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 December 31, 1998

      __September 30, 1999

   ___        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:

2,107,0572,109,957 shares of Common stock, $.10 par value as of FebruaryNovember 1, 1999.






                     TEL-INSTRUMENT ELECTRONICS CORPORATION
                     --------------------------------------

                                TABLE OF CONTENTS
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                                                                      PAGE
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Item 1.  Financial Statements (Unaudited):

         Condensed Comparative Balance Sheets
            December 31, 1998September 30, 1999 and March 31, 19981999                      1

         Condensed Comparative Statements of Operations -
            Three and NineSix Months Ended December 31,September 30, 1999 and 1998 and 1997     2

         Condensed Comparative Statements of Cash Flows -
            NineSix Months Ended December 31,September 30, 1999 and 1998 and 1997               3

         Notes to Condensed Financial Statements                       4-54-7

Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations                      6-10

Part II     Other Information                                                 118-11

                                SIGNATURES                             11





1



Item 1 - Financial Statements

TEL-INSTRUMENT ELECTRONICS CORPORATION
                      CONDENSED COMPARATIVE BALANCE SHEETS
                                   (Unaudited)

                                     ASSETS          December 31,     March 31,
                                                        1998            1998
                                                     -----------     ----------
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
                                                     ===========    ===========
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED COMPARATIVE BALANCE SHEETS ------------------------------------ September 30, 1999 and March 31, 1999 (Unaudited) (Audited) ASSETS September 30, March 31, 1999 1999 ----------------- --------------- Current assets: Cash $ 83,868 $ 70,617 Accounts receivable, net 890,720 638,721 Inventories 1,021,293 713,700 Prepaid expenses and other current assets 33,637 39,173 Deferred income tax benefit - current 78,300 78,300 ----------------- --------------- Total current assets 2,107,818 1,540,511 ----------------- --------------- Property, plant, and equipment, net 227,010 130,901 Other assets 145,604 128,892 Deferred income tax benefit 348,661 418,204 ----------------- --------------- Total assets 2,829,093 2,218,508 ================= =============== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Note payable - related party - current portion 100,000 100,000 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 wages. payroll taxes, and interest on deferred wages 282,092 218,289 Accounts payable and accrued expenses 749,940 555,206 ----------------- --------------- Total current liabilities 1,471,503 1,032,929 ----------------- --------------- Notes payable - related party - non-current portion 250,000 250,000 Capitalized lease obligations - excluding current portion 83,967 16,486 ----------------- --------------- Total liabilities 1,805,470 1,299,415 Stockholders' equity Common stock 210,998 210,998 Additional paid-in capital 3,925,854 3,925,854 Accumulated deficit (3,113,229) (3,217,759) ----------------- --------------- Total stockholders' equity 1,023,623 919,093 ----------------- --------------- Total liabilities and stockholders' equity $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 NineSix Months Ended December 31, December 31, December 31, December 31, SalesSeptember 30, September 30, September 30, September 30, 1999 1998 19971999 1998 1997 ----------- ----------- ----------- ---------------------------- ---------------- ----------------- ----------------- Sales Government, net $ 584,490811,287 $ 1,133,538418,472 $ 1,385,7021,364,715 $ 2,258,243801,212 Commercial, net 388,446 348,495 1,278,103 938,654 ----------- ----------- ----------- -----------525,507 607,204 1,083,908 889,657 ----------------- ---------------- ----------------- ----------------- Total Sales 972,936 1,482,033 2,663,805 3,196,8971,336,794 1,025,676 2,448,623 1,690,869 Cost of sales 346,610 505,202 1,111,420 1,193,096 ----------- ----------- ----------- -----------634,996 425,504 1,100,420 764,810 ----------------- ---------------- ----------------- ----------------- Gross Margin 626,326 976,831 1,552,385 2,003,801701,798 600,172 1,348,203 926,059 Operating expenses:expenses Selling, general & administrative 233,366 334,208 706,593 737,383277,680 258,704 568,239 473,228 Engineering, research, & development 273,057 284,309 842,602 648,235 ----------- ----------- ----------- -----------302,859 327,532 581,302 569,544 ----------------- ---------------- ----------------- ----------------- Total operating expenses 506,423 618,517 1,549,195 1,385,618580,539 586,236 1,149,541 1,042,772 Income (loss) from operations 119,903 358,314 3,190 618,183121,259 13,936 198,662 (116,713) Other income (expense): Interest income 82 6,145 8,635 17,8782,083 2,484 3,698 8,554 Interest expense (10,238) (17,578) (31,731) (55,170) ----------- ----------- ----------- ----------- Income/(14,699) (9,611) (28,287) (21,494) ----------------- ---------------- ----------------- ----------------- Income (loss) before taxes 109,747 346,881 (19,906) 580,891 Provision/(Benefit)108,643 6,809 174,073 (129,653) Provision (benefit) for income taxes 43,844 138,834 (7,952) 232,298 ----------- ----------- ----------- -----------43,403 2,720 69,543 (51,796) ----------------- ---------------- ----------------- ----------------- Net income/income (loss) $ 65,90365,240 $ 208,0474,089 $ (11,954)104,530 $ 348,593 =========== =========== =========== ===========(77,857) ================= ================ ================= ================= Basic and diluted income (loss) per common share $ 0.03 $ 0.100.00 $ (0.01)0.05 $ 0.17(0.04) Dividends per share None None None None Weighted average shares outstanding Basic 2,104,539 2,039,581 2,098,657 2,035,2482,109,957 2,095,298 2,109,957 2,095,056 Diluted 2,116,101 2,093,989 2,098,657 2,089,6562,122,896 2,118,317 2,122,896 2,118,075
