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 December 31, 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 February 1, 2001. TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS PAGE Item 1. Financial Statements (Unaudited): Condensed Comparative Balance Sheets December 31, 2000 and March 31, 2000 1 Condensed Comparative Statements of Operations - Three and Nine Months Ended December 31, 2000 and 1999 2 Condensed Comparative Statements of Cash Flows - Nine Months Ended December 31, 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 Part II Other Information 10 SIGNATURES 11 Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE BALANCE SHEETS (Unaudited) (Audited) ASSETS December 31, 2000 March 31, 2000 ----------------- -------------- Current assets: Cash $ 314,439 $ 172,836 Accounts receivable, net of allowance for doubtful 1,425,173 1,099,425 Accounts of $11,598 at December 31, 2000 and March 31, 2000 Inventories 1,728,395 1,486,885 Prepaid expenses and other current assets 58,513 56,020 Deferred income tax benefit - current 275,000 215,000 ----------- ----------- Total current assets 3,801,520 3,030,166 Property, plant, and equipment, net 388,505 350,872 Other assets 35,356 28,628 Deferred income tax benefit 364,454 523,099 ----------- ----------- Total assets 4,589,835 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 subordinated notes - related party 15,000 15,000 Capitalized lease obligations - current portion 77,644 56,376 Advance payments and deferred revenues 174,288 176,193 Accrued payroll, vacation pay, deferred wages, payroll taxes and interest on deferred wages 505,663 350,286 Accounts payable and accrued expenses 1,029,416 1,111,181 ----------- ----------- Total current liabilities 2,202,011 2,109,036 Notes payable - related party - non-current portion 200,000 200,000 Capitalized lease obligations - excluding current portion 90,025 101,682 ----------- ----------- Total liabilities 2,492,036 2,410,718 Stockholders' equity: Common stock 211,372 211,332 Additional paid-in capital 3,928,545 3,927,921 Accumulated deficit (2,042,118) (2,617,206) ----------- ----------- Total stockholders' equity 2,097,799 1,522,047 ----------- ----------- Total liabilities and stockholders' equity $ 4,589,835 $ 3,932,765 =========== =========== See accompanying notes to condensed financial statement 1 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 2000 Dec. 31, 1999 ------------- ------------- ------------- ------------- Sales Government, net $ 1,454,141 $ 1,110,275 $ 3,304,339 $ 2,474,990 Commercial, net 822,015 299,715 2,214,074 1,383,623 ----------- ----------- ----------- ----------- Total Sales $ 2,276,156 $ 1,409,990 $ 5,518,413 $ 3,858,613 Cost of sales 1,158,023 677,030 2,841,286 1,777,450 ----------- ----------- ----------- ----------- Gross Margin 1,118,133 732,960 2,677,127 2,081,163 Operating expenses: Selling, general & administrative 437,081 269,915 1,153,370 838,154 Engineering, research, & development 294,274 381,777 734,566 963,079 ----------- ----------- ----------- ----------- Total operating expenses 731,355 651,692 1,887,936 1,801,233 Income from operations 386,778 81,268 789,191 279,930 Other income (expense): Interest income 7,440 2,735 16,715 6,433 Interest expense (35,946) (20,946) (97,776) (49,233) ----------- ----------- ----------- ----------- Income before taxes 358,272 63,057 708,130 237,130 (Benefit)/provision for income taxes, net (7,908) (359,810) 133,042 (290,267) ----------- ----------- ----------- ----------- Net income $ 366,180 $ 422,867 $ 575,088 $ 527,397 =========== =========== =========== =========== Basic and diluted income per common share $ 0.17 $ 0.20 $ 0.27 $ 0.25 Dividends per share None None None None Weighted average shares outstanding Basic 2,113,690 2,110,790 2,113,570 2,110,290 Diluted 2,141,061 2,127,883 2,140,941 2,127,383
See accompanying notes to condensed financial statements 2 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended December 31, 2000 1999 --------- --------- Increase in cash: Cash flows from operating activities Net income $ 575,088 $ 527,397 Adjustments to reconcile net income to cash used In operating activities: Deferred income taxes 98,645 (290,267) Depreciation 93,564 53,263 Changes in assets or liabilities: Increase in accounts receivable and unbilled revenue (325,748) (266,902) Increase in inventories (241,510) (301,091) (Increase) decrease in prepaid expenses and other current assets (2,493) 2,182 Increase in other assets (6,728) (25,746) Decrease in advanced payments and deferred revenues (1,905) 270 Increase in accrued payroll, deferred wages and vacation pay 155,377 78,810 (Decrease) increase in accounts payable and accrued