UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
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:
2,601,261 shares of Common stock, $.10 par value as of November 10, 2009.
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
TABLE OF CONTENTS
-----------------
PAGE
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
September 30, 2009 and March 31, 2009 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 2009 and 2008 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 2009 and 2008 5
Notes to Condensed Consolidated Financial Statements 6-15
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 16-23
Item 4. Controls and Procedures 23
Part II - Other Information
Item 1. Legal Proceedings 24
Item 2. Unregistered sales of Equity Securities and Use of Proceeds 24
Item 6. Exhibits 24
Signatures 25
Certifications
2
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
September 30, March 31,
------------- ---------
2009 2009
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 457,663 $ 601,887
Accounts receivable, net 1,514,024 1,516,698
Unbilled government receivables 1,441,200 1,265,470
Inventories, net 1,662,692 2,206,546
Prepaid expenses and other 71,639 90,509
Deferred income tax asset 461,627 461,631
----------- -----------
Total current assets 5,608,845 6,142,741
Equipment and leasehold improvements, net 363,502 437,974
Deferred income tax asset - non-current 1,248,800 852,413
Other assets 70,764 72,261
----------- -----------
Total assets $ 7,291,911 $ 7,505,389
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit 600,000 450,000
Accounts payable 448,009 456,343
Deferred revenues 21,222 21,891
Accrued payroll, vacation pay and payroll taxes 317,507 326,202
Accrued expenses 1,286,692 1,604,190
----------- -----------
Total current liabilities 2,673,430 2,858,626
Deferred revenues 39,076 43,243
----------- -----------
Total liabilities 2,712,506 2,901,869
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,601,261
and 2, 478,761 issued and outstanding as of
September 30, 2009 and March 31, 2009, respectively 260,126 247,876
Additional paid-in capital 5,355,056 4,801,272
Accumulated deficit (1,035,777) (445,628)
----------- -----------
Total stockholders' equity 4,579,405 4,603,520
----------- -----------
Total liabilities and stockholders' equity $ 7,291,911 $ 7,505,389
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2009 2008 2009 2008
---- ---- ---- ----
Net sales $ 2,384,354 $ 3,855,121 $ 4,710,109 $ 7,407,096
Cost of sales 1,160,105 1,715,634 2,417,771 3,778,680
----------- ----------- ----------- -----------
Gross margin 1,224,249 2,139,487 2,292,338 3,628,416
Operating expenses:
Selling, general and administrative 710,718 763,784 1,517,966 1,472,142
Engineering, research and development 815,203 713,853 1,748,075 1,449,004
----------- ----------- ----------- -----------
Total operating expenses 1,525,921 1,477,637 3,266,041 2,921,146
----------- ----------- ----------- -----------
Operation income (loss) from continuing
operations (301,672) 661,850 (973,703) 707,270
Interest income (expense):
Interest income 123 1,683 493 2,073
Interest expense (11,526) (13,336) (18,999) (24,855)
----------- ----------- ----------- -----------
Income (loss) from continuing operations
Before income taxes (313,075) 650,197 (992,209) 684,488
Income tax provision (benefit) (125,074) 304,365 (396,387) 318,065
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations (188,001) 345,832 (595,822) 366,423
Income (loss) from discontinued operations,
net of income taxes 6,583 44,819 5,673 67,239
----------- ----------- ----------- -----------
Net income (loss) $ (181,418) $ 390,651 $ (590,149) $ 433,662
----------- ----------- ----------- -----------
Income (loss) from continuing operations
Basic income (loss) per common share $ (0.07) $ 0.14 $ (0.24) $ 0.15
=========== =========== =========== ===========
Diluted income (loss) per common share $ (0.07) $ 0.14 $ (0.24) $ 0.15
=========== =========== =========== ===========
Income (loss) from discontinued operations,
net of income taxes:
Basic income (loss) per common share $ 0.00 $ 0.02 $ 0.00 $ 0.03
=========== =========== =========== ===========
Diluted income (loss) per common share $ 0.00 $ 0.02 $ 0.00 $ 0.03
=========== =========== =========== ===========
Net Income (loss):
Basic income (loss) per common share $ (0.07) $ 0.16 $ (0.24) $ 0.18
Diluted income (loss) per common share $ (0.07) $ 0.16 $ (0.24) $ 0.17
Weighted average shares outstanding:
Basic 2,504,794 2,445,511 2,491,848 2,439,547
Diluted 2,504,794 2,512,068 2,491,848 2,506,104
See accompanying notes to condensed consolidated financial statements
4
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Six Months Ended
----------------
September 30, September 30,
------------- -------------
2009 2008
---- ----
Cash flows from operating activities:
Net income (loss) $ (590,149) $ 433,662
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (396,383) 302,896
Depreciation 90,580 93,912
Non-cash stock-based compensation 36,149 24,766
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,674 (1,151,299)
Increase in unbilled government receivables (175,730) (176,750)
Decrease (increase) in inventories 543,854 (133,799)
Decrease in prepaid expenses & other 18,870 84,443
Decrease (increase) in other assets 1,497 (834)
Decrease in accounts payable (8,334) (57,765)
Decrease in accrued payroll, vacation pay
and payroll taxes (8,695) (26,458)
(Decrease) increase in deferred revenues (4,836) 10,329
(Decrease) increase in accrued expenses (317,498) 450,036
----------- -----------
Net cash used in operating activities (808,001) (146,861)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (16,108) (57,730)
----------- -----------
Net cash used in investing activities (16,108) (57,730)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of common stock 359,470 --
Proceeds from the exercise of stock options 170,415 45,780
Proceeds from loan on life insurance policy -- 67,578
Proceeds from borrowings from line of credit
150,000 100,000
----------- -----------
Net cash provided by financing activities 679,885 213,358
----------- -----------
Net (decrease) increase in cash and cash equivalents (144,224) 8,767
Cash and cash equivalents at beginning of period 601,887 469,906
----------- -----------
Cash and cash equivalents at end of period $ 457,663 $ 478,673
=========== ===========
Taxes paid $ 3,470 $ 15,290
=========== ===========
Interest paid $ 9,656 $ 14,418
=========== ===========
See accompanying notes to condensed consolidated financial statements
5
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 September 30, 2009,
the results of operations for the three and six months ended September 30, 2009
and September 30, 2008, and statements of cash flows for the six months ended
September 30, 2009 and September 30, 2008. 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, 2009 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, 2009.
