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 December 31, 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:
2,613,861 shares of Common stock, $.10 par value as of February 12, 2010.
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
TABLE OF CONTENTS
-----------------
PAGE
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
December 31, 2009 and March 31, 2009 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 2009 and 2008 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2009 and 2008 3
Notes to Condensed Consolidated Financial Statements 4-13
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 14-22
Item 4. Controls and Procedures 22
Part II - Other Information
Item 1. Legal Proceedings 22
Item 2. Unregistered sales of Equity Securities and Use of Proceeds 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits 23
Signatures 23
Certifications
i
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
-------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
December 31, March 31,
------------ ---------
2009 2009
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 138,640 $ 601,887
Accounts receivable, net 1,165,751 1,516,698
Unbilled government receivables 1,423,859 1,265,470
Inventories, net 1,899,814 2,206,546
Prepaid expenses and other 74,881 90,509
Deferred income tax asset 842,907 461,631
----------- -----------
Total current assets 5,545,852 6,142,741
Equipment and leasehold improvements, net 341,364 437,974
Deferred income tax asset - non-current 1,248,800 852,413
Other assets 71,214 72,261
----------- -----------
Total assets $ 7,207,230 $ 7,505,389
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit 600,000 450,000
Accounts payable 909,801 456,343
Deferred revenues 33,454 21,891
Accrued payroll, vacation pay and payroll taxes 343,064 326,202
Accrued expenses 1,219,022 1,604,190
----------- -----------
Total current liabilities 3,105,341 2,858,626
Deferred revenues 32,888 43,243
----------- -----------
Total liabilities 3,138,229 2,901,869
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,612,861
and 2,478,761 issued and outstanding as of
December 31, 2009 and March 31, 2009, respectively 261,286 247,876
Additional paid-in capital 5,415,822 4,801,272
Accumulated deficit (1,608,107) (445,628)
----------- -----------
Total stockholders' equity 4,069,001 4,603,520
----------- -----------
Total liabilities and stockholders' equity $ 7,207,230 $ 7,505,389
=========== ===========
See accompanying notes to condensed consolidated financial
statements
1
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31, December 31, December 31,
------------ ------------ ------------ ------------
2009 2008 2009 2008
---- ---- ---- ----
Net sales $ 1,633,971 $ 2,915,428 $ 6,344,080 $ 10,322,524
Cost of sales 949,442 1,490,161 3,367,213 5,268,841
------------ ------------ ------------ ------------
Gross margin 684,529 1,425,267 2,976,867 5,053,683
Operating expenses:
Selling, general and administrative 740,250 709,534 2,258,216 2,181,676
Engineering, research and development 924,044 684,017 2,672,119 2,133,021
------------ ------------ ------------ ------------
Total operating expenses 1,664,294 1,393,551 4,930,335 4,314,697
------------ ------------ ------------ ------------
Operation income (loss) from continuing
Operations (979,765) 31,716 (1,953,468) 738,986
Interest income (expense):
Interest income 209 1,710 702 3,783
Interest expense (15,419) (11,248) (34,418) (36,103)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
Before income taxes (994,975) 22,178 (1,987,184) 706,666
Income tax provision (benefit) (397,493) 8,861 (793,880) 326,926
------------ ------------ ------------ ------------
Net income (loss) from continuing
operations (597,482) 13,317 (1,193,304) 379,740
Income from discontinued operations,
net of income taxes 25,152 3,317 30,825 70,556
------------ ------------ ------------ ------------
Net income (loss) $ (572,330) $ 16,634 $ (1,162,479) $ 450,296
============ ============ ============ ============
Income (loss) from continuing operations
Basic income (loss) per common share $ (0.23) $ 0.01 $ (0.47) $ 0.16
============ ============ ============ ============
Diluted income (loss) per common share $ (0.23) $ 0.01 $ (0.47) $ 0.15
============ ============ ============ ============
Income from discontinued operations,
Net of income taxes:
Basic income per common share $ 0.01 $ 0.00 $ 0.01 $ 0.03
============ ============ ============ ============
Diluted income per common share $ 0.01 $ 0.00 $ 0.01 $ 0.03
============ ============ ============ ============
Net Income (loss):
Basic income (loss) per common share $ (0.22) $ 0.01 $ (0.46) $ 0.18
============ ============ ============ ============
Diluted income (loss) per common share $ (0.22) $ 0.01 $ (0.46) $ 0.18
============ ============ ============ ============
Weighted average shares outstanding:
Basic 2,605,148 2,452,718 2,529,752 2,443,854
Diluted 2,605,148 2,481,218 2,529,752 2,472,354
See accompanying notes to condensed consolidated financial
