UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,December 31, 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:
2,096,9852,107,057 shares of Common stock, $.10 par value as of October 28, 1998.February 1, 1999.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
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Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
September 30,December 31, 1998 and March 31, 1998 1
Condensed Comparative Statements of Operations -
Three and SixNine Months Ended September 30,December 31, 1998 and 1997 2
Condensed Comparative Statements of Cash Flows -
SixNine Months Ended September 30,December 31, 1998 and 1997 3
Notes to Condensed Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-96-10
Part II.II Other Information 1011
SIGNATURES 1011
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
September 30, 1998 andASSETS December 31, March 31,
1998
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 $ 1,860,2971998
----------- ----------
Current assets:
Cash $ 55,506 $ 585,281
Accounts receivable, net of allowance for doubtful 447,495 374,506
Accounts of $15,923 at December 31, 1998 and
$16,164 at March 31, 1998
Unbilled revenues (see note 2) 154,011 --
Inventories 592,720 383,030
Prepaid expenses and other current assets 33,060 24,017
Deferred income tax benefit - current 78,300 78,300
----------- -----------
Total current assets 1,361,092 1,445,134
Property, plant, and equipment, net 108,477 79,321
Other assets 127,063 96,067
Deferred income tax benefit 328,571 320,619
----------- -----------
Total assets 1,925,203 1,941,141
=========== ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Note payable - related party - current portion 50,000 50,000
Convertible subordinated notes - related party 15,000 15,000
Accrued payroll, vacation pay, deferred wages,
payroll taxes, and interest on deferred wages 210,624 211,400
Accounts payable and accrued expenses 296,846 304,673
----------- -----------
Total current liabilities 572,470 581,073
Notes payable - related party -
non-current portion 300,000 300,000
----------- -----------
Total liabilities 872,470 881,073
----------- -----------
Stockholders' equity:
Common stock 210,708 209,476
Additional paid-in capital 3,925,057 3,921,670
Accumulated deficit (3,083,032) (3,071,078)
----------- -----------
Total stockholders' equity 1,052,733 1,060,068
----------- -----------
Total liabilities and stockholders' equity $ 1,925,203 $ 1,941,141
=========== ===========
See accompanying notes to condensed financial statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended SixNine Months Ended
September 30, September 30, September 30, September 30,December 31, December 31, December 31, December 31,
Sales 1998 1997 1998 1997
------------- ------------- ------------- ------------------------ ----------- ----------- -----------
Sales
Government, net $ 418,472 567,191584,490 $ 801,212 1,124,7051,133,538 $ 1,385,702 $ 2,258,243
Commercial, net 607,204 276,850 889,657 590,159388,446 348,495 1,278,103 938,654
----------- ----------- ----------- -----------
Total Sales 1,025,676 844,041 1,690,869 1,714,864972,936 1,482,033 2,663,805 3,196,897
Cost of sales 425,504 351,674 764,810 687,894346,610 505,202 1,111,420 1,193,096
----------- ----------- ----------- -----------
Gross Margin 600,172 492,367 926,059 1,026,970626,326 976,831 1,552,385 2,003,801
Operating expensesexpenses:
Selling, general & administrative 258,704 184,245 473,228 403,175233,366 334,208 706,593 737,383
Engineering, research, & development 327,532 205,981 569,544 363,926273,057 284,309 842,602 648,235
----------- ----------- ----------- -----------
Total operating expenses 586,236 390,226 1,042,772 767,101
Income/ (Loss)506,423 618,517 1,549,195 1,385,618
Income from operations 13,936 102,141 (116,713) 259,869119,903 358,314 3,190 618,183
Other income (expense):
Interest income 2,484 5,651 8,554 11,73382 6,145 8,635 17,878
Interest expense (9,611) (19,849) (21,494) (37,592)(10,238) (17,578) (31,731) (55,170)
----------- ----------- ----------- -----------
Income/ (Loss)(loss) before taxes 6,809 87,943 (129,653) 234,010109,747 346,881 (19,906) 580,891
Provision/(Benefit) for income taxes 2,720 35,125 (51,796) 93,46443,844 138,834 (7,952) 232,298
----------- ----------- ----------- -----------
(Loss)/net incomeNet income/(loss) $ 4,089 52,81865,903 $ (77,857) 140,546208,047 $ (11,954) $ 348,593
=========== =========== =========== ===========
Basic and diluted income (loss)
per common share $ 0.00 0.03 $ (0.04) 0.070.10 $ (0.01) $ 0.17
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,095,298 2,034,123 2,095,056 2,032,7622,104,539 2,039,581 2,098,657 2,035,248
