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
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TABLE OF CONTENTS
------------------
PAGE
----
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