect when the differences reverse.
Note 9 Stock Option Exercises
------ ----------------------
During the quarter ended June 30, 2008 stock options for 11,000 shares were
exercised for total proceeds of $25,330.
Note 10 Fair Value Measurements
------- -----------------------
On April 1, 2008, the Company adopted SFAS No. 157 "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, provides a consistent framework for
measuring fair value under Generally Accepted Accounting Principles and expands
fair value financial statement disclosure requirements. SFAS 157's valuation
techniques are based on observable and unobservable inputs. Observable inputs
reflect readily obtainable data from independent sources, while unobservable
inputs reflect our market assumptions. SFAS 157 classifies these inputs into the
following hierarchy:
Level 1 Inputs- Quoted prices for identical instruments in active markets.
Level 2 Inputs- Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations whose inputs are observable or
whose significant value drivers are observable.
Level 3 Inputs- Instruments with primarily unobservable value drivers.
At June 30, 2008, the Company had no financial assets or liabilities reported at
fair value.
7
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 11 New Accounting Pronouncements (continued)
------- -----------------------------------------
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. The adoption of SFAS No. 159 did not have a material
impact on the Company's financial position or results of operations.
In December 2007, the FASB issued SFAS No 141(R), "Business Combinations." This
statement provides new accounting guidance and disclosure requirements for
business combinations. SFAS No 141(R) is effective for business combinations
which occur in the first fiscal year beginning on or after December 15, 2008.
The Company is currently assessing the effect of SFAS No 141(R) on its
financial statements, but it is not expected to be material.
In December 2007, the FASB finalized the provisions of the Emerging Issues Task
Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This
EITF Issue provides guidance and requires financial statement disclosures for
collaborative arrangements. EITF Issue No. 07-1 is effect for financial
statements issued for fiscal years beginning after December15, 2008. The Company
is currently assessing the effect of EITF Issue No. 07-1 on its financial
statements, but it is not expected to be material.
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements
for derivative instruments and hedging activities. SFAS 161 requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation and requires quantitative disclosures about fair
value amounts and gains and losses on derivative instruments. It also requires
disclosures about credit-related contingent features in derivative agreements.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. SFAS 161 encourages, but does not require, comparative disclosures
for earlier periods at initial adoption. The adoption of SFAS 161 is not
expected to have a material impact on the Company's financial condition or
results of operations.
8
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 12 Discontinued Operations
------- -----------------------
The Board of Directors approved discontinuing the Company's marine systems
division effective March 31, 2008. As a result, the consolidated financial
statements present the marine systems division as a discontinued operation.
The Company wrote-off fixed assets of approximately $77,000 and inventories of
approximately $151,000 in 2008.
The Company's decision to discontinue its marine operations was based primarily
on the historical losses sustained and management's intent to focus on its
avionics business
The following tables reflects sales, costs and expenses, and loss from
discontinued operations, net of taxes for the three months ended June 30, 2008
and 2007, respectively.
---------------------------------------------------------------------------------- ---------------------- -----------------
Three Months Three Months
Ended Ended
June 30, 2008 June 30, 2007
---------------------------------------------------------------------------------- ---------------------- -----------------
Discontinued Operations:
---------------------------------------------------------------------------------- ---------------------- -----------------
Net sales $ 81,506 $125,313
---------------------------------------------------------------------------------- ---------------------- -----------------
Costs and expenses 44,170 142,936
---------------------------------------------------------------------------------- ---------------------- -----------------
Income (loss) from operations of discontinued operations 37,336 (17,623)
---------------------------------------------------------------------------------- ---------------------- -----------------
Income tax provision (benefit) 14,916 (5,991)
---------------------------------------------------------------------------------- ---------------------- -----------------
Net income (loss) from discontinued operations $ 22,420 $ (11,632)
---------------------------------------------------------------------------------- ---------------------- -----------------
Note 13 Reclassifications
------- -----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation, relating primarily to discontinued operations.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Forward Looking Statements
--------------------------
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in demand
for the Company's products or in the 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 filings
with the Securities and Exchange Commission.
Critical Accounting Policies
----------------------------
In preparing the financial statements and accounting for the underlying
transactions and balances, the Company applies its accounting policies as
disclosed in Note 2 of our Notes to Financial Statements included in our Form
10-K. The Company's accounting policies that require a higher degree of judgment
and complexity used in the preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment to, or
acceptance by customer provided title and risk of loss is transferred to the
customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under short-term service contracts are recognized when the
services are performed.
Due to the unique nature of the ITATS program (AN/ARM-206) 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 it is earned based on actual expenses incurred.
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 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. If market conditions and actual demands are less favorable than
those projected by management, additional 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 credit of 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 expectation and the provision
established, the Company cannot guarantee that this will continue.