Diluted 2,118,317 2,101,731 2,118,075 2,100,3702,116,101 2,093,989 2,098,657 2,089,656
See accompanying notes to condensed financial statements
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
1998 1997
---------- ---------
(Decrease) increase in cash:
Cash flows from operating activities
Net (loss) income $ (77,857) $ 140,546
Adjustments to reconcile net (loss) income to cash used
in operating activities:
Deferred income taxes (51,796) 93,464
Depreciation 20,339 12,535
Changes in operating assets or liabilities:
Increase in accounts receivable and unbilled revenues (220,670) (251,434)
Increase in inventories (79,968) (93,993)
Increase in prepaid expenses and other current assets (14,316) (14,132)
Increase in other assets (24,656) (15,000)
(Decrease) increase in accrued payroll, deferred wages and
and vacation pay (808) 14,279
Decrease in accounts payable and accrued expenses (3,022) (26,725)
--------- ---------
Net cash used in operations (452,754) (140,460)
--------- ---------
Cash flows from investing activities:
Cash purchases of property, plant and equipment (53,689) (41,790)
--------- ---------
Net cash used in investing activities (53,689) (41,790)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 843 1,588
Proceeds from issuance of common stock -- --
--------- ---------
Net cash provided by financing activities 843 1,588
--------- ---------
Net decrease in cash (505,600) (180,662)
Cash at beginning of period 585,281 528,636
--------- ---------
Cash at end of period $ 79,681 $ 347,974Nine Months Ended
December 31,
1998 1997
------------ ----------
(Decrease) increase in cash:
Cash flows from operating activities
Net (loss) income $ (11,954) $ 348,593
Adjustments to reconcile net (loss) income
to cash used in operating activities:
Deferred income taxes (7,952) 232,298
Depreciation 30,558 24,483
Changes in assets or liabilities:
(Increase) decrease in accounts receivable
and unbilled revenue (227,000) (482,853)
(Increase) decrease in inventories (209,690) (45,318)
(Increase) decrease in prepaid expenses and
other current assets (9,043) (18,594)
(Increase) decrease in other assets (30,996) (15,000)
Increase in advanced billings -- 57,061
(Decrease) increase in accrued payroll,
deferred wages and
And vacation pay (776) (5,747)
(Decrease) increase in accounts payable
and accrued expenses (7,827) (106,206)
--------- ---------
Net cash used in operations (474,680) (11,283)
--------- ---------
Cash flows from investing activities:
Cash purchases of property, plant and equipment (59,714) (62,483)
--------- ---------
Net cash used in investing activities (59,714) (62,483)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 4,619 8,188
Proceeds from issuance of common stock -- --
--------- ---------
Net cash provided by financing activities 4,619 8,188
--------- ---------
Net decrease in cash (529,775) (65,578)
Cash at beginning of period 585,281 528,636
--------- ---------
Cash at end of period $ 55,506 $ 463,058
========= =========
Interest paid $ 20,538 $ 45,041
========= =========
Interest paid $ 19,786 $ 25,864
========= =========
See accompanying notes to condensed financial 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 September 30,December 31, 1998, the results of operations for the
three and sixnine months ended September 30,December 31, 1998 and September 30,December 31, 1997, and
statements of cash flows for the sixnine months ended September 30,December 31, 1998 and
September 30,December 31, 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, 1998 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 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$154,011 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:
September 30,December 31, March 31,
1998 1998
----------------------------------------- ---------
Purchased parts $ 282,409$355,843 $ 253,616
Work-in-process 216,209272,497 165,034
Less: Reserve for obsolescence (35,620) (35,620)
--------------------------------
$ 462,998-------- ---------
$592,720 $ 383,030
======================================== =========
Note 4 Income Taxes
The Company, in accordance with SFAS 109, has recognized a deferred income tax
benefit 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 operating losses before they expire. For the sixnine months ended
September 30,December 31, 1998, the Company recorded a deferred income tax benefit of $51,796,$7,952,
which represents the effective federal and state tax rate on the Company's net
loss before taxes of $129,653.$19,906. This tax benefit reduced the loss for the period.
