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, 2007
___ 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
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(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.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Act). Yes No X
----- -----
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,379,831 shares of Common stock, $.10 par value as of November 7, 2007.
TEL-INSTRUMENT ELECTRONICS CORPORATION
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TABLE OF CONTENTS
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PAGE
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Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
September 30, 2007 and March 31, 2007 (Audited) 1
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 2007 and 2006 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 2007 and 2006 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 9-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered sales of Equity Securities and Use of Proceeds 16
Item 6. Exhibits 16
Signatures 17
Certifications
i
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS September 30, 2007 March 31, 2007
------ ------------------ --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 243,735 $ 655,836
Accounts receivable, net 2,620,575 982,214
Inventories, net 2,188,586 2,460,642
Taxes receivable 28,776 28,776
Prepaid expenses and other current assets 112,543 98,053
Deferred income taxes 469,370 395,756
----------- -----------
Total current assets 5,663,585 4,621,277
Property, plant and equipment, net 545,217 625,247
Deferred income taxes - non-current 800,000 800,000
Other assets 84,632 81,318
----------- -----------
Total assets $ 7,093,434 $ 6,127,842
=========== ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Line of credit 350,000 --
Accounts payable 808,580 372,106
Deferred revenues 112,519 115,409
Accrued payroll, vacation pay, and payroll taxes 332,075 353,727
Accrued expenses 814,751 608,692
----------- -----------
Total current liabilities 2,467,925 1,499,934
Deferred revenues 23,656 23,656
Convertible note payable - related party - long-term 50,000 50,000
----------- -----------
Total liabilities 2,541,581 1,573,590
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Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,379,831 and
2,341,861 issued and outstanding as of September 30,
2007, and March 31, 2007, respectively 237,983 234,186
Additional paid-in capital 4,480,444 4,380,149
Accumulated deficit (166,574) (60,083)
----------- -----------
Total stockholders' equity 4,551,853 4,554,252
----------- -----------
Total liabilities and stockholders' equity $ 7,093,434 $ 6,127,842
=========== ===========
See accompanying notes to condensed financial statements
- 1 -
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
Three Months Ended Six Months Ended
Sept. 30, 2007 Sept. 30, 2006 Sept. 30, 2007 Sept. 30, 2006
Net sales $ 2,968,247 $ 2,127,349 $ 6,049,299 $ 3,892,400
Cost of sales 1,709,460 1,056,189 3,540,295 2,015,662
----------- ----------- ----------- -----------
Gross margin 1,258,787 1,071,160 2,509,004 1,876,738
Operating expenses
Selling, general and administrative 648,445 649,966 1,229,552 1,272,089
Engineering, research and
Development 644,561 569,919 1,446,724 1,215,100
----------- ----------- ----------- -----------
Total operating expenses 1,293,006 1,219,885 2,676,276 2,487,189
----------- ----------- ----------- -----------
Loss from operations (34,219) (148,725) (167,272) (610,451)
Interest income (expense):
Interest income 6,521 12,804 9,682 25,254
Interest expense (10,798) (2,264) (19,745) (4,534)
----------- ----------- ----------- -----------
Loss before taxes (38,496) (138,185) (177,335) (589,731)
Income tax benefit (15,379) (55,207) (70,844) (235,599)
----------- ----------- ----------- -----------
Net loss $ (23,117) $ (82,978) $ (106,491) $ (354,132)
Basic and diluted loss per common $ (0.01) $ (0.04) $ (0.05) $ (0.15)
=========== =========== =========== ===========
share
Dividends per share None None None None
Weighted average shares outstanding
Basic and diluted 2,362,331 2,298,631 2,353,545 2,290,381
See accompanying notes to condensed financial statements
- 2 -
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
-----------
Six Months Ended
Sept. 30, 2007 Sept. 30, 2006
