UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2008
[ ] 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 by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting company. See
definitions of "Large Accelerated Filer", "Accelerated Filer" and "Smaller
Reporting Company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,456,261 shares of Common stock, $.10 par value as of February 9, 2009.
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
TABLE OF CONTENTS
-----------------
PAGE
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
December 31, 2008 and March 31, 2008 (Audited) 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 2008 and 2007 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2008 and 2007 3
Notes to Condensed Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 12-18
Item 4 (T). Controls and Procedures 19
Part II - Other Information
Item 1. Legal Proceedings 19
Item 2. Unregistered sales of Equity Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 20
Signatures 20
Certifications
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS December 31, 2008 March 31, 2008
------ ----------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 220,037 $ 469,906
Accounts receivable, net 2,304,733 1,223,753
Unbilled government receivables 1,311,239 1,100,323
Inventories, net 2,533,327 2,075,542
Prepaid expenses and other current assets 58,588 141,446
Deferred income taxes 223,512 531,975
----------- -----------
Total current assets 6,651,436 5,542,945
Property, plant and equipment, net 450,295 532,240
Deferred income taxes - non-current 900,221 900,221
Other assets 73,411 142,069
----------- -----------
Total assets $ 8,075,363 $ 7,117,475
=========== ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party $ 50,000 $ 50,000
Line of credit 450,000 350,000
Accounts payable 919,885 928,367
Deferred revenues 46,204 55,014
Accrued payroll, vacation pay, and payroll taxes 309,195 348,683
Accrued expenses 1,486,886 1,129,370
----------- -----------
Total current liabilities 3,262,170 2,861,434
Deferred revenues 46,973 43,818
----------- -----------
Total liabilities 3,309,143 2,905,252
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,456,261 and
2,428,261 issued and outstanding as of December 30,
2008, and March 31, 2008, respectively 245,626 242,826
Additional paid-in capital 4,712,163 4,611,262
Accumulated deficit (191,569) (641,865)
----------- -----------
Total stockholders' equity 4,766,220 4,212,223
----------- -----------
Total liabilities and stockholders' equity $ 8,075,363 $ 7,117,475
=========== ===========
See accompany notes to condensed consolidated financial statements
- 1 -
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31, December 31, December 31,
------------ ------------ ------------ ------------
2008 2007 2008 2007
---- ---- ---- ----
Net sales $ 2,915,428 $ 3,088,334 $ 10,322,524 $ 8,888,765
Cost of sales 1,490,161 1,763,605 5,268,841 5,117,525
------------ ------------ ------------ ------------
Gross margin 1,425,267 1,324,729 5,053,683 3,771,240
Operating expenses:
Selling, general and administrative 709,534 682,045 2,181,676 1,851,520
Engineering, research and development 684,017 654,526 2,133,021 2,044,810
------------ ------------ ------------ ------------
Total operating expenses 1,393,551 1,336,571 4,314,697 3,896,330
------------ ------------ ------------ ------------
Income (loss) from continuing operations 31,716 (11,842) 738,986 (125,090)
Interest income (expense):
Interest income 1,710 4,694 3,783 14,380
Interest expense (11,248) (11,711) (36,103) (31,456)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 22,178 (18,859) 706,666 (142,166)
Income tax provision (benefit) 8,861 (12,142) 326,926 (62,452)
------------ ------------ ------------ ------------
Net income (loss) from continuing
operations, net of income taxes 13,317 (6,717) 379,740 (79,714)
Income (loss) from discontinued operations,
net of income taxes 3,317 (29,242) 70,556 (62,736)
------------ ------------ ------------ ------------
Net income (loss) $ 16,634 $ (35,959) $ 450,296 $ (142,450)
============ ============ ============ ============
Income (loss) from continuing operations,
net of income taxes:
Basic income (loss) per common share $ 0.01 $ 0.00 $ 0.16 $ (0.03)
============ ============ ============ ============
Diluted income (loss) per common share $ 0.01 $ 0.00 $ 0.15 $ (0.03)
============ ============ ============ ============
Income (loss) from discontinued operations,
net of income taxes:
Basic income (loss) per common share $ 0.00 $ (0.01) $ 0.03 $ (0.03)
============ ============ ============ ============
Diluted income (loss) per common share $ 0.00 $ (0.01) $ 0.03 $ (0.03)
============ ============ ============ ============
Net Income (loss):
Basic income (loss) per common share $ 0.01 $ (0.02) $ 0.18 $ (0.06)
============ ============ ============ ============
Diluted income (loss) per common share $ 0.01 $ (0.02) $ 0.18 $ (0.06)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 2,452,511 2,387,681 2,443,861 2,364,561
Diluted 2,481,011 2,387,681 2,472,361 2,364,561
See accompanying notes to condensed consolidated financial statements
- 2 -
