UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------------------------
FORM 10-Q
_X_X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997September 30, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1441806
(State of Incorporation) (I.R.S. Employer ID Number)
728 Garden Street, Carlstadt, New Jersey 07072
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 201-933-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ____
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,052,7812,096,985 shares of Common stock, $.10 par value as of February 6,October 28, 1998.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
----
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
December 31, 1997September 30, 1998 and March 31, 19971998 1
Condensed Comparative Statements of Operations -
Three and NineSix Months Ended December 31,September 30, 1998 and 1997
and December 31,1996 2
Condensed Comparative Statements of Cash Flows -
NineSix Months Ended December 31,September 30, 1998 and 1997 and
December 31, 1996 3
Notes to Condensed Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition Andand Results of Operations 5-86-9
Part IIII. Other Information 910
SIGNATURES 910
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS)SHEETS
(Unaudited)
December 31, 1997September 30, 1998 and March 31, 1997
December 31, March 31,
1997 1997
----------- -----------
ASSETS
Current assets:
Cash $ 463,058 $ 528,636
Accounts receivable, net of allowance
for doubtful accounts of $16,074 at
December 31, 1997 and $65,521 at
March 31, 1997 785,590 302,737
Inventories 397,491 352,173
Other current assets 25,538 6,944
Deferred income tax benefit - current 78,300 78,300
----------- -----------
Total current assets 1,749,977 1,268,790
Office and manufacturing equipment, net 83,492 45,492
Other assets, net 86,884 71,884
Deferred income tax benefit 29,602 261,900
----------- -----------
Total assets 1,949,955 1,648,0661998
ASSETS September 30, March 31,
1998 1998
------------- ------------
Current assets:
Cash $ 79,681 $ 585,281
Accounts receivable, net of allowance for doubtful 399,904 374,506
accounts of $15,923 at September 30,1998 and
$16,164 at March 31, 1998
Unbilled revenues (see note 2) 195,272 --
Inventories 462,998 383,030
Prepaid expenses and other current assets 38,333 24,017
Deferred income tax benefit - current 78,300 78,300
----------- -----------
Total current assets 1,254,488 1,445,134
----------- -----------
Property, plant, and equipment, net 112,671 79,321
Other assets 120,723 96,067
Deferred income tax benefit 372,415 320,619
----------- -----------
Total assets 1,860,297 1,941,141
=========== ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Note payable - related party - current portion 50,000 50,000
Convertible subordinate notes - related party 15,000 15,000
Accrued payroll, vacation pay, deferred wages
payroll taxes, and interest on deferred wages 210,592 211,400
Accounts payable and accrued expenses 301,651 304,673
----------- -----------
Total current liabilities 577,243 581,073
----------- -----------
Notes payable - related party - non-current portion 300,000 300,000
----------- -----------
Total liabilities 877,243 881,073
Stockholders' equity
Common stock 209,701 209,476
Additional paid-in capital 3,922,288 3,921,670
Accumulated deficit (3,148,935) (3,071,078)
----------- -----------
Total stockholders' equity 983,054 1,060,068
----------- -----------
Total liabilities and stockholders' equity $ 1,860,297 $ 1,941,141
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Advanced billings 57,061 --
Accrued payroll, deferred wages and
vacation pay 336,685 342,432
Accounts payable and accrued expenses 379,174 485,380
----------- -----------
Total current liabilities 772,920 827,812
Convertible subordinated notes - related parties
Total liabilities 365,000 365,000
----------- -----------
1,137,920 1,192,812
=========== ===========
Stockholders' equity:
Common stock 205,281 203,097
Additional paid-in capital 3,907,056 3,901,052
Accumulated deficit (3,300,302) (3,648,895)
----------- -----------
Total stockholders' equity 812,035 455,254
----------- -----------
Total liabilities and stockholders' equity $ 1,949,955 $ 1,648,066
=========== ===========
See accompanying notes to condensed financial statements.
1statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended NineSix Months Ended
------------------------------ ------------------------------
December 31, December 31, December 31, December 31,September 30, September 30, September 30, September 30,
1998 1997 19961998 1997 1996
------------- ------------- ------------- -------------
Sales
Government, net $ 1,133,538 672,740418,472 567,191 $ 2,258,243 1,457,114801,212 1,124,705
Commercial, net 348,495 267,996 938,654 718,830
------------- ------------- ------------- -------------607,204 276,850 889,657 590,159
----------- ----------- ----------- -----------
Total sales 1,482,033 940,736 3,196,897 2,175,944Sales 1,025,676 844,041 1,690,869 1,714,864
Cost of sales 505,202 414,320 1,193,096 918,472
------------- ------------- ------------- -------------425,504 351,674 764,810 687,894
----------- ----------- ----------- -----------
Gross margin 976,831 526,416 2,003,801 1,257,472Margin 600,172 492,367 926,059 1,026,970
Operating expenses
Selling, general & administrative 334,208 221,904 737,383 634,009258,704 184,245 473,228 403,175
Engineering, research, & development 284,309 117,734 648,235 338,063
------------- ------------- ------------- -------------327,532 205,981 569,544 363,926
----------- ----------- ----------- -----------
Total operating expenses 618,517 339,638 1,385,618 972,072
Profit586,236 390,226 1,042,772 767,101
Income/ (Loss) from operations 358,314 186,778 618,183 285,40013,936 102,141 (116,713) 259,869
Other income (expense):
Interest income 6,145 6 17,878 6152,484 5,651 8,554 11,733
Interest expense (17,578) (15,017) (55,170) (48,124)
------------- ------------- ------------- -------------
Income(9,611) (19,849) (21,494) (37,592)
----------- ----------- ----------- -----------
Income/ (Loss) before taxes 346,881 171,767 580,891 237,891
Provision6,809 87,943 (129,653) 234,010
Provision/(Benefit) for income taxes 138,834 -- 232,298 --
------------- ------------- ------------- -------------
Net2,720 35,125 (51,796) 93,464
----------- ----------- ----------- -----------
(Loss)/net income $ 208,047 171,7674,089 52,818 $ 348,593 237,891
============= ============= ============= =============(77,857) 140,546
=========== =========== =========== ===========
Basic and diluted earningsincome (loss)
per common share $ 0.10 0.080.00 0.03 $ 0.17 0.13(0.04) 0.07
Dividends per share None None None None
Weighted average shares outstanding
2,093,989 2,049,629 2,089,656 1,866,785Basic 2,095,298 2,034,123 2,095,056 2,032,762
Diluted 2,118,317 2,101,731 2,118,075 2,100,370
See accompanying notes to condensed finanicalfinancial statements
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
NineSix Months Ended
December 31,September 30,
1998 1997
1996
------------------- ---------
Increase (decrease)(Decrease) increase in cash:
Cash flows from operating activities
Net (loss) income $ 348,593(77,857) $ 237,891140,546
Adjustments to reconcile net (loss) income to cash provided
byused
in operating activities:
Deferred income taxes 232,298 --(51,796) 93,464
Depreciation 24,483 18,344
Disposal of sales equipment -- 2,09320,339 12,535
Changes in operating assets andor liabilities:
(Increase) decreaseIncrease in accounts receivable net (482,853) 105,551
(Increase) decreaseand unbilled revenues (220,670) (251,434)
Increase in inventories (45,318) 4,467
(Increase) decrease(79,968) (93,993)
Increase in prepaid expenses and other current assets (18,594) (6,348)
(Increase) decrease(14,316) (14,132)
Increase in other assets (24,656) (15,000)
1,124
Increase in advanced billings 57,061 --
Increase (decrease)(Decrease) increase in accrued payroll, deferred wages and
and vacation pay (5,747) (117,358)
(Decrease) increase(808) 14,279
Decrease in accounts payable and accrued expenses (106,206) (68,637)(3,022) (26,725)
--------- ---------
Net cash (used in) provided byused in operations (11,283) 177,127(452,754) (140,460)
--------- ---------
Cash flows from investing activities:
PurchasesCash purchases of officeproperty, plant and manufacturing equipment (62,483) (33,938)(53,689) (41,790)
--------- ---------
Net cash used in investing activities (62,483) (33,938)(53,689) (41,790)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 8,188 --843 1,588
Proceeds from issuance of common stock -- 87,500--
--------- ---------
Net cash provided by financing activities 8,188 87,500843 1,588
--------- ---------
Net (decrease) increasedecrease in cash (65,578) 230,689(505,600) (180,662)
Cash at beginning of period 585,281 528,636 22,625
--------- ---------
Cash at end of period $ 463,05879,681 $ 253,314347,974
========= =========
Interest Paid:paid $ 45,04119,786 $ 61,17325,864
========= =========
Non-Cash Items:
Preferred stock redeemed and exchanged for common stock $ -- $ 606,643
Stock issued to related party for liabilities $ -- $ 46,540
See accompanying notes to condensed financial statements.statements
3
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Tel-Instrument
Electronics Corp. as of December 31, 1997,September 30, 1998, the results of operations for the
three and ninesix months ended December 31,September 30, 1998 and September 30, 1997, and December 31, 1996, and
statements of cash flows for the ninesix months ended December 31, 1997September 30, 1998 and
December 31, 1996.September 30, 1997. 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, 1997 amounts1998 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. TheAccordingly, 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, 1997.1998.