-------------- --------------
Cash flows from operating activities:
Net loss $ (106,491) $ (354,132)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred income taxes (73,614) (235,599)
Non-cash stock-based compensation 16,492 --
Depreciation 119,616 131,105
Changes in operating assets or liabilities:
(Increase) in accounts receivable (1,638,361) (14,932)
Decrease (increase) in inventories, net 272,056 (11,973)
(increase)decrease in prepaid expenses and
other current assets (14,490) 50,816
Increase in other assets (3,314) (8,549)
Increase (decrease) in accounts payable 436,474 (5,550)
Decrease in deferred revenues (2,890) (8,725)
Decrease increase in accrued payroll, vacation pay,
and payroll taxes (21,652) (37,522)
(Decrease) increase in accrued expenses 206,059 (292,183)
----------- -----------
Net cash used in operating activities (810,115) (787,244)
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Cash flows from investing activities:
Purchases of property, plant and equipment (39,586) (51,941)
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Net cash used in investing activities (39,586) (51,941)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 87,600 37,050
Proceeds from borrowings from line of credit 350,000 --
----------- -----------
Net cash provided by financing activities 437,600 37,050
----------- -----------
Net decrease in cash and cash equivalents (412,101) (802,135)
Cash and cash equivalents at beginning of period 655,836 1,934,541
----------- -----------
Cash and cash equivalents at end of period $ 243,735 $ 1,132,406
=========== ===========
Supplemental information
Interest paid $ 15,542 $ --
===========
Taxes paid $ -- $ --
===========
See accompanying notes to condensed financial statements
- 3 -
TEL-INSTRUMENT ELECTRONICS CORP.
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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, 2007, the results of
operations for the three and six months ended September 30, 2007 and September
30, 2006, and cash flows for the six months ended September 30, 2007 and
September 30, 2006. 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, 2007 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 consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2007.
Note 2 Revenue Recognition - Percentage-of-Completion - ITATS
------ ------------------------------------------------------
Due to the unique nature of the ITATS (Intermediate Level TACAN Test Set)
program wherein a significant portion of this contract will not be delivered for
over a year, revenues under this contract are recognized on a
percentage-of-completion basis. All expenses related to this contract are
charged to cost of sales, and revenues are derived based on the incurred costs.
The Company also receives progress billings on this program, which is a funding
mechanism by the government to assist contractors on long-term contracts prior
to delivery. See Critical Accounting Policies - Revenue Recognition.
Note 3 Accounts Receivable, net
------ ------------------------
Accounts receivable, net, consist of:
September 30, 2007 March 31, 2007
Commercial $ 483,750 $ 338,070
Government 1,403,661 678,688
Unbilled government receivables * 766,965 --
Allowance for doubtful accounts (33,801) (34,544)
----------- -----------
Total $ 2,620,575 $ 982,214
=========== ===========
* Unbilled government receivables represents the sales
accrued on a percentage-of-completion basis less amounts
invoiced to the government.
- 4 -
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 4 Inventories, net
Inventories, net, consist of:
September 30, 2007 March 31, 2007
------------------ --------------
Purchased parts $ 1,383,116 $ 1,414,558
Work-in-process 973,733 1,171,998
Finished goods 199,678 220,896
Less: Reserve for obsolescence (a) (367,941) (346,810)
----------- ------------
Total $ 2,188,586 $ 2,460,642
=========== ============
(a) Reserve primarily relates to purchased parts
Note 5 Loss Per Share
------ --------------
Both the Company's basic loss per common share and its diluted loss per common
share are based on the net loss for the relevant period, divided by the weighted
average number of common shares outstanding during the period. Diluted loss per
share for the periods ended September 30, 2007 and 2006 does not include common
stock equivalents, as these would be antidilutive.