TEL-INSTTRUMENT ELECTRONICS CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31, 2008 December 31, 2007
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 450,296 $ (142,450)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred income taxes 308,463 (98,619)
Non-cash stock-based compensation 38,971 27,654
Depreciation 140,474 179,731
Changes in operating assets or liabilities:
Increase in accounts receivable (1,080,980) (288,866)
Increase in unbilled government receivables (210,916) (1,133,980)
(Increase) decrease in inventories, net (435,013) 379,035
Decrease in prepaid expenses and
other current assets 82,858 20,723
Decrease (increase) in other assets 1,080 (2,430)
(Decrease) increase in accounts payable (8,482) 445,553
Decrease in deferred revenues (5,655) (5,174)
Decrease in accrued payroll, vacation pay,
and payroll taxes (39,488) (107,295)
Increase in accrued expenses 357,516 354,528
----------- -----------
Net cash used in operating activities (400,876) (371,590)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (81,301) (65,949)
----------- -----------
Net cash used in investing activities (81,301) (65,949)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 64,730 130,800
Proceeds from loan on life insurance policy 67,578 --
Proceeds from borrowings from line of credit, net 100,000 350,000
----------- -----------
Net cash provided by financing activities 232,308 480,800
----------- -----------
Net increase (decrease) in cash and cash equivalents (249,869) 43,261
Cash and cash equivalents at beginning of period 469,906 655,836
----------- -----------
Cash and cash equivalents at end of period $ 220,037 $ 699,097
=========== ===========
Supplemental information
Interest paid $ 23,178 $ 24,809
=========== ===========
Taxes paid $ 20,790 $ 3,849
=========== ===========
See accompanying notes to condensed consolidated 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, and its marine systems subsidiary whose
operations are being accounted for as a discontinued operation, as of December
31, 2008, the results of operations for the three and nine months ended December
31, 2008 and December 31, 2007, and statements of cash flows for the nine months
ended December 31, 2008 and December 31, 2007. 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, 2008 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K as of that date. 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, 2008.
Note 2 Revenue Recognition - Percentage-of-Completion - ITATS
------ ------------------------------------------------------
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 they are earned, rather than at the time of shipment.
Revenues and profits are estimated using the cost-to-cost method of accounting
where revenues are recognized and profits recorded based upon the ratio of costs
incurred to estimate of total costs at completion. The ratio of costs incurred
to date to the estimate of total costs at completion is applied to the contract
value to determine the revenues and profits. When adjustments in estimated
contract revenues or estimated costs at completion are required, any changes
from prior estimates are recognized by recording adjustments in the current
period for the inception-to-date effect of the changes on current and prior
periods. 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 Note 4 and Critical Accounting Policies - Revenue
Recognition)
Note 3 Accounts Receivable, net
------ ------------------------
Accounts receivable, net, consist of:
December 31, 2008 March 31, 2008
----------------- --------------
Commercial $ 265,100 $ 647,063
Government 2,070,839 607,896
Allowance for doubtful accounts (31,206) (31,206)
----------- -----------
Total $ 2,304,733 $ 1,223,753
=========== ===========
Note 4 Unbilled Government Receivables
------ -------------------------------
Unbilled government receivables represent unbilled costs and accrued profits
primarily related to revenues on long-term contracts that have been recognized
on a percentage-of-completion basis for accounting purposes, but not yet billed
to customers. As revenues are recognized, performance-based payments and
progress payments are charged as an offset to the related receivables balance.
- 4 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 5 Inventories, net
------ ----------------
Inventories, net, consist of: December 31, 2008 March 31, 2008
----------------- --------------
Purchased parts $ 1,659,749 $ 1,246,733
Work-in-process 1,183,556 881,472
Finished goods 29,941 224,284
Less: Reserve for obsolescence (339,919) (276,947)
----------- -----------
Total $ 2,533,327 $ 2,075,542
=========== ===========
Note: Inventories over one year are immaterial.
Note 6 Earnings Per Share
------ ------------------
SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings per
share ("basic EPS") and diluted earnings per share ("diluted EPS").
The Company's basic income (loss) per common 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 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. Diluted loss per share for the periods ended December
31, 2007 do not include common stock equivalents, as these equivalents would be
anti-dilutive.
