10-Q 1 0001.txt FORM 10-Q 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, 2000 __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 33-18978 TEL-INSTRUMENT ELECTRONICS CORP. (Exact name of the Registrant as specified in Charter) New Jersey 22-1441806 (State of Incorporation) (I.R.S. Employer ID Number) 728 Garden Street, Carlstadt, New Jersey 07072 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone No. including Area Code: 201-933-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date: 2,113,690 shares of Common stock, $.10 par value as of November 1, 2000. TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS PAGE ---- Item 1 Financial Statements (Unaudited): Condensed Comparative Balance Sheets September 30, 2000 and March 31, 2000 1 Condensed Comparative Statements of Operations - Three and Six Months Ended September 30, 2000 and 1999 2 Condensed Comparative Statements of Cash Flows - Six Months Ended September 30, 2000 and 1999 3 Notes to Condensed Financial Statements 4-6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7-10 SIGNATURES 10 Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE BALANCE SHEETS September 30, 2000 and March 31, 2000
(Unaudited) (Audited) ASSETS September 30, March 31, 2000 2000 ------------- ----------- Current assets: Cash $ 231,455 $ 172,836 Accounts receivable, net 1,199,504 1,099,425 Inventories 1,646,017 1,486,885 Prepaid expenses and other current assets 41,104 56,020 Deferred income tax asset - current 215,000 215,000 ----------- ----------- Total current assets 3,333,080 3,030,166 ----------- ----------- Property, plant, and equipment, net 379,669 350,872 Other assets 34,776 28,628 Deferred income tax asset 387,389 523,099 ----------- ----------- Total assets 4,134,914 3,932,765 =========== =========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Note payable - related party - current portion 150,000 150,000 Note payable - bank 250,000 250,000 Convertible subordinate notes - related party 15,000 15,000 Capitalized lease obligations - current portion 73,324 56,376 Advance payments 102,125 176,193 Accrued payroll, vacation pay, deferred wages, 505,604 350,286 payroll taxes, and interest on deferred wages Accounts payable and accrued expenses 1,008,220 1,111,181 ----------- ----------- Total current liabilities 2,104,273 2,109,036 ----------- ----------- Notes payable - related party - non-current portion 200,000 200,000 Capitalized lease obligations - excluding current portion 99,022 101,682 ----------- ----------- Total liabilities 2,403,295 2,410,718 Stockholders' equity Common stock 211,372 211,332 Additional paid-in capital 3,928,545 3,927,921 Accumulated deficit (2,408,298) (2,617,206) ----------- ----------- Total stockholders' equity 1,731,619 1,522,047 ----------- ----------- Total liabilities and stockholders' equity $ 4,134,914 $ 3,932,765 =========== ===========
See accompanying notes to condensed financial statements -1- TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------ ------------- ------------- ------------- Sales Government, net $ 933,085 $ 811,287 $ 1,850,198 $ 1,364,715 Commercial, net 819,169 525,507 1,392,059 1,083,908 ----------- ----------- ----------- ----------- Total Sales 1,752,254 1,336,794 3,242,257 2,448,623 Cost of sales 896,554 634,996 1,683,263 1,100,420 ----------- ----------- ----------- ----------- Gross Margin 855,700 701,798 1,558,994 1,348,203 Operating expenses Selling, general & administrative 362,846 277,680 716,289 568,239 Engineering, research, & development 258,294 302,859 440,292 581,302 ----------- ----------- ----------- ----------- Total operating expenses 621,140 580,539 1,156,581 1,149,541 Income from operations 234,560 121,259 402,413 198,662 Other income (expense): Interest income 5,821 2,083 9,275 3,698 Interest expense (31,217) (14,699) (61,830) (28,287) ----------- ----------- ----------- ----------- Income before taxes 209,164 108,643 349,858 174,073 Provision for income taxes 84,743 43,403 140,950 69,543 ----------- ----------- ----------- ----------- Net income $ 124,421 $ 65,240 $ 208,908 $ 104,530 =========== =========== =========== =========== Basic and diluted income per common share $ 0.06 $ 0.03 $ 0.10 $ 0.05 Dividends per share None None None None Weighted average shares outstanding Basic 2,113,690 2,109,957 2,113,519 2,109,957 Diluted 2,150,185 2,122,896 2,150,014 2,122,896