Note 2 Revenue Recognition - Percentage-of-Completion - ITATS
------ ------------------------------------------------------
("Intermediate Level TACAN Test Set") (AN/ARM-206)
--------------------------------------------------
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.
Revenues and profits are estimated using the cost-to-cost method of accounting
where revenues are recognized and profits recorded based upon the ratio of costs
incurred to estimate of total costs at completion. The ratio of costs incurred
to date to the estimate of total costs at completion is applied to the contract
value to determine the revenues and profits. When adjustments in estimated
contract revenues or estimated costs at completion are required, any changes
from prior estimates are recognized by recording adjustments in the current
period for the inception-to-date effect of the changes on current and prior
periods. 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).
These progress payments are applied to Accrued Receivables resulting from
revenues recognized under percentage-of-completion accounting.
Note 3 Accounts Receivable, net
------ ------------------------
The following table sets forth the components of accounts receivable:
September 30, March 31,
------------- ---------
2009 2009
---- ----
Government $ 1,205,412 $ 1,199,989
Commercial 348,916 357,013
Allowance for doubtful accounts (40,304) (40,304)
------------ ------------
$ 1,514,024 $ 1,516,698
============ ============
6
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 4 Inventories, net
------ ----------------
Inventories consist of:
September 30, March 31,
------------- ---------
2009 2009
---- ----
Purchased parts $ 1,155,136 $ 1,534,184
Work-in-process 777,061 918,038
Finished goods 110,414 104,243
Less: Inventory reserve (379,919) (349,919)
$ 1,662,692 $ 2,206,546
Note 5 Earnings Per Share
Financial Accounting Standards Board ("FASB") ASC 260-10 (Prior authoritative
Financial Accounting 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 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 periods ended
September 30, 2009 do not include common stock equivalents, as these shares
would be anti-dilutive.
Three Months Ended Three Months Ended
------------------ ------------------
September 30, 2009 September 30, 2008
------------------ ------------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ (181,418) $ 390,651
Weighted-average common shares outstanding 2,504,794 2,445,511
Basic net income(loss) per share attributable to common
Stockholders $ (0.07) $ 0.16
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders $ (181,418) $ 390,651
Weighted-average common shares outstanding 2,504,794 2,445,511
Incremental shares attributable to the assumed exercise of
outstanding stock options -- 66,557
Total adjusted weighted-average shares 2,504,794 2,512,068
Diluted net income(loss) per share attributable to common
stockholders $ (0.07) $ 0.16
7
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
-----------
Note 5 Earnings Per Share (continued)
------ ------------------------------
Six Months Ended Six Months Ended
---------------- ----------------
September 30, 2009 September 30, 2008
------------------ ------------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ (590,149) $ 433,662
Weighted-average common shares outstanding 2,491,848 2,439,547
Basic net income(loss) per share attributable to common
Stockholders $ (0.24) $ 0.18
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders $ (590,149) $ 433,662
Weighted-average common shares outstanding 2,491,848 2,439,547
Incremental shares attributable to the assumed exercise of
outstanding stock options -- 66,557
Total adjusted weighted-average shares 2,491,848 2,506,104
Diluted net income(loss) per share attributable to common
stockholders $ (0.24) $ 0.17
Note 6 Stock Options
------ -------------
Effective April 1, 2006, the Company adopted the Financial Accounting Standards
Board ("FASB") ASC 718-10 (Prior authoritative Financial Accounting Standards
No. 123R, "Share-Based Payment" ("SFAS 123R")), utilizing the modified
prospective method. FASB ASC 718-10 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 FASB ASC 718-10 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 FASB ASC 718-10, operations were charged $18,444
and $36,149 and $12,546 and $24,766 for three and six months ended September 30,
2009 and 2008, 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 2.09%
to 2.74%, volatility at 38.71% to 43.06%, and an expected life of 5 years for
the six months ended September 30, 2009; expected dividend yield of 0.0%,
risk-free interest rate of 2.26% to 3.16%, volatility at 37.96% to 39.14%, and
an expected life of 5 years for the six months ended September 30, 2008. 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%.