Three Months Ended Three Months Ended
------------------ ------------------
December 31, 2008 December 31, 2007
----------------- -----------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ 16,634 $ (35,959)
Weighted-average common shares outstanding 2,452,511 2,387,681
Basic net income(loss) per share attributable to common stockholders $ 0.01 $ (0.02)
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders $ 16,634 $ (35,959)
Weighted-average common shares outstanding 2,452,511 2,387,681
Incremental shares attributable to the assumed exercise of
Outstanding stock options 28,500 --
Total adjusted weighted-average shares 2,481,011 2,387,681
Diluted net income(loss) per share attributable to common stockholders $ 0.01 $ (0.02)
Nine Months Ended Nine Months Ended
----------------- -----------------
December 31, 2008 December 31, 2007
----------------- -----------------
Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ 450,296 $ (142,450)
Weighted-average common shares outstanding 2,443,861 2,364,561
Basic net income(loss) per share attributable to common stockholders $ 0.18 $ (0.06)
Diluted net income (loss) per share computation
Net income(loss) attributable to common stockholders $ 450,296 $ (142,450)
Weighted-average common shares outstanding 2,443,861 2,364,561
Incremental shares attributable to the assumed exercise of
outstanding stock options 28,500 --
Total adjusted weighted-average shares 2,472,361 2,364,561
Diluted net income(loss) per share attributable to common stockholders $ 0.18 $ (0.06)
- 5 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 7 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), operations was charged $14,205 and $11,162
for three months ended December 31, 2008 and 2007, respectively, and $38,971 and
$27,654 for the nine months ended December 31, 2008 and 2007, respectively. 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 1.07% to 3.16%, volatility at
37.67% to 40.35%, and an expected life of 5 years for the nine months ended
December 31, 2008; expected dividend yield of 0.0%, risk-free interest rate of
2.91% to 5%, volatility at 43.25% to 56.94%, and an expected life of 5 years for
the nine months ended December 31, 2007. 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% for both periods.
Note 8 Segment Information
------ -------------------
As a result of the classification of its marine systems division as discontinued
operations in accordance with FAS No. 131, "Disclosures about Segments of an
Enterprise and related information", the Company determined it has two
reportable segments for continuing operations - avionics government and avionics
commercial. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics products. The
avionics government segment consists primarily of the design, manufacture, and
sale of test equipment to the U.S. and foreign governments and militaries either
directly or through distributors. The avionics commercial segment consists of
design, manufacture, and sale of test equipment to domestic and foreign
airlines, directly or through commercial distributors, and to general aviation
repair and maintenance shops. The Company develops and designs test equipment
for the avionics industry and as such, the Company's products and designs cross
segments.
Management evaluates the performance of its segments and allocates resources to
them based on gross margin. The Company's general and administrative costs and
sales and marketing expenses are not segment specific. As a result, all
operating expenses are not managed on a segment basis. Net interest includes
expenses on debt and income earned on cash balances. Segment assets include
accounts receivable, unbilled government receivables and inventories. Asset
information, other than accounts receivable, unbilled government receivables and
inventories, is not reported, since the Company does not produce such
information internally. All long-lived assets are located in the U.S.
- 6 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 8 Segment Information (continued)
------ -------------------------------
The table below presents information about reportable segments within the
avionics business for the periods ending December 31, 2008 and 2007:
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
December 31, 2008 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 2,526,036 $ 389,392 $ 2,915,428 $ 2,915,428
Cost of sales 1,230,636 259,525 1,490,161 1,490,161
--------- ------- --------- ---------
Gross margin 1,295,400 129,867 1,425,267 1,425,267
--------- ------- --------- ---------
Engineering, research, & dev. 684,017 684,017
Selling, general, and admin. 374,185 $ 335,349 709,534
Interest expense, net 9,538 -- 9,538
--------- --------- ---------
Total expenses 1,067,740 335,349 1,403,089
--------- --------- ---------
Income (loss) from continuing
operations before taxes $ 357,527 $ (335,349) $ 22,178
========= ========= =========
Segment assets $ 5,809,904 $ 339,395 $ 6,149,299 $ 1,926,064 $ 8,075,363
========= ========= ========= ========= =========
Three Months Ended Avionics Avionics Avionics Corporate
------------------ -------- -------- -------- ---------
December 31, 2007 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 2,467,834 $ 620,500 $ 3,088,334 $ 3,088,334
Cost of sales 1,385,671 377,934 1,763,605 1,763,605
--------- ------- --------- ---------
Gross margin 1,082,163 242,566 1,324,729 1,324,729
--------- ------- --------- ---------
Engineering, research, & dev. 654,526 654,526
Selling, general, and admin. 332,044 $ 350,001 682,045
Interest expense, net 7,017 -- 7,017
--------- --------- ---------
Total expenses 993,587 350,001 1,343,588
========= ========= =========
Income (loss) from continuing
operations before taxes $ 331,142 $ (350,001) $ (18,859)
========= ========= =========
Nine Months Ended Avionics Avionics Avionics Corporate
----------------- -------- -------- -------- ---------
December 31, 2008 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 8,843,166 $ 1,479,358 $10,322,524 $10,322,524
Cost of sales 4,396,054 872,787 5,268,841 5,268,841
--------- ------- --------- ---------
Gross margin 4,447,112 606,571 5,053,683 5,053,683
--------- ------- --------- ---------
Engineering, research, & dev. 2,133,021 2,133,021
Selling, general, and admin. 1,049,281 $ 1,132,395 2,181,676
Interest expense, net 32,320 -- 32,320
--------- --------- ---------
Total expenses 3,214,622 1,132,395 4,347,017
--------- --------- ---------
Income (loss) from continuing
operations before taxes $ 1,839,061 $(1,132,395) $ 706.666
========= ========= =========
Nine Months Ended Avionics Avionics Avionics Corporate
----------------- -------- -------- -------- ---------
December 31, 2007 Gov't Comm'l. Total Items Total
----------------- ----- ------- ----- ----- -----
Net sales $ 6,512,652 $ 2,376,113 $ 8,888,765 $ 8,888,765
Cost of sales 3,751,865 1,365,660 5,117,525 5,117,525
--------- --------- --------- ---------
Gross margin 2,760,787 1,010,453 3,771,240 3,771,240
--------- --------- --------- ---------
Engineering, research, & dev. 2,044,810 2,044,810
Selling, general, and admin. 956,754 $ 894,766 1,851,520
Interest expense, net 17,076 -- 17,076
--------- --------- ---------
Total expenses 3,018,640 894,766 3,913,406
--------- --------- ---------
Income (loss) from continuing
operations before taxes $ 752,600 $ (894,766) $ (142,166)
========= ========= =========
- 7 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 9 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 does not believe it has any
unrecognized tax benefits and there was no effect on its 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 December 31, 2008 and March 31,
2008 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 10 Stock Options
------- -------------
During the quarter ended December 31, 2008, stock options for 8,000 shares were
exercised for total proceeds of $18,950. For the nine months ended December 31,
2008, stock options for 28,000 shares were exercised for total proceeds of
$64,730.