Warranty reserves - warranty reserves are based upon historical rates and
specific items that are identifiable and can be estimated at time of sale. While
warranty costs have historically been within expectations and the provisions
established, future warranty costs could be in excess of the Company's warranty
reserves. A significant increase in these costs could adversely affect the
Company's operating results for the period and the periods these additional
costs materialize. Warranty reserves are adjusted from time to time when actual
warranty claim experience differs from estimates.
Income taxes - deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefit which is
not more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in the period that such tax
rate changes are enacted.
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 financial notes in the Company's Annual Report on
Form 10-K for the year ended March 31, 2008.
The Company's avionics business is conducted in the Government, Commercial and
General aviation markets (see Note 7 of Notes to Financial Statements for
segment financial information). In January 2004, the Company completed its
acquisition of ITI, a company selling products to the marine industry, and ITI's
financial statements were consolidated with the Company's financial statements
until the Company considered it a discontinued operation as of March 31, 2008
(see Note 12 to Financial Statements).
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations
---------------------
Overview
--------
In the first quarter of fiscal year 2009, the Company's sales increased sharply
to $3.5 million and it recorded net income of $43K. This included net income of
$21K from continuing operations and net income of $22K from discontinued
operations. Net income in the first quarter was limited by high engineering
costs for the CRAFT program and a low gross profit margin on the AN/ARM-206
(ITATS) pilot production contract. These engineering costs associated with CRAFT
should decline as the program nears completion, and the gross profit should
increase when the Company begins delivering production units of the AN/ARM-206.
Despite continued weakness in the commercial aviation market, Tel anticipates a
return to profitable operations in fiscal year 2009 due primarily to an expected
strong increase in projected military sales of its legacy products, and the
commencement of AN/USM-719 IFF and AN/ARM-206 test set deliveries.
The increased sales and income in the first quarter of the 2009 fiscal year were
the result of increased sales of legacy products and commencement of sales of
products to the U.S. Army under two large IDIQ (Indefinite Delivery/Indefinite
Quantity) contracts for Tel's T-30D and T-47N products. As previously reported,
these IDIQ Army contracts have an aggregate value of $5.9 million over the next
5 years, and the Company has received delivery orders for $1.3 million from
these two contracts. The Company believes that additional units under these IDIQ
contracts may be ordered and delivered during the current fiscal year.
Over the last several years, Tel has aggressively invested in revitalizing its
product line with three cutting edge products now nearing completion, including
two variants of CRAFT (AN/USM-708 and (AN/USM-719), and the AN/ARM-206 TACAN
bench test set. The CRAFT products are still the only Mode 5 flight line test
sets under contract with the U.S. Military. Tel will begin pilot production
shipments of the AN/USM -719 in the second quarter of this fiscal year, and
continues to work to finalize the AN/USM-708 product, with the Navy technical
evaluation process scheduled to commence later this year. To date, the Navy has
exercised CRAFT production options for 98 pilot production units out of a
maximum IDIQ contract of 1,200 units. The AN/ARM-206 design combines advanced
digital technology with state of the art automated testing capabilities. This
product will enter Navy technical evaluation this calendar year with production
deliveries expected in the fourth quarter of this fiscal year. This IDIQ
contract is for up to 180 units with a maximum contract value of $12 million.
As revenues have increased this quarter, cash and working capital have improved
from March 31, 2008. The Company believes that it has adequate liquidity,
borrowing resources and backlog to fund operating plans for the next 12 months,
and until substantial deliveries of its new units commence.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Sales
-----
For the first quarter ended June 30, 2008, total sales increased $596,136
(20.2%) to $3,551,875 as compared to $2,955,739 for the same quarter in the
prior year. Avionics Government sales increased $900,289 (43.7%) to $2,960,596
for the period as compared to $2,060,307 for the same period last year. The
increase in Avionics Government sales is primarily attributed to: the shipment
of T-47G test sets to the Canadian Air Force (through our distributor in
Canada), shipments of the T-30D test sets to the Army, shipments of the
AN/APM-480 upgrades to T-47N, and shipments of its new TR-420 products. These
increases were partially offset by lower sales of the T-47N test set as prior
year sales included a large shipment to the Royal Australian Air Force (through
the Company's distributor). Avionics Commercial sales decreased $304,053 (34.0%)
to $591,379 for the three months ended June 30, 2008 as compared to $895,432 in
the same period in the prior year, attributed mostly to the decrease in
shipments of the TR-220 Multi-Function Test set.
Gross Margin
------------
Gross margin increased $275,627 (22.7%) to $1,488,929 for the three months ended
June 30, 2008 as compared to $1,213,302 for the same three months 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 June 30, 2008 was
41.9% as compared to 41.0% for the three months ended June 30, 2007. These gross
margins remain below Tel's historical levels due primarily to the low margin
ITATS pilot production contract.
