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, 19981999
___ 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_X No ____
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,096,9852,109,957 shares of Common stock, $.10 par value as of October 28, 1998.November 1, 1999.
TEL-INSTRUMENT ELECTRONICS CORPORATION
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TABLE OF CONTENTS
------------------
PAGE
----
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
September 30, 19981999 and March 31, 19981999 1
Condensed Comparative Statements of Operations -
Three and Six Months Ended September 30, 19981999 and 19971998 2
Condensed Comparative Statements of Cash Flows -
Six Months Ended September 30, 19981999 and 19971998 3
Notes to Condensed Financial Statements 4-54-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
Part II. Other Information 108-11
SIGNATURES 1011
1
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
September 30, 1998 and March 31, 1998
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED COMPARATIVE BALANCE SHEETS
------------------------------------
September 30, 1999 and March 31, 1999
(Unaudited) (Audited)
ASSETS September 30, March 31,
1998 1998
------------- ------------1999 1999
----------------- ---------------
Current assets:
Cash $ 79,68183,868 $ 585,28170,617
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 --890,720 638,721
Inventories 462,998 383,0301,021,293 713,700
Prepaid expenses and other current assets 38,333 24,01733,637 39,173
Deferred income tax benefit - current 78,300 78,300
----------- ---------------------------- ---------------
Total current assets 1,254,488 1,445,134
----------- -----------2,107,818 1,540,511
----------------- ---------------
Property, plant, and equipment, net 112,671 79,321227,010 130,901
Other assets 120,723 96,067145,604 128,892
Deferred income tax benefit 372,415 320,619
----------- -----------348,661 418,204
----------------- ---------------
Total assets 1,860,297 1,941,141
=========== ===========2,829,093 2,218,508
================= ===============
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Note payable - related party - current portion 50,000 50,000100,000 100,000
Note payable - bank 250,000 -
Convertible subordinate notes - related party 15,000 15,000
Capitalized lease obligations - current portion 35,306 9,667
Advance Payments 39,165 134,767
Accrued payroll, vacation pay, deferred wageswages.
payroll taxes, and interest on deferred wages 210,592 211,400282,092 218,289
Accounts payable and accrued expenses 301,651 304,673
----------- -----------749,940 555,206
----------------- ---------------
Total current liabilities 577,243 581,073
----------- -----------1,471,503 1,032,929
----------------- ---------------
Notes payable - related party - non-current portion 300,000 300,000
----------- -----------250,000 250,000
Capitalized lease obligations - excluding current portion 83,967 16,486
----------------- ---------------
Total liabilities 877,243 881,0731,805,470 1,299,415
Stockholders' equity
Common stock 209,701 209,476210,998 210,998
Additional paid-in capital 3,922,288 3,921,6703,925,854 3,925,854
Accumulated deficit (3,148,935) (3,071,078)
----------- -----------(3,113,229) (3,217,759)
----------------- ---------------
Total stockholders' equity 983,054 1,060,068
----------- -----------1,023,623 919,093
----------------- ---------------
Total liabilities and stockholders' equity $ 1,860,297 $ 1,941,141
=========== ===========$2,829,093 $2,218,508
================= ===============
See accompanying notes to condensed financial statements
1
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
----------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1999 1998 19971999 1998
1997
------------- ------------- ------------- ------------------------------ ---------------- ----------------- -----------------
Sales
Government, net $ 811,287 $ 418,472 567,191$ 1,364,715 $ 801,212
1,124,705
Commercial, net 525,507 607,204 276,8501,083,908 889,657
590,159
----------- ----------- ----------- ---------------------------- ---------------- ----------------- -----------------
Total Sales 1,336,794 1,025,676 844,0412,448,623 1,690,869 1,714,864
Cost of sales 634,996 425,504 351,6741,100,420 764,810
687,894
----------- ----------- ----------- ---------------------------- ---------------- ----------------- -----------------
Gross Margin 701,798 600,172 492,3671,348,203 926,059 1,026,970
Operating expenses
Selling, general & administrative 277,680 258,704 184,245568,239 473,228 403,175
Engineering, research, & development 302,859 327,532 205,981581,302 569,544
363,926
----------- ----------- ----------- ---------------------------- ---------------- ----------------- -----------------
Total operating expenses 580,539 586,236 390,2261,149,541 1,042,772
767,101