Note 11 Fair Value Measurements
------- -----------------------
On April 1, 2008, the Company adopted SFAS No. 157 "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, provides a consistent framework for
measuring fair value under Generally Accepted Accounting Principles and expands
fair value financial statement disclosure requirements. SFAS 157's valuation
techniques are based on observable and unobservable inputs. Observable inputs
reflect readily obtainable data from independent sources, while unobservable
inputs reflect our market assumptions. SFAS 157 classifies these inputs into the
following hierarchy:
Level 1 Inputs- Quoted prices for identical instruments in active markets.
Level 2 Inputs- Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations whose inputs are observable
or whose significant value drivers are observable.
Level 3 Inputs- Instruments with primarily unobservable value drivers.
At December 31, 2008, the Company had no financial assets or liabilities that
required fair value reporting.
- 8 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
Note 12 New Accounting Pronouncements
------- -----------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities, including an amendment of FASB Statement No.
115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified
election dates, to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value.
Unrealized gains and losses shall be reported on items for which the fair value
option has been elected in earnings at each subsequent reporting date. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157. The adoption of SFAS No. 159 had no impact on the
Company's financial position or results of operations.
In December 2007, the FASB issued SFAS No 141(R), "Business Combinations." This
statement provides new accounting guidance and disclosure requirements for
business combinations. SFAS No 141(R) is effective for business combinations
which occur in the first fiscal year beginning on or after December 15, 2008.
The adoption of SFAS No 141 (R) will not have a material impact on the Company's
financial statements..
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements ("SFAS 160"). SFAS 160 requires all entities
to report noncontrolling interests as equity in the consolidated financial
statements. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company does
not expect the adoption of this statement will have a significant impact on its
financial position or results of operations.
In December 2007, the FASB finalized the provisions of the Emerging Issues Task
Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This
EITF Issue provides guidance and requires financial statement disclosures for
collaborative arrangements. EITF Issue No. 07-1 is in effect for financial
statements issued for fiscal years beginning after December15, 2008. The
adoption of EITF Issue No. 07-1 will not have a material impact on the Company's
financial statements..
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements
for derivative instruments and hedging activities. SFAS 161 requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation and requires quantitative disclosures about fair
value amounts and gains and losses on derivative instruments. It also requires
disclosures about credit-related contingent features in derivative agreements.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. SFAS 161 encourages, but does not require, comparative disclosures
for earlier periods at initial adoption. The adoption of SFAS 161 is not
expected to have a material impact on the Company's financial statements.
- 9 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
-----------
Note 12 New Accounting Pronouncements (continued)
------- -----------------------------------------
In May 2008, the FASB issued SFAS No. 162, "Hierarchy of Generally Accepted
Accounting Principles" (SFAS 162). This statement is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements of
nongovernmental entities that are presented in conformity with GAAP. This
statement will be effective 60 days following the Securities and Exchange
Commission's approval of the Public Company Accounting Oversight Board amendment
to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles." The Company believes that SFAS 162 will have no
effect on its condensed consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") Financial Accounting
Standard 142-3, Determination of the Useful Life of Intangible Assets ("FSP FAS
142-3"). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142. In developing assumptions
about renewal or extension, FSP FAS 142-3 requires an entity to consider its own
historical experience (or, if no experience, market participant assumptions)
adjusted for relevant entity-specific factors in paragraph 11 of SFAS No. 142.
FSP FAS 142-3 expands the disclosure requirements of SFAS No. 142 and is
effective for the Company beginning April 1, 2009. The guidance for determining
the useful life of a recognized intangible asset shall be applied prospectively
to intangible assets acquired after the effective date. The disclosure
requirements shall be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. The Company does not expect the
adoption of FSP FAS 142-3 on April 1, 2009 to have a material impact on the
Company's consolidated financial position or results of operations.