Three Months Ended Three Months Ended
------------------ ------------------
September 30, 2007 September 30, 2006
------------------ ------------------
Basic net loss per share computation:
Net loss attributable to common stockholders $ (23,117) $ (82,978)
Weighted-average common shares outstanding 2,362,331 2,298,631
Basic net loss per share attributable to common stockholders $ (0.01) $ (0.04)
Diluted net loss per share computation
Net loss attributable to common stockholders $ (23,117) $ (82,978)
Weighted-average common shares outstanding 2,362,331 2,298,631
Incremental shares attributable to the assumed exercise of
outstanding stock options -- --
Total adjusted weighted-average shares 2,362,331 2,298,631
Diluted net loss per share attributable to common stockholders $ (0.01) $ (0.04)
Six Months Ended Six Months Ended
---------------- ----------------
September 30, 2007 September 30, 2006
------------------ ------------------
Basic net loss per share computation:
Net loss attributable to common stockholders $ (106,491) $ (354,132)
Weighted-average common shares outstanding 2,353,545 2,290,381
Basic net loss per share attributable to common stockholders $ (0.05) $ (0.15)
Diluted net loss per share computation
Net loss attributable to common stockholders $ (106,491) $ (354,132)
Weighted-average common shares outstanding 2,353,545 2,290,381
Incremental shares attributable to the assumed exercise of
outstanding stock options -- --
Total adjusted weighted-average shares 2,353,545 2,290,381
Diluted net loss per share attributable to common stockholders $ (0.05) $ (0.15)
- 5 -
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 6 Stock Options
------ -------------
Effective April 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified
prospective method. SFAS 123R requires the measurement of stock-based
compensation based on the fair value of the award on the date of grant. Under
the modified prospective method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption. The Company recognizes compensation cost on
awards on a straight-line basis over the vesting period, typically four years.
As a result of adopting SFAS 123(R), the loss before taxes was charged $8,991
and $-0- for three months ended September 30, 2007 and 2006, respectively, and
$16,492 and $-0- for the six months ended September 30, 2007, and 2006,
respectively. Prior to the adoption of SFAS 123R, the Company accounted 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, which required supplemental disclosure, but did not
impact the financial statements. The Company estimates the fair value of each
option granted using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield of 0.0%, risk-free
interest rate 3.99% to 5.0%, volatility at 45.53% to 56.94%, and an expected
life of 5 years for the six months ended September 30, 2007; expected dividend
yield of 0.0%, risk-free interest rate of 5%, volatility at 50% and an expected
life of 5 years for the six months ended September 30, 2006. The Company
estimates forfeiture rate based on historical data. Based on an analysis of
historical information, the Company has applied a forfeiture rate of 15%.
- 6 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 7 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. Engineering,
research and development expenses, and marketing and selling expenses represent
direct expenses for the avionics and marine segments.
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
September 30, 2007 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Net sales $ 1,984,511 $ 860,181 $ 2,844,692 $ 123,555 $ 2,968,247
Cost of sales 1,126,868 497,115 1,623,983 85,477 1,709,460
--------- ------- --------- ------ ---------
Gross margin 857,643 363,066 1,220,709 38,078 1,258,787
------- ------- --------- ------ ---------
Engineering, research, & dev. 607,721 36,840 644,561
Selling, general, and admin. 318,521 42,939 $ 286,985 648,445
Interest expense, net 4,277 -- -- 4,277
----- ------ ----------- -----
Total expenses 930,519 79,779 286,985 1,297,283
------- ------ ------- ---------
Income (loss) before taxes $ 290,190 $ (41,701) $ (286,985) $ (38,496)
=========== =========== =========== ===========
Segment assets $ 2,588,035 $ 530,587 $ 3,118,622 $ 515,592 $ 3,459,220 $ 7,093,434
=========== =========== =========== =========== =========== ===========
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
September 30, 2006 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Net sales $ 1,242,366 $ 601,490 $ 1,843,856 $ 283,493 $ 2,127,349
Cost of sales 496,349 348,761 845,110 211,079 1,056,189
------- ------- ------- ------- ---------
Gross margin 746,017 252,729 998,746 72,414 1,071,160
------- ------- ------- ------ ---------
Engineering, research, & dev. 523,854 46,065 569,919
Selling, general, and admin. 317,398 33,767 $ 298,801 649,966
Interest income, net (10,540) -- -- (10,540)
------- ------ ------- ---------
Total expenses 830,712 79,832 298,801 1,209,345
------- ------ ------- ---------
Income (loss) before taxes $ 168,034 $ (7,418) $ (298,801) $ (138,185)
=========== =========== =========== ===========
- 7 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 7 Segment Information (continued)
------ -------------------------------
Six Months Ended Avionics Avionics Avionics Marine Corporate
---------------- -------- -------- -------- ------ ---------
September 30, 2007 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Net sales $ 4,044,818 $ 1,755,613 $ 5,800,431 $ 248,868 $ 6,049,299