Income/ (Loss)Income (loss) from operations 121,259 13,936 102,141198,662 (116,713) 259,869
Other income (expense):
Interest income 2,083 2,484 5,6513,698 8,554 11,733
Interest expense (14,699) (9,611) (19,849)(28,287) (21,494)
(37,592)
----------- ----------- ----------- -----------
Income/ (Loss)----------------- ---------------- ----------------- -----------------
Income (loss) before taxes 108,643 6,809 87,943174,073 (129,653)
234,010
Provision/(Benefit)Provision (benefit) for income taxes 43,403 2,720 35,12569,543 (51,796)
93,464
----------- ----------- ----------- -----------
(Loss)/net----------------- ---------------- ----------------- -----------------
Net income (loss) $ 65,240 $ 4,089 52,818$ 104,530 $ (77,857)
140,546
=========== =========== =========== ============================ ================ ================= =================
Basic and diluted income (loss)
per common share $ 0.00 0.03 $ 0.00 $ 0.05 $ (0.04) 0.07
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,109,957 2,095,298 2,034,1232,109,957 2,095,056
2,032,762
Diluted 2,122,896 2,118,317 2,101,7312,122,896 2,118,075 2,100,370
See accompanying notes to condensed financial statements
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
----------------------------------------------
(Unaudited)
-----------
Six Months Ended
September 30,
1999 1998
1997
---------- ------------------------- ----------------
(Decrease) increaseIncrease (decrease) in cash:
Cash flows from operating activities
Net income (loss) income$104,530 $ (77,857) $ 140,546
Adjustments to reconcile net income (loss) income to cash used
in operating activities:
Deferred income taxes 69,543 (51,796)
93,464
Depreciation 31,962 20,339 12,535
Changes in operating assets or liabilities:
Increase in accounts receivable and unbilled revenues (251,999) (220,670) (251,434)
Increase in inventories (307,593) (79,968)
(93,993)
IncreaseDecrease (increase) in prepaid expenses and other current assets 5,536 (14,316) (14,132)
Increase in other assets (16,712) (24,656)
(15,000)
(Decrease) increaseIncrease (decrease) in accrued payroll, deferred wages and
and vacation pay 63,803 (808)
14,279
DecreaseIncrease (decrease) in accounts payable, advance payments and
accrued expenses 99,132 (3,022)
(26,725)
--------- ------------------------- ----------------
Net cash used in operations (201,798) (452,754)
(140,460)
--------- ------------------------- ----------------
Cash flows from investing activities:
Cash purchases of property, plant and equipment (26,171) (53,689)
(41,790)
--------- ------------------------- ----------------
Net cash used in investing activities (26,171) (53,689)
(41,790)
--------- ------------------------- ----------------
Cash flows from financing activities:
Proceeds from exercise of stock options - 843 1,588
Proceeds from issuancenotes payable - bank 250,000 -
Repayment of common stock -- --
--------- ---------capitalized lease obligations (8,780) -
---------------- ----------------
Net cash provided by financing activities 241,220 843
1,588
--------- ------------------------- ----------------
Net decreaseincrease (decrease) in cash 13,251 (505,600) (180,662)
Cash at beginning of period 70,617 585,281
528,636
--------- ------------------------- ----------------
Cash at end of period $ 83,868 $ 79,681
$ 347,974
========= ========================= ================
Capitalized lease obligations $101,900 -
================ ================
Interest paid $ 39,934 $ 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, 1998,1999, the results of operations for the
three and six months ended September 30, 19981999 and September 30, 1997,1998, and
statements of cash flows for the six months ended September 30, 19981999 and
September 30, 1997.1998. 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, 19981999 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, theThe 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, 1998.1999.
Note 2 Accounts Receivable
- ------ -------------------
The following table sets forth the components of accounts receivable:
September 30, March 31,
1999 1999
---- ----
Commercial $228,641 $179,742
Government 577,063 359,716
Unbilled Revenuerevenues 100,614 114,848
Allowance for bad debts (15,598) (15,585)
-------- --------
Total $890,720 $638,721
======== ========
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 underassociated with the documentation and test portion of the U.S. Navy
contract have been recorded on the percentage-of-completion method. Under this
approach, sales and gross margin are recognized based onupon 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 contractualactual billing terms. In August 1999, the Company received the first
production order for 230 test sets with a value of approximately $3,000,000. In
September 1999, the U.S. Navy increased the quantity ordered to 251 units,
bringing the total order to over $3,300,000.