8
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 Financial Accounting Standards Board ("FASB") ASC
280-10 (Prior authoritative Financial 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 September 30, 2009 and 2008:
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
September 30, 2009 Gov't Comm'l. Total Items Total
------------------ ----- ------- ----- ----- -----
Net sales $ 1,798,305 $ 586,049 $ 2,384,354 $ 2,384,354
Cost of sales 788,216 371,889 1,160,105 1,160,105
----------- ----------- ----------- -----------
Gross margin 1,010,089 214,160 1,224,249 1,224,249
----------- ----------- ----------- -----------
Engineering, research, & dev. 815,203 815,203
Selling, general, and admin. 362,500 $ 348,218 710,718
Interest expense, net 11,403 - 11,403
----------- ----------- -----------
Total expenses 1,189,106 348,218 1,537,324
----------- ----------- -----------
Income (loss) from continuing
operations before taxes $ 35,143 $ (348,218) $ (313,075)
=========== =========== ===========
Segment assets $ 4,231,418 $ 386,498 $ 4,617,916 $ 1,387,316 $ 6,005,232
=========== =========== =========== =========== ===========
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
September 30, 2008 Gov't Comm'l. Total Items Total
------------------ ----- ------- ----- ----- -----
Net sales $ 3,356,533 $498,588 $ 3,855,121 $ 3,855,121
Cost of sales 1,424,221 _291,413 1,715,634 1,715,634
----------- ----------- ----------- -----------
Gross margin 1,932,312 207,175 2,139,487 2,139,487
----------- ----------- ----------- -----------
Engineering, research, & dev. 713,853 713,853
Selling, general, and admin. 370,461 $ 393,323 763,784
Interest expense, net 11,653 -- 11,653
----------- ----------- -----------
Total expenses 1,095,967 393,323 1,489,290
----------- ----------- -----------
Income (loss) from continuing
operations before taxes 1,043,520 $ (393,323) $ 650,197
=========== =========== ===========
Segment assets $ 5,185,267 $ 698,971 $ 5,884,238 $ 2,213,587 $ 8,097,825
=========== =========== =========== =========== ===========
9
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 7 Segment Information (continued)
------ -------------------------------
Six Months Ended Avionics Avionics Avionics Corporate
---------------- -------- -------- -------- ---------
September 30, 2009 Gov't Comm'l. Total Items Total
------------------ ----- ------- ----- ----- -----
Net sales $ 3,689,545 $ 1,020,564 $ 4,710,109 $ 4,710,109
Cost of sales 1,762,441 655,330 2,417,771 2,417,771
----------- ----------- ----------- -----------
Gross margin 1,927,104 365,234 2,292,338 2,292,338
----------- ----------- ----------- -----------
Engineering, research, & dev. 1,748,075 1,748,075
Selling, general, and admin. 860,893 $ 657,073 1,517,966
Interest expense, net 18,506 -- 18,506
----------- ----------- -----------
Total expenses 2,627,474 657,073 3,284,547
----------- ----------- -----------
Income (loss) from continuing
operations before taxes $ (335,136) $ (657,073) $ (992,209)
=========== =========== ===========
Six Months Ended Avionics Avionics Avionics Corporate
---------------- -------- -------- -------- ---------
September 30, 2008 Gov't Comm'l. Total Items Total
------------------ ----- ------- ----- ----- -----
Net sales $ 6,317,129 $ 1,089,967 $ 7,407,096 $ 7,407,096
Cost of sales 3,165,417 613,262 3,778,680 3,778,680
----------- ----------- ----------- -----------
Gross margin 3,151,712 476,705 3,628,416 3,628,416
----------- ----------- ----------- -----------
Engineering, research, & dev. 1,449,004 1,449,004
Selling, general, and admin. 756,025 $ 716,117 1,472,142
Interest income, net 22,782 -- 22,782
----------- ----------- -----------
Total expenses 2,227,811 716,117 2,943,928
----------- ----------- -----------
Income (loss) from continuing
operations before taxes $ 1,400,605 $ (716,117) $ 684,488
=========== =========== ===========
Note 8 Income Taxes
------ ------------
The Company adopted the provisions of FASB ASC 718-10 (formerly 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 does not have any unrecognized tax benefits.
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 September 30, 2009 and March
31, 2009 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.
10
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 9 Fair Value Measurements
------ -----------------------
On September 2006, the FASB issued FASB ASC 820-10, which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The provisions of FASB ASC 820-10 were effective April
1, 2008.
As defined in FASB ASC 820-10, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The Company utilizes
market data or assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and the risks inherent in
the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable. The Company classifies fair
value balances based on the observability of those inputs. FASB ASC 820-10
establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (level 1 measurement) and
the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by FASB ASC 820-10 are as
follows:
Level 1 - Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. Active markets are those in which
transactions for the asset or liability occur in sufficient frequency and volume
to provide pricing information on an ongoing basis. Level 1 primarily consists
of financial instruments such as exchange-traded derivatives, marketable
securities and listed equities.