In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements
("EITF 08-3"). EITF 08-3 provides guidance for accounting for nonrefundable
maintenance deposits. It also provides revenue recognition accounting guidance
for the lessor. EITF 08-3 is effective for fiscal years beginning after December
15, 2008. The adoption of this EITF will not have a material effect on the
Company's consolidated financial statements.
- 10 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
(Unaudited)
-----------
Note 13 Discontinued Operations
------- -----------------------
As of March 2008, the Board of Directors approved categorizing the Company's
marine systems division as a discontinued operation. The Company's decision to
discontinue its marine operations was based primarily on the historical losses
sustained and management's intent to focus on its avionics business
The Company wrote-off fixed assets of approximately $77,000 and inventories of
approximately $151,000 in 2008. The Company continues to sell and service these
products while sales options for the division are explored. As a result, all
results for this operation are recorded separately as results from discontinued
operations.
The following tables reflect sales, costs and expenses, and income (loss) from
discontinued operations, net of taxes for the three and nine months ended
December 31, 2008 and 2007, respectively.
------------------------------------------------------------- ---------------------- ---------------------
Three Months Three Months
------------ ------------
Ended Ended
----- -----
December 31, 2008 December 31, 2007
----------------- -----------------
------------------------------------------------------------- ---------------------- ---------------------
Discontinued Operations:
------------------------------------------------------------- ---------------------- ---------------------
Sales $ 46,848 $ 156,605
------------------------------------------------------------- ---------------------- ---------------------
Costs and expenses 41,325 197,635
---------- ----------
------------------------------------------------------------- ---------------------- ---------------------
Income (loss) from operations of discontinued operations 5,523 (41,030)
------------------------------------------------------------- ---------------------- ---------------------
Income tax provision (benefit) 2,206 (11,788)
---------- ----------
------------------------------------------------------------- ---------------------- ---------------------
Net income (loss) from discontinued operations $ 3,317 $ (29,242)
========== ==========
------------------------------------------------------------- ---------------------- ---------------------
------------------------------------------------------------- ---------------------- ---------------------
Nine Months Nine Months
----------- -----------
Ended Ended
----- -----
December 31, 2008 December 31, 2007
----------------- -----------------
------------------------------------------------------------- ---------------------- ---------------------
Discontinued Operations:
------------------------------------------------------------- ---------------------- ---------------------
Sales $ 233,449 $ 405,473
------------------------------------------------------------- ---------------------- ---------------------
Costs and expenses 115,954 500,527
------------------ ---------- ----------
------------------------------------------------------------- ---------------------- ---------------------
Income (loss) from operations of discontinued operations 117,495 (95,054)
------------------------------------------------------------- ---------------------- ---------------------
Income tax provision (benefit) 46,939 (32,318)
---------- ----------
------------------------------------------------------------- ---------------------- ---------------------
Net income (loss) from discontinued operations $ 70,556 $ (62,736)
========== ==========
------------------------------------------------------------- ---------------------- ---------------------
Note 14 Reclassifications
------- -----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation, relating primarily to discontinued operations.
- 11 -
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 its 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 in accordance with generally accepted
principles, and accounting for the underlying transactions and balances, we are
required to makes estimates and judgments which affect the amounts reported in
the financial statements and the notes and 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, 2008. 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 on repairs and calibrations are recognized at the time the repaired or
calibrated unit is shipped, as it is at this time that the work is completed.
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 they are earned, rather than at the time of shipment.
Revenues and profits are estimated using the cost-to-cost method of accounting
where revenues are recognized and profits recorded based upon the ratio of costs
incurred to date to our estimate of total costs at completion. The ratio of
costs incurred to our estimate of total costs at completion is applied to the
contract value to determine the revenues and profits. When adjustments in
estimated contract revenues or estimated costs at completion are required, any
changes from prior estimates are recognized by recording adjustments in the
current period for the inception-to-date effect of the changes on current and
prior periods. 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 classified as revenue, and
the shipping and handling costs incurred are included in cost of goods sold.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues.
- 12 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
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.
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 of 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 reserves - warranty reserves are based upon historical rates and
specific items that are identifiable and can be estimated at time of sale. While
warranty costs have historically been within expectations and the provisions
established, future warranty costs could be in excess of the Company's warranty
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 reserves are adjusted from time to time when actual
warranty claim experience differs from estimates.
Income taxes - deferred tax assets arise from a variety of sources, the most
significant being: a) tax losses that can be carried forward to be utilized
against profits in future years; b) expenses recognized in the books but
disallowed in the tax return until the associated cash flow occurs; and c)
valuation changes of assets which need to be tax effected for book purposes but
are taxable only when the valuation change is realized. 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 are expected to 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. In assessing the need for a valuation allowance, future taxable income
is estimated, considering the realization of tax loss carryforwards. Valuation
allowances related to deferred tax assets can also be affected by changes to tax
laws, changes to statutory tax rates and future taxable income levels. In the
event it was determined that the Company would not be able to realize all or a
portion of our deferred tax assets in the future, we would reduce such amounts
through a charge to income in the period in which that determination is made.