4
TEL-INSTRUMENT ELECTRONICS CORP.
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
---------------------------------------------------
Note 3 Inventories
- ------ -----------
Inventories consist of:
September 30, March 31,
1998 1998
--------------------------------1999 1999
---- ----
Purchased parts $ 282,409 $ 253,616Parts $637,591 $402,804
Work-in-process 216,209 165,034413,322 340,516
Less: Reserve for obsolescence (35,620) (35,620)
--------------------------------Obsolescence (29,620) (29,620)
-------- --------
Total $ 462,998 $ 383,030
================================1,021,293 $713,700
=========== ========
Note 4 Income Taxes
- ------ ------------
The Company, in accordance with SFASFASB 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 six months ended
September 30, 1998,1999, the Company recorded a deferred income tax benefitprovision of $51,796,$69,543 which
represents the effective federal and state tax rate on the Company's net lossincome
before taxes of $129,653. This$174,073. The Company has no tax benefit reduced the loss
for the period.liability. The $51,796 increased$69,543
decreased the Company's deferred income tax assetbenefit 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)The Company continues to
evaluate the impact of FASB 109. At March 31, 1999, the Company had a deferred
tax asset of $1,542,000 and recorded a valuation allowance of $1,045,496 against
this asset.
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- ------ ------------------
The Company's 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 during the period, including common share equivalents, such as
outstanding stock options and warrants during the period.options. 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.
5
TEL-INSTRUMENT ELECTRONICS CORP
-------------------------------.
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
---------------------------------------------------
Note 6 Government and Commercial Sales
- ------ -------------------------------
In 1999, the Company adopted SFAS 131. The prior years' information has been
restated to present separately the Company's government and commercial
activities.
The Company primarily develops and designs test equipment for the avionics
industry and, as such, the Company's products and designs are sold in the
government and commercial markets. Government sales consist of the sale of test
equipment to U.S. and foreign governments and militaries either direct or
through distributors. Commercial sales consist of sales of test equipment to
domestic and foreign airlines and to commercial distributors.
The table below presents information about sales and gross margin. Costs of
sales includes certain allocation factors for indirect costs.
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
Government Commercial Government Commercial
---------- ---------- ---------- ----------
Sales 811,287 525,507 418,472 607,204
Cost of Sales 411,923 223,073 190,932 234,572
------- ------- ------- -------
Gross Margin 399,364 302,434 227,540 372,632
Six Months Ended Six Months Ended
September 30, 1999 September 30, 1998
Government Commercial Government Commercial
---------- ---------- ---------- ----------
Sales 1,364,715 1,083,908 801,212 889,657
Cost of Sales 645,889 454,531 386,933 377,877
--------- ---------- ------- -------
Gross Margin 718,826 629,377 414,279 511,780
Note 7 Line of Credit
Facility
On- ------ --------------
In July 22, 1998,1999, the Company entered into arenegotiated its line of credit agreement with Summit Bank
for $350,000, which extends for one year andof $250,000, maturing
in July 2000. Interest is thereafter renewable onpayable monthly at an annual basis. The Company has not borrowed against this line. The Company pays
no commitment fee and theinterest rate of interest borrowings1% above the
lender's prevailing base rate. The line is collateralized by substantially all
of the Lender's Prevailing
Base Rate plus 1%.
5assets of the Company. During the six months ended September 30, 1999,
the Company had borrowed all of the $250,000 for working capital needs.
Note 8 Note Payable - Related party
- ------ ----------------------------
The outstanding $50,000 note due March 31, 1999 was extended until March 31,
2000.
Note 9 Convertible Subordinated Note - Related party
- ------ ---------------------------------------------
The $15,000 convertible subordinated note due March 31, 1999 was extended to
March 31, 2000.
6
Item 2 MANAGEMENT2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL POSITIONCONDITION
---------------------------------------------
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 unforeseen
circumstances. A number of these factors are discussed in the Company's filings
with the Securities and Exchange Commission.
Overview
The- --------
In August 1999 the Company invested heavily in product development and expenditures increased
$205,618 (57%) forreceived the first six months of the current fiscal year as compared
to the same period in the prior fiscal year. The total expenditure of $569,544
represents 34% of total sales. The principal effort resultedproduction order from the U.S.