Level 2 - Pricing inputs are other than quoted prices in active markets included
in level 1, which are either directly or indirectly observable as of the
reported date. Level 2 includes those financial instruments that are valued
using models or other valuation methodologies. These models are primarily
industry-standard models that consider various assumptions, including quoted
forward prices for commodities, time value, volatility factors, and current
market and contractual prices for the underlying instruments, as well as other
relevant economic measures. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels at which
transactions are executed in the marketplace. Instruments in this category
generally include non-exchange-traded derivatives such as commodity swaps,
interest rate swaps, options and collars.
Level 3 - Pricing inputs include significant inputs that are generally less
observable from objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of fair value.
Cash, accounts receivable, accounts payable, and accrued expenses reflected in
the consolidated balance sheets are a reasonable estimate of their fair value
due to the short-term nature of these instruments. The carrying value of the
Company's short-term borrowings is a Reasonable estimate of their fair value as
borrowings under the Company's credit facility have variable rates that reflect
currently available terms and conditions for similar debt. As of September 30,
2009 and March 31, 2009, the Company did not have any financial assets and
liabilities measured at fair value on a recurring basis that would be subject to
the disclosure provisions of FASB ASC 820-10.
11
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 10 Discontinued Operations
------- -----------------------
In fiscal year 2008, the Board of Directors approved discontinuing the Company's
marine systems division. 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 reflect sales, costs and expenses, and loss from
discontinued operations, net of taxes for the three and six months ended
September 30, 2009 and 2008, respectively.
----------------------------------------------------------------------------------------------------------
Three Months Three Months
------------ ------------
Ended Ended
----- -----
September 30, 2009 September 30, 2008
------------------ ------------------
--------------------------------------------------------- ----------------------- ------------------------
Discontinued Operations:
--------------------------------------------------------- ----------------------- ------------------------
Sales $ 26,757 $105,095
--------------------------------------------------------- ----------------------- ------------------------
Costs and expenses 15,794 30,459
--------------------------------------------------------- ----------------------- ------------------------
Income from operations of discontinued operations 10,963 74,636
--------------------------------------------------------- ----------------------- ------------------------
Income tax provision 4,380 29,817
--------------------------------------------------------- ----------------------- ------------------------
Income from discontinued operations $ 6,583 $ 44,819
--------------------------------------------------------- ----------------------- ------------------------
--------------------------------------------------------- ----------------------- ------------------------
Six Months Six Months
---------- ----------
Ended Ended
----- -----
September 30, 2009 September 30, 2008
------------------ ------------------
--------------------------------------------------------- ----------------------- ------------------------
Discontinued Operations:
--------------------------------------------------------- ----------------------- ------------------------
Sales $ 43,201 $ 186,601
--------------------------------------------------------- ----------------------- ------------------------
Costs and expenses 33,754 74,629
--------------------------------------------------------- ----------------------- ------------------------
Income from operations of discontinued operations 9,447 111,972
--------------------------------------------------------- ----------------------- ------------------------
Income tax provision 3,774 44,733
--------------------------------------------------------- ----------------------- ------------------------
Income from discontinued operations $ 5,673 $ 67,239
--------------------------------------------------------- ----------------------- ------------------------
Note 11 Reclassifications
Certain prior year and period amounts have been reclassified to conform to the
current period presentation.
12
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 12 Litigation
On March 24, 2009, Aeroflex Wichita, Inc. ("Aeroflex") filed a petition against
the Company and two of its employees in the District Court, Sedgwick County,
Kansas, Case No. 09 CV 1141 (the "Aeroflex Action"), alleging that the Company
and two of its employees misappropriated Aeroflex's proprietary technology in
connection with the Company winning a substantial contract from the U.S. Army
(the "Award"), to develop new Mode-5 radar test sets and kits to upgrade the
existing TS-4530 radar test sets to Mode 5. Aeroflex's petition alleges that in
connection with the award, the Company and its named employees misappropriated
Aeroflex's trade secrets; tortiously interfered with its business relationship;
conspired to harm Aeroflex and tortiously interfered with its contract and seeks
injunctive relief and damages. The gravamen of all the claims in the Aeroflex
Action is that the Company misappropriated and used Aeroflex proprietary
technology in winning the Award.
In February 2009, subsequent to the Award to the Company, Aeroflex filed a
protest of the Award with the Government Accounting Office ("GAO"). In its
protest, Aeroflex alleged, inter alia, that the Company used Aeroflex's
proprietary technology in order to win the Award, the same material allegations
as were later alleged in the Aeroflex Action. On or about March 17, 2009, the
Army Contracts Attorney and the Army Contracting Officer each filed a statement
with the GAO, expressly rejecting Aeroflex's allegations that the Company used
or infringed Aeroflex proprietary technology in winning the Award, and
concluding that the Company had used only its own proprietary technology. On
April 6, 2009, Aeroflex withdrew its protest.
The Aeroflex civil claim is currently in the jurisdiction phase. Based, among
other things, on Tel's knowledge of the technology involved and the Army's
detailed and emphatic refutation of Aeroflex's allegations, Tel believes that
Aeroflex's claims are without merit. However, Tel has incurred and anticipates
that it will incur substantial legal fees in connection with the litigation, and
these costs will have an adverse effect on its results of operations for the
fiscal year ending March 31, 2010.
Note 13 New Accounting Pronouncements
------- -----------------------------
In December 2007, the FASB issued FASB ASC 805-10 Prior authoritative
literature: SFAS No 141(R), "Business Combinations.)" This statement provides
new accounting guidance and disclosure requirements for business combinations.