Operating Expenses
------------------
Selling, general and administrative expenses increased $152,371 (27.4%) to
$708,358 for the three months ended June 30, 2008, as compared to $555,987 for
the three months ended June 30, 2007. This increase is attributed mainly to an
increase in outside commissions and higher marketing and sales expenses
associated with an increase in customer support services.
Engineering, research and development expenses decreased $37,596 (4.9%) to
$735,151 for three months ended June 30, 2008 as compared to $772,747 for the
three months ended June 30, 2007. Engineering, research and development expenses
are mostly attributed to efforts related to the CRAFT program.
Interest, net
-------------
Interest income decreased as a result of lower average cash balances. Interest
expense increased as a result of the increased borrowings associated with the
line of credit and the loan against the cash surrender value of the keyman life
insurance policy.
Income (Loss) from Continuing Operations before Income Taxes
------------------------------------------------------------
As a result of the above, the Company recorded income from continuing operations
before income taxes of $34,291 for the quarter ended June 30, 2008 as compared
to a loss from continuing operations before income taxes of $121,217 for the
quarter ended June 30, 2007.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Income Taxes
------------
An income tax provision in the amount of $13,700 was recorded for the three
months ended June 30, 2008 as compared to an income tax benefit of $49,475 for
the quarter ended June 30, 2007. The change is due to the income before taxes
for the quarter ended June 30, 2008 as compared to a loss before taxes for the
quarter ended June 30, 2007. These amounts represent the effective federal and
state tax rate of approximately 40% on the Company's net loss before taxes.
Net Income (Loss) from Continuing Operations, Net of Taxes
----------------------------------------------------------
As a result of the above, the Company recorded net income from continuing
operations, net of taxes of $20,591 for the quarter ended June 30, 2008 as
compared to a net loss from continuing operations, net of taxes of $71,742 for
the quarter ended June 30, 2007.
Income (Loss) from Discontinued Operations, Net of taxes
------------------ -------------------------------------
For the three months ended June 30, 2008, the Company recorded income from
discontinued operations, net of taxes, of $22,420 as compared to a loss from
operations of discontinued operations, net of taxes, of $11,632 for the three
months ended June 30, 2007, primarily as a result of the reclassification of
certain allocated fixed costs to continuing operations and sales of products
that were written-off in 2008.
Net Income (Loss)
-----------------
As a result of the above, the Company recorded net income of $43,011 for the
quarter ended June 30, 2008 as compared to a net loss of $83,374 for the quarter
ended June 30, 2007.
Liquidity and Capital Resources
-------------------------------
At June 30, 2008, the Company had working capital of $2,796,912 as compared to
$2,681,511 at March 31, 2008. For the three months ended June 30, 2008, the
Company generated $218,457 in cash from operations as compared to using $556,052
of cash in operations the three months ended June 30, 2007, an improvement of
$774,509. This increase in cash from operations is primarily attributed to the
increased income for the current quarter, an increase in accrued expenses, as
well as the change in unbilled government receivables.
Net cash used in investing activities increased to $39,276 for the three months
ended June 30, 2008 from $3,534 for the three months ended June 30, 2007 due to
the increase in purchases of equipment.
Net cash provided by financing activities decreased to $225,230 for the three
months ended June 30, 2008 from $256,750 for the three months ended June 30,
2007 due to the lower borrowings from the line of credit offset partially by an
increase in proceeds from the exercise of stock options.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
At June 30, 2008 the Company had an outstanding loan balance of $550,000 on
which it currently pays 5.5% interest. The line of credit is collateralized by
substantially all of the assets of the Company. The credit agreement expires
September 30, 2008, and the agreement includes a borrowing base calculation tied
to working capital. The Company expects to renegotiate the line of credit, as it
has done for the last few years, during the next quarter; however there is no
guarantee the line of credit will be extended. As of June 30, 2008, remaining
availability under this modified line was approximately $375,000 based upon
eligible receivables and inventories at June 30, 2008. The Company's cash
balance was $874,417 at June 30, 2008 as compared to $469,906 at March 31, 2008.
As a consequence of the increase in sales and profitability, the Company has
improved its financial position. The Company believes that it has adequate
liquidity, borrowing resources and backlog to fund operating plans for the next
12 months, and until deliveries of its new units commence.
There was no significant impact on the Company's operations as a result of
inflation for the three months ended June 30, 2008. 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 4 (T). Controls and Procedures
----------- -----------------------
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There was no change in the Company's internal control over financial reporting
during the Company's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
15
Part II. Other Information
-------- -----------------
Item 1. Legal Proceedings
------- -----------------
None.
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 first quarter ended June
30, 2008.
Item 6. Exhibits
------- --------
Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the
Securities Exchange Act.
31.2 Certification by CFO pursuant to Rule 15d-14 under the
Securities Exchange Act.
32.1 Certification by CEO and CFO 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: August 14, 2008 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
CEO
Date: August 14, 2008 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
16