expenses (81,765) 195,577 --------- --------- Net cash provided by (used in) operations 262,525 (26,507) --------- --------- Cash flows from investing activities: Cash purchases of property, plant and equipment (73,583) (41,090) --------- --------- Net cash used in investing activities (73,583) (41,090) --------- --------- Cash flows from financing activities: Proceeds from exercise of stock options 664 2,401 Proceeds from notes payable - bank, net -- 200,000 Repayment of capitalized lease obligations (48,003) (20,137) --------- --------- Net cash provided by financing activities (47,339) 182,264 --------- --------- Net increase in cash 141,603 114,667 Cash at beginning of period 172,836 70,617 --------- --------- Cash at end of period $ 314,439 $ 185,284 ========= ========= Interest paid $ 71,006 $ 56,783 ========= ========= Capitalized lease obligations $ 57,614 $ 164,256 ========= ========= See accompanying notes to condensed financial statements 3 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1 Basis of Presentation In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of December 31, 2000, the results of operations for the three and nine months ended December 31, 2000 and December 31, 1999, and statements of cash flows for the nine months ended December 31, 2000 and December 31, 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. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. Note 2 Accounts Receivable The following table sets forth the components of accounts receivable: December 31, 2000 March 31, 2000 ----------------- -------------- Commercial $ 526,000 $ 345,209 Government 910,771 765,814 Allowance for bad debts (11,598) (11,598) ---------- ---------- Total $1,425,173 $1,099,425 ========== ========== 4 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) Note 3 Inventories Inventories consist of: Dec. 31, 2000 March 31, 2000 ------------- -------------- Purchased Parts $1,220,360 $ 921,185 Work-in-process 545,273 609,824 Less: Reserve for Obsolescence (37,238) (44,124) ---------- ---------- Total $1,728,395 $1,486,885 ========== ========== Note 4 Income Taxes The Company, in accordance with SFAS 109, has recognized a deferred income tax benefit based upon the expected utilization of net operating loss carryforwards as the Company believes that it is more likely than not that it will realize a portion of its operating losses before they expire. For the nine months ended December 31, 2000, the Company recorded a net tax provision of $133,032, net of the additional deferred tax asset of $150,000 recorded for the three months ended December 31, 2000. This additional deferred tax asset partially offsets the tax provision based upon the effective federal and state tax rate on the Company's income before taxes of $708,130. The Company has no significant liability for federal taxes. The recognized deferred tax assets are based on the Company's expected future taxable income as a result of a significant increase in government and commercial orders, including orders from the U.S. Navy contract which are expected to result in the partial utilization of its operating loss carryforwards. The Company believes that it is more likely than not that it will realize this portion of its net operating losses before they expire. These amounts are based upon management's estimates and the actual results could differ from these estimates. 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, including common share equivalents such as outstanding stock options and warrants during the period. The inclusion of stock options to calculate diluted income per share, under the treasury stock method, did not materially affect earnings per share. 5 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) Note 6 Government and Commercial Sales The Company is organized on the basis of its avionics products. The government segment consists primarily of the sale of test equipment to U.S. and foreign governments and militaries, either direct or through distributors. The commercial segment consists mostly 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, where appropriate, the Company's products are designed to be sold in both 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 December 31, 2000 December 31, 1999 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $1,454,141 822,015 1,110,275 299,715 Cost of Sales 770,399 387,624 529,929 147,101 ---------- ---------- ---------- ---------- Gross Margin 683,742 434,391 580,346 152,614 ========== ========== ========== ========== Nine Months Ended Nine Months Ended December 31, 2000 December 31, 1999 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $3,304,339 2,214,074 2,474,990 