Note 2 Unbilled Revenue
Sales are recognized primarily upon shipment of products, except in the case of
long-term contracts wherein sales are recognized on the percentage-of-completion
method.
Sales under the U.S. Navy contract have been recorded on the
percentage-of-completion method. Under this approach, sales and gross margin are
recognized based on the ratio of costs incurred to date to total estimated
contract costs. Unbilled revenues of $195,272 represent recoverable costs and
accrued profit not billed resulting from the application of
percentage-of-completion accounting. Actual billing of these amounts will be
based upon contractual billing terms.
Note 3 Inventories
Inventories consist of:
December 31,September 30, March 31,
1997 1997
------------------------------1998 1998
--------------------------------
Purchased parts $ 289,213282,409 $ 213,842253,616
Work-in-process 176,583 206,750216,209 165,034
Less: Reserve for obsolescence (68,305) (68,419)
------------------------------(35,620) (35,620)
--------------------------------
$ 397,491462,998 $ 352,173
==============================
Note 3 Reclassifications
Certain reclassifications have been made to the fiscal year 1997 financial
statements to be consistent with the fiscal year 1998 presentation. These
reclassifications have no effect on the financial results.383,030
================================
Note 4 Income Taxes
At March 31, 1997, theThe Company, in accordance with FASBSFAS 109, reduced the
valuation allowance andhas recognized a deferred income tax
benefit of $340,200.
The recognized deferred income tax benefit is based upon the expected utilization of net operating loss carryforwards
as the Company believes that it is more likely than not that it will realize a
portion of its net operating losses before they expire. For the ninesix months ended
December 31, 1997,September 30, 1998, the Company recorded a provision fordeferred income taxestax benefit of
$232,298,$51,796, which represents the effective federal and state tax rate on the
Company's net incomeloss before taxes of $580,891.$129,653. This tax benefit reduced the loss
for the period. The Company has no tax liability. The $232,298 tax provision reduced$51,796 increased the Company's deferred income tax asset by
the same amount at December 31, 1997. This
amount represents a portion ofin the net operating loss carryforward tax benefit
as stated on the March 31, 1997accompanying balance sheet that thesheet. The Company previously
recognized for financial statement reporting purposes and expects to
utilize this deferred income tax benefit in the future for tax reporting
purposes.
4
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Note 5 Reclassifications
Certain reclassifications have been made to the fiscal year 1998 financial
statements to be consistent with the fiscal year 1999 presentation.
Note 6 Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS 128 is effective
for financial statements relating to both interim and annual periods ending
after December 15, 1997.
Basic income (loss) per 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 share for September 30, 1998 is
based on net income (loss), divided by the weighted average number of common
shares outstanding, including common share equivalents such as outstanding stock
options and warrants during the period. Common share equivalents, such as
outstanding stock options, are not included in the calculation for the six
months ended September 30, 1998 since the effect would be antidilutive.