Conversely, if we were to determine that we would be able to realize our
deferred tax assets in the future in excess of the net carrying amounts, we
would decrease the recorded valuation allowance through an increase to income in
the period in which that determination is made. In its evaluation of a valuation
allowance the Company takes into account existing contracts and backlog, and the
probability that options under these contract awards will be exercised as well
as sales of existing products. The Company prepares profit projections based on
the revenue and expenses forecast to determine that such revenues will produce
sufficient taxable income to realize the deferred tax assets.
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
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. This discussion and analysis should be read
in conjunction with the consolidated financial statements and accompanying
financial notes in the Company's Annual Report on Form 10-K for the year ended
March 31, 2008.
The Company's avionics business is conducted in the Government, Commercial and
General aviation markets (see Note 8 of Notes to Financial Statements for
segment financial information). In January 2004, the Company completed its
acquisition of ITI, a company selling products to the marine industry, and ITI's
financial statements were consolidated with the Company's financial statements
until the Company considered it a discontinued operation as of March 31, 2008
(see Note 13 to Financial Statements).
Results of Operations
---------------------
Overview
--------
Tel's financial results for the nine months ended December 31, 2008
significantly improved with revenues, profits and working capital improving over
last year's comparable period. Shareholders' equity also increased significantly
from March 31, 2008. The current quarter showed a slight dip in sales and a
modest profit as a result of shipments related to the CRAFT program moving to
the next quarter, but was an improvement over the loss in the comparable period
last year.
Revenues from continuing operations increased 16% to $10.3 million for the nine
months ended December 31, 2008 and pretax profits from continuing operations
also increased to $706,666 as compared to a loss of $142,166 for the same period
in the prior fiscal year.
Net income for the nine months ended December 31, 2008 increased as a result of:
(1) an increase in product shipments; (2) a negotiated billing to the government
in the amount of $406,000 for additional work previously performed and expensed
on the CRAFT program; (3) increased billings for revenues associated with the
test and documentation phase of the CRAFT program; and (4) increase in shipments
of the T-47NH as a result of a contract with the U.S. Government.
Since fiscal year 2007, the Company has been awarded several large contracts,
which required significant engineering. The Company has completed much of the
engineering and began shipping some of the units (AN/APM-719) under the contract
during the nine months ended December 31, 2008. Significant shipments should
occur in subsequent years when the Company receives production orders for these
units. However there can be no assurance that the U.S. Government will exercise
all of its options under the contract.
Despite an uncertain economic situation, which is adversely affecting the
Company's commercial sales, the Company anticipates a profitable result for
fiscal year 2009 primarily due to a strong increase and projected increases in
military sales of its legacy products, and the recent commencement of deliveries
of the AN/USM-719 test set.
- 14 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Overview (continued)
--------------------
TIC was previously awarded the US Navy AN/USM-708 (CRAFT) contract for a
multi-functional flight-line test set. This unit combines the function of five
different test sets into one and is the only Mode 5 IFF ("Identification,
Friend, or Foe") flight-line test unit now under government contract. The Navy
subsequently amended the contract to provide for an IFF only variant called the
AN/USM-719 and increased the total IDIQ (Indefinite Quantity - Indefinite
Delivery) order quantity from 750 to 1,200 units. These IDIQ options for the
AN/USM-708 and 719 units, if exercised, would add up to $23 million to the
Company's backlog and projected revenues. To date, the Company has received a
delivery order for 83 AN/USM-719 units and has shipped 23 units. The AN/USM-708
engineering hardware design has been largely completed and the fabrication of 15
pilot production units is expected to take place during calendar year 2009.
These units are currently scheduled to undergo design validation testing and
Navy TECHEVAL in the next six months with production currently scheduled in the
2010 calendar year.
In July 2006 the Company was awarded a second major U.S. Navy contract for an
Intermediate Level TACAN Test Set AN/APM-206 (ITATS). This contract has options
for up to 180 units with a total value of over $12 million; the initial work
authorization was $4.4 million. The Company has been working with an engineering
sub-contractor on this project and this program has entailed substantially less
of the Company's engineering effort than the AN/USM-708. The design has now been
completed and the product should begin the Navy TECHEVAL process this summer.
Given the unique nature of the design of the AN/USM-708 and the AN/APM-206,
these units could also generate significant sales to other military customers,
both domestically and overseas, and the Company is working on other products
derived from them.