See accompanying notes to condensed financial statements 2 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited) Nine 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 ========= =========
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS ---------------------------------------------- (Unaudited) ----------- Six Months Ended September 30, 1999 1998 ---------------- ---------------- Increase (decrease) in cash: Cash flows from operating activities Net income (loss) $104,530 $ (77,857) Adjustments to reconcile net income (loss) to cash used in operating activities: Deferred income taxes 69,543 (51,796) Depreciation 31,962 20,339 Changes in operating assets or liabilities: Increase in accounts receivable and unbilled revenues (251,999) (220,670) Increase in inventories (307,593) (79,968) Decrease (increase) in prepaid expenses and other current assets 5,536 (14,316) Increase in other assets (16,712) (24,656) Increase (decrease) in accrued payroll, deferred wages and vacation pay 63,803 (808) Increase (decrease) in accounts payable, advance payments and accrued expenses 99,132 (3,022) ---------------- ---------------- Net cash used in operations (201,798) (452,754) ---------------- ---------------- Cash flows from investing activities: Cash purchases of property, plant and equipment (26,171) (53,689) ---------------- ---------------- Net cash used in investing activities (26,171) (53,689) ---------------- ---------------- Cash flows from financing activities: Proceeds from exercise of stock options - 843 Proceeds from notes payable - bank 250,000 - Repayment of capitalized lease obligations (8,780) - ---------------- ---------------- Net cash provided by financing activities 241,220 843 ---------------- ---------------- Net increase (decrease) in cash 13,251 (505,600) Cash at beginning of period 70,617 585,281 ---------------- ---------------- Cash at end of period $ 83,868 $ 79,681 ================ ================ Capitalized lease obligations $101,900 - ================ ================ Interest paid $ 39,934 $ 19,786 ================ ================ 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 December 31, 1998,September 30, 1999, the results of operations for the three and ninesix months ended December 31,September 30, 1999 and September 30, 1998, and December 31, 1997, and statements of cash flows for the ninesix months ended December 31, 1998September 30, 1999 and December 31, 1997.September 30, 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 $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 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: December 31,September 30, March 31, 1998 1998 --------- ---------1999 1999 ---- ---- Purchased parts $355,843 $ 253,616Parts $637,591 $402,804 Work-in-process 272,497 165,034413,322 340,516 Less: Reserve for obsolescence (35,620) (35,620)Obsolescence (29,620) (29,620) -------- --------- $592,720-------- Total $ 383,0301,021,293 $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 ninesix months ended December 31, 1998,September 30, 1999, the Company recorded a deferred income tax benefitprovision of $7,952,$69,543 which represents the effective federal and state tax rate on the Company's net lossincome before taxes of $19,906. This$174,073. The Company has no tax benefit reduced the loss for the period.liability. The $7,952 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 statement format to be consistent with the fiscal year 1999 presentation. Note 6 Earnings Per Share 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 December 31, 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 ninesix months ended December 31,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 at the bank's option. The Company does not currently have any outstanding balance against this credit line. The Company pays no commitment fee and theinterest rate of interest on 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 22. 