Cost of sales 2,391,194 987,726 3,378,920 161,375 3,540,295
--------- ------- --------- ------- ---------
Gross margin 1,653,624 767,887 2,421,511 87,493 2,509,004
--------- ------- --------- ------ ---------
Engineering, research, & dev. 1,371,095 75,629 1,446,724
Selling, general, and admin. 607,030 76,645 $ 545,877 1,229,552
Interest expense, net 10,063 -- -- 10,063
------ ------- ------- ---------
Total expenses 1,988,188 152,274 545,877 2,686,339
--------- ------- ------- ---------
Income (loss) before taxes $ 433,323 $ (64,781) $ (545,877) $ (177,335)
=========== =========== =========== ===========
Six Months Ended Avionics Avionics Avionics Marine Corporate
---------------- -------- -------- -------- ------ ---------
September 30, 2006 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Net sales $ 2,245,916 $ 1,241,558 $ 3,487,474 $ 404,926 $ 3,892,400
Cost of sales 952,936 760,416 1,713,352 302,310 2,015,662
------- ------- --------- ------- ---------
Gross margin 1,292,980 481,142 1,774,122 102,616 1,876,738
--------- ------- --------- ------- ---------
Engineering, research, & dev. 1,115,951 99,149 1,215,100
Selling, general, and admin. 615,312 86,052 $ 570,725 1,272,089
Interest income, net (20,720) -- -- (20,720)
-------- ------- ------- --------
Total expenses 1,710,543 185,201 570,725 2,466,469
--------- ------- ------- ---------
Income (loss) before taxes $ 63,579 $ (82,585) $ (570,725) $ (589,731)
=========== =========== =========== ===========
Note 8 Income Taxes
------ ------------
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes- an Interpretation of FASB Statement No. 109, on April 1, 2007. The
Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The Company did not have any unrecognized
tax benefits and there was no effect on our financial condition or results of
operations as a result of implementing FIN 48.
The tax effect of temporary differences, primarily net operating loss
carryforwards, asset reserves and accrued liabilities, gave rise to the
Company's deferred tax asset in the accompanying September 30, 2007 and March
31, 2007 consolidated balance sheets. Deferred income taxes are recognized for
the tax consequence of such temporary differences at the enacted tax rate
expected to be in effect when the differences reverse.
Note 9 Stock Options
------ -------------
During the quarter ended September 30, 2007 stock options for 35,000 shares were
exercised for total proceeds of $80,850. For the six months ended September 30,
2007 stock options for 38,000 shares were exercised for total proceeds of
$87,600. For the six months ended September 30, 2007, options for 40,250 shares
expired.
- 8 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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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 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 for the fiscal
year ended March 31, 2007. 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 customer provided title and risk of loss are transferred to the
customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under short-term service contracts are recognized when the
services are performed.
Due to the unique nature of the ITATS program wherein a significant portion of
this contract will not be delivered for over a year, revenues under this
contract are recognized on a percentage-of-completion basis, which recognizes
sales and profit as it is earned, rather than at the time of shipment. All
expenses related to this contract are charged to cost of sales. The Company also
receives progress billings on this program, which is a funding mechanism by the
government to assist contractors on long-term contracts prior to delivery.
Shipping and handling costs charged to customers are not material. The revenues
and related shipping and handling costs are included in selling, general and
administrative expenses.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues.
Inventory reserves - inventory reserves or write-downs (primarily for purchased
parts) 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. While reserves have historically
been within expectation, if market conditions and actual demands are less
favorable than those projected by management, additional reserves or inventory
write-downs may be required.
- 9 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
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 credit and payments from its customers and
maintains a 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 expectation and the provision
established, the Company cannot guarantee that this will continue.
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
expectations and the provisions established, future warranty/enhancement costs
could be in excess of the Company's warranty/enhancement reserves. A significant
increase in these costs could adversely affect the Company's 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.
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.
General
-------
Management's discussion and analysis of results of operations and financial
condition is intended to assist the reader in the understanding and assessment
of significant changes and trends related to the results of operations and
financial position of the Company together with its subsidiary. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and accompanying notes in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2007.