1,383,623 Cost of Sales 1,769,559 1,071,727 1,175,818 601,632 ---------- ---------- ---------- ---------- Gross Margin 1,534,780 1,142,347 1,299,172 781,991 ========== ========== ========== ========== 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 For the first nine months of the current fiscal year sales totaled more than $5,500,000 already exceeding the total for all of the prior fiscal year. Shipments of the AN/APM-480 IFF (Identification, Friend or Foe) Transponder Set Test Sets (TSTS) continue without any significant problems and the unit has been favorably received by the customer. The Company has now received orders from the U.S. Navy for a total of 960 units, with a value totaling over $12,500,000 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 (Traffic Alert and Collision Avoidance System) functions to provide accurate go, no-go testing of avionics test equipment installed in military 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 T-30D ILS (Instrument Landing System) and T-49C (TCAS) commercial test sets. The total order exceeds $900,000, and the Company expects to ship the majority of this order in the current fiscal year. In addition, during the current fiscal year the Company shipped all of the T-76 DME/P (Precision Distance Measuring Equipment) ramp test sets under the contract, totaling approximately $400,000, with Marconi Communications through our Italian intermediary, M.P.G. Instruments s.r.l. DME/P is directed solely to the European market. The Company 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 new product development efforts based upon its evaluation of these markets. The Company is also exploring opportunities in other government and commercial markets in order to broaden the Company's product base. The Company's backlog at December 31, 2000 exceeds $14,500,000. This backlog is deliverable over the next three to four years. 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations (continued) Overview (continued) In summary, sales for the nine months ended December 31, 2000 sales increased $1,659,800 (43.0%) to $5,518,413 as compared to the same period in the prior fiscal year. For the nine months ended December 31, 2000, the Company generated net income before taxes of $708,130, an increase of 198.6% as compared to the same nine months in the prior fiscal year, primarily as a result of increased government and commercial sales. In accordance with SFAS 109, for the nine months ended December 31, 2000, the Company recorded a net tax provision of $133,032, net of the additional deferred tax asset of $150,000 recorded for the three months ended December 31, 2000. This additional deferred tax asset partially offsets the tax provision based upon the effective federal and state tax rate on the Company's income before taxes of $708,130. The Company has no significant liability for federal taxes. Sales Total sales increased $866,166 (61.4%) for the three months ended December 31, 2000 as compared to the same period in the prior fiscal year. Commercial sales increased $522,300 (174.3%) and government sales increased $343,866 (31.0%). The increase in commercial sales is primarily attributed to the shipment of commercial test sets to a major freight carrier and an increase in ILS and TCAS test set shipments. There is no assurance that commercial sales will continue to grow at the current rate. Government sales increased as a result of the shipment of the AN/APM-480 to the U.S. Navy, and higher sales of the T-47C IFF test sets. These increases were partially offset by lower sales of T-49CF military TCAS unit, T-47N IFF/TCAS/TACAN test sets, and sales associated with the test and documentation portion of the Navy contract, which is substantially complete. For the nine months ended December 31, 2000 total sales increased $1,659,800 (43.0%) as compared to the same period in the prior fiscal year. Commercial sales increased $830,451 (60.0%) and government sales increased $829,349 (33.5%). The increase in commercial sales is primarily attributed to the shipment of ILS test sets from the order from the major freight carrier and an increase in TCAS test sets. Government sales increased as a result of the shipment of the AN/APM-480 IFF to the U.S. Navy, and the T-76 DME ramp test sets. These increases were partially offset by lower sales of the T-47 family of IFF test sets and of T-49CF military TCAS units. Gross Margin Gross margin increased $385,173 (52.6%) and $595,964 (28.6%) for the three and nine months ended December 31, 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 the higher volume. However, gross margin, as a percentage of sales, was reduced by the introduction of new products, such