Navy exercising its option to incorporatefor 230 test sets for a collision avoidance (TCAS) test
capability into the T-47M test set design. Eight T-47M prototypes have been
fabricated and these units have begun several monthstotal value of environmental and
functional testing. Several tests have been successfully completed. Field
evaluation by the U.S. Navyover $3,000,000. This order is anticipated to begin early in the fourth quarter
of the current fiscal year. 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 ofunder the next fiscal year. This contract can be a
source of significant revenues, withwhich includes options for up to 1,300 units, which the
U.S. Navy can exercise, on behalf of all U.S. military services, through
calendar year 2001. In September 1999 the U.S. Navy increased the quantity
ordered to 251 units, bringing the total order to over $3,300,000. However,
there can be no assurance that field evaluations will be favorable and that the U.S. Navy will exercise the balance of all of
its purchase options under this contract. In addition,The Company expects to begin shipping
these units at the end of the fourth quarter of the current fiscal year.
Sales for the first half of the current fiscal year totaled $2,448,623 and the
Company continues the
developmentgenerated income before taxes of the T-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.$174,073. 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,invest heavily in engineering, research, and that foreign
government sales will grow, particularlydevelopment as the resultCompany develops
other products for targeted markets.
For the first six months of our growing reputation
in IFF testing.
6the current fiscal year the Company received orders
approximating $6,500,000, including the order from the U.S. Navy. The Company's
backlog, including the order from the U.S. Navy, for which shipments are
scheduled to begin at the end of the fourth quarter of the current fiscal year,
currently exceeds $6,500,000.
7
Item 2 MANAGEMENT2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
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 unitsCONDITION (continued)
---------------------------------------------------------
Results 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.Operations (continued)
- ---------------------------------
Sales
For the three months ended September 30, 1998- -----
Total sales increased $181,635 (21.5%)
to $1,025,676, as compared to the same period ending September 30, 1997.
Commercial sales increased $330,354 (119.3%) to $607,204 for the three 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, 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. 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%$311,118 (30.3%) and $205,618
(56.5%$757,754 (44.8%) for the three and
six months ended September 30, 1998,1999, respectively, as compared to the same
periods in the prior fiscal year.
Government sales increased $392,815 (93.9%) and $563,503 (70.3%) for the three
and six months ended September 30, 1999, respectively, as compared to the three
and six months ended September 30, 1998. The increase in government sales is
attributed primarily to the T-47 family of IFF test sets, including the T-47CC,
which incorporates a directional antenna, and the T-47N, which includes an
interrogator test function. During the second quarter, the Company completed
delivery of all the units of the T-47CC ramp test sets to the Australian
military through its exclusive distributor.
Commercial sales decreased $81,697 (13.5%) for the three months ended September
30, 1999 as compared to the three months ended September 30, 1998. However,
commercial sales increased $194,251 (21.8%) for the six months ended September
30, 1999 as compared to the same period last year. ThisThe increase in commercial
sales for the six months reflects the favorable economic conditions within the
airline industry. The decrease in sales in the second quarter is attributed to
the timing of the orders received. However, there is no assurance that the
positive trend in the commercial market for the first six months of the current
fiscal year will continue. The increase in sales in both the commercial and
government segments resulted also from the efforts of the Company's
ongoing commitmentinternational distributors.
Gross Margin
- ------------
Gross Margin increased $101,626 (16.9%) and $422,144 (45.6%) for the three and
six months ended September 30, 1999 as compared to developingthe same periods in the prior
fiscal year. The increase in gross margin, for the most part, is attributed to
the higher volume. Gross margin was negatively affected in the second quarter as
a result of the introduction of new products and finalizingthe associated learning curve
in building these more sophisticated products. The gross margin percentage for
the three months ended September 30, 1999 was 52.5% as compared to 58.5% for the
three months ended September 30, 1998. The gross margin percentage for the six
months ended September 30, 1999 was 55.1% as compared to 54.8% for the six
months ended September 30, 1998.
Operating Expenses
- ------------------
Selling, general and administrative expenses increased $18,976 (7.3%) and
$95,011 (20.1%) for the three and six months ended September 30, 1999 as
compared to the three and six months ended September 30, 1998. This increase is
attributed to higher sales and marketing expenses, the addition to staff of a
Director of Finance, an increase in salaries and compensation expense, and
higher legal expenses, all partially offset by lower sales commissions.
Engineering, research and development expenses decreased $24,673 (7.5%) for the
three months ended September 30, 1999 as compared to the same period last year.