The Company's avionics business is conducted in the Government and Commercial
and General Aviation markets (see Note 7 of Notes to Financial Statements for
segment financial information). The Company's subsidiary Innerspace Technology,
Inc. ("ITI") sells products to the marine industry, and ITI's financial
statements have been consolidated with the Company's financial statements.
- 10 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations
---------------------
Overview
--------
For the six months ended September 30, 2007, total revenues increased
approximately 55% to over $6 million, and the loss before taxes decreased from
approximately $590,000 to $177,000, though the Company's gross margin percentage
declined (see below). The increase in gross margin dollars, associated with the
increase in revenues, was offset partially by an increase in engineering,
research and development expenditures, primarily associated with the
Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline
Tester ("CRAFT") program. This increase in sales is primarily attributed to the
following:
o In fiscal year 2007, the Company was awarded the AN/ARM-206
Intermediate Level TACAN Test Set (ITATS) contract for $4.4 million.
Since this contract has a long duration, revenues under this contract
have been recognized on a percentage-of-completion basis. For the
first six months of fiscal year 2008, revenues under this contract
were approximately $1,389,000. However, the gross profit margin (9.6%)
for this contract is significantly less than the Company's historical
gross profit margin due to use of an engineering subcontractor, and
the competitiveness of the bidding process.
o The shipment of T-47N test sets to the Royal Australian Air Force
(through the Company's distributor) for approximately $600,000.
o The shipment of T-30CM test sets under a contract from the U.S. Navy
for approximately $255,000.
o Increase in shipments of the TR-220 Multi-Function test set for
approximately $289,000.
Over the last two calendar years, the Company has won competitive awards for two
major contracts, CRAFT and ITATS, from the U.S. Navy. These contracts include
multi-year production deliveries, commencing late in calendar year 2008 or early
2009, and have an aggregate revenue value of approximately $30 million. The
products under these contracts represent cutting edge technology, and should
provide Tel with a competitive advantage for years to come.
Research and development expenditures will continue to remain high for the next
several quarters to support the CRAFT program (AN/USM-708). Despite ongoing
changes in the Mode 5 technology and limited hardware availability for design
validation, Tel has successfully demonstrated Mode 5 testing capability to the
U.S. Navy and is preparing to ship several IFF/Mode 5 prototype variants of the
AN/USM-708 to other military services later this calendar year. The AN/USM-708
engineering hardware design has been largely completed and the fabrication of 15
pilot production units is now in process. The Company still has to finalize some
non-IFF software and conduct systems integration testing. These units are
currently scheduled to undergo design validation testing and U.S. Navy TECHEVAL
next summer with production currently scheduled to begin late in the 2008
calendar year or early 2009. The Navy has options for up to 750 AN/USM-708 units
which, if exercised, would add about $14 million to Tel's backlog and to
projected revenues over a several year period. The Navy has also announced plans
to possibly purchase up to 450 additional units on a sole source basis. Given
the unique nature of the design, this unit could also generate significant sales
to other military customers, both domestically and overseas.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Overview (continued)
--------------------
In July 2006, Tel was awarded a second major US Navy contract for an
Intermediate Level TACAN Test Set (ITATS). This contract has options for
approximately 150 units with a total value of over $12 million; the initial work
authorization was $4.4 million. Tel is working with an engineering
sub-contractor on this project and this program entails substantially less Tel
engineering effort than the AN/USM-708. The development work remains on schedule
with pilot production expected to take place next summer and production expected
to commence following Navy TECHEVAL. Given the unique nature of the design, this
unit could also generate significant sales to other military customers, both
domestically and overseas.
Sales of marine products in our subsidiary ITI declined in the second quarter
and the first six months of fiscal year 2008 as compared to the same periods of
the prior year. Although the Company reduced expenses pursuant to its profit
improvement plan, current sales volume remains inadequate to cover existing
expenses. ITI's sales have not grown as expected and the Company is closely
monitoring its performance, and is evaluating its future.