statements
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
Nine Months Ended
-----------------
December 31, December 31,
------------ ------------
2009 2008
---- ----
Cash flows from operating activities:
Net income (loss) $(1,162,479) $ 450,296
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (777,663) 308,463
Depreciation 133,263 140,474
Non-cash stock-based compensation 55,135 38,971
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 350,947 (1,080,980)
Increase in unbilled government receivables (158,389) (210,916)
Decrease (increase) in inventories 306,732 (435,013)
Decrease in prepaid expenses & other current assets 15,628 82,858
Decrease in other assets 1,047 1,080
Increase (decrease) in accounts payable 453,458 (8,482)
Increase (decrease) in accrued payroll, vacation pay
and payroll taxes 16,862 (39,488)
Increase (decrease) in deferred revenues 1,208 (5,655)
(Decrease) increase in accrued expenses (385,168) 357,516
----------- -----------
Net cash used in operating activities (1,149,419) (400,876)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (36,653) (81,301)
----------- -----------
Net cash used in investing activities (36,653) (81,301)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of common stock 359,470 --
Proceeds from the exercise of stock options 213,355 64,730
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 722,825 232,308
----------- -----------
Net decrease in cash and cash equivalents (463,247) (249,869)
Cash and cash equivalents at beginning of period 601,887 469,906
----------- -----------
Cash and cash equivalents at end of period $ 138,640 $ 220,037
=========== ===========
Taxes paid $ 3,990 $ 20,790
=========== ===========
Interest paid $ 15,406 $ 23,178
=========== ===========
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 December 31, 2009,
the results of operations for the three and nine months ended December 31, 2009
and December 31, 2008, and statements of cash flows for the nine months ended
December 31, 2009 and December 31, 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. This
contract is nearing completion and a major portion of the revenues associated
with this program have been recognized. 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 Unbilled Government 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:
December 31, March 31,
------------ ---------
2009 2009
---- ----
Government $ 955,807 $ 1,199,989
Commercial 249,862 357,013
Less: Allowance for doubtful accounts (39,918) (40,304)
------------ ------------
$ 1,165,751 $ 1,516,698
============ ============
4
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 4 Inventories, net
Inventories consist of:
December 31, March 31,
------------ ---------
2009 2009
---- ----
Purchased parts $ 1,175,103 $ 1,534,184
Work-in-process 946,174 918,038
Finished goods 178,537 104,243
Less: Inventory reserve (400,000) (349,919)
------------ ------------
$ 1,899,814 $ 2,206,546
============ ============
Note 5 Earnings Per Share
------ ------------------
Financial Accounting Standards Board ("FASB") ASC 260 (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 December
31, 2009 do not include common stock equivalents, as these stock equivalents
would be anti-dilutive.
Three Months Ended Three Months Ended
------------------ ------------------
December 31, 2009 December 31, 2008
----------------- -----------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ (572,330) $ 16,634
Weighted-average common shares outstanding 2,605,148 2,452,718
Basic net income(loss) per share attributable to common
Stockholders $ (0.22) $ 0.01
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders $ (572,330) $ 16,634
Weighted-average common shares outstanding 2,605,148 2,452,718
Incremental shares attributable to the assumed exercise of
outstanding stock options -- 28,500
Total adjusted weighted-average shares 2,605,148 2,481,218
Diluted net income(loss) per share attributable to common
stockholders $ (0.22) $ 0.01
5
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 5 Earnings Per Share (continued)
------ ------------------------------
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2009 December 31, 2008
----------------- -----------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ (1,162,479) $ 450,296
Weighted-average common shares outstanding 2,529,752 2,443,854
Basic net income(loss) per share attributable to common
Stockholders $ (0.46) $ 0.18
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders $ (1,162,479) $ 450,296
Weighted-average common shares outstanding 2,529,752 2,443,854
Incremental shares attributable to the assumed exercise of
outstanding stock options -- 28,500
Total adjusted weighted-average shares 2,529,752 2,472,354
Diluted net income(loss) per share attributable to common
stockholders $ (0.46) $ 0.18
Note 6 Stock Options
------ -------------
Effective April 1, 2006, the Company adopted the Financial Accounting Standards
Board ("FASB") ASC 718 (Prior authoritative Financial Accounting Standards No.