Note 7 Credit Facility
On July 22, 1998, the Company entered into a credit agreement with Summit Bank
for $350,000, which extends for one year and is thereafter renewable on an
annual basis. The Company has not borrowed against this line. The Company pays
no commitment fee and the rate of interest borrowings is the Lender's Prevailing
Base Rate plus 1%.
5
Item 2. MANAGEMENT'S2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
Results of Operations
TheA number of the statements made by the Company has continued to increasein 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
income from operations while
increasing its research and development expenditures, which grew by over 91%
from the prior fiscal year, to over 20% of sales. This investment in research
and development is necessary to perform on existing contracts, to sustain the
growth and profitabilitytheir results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to continue producing innovative,
state-of-the-art products. This increase includes several temporary engineers
employedfuture 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 the
demand for the Company's products or in the cost and availability of its raw
materials; the actions of its competitors; the success of our customers;
technological change; changes in employee relations; government regulations;
litigation, including its inherent uncertainty; difficulties in plant operations
and materials; transportation, environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the Company's filings
with the Securities and Exchange Commission.
Overview
The Company invested heavily in product development and expenditures increased
$205,618 (57%) for the first six months of the current fiscal year as compared
to finalizethe same period in the prior fiscal year. The total expenditure of $569,544
represents 34% of total sales. The principal effort resulted from the U.S. Navy
exercising its option to incorporate a collision avoidance (TCAS) test
capability into the T-47M design, as mentioned below.
The Company continuestest set design. Eight T-47M prototypes have been
fabricated and these units have begun several months of environmental and
functional testing. Several tests have been successfully completed. Field
evaluation by the U.S. Navy is anticipated to focus its principal effortsbegin early in the government marketfourth quarter
of the current fiscal year. Assuming field evaluations are satisfactory and has been very active in responding to requests for quotation, from the
U.S. Government,Navy exercises production options later in addition to adapting its product designs to respond to these
requests.
On August 12, 1997 the Company received notice that it had been awarded a majorfourth quarter, deliveries
could begin in the first quarter of the next fiscal year. This contract from the U.S. Navy. The initial order is for $949,324 to provide five
T-47M IFF test sets, for Navy evaluation, and for the associated tests and
documentation. This work, to be completed during calendar year 1998, represents
a major milestone for the Company since this contract couldcan be a
significant
source of future revenues. This contract includessignificant revenues, with options for up to 1,300 units which the
U.S. Navy can exercise through thecalendar year 2001. There isHowever, there can be no
assurance that these optionsfield evaluations will be exercised byfavorable and that the Navy.U.S. Navy will
exercise its options under this contract. In addition, the third quarterCompany continues the
development of the currentT-36M, under a U.S. Army contract, and new products for other
markets.
In June 1998, the Company signed an exclusive agreement with Muirhead Avionics,
based in the United Kingdom, to represent the Company in parts of Europe. The
Company also signed an exclusive agreement with Milspec Services Pty. Ltd. in
August 1998 to represent the Company in Australia and New Zealand, and an
agreement with M.P.G. Instruments s.r.l. in September 1998 to represent the
Company in Europe to obtain a contract for a new military product which would be
based on the Company's technology. The Company continues to believe that the
foreign commercial market is larger than the domestic market, because many
foreign airlines are upgrading to meet U.S. requirements, and that foreign
government sales will grow, particularly as the result of our growing reputation
in IFF testing.
6
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION (Continued)
Overview (Continued)
As previously reported, during fiscal year 1998 the Company fulfilled its
obligation and delivered the final units of the T-30CM ILS test set to the U.S.
Air Force. Sales derived fromAs a result of completing this contract, represented 35%it was anticipated that the
Company would have lower sales during the first half of totalfiscal year 1999. The
Company continues to believe that this decline is temporary and new contracts
can be obtained to increase sales forand earnings. In this regard, management is
encouraged by the ninedollar value of its backlog, by the second quarter revenues
which included a large and unexpected increase in commercial sales, by the
progress on the U.S. Navy contract, and by the efforts of its new offshore
distributors.
Sales
For the three months ended December 31, 1997September 30, 1998 sales increased $181,635 (21.5%)
to $1,025,676, as compared to 46%the same period ending September 30, 1997.