In February 2009, the Company was awarded a five year firm fixed price
indefinite-delivery/indefinite-quantity (IDIQ) contract by the U.S. Army
Aviation and Missile Command with a maximum dollar value of $44,046,886,
depending on the number of units purchased. This contract entails production of
at least 20 Mode 5 conversion kits for the Army's TS-4530 IFF test set and 20
new Mode 5 test sets. The IDIQ portion of the contract will entail the
production quantity of -0- to 2,980 Mode 5 conversion kits and a quantity of -0-
to 1,980 new production test sets. These Mode 5 conversion kits and new IFF test
sets will incorporate Tel's proprietary electronics and IFF technology in
addition to EHS test functionality. The systems engineering, design and
integration, fabrication, testing, and associated logistics effort will take
place in Carlstadt, N.J.
As revenues and profits have increased this year, cash and working capital have
improved from March 31, 2008. The Company's bank loan has also been extended
until September 2009. The Company believes that it has adequate liquidity,
borrowing resources and backlog to fund operating plans for the next 12 months,
and until substantial deliveries of its new units commence.
Net Sales
---------
Total net sales decreased $172,206 (5.6%) to $2,915,428 for the three months
ended December 31, 2008 as compared to the three months ended December 31, 2007.
Total net sales increased $1,433,759 (16.1%) to $10,322,424 nine months ended
December 31, 2008 as compared to the same periods in the prior fiscal year.
- 15 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Net Sales (continued)
---------------------
Avionics government sales increased $58,202 (2.4%) to $2,526,036 and $2,330,514
(35.8%) to $8,843,166, respectively, for the three and nine months ended
December 31, 2008 as compared to the same periods in the prior fiscal year. The
increase in avionics government sales for the quarter ended December 31, 2008 is
primarily attributed to: increased shipments of the T-47N as a result of a large
contract from the U.S. Army, the T-76, and the AN/APM-719 (CRAFT variant)
partially offset by lower revenues associated with the ITATS programs and
reduced revenues on other military/government products. For the nine months
ended December 31, 2008 Avionics government sales increased primarily as a
result of; increased shipments of the T-30D as a result of a large contract from
the U.S. Army, a negotiated billing to the government in the amount of $406,000
for additional work previously performed and expensed on the CRAFT program:,
increased billings for revenues associated with the test and documentation phase
of the CRAFT program, the shipment of T-47G test sets to the Canadian Air Force
(through our distributor in Canada) and shipments of the AN/APM-719 (Craft
variant) and the Company's new TR-420, as well as increases in other legacy
products. These increases were partially offset by lower shipments of the T-30CM
and AN/APM-480 and lower revenues associated with the ITATS program.
Avionics commercial sales decreased $231,108 (37.2%) to $389,392 and $896,755
(37.7%) to $1,479,358, respectively, for the same periods. This decrease is
mostly attributed to decreases in sales of the TR-220 Multi-Function Test set
and the T-36C, as a result of the continued weak financial condition of the
commercial airline industry. Revenues associated with repairs and calibrations
increased $7,002 (1%) to $710,686 for the nine months ended December 31, 2008.
Gross Margin
------------
Gross margin dollars increased $100,538 (7.6%) to $1,425,267 and $1,284,443
(34%) to $5,053,683 for the three and nine months ended December 31, 2008,
respectively, as compared to the same period in the prior fiscal year. For the
three months ended December 31, 2008, the increase in gross margin is attributed
to the increase in volume and higher gross profit percentage resulting from a
change in the sales mix. The increase in gross profit dollars and percentage for
the nine months ended December 31, 2008 is also attributed to a negotiated
billing to the government in the amount of $406,000 for additional work
previously performed and expensed on the CRAFT program and higher profitability
on the revenues associated with the test and documentation phase of the CRAFT
program. The gross margin percentage for the three months ended December 31,
2008 was 48.9% as compared to 42.9% for the three months ended December 31,
2007. The gross margin percentage for the nine months ended December 31, 2008
was 49.0% as compared to 42.4% for the nine months ended December 31, 2007.
- 16 -
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 increased $27,489 (4%) to $709,534
and $330,156 (17.8%) to $2,181,676 for the three months and nine months ended
December 31, 2008, respectively, as compared to the three and nine months ended
December 31, 2007. This increase is attributed mainly to an increase in sales
commissions to independent representatives.
Engineering, research and development expenses increased $29,491 (4.5%) to
$684,017 and $88,211 (4.3%) to $2,133,021 for the three and nine months ended
December 31, 2008, respectively, as compared to the same periods in the prior
fiscal year. Engineering, research and development expenses are mostly
attributed to efforts related to the CRAFT program.
Interest, net
-------------
Interest income decreased as a result of lower average cash balances. Interest
expense increased as a result of the increased borrowings associated with the
line of credit and the loan against the cash surrender value of the keyman life
insurance policy. However, for the three months ended December 31, 2008,
interest expense was slightly lower as a result of the lower interest rate
associated with the line of credit.
Income (Loss) from Continuing Operations before Income Taxes
------------------------------------------------------------
As a result of the above, the Company recorded income from continuing operations
before income taxes of $22,178 and $706,666 for the three and nine months ended
December 31, 2008, respectively, as compared to losses from continuing
operations before income taxes of $18,859 and $142,166 for the three and nine
months ended December 31, 2007, respectively.