See accompanying notes to condensed financial statements -2- TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended September 30, 2000 1999 --------- --------- Increase in cash: Cash flows from operating activities Net income $ 208,908 $ 104,530 Adjustments to reconcile net income to cash used in operating activities: Deferred income taxes 135,710 69,543 Depreciation 57,602 31,962 Changes in operating assets or liabilities: Increase in accounts receivable and unbilled revenues (100,079) (251,999) Increase in inventories (159,132) (307,593) Decrease in prepaid expenses and other current assets 14,916 5,536 Increase in other assets (6,148) (16,712) Increase in accrued payroll, deferred wages and vacation pay 155,318 63,803 (Decrease) increase in accounts payable, advance payments and accrued expenses (177,029) 99,132 --------- --------- Net cash provided by (used in) operations 130,066 (201,798) --------- --------- Cash flows from investing activities: Cash purchases of property, plant and equipment (41,655) (26,171) --------- --------- Net cash used in investing activities (41,655) (26,171) --------- --------- Cash flows from financing activities: Proceeds from exercise of stock options 664 Proceeds from notes payable - bank -- 250,000 Repayment of capitalized lease obligations (30,456) (8,780) --------- --------- Net cash (used in) provided by financing activities (29,792) 241,220 --------- --------- Net increase in cash 58,619 13,251 Cash at beginning of period 172,836 70,617 --------- --------- Cash at end of period $ 231,455 $ 83,868 ========= ========= Supplemental information Interest paid $ 28,983 $ 39,934 Assets acquired through capital leases $ 44,744 $ 101,900 ========= =========
See accompanying notes to condensed financial statements -3- TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1 Basis of Presentation In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in accordance with the requirements of Form 10-Q, the financial position of Tel-Instrument Electronics Corp. as of September 30, 2000, the results of operations for the three and six months ended September 30, 2000 and September 30, 1999, and statements of cash flows for the six months ended September 30, 2000 and September 30, 1999. 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, 2000 results included herein have been derived from the audited financial statements included in the Company's annual report on Form 10-K. The financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. Note 2 Accounts Receivable The following table sets forth the components of accounts receivable: September 30, 2000 March 31, 2000 ------------------ -------------- Commercial $ 579,733 $ 345,209 Government 631,369 765,814 Allowance for bad debts (11,598) (11,598) ---------- ---------- Total $1,199,504 $1,099,425 ========== ========== -4- TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) Note 3 Inventories Inventories consist of: September 30, 2000 March 31, 2000 ------------------ -------------- Purchased Parts $ 915,394 $ 921,185 Work-in-process 752,861 609,824 Less: Reserve for obsolescence (22,238) (44,124) ---------- ---------- Total $1,646,017 $1,486,885 ========== ========== Note 4 Income Taxes The Company, in accordance with FASB 109, has recognized a deferred income tax benefit based upon the expected utilization of net operating loss carryforwards as the Company believes that it is more likely than not that it will realize a portion of its operating losses before they expire. For the six months ended September 30, 2000, the Company recorded a tax provision of $140,950, which represents the effective federal and state tax rate on the Company's net income before taxes of $349,858. The Company has no federal tax liability. The $140,950 decreased the Company's deferred income tax benefit by the same amount in the accompanying balance sheet. The Company expects to utilize this deferred income tax benefit in the future for tax reporting purposes. Note 5 Earnings Per Share The Company's basic income per share is based on net income for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income per share is based on net income, divided by the weighted average number of common shares outstanding during the period, including common share equivalents, consisting of outstanding stock options. The inclusion of stock options to calculate diluted income per share, under the treasury stock method, did not affect earnings per share. -5- TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) Note 6 Government and Commercial Sales In 1999, the Company adopted SFAS 131. The prior years' information has been restated to present separately the Company's government and commercial activities. The Company is organized primarily on the basis of its avionics products. The government market consists primarily of the sale of test equipment to U.S. and foreign governments and militaries either direct or through distributors. The commercial market consists of sales of test equipment to domestic and foreign airlines and to commercial distributors. The Company primarily develops and designs test equipment for the avionics industry and, as such, the Company's products and designs may be sold in the government and commercial markets. The table below presents information about sales and gross margin. Costs of sales includes certain allocation factors for indirect costs.