Commercial sales increased $330,354 (119.3%) to $607,204 for fiscal yearthe three months
ended September 30, 1998, as compared to the same period ending September 30,
1997. As a
result, the nextThis increase in commercial sales is attributed to decisions by several
quarterslarge fleet owners to upgrade their test equipment and may not exhibitbe continued. The
Company had a commercial backlog of $297,090 at September 30, 1998.
Government sales decreased $148,719 (26.2%), as compared to the growthsame period
ending September 30, 1997. This decrease is primarily attributed to the
completion of the U.S. Air Force T-30CM contract for which there were no sales
in the current fiscal year. This decrease was partially offset by revenues of
$195,242 for fabrication of the initial prototypes and certain documentation and
testing related to the U.S. Navy T-47M IFF test set contract. The Company has
experienced overhad a
government backlog of $2,043,307 at September 30, 1998.
For the last few years. However, whilesix months ended September 30, 1998 sales declined $23,995 (1.4%), as
compared to the Company believes thatsame period ending September 30, 1997. The decline in government
sales related to the future still remains positive based oncompletion of the Navy contract with the U.S. Air Force was
mostly offset by the increase in commercial sales during the second quarter and
other
outstanding proposals, therethe sales related to the contract with the U.S. Navy. There can be no assurance
that thesethe increase in commercial sales will materialize.
Sales
Salescontinue.
Gross Margin
For the three months ended September 30, 1998 gross margin increased $541,297 (57.5%$107,805
(21.9%), as compared to the same period ending September 30, 1997. This increase
is primarily attributed to the higher sales in the second quarter. The gross
margin percentage was 58.5% for the three months ended September 30, 1998 as
compared to 58.3% for the three months ended September 30, 1997.
For the six months ended September 30, 1998 gross margin decreased $100,911
(9.8%), as compared to the same period ended September 30, 1997. This decrease
is primarily attributed to the lower gross margin associated with the U.S. Navy
T-47M contract. The gross margin percentage was 54.8% for the six months ended
September 30, 1998 as compared to 59.9% for the six months ended September 30,
1997.
7
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION (Continued)
Operating Expenses
Selling, general and administrative expenses increased $74,459 (40.4%) for the
three months ended September 30, 1998 as compared to the same period last year.
This increase is associated with an increase in selling expenses, mostly
attributed to higher commissions based upon the increase in commercial sales and
to higher administrative salaries. In fiscal year 1998 the Company's President
devoted a percentage of his time to research and development to ensure that such
activities were properly conducted. In fiscal year 1999, the Company hired a
Director of Engineering, thus minimizing the President's time in overseeing the
research and development function and allowing him to concentrate on Company
growth.
Selling, general and administrative expenses increased $70,053 (17.4%) for the
six months ended September 30, 1998 as compared to the same period last year.
This increase is primarily attributed to the increase for the three months ended
September 30, 1998, as discussed above.
Engineering, research and development increased $121,551 (59.0%) and $1,020,953 (46.9%$205,618
(56.5%) for the three and ninesix months ended December 31, 1997,September 30, 1998, respectively, as
compared to the same periods last year. The sales increases were bothThis increase reflects the Company's
ongoing commitment to developing new products and finalizing of the design of
the U.S. Navy T-47M test sets, as described in the government and commercial
markets. Government sales increased $460,798 (68.5%) and $801,129 (55.0%)
related to contracts withOverview. As this work is
completed, the government and from several Departmentrate of Defense
prime contractors. Commercial sales increased $80,499 (30.0%) and $219,824
(30.6%) for the three and nine months ended December 31, 1997, respectively , as
compared to the three and nine months ended December 31, 1996. These increases
cannotengineering expenditures should be assured for the future.
During the first quarter of the current fiscal year the Company had identified
certain technical issues with one of its products scheduled to be delivered
during the second quarter. The Company corrected such technical issues and all
of the remaining units were shipped during the third quarter. As such, these
delayed shipments had a positive affect on the third quarter results.
5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATION
Sales (continued)
The Company continues to explore expansion into other markets in order to
capitalize on its test equipment technology.