FASB ASC 805-10 is effective for business combinations which occur in the first
fiscal year beginning on or after December 15, 2008. The adoption of FASB ASC
805-10 did not have an impact on the Company's consolidated financial statements
or financial position, but the nature and magnitude of any specific effects in
the future will depend upon the nature, terms and size of any acquisitions the
Company consummates after the effective date.
13
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 13 New Accounting Pronouncements (continued)
------- -----------------------------------------
In March 2008, the FASB issued FASB ASC 808-10 (Prior authoritative literature:
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. FASB ASC 808-10 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. FASB ASC 808-10 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. FASB ASC 808-101 encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company adopted this standard effective January 1, 2009. The implementation of
this standard did not impact the disclosures related to the Company's
consolidated financial statements.
In April 2009, the FASB issued FASB ASC 825-10 (Prior authoritative literature:
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. FASB ASC 825-10 requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. FASB ASC 825-10 requires those disclosures in
summarized financial information at interim reporting periods. FASB ASC 825-10
was effective for interim and annual reporting periods ending after June 15,
2009. The Company made the disclosures required by this statement.
In April 2009, the FASB issued FASB ASC 825-10 (Prior authoritative literature:
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly). FASB ASC 825-10 provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. FASB ASC 825-10 also includes guidance
on identifying circumstances that indicate a transaction is not orderly. FASB
ASC 825-10 emphasizes that even if there has been a significant decrease in the
volume and level of activity for the asset or liability and regardless of the
valuation technique(s) used, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. FASB ASC 825-10 was effective for interim
and annual reporting periods ending after June 15, 2009, and is applied
prospectively. The Company's adoption of FASB ASC 825-10 did not have an impact
on the Company's condensed consolidated financial statements.
14
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 13 New Accounting Pronouncements (continued)
------- -----------------------------------------
In June 2009, the FASB issued FASB ASC 105 -10 (Prior authoritative literature:
SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of
Generally Accepted Accounting Principles (GAAP), a replacement of FASB Statement
No. 162). FASB ASC 105 -10 establishes the FASB Standards Accounting
Codification ("Codification") as the source of authoritative GAAP recognized by
the FASB to be applied to nongovernmental entities. The only other source of
authoritative GAAP is the rules and interpretive releases of the SEC which only
apply to SEC registrants. The Codification will supersede all the existing
non-SEC accounting and reporting standards upon its effective date. Since the
issuance of the Codification is not intended to change or alter existing GAAP,
adoption of this statement did not have an impact on the Company's financial
position or results of operations, but will change the way in which GAAP is
referenced in the Company's financial statements. FASB ASC 105 -10 is effective
for interim and annual reporting periods ending after September 15, 2009, and
the Company has complied with this pronouncement.
In May 2009, the FASB issued FASB ASC 855 -10, Subsequent Events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. The Company adopted FASB ASC 855 -10
effective April 1, 2009 and has evaluated subsequent events after the balance
sheet date of September 30, 2009 through the date the financial statements were
issued, November 16, 2009.
In October 2009, the FASB issued Accounting Standards Update 2009-13, "Revenue
Recognition (Topic 605)". This Update provides amendments to the criteria in
Subtopic 605-24 for separating consideration in multiple-deliverable revenue
arrangements. It establishes a hierarchy of selling prices to determine the
selling price of each specific deliverable which includes vendor-specific
objective evidence (if available), third-party evidence (if vendor-specific
evidence is not available), or estimated selling price if neither of the first
two are available. This Update also eliminates the residual method for
allocating revenue between the elements of an arrangement and requires that
arrangement consideration be allocated at the inception of the arrangement.
Finally, this Update expands the disclosure requirements regarding a vendor's
multiple-deliverable revenue arrangements. This Update is effective for fiscal
years beginning on or after June 15, 2010. We do not anticipate any material
impact from this Update.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
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, including statements regarding litigation, 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; changes in 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 on repairs and calibrations are recognized at the time the repaired or
calibrated unit is shipped, as it is at the time that the work is completed.
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.
Revenues and profits are estimated using the cost-to-cost method of accounting
where revenues are recognized and profits recorded based upon the ratio of costs
incurred to date to our estimate of total costs at completion. The ratio of
costs incurred to our estimate of total costs at completion is applied to the
contract value to determine the revenues and profits. When adjustments in
estimated contract revenues or estimated costs at completion are required, any
changes from prior estimates are recognized by recording adjustments in the
current period for the inception-to-date effect of the changes on current and
prior periods. 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. These progress payments are applied to
Accrued Receivables resulting from revenues recognized under
percentage-of-completion accounting.
Shipping and handling costs charged to customers are classified as revenue, and
the shipping and handling costs incurred are included in cost of goods sold.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues.
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
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.
While such estimates have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.