123R, "Share-Based Payment" ("SFAS 123R")), utilizing the modified prospective
method. FASB ASC 718 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 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, operations were charged $18,986 and $14205 for
the three months ended December 31, 2009 and 2008, respectively, and $55,085 and
$38,971 for the nine months ended December 31, 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
37.28% to 43.06%, and an expected life of 5 years for the nine months ended
December 31, 2009; expected dividend yield of 0.0%, risk-free interest rate of
1.07% to 3.16%, volatility at 37.67% to 40.35%, and an expected life of 5 years
for the nine months ended December 31, 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%.
6
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 FASB ASC 280 (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, directly or through distributors. 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 December 31, 2009
and 2008:
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
December 31, 2009 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 1,161,985 $ 471,986 $ 1,633,971 $ 1,633,971
Cost of sales 599,848 349,594 949,442 949,442
------------ ------------ ------------ ------------
Gross margin 562,137 122,392 684,529 684,529
------------ ------------ ------------ ------------
Engineering, research, & dev. 924,044 924,044
Selling, general, and admin. 341,152 $ 399,098 740,250
Interest expense, net 15,210 -- 15,210
------------ ------------ ------------
Total expenses 1,280,406 399,098 1,679.504
------------ ------------ ------------
Income (loss) from continuing
operations before taxes $ (595,877) $ (399,098) $ (994,975)
============ ============ ============
Segment assets $ 3,969,882 $ 519,542 $ 4,489,424 $ 2,717,806 $ 7,207,230
============ ============ ============ ============ ============
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
December 31, 2008 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 2,526,036 $ 389,392 $ 2,915,428 $ 2,915,428
Cost of sales 1,230,636 259,525 1,490,161 1,490,161
------------ ------------ ------------ ------------
Gross margin 1,295,400 129,867 1,425,267 1,425,267
------------ ------------ ------------ ------------
Engineering, research, & dev. 684,017 684,017
Selling, general, and admin. 374,185 $ 335,349 709,534
Interest expense, net 9,538 -- 9,538
------------ ------------- ------------
Total expenses 1,067,740 335,349 1,403,089
------------ ------------- ------------
Income (loss) from continuing
operations before taxes $ 357,527 $ (335,349) $ 22,178
============ ============= ============
Segment assets $ 5,809,904 $ 339,395 $ 6,149,299 $ 1,926,064 $ 8,075,363
============ ============ ============ ============= ============
7
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 7 Segment Information (continued)
------ -------------------------------
Nine Months Ended Avionics Avionics Avionics Corporate
----------------- -------- -------- -------- ---------
December 31, 2009 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 4,851,530 $ 1,492,550 $ 6,344,080 $ 6,344,080
Cost of sales 2,362,290 1,004,923 3,367,213 3,367,213
------------ ------------ ------------ ------------
Gross margin 2,489,240 487,627 2,976,867 2,976,867
------------ ------------ ------------ ------------
Engineering, research, & dev. 2,672,119 2.672,119
Selling, general, and admin. 998,225 $ 1,259,991 2,258,216
Interest expense, net 33,716 -- 33,716
------------ ------------- ------------
Total expenses 3,704,060 1,259,991 4,964,051
------------ ------------- ------------
Income (loss) from continuing
operations before taxes $ (727,193) $ (1,259,991) $ (1,987,184)
============ ============= ============
Nine Months Ended Avionics Avionics Avionics Corporate
----------------- -------- -------- -------- ---------
December 31, 2008 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 8,843,166 $ 1,479,358 $ 10,322,524 $ 10,322,524
Cost of sales 4,396,054 872,787 5,268,841 5,268,841
------------ ------------ ------------ ------------
Gross margin 4,447,112 606,571 5,053,683 5,053,683
------------ ------------ ------------ ------------
Engineering, research, & dev. 2,133,021 2,133,021
Selling, general, and admin. 1,049,281 $ 1,132,395 2,181,676
Interest income, net 32,320 -- 32,320
------------ ------------ ------------
Total expenses 3,214,622 1,132,395 4,347,017
------------ ------------ ------------
Income (loss) from continuing
operations before taxes $ 1,839,061 $ (1,132,395) $ 706,666
============ ============ ============
Note 8 Income Taxes
------ ------------
The Company adopted the provisions of FASB ASC 718 (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 December 31, 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.