The $51,796$7,952 increased the Company's deferred income tax asset by the same amount
in the accompanying balance sheet. The Company 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
statementsstatement format 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,December 31, 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 sixnine
months ended September 30,December 31, 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.basis at the bank's option. The Company hasdoes not borrowedcurrently have any
outstanding balance against this credit line. The Company pays no commitment fee
and the rate of interest on borrowings is the Lender's Prevailing Base Rate plus
1%.
5
Item 2 MANAGEMENTMANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL POSITION
Results of Operations
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in 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 unforeseenunforseen
circumstances. A number of these factors are discussed in the Company's filings
with the Securities and Exchange Commission.
Overview
TheWhile the Company's long-term outlook continues to be positive, the Company
invested heavilyexperienced two problems which resulted in product developmenta decline in sales and expenditures increased
$205,618 (57%)income for the
first sixnine months of the current fiscal year as compared to the same period infirst nine
months of the prior fiscal year. As previously reported, the Company completed
deliveries under its substantial U.S. Air Force T-30CM contract in the last
quarter of fiscal year 1998. The total expenditurecompany also experienced manpower problems and
technical issues in engineering, associated with the Company's substantial
growth in sales in the last two years, due to development of $569,544
represents 34%new and more
sophisticated products. This resulted in delays in completion and shipment of
totalorders, and consequent reduction in sales for the current year. These problems
have been identified and are in the process of being corrected. Management
believes that most of the delayed shipments will be made in the first half of
the next fiscal year.
Operating income levels have declined from the prior fiscal year primarily as a
result of lower sales, while operating expense levels have been as planned.
Management continues to believe that this decline is temporary and that new
contracts can and will be obtained and the current backlog shipped to increase
sales. In this regard, management is encouraged by the dollar value of its
backlog, which was over $2,250,000 at December 31, 1998, the large and
unexpected increase in commercial sales, which increased 36% for the first nine
months of the current fiscal year as compared to last year, the progress on the
U.S. Navy contract, and the efforts of its international distributors. Total
bookings increased $581,982 (22%) for the nine months ended December 31, 1998,
as compared to the same period last year.
The Company's profit before taxes was $109,747 for the three months ended
December 31, 1998, which reduced the loss before taxes for the nine months ended
December 31, 1998 to $19,906. The net profit for the three months ended December
31, 1998 was earned despite the Company having lower sales as compared to the
three months ended September 30, 1998. The higher profitability in the current
quarter is the result of a higher gross profit on sales and slightly lower
engineering, research and development expenses.
The Company continues to invest heavily in product development, and these
expenditures represented 28% of sales for the three months ended December 31,
1998. The principal effort resulted from the U.S. Navy exercising itstheir option
to incorporate a collision avoidance (TCAS) test capability into the T-47M test
set6
Item 2 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL POSITION (Continued)
Overview (Continued)
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.completed, including the reliability test, which exceeded the
Navy's requirements. Field evaluation by the U.S. Navy is anticipated to begin
early in the fourth quarter
ofnext fiscal year. The U.S. Navy continually monitors the current fiscal year.Company's
progress on this contract and management believes that the Navy is satisfied
with the Company's product and progress. Assuming field evaluations are
satisfactory and the U.S. Navy exercises production options later in the fourth quarter, deliveries
could begin in the first quarter
of the next fiscal year, deliveries would begin in the second quarter of that
year. This contract can be a source of significant revenues withthat could include
options for up to 1,300 units, which the U.S. Navy can exercise through calendar
year 2001. However, there can be no assurance that field evaluations will be
favorable and that the U.S. Navy will exercise its options under this contract.