Warranty 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 arise from a variety of sources, the most
significant being: a) tax losses that can be carried forward to be utilized
against profits in future years; b) expenses recognized in the books but
disallowed in the tax return until the associated cash flow occurs; and c)
valuation changes of assets which need to be tax effected for book purposes but
are taxable only when the valuation change is realized. 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 are expected to 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. In assessing the need for a valuation allowance, future taxable income
is estimated, considering the realization of tax loss carryforwards. Valuation
allowances related to deferred tax assets can also be affected by changes to tax
laws, changes to statutory tax rates and future taxable income levels. In the
event it is determined that the Company would not be able to realize all or a
portion of our deferred tax assets in the future, we would reduce such amounts
through a charge to income in the period in which that determination is made.
Conversely, if we were to determine that we would be able to realize our
deferred tax assets in the future in excess of the net carrying amounts, we
would decrease the recorded valuation allowance through an increase to income in
the period in which that determination is made. In its evaluation of a valuation
allowance the Company takes into account existing contracts and backlog, and the
probability that options under these contract awards will be exercised as well
as sales of existing products. The Company prepares profit projections based on
the revenue and expenses forecast to determine that such revenues will produce
sufficient taxable income to realize the deferred tax assets.
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
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 and in Management's Discussion and
Analysis in the Company's Annual Report on Form 10-K for the year ended March
31, 2009.
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 10 to Financial Statements).
Overview
--------
As projected in our Form 10-K for the year ended March 31, 2009, sales and
profits in the first half of the current fiscal year declined materially because
of the difficult economic environment, delays in several major anticipated
government orders, the increased new product engineering costs, and the
increased legal and professional fees. The Company believes that substantial
production and delivery of products will commence in the second half of this
fiscal year, and the financial situation for the Company will improve. The
Company expects to be profitable in the fourth quarter of this fiscal year and
in the next fiscal year.
During the first six months of the current fiscal year, the Company's sales fell
36% as compared to the same period last year, and the Company recorded a net
loss from continuing operations before taxes of $992,000 as compared to $684,488
in net income from continuing operations before taxes in the prior year.
The current fiscal year will be a challenge as the commercial avionics market
shows no signs of improvement and military sales have been impacted by delays in
the receipt of several expected large orders, as well as some delay in
completion of our existing programs. The Company continues to make substantial
engineering investments in the AN/USM-708 and the recently awarded TS-4530A
programs. TEL has experienced delays on two of its major programs (AN/USM-708
and AN/ARM-206) that have collectively increased development cost and time and
delayed production shipments and revenues. During the second half of this fiscal
year, revenues are expected to increase due to anticipated shipments of the
AN/APM-719 as well as the receipt of anticipated government orders which have
been delayed, and the Company should be profitable in the fourth quarter of the
current fiscal year. In November 2009, the Company received an order for
approximately $2.4 million for its AN/ASM-719 and AN/USM-708. Shipments of the
AN/APM-719 will commence in the 3rd quarter of the current fiscal year.
Over the last few years TEL was awarded three major government contracts
totaling over $80 million of potential orders, which it won competitively. Upon
completion of our engineering development on these major programs, TEL has the
ability to substantially increase the size and profitability of our business
over the next 18 months as production deliveries of the AN/USM-708, AN/APM-206
and TS-4530A are expected to commence in volume, and engineering costs should
also decline.
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Overview (continued)
--------------------
On July 28, 2009, Tel was notified by the AIMS Program Office that its
AN/USM-719 Mode 5 test set has been officially certified for Mode 5 system
integration purposes. This is a major accomplishment as this represents the
first Mode 5 flight-line test set certified by AIMS (the DoD Agency in charge of
IFF system certification), and the culmination of a multi-year, multi-million
investment by the Company in Mode 5 technology and will provide a significant
competitive advantage in the years to come as the U.S. and our NATO allies
migrate to this leading edge IFF technology. To our knowledge, Tel is the only
company with AIMS certified Mode 5 flight-line test sets.
At September 30, 2009 the Company's backlog stood at approximately $18.3 million
as compared to approximately $10 million at September 30, 2008. The backlog at
September 30, 2009 includes only the amount of currently exercised delivery
orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and is
expected to materially increase when the volume production orders for the two
large Navy contracts are received. Historically, the Company obtains a
substantial volume of orders which are required to be filled in less than twelve
months, and, therefore, these anticipated orders are not reflected in the
backlog. The Company has received approximately $14.9 million in orders related
to the TS-4530A program, and this amount is included in the backlog at September
30, 2009.
On March 24, 2009, Aeroflex Wichita, Inc. ("Aeroflex") filed a civil claim
against the Company and two of its employees in the District Court, Sedgwick
County, Kansas, Case No. 09 CV 1141 (the "Aeroflex Action"), alleging that the
Company and two of its employees misappropriated Aeroflex's proprietary
technology in connection with TEL winning the Army TS-4530A contract. Many of
these same claims were included in Aeroflex's previous, formal Protest of the
Contract award which it filed with the U.S. Government Accounting Office
("GAO"), and which the Company denied. On or about March 17, 2009, the Army
Contracts Attorney and the Army Contracting Officer each filed a statement with
the GAO, expressly rejecting Aeroflex's allegations that the Company used or
infringed Aeroflex proprietary technology in winning the Award, and concluding
that the Company had used only its own proprietary technology. On April 6, 2009,
Aeroflex withdrew its GAO Protest, but continued the civil litigation. The
Aeroflex civil claim is currently in the jurisdiction phase. (See Note 12 to the
Financial Statements)
While TEL is contesting Aeroflex's claims, and is confident about the ultimate
successful outcome of the litigation, the Company anticipates that it will incur
legal fees in connection with the litigation, which have had and will have an
adverse effect on its results of operations for the fiscal year ending March 31,
2010.