8
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, which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The provisions of FASB ASC 820 were effective April 1,
2008.
As defined in FASB ASC 820, 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, when applicable. The Company
classifies fair value balances based on the observability of those inputs. FASB
ASC 820 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 December 31,
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.
9
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 nine months ended
December 31, 2009 and 2008, respectively.
------------------------------------------------------ ----------------------- ------------------------
Three Months Three Months
------------ ------------
Ended Ended
----- -----
December 31, 2009 December 31, 2008
----------------- -----------------
------------------------------------------------------ ----------------------- ------------------------
Discontinued Operations:
------------------------------------------------------ ----------------------- ------------------------
Sales $ 56,489 $ 46,848
------------------------------------------------------ ----------------------- ------------------------
Costs and expenses 14,604 41,325
--------- ---------
------------------------------------------------------ ----------------------- ------------------------
Income from operations of discontinued operations 41,885 5,523
------------------------------------------------------ ----------------------- ------------------------
Income tax provision 16,733 2,206
--------- ---------
------------------------------------------------------ ----------------------- ------------------------
Income from discontinued operations $ 25,152 $ 3,317
========= =========
------------------------------------------------------ ----------------------- ------------------------
------------------------------------------------------ ----------------------- ------------------------
Nine Months Nine Months
----------- -----------
Ended Ended
----- -----
December 31, 2009 December 31, 2008
----------------- -----------------
------------------------------------------------------ ----------------------- ------------------------
Discontinued Operations:
------------------------------------------------------ ----------------------- ------------------------
Sales $ 99,690 $ 233,449
------------------------------------------------------ ----------------------- ------------------------
Costs and expenses 48,358 115,954
--------- ---------
------------------------------------------------------ ----------------------- ------------------------
Income from operations of discontinued operations 51,332 117,495
------------------------------------------------------ ----------------------- ------------------------
Income tax provision 20,507 46,939
--------- ---------
------------------------------------------------------ ----------------------- ------------------------
Income from discontinued operations $ 30,825 $ 70,556
========= =========
------------------------------------------------------ ----------------------- ------------------------
Note 11 Reclassifications
------- -----------------
Certain prior year and period amounts have been reclassified to conform to the
current period presentation.
10
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.
In December 2009, the Kansas court dismissed the Aeroflex civil suit against the
Company. While this decision was based primarily on jurisdictional issues, the
ruling did note that Aeroflex, after discovery proceedings, did not provide any
evidence that Tel or its employees misappropriated Aeroflex trade secrets. The
Kansas ruling also referenced the Army's findings, in its response to the
General Accountability Office ("GAO"), which rejected Aeroflex's claims and
determined that Tel used its own proprietary technology on this program.
Aeroflex has elected to appeal this Kansas decision and has agreed to stay any
action against the two former employees until a decision is reached. Tel remains
confident as to the outcome of this appeal and any potential follow-on
litigation.
However, Tel has incurred 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 June 2009, the FASB issued FASB ASC 105 (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 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 supersedes all the existing non-SEC accounting and
reporting standards upon its effective date. Since the issuance of the
Codification did not 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 is effective for interim and annual reporting
periods ending after September 15, 2009, and the Company has complied with this
pronouncement.
11
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 13 New Accounting Pronouncements
------- -----------------------------
In March 2008, the FASB issued FASB ASC 808 (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 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 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. FASB ASC 808 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 (Prior authoritative literature: FSP
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. FASB ASC 825 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 was effective for interim and
annual reporting periods ending after June 15, 2009. The Company is making the
disclosures required by this statement. In April 2009, the FASB issued FASB ASC
825 (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
provides additional guidance for estimating fair value when the volume and level
of activity for an asset or liability have significantly decreased. FASB ASC 825
also includes guidance on identifying circumstances that indicate a transaction
is not orderly. FASB ASC 825 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 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 did not have an impact on the Company's condensed consolidated financial
statements.