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 unforseenunforeseen circumstances. A number of these factors are discussed in the Company's filings with the Securities and Exchange Commission. Overview While the Company's long-term outlook continues to be positive,- -------- In August 1999 the Company experienced two problems which resulted in a decline in sales and income forreceived the first nine months of the current fiscal year as compared to the first 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 company 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 new and more sophisticated products. This resulted in delays in completion and shipment of orders, 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 resultedproduction order from the U.S. Navy exercising their option to incorporatefor 230 test sets for a collision avoidance (TCAS) test capability into the T-47M test 6 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 monthstotal value of environmental and functional testing. Several tests have been successfully completed, including the reliability test, which exceeded the Navy's requirements. Field evaluation by the U.S. Navyover $3,000,000. This order is anticipated to begin early in the next fiscal year. The U.S. Navy continually monitors the 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 in the first quarter ofunder the next fiscal year, deliveries would begin in the second quarter of that year. This contract can be a source of significant revenues that could includewhich 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 generated income before taxes of $174,073. The Company continues to invest heavily in engineering, research, and development as the developmentCompany develops other products for targeted markets. For the first six months of the T-36M, undercurrent 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Sales - ----- Total sales increased $311,118 (30.3%) and $757,754 (44.8%) for the three and six months ended September 30, 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 U.S. Army contractdirectional antenna, and the development of new products for other markets. In June 1998,T-47N, which includes an interrogator test function. During the second quarter, the Company signed an exclusive agreement with Muirhead Avionics, based incompleted delivery of all the United Kingdom, to representunits of 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. ("Milspec") to represent the Company in Australia and New Zealand. The Company received a $447,000 contract to supply T-47CC ramp test sets to the Australian military as direct result of Milspec's efforts,through its exclusive distributor. Commercial sales decreased $81,697 (13.5%) 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. Sales For the three months ended December 31, 1998 sales decreased $509,097 (34%),September 30, 1999 as compared to the three months ended December 31, 1997. CommercialSeptember 30, 1998. However, commercial sales increased $39,951 (12%) while government sales decreased $549,048 (48%$194,251 (21.8%) for the threesix 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,September 30, 1999 as compared to the same period last year. The backlog forincrease in commercial sales increased $418,326 (39%) as comparedfor the six months reflects the favorable economic conditions within the airline industry. The decrease in sales in the second quarter is attributed to December 31, 1997.the timing of the orders received. However, there is no assurance that thisthe positive trend in the commercial market for the first six months of the current fiscal year will continue to grow. 7 Item 2 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL POSITION (Continued)continue. The increase in sales in both the commercial and government segments resulted also from the efforts of the Company's international distributors. Gross Margin For- ------------ 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 the 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 the associated learning curve in building these more sophisticated products. The gross margin percentage for the three months and nineended September 30, 1999 was 52.5% as compared to 58.5% for the three months ended December 31, 1998September 30, 1998. The gross margin decreased $350,505 (36%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 $451,416 (23%$95,011 (20.1%), respectively, for the three and six months ended September 30, 1999 as compared to the three and ninesix months ended December 31, 1997.September 30, 1998. This decreaseincrease is primarily 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. The gross margin percentage was 64% for the three months ended December 31, 1998 as compared to 66% for the three months ended December 31, 1997. For the nine months ended December 31, 1998 the gross margin percentage was 58% as compared to 63% for the nine months ended December 31, 1997. This decrease is primarily attributed to the lower gross margin associated with the documentationsales commissions. Engineering, research and test portion of the U.S. Navy T-47M contract. Operating Expenses Selling, general and administrativedevelopment expenses decreased $100,842 (30%$24,673 (7.5%) for the three months ended December 31, 1998September 30, 1999 as compared to the same period last year. This decrease isFor the six months ended September 30, 1999 engineering, research and development expenses increased $11,758 (2.1%). These expenditures are 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 and 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 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. Engineering, research and development decreased $11,252 (4%) for the three months ended December 31, 1998 as compared to the three months ended 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 $194,367 (30%) for the nine months ended December 31, 1998 as compared to the nine months ended December 31, 1997. This increase reflects the Company's ongoing commitment to developing new products and finalization of the design of the T-47M IFF test sets for the U.S, Navy. Outlays for new productU.S. Navy and the development continue to be high.of additional products, such as the T-47CC and T-47N. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Income Taxes - ------------ In accordance with SFAS 109, a provision for income taxes was recognized in the amount of $232,298$69,543 for the ninesix months ended December 31, 1997.September 30, 1999. For the ninesix months ended December 31,September 30, 1998, the Company recorded a deferred income tax benefit of $7,952,$51,796, which represents the effective federal and state tax rate on the Company's net loss before taxes of $19,906$129,653. The Company currently does not have any tax liability. (See Note 4 to Notes to Condensed Comparative Financial Statements). 8 Item 2 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL POSITION (Continued) Liquidity and Capital Resources - ------------------------------- At December 31, 1998September 30, 1999 the Company had positive working capital of $788,622$636,315 as compared to $864,061$507,582 at March 31, 1998.1999. For the ninesix months ended December 31, 1998,September 30, 1999, cash used in operations was $474,680$201,798 as compared to $11,283$452,754 for the ninesix months ended December 31, 1997.September 30, 1998. This reduction in available cash used in operations is primarily associated withattributed to the improvement in the Company's operating income. Increases in accounts receivable and inventories were partially offset by the Company's operating income, borrowings from the bank in the amount of $250,000, and increases in accounts receivable, unbilled revenues,payable and inventories. Theother accrued liabilities. In July 1999, the Company continues to invest heavily in research and development. The Company expects these investments will finalize the design for the T-47M for the U.S. Navy and complete the development of projects, such as the T-47N, T-36M and T-47CC. The company will then begin to ship these units now in the backlog, which should increase sales, cash flow and profits. However, there is no assurance that sales and profits will increase. The Company has received a commitment from Summit Bank for a creditrenegotiated its line of $350,000. As of December 31, 1998,credit for $250,000, maturing July 2000. During the six months ended September 30, 1999, the Company has no outstanding balance against this line.had borrowed all of the $250,000 for working capital needs. Based upon the current backlog, expected sales 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, although it may use someactivities. However, the Company continues to seek additional credit in order to increase working capital. The Company has been closely monitoring its accounts receivable collections and payments to vendors during this period of its credit line with Summit Bank on a short term basis.increasing sales. There was no significant impact on the Company's operations as a result of inflation for the ninesix months ended December 31, 1998.September 30, 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-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 suffix to identify year references with an assumed prefix of "19". ThisConsequently, this 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 and/or applications could fail or create erroneous results by or at or in connection with applications after December 31, 1999. Significant uncertainty exists concerning the scope and magnitude of problems associated with the century change.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 its information and operationalthe 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 manufacturing processesother areas. The Company does not anticipate that the Year 2000 issue will impact operations or operating 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 identify those products, services or systems that are notcontinue normal business relations. The Company is continuing to evaluate alternatives and develop contingency plans for key business partners. Year 2000 compliant. As a resultdisruptions in the operations of key business partners could also impact the Company's ability to fulfill some of its initial assessment,contractual obligations. At this time, it is impossible to assess the Company does not believe, based upon available information, that any material exposure to significant business interruption exists as a resultimpact of the Year 2000 compliance issues. Accordingly, the Company has not adopted any formal contingency plan. However, thereissue on each of these organizations. There can be no assuranceguarantee that the systems of other unrelated entities on which the Company can identifyrelies will be corrected on a timely basis and remediate all significant Year 2000 problems, that remedial efforts will not involve significant time and expense, or that such problems will not have a material adverse effect on the Company's business, results of 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 also 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 comply 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 results 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 impact on the Company's results of operations, liquidity or financial condition.Company. The discussion of the Company's efforts, 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 Other Information Item 4 Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on December 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 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 1,376,464 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: 02/12/99November 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 ----------------- 27 Financial data schedule which is submitted electronically to the Securities and Exchange Commission for information only and is not filed. 11