The Company has increased its capital and liquidity in the last six months in
order to fund the operating losses in the first two quarters of this fiscal
year, and the anticipated increase in production and sales in the last two
quarters. See Liquidity and Capital Resources below.
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Sales
-----
For the quarter ended September 30, 2009, total sales decreased $1,470,767
(38.2%) to $2,384,354 as compared to $3,855,121 for the same quarter in the
prior year. Avionics Government sales decreased $1,558,228 (46.4%) to $1,798,305
for the period as compared to $3,356,533 for the same period last year. The
decrease in Avionics Government sales is primarily attributed to: a decrease in
shipments of the T-47N, AN/APM-719, TR-401, and T-76 as well as sales associated
with the ITATS, which are recognized on a percentage of completion as the
initial phase of the programs nears completion. Additionally, the second quarter
of the prior fiscal year included a negotiated billing to the government in the
amount of $406,000 for additional work previously performed and expensed on the
CRAFT program as well as increased billings for revenues associated with the
test and documentation phase of the CRAFT program. Government sales have been
impacted by delays in the receipt of several expected large orders as well as in
the completion of two of its major programs. These decreases were partially
offset by higher sales of the TR-420 and the T-47G. Commercial sales increased
$87,461 (17.5%) to $586,049 for the three months ended September 30, 2009 as
compared to $498,588 in the same period in the prior year. The increase in sales
is only the result of the timing of orders and is not a trend that the Company
expects to continue.
For the six months ended September 30, 2009, total sales decreased $2,696,987
(36.4%) to $4,710,109 as compared to $7,407,096 for the same period in the prior
year. Avionics Government sales decreased $2,627,584 (41.6%) to $3,689,545 for
the period as compared to $6,317,129 for the same period last year. The decrease
in Avionics Government sales is primarily attributed to: a decrease in shipments
of the T-47N, T-30D, TR-401, T-76, T-47G as well as sales associated with the
ITATS, which are recognized on a percentage of completion as the initial phase
of the programs nears completion. Additionally, the first six months of the
prior fiscal year included a negotiated billing to the government in the amount
of $406,000 for additional work previously performed and expensed on the CRAFT
program as well as increased billings for revenues associated with the test and
documentation phase of the CRAFT program. Government sales have been impacted by
delays in the receipt of several expected large orders as well as in the
completion of two of its major programs. These decreases were partially offset
by higher sales of the TR-420, T-30CM, AN/APM-719 and the T-760. Commercial
sales decreased $69,403 (6.4%) to $1,020,564 for the six months ended September
30, 2009 as compared to $1,089,967 in the same period in the prior year. This
decrease in sales is a result of the continued weak condition of the commercial
airline industry.
Gross Margin
------------
Gross margin decreased $915,238 (42.8%) to $1,224,249 for the quarter ended
September 30, 2009 as compared to $2,139,487 for the same quarter in the prior
fiscal year. The decrease in gross margin is primarily attributed to the
decrease in volume. The gross margin percentage for the quarter ended September
30, 2009 was 51.3% as compared to 55.5% for the quarter ended September 30,
2008. The decrease in gross margin dollars and percentage is also attributed to
a negotiated billing in the second quarter of the prior year to the government
in the amount of $406,000 for additional work previously performed and expensed
on the CRAFT program.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Gross Margin (continued)
------------------------
Gross margin decreased $1,336,078 (36.8%) to $2,292,338 for the six months ended
September 30, 2009 as compared to $3,628,416 for the same period in the prior
fiscal year. The decrease in gross margin is primarily attributed to the
decrease in volume. The gross margin percentage for the six months ended
September 30, 2009 was 48.7% as compared to 49% for the six months ended
September 30, 2008. The decrease in gross margin dollars and percentage is also
attributed to a negotiated billing in the second quarter of the prior year to
the government in the amount of $406,000 for additional work previously
performed and expensed on the CRAFT program.
Operating Expenses
------------------
Selling, general and administrative expenses decreased $53,066 (6.9%) to
$710,718 for the quarter ended September 30, 2009, as compared to $763,784 for
the quarter ended September 30, 2008. This decrease is attributed mainly to
lower bonus accrual and travel expenses offset partially by an increase in legal
fees associated with the litigation (see Note 12 to the Financial Statements).
Selling, general and administrative expenses increased $45,824 (3.1%) to
$1,517,966 for the six months ended September 30, 2009, as compared to
$1,472,142 for the six months ended September 30, 2008. This increase is
attributed mainly to an increase in legal fees associated with the litigation
(see Note 12 to the Financial Statements), and professional fees offset
partially by lower outside commissions and lower bonus accrual expense.
Engineering, research and development expenses increased $101,350 (14.2%) to
$815,203 and $299,071 (20.6%) to $1,748,075 for the three months and six months
ended September 30, 2009 as compared to $713,853 and $1,449,004 for the three
and six months ended September 30, 2008. Engineering, research and development
expenses are mostly attributed to engineering costs related to the CRAFT and
TS-4530 programs.