In addition, the Company continues the development of the T-36M, under a U.S.
Army contract and the development of 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 had received from Muirhead Avionics a $323,000 contract for its T-48I,
which deliveries have been mostly completed. The Company also signed an
exclusive agreement with Milspec Services Pty. Ltd. in
August 1998("Milspec") 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.Zealand. The Company continuesreceived a $447,000 contract
to believesupply T-47CC ramp test sets to the Australian military, as direct result of
Milspec's efforts, for completion in the first quarter of the next fiscal year.
The Company believes that the foreign commercial market is larger than the
domestic market because many foreign airlines are upgrading to meet U.S.
requirements, and that foreignrequirements.
Sales
For the three months ended December 31, 1998 sales decreased $509,097 (34%), as
compared to the three months ended December 31, 1997. Commercial sales increased
$39,951 (12%) while government sales decreased $549,048 (48%) for the three
months ended December 31, 1998 as compared to the same period in the prior
fiscal year. Government sales for the three months ended December 31, 1997
included sales to a Defense Department prime contractor for the Company's T-47C
in the amount of $564,445 and the final shipments of the T-30CM to the U.S. Air
Force in the amount of $198,159, thereby accounting for the decline in fiscal
year 1999. These decreases were partially offset by sales to Muirhead Avionics
for the T-48I.
For the nine months ended December 31, 1998 sales declined $533,092 (17%), as
compared to the nine months ended December 31, 1997. Government sales decreased
$872,541 (39%), as compared to the same period last year. Government sales for
the nine months ended December 31, 1997 included sales to a Defense Department
prime contractor for the Company's T-47C in the amount of $743,660 and the final
shipments of the T-30CM to the U.S. Air Force in the amount of $836,014. This
decline was partially offset by sales to Muirhead for the T-48I and by the
increase in commercial sales of $339,449 (36%). The Company is encouraged with
the growth in the commercial market for which sales increased 36% in the nine
months ended December 31, 1998, as compared to the same period last year. The
backlog for commercial sales increased $418,326 (39%) as compared to December
31, 1997. However, there is no assurance that this market will grow, particularly as the result of our growing reputation
in IFF testing.
6continue to grow.
7
Item 2 MANAGEMENTMANAGEMENT'S 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. As a result of completing this contract, it was anticipated that the
Company would have lower sales during the first half of fiscal year 1999. The
Company continues to believe that this decline is temporary and new contracts
can be obtained to increase sales and earnings. In this regard, management is
encouraged by the dollar 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.
SalesGross Margin
For the three months and nine months ended September 30,December 31, 1998 sales increased $181,635 (21.5%gross margin
decreased $350,505 (36%) to $1,025,676,and $451,416 (23%), respectively, as compared to the
same period ending September 30, 1997.
Commercial sales increased $330,354 (119.3%) to $607,204 for the three and nine months ended September 30, 1998, as compared to the same period ending September 30,
1997. This increase in commercial sales is attributed to decisions by several
large fleet owners to upgrade their test equipment and may not be 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 same period
ending September 30,December 31, 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 had a
government backlog of $2,043,307 at September 30, 1998.
For the six months ended September 30, 1998 sales declined $23,995 (1.4%), as
compared to the same period ending September 30, 1997. The decline in government
sales related to the completion of the contract with the U.S. Air Force was
mostly offset by the increase in commercial sales during the second quarter and
the sales related to the contract with the U.S. Navy. There can be no assurance
that the increase in commercial sales will continue.
