UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1441806
(State of Incorporation) (I.R.S. Employer
ID Number)
728 Garden Street, Carlstadt, New Jersey 07072
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 201-933-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,210,731 shares of Common stock, $.10 par value as of November 7, 2005.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
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Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
September 30, 2005 and March 31, 2005 1
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information
Item 6. Exhibits 14
Signatures 14
Certifications 15-17
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2005 March 31, 2005
------------------ --------------
(Unaudited)
Current assets:
Cash and cash equivalents $1,588,841 $ 826,959
Accounts receivable, net 1,378,095 1,610,519
Inventories, net 2,411,204 2,926,011
Taxes receivable 125,674 125,674
Prepaid expenses and other current assets 153,754 124,946
Deferred income taxes 526,203 583,560
---------- ----------
Total current assets 6,183,771 6,197,669
Property, plant and equipment, net 819,931 844,075
Intangible assets, net 326,851 283,754
Other assets 308,132 302,135
---------- ----------
Total assets $7,595,588 $7,670,730
========== ==========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Convertible subordinated notes - related party 7,500 7,500
Notes payable - other 58,000 58,000
Capitalized lease obligations - current portion -- 2,323
Accounts payable 282,783 481,146
Deferred revenues 149,991 169,866
Accrued payroll, vacation pay, profit sharing
and payroll taxes 328,815 353,704
Accrued expenses 1,075,608 1,028,014
---------- ----------
Total current liabilities 1,952,697 2,150,553
Convertible notes payable - related party - long-term 150,000 150,000
Deferred taxes - long-term 43,000 43,000
---------- ----------
Total liabilities 2,145,697 2,343,553
Stockholders' equity:
Common stock, par value $.10 per share, 2,195,731 and
2,187,831 issued and outstanding as of September 30,
2005, and March 31, 2005, respectively 219,576 218,786
Additional paid-in capital 4,081,570 4,024,910
Retained earnings 1,148,745 1,083,481
---------- ----------
Total stockholders' equity 5,449,891 5,327,177
---------- ----------
Total liabilities and stockholders' equity $7,595,588 $7,670,730
========== ==========
See accompanying notes to condensed financial statements
-1-
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
-------------- -------------- -------------- --------------
Net sales $ 3,094,442 $ 2,238,950 $ 6,245,420 $ 5,051,750
Cost of sales 1,589,623 1,026,411 3,133,918 2,361,651
----------- ----------- ----------- -----------
Gross margin 1,504,819 1,212,539 3,111,502 2,690,099
Operating expenses
Selling, general and administrative 774,853 808,742 1,672,848 1,641,953
Amortization of intangibles 21,549 21,549 43,098 43,098
Engineering, research and development 643,578 510,046 1,272,100 1,042,496
----------- ----------- ----------- -----------
Total operating expenses 1,439,980 1,340,337 2,988,046 2,727,547
----------- ----------- ----------- -----------
Income (loss) from operations 64,839 (127,798) 123,456 (37,448)
Other income (expense):
Interest income 3,300 3,246 6,390 6,750
Interest expense (3,255) (7,225) (6,971) (13,562)
----------- ----------- ----------- -----------
Income (loss) before taxes 64,884 (131,777) 122,875 (44,260)
Provision (benefit) for income taxes- 28,768 (52,644) 57,611 (17,681)
----------- ----------- ----------- -----------
Net income (loss) $ 36,116 $ (79,133) $ 65,264 $ (26,579)
=========== =========== =========== ===========
Basic income (loss) per common share $0.02 $(0.04) $0.03 $(0.01)
===== ====== ===== ======
Diluted income (loss) per common share $0.02 $(0.04) $0.03 $(0.01)
===== ====== ===== ======
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,190,006 2,144,301 2,189,074 2,144,237
Diluted 2,302,015 2,144,301 2,301,083 2,144,237
See accompanying notes to condensed financial statements
-2-
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Sept. 30, 2005 Sept. 30, 2004
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ 65,264 $ (26,579)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes 57,356 (17,681)
Depreciation 136,829 130,414
Amortization of intangibles 43,098 43,098
Non-cash stock-based compensation 43,230 --
Changes in operating assets or liabilities:
Decrease (increase) in accounts receivable, net 232,424 (521,449)