12
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 13 New Accounting Pronouncements (continued)
------- -----------------------------------------
In May 2009, the FASB issued FASB ASC 855, 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 effective April 1, 2009
and has evaluated subsequent events after the balance sheet date of December 31,
2009 through the date the financial statements were issued, February 16, 2010.
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 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 impact from
this Update.
13
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 Securities Exchange Act
of 1934 and the rules and regulations thereunder.
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
Unbilled Government 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.
14
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 its estimates will
continue to be within the provision established.
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 its estimates will
continue to be within the provision established.
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
recorded 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
15
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 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
--------
In the third quarter of the current fiscal year, revenues declined and the
Company incurred a net loss, principally as a result of a delay in the receipt
of a large Navy CRAFT production order as well as manufacturing issues at a key
sub-contractor that limited the number of CRAFT units that could be shipped.
Revenues for the nine months ended December 31, 2009 declined by 38% from the
same period in 2008 and the Company recorded a net loss from continuing
operations, net of taxes, for the period of $1,193,304. Profits for the period
declined due to the reduction in revenues and due to increased engineering costs
for the new projects and legal costs incurred in connection with the Aeroflex
litigation discussed below. For the quarter ended December 31, 2009, revenues
declined by 44% from last year's comparable quarter to $1.6 million and the
Company recorded a net loss from continuing operations of $597,482 for the same
reasons discussed above.
The delayed revenues have not been lost, but are expected to be recognized in
the next two fiscal quarters. The Company believes that based on expected
production orders on existing contracts and its current backlog, revenues and
profits will substantially improve beginning in the next fiscal year, with
increased sales of the CRAFT AN/USM 719 and AN/USM-708, as well as sales of the
AN/ARM-206 and T-4530A. Engineering costs are also expected to decline due to
the completion of the engineering for AN/USM-708 and AN/ARM-206 units. The
Company anticipates that due to increased revenues and a decrease in engineering
and legal costs, the Company will be profitable in the next fiscal year.
On February 8, 2010 the Company won a five year indefinite delivery indefinite
quantity contract with the U.S. Air Force with a maximum value of $2.7 million
for yet another product, the T-100 TACAN test set. The Company continues to bid
on Military solicitations where the Company believes it has a technical or cost
advantage.
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Overview (continued)
--------------------
At December 31, 2009 the Company's backlog stood at approximately $20.6 million
as compared to approximately $10 million at December 31, 2008. The backlog at
December 31, 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 Navy
CRAFT AN/USM-708 and the ITATS AN/ARM-206 products 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 December 31, 2009.
As a result of the decline in revenues and losses incurred due to the delays
discussed above, and the increased engineering costs incurred in the development
of the AN/USM-708, AN/ARM-206 and the TS4530A, the Company's working capital and
cash flow declined. In September 2009, as previously reported, the Company
raised approximately $520,000 through the sales of common shares to Directors of
the Company. The Company is currently in discussions to raise additional
capital, and is confident that it will be able to improve its cash flow.
The Company has renewed its annual bank agreement on September 30th for several
years, and is currently in discussion for a renewal until September 30, 2010.
Based on those discussions, the Company believes the bank will renew the
agreement, but with a lower borrowing limit. The Company currently has borrowed
$600,000 against this line, and does not believe that the lower limit discussed
with the bank will be materially adverse.
The Company's win of the critical TS-4530A Mode 5 Army program represents a
major event for our future. This award, in conjunction with our Navy CRAFT Mode
5 program, provides TIC with undisputed market leadership in the Mode 5
Identification Friend & Foe ("IFF") business and should provide a robust revenue
stream for some years to come. The Company has already received $14.9 million in
delivery orders on the TS-4530A program out of a maximum contract value of
approximately $44 million. In contrast to the multi-year CRAFT program, this is
an accelerated development program that takes full advantage of the significant
investment that the Company has made in its proprietary Mode 5 technology. TIC
has also completed our CRAFT AN/USM-719 test set and this is the only Mode 5
flight-line test set fully certified by the AIMS Program Office. This represents
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. Moreover, these programs will provide a technical base from which
additional advanced products can be developed.