Interest, net
-------------
Interest expense decreased for the three and six months ended September 30, 2009
primarily as a result of lower interest rates.
Income (Loss) from Continuing Operations before Income Taxes
------------------------------------------------------------
As a result of the above, the Company recorded losses from continuing operations
before income taxes of $313,075 and $992,209 for the three and six months ended
September 30, 2009 as compared to income from continuing operations before
income taxes of $650,197 and $684,488 for the three and six months ended
September 30, 2008.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Income Taxes
------------
Income tax benefits in the amounts $125,074 and $396,387 were recorded for the
three and six months ended September 30, 2009 as compared to income tax
provisions in the amounts of $304,365 and $318,065 for the three and six months
ended September 30, 2008. The change is due to the losses before taxes for the
three and six months ended September 30, 2009 as compared to income before taxes
for the three and six months ended September 30, 2008. These amounts represent
the effective federal and state tax rate of approximately 40% on the Company's
net income or loss before taxes.
Net Income (Loss) from Continuing Operations, Net of Taxes
----------------------------------------------------------
As a result of the above, the Company recorded net losses from continuing
operations, net of taxes of $188,001 and $595,822 for the three and six months
ended September 30, 2009 as compared to net income from continuing operations,
net of taxes of $345,832 and $366,423 for the three and six months ended
September 30, 2008.
Income from Discontinued Operations, Net of taxes
--------------------------------------------------
For the three and six months ended September 30, 2009, the Company recorded
income from discontinued operations, net of taxes, of $6,583 and $5,673,
respectively, as compared to income from discontinued operations, net of taxes,
of $44,819 and $67,239, respectively, for the three and six months ended
September 30, 2008, primarily as a result of the lower sales volume. See Note 10
to the Financial Statements.
Net Income (Loss)
-----------------
As a result of the above, the Company recorded net losses of $181,418 and
$590,149 for the three and six months ended September 30, 2009 as compared to
recording net income of $390,651 and $443,662 for the three and six months ended
September 30, 2008.
Liquidity and Capital Resources
-------------------------------
At September 30, 2009, the Company had working capital of $2,935,415 as compared
to $3,284,115 at March 31, 2009. For the six months ended September 30, 2009,
the Company used $808,001 in cash for operations as compared to $146,861 for the
six months ended September 30, 2008. This increase in cash used in operations is
primarily attributed to the operating loss for the period and the decrease in
accrued expenses partially offset by the decrease in inventories.
Net cash used in investing activities was $16,108 for the six months ended
September 30, 2009 as compared to $57,730 for the six months ended September 30,
2008 due to the decrease in purchases of equipment.
Net cash provided by financing activities increased to $679,885 for the six
months ended September 30, 2009 from $213,358 for the six months ended September
30, 2008 primarily due to proceeds from the sale of new common stock and the
proceeds from the exercise of stock options, discussed below.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
At September 30, 2009 the Company's backlog stood at approximately $18.3 million
as compared to approximately $10.0 million at September 30 2008. The backlog at
September 30, 2009 includes only the amount of currently exercised delivery
orders on open IDIQ (indefinite delivery/indefinite quantity) contracts, and is
expected to materially increase when the volume production orders for the two
large Navy contracts are received. Historically, the Company obtains a
substantial volume of orders which are required to be filled in less than twelve
months, and, therefore, these anticipated orders are not reflected in the
backlog. Approximately $14.3 million in orders is related to the TS-4530A
program, and this amount is included in the backlog at September 30, 2009.
In order to ensure adequate funding, in light of the losses in the first two
quarters, and of the anticipated increasing production and sales in the last two
quarters, the Company increased its borrowing under its bank credit agreement by
$150,000 to $600,000 and raised an additional $520,000 of capital from
Directors, through a combination of sales of new shares and the exercise of
previously granted stock options. All other shareholders were given the
opportunity to purchase additional shares of stock at the same price paid by the
directors, but none chose to participate. See Part II, Item 2, below.
The Company has an additional $248,000 available to borrow under its bank credit
agreement at September 30, 2009 and is currently discussing with the bank
another annual extension of that agreement until September 30, 2010. The bank
has agreed to annual extensions for several years, and the Company is confident
that the agreement will be extended to September 30, 2010.
Based on its substantial backlog, the additional capital raised from the
directors, and the available amount under its bank agreement, the Company
believes that it has adequate liquidity for at least the next twelve months.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 2009. 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, 2009.
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.
23
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.
Part II. Other Information
-------- -----------------
Item 1. Legal Proceedings
------- -----------------
See discussion in Note 12 to the Financial Statements, and under
M,D&A overview.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
In September 2009, the Company sold 76,000 shares of its Common
Stock at $4.73 per share to certain Directors and Officers of the
Company. All other shareholders were given the opportunity to
participate on the same price, terms and conditions subject to a
minimum share purchase. A mailing was sent to all shareholders,
but no existing shareholders chose to participate. Theses funds
were used for working capital needs.
The shares were sold to the Directors pursuant to the exemption
provided by Section 4 of the Securities Act of 1933 and Regulation
D thereunder. The Directors were accredited investors under Rule
501(a)(4) under the Securities Act of 1933.
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.
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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: November 16, 2009 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
CEO
Date: November 16, 2009 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
25