Decrease (increase) in inventories, net 514,807 (331,814)
(Increase) decrease in prepaid expenses and
other current assets (28,808) 32,292
(Increase) decrease in other assets (5,997) 1,835
(Decrease) increase in accounts payable (198,363) 253,044
(Decrease) increase in deferred revenues (19,875) 33,154
(Decrease) increase in accrued payroll, vacation pay,
and payroll taxes (24,889) 55,666
Increase in accrued expenses 47,594 44,249
----------- -----------
Net cash provided by (used in) operating activities 862,670 (303,771)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (112,685) (168,536)
----------- -----------
Net cash used in investing activities (112,685) (168,536)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 14,220 1,080
Payment of capitalized lease obligations (2,323) (10,931)
----------- -----------
Net cash provided by (used in) financing activities 11,897 (9,851)
----------- -----------
Net increase (decrease) in cash and cash equivalents 761,882 (482,158)
Cash and cash equivalents at beginning of period 826,959 1,509,828
----------- -----------
Cash and cash equivalents at end of period $ 1,588,841 $ 1,027,670
=========== ===========
Supplemental information
Interest paid $ 4,500 $ 2,383
=========== ===========
See accompanying notes to condensed financial statements
-3-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position of
Tel-Instrument Electronics Corp as of September 30, 2005, the results of
operations for the three and six months ended September 30, 2005 and September
30, 2004, and statements of cash flows for the six months ended September 30,
2005 and September 30, 2004. 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, 2005 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2005.
Note 2 Accounts Receivable, net
Accounts receivable, net, consist of:
September 30, 2005 March 31, 2005
Commercial $ 718,119 $ 642,954
Government 703,004 1,013,771
Allowance for doubtful accounts (43,028) (46,206)
----------- -----------
Total $ 1,378,095 $ 1,610,519
=========== ===========
Note 3 Inventories, net
Inventories, net, consist of:
September 30, 2005 March 31, 2005
Purchased parts $ 1,457,761 $ 1,452,080
Work-in-process 1,052,761 1,532,535
Finished goods 92,901 112,036
Less: Reserve for obsolescence (192,219) (170,640)
----------- -----------
Total $ 2,411,204 $ 2,926,011
=========== ===========
-4-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 Earnings Per Share
The Company's basic income (loss) per common share is based on net income for
the relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted income per common share 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. Common share equivalents are not included in the
calculation for the three and six months ended September 30, 2004 since the
effect would be antidilutive.
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Basic net income (loss) per share computation:
Net income (loss) for common stockholders $ 36,116 $ (79,133)
Weighted-average common shares outstanding 2,190,006 2,144,301
Basic net income (loss) per share for common stockholders $ 0.02 $ (0.04)
Diluted net income (loss) per share computation
Net income (loss) for common stockholders $ 36,116 $ (79,133)
Weighted-average common shares outstanding 2,190,006 2,144,301
Incremental shares attributable to the assumed exercise of
outstanding stock options 112,009 --
Total adjusted weighted-average shares 2,302,015 2,144,301
Diluted net income (loss) per share for common stockholders $ 0.02 $ (0.04)
Six Months Ended Six Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Basic net income (loss) per share computation:
Net income (loss) for common stockholders $ 65,264 $ (26,579)
Weighted-average common shares outstanding 2,189,074 2,144,237
Basic net income (loss) per share for common stockholders $ 0.03 $ (0.01)
Diluted net income (loss) per share computation
Net income (loss) for common stockholders $ 65,264 $ (26,579)
Weighted-average common shares outstanding 2,189,074 2,144,237
Incremental shares attributable to the assumed exercise of
outstanding stock options 112,009 --
Total adjusted weighted-average shares 2,301,083 2,144,237
Diluted net income (loss) per share for common stockholders $ 0.03 $ (0.01)
-5-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5 Stock Options
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123 and 148, "Accounting for Stock-Based Compensation" ("SFAS 123 and 148").