Tel has built a solid infrastructure to support a rapidly growing business and
the outlook for the Company is very positive with potential backlog on our new
products totaling around $80 million. Our continuing challenge is to finalize
the AN/USM-708 and TS-4530A programs on schedule in a cost-effective fashion. We
also continue to evaluate other attractive potential market opportunities
although our current capital structure and engineering backlog limits our
flexibility at this time. We will continue to prudently explore these
opportunities as well as additional financing options to allow us to fully
capitalize on these market opportunities and support the expected doubling in
the size of our business in the next fiscal year.
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Overview (continued)
--------------------
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 had been 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.
In December 2009, the Kansas court dismissed the Aeroflex civil suit against the
Company. While this decision was based primarily on jurisdictional issues, the
ruling did note that Aeroflex, after discovery proceedings, did not provide any
evidence that Tel or its employees misappropriated Aeroflex trade secrets. The
Kansas ruling also referenced the Army's findings, in its response to the
General Accountability Office ("GAO"), which rejected Aeroflex's claims and
determined that Tel used its own proprietary technology on this program.
Aeroflex has elected to appeal this Kansas decision and has agreed to stay any
action against the two former employees until a decision is reached. Tel remains
confident as to the outcome of this appeal. (See Note 12 to the Financial
Statements).
Sales
-----
For the quarter ended December 31, 2009, total sales decreased $1,281,457 (44%)
to $1,633,971 as compared to $2,915,428 for the same quarter in the prior year.
Avionics Government sales decreased $1,364,051 (54%) to $1,161,985 for the
period as compared to $2,526,036 for the same period last year. The decrease in
Avionics Government sales is primarily attributed to a decrease in shipments of
the T-47N for which the Company had a large contract from the U.S. Army in the
prior year. 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. Commercial sales increased $82,594 (21.2%) to $471.986 for the three
months ended December 30, 2009 as compared to $389,392 in the same period in the
prior year. The increase in sales is the result of an increase in revenues
associated with repairs and is not a trend that the Company expects to continue.
For the nine months ended December 31, 2009, total sales decreased $3,978,444
(38.5%) to $6,344,080 as compared to $10,322,524 for the same period in the
prior year. Avionics Government sales decreased $3,991,636 (45.1%) to $4,851,530
for the period as compared to $8,843,166 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 nine
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Sales
-----
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 delays in the completion of two of its major programs. These decreases were
partially offset by higher sales of the TR-420. Commercial sales increased
$13,192 (0.9%) to $1,492,550 for the nine months ended December 31, 2009 as
compared to $1,479,358 in the same period in the prior year. The increase in
sales is the result of an increase in revenues associated with repairs and is
not a trend that the Company expects to continue.
Gross Margin
------------
Gross margin decreased $748,738 (52%) to $684,529 for the quarter ended December
31, 2009 as compared to $1,425,267 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 December 31, 2009 was
41.9% as compared to 48.9% for the quarter ended December 31, 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.
Gross margin decreased $2,076,816 (41.1%) to $2,976,867 for the nine months
ended December 31, 2009 as compared to $5,053,683 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 nine months ended
December 31, 2009 was 46.9% as compared to 49% for the nine months ended
December 31, 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 increased $30,716 (4.3%) to
$740,250 for the quarter ended December 31, 2009, as compared to $709,534 for
the quarter ended December 31, 2008. This increase is attributed mainly an
increase in legal fees associated with the Aeroflex litigation (see Note 12 to
the Financial Statements) and the addition of a program manager for the TS-4530A
program offset partially by lower outside selling commissions.
Selling, general and administrative expenses increased $76,540 (3.5%) to
$2,258,216 for the nine months ended December 31, 2009, as compared to
$2,181,676 for the nine months ended December 31, 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.
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Operating Expenses (continued)
------------------------------
Engineering, research and development expenses increased $240,027 (35.1%) to
$924,044 and $539,098 (25.3%) to $2,672,119 for the three months and nine months
ended December 31, 2009 as compared to $684,017 and $2,133,021 for the three and
nine months ended December 31, 2008. Engineering, research and development
expenses are mostly attributed to engineering costs related to the CRAFT and
TS-4530A programs.
Interest, net
-------------
Interest income decreased primarily as a result of lower cash balances.
Interest expense increased by $4,171 for the three months ended December 31,
2009 to $15,419 as compared to $11,248 in the prior year primarily as a result
of interest on the loan on the life insurance policy.