Gross Margin
For the three months ended September 30, 1998 gross margin increased $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.lower sales. The gross margin percentage was 58.5%64% for the three
months ended September 30,December 31, 1998 as compared to 58.3%66% for the three months ended
September 30,December 31, 1997. For the sixnine months ended September 30,December 31, 1998 the gross margin
decreased $100,911
(9.8%),percentage was 58% as compared to 63% for the same periodnine months ended September 30,December 31,
1997. This decrease is primarily attributed to the lower gross margin associated
with the documentation and test portion of 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%decreased $100,842 (30%) for the
three months ended September 30,December 31, 1998 as compared to the same period last year.
This increasedecrease is primarily associated with lower accrued employee incentive
compensation expense and a reduction in the level of expenditures related to the
Company's efforts to explore additional markets for its technology.
Selling, general and administrative expenses decreased $30,790 (4%) for the nine
months ended December 31, 1998 as compared to the same period last year. This
decrease is primarily associated with lower accrued employee incentive
compensation expense and a reduction in the level of expenditures related to the
Company's efforts to explore additional markets for its technology, partially
offset by 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 activities to ensure that such activities were properly
conducted.supervised. 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, generalEngineering, research and administrative expenses increased $70,053 (17.4%development decreased $11,252 (4%) for the sixthree
months ended September 30,December 31, 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.December
31, 1997. Lower accrued employee incentive compensation expense was mostly
offset by higher consulting fees for work on the development of the T-47M for
the U.S. Navy.
Engineering, research and development increased $121,551 (59.0%) and $205,618
(56.5%$194,367 (30%) for the three and sixnine
months ended September 30,December 31, 1998 respectively, as compared to the same periods last year.nine months ended December 31,
1997. This increase reflects the Company's ongoing commitment to developing new
products and finalizingfinalization of the design of the U.S. Navy T-47M test sets as described infor the Overview. As this work is
completed, the rate of engineering expenditures shouldU.S,
Navy. Outlays for new product development continue to be reduced.high.
Income Taxes
In accordance with SFAS 109, a provision for income taxes was recognized in the
amount of $93,464$232,298 for the sixnine months ended September 30,December 31, 1997. For the sixnine
months ended September 30,December 31, 1998 the Company recorded ana deferred income tax
benefit of $51,796,$7,952, which represents the effective federal and state tax rate on
the Company's net loss before taxes of $129,653.$19,906 (See Note 4 to Notes to Condensed
Financial Statements).
8
Item 2 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL POSITION (Continued)
Liquidity and Capital Resources
At September 30,December 31, 1998 the Company had positive working capital of $677,245$788,622 as
compared to $864,061 at March 31, 1998. For the sixnine months ended September 30,December 31,
1998, cash used in operations was $452,754$474,680 as compared to $140,460$11,283 for the sixnine
months ended September 30,December 31, 1997. This increasereduction in available cash used in operations is primarily
associated with the Company's loss from operations and increases in accounts receivable, unbilled revenues, and
inventories. The total decrease in
cash of $505,600 was also impacted by purchases of equipment in the amount of
$53,689.
The Company continues to invest heavily in research and development. The Company
expects these investments will finalize the designsdesign for the T-47M for the U.S.
Navy and complete the development of projects, such as the T-47N, T-36M and
T-48IC, andT-47CC. The company will then begin to ship these units for which there are current ordersnow in the backlog. While this wouldbacklog,
which should increase sales, cash flow and profits,profits. However, there is no
assurance that these increasessales and profits will occur.increase.
The Company has received a commitment from Summit Bank for a credit line of
$350,000. As of December 31, 1998, the Company has no outstanding balance
against this line.
Based upon the current backlog, and available working capital, and the available
credit line, the Company believes that it has sufficient working capital to fund
its plans for the next 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 fromactivities, although it may use some of its credit line with Summit Bank on a
credit line of
$350,000. The Company has not borrowed against this line as of September 30,
1998.short term basis.
There was no significant impact on the Company's operations as a result of
inflation for the sixnine months ended September 30,December 31, 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, 1998.