Under SFAS 123 and 148, the Company provides pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made since
fiscal 1996 as if the fair-value-based method as defined in SFAS No. 123 has
been applied. The Company currently plans to adopt the fair value based method
prescribed by SFAS 123R for the fiscal year ended March 31, 2007.
The Company estimates the fair value of each option using the Black Scholes
option-pricing model with the following weighted-average assumptions: expected
dividend yield of 0.0%, risk-free interest rate of 5%, volatility at 50% and an
expected life of 5 years. Had the Company determined compensation cost based on
the fair market value at the grant date for its 408,500 outstanding stock
options under SFAS No. 123R, the pro forma amounts are indicated below:
Six Months Ended Six Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Net income (loss) - as reported $ 65,264 $ (26,579)
Add: Stock-based compensation expense included
in reported net income, net of taxes 25,960 --
Less fair value of stock options, net of taxes (35,009) (13,156)
------ -------
Net income (loss)- pro forma 56,215 (39,735)
====== =======
Basic earnings (loss) per share - as reported 0.03 (0.01)
Basic earnings (loss) per share - pro forma 0.03 (0.02)
Diluted earnings (loss) per share - as reported 0.03 (0.01)
Diluted earnings (loss) per share - pro forma 0.02 (0.02)
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Net income (loss) - as reported $ 36,116 $ (79,133)
Add: Stock-based compensation expense included
in reported net income, net of taxes 10,321 --
Less fair value of stock options, net of taxes (17,505) (1,838)
------ -------
Net income (loss)- pro forma 28,932 (80,971)
====== =======
Basic earnings (loss) per share - as reported 0.02 (0.04)
Basic earnings (loss) per share - pro forma 0.01 (0.04)
Diluted earnings (loss) per share - as reported 0.02 (0.04)
Diluted earnings (loss) per share - pro forma 0.01 (0.04)
-6-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 Segment Information
Information is presented for the Company's three reportable activities, avionics
government, avionics commercial, and marine systems. There are no inter-segment
revenues.
The Company is organized primarily on the basis of its avionics and marine
instrument products. The avionics government market consists primarily of the
design, manufacture, and sale of test equipment to U.S. and foreign governments
and militaries, either direct or through distributors. The avionics commercial
market consists primarily of the design, manufacture, and sales of test
equipment to domestic and foreign airlines, to commercial distributors, and to
general aviation repair and maintenance shops. The avionics commercial market
also includes sales related to repairs and calibration which have a lower gross
margin. The Company primarily develops and designs test equipment for the
avionics industry and, as such, the Company's products and designs cross
segments. The marine instrumentation systems segment consists of sales of
different products to hydrographic, oceanographic, researchers, engineers,
geophysicists, and surveyors.
The table below presents information about sales and gross margin. Costs of
sales include certain allocation factors for indirect costs. Additionally,
administrative expenses have been allocated between avionics and marine systems.
Three Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2005 Gov't Comm'l. Total Systems Items Total
- ------------------ ----- ------- ----- ------- ----- -----
Sales $ 1,832,373 $ 917,352 $ 2,749,725 $ 344,717 $ 3,094,442
Cost of sales 833,272 543,166 1,376,438 213,185 1,589,623
----------- ----------- ----------- ----------- -----------
Gross margin 999,101 374,186 1,373,287 131,532 1,504,819
----------- ----------- ----------- ----------- -----------
Engineering, research, & dev. 592,793 50,785 643,578
Selling, general, and admin. 330,078 91,652 $ 353,123 774,853
Amortization of intangibles 21,549 21,549
Interest,, net (45) -- -- (45)
----------- ----------- ----------- -----------
Total expenses 922,826 142,437 374,672 1,439,935
----------- ----------- ----------- -----------
Income (loss) before income taxes $ 450,461 $ (10,905) $ (374,672) $ 64,884
============ =========== =========== ==========
Three Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2004 Gov't Comm'l. Total Systems Items Total
- ------------------ ----- ------- ----- ------- ----- -----
Sales $ 1,382,992 $ 702,338 $ 2,085,330 $ 153,620 $ 2,238,950
Cost of sales 505,861 425,210 931,071 95,340 1,026,411
----------- ----------- ----------- ----------- -----------
Gross margin 877,131 277,128 1,154,259 58,280 1,212,539
----------- ----------- ----------- ----------- -----------
Engineering, research, & dev. 414,688 95,358 510,046
Selling, general, and admin. 326,268 100,927 $ 381,547 808,742
Amortization of intangibles 21,549 21,549
Interest expense, net 3,800 179 -- 3,979
----------- ----------- ----------- -----------
Total expenses 744,756 196,464 403,096 1,344,316
----------- ----------- ----------- -----------
Income (loss) before income taxes $ 409,503 $ (138,184) $ (403,096) $ (131,777)
=========== =========== =========== ===========
-7-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 Segment Information (continued)
Six Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2005 Gov't Comm'l. Total Systems Items Total
- ------------------ ----- ------- ----- ------- ----- -----
Sales $ 4,205,408 $ 1,479,424 $ 5,684,832 $ 560,588 $ 6,245,420
Cost of sales 1,811,666 961,941 2,773,607 360,311 3,133,918
----------- ----------- ----------- ----------- -----------
Gross margin 2,393,742 517,483 2,911,225 200,277 3,111,502
----------- ----------- ----------- ----------- -----------
Engineering, research, & dev. 1,179,491 92,609 1,272,100
Selling, general, and admin. 748,276 177,365 $ 747,207 1,672,848
Amortization of intangibles 43,098 43,098
Interest expense, net 581 -- -- 581
----------- ----------- ----------- -----------
Total expenses 1,928,348 269,974 790,305 2,988,627
----------- ----------- ----------- -----------
Income (loss) before income taxes $ 982,897 $ (69,697) $ (790,305) $ 122,875
=========== =========== =========== ===========
Six Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2004 Gov't Comm'l. Total Systems Items Total
- ------------------ ----- ------- ----- ------- ----- -----
Sales $ 3,284,850 $ 1,383,551 $ 4,668,401 $ 383,349 $ 5,051,750
Cost of sales 1,293,437 831,388 2,124,825 236,826 2,361,651
----------- ----------- ----------- ----------- -----------
Gross margin 1,991,413 552,163 2,543,576 146,523 2,690,099
----------- ----------- ----------- ----------- -----------
Engineering, research, & dev. 905,553 136,943 1,042,496
Selling, general, and admin. 672,026 197,056 $ 772,871 1,641,953
Amortization of intangibles 43,098 43,098
Interest expense, net 6,376 436 -- 6,812
----------- ----------- ----------- -----------
Total expenses 1,583,955 334,435 815,969 2,734,359
----------- ----------- ----------- -----------
Income (loss) before income taxes $ 959,621 $ (187,912) $ (815,969) $ (44,260)
=========== =========== =========== ===========
Note 7 Reclassifcation
Certain prior year amounts have been reclassified to conform to the current year
presentation.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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 demand
for the Company's products or in the cost and availability of its raw materials;
the actions of its competitors; the success of our customers; technological
change; changes in employee relations; government regulations; litigation,
including its inherent uncertainty; difficulties in plant operations and
materials; transportation, environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the Company's previous
filings with the Securities and Exchange Commission.
Critical Accounting Policies
In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies as disclosed in Note
2 of our Notes to Financial Statements included in our Form 10-K. The Company's
accounting policies that require a higher degree of judgment and complexity used
in the preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment to, or
acceptance by the customer provided title and risk of loss is transferred to the
customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under service contracts are recognized when the services are
performed.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
The Company has an existing contract with the U.S. Navy for the delivery of test
equipment (AN/APM-480). The AN/APM-480 is a catalog product, which the Company
also sells to civilian and other government customers. While the Company sells
this product to the U.S. Navy, the proprietary rights to the technology are
retained by the Company. Since the AN/APM-480 was a significant product, and the
Company's premier IFF test set, the Company continued to improve the product to
meet the needs of its other customers, to increase product performance, and to
improve the manufacturing process. Further, although the AN/APM-480 was accepted
and used by the Navy, since it was in substantial compliance with the
specification, there were limited areas where the AN/APM-480 did not operate at
maximum performance according to the specification. Since U.S. Navy was a
significant customer and because of these minor specification issues, the
Company agreed in fiscal year 2002 to provide enhancements at no additional cost
to the customer.
The Company, beginning in fiscal year 2002, began to accrue the cost of these
enhancements as the original units were shipped in order to properly match the
revenues with the expenses. The Company considers this accrual similar to a
warranty expense, and recorded the liability and the expense to cost of sales.
The enhancements made, and to be made to the product, the Company believes, are
relatively insignificant. The Company has shipped and has been paid for over
1,200 units (approximately $17,000,000 in revenues)
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (Continued)
Critical Accounting Policies (continued)
through the period ended September 30, 2005, and the cost of these enhancements
is less than 3% of the revenues. The customer continues to use the original
product in the field, because the enhancements are not essential to the unit to
perform the major functions of the delivered products. We continue to ship the
units in accordance with the original contract, and are being paid in accordance
with the terms of the original contract. Revenue was recognized because Tel
substantially completed and fulfilled the terms specified in the original
contract, the Navy took delivery and the Armed Forces are using the product in
the field. There was no obligation to perform any enhancements at the time the
original contract was signed in 2000, and when the first shipments were made in
our fiscal year ended March 31, 2001.
The costs, estimated to be approximately $480 per unit are for labor and
material, based upon our experience manufacturing the product, and our standard
costing information. The Company is charging costs of performing the enhancement
to the accrued liability as the units are shipped. This accrual is being reduced
as the units are enhanced and returned to the military.
Warranty/enhancement reserves - warranty/enhancement reserves are based upon
historical rates and specific items that are identifiable and can be estimated
at time of sale. While warranty/enhancement costs have historically been within
our expectations and the provisions established, future warranty/enhancement
costs could be in excess of our warranty/enhancement reserves. A significant
increase in these costs could adversely affect our operating results for the
period and the periods these additional costs materialize. Warranty/enhancement
reserves are adjusted from time to time when actual warranty/enhancement claim
experience differs from estimates.
Property and equipment - property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets over periods
ranging from three to eight years. Useful lives are estimated at the time the
asset is acquired and are based upon historical experience with similar assets
as well as taking into account anticipated technological or other changes.
Leasehold improvements are amortized over the term of the lease or the useful
life of the asset, whichever is shorter.
Inventory reserves - inventory reserves or write-downs are estimated for excess,
slow-moving and obsolete inventory as well as inventory whose carrying value is
in excess of net realizable value. These estimates are based on current
assessments about future demands, market conditions and related management
initiatives. If market conditions and actual demands are less favorable than
those projected by management, additional reserves or inventory write-downs may
be required.
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.
-10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (Continued)
Critical Accounting Policies (continued)
Income taxes - deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefit which is
not more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in the period that such tax
rate changes are enacted.
Results of Operations
Overview
In March 2005, the Company won a competitive procurement and was awarded a
$17,344,853 multi-year, firm-fixed-price,
indefinite-delivery/indefinite-quantity contract for the systems engineering,
design and integration, fabrication, testing, and production of a
Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline
Tester (CRAFT) with sonobuoy simulator capabilities. In August 2005, this
contract was modified to include testing of the next generation of IFF in this
state-of-the-art multi-function test set. This contract is expected to be
completed in March 2010. The CRAFT combines advanced navigation, communication,
IFF, and sonobuoy test capabilities in a portable test set, which will utilize a
flexible and expandable digital-signal-processing-based architecture. The CRAFT
is another significant milestone for the Company, because the development of
this technology will help solidify the Company as one of the leaders in the
industry, and will meet the U.S. Navy's test requirements for years to come. The
Company will continue funding the development of this product. This contract
currently has production options totaling 750 units, which if exercised, would
result in deliveries beginning in early fiscal year 2008. The Company believes
the CRAFT technology is a significant advance on current products in the
marketplace and will form the basis for a new family of test instruments which
will diversify and modernize our product line and could lead to additional
sales. Tel is actively pursuing other major government contracts and is
continuing its efforts to broaden its markets and products.
Sales and operating results for the first six months of the 2006 fiscal year
have improved as compared to the same six months in fiscal year 2005, although
near-to-mid-term commercial and military orders have continued to be below
expectations.
For the six months ended September 30, 2005, total sales increased 24% to
$6,245,420 as compared to the same period in the prior year, and net income for
the six months ended September 30, 2005 was $65,264 as compared to a loss of
$26,579 for the first six months of the prior fiscal year. The increase in sales
is primarily attributed to the increase in avionics government sales. The
increase in sales was offset by an increase in engineering, research and
development expenditures for avionics. Gross profit declined as a percentage
from the same period in the last fiscal year primarily as a result of a change
in product mix, lower pricing on commercial products and lower gross margin on
billings related to the documentation and test activities for CRAFT and on the
initial shipments of the TR-401. In the second quarter of fiscal year 2006, the
marine systems showed improvement. The introduction, production, and shipment of
new products significantly increased sales, but decreased the product backlog as
new orders have been below expectations.
As of September 30, 2005, cash increased to $1,588,841 from $826,959 at March
31, 2005 as a result of reductions in inventories and accounts receivable.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Sales
Sales of avionics products increased $664,395 (31.9%) and $1,016,431 (21.8%) for
the three and six months ended September 30, 2005, respectively, as compared to
the same periods in the prior year. Avionics commercial sales increased $215,014
(30.6%) for the three months ended September 30, 2005, which is attributed to
sales of the new TB-2100 Bench Test set, an increase in sales for the TR-220
line of Multi-Function Test sets and the T-30D, partially offset by lower sales
for repairs and calibrations. For the six months ended September 30, 2005,
avionics commercial sales increased $95,873 (6.9%) as a result of sales for the
new TB-2100 Bench Test set and increased sales of the T-30D, partially offset by
lower sales of the TR-220 line of Multi-Function Test sets. The weak financial
condition of the commercial airline industry continues to curtail significant
growth in this segment. Avionics government sales increased $449,381 (32.5%) for
the second quarter of fiscal year 2006 as compared to the second quarter last
year. Shipments of the AN/APM-480 to the U.S. Navy, an increase in sales of the
T-47N associated with a contract with the U.S. Military, sales of the TR-401,
and billings related to the test and documentation phase of the CRAFT program
were offset by lower sales of the T-760 and sales of the AN/APM-480 to customers
other than the U.S. Navy. Avionics government sales increased $920,558 (28%) for
the six months ended September 30, 2005. An increase in sales of the T-47N and
the T-36M associated with a contract with the U.S, Military was partially offset
by lower sales of the AN/APM-480 to customers other than the U.S. Navy, the
T-760 and the T-30CM. Marine Systems sales increased $191,097 and $177,239 for
the three and six months ended September 30, 2005, respectively, as compared to
the three and six months ended September 30, 2004. The introduction, production,
and shipment of new products significantly increased sales, but decreased the
product backlog as new orders have been below expectations.
Gross Margin
Gross margin increased $292,280 (24.1%) and $421,403 (15.7%) for the three and
six months ended September 30, 2005, respectively, as compared to the same
period in the prior fiscal year. The increase in gross margin is primarily
attributed to the higher sales volume. The gross margin percentage for the three
months ended September 30, 2005 was 48.6% as compared to 54.2% for the three
months ended September 30, 2004. The gross margin percentage for the six months
ended September 30, 2005 was 49.8% as compared to 53.3% for the six months ended
September 30, 2004. The decrease in gross margin percentage is primarily as a
result of a change in product mix, lower pricing on commercial products and
lower gross margin on billings related to the documentation and test activities
for CRAFT, and the initial shipments of the TR-401.
Operating Expenses
Selling, general and administrative expenses decreased $33,889 (4.2%) for the
three months ended September 30, 2005 as compared to the three months ended
September 30, 2004, primarily as a result of lower administrative salaries, and
a decrease in advertising expenses for the marine systems division. Selling,
general and administrative expenses increased $30,895 (1.9%) for the six months
ended September 30, 2005 as compared to the same period last year, as the result
of higher commission expenses for the avionics division and higher salaries
which were partially offset by lower travel expenses for the avionics division
and lower advertising expenses for the marine systems division.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (Continued)
Operating Expenses (continued)
Engineering, research and development expenses increased $133,532 (26.2%) and
$229,604 (22%) for the three and six months ended September 30, 2005,
respectively, as compared to the same periods in the prior fiscal year as a
result of increased research and development efforts, including CRAFT,
enhancements to the TB-2100, and the TR-401.
Income Taxes
A provision for income taxes was recorded in the amount of $57,611 for the six
months ended September 30, 2005 as compared to a tax benefit of $17,681 for the
six months ended September 30, 2004 as a result of the loss for that period.
These amounts represent the effective federal and state tax rate of
approximately 40% on the Company's net income before taxes, plus additional New
Jersey state taxes for the avionics business. Under New Jersey law, losses in
the marine systems subsidiary cannot be applied to reduce taxes on the avionics
business
Liquidity and Capital Resources
At September 30, 2005, the Company had positive working capital of $4,231,074 as
compared to $4,047,116 at March 31, 2005, and cash increased to $1,588,841 from
$826,959 at March 31, 2005. For the six months ended September 30, 2005, the
Company generated $862,670 in cash from operating activities as compared to
using $303,771 for the same period last year. This improvement in cash from
operating activities is primarily attributed to a reduction in inventories and
accounts receivable, partially offset by a reduction in accounts payable.
Stockholders' equity increased to $5,449,891 at September 30, 2005 from
$5,327,177 at March 31, 2005.
The Company has a line of credit of $1,750,000 from Bank of America. The line of
credit bears an interest rate of 0.5% above the lender's prevailing base rate,
which is payable monthly, based upon the outstanding balance. The Company does
not pay any fees to maintain this open line. At September 30, 2005, the Company
had no outstanding balance. The line of credit is collateralized by
substantially all of the assets of the Company, and requires the Company to
maintain certain financial covenants. As of September 30, 2005, the Company was
in compliance with all financial covenants. The Company has received a
commitment from the bank to renew this line for another year, and, as such, the
line of credit will expire on November 30, 2006.
Based upon the current backlog, which has increased to $6,400,000 at September
30, 2005 from $6,200,000 at March 31, 2005, its existing credit line, and cash
balance, the Company believes that it has sufficient working capital to fund its
operating plans for at least the next twelve months. However, as the Company
pursues additional opportunities, the need for additional capital may arise. The
Company will evaluate its alternatives when these opportunities arise. The
Company has also retained Semaphore Capital Advisors as its investment bankers,
to help pursue acquisitions and alliances and, if needed, to help raise capital.
The Company maintains its cash balance primarily in a money market account until
needed.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 2005. 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, 2005.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company, at this time, is generally not exposed to financial market risks,
including changes in interest rates, foreign currency exchange rates, and
marketable equity security prices.
Item 4. Controls and Procedures
The Company adopted disclosure controls and procedures, as called for by the
recently adopted legislation and rules of the Securities and Exchange
Commission. Under Rules promulgated by the SEC, disclosure controls and
procedures are defined as "those controls or other procedures of the issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
commission's rules and forms." The Chief Executive Officer and Principal
Accounting Officer evaluated the Company's Disclosure Controls and Procedures at
September 30, 2005 and have concluded that they are effective, based on their
evaluation of these controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of September 30, 2005 by the Chief Executive
Officer and Principal Accounting Officer, required by paragraph (d) of Exchange
Act Rules 13a-15 or 15d-15, which occurred during Tel's last fiscal quarter and
which have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
Part II. Other Information
Item 6. Exhibits
Exhibits
31.1 Certification by CEO pursuant to Rule 13a-14 under the
Securities Exchange Act.
31.2 Certification by CFO pursuant to Rule 13a-14 under the
Securities Exchange Act.
32.1 Certification by CEO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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: November 11, 2005 By: /s/ Harold K. Fletcher
----------------------------
/s/ Harold K. Fletcher
Chairman and President
Date: November 11, 2005 By: /s/ Joseph P. Macaluso
----------------------------
/s/ Joseph P. Macaluso
Principal Accounting Officer
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