For the six months ended September 30, 1999 engineering, research and
development expenses increased $11,758 (2.1%). These expenditures are primarily
associated with the finalization of the design of the T-47M IFF test sets for
the U.S. Navy T-47M test sets,and the development of additional products, such as described in the Overview. As this work is
completed, the rateT-47CC and
T-47N.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of engineering expenditures should be reduced.Operations (continued)
- ---------------------------------
Income Taxes
- ------------
In accordance with SFAS 109, a provision for income taxes was recognized in the
amount of $93,464$69,543 for the six months ended September 30, 1997.1999. For the six
months ended September 30, 1998, the Company recorded ana deferred income tax
benefit of $51,796, which represents the effective federal and state tax rate on
the Company's net loss before taxes of $129,653. The Company currently does not
have any tax liability. (See Note 4 to Notes to Condensed Comparative Financial
Statements).
Liquidity and Capital Resources
- -------------------------------
At September 30, 19981999 the Company had positive working capital of $677,245$636,315 as
compared to $864,061$507,582 at March 31, 1998.1999. For the six months ended September 30,
1998,1999, cash used in operations was $452,754$201,798 as compared to $140,460$452,754 for the six
months ended September 30, 1997.1998. This increasereduction in cash used in operations is
primarily associated withattributed to the improvement in the Company's lossoperating income.
Increases in accounts receivable and inventories were partially offset by the
Company's operating income, borrowings from operationsthe bank in the amount of $250,000,
and increases in accounts receivable, unbilled revenues,payable and inventories. The total decrease in
cashother accrued liabilities.
In July 1999, the Company renegotiated its line of $505,600 was also impacted by purchasescredit for $250,000, maturing
July 2000. During the six months ended September 30, 1999, the Company had
borrowed all 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 designs$250,000 for the T-47M, T-47N, T-36M,
and T-48IC, and begin to ship these units for which there are current orders in
the backlog. While this would increase sales, cash flow, and profits, there is
no assurance that these increases will occur.working capital needs.
Based upon the current backlog, expected sales and available working capital,
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,However, the Company received from Summit Bank acontinues to seek additional credit line of
$350,000.in order to
increase working capital. The Company has not borrowed againstbeen closely monitoring its accounts
receivable collections and payments to vendors during this line asperiod of September 30,
1998.increasing
sales.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 1998.1999.
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, 1998.1999.
Year 2000 Issue
- ---------------
Many existing computer programs use only two digitstwo-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 yearYear 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 andand/or applications could fail or create
erroneous results by or at the year 2000.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Year 2000 Issue (continued)
- ---------------------------
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.results
or require future material expenditures. The Company's products are not date
sensitive. In addition, the Company is in the process of contacting its
suppliers to determine as to whether they are Year 2000 compliant. The Company
relies on its customers, suppliers, utility service providers, financial
institutions, and other partners in order to continue normal business relations.
The Company is continuing to evaluate alternatives and develop contingency plans
for key business partners. Year 2000 disruptions in the operations of key
business partners could also impact the Company's ability to fulfill some of its
contractual obligations. At this time, it is impossible to assess the impact of
the Year 2000 issue on each of these organizations. There can be no guarantee
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
StatementThe discussion 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. The Company does not expect its implementation will have a material
effect on the Company's financialefforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. StatementThe Company's ability to
achieve Year 2000 compliance and the level of Financial Accounting Standards No. 134, Accounting for Certain
Mortgage Banking Activities was issued in October 1998incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and is effective for all
fiscal quarters beginning after December 15, 1998. This statement establishes
reporting standards for certain banking activitiescost of mortgage banking
enterprisesprogramming and other enterprises that conduct operations that are substantially
similartesting resources, vendors' ability 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.
9
Part II. Other Information
Item 6. Exhibitsmodify
proprietary software, and Reports on Form 10-Q.
The exhibits filed or incorporated by reference as part of the Quarterly
Report on Form 10-Q are listedunanticipated problems identified in the attached Index to Exhibits.ongoing
compliance review.
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: 11/10/98November 3, 1999 By: /s/ Harold K. Fletcher
------------------------------------------------------
/s/ Harold K. Fletcher
Chairman and President
Date: November 3, 1999 By: /s/ Joseph P. Macaluso
----------------------
/s/ Joseph P. Macaluso
Principal Accounting Officer
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