Gross Margin
Gross margin increased $450,415 (85.6%) and $746,329 (59.4%) for the three and
nine months ended December 31, 1997, respectively, as compared to the same
periods in the prior fiscal year. Gross margin as a percent of sales was 65.9%
and 62.7% for the three and nine months ended December 31, 1997, respectively,
as compared to 56.0% and 57.8% for the three and nine months ended December 31,
1996, respectively. The increase in gross margin primarily reflects the higher
volume and cannot be assured for the future.
Operating Expenses
Selling, general, and administrative expenses increased $112,304 (50.6%) and
$103,374 (16.3%) for the three and nine months ended December 31, 1997 as
compared to the prior fiscal year. These increases are the result of expenses
incurred related to the Company's efforts to explore additional markets for its
technology, additional employee incentive compensation, and higher sales
commissions. These increases were partially offset by lower selling and
administrative salaries. Engineering, research and development expenses
increased $166,575 (141.4%) and $310,172 (91.7%) for the three and nine months
ended December 31, 1997 as compared to the prior fiscal year, reflecting the
Company's commitment and effort to develop new products, especially the
aforementioned contract with the U.S. Navy.
Interest Income
Interest income increased as a result of higher cash balances.
Income Before Taxes
Income before taxes increased $175,114 to $346,881 for the three months ended
December 31, 1997, and $343,000 to $580,891 for the nine months ended December
31, 1997 as compared to the same period last year.
Provision Forreduced.
Income Taxes
AIn accordance with SFAS 109, a provision for income taxes was not recognized in the
prior fiscal year becauseamount of $93,464 for the six months ended September 30, 1997. For the six
months ended September 30, 1998 the Company applied a full valuation allowance. At March 31, 1997, the Company
reduced the valuation allowance and recorded the resulting deferredan income tax benefit. Forbenefit of
$51,796, which represents the nine months ended December 31, 1997,effective federal and state tax rate on the
Company has
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATION
Provision For Income Taxes (continued)
recorded a provision for incomeCompany's net loss before taxes utilizing estimated effective Federal and
State income tax rates for fiscal year 1998. The Company has no tax liability.
The Company will continueof $129,653. (See Note 4 to monitor the amount of deferred tax benefit (net
operating loss carryforward) which can be currently recognized from future
taxable income.
Net Income
Net income for the three months ended December 31, 1997 was $208,047 or $0.10
per share, as comparedNotes to $171,767 or $0.08 per share for the three months ended
December 31, 1996. Net income for the nine months ended December 31, 1997 was
$348,593 or $0.17 per share as compared to $237,891 or $0.13 per share for the
nine months ended December 31, 1996. The improvement in net income per common
share was partially offset by the increase in the number of shares outstanding
and by the tax provision. Net income for the nine months ended December 31, 1997
was reduced by a $232,298 tax provision as described in the preceding paragraph.
The net income for the comparable fiscal 1997 period was not reduced.Condensed
Financial Statements).
Liquidity and Capital Resources
At December 31, 1997September 30, 1998 the Company had positive working capital of $977,057$677,245 as
compared to $440,978$864,061 at March 31, 1997. The Company's financial position
continues to improve. The Company's net worth improved to $812,035 at December
31, 19971998. For the six months ended September 30,
1998, cash used in operations was $452,754 as compared to $455,254 at March 31, 1997. For$140,460 for the ninesix
months ended December 31, 1997,September 30, 1997. This increase in cash flowsused in operations is
primarily associated with the Company's loss from operations used $11,283 of cash as compared
to providing cash of $177,127 during the nine months ended December 31, 1996.
This decrease in operating cash flows resulted fromand increases in
accounts receivable, of $482,853unbilled revenues, and decreases in accounts payable and accrued expenses of
$106,206.inventories. The increase in accounts receivable is directly related to the
increase in sales and thetotal decrease in
accounts payable and accrued expenses is
due to significant payments made to vendors uponcash of $505,600 was also impacted by purchases of equipment in the completionamount of
certain
contracts. These uses of cash were offset by the Company's income before taxes
and depreciation expense of $605,374.$53,689.