as the AN/APM 480 and the T-76, and the associated learning curve in building these new and more sophisticated products, and lower gross profit on the AN/APM 480 contract. The gross margin percentage for the three months ended December 31, 2000 was 49.1% as compared to 52.0% for the three months ended December 31, 1999. The gross margin 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Results of Operations (continued) Gross Margin (continued) percentage for the nine months ended December 31, 2000 was 48.5% as compared to 53.9% for the nine months ended December 31, 1999. The gross margin percentage was also lower in the current fiscal year as a result of the increase in sales to distributors (sales to distributors are sold at a discount from standard list prices). Operating Expenses Selling, general and administrative expenses increased $167,166 (61.9%) and $315,216 (37.6%) for the three and nine months ended December 31, 2000, respectively, as compared to the three and nine months ended December 31, 1999. This increase is attributed to higher sales and marketing expenses, and an increase in accrued compensation expense. Engineering, research and development expenses decreased $87,503 (22.9%) and $228,513 (23.7%) for the three and nine months ended December 31, 2000 as compared to the same period last year. This decrease is associated with certain development activities that were funded through contracts and, therefore, not included in engineering, research and development expenses. The Company expects company funded expenses to increase when the work for these contracts has been completed. Income Taxes For the nine months ended December 31, 2000, the Company, in accordance with FASB 109, recorded a net tax provision of $133,042, which represents the recognition of a federal and state tax provision on the Company's net income before taxes of $708,130 in the amount of $283,042 offset by reduction of its deferred tax valuation allowance in the amount of $150,000. For the nine months ended December 31, 1999, the Company recorded a net deferred tax benefit of $290,267, which represents the recognition of federal and state tax provision on the Company's net income before taxes of $237,130 in the amount of $94,733 and offset by a reduction of its deferred tax valuation allowance in the amount of $385,000. The Company currently does not have any significant federal tax liability. Liquidity and Capital Resources At December 31, 2000 the Company had positive working capital of $1,599,509 as compared to $921,130 at March 31, 2000. For the nine months ended December 31, 2000, the Company generated cash from operations in the amount of $262,525 as compared to using $26,507 for the nine months ended December 31, 1999. This increase in cash from operations is primarily attributed to the improvement in the Company's operating income as a result of the higher sales volume and an increase in accrued compensation expense. These increases were partially offset by increases in accounts receivable and inventory. 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 December 31, 2000, the Company had an outstanding balance of $250,000. The line 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Liquidity and Capital Resources (continued) 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 December 31, 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 nine months ended December 31, 2000. Part II Other Information Item 4 Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on December 13, 2000 (the "Annual Meeting"). (b) Not applicable because (i) proxies for the Annual Meeting were not solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934; (ii) there was no solicitation in opposition to management's nominees as listed in the Company's proxy statement; and (iii) all of such nominees were elected. (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 1,582,680 0 George F. Leon 1,582,680 0 Robert J. Melnick 1,582,680 0 Jeff C. O'Hara 1,582,680 0 Robert J. Walker 1,582,680 0 The shareholders also voted all 1,582,680 shares in favor of PricewaterhouseCoopers L.L.P. as the Company's certified public accountants for the fiscal year ending March 31, 2001. (d) Not applicable 10 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 14, 2001 By: /s/ Harold K. Fletcher ------------------------------------- /s/ Harold K. Fletcher Chairman and President Date: February 14, 2001 By: /s/ Joseph P. Macaluso ------------------------------------- /s/ Joseph P. Macaluso Principal Accounting Officer 11 INDEX TO EXHIBITS 27 Financial data schedule which is submitted electronically to the Securities and Exchange Commission for information only and is not filed.