Three Months Ended Three Months Ended September 30, 2000 September 30, 1999 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $933,085 819,169 $811,287 525,507 Cost of Sales 502,416 394,138 411,923 223,073 -------- -------- -------- -------- Gross Margin $430,669 425,031 $399,364 302,434 ======== ======== ======== ======== Six Months Ended Six Months Ended September 30, 2000 September 30, 1999 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $1,850,198 1,392,059 $1,364,715 1,083,908 Cost of Sales 999,160 684,103 645,889 454,531 ---------- ---------- ---------- ---------- Gross Margin $ 851,038 707,956 $ 718,826 629,377 ========== ========== ========== ==========
-6- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations A number of the statements made by the Company in this report may be regarded as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among others, statements concerning the Company's outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially. Among the factors that could cause a difference are: changes in the general economy; changes in demand for the Company's products or in the cost and availability of its raw materials; the actions of its competitors; the success of our customers; technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials; transportation, environmental matters; and other unforeseen circumstances. A number of these factors are discussed in the Company's filings with the Securities and Exchange Commission. Overview Sales of the AN/APM-480 IFF (Identification, Friend or Foe) Transponder Set Test Set (TSTS ) to the U.S. Navy accounted for approximately $560,000 (32% of total sales) for the three months ended September 30, 2000. The Company has received total orders for more than 960 units, totaling over $12.5, million to be delivered over the next three to four years. The AN/APM-480 is a militarized avionics ramp tester used to simulate IFF Transponder/Interrogator and TCAS (collision avoidance) functions to provide accurate go, no-go testing of avionics equipment installed in U.S. Navy aircraft on the flightline and aircraft carrier deck. During the second quarter of the current fiscal year, the Company began shipment to a major freight carrier (through a domestic distributor) of its commercial avionics test sets. The total order exceeds $900,000, and the Company expects to ship this order during the current fiscal year. In, addition, during the first quarter the Company shipped all of the T-76 Precision DME/P ("DME/P") ramp rest sets under the contract with Marconi Communications through its Italian intermediary, M.P.G. Instruments s.r.l. Precision DME/P is directed solely to the European market. The Company also continues its efforts to complete the DME/P bench test sets under a contract with Marconi Communications in the amount of $680,000. The Company continues to actively pursue opportunities in both the commercial and government markets, both domestically and internationally, and has been active in responding to request for quotations, in addition to adapting its product designs to respond to these requests. For the second quarter of fiscal year 2001 sales increased 31% to $1,752,254, and net income before taxes was $209,164, a 93% increase, as compared to the second quarter of the prior fiscal year. For the six months ended September 30, 2000, sales increased 32% to $3,242,257 as compared to the same period last year, and net income before taxes was $349,858, more than double net income before taxes for the same six month period in the prior fiscal year. -7- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations (continued) Overview (continued) The Company's backlog at September 30, 2000, including the production order from the U.S. Navy of approximately $12,000,000, exceeds $16,000,000. The Company expects to ship the backlog over the next three to four years. Sales Total sales increased $415,460 (31.1%) for the three ended September 30, 2000, as compared to the same period in the prior fiscal year. Commercial sales increased $293,662 (55.9%) and government sales increased $121,798 (15.0%). The increase in commercial sales is primarily attributed to the shipment of commercial test sets under the order from the major freight carrier, an increase in repair and overhaul sales, as a result of the Company reducing its backorders, and an increase in ILS (Instrument Landing System) and TCAS (Total Collision Avoidance System) test sets. Government sales increased as a result of the shipment of the AN/APM-480 to the U.S. Navy, partially offset by lower sales of the T-47 family of IFF test sets. For the six months ended September 30, 2000 total sales increased $793,634 (32.4%) as compared to the same period in the prior fiscal year. Commercial sales increased $308,151 (28.4%) and government sales increased $485,483 (35.6%). The increase in commercial sales is primarily attributed to the shipment of commercial test sets from the order from the major freight carrier, an increase in repair and overhaul sales, as a result of the Company reducing its backorder, and an increase in TCAS test sets. Government sales increased as a result of the shipment of