While the near-term competitive and economic situation remains difficult for
both the avionics and marine system markets, management remains optimistic about
the Company's prospects and improving results. Tel has significantly upgraded
its management team and engineering staff over the last several years and the
new digital technology incorporated into the AN/USM-708 and AN/ARM-206 units
could have applications outside of Tel's traditional avionics business as well
as increasing opportunities in regular markets.
As a consequence of operating losses, stockholders' equity, and cash have
declined. At September 30, 2007, the Company had positive working capital of
$3,195,660, as compared to $3,121,343 at March 31, 2007, principally as a result
of the increase in accounts receivable. The Company's credit agreement with Bank
of America remains at $1,750,000, against which $350,000 has been drawn down.
The bank has agreed to extend the credit agreement until September 30, 2008, and
the new agreement includes a new borrowing base calculation tied to working
capital. As of September 30, 2007, remaining availability under this modified
line is approximately $700,000. Based upon its working capital, backlog, and
credit agreement, management believes the Company has adequate funding for its
operations for at least the next twelve months.
At September 30, 2007, the Company's backlog was approximately $7.3 million as
compared to approximately $8.7 million at September 30, 2006. These amounts do
not include any production options for CRAFT or ITATS. Historically, commercial
and government orders received by the Company, other than for larger programs
like the AN/APM-480 or AN/USM-708, are received and shipped within the year and,
as such, backlog may not necessarily be indicative of future sales activity.
- 12 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Net Sales
---------
Total net sales increased $840,898 (39.5%) to $2,968,247 and $2,156,899 (55.4%)
to $6,049,299, respectively, for the three and six months ended September 30,
2007 as compared to the same periods in the prior fiscal year.
Net sales of avionics products increased $1,000,836 (54.3%) to $2,844,692 and
$2,312,957 (66.3%) to 5,800,431 for the three and six months ended September 30,
2007, respectively, as compared to the same periods in the prior year. Marine
systems sales decreased $159,938 (56.4%) to $123,555 and $156,058 (38.5%) to
$248,868 for the three and six months ended September 30, 2007, respectively, as
compared to the same periods in the prior year.
Avionics commercial sales increased from prior year by $258,691 (43%) to
$860,181 and $514,055 (41.4%) to $1,755,613, respectively, for the same periods.
This increase is mostly attributed to an increase in sales of the TR-220
Multi-Function Test set, and the T-36C, as a result of efforts of the Company's
domestic distributors, as well as an increase in repair and parts sales. The
weak financial condition of the commercial airline industry continues.
Avionics government sales increased $742,145 (59.7%) to $1,984,511 and
$1,798,902 (80.1%) to $4,044,818, respectively, for the three and six months
ended September 30, 2007 as compared to the same periods in the prior fiscal
year. The increase in avionics government sales for the quarter ended September
30, 2007 is largely attributable to revenues of approximately $653,000 from the
ITATS contract, which is recognized on a percentage-of-completion basis and the
shipment of T-30CM under a contract with the U.S. Navy. For the six months ended
September 30, 2007, government revenues increased largely as a result of
revenues of approximately $1,389,000 from the ITATS contract, which are
recognized on a percentage-of-completion basis, the shipment of T-30CM under a
contract with the U.S. Navy the shipment of T-47NC test sets to the Royal
Australian Air Force (through the Company's distributor) for approximately
$600,000, partially offset by lower revenues associated with the test and
documentation phase of the CRAFT program and other products.
Gross Margin
------------
Gross margin dollars increased $187,627 (17.5%) to $1,258,787 and $632,266
(33.7%) to $2,509,004 for the three and six months ended September 30, 2007,
respectively, as compared to the same period in the prior fiscal year. The
increase in gross margin is attributed to the increase in volume. The gross
margin percentage for the three months ended September 30, 2007 was 42.4% as
compared to 50.4% for the three months ended September 30, 2006. The gross
margin percentage for the six months ended September 30, 2007 was 41.5% as
compared to 48.2% for the six months ended September 30, 2006. The decrease in
gross profit percentage is primarily attributed to the lower gross profit
percentage on the ITATS contract.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Operating Expenses
------------------
Selling, general and administrative expenses decreased $1,521 (0.2%) to $648,445
and $42,537 (3.3%) to $1,229,552 for the three months and six months ended
September 30, 2007, respectively, as compared to the three and six months ended
September 30, 2006.