Income Taxes
------------
An income tax provision in the amount of $8,861 was recorded for the three
months ended December 31, 2008 as compared to an income tax benefit of $12,142
for the three months ended December 31, 2007. An income tax provision in the
amount of $326,926 was recorded for the nine months ended December 31, 2008 as
compared to an income tax benefit of $62,452 for the nine months ended December
31, 2007. The change is due to the income before taxes for the three and nine
months ended December 31, 2008 as compared to a loss before taxes for the three
and nine months ended December 31, 2007.
Net Income (Loss) from Continuing Operations, Net of Taxes
----------------------------------------------------------
As a result of the above, the Company recorded net income from continuing
operations, net of taxes, of $13,317 and $379,740 for the three and nine months
ended December 31, 2008, respectively, as compared to net losses from continuing
operations, net of taxes of $6,717 and $79,714 for the three and nine months
ended December 31, 2007, respectively.
- 17 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Income (Loss) from Discontinued Operations, Net of taxes
------------------ -------------------------------------
For the three and nine months ended December 31, 2008, the Company recorded
income from discontinued operations, net of taxes, of $3,317 and $70,556,
respectively, as compared to losses from discontinued operations, net of taxes,
of $29,242 and $62,736 for the three and nine months ended December 31, 2007,
primarily as a result of the reclassification of certain allocated fixed costs
to continuing operations and sales of products that were written-off in 2008,
and the termination of marketing and engineering expenses
Net Income (Loss)
-----------------
As a result of the above, the Company recorded net income of $16,634 and
$450,296 for the three and nine months ended December 31, 2008, respectively, as
compared to net losses of $39,959 and $142,450 for the three and nine months
ended December 31, 2007.
Liquidity and Capital Resources
-------------------------------
At December 31, 2008, the Company had working capital of $3,389,266 as compared
to $2,681,511 at March 31, 2008. For the nine months ended December 31, 2008,
the Company used $400,876 in cash for operating activities as compared to using
$371,590 of cash for operating activities for the nine months ended December 31,
2007. This increase in cash used in operating activities is primarily attributed
to the increase in inventories and accounts receivable offset mostly by the
change in unbilled government receivables and the profit before taxes for the
period.
Net cash used in investing activities increased to $81,301 for the nine months
ended December 31, 2008 from $65,949 for the nine months ended December 31, 2007
due to the increase in purchases of equipment.
Net cash provided by financing activities decreased to $232,308 for the nine
months ended December 31, 2008 from $480,800 for the nine months ended December
31, 2007 due to the lower borrowings and a decrease in proceeds from the
exercise of stock options.
At December 31, 2008 the Company had an outstanding loan balance of $450,000 on
which it currently pays 3.75% interest (1/2% above the bank's prime rate). The
line of credit is collateralized by substantially all of the assets of the
Company. The credit agreement expires September 30, 2009, and the agreement now
includes an expanded borrowing base calculation tied to working capital. As of
December 31, 2008, remaining availability under this modified line was
approximately $1,300,000 based upon defined eligible receivables and inventories
at December 31, 2008.
As a result of the increase in sales and profitability, the Company has improved
its financial position. The Company believes that it has adequate liquidity,
borrowing resources and backlog to fund operating plans for the next 12 months,
and until deliveries of its new units commence.
There was no significant impact on the Company's operations as a result of
inflation for the nine months ended December 31, 2008. 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, 2008.
- 18 -
Item 4 (T). Controls and Procedures
----------- -----------------------
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
There was no change in the Company's internal control over financial reporting
during the Company's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II. Other Information
-------- -----------------
Item 1. Legal Proceedings
------- -----------------
None.
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 for nine months ended
December 31, 2008.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on December 3, 2008 (the
"Annual Meeting").
(b) Not applicable
(c) At the Annual Meeting, the Company's shareholders voted in favor of
re-electing management's nominees for election as directors of the Company
as follows:
For Against
--- -------
Harold K. Fletcher 2,273,409 28,024
George J. Leon 2,273,409 28,024
Robert J. Melnick 2,291,409 10,024
Jeff C. O'Hara 2,273,409 28,024
Robert A. Rice 2,199,737 101,696
Robert H. Walker 2,291,409 10,024
The shareholders also voted 2,297,953 shares in favor of ratifying the audit
committee's appointment of BDO Seidman, LLP, as the Company's independent
registered public accountants for the fiscal year ending March 31, 2009.
Shareholders owning 3,480 shares voted against this proposal.
(d) Not applicable
- 19 -
Item 6. Exhibits
Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the
Securities Exchange Act.
31.2 Certification by CFO pursuant to Rule 15d-14 under the
Securities Exchange Act.
32.1 Certification by CEO and 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: February 13, 2009 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
CEO
Date: February 13, 2009 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
- 20 -