the AN/APM-480 to the U.S. Navy and the T-76 Precision DME Ramp test sets. These increases were partially offset by lower sales of the T-47 family of IFF test sets. Gross Margin Gross margin dollars increased $153,902 (21.9%) and $210,791 (15.6%) for the three and six months ended September 30, 2000, respectively, as compared to the same periods in the prior fiscal year. The increase in gross margin, for the most part, is attributed to higher sales volume. However, gross margin, as a percentage of sales, was reduced by the introduction of new products, such as the T-76 and the AN/APM 480, and the associated learning curve in building and testing these new and more sophisticated products, and the lower gross profit on the AN/APM-480 contract. The gross margin percentage for the three months ended September 30, 2000 was 48.8% as compared to 52.5% for the three months ended September 30, 1999. The gross margin percentage for the six months ended September 30, 2000 was 48.1% as compared to 55.1% for the six months ended September 30, 1999. The gross margin percentage was impacted in the second quarter by the lower gross profit on the sales to the major freight carrier as a result of the discount given to the Company's domestic distributor. -8- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations (continued) Operating Expenses (continued) Selling, general and administrative expenses increased $85,166 (30.7%) and $148,050 (26.1%) for the three and six months ended September 30, 2000, respectively, as compared to the three and six months ended September 30, 1999. This increase is attributed to higher sales and marketing expenses, including the addition to staff of a Director of Business Development, higher outside commission expenses, consulting fees for program management, and an increase in salaries. Engineering, research and development expenses decreased $44,565 (14.7%) and $141,010 (24.3%) for the three and six months ended September 30, 2000, respectively, as compared to the same periods last year. Income Taxes In accordance with SFAS 109, a provision for income taxes was recognized in the amount of $140,950 for the six months ended September 30, 2000, which represents the effective federal and state tax rate on the Company's net income before taxes of $349,858. The Company currently does not have any federal tax liability. (See Note 4 to Notes to Condensed Comparative Financial Statements). Liquidity and Capital Resources At September 30, 2000 the Company had positive working capital of $1,228,807, as compared to $921,130 at March 31, 2000. For the six months ended September 30, 2000, the Company generated $130,066 in cash used from operations as compared to using $201,798 for the six months ended September 30, 1999. The increase in cash from operations is primarily attributed to the improvement in the Company's operating income due to an increase in sales. The Company has a credit line in the amount of $600,000 from Summit Bank. The line of credit bears an interest rate of 1% above the lender's prevailing base rate, which is payable monthly, based upon the outstanding balance. At September 30, 2000, the Company had an outstanding balance of $250,000. The line of credit is collateralized by substantially all of the assets of the Company and expires in June 2001. The credit facility requires the Company to maintain certain financial covenants. As of September 30, 2000, the Company was in compliance with all financial covenants. Based upon the current backlog, available credit line and cash balance, the Company believes that it has sufficient working capital to fund its plans for the next twelve months. At present, the Company does not anticipate significant long-term needs for capital outside its normal operating activities. There was no significant impact on the Company's operations as a result of inflation for the three months ended September 30, 2000. -9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Liquidity and Capital Resources (continued) 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, 2000. New Accounting Pronouncement Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition in Financial Statements, was issued on December 3, 1999 with an original effective date of the first quarter of fiscal years beginning after December 15, 1999. SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. On June 26, 2000, the SEC staff issued SAB 101B to provide registrants with additional time to implement guidance contained in SAB 101. SAB 101B delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. This provides an additional six months for companies with fiscal year ends in December, January, or February. Companies with other fiscal year ends will have an additional nine months. The Company does not believe that implementation of SAB 101 will have a material impact on its financial statements. 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 10, 2000 By: /s/ Harold K. Fletcher ---------------------------- /s/ Harold K. Fletcher Chairman and President Date: November 10, 2000 By: /s/ Joseph P. Macaluso ---------------------------- Joseph P. Macaluso Principal Accounting Officer -10-