For the quarter ended September 30, 2007 as compared to the same quarter last
year the decrease in selling, general, and administrative expenses was not
significant.
For the six months ended September 30, 2007 as compared to the same six month
period in the prior fiscal year, selling, general, and administrative expenses
decreased primarily as a result of charging of related expenses to the CRAFT and
ITATS programs ($51,000), lower expenses for avionics sales and marketing
related to outside commissions, group insurance, freight and recruitment
($56,000), partially offset by higher salaries for avionics marketing and sales
($61,000), attributed mostly to the addition of a new Director of Business
Development.
Engineering, research and development expenses increased $74,642 (13.1%) to
$644,561 and $231,624 (19.1%) to $1,446,724 for the three and six months ended
September 30, 2007, respectively, as compared to the same periods in the prior
fiscal year. These increases are primarily attributed to efforts related to the
CRAFT program.
Income Taxes
------------
An income tax benefit in the amount of $70,844 was recorded for the six months
ended September 30, 2007 as a result of the loss before taxes as compared to an
income tax benefit for income taxes in the amount of $235,599 for the six months
ended September 30, 2006. These amounts represent the effective federal and
state tax rate of approximately 40% on the Company's net loss before taxes.
Net Loss
--------
As a result of the above, the Company incurred net losses of $23,117 and
$106,491 for the three and six months ended September 30, 2007 as compared to
net losses of $82,978 and $354,132 for for the three and six months ended
September 30, 2006.
- 14 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
At September 30, 2007 the Company had working capital of $3,195,660 as compared
to $3,121,343 at March 31, 2007. For the six months ended September 30, 2007,
the Company used $810,115 of cash for operations as compared to $787,244 for the
six months ended September 30, 2006. This increase in cash used for operations
is primarily attributed to the increase in accounts receivable, offset partially
by an increase in accounts payable and accrued expenses, a reduced loss for the
period, and a reduction in inventories.
Net cash used in investing activities decreased from $51,941 for the six months
ended September 30, 2006 to $39,586 for the six months ended September 30, 2007
due to lower volume of purchases of equipment.
Net cash provided by financing activities increased to $437,600 for the six
months ended September 30, 2007 as compared to $37,050 for the six months ended
September 30, 2006 due to the borrowing from the line of credit in the amount of
$350,000, and an increase in the cash proceeds from the exercise of stock
options in the amount of $87,600. 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, and is payable monthly based upon the
outstanding balance. The Company does not pay to maintain this open line. At
September 30, 2007 the Company had an outstanding balance of $350,000 on which
it currently pays 8.25% interest. The line of credit is collateralized by
substantially all of the assets of the Company. The line of credit expired on
September 30, 2007. The bank has agreed to extend the credit agreement until
September 30, 2008, and the new agreement includes a new borrowing base
calculation tied to working capital. As of September 30, 2007, remaining
availability under this modified line is approximately $700,000, based upon
receivables and inventories at September 30, 2007.
As a consequence of operating losses, stockholders' equity, and cash have
declined. However, the Company believes that it has adequate liquidity,
borrowing resources and backlog to fund operating plans for the at least the
next twelve months, and until deliveries of its new units commence. Currently,
the Company has no material capital expenditure requirements.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 2007. 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, 2007.
- 15 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Company, at this time, is generally not exposed to material financial market
risks, including changes in interest rates, foreign currency exchange rates, and
marketable equity security prices.
Item 4. Controls and Procedures
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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, 2007 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, 2007 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 our 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 1. Legal Proceedings
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None.
Item 1A. Risk Factors
-------- ------------
Information related to our risk factors are disclosed under
Item 1A to Part I of our Annual Report on Form 10-K for the
year ended March 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
There were no unregistered sales of equity securities and there
were no repurchases of equity securities during the Company's
six months ended September 30, 2007.
Item 6. Exhibits
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Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the
Securities Exchange Act.
31.2 Certification by Principal Accounting Officer pursuant to
Rule 15d-14 under the Securities Exchange Act.
32.1 Certification by CEO and Principal Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- 16 -
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 13, 2007 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
CEO
Date: November 13, 2007 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
- 17 -