Year 2000 Issue
Many existing computer programs use only two digitsa two-digit suffix 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 yearreferences with an assumed prefix of "19". Consequently, thisThis limits those systems to
recognizing dates between 1900 and 1999. As a result, in a little less than a
year, computer systems and/or software used by many companies in a wide variety
of applications may experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. If not corrected, many computer systems andand/or applications could
fail or create erroneous results byat or atin connection with applications after
December 31, 1999. Significant uncertainty exists concerning the year 2000.scope and
magnitude of problems associated with the century change.
The Company has reviewed the potential impact of theits information and operational systems and
manufacturing processes in order to identify those products, services or systems
that are not Year 2000 issue. Thiscompliant. As a result of its initial 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 anticipatebelieve, based upon available information, 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 orderany material
exposure to continue normalsignificant business relations. At this time, it is impossible to assess the impactinterruption exists as a result of Year 2000
issue on each of these organizations. Therecompliance issues. Accordingly, the Company has not adopted any formal
contingency plan. However, there can be no guaranteeassurance that the systems
of other unrelated entities on which the Company reliescan
identify and remediate all significant Year 2000 problems, that remedial efforts
will be corrected on a
timely basisnot involve significant time and expense, or that such problems will not
have a material adverse effect on the Company.
New Accounting Pronouncements
StatementCompany's business, results of Financial Accounting Standards No. 133, Accounting for Derivative
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.operations
or financial position.
9
Item 2 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL POSITION (Continued)
Year 2000 Issue (continued)
The Company doesalso faces risk to the extent that suppliers of products, services
and systems purchased by it and others whom the Company transacts business on a
worldwide basis do not expectcomply with Year 2000 requirements. The Company will
initiate written communications with significant suppliers and customers to
determine the extent to which it is vulnerable to these third parties' failure
to remediate their own Year 2000 issues. In the event any such third parties
cannot provide the Company with products, services or systems that meet the Year
2000 requirements on a timely basis, or in the event Year 2000 issues prevent
such third parties from timely delivery of products or services required by the
Company, its implementationresults of operations could be materially adversely affected. To
the extent Year 2000 issues cause significant delays in, or cancellation of,
decisions to purchase the Company's products or services, its business, results
of operations and financial position could be materially adversely affected. Due
to the uncertainty, both internally and externally, inherent in the Year 2000
problem resulting, in part, from the uncertainty of its Year 2000 readiness of
third parties, suppliers and customers, the Company is unable to accurately
predict at this time whether the consequences of Year 2000 failures will have a
material effectimpact on the Company's results of operations, liquidity or financial
statements.
Statementcondition.
The discussion 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 primary operations of a mortgage banking enterprise. The Company
does not expect its implementation will have a material effect on the Company's financial statements as currently presented.
9efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The Company's ability to
achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
10
Part II.II Other Information
Item 6. Exhibits and Reports4 Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on Form 10-Q.
The exhibits filed or incorporated by referenceDecember 1, 1998 (the
"Annual Meeting").
(b) Not applicable because (i) proxies for the Annual Meeting were not
solicited pursuant to Regulation 14A under the Securities Exchange Act of
1934; (ii) there was no solicitation in opposition to management's
nominees as part of the Quarterly
Report on Form 10-Q are listed in the attached Index to Exhibits.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 1,376,464 0
George F. Leon 1,376,464 0
Robert J. Melnick 1,376,464 0
Jeff C. O'Hara 1,376,464 0
Robert J. Walker 1.376,464 0
The shareholders also voted all 1,376,464 shares in favor of
PricewaterhouseCoopers L.L.P. as the Company's certified public accountants for
the fiscal year ending March 31, 1999.
The shareholders also voted all 1,376,464 shares for ratification of the
Company's 1998 Stock Option Plan.
(d) Not applicable
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: 11/10/9802/12/99 By: /s/ Harold K. Fletcher
--------------------------------
/s/------------------------------
Harold K. Fletcher
Chairman and President
10
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