The Company continues to devote its effortsinvest heavily in research and development. The Company
expects these investments will finalize the designs for the T-47M, T-47N, T-36M,
and T-48IC, and begin to new productship these units for which there are current orders in
the backlog. While this would increase sales, cash flow, and market
development, and to explore opportunities to improve its profitability and cash
flow.profits, there is
no assurance that these increases will occur.
Based upon the current backlog and cash on hand,available working capital, the Company
believes that it should havehas sufficient working capital to fund its plans for the next
year.twelve months. At present, the Company does not expect to incur significant
long-term needs for capital outside of its normal operating activities.
8
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION (Continued)
Liquidity and Capital Resources (Continued)
On July 22, 1998, the Company received from Summit Bank a credit line of
$350,000. The Company received in the current fiscal quarter approval to apply for
progress paymentshas not borrowed against this line as of September 30,
1998.
There was no significant impact on the contract withCompany's operations as a result of
inflation for the U.S. Navy.six months ended September 30, 1998.
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, 1997.
7
Market Information1998.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the year 2000. Some older computer systems
stored dates with only a two-digit year with an assumed prefix of "19".
Consequently, this limits those systems to dates between 1900 and 1999. If not
corrected, many computer systems and applications could fail or create erroneous
results by or at the year 2000.
The Company has reviewed the potential impact of the Year 2000 issue. This
assessment included a review of the impact of the issue in four areas: products,
manufacturing systems, business systems and other areas. The Company does not
anticipate that the Year 2000 issue will impact operations or operating results.
The Company relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
relations. At this time, it is impossible to assess the impact of Year 2000
issue on each of these organizations. There has beencan be no established public trading marketguarantee that the systems
of other unrelated entities on which the Company relies will be corrected on a
timely basis and will not have a material adverse effect on the Company.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for Registrant's Common
Stock. SubsequentDerivative
Instruments and Hedging Activities was issued in June 1998 and is effective for
all fiscal quarters beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The Company does not expect its implementation will have a material
effect on the Company's financial statements.
Statement of Financial Accounting Standards No. 134, Accounting for Certain
Mortgage Banking Activities was issued in October 1998 and is effective for all
fiscal quarters beginning after December 15, 1998. This statement establishes
reporting standards for certain banking activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar to the public offeringprimary operations of a mortgage banking enterprise. The Company
does not expect its implementation will have a material effect on the Company's
Common Stock in
December 1988, the Common Stock has traded sporadically in the over-the-counter
market. During the fiscal quarter ended December 31, 1997, the Company's Common
Stock was reportedfinancial statements as having the high and low trades of $1.94 and $1.25,
respectively. These trades reflect reported inter-dealer prices without retail
markup or commission.currently presented.
9
Part IIII. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on December 3, 1997 (the "Annual
Meeting").
(b) Not applicable because (i) proxies for the Annual Meeting were not solicited
pursuant to Regulation 14A under the Securities and Exchange Act of 1934; (ii)
there was no solicitation in opposition to management's nominees as listed in
the Company's proxy statement; and (iii) all of such nominees were elected.
(c) At the Annual Meeting, the Company's shareholders voted in favor of
management's nominees for election as directors of the Company as follows:
For Against
--- -------
Harold K. Fletcher 1,388,721 0
Robert J. Walker 1,388,721 0
George F. Leon 1,388,721 0
The shareholders also voted all 1,388,721 shares in favor of Coopers and Lybrand
as the Corporation's certified public accountants for the fiscal year ending
March 31, 1998.
The shareholders also voted all 1,388,721 shares for ratification of the
Company's issuance of 10% convertible notes, in aggregate amount of $350,000, to
Harold K. Fletcher.
(d) Not applicable.
8
Item 6. Exhibits and Reports on Form 8-K
(a)10-Q.
The exhibits filed or incorporated by reference as part of thisthe Quarterly
Report on Form 10-Q are listed in the attached Index to Exhibits.
(b) During the quarter ended December 31, 1997, the Company did not
file any current Reports on Form 8-K.
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: 12 February 199811/10/98 By: /s/ Harold K. Fletcher
-----------------------------------------------------
/s/ Harold K. Fletcher
Chairman and President
910
INDEX TO EXHIBITS
1 Loan agreement with Summit Bank dated July 22, 1998
27 Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not filed.
11