Interest expense decreased $1,685 for the nine months ended December 31, 2009 to
$34,418 as compared to $36,103 in the prior year primarily as a result of the
payment in full of the convertible note payable.
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 $994,975 and $1,987,184 for the three and nine months
ended December 31, 2009 as compared to income from continuing operations before
income taxes of $22,178 and $706,666 for the three and nine months ended
December 31, 2008.
Income Taxes
------------
Income tax benefits in the amounts $397,493 and $793,880 were recorded for the
three and nine months ended December 31, 2009 as compared to income tax
provisions in the amounts of $8,861 and $326,926 for the three and nine months
ended December 31, 2008. The change is due to the losses before taxes for the
three and nine months ended December 31, 2009 as compared to income before taxes
for the three and niine months ended December 31, 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 $597,482 and $1,193,304 for the three and nine
months ended December 31, 2009 as compared to net income from continuing
operations, net of taxes of $13,317 and $379,740 for the three and nine months
ended December 31, 2008.
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Income from Discontinued Operations, Net of taxes
-------------------------------------------------
For the three months ended December 31, 2009, the Company recorded income from
discontinued operations, net of taxes, of $25,152 as compared to income from
discontinued operations, net of taxes of $3,317. This increase was the result of
higher sales. For the nine months ended December 31, 2009, the Company recorded
income from discontinued operations, net of taxes, of $30,825 as compared to
income from discontinued operations, net of taxes of $70,556 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 $572,330 and
$1,162,479 for the three and nine months ended December 31, 2009 as compared to
recording net income of $16,634 and $450,296 for the three and nine months ended
December 31, 2008.
Liquidity and Capital Resources
-------------------------------
At December 31, 2009, the Company had working capital of $2,440,511 as compared
to $3,284,115 at March 31, 2009. For the nine months ended December 31, 2009,
the Company used $1,149,419 in cash for operations as compared to $400,876 for
the nine months ended December 31, 2008. This increase in cash used in
operations is primarily attributed to the increase in the operating loss for the
period as compared to the previous year offset partially by the decrease in
accounts receivable as compared to an increase in accounts receivable for the
nine months ended December 31, 2008.
Net cash used in investing activities was $36,653 for the nine months ended
December 31, 2009 as compared to $81,301 for the nine months ended December 31,
2008 due to the decrease in purchases of equipment.
Net cash provided by financing activities increased to $722,825 for the nine
months ended December 31, 2009 from $232,308 for the nine months ended December
31, 2008 primarily due to proceeds from the sale of new common stock and the
proceeds from the exercise of stock options, discussed below.
At December 31, 2009 the Company's backlog stood at approximately $20.6 million
as compared to approximately $10.0 million at December 31 2008. The backlog at
December 31, 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 Navy
CRAFT AN/USM-708 and the ITATS AN/ARM-206 products 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 December
31, 2009.
The Company raised $520,000 of capital from Directors, through a combination of
sales of new shares (at "market") and the exercise of previously granted stock
options in September 2009. In addition, the Company is in discussions to raise
additional capital and it is confident that it will be able to improve its cash
position. (See Overview).
21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
As discussed, the Company is currently discussing an extension of its credit
line.
There was no significant impact on the Company's operations as a result of
inflation for the nine months ended December 31, 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
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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.
Part II. Other Information
-------- -----------------
Item 1. Legal Proceedings
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See discussion in Note 12 to the Financial Statements, and MD&A
overview.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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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.
22
Item 4. Submission of Matters to a Vote of Security Holders
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(a) The Annual Meeting of Shareholders was held on December 16, 2009 (the
"Annual Meeting").
(b) Not applicable
(c) At the Annual Meeting, the Company's shareholders voted in favor of
re-electing management's nominees for election as directors of the Company
as follows:
For Against
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Harold K. Fletcher 2,305,514 104,442
George J. Leon 2,322,701 87,255
Robert J. Melnick 2,307,661 102,295
Jeff C. O'Hara 2,307,661 102,295
Robert A. Rice 2,322,701 87,255
Robert H. Walker 2,322,701 87,255
(d) Not applicable
Item 6. Exhibits
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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: February 16, 2010 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
CEO
Date: February 16, 2010 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer