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, 1998
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1441806
(State of Incorporation) (I.R.S. Employer ID Number)
728 Garden Street, Carlstadt, New Jersey 07072
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 201-933-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ____
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,096,985 shares of Common stock, $.10 par value as of October 28, 1998.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
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Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
September 30, 1998 and March 31, 1998 1
Condensed Comparative Statements of Operations -
Three and Six Months Ended September 30, 1998 and 1997 2
Condensed Comparative Statements of Cash Flows -
Six Months Ended September 30, 1998 and 1997 3
Notes to Condensed Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
Part II. Other Information 10
SIGNATURES 10
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
September 30, 1998 and March 31, 1998
ASSETS September 30, March 31,
1998 1998
------------- ------------
Current assets:
Cash $ 79,681 $ 585,281
Accounts receivable, net of allowance for doubtful 399,904 374,506
accounts of $15,923 at September 30,1998 and
$16,164 at March 31, 1998
Unbilled revenues (see note 2) 195,272 --
Inventories 462,998 383,030
Prepaid expenses and other current assets 38,333 24,017
Deferred income tax benefit - current 78,300 78,300
----------- -----------
Total current assets 1,254,488 1,445,134
----------- -----------
Property, plant, and equipment, net 112,671 79,321
Other assets 120,723 96,067
Deferred income tax benefit 372,415 320,619
----------- -----------
Total assets 1,860,297 1,941,141
=========== ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Note payable - related party - current portion 50,000 50,000
Convertible subordinate notes - related party 15,000 15,000
Accrued payroll, vacation pay, deferred wages
payroll taxes, and interest on deferred wages 210,592 211,400
Accounts payable and accrued expenses 301,651 304,673
----------- -----------
Total current liabilities 577,243 581,073
----------- -----------
Notes payable - related party - non-current portion 300,000 300,000
----------- -----------
Total liabilities 877,243 881,073
Stockholders' equity
Common stock 209,701 209,476
Additional paid-in capital 3,922,288 3,921,670
Accumulated deficit (3,148,935) (3,071,078)
----------- -----------
Total stockholders' equity 983,054 1,060,068
----------- -----------
Total liabilities and stockholders' equity $ 1,860,297 $ 1,941,141
=========== ===========
See accompanying notes to condensed financial statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Sales
Government, net $ 418,472 567,191 $ 801,212 1,124,705
Commercial, net 607,204 276,850 889,657 590,159
----------- ----------- ----------- -----------
Total Sales 1,025,676 844,041 1,690,869 1,714,864
Cost of sales 425,504 351,674 764,810 687,894
----------- ----------- ----------- -----------
Gross Margin 600,172 492,367 926,059 1,026,970
Operating expenses
Selling, general & administrative 258,704 184,245 473,228 403,175
Engineering, research, & development 327,532 205,981 569,544 363,926
----------- ----------- ----------- -----------
Total operating expenses 586,236 390,226 1,042,772 767,101
Income/ (Loss) from operations 13,936 102,141 (116,713) 259,869
Other income (expense):
Interest income 2,484 5,651 8,554 11,733
Interest expense (9,611) (19,849) (21,494) (37,592)
----------- ----------- ----------- -----------
Income/ (Loss) before taxes 6,809 87,943 (129,653) 234,010
Provision/(Benefit) for income taxes 2,720 35,125 (51,796) 93,464
----------- ----------- ----------- -----------
(Loss)/net income $ 4,089 52,818 $ (77,857) 140,546
=========== =========== =========== ===========
Basic and diluted income (loss)
per common share $ 0.00 0.03 $ (0.04) 0.07
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,095,298 2,034,123 2,095,056 2,032,762
Diluted 2,118,317 2,101,731 2,118,075 2,100,370
See accompanying notes to condensed financial statements
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
1998 1997
---------- ---------
(Decrease) increase in cash:
Cash flows from operating activities
Net (loss) income $ (77,857) $ 140,546
Adjustments to reconcile net (loss) income to cash used
in operating activities:
Deferred income taxes (51,796) 93,464
Depreciation 20,339 12,535
Changes in operating assets or liabilities:
Increase in accounts receivable and unbilled revenues (220,670) (251,434)
Increase in inventories (79,968) (93,993)
Increase in prepaid expenses and other current assets (14,316) (14,132)
Increase in other assets (24,656) (15,000)
(Decrease) increase in accrued payroll, deferred wages and
and vacation pay (808) 14,279
Decrease in accounts payable and accrued expenses (3,022) (26,725)
--------- ---------
Net cash used in operations (452,754) (140,460)
--------- ---------
Cash flows from investing activities:
Cash purchases of property, plant and equipment (53,689) (41,790)
--------- ---------
Net cash used in investing activities (53,689) (41,790)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 843 1,588
Proceeds from issuance of common stock -- --
--------- ---------
Net cash provided by financing activities 843 1,588
--------- ---------
Net decrease in cash (505,600) (180,662)
Cash at beginning of period 585,281 528,636
--------- ---------
Cash at end of period $ 79,681 $ 347,974
========= =========
Interest paid $ 19,786 $ 25,864
========= =========
See accompanying notes to condensed financial statements
3
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Tel-Instrument
Electronics Corp. as of September 30, 1998, the results of operations for the
three and six months ended September 30, 1998 and September 30, 1997, and
statements of cash flows for the six months ended September 30, 1998 and
September 30, 1997. These results are not necessarily indicative of the results
to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. The March 31, 1998 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998.
Note 2 Unbilled Revenue
Sales are recognized primarily upon shipment of products, except in the case of
long-term contracts wherein sales are recognized on the percentage-of-completion
method.
Sales under the U.S. Navy contract have been recorded on the
percentage-of-completion method. Under this approach, sales and gross margin are
recognized based on the ratio of costs incurred to date to total estimated
contract costs. Unbilled revenues of $195,272 represent recoverable costs and
accrued profit not billed resulting from the application of
percentage-of-completion accounting. Actual billing of these amounts will be
based upon contractual billing terms.
Note 3 Inventories
Inventories consist of:
September 30, March 31,
1998 1998
--------------------------------
Purchased parts $ 282,409 $ 253,616
Work-in-process 216,209 165,034
Less: Reserve for obsolescence (35,620) (35,620)
--------------------------------
$ 462,998 $ 383,030
================================
Note 4 Income Taxes
The Company, in accordance with SFAS 109, has recognized a deferred income tax
benefit based upon the expected utilization of net operating loss carryforwards
as the Company believes that it is more likely than not that it will realize a
portion of its operating losses before they expire. For the six months ended
September 30, 1998, the Company recorded a deferred income tax benefit of
$51,796, which represents the effective federal and state tax rate on the
Company's net loss before taxes of $129,653. This tax benefit reduced the loss
for the period. The $51,796 increased the Company's deferred income tax asset by
the same amount in the accompanying balance sheet. The Company expects to
utilize this deferred income tax benefit in the future for tax reporting
purposes.
4
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Note 5 Reclassifications
Certain reclassifications have been made to the fiscal year 1998 financial
statements to be consistent with the fiscal year 1999 presentation.
Note 6 Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS 128 is effective
for financial statements relating to both interim and annual periods ending
after December 15, 1997.
Basic income (loss) per share is based on net income (loss) for the relevant
period, divided by the weighted average number of common shares outstanding
during the period. Diluted income (loss) per share for September 30, 1998 is
based on net income (loss), divided by the weighted average number of common
shares outstanding, including common share equivalents such as outstanding stock
options and warrants during the period. Common share equivalents, such as
outstanding stock options, are not included in the calculation for the six
months ended September 30, 1998 since the effect would be antidilutive.
Note 7 Credit Facility
On July 22, 1998, the Company entered into a credit agreement with Summit Bank
for $350,000, which extends for one year and is thereafter renewable on an
annual basis. The Company has not borrowed against this line. The Company pays
no commitment fee and the rate of interest borrowings is the Lender's Prevailing
Base Rate plus 1%.
5
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION
Results of Operations
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in the
demand for the Company's products or in the cost and availability of its raw
materials; the actions of its competitors; the success of our customers;
technological change; changes in employee relations; government regulations;
litigation, including its inherent uncertainty; difficulties in plant operations
and materials; transportation, environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the Company's filings
with the Securities and Exchange Commission.
Overview
The Company invested heavily in product development and expenditures increased
$205,618 (57%) for the first six months of the current fiscal year as compared
to the same period in the prior fiscal year. The total expenditure of $569,544
represents 34% of total sales. The principal effort resulted from the U.S. Navy
exercising its option to incorporate a collision avoidance (TCAS) test
capability into the T-47M test set design. Eight T-47M prototypes have been
fabricated and these units have begun several months of environmental and
functional testing. Several tests have been successfully completed. Field
evaluation by the U.S. Navy is anticipated to begin early in the fourth quarter
of the current fiscal year. Assuming field evaluations are satisfactory and the
U.S. Navy exercises production options later in the fourth quarter, deliveries
could begin in the first quarter of the next fiscal year. This contract can be a
source of significant revenues, with options for up to 1,300 units which the
U.S. Navy can exercise through calendar year 2001. However, there can be no
assurance that field evaluations will be favorable and that the U.S. Navy will
exercise its options under this contract. In addition, the Company continues the
development of the T-36M, under a U.S. Army contract, and new products for other
markets.
In June 1998, the Company signed an exclusive agreement with Muirhead Avionics,
based in the United Kingdom, to represent the Company in parts of Europe. The
Company also signed an exclusive agreement with Milspec Services Pty. Ltd. in
August 1998 to represent the Company in Australia and New Zealand, and an
agreement with M.P.G. Instruments s.r.l. in September 1998 to represent the
Company in Europe to obtain a contract for a new military product which would be
based on the Company's technology. The Company continues to believe that the
foreign commercial market is larger than the domestic market, because many
foreign airlines are upgrading to meet U.S. requirements, and that foreign
government sales will grow, particularly as the result of our growing reputation
in IFF testing.
6
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION (Continued)
Overview (Continued)
As previously reported, during fiscal year 1998 the Company fulfilled its
obligation and delivered the final units of the T-30CM ILS test set to the U.S.
Air Force. As a result of completing this contract, it was anticipated that the
Company would have lower sales during the first half of fiscal year 1999. The
Company continues to believe that this decline is temporary and new contracts
can be obtained to increase sales and earnings. In this regard, management is
encouraged by the dollar value of its backlog, by the second quarter revenues
which included a large and unexpected increase in commercial sales, by the
progress on the U.S. Navy contract, and by the efforts of its new offshore
distributors.
Sales
For the three months ended September 30, 1998 sales increased $181,635 (21.5%)
to $1,025,676, as compared to the same period ending September 30, 1997.
Commercial sales increased $330,354 (119.3%) to $607,204 for the three months
ended September 30, 1998, as compared to the same period ending September 30,
1997. This increase in commercial sales is attributed to decisions by several
large fleet owners to upgrade their test equipment and may not be continued. The
Company had a commercial backlog of $297,090 at September 30, 1998.
Government sales decreased $148,719 (26.2%), as compared to the same period
ending September 30, 1997. This decrease is primarily attributed to the
completion of the U.S. Air Force T-30CM contract for which there were no sales
in the current fiscal year. This decrease was partially offset by revenues of
$195,242 for fabrication of the initial prototypes and certain documentation and
testing related to the U.S. Navy T-47M IFF test set contract. The Company had a
government backlog of $2,043,307 at September 30, 1998.
For the six months ended September 30, 1998 sales declined $23,995 (1.4%), as
compared to the same period ending September 30, 1997. The decline in government
sales related to the completion of the contract with the U.S. Air Force was
mostly offset by the increase in commercial sales during the second quarter and
the sales related to the contract with the U.S. Navy. There can be no assurance
that the increase in commercial sales will continue.
Gross Margin
For the three months ended September 30, 1998 gross margin increased $107,805
(21.9%), as compared to the same period ending September 30, 1997. This increase
is primarily attributed to the higher sales in the second quarter. The gross
margin percentage was 58.5% for the three months ended September 30, 1998 as
compared to 58.3% for the three months ended September 30, 1997.
For the six months ended September 30, 1998 gross margin decreased $100,911
(9.8%), as compared to the same period ended September 30, 1997. This decrease
is primarily attributed to the lower gross margin associated with the U.S. Navy
T-47M contract. The gross margin percentage was 54.8% for the six months ended
September 30, 1998 as compared to 59.9% for the six months ended September 30,
1997.
7
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION (Continued)
Operating Expenses
Selling, general and administrative expenses increased $74,459 (40.4%) for the
three months ended September 30, 1998 as compared to the same period last year.
This increase is associated with an increase in selling expenses, mostly
attributed to higher commissions based upon the increase in commercial sales and
to higher administrative salaries. In fiscal year 1998 the Company's President
devoted a percentage of his time to research and development to ensure that such
activities were properly conducted. In fiscal year 1999, the Company hired a
Director of Engineering, thus minimizing the President's time in overseeing the
research and development function and allowing him to concentrate on Company
growth.
Selling, general and administrative expenses increased $70,053 (17.4%) for the
six months ended September 30, 1998 as compared to the same period last year.
This increase is primarily attributed to the increase for the three months ended
September 30, 1998, as discussed above.
Engineering, research and development increased $121,551 (59.0%) and $205,618
(56.5%) for the three and six months ended September 30, 1998, respectively, as
compared to the same periods last year. This increase reflects the Company's
ongoing commitment to developing new products and finalizing of the design of
the U.S. Navy T-47M test sets, as described in the Overview. As this work is
completed, the rate of engineering expenditures should be reduced.
Income Taxes
In accordance with SFAS 109, a provision for income taxes was recognized in the
amount of $93,464 for the six months ended September 30, 1997. For the six
months ended September 30, 1998 the Company recorded an income tax benefit of
$51,796, which represents the effective federal and state tax rate on the
Company's net loss before taxes of $129,653. (See Note 4 to Notes to Condensed
Financial Statements).
Liquidity and Capital Resources
At September 30, 1998 the Company had positive working capital of $677,245 as
compared to $864,061 at March 31, 1998. For the six months ended September 30,
1998, cash used in operations was $452,754 as compared to $140,460 for the six
months ended September 30, 1997. This increase in cash used in operations is
primarily associated with the Company's loss from operations and increases in
accounts receivable, unbilled revenues, and inventories. The total decrease in
cash of $505,600 was also impacted by purchases of equipment in the amount of
$53,689.
The Company continues to invest heavily in research and development. The Company
expects these investments will finalize the designs for the T-47M, T-47N, T-36M,
and T-48IC, and begin to ship these units for which there are current orders in
the backlog. While this would increase sales, cash flow, and profits, there is
no assurance that these increases will occur.
Based upon the current backlog and available working capital, the Company
believes that it has sufficient working capital to fund its plans for the next
twelve months. At present, the Company does not expect to incur significant
long-term needs for capital outside of its normal operating activities.
8
Item 2 MANAGEMENT DISCUSSION OF RESULTS OF OPERATIONS AND
ANALYSIS OF FINANCIAL POSITION (Continued)
Liquidity and Capital Resources (Continued)
On July 22, 1998, the Company received from Summit Bank a credit line of
$350,000. The Company has not borrowed against this line as of September 30,
1998.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 1998.
These financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K to the Securities and Exchange Commission for the
fiscal year ended March 31, 1998.
Year 2000 Issue
Many existing computer programs use only two 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 year with an assumed prefix of "19".
Consequently, this limits those systems to dates between 1900 and 1999. If not
corrected, many computer systems and applications could fail or create erroneous
results by or at the year 2000.
The Company has reviewed the potential impact of the Year 2000 issue. This
assessment included a review of the impact of the issue in four areas: products,
manufacturing systems, business systems and other areas. The Company does not
anticipate that the Year 2000 issue will impact operations or operating results.
The Company relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
relations. At this time, it is impossible to assess the impact of Year 2000
issue on each of these organizations. There can be no guarantee that the systems
of other unrelated entities on which the Company relies will be corrected on a
timely basis and will not have a material adverse effect on the Company.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities was issued in June 1998 and is effective for
all fiscal quarters beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The Company does not expect its implementation will have a material
effect on the Company's financial statements.
Statement of Financial Accounting Standards No. 134, Accounting for Certain
Mortgage Banking Activities was issued in October 1998 and is effective for all
fiscal quarters beginning after December 15, 1998. This statement establishes
reporting standards for certain banking activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. The Company
does not expect its implementation will have a material effect on the Company's
financial statements as currently presented.
9
Part II. Other Information
Item 6. Exhibits and Reports on Form 10-Q.
The exhibits filed or incorporated by reference as part of the Quarterly
Report on Form 10-Q are listed in the attached Index to Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP.
Date: 11/10/98 By: /s/ Harold K. Fletcher
--------------------------------
/s/ Harold K. Fletcher
Chairman and President
10
INDEX TO EXHIBITS
1 Loan agreement with Summit Bank dated July 22, 1998
27 Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not filed.
11