10-Q 1 e13034form10q.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, 2001 [ ] 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: 2,128,351 shares of Common stock, $.10 par value as of February 7, 2002. TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS PAGE ---- Item 1. Financial Statements (Unaudited): Condensed Comparative Balance Sheets December 31, 2001 and March 31, 2001 1 Condensed Comparative Statements of Operations - Three and Nine Months Ended December 31, 2001 and 2000 2 Condensed Comparative Statements of Cash Flows - Nine Months Ended December 31, 2001 and 2000 3 Notes to Condensed Financial Statements 4-5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9 Part II Other Information 9 SIGNATURES 10 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE BALANCE SHEETS December 31, 2001 and March 31, 2001 (unaudited)
ASSETS December 31, 2001 March 31, 2001 ----------------- -------------- Current assets: Cash $ 858,106 $ 433,438 Accounts receivable, net of allowance for doubtful 1,390,933 1,264,383 accounts of $11,598 at December 31, 2001 and March 31, 2001 Inventories 2,555,802 2,351,648 Prepaid expenses and other current assets 24,329 43,568 Deferred income tax benefit -- current 527,276 527,276 ----------- ----------- Total current assets 5,356,446 4,620,313 Property, plant, and equipment, net 791,838 674,656 Other assets 52,801 35,354 Deferred income tax benefit 332,144 604,323 ----------- ----------- Total assets 6,533,229 5,934,646 =========== =========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Note payable -- related party -- current portion 200,000 200,000 Note payable -- bank 100,000 250,000 Convertible subordinated notes -- related party 15,000 15,000 Capitalized lease obligations -- current portion 77,927 77,826 Deferred revenues and payments in advance 1,088,811 267,630 Accrued payroll, vacation pay, deferred wages, payroll taxes and interest on deferred wages 475,624 535,850 Accounts payable and accrued expenses 934,571 1,507,647 ----------- ----------- Total current liabilities 2,891,933 2,853,953 Notes payable -- related party -- non-current portion 150,000 150,000 Capitalized lease obligations - excluding current portion 64,418 68,345 ----------- ----------- Total liabilities 3,106, 351 3,072,298 Stockholders' equity: Common stock 215,070 212,438 Additional paid-in capital 3,932,735 3,932,111 Accumulated deficit (720,927) (1,282,201) ----------- ----------- Total stockholders' equity 3,426,878 2,862,348 ----------- ----------- Total liabilities and stockholders' equity $ 6,533,229 $ 5,934,646 =========== ===========
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, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000 ------------- ------------- ------------- ------------- Sales Government, net $ 1,601,158 $ 1,454,141 $ 5,061,879 $ 3,304,339 Commercial, net 438,195 822,015 1,725,645 2,214,074 ----------- ----------- ----------- ----------- Total Sales $ 2,039,353 $ 2,276,156 $ 6,787,524 $ 5,518,413 Cost of Sales 1,009,736 1,158,023 3,436,913 2,841,286 ----------- ----------- ----------- ----------- Gross margin 1,029,617 1,118,133 3,350,611 2,677,127 Operating expenses: Selling, general & administrative 399,761 437,081 1,249,656 1,153,370 Engineering, research, & development 318,867 294,274 1,113,417 734,566 ----------- ----------- ----------- ----------- Total operating expenses 718,628 731,355 2,363,073 1,887,936 Income from operations 310,989 386,778 987,538 789,191 Other income (expense): Interest income 968 7,440 10,296 16,715 Interest expense (19,580) (35,946) (63,155) (97,776) ----------- ----------- ----------- ----------- Income before taxes 292,377 358,272 934,679 708,130 Provision (benefit) for income taxes, net 116,806 (7,908) 373,405 133,042 ----------- ----------- ----------- ----------- Net income $ 175,571 $ 366,180 $ 561,274 $ 575,088 =========== =========== =========== =========== Basic and diluted income per common share $ 0.08 $ 0.17 $ 0.26 $ 0.27 Dividends per share None None None None Weighted average shares outstanding Basic 2,128,351 2,113,690 2,127,111 2,113,570 Diluted 2,158,264 2,141,061 2,157,024 2,140,941
See accompanying notes to condensed financial statements 2 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended Nine Months Ended December 31, 2001 December 31,2000 ----------------- ---------------- Increase in cash: Cash flows from operating activities Net income $ 561,274 $ 575,088 Adjustments to reconcile net income to cash used In operating activities: Deferred income taxes 272,179 98,645 Depreciation 155,335 93,564 Changes in assets or liabilities: Increase in accounts receivable and unbilled revenue (126,550) (325,748) Increase in inventories (204,154) (241,510) Decrease (increase) in prepaid expenses and other current assets 19,239 (2,493) Increase in other assets (17,447) (6,728) Increase (decrease) in advanced payments and deferred revenues 821,181 (1,905) (Decrease) increase in accrued payroll, deferred wages and and vacation pay (60,226) 155,377 Decrease in accounts payable and accrued expenses (573,076) (81,765) --------- --------- Net cash provided by operations 847,755 262,525 --------- --------- Cash flows from investing activities: Cash purchases of property, plant and equipment (210,660) (73,583) --------- --------- Net cash used in investing activities (210,660) (73,583) --------- --------- Cash flows from financing activities: Proceeds from exercise of stock options 3,256 664 Repayment of notes payable to bank (150,000) -- Repayment of capitalized lease obligations (65,683) (48,003) --------- --------- Net cash used in financing activities (212,427) (47,339) --------- --------- Net increase in cash 424,668 141,603 Cash at beginning of period 433,438 172,836 --------- --------- Cash at end of period $ 858,106 $ 314,439 ========= ========= Interest paid $ 43,772 $ 71,006 ========= ========= Capitalized lease obligations $ 61,857 $ 57,614 ========= =========
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, 2001, the results of operations for the three and nine months ended December 31, 2001 and December 31, 2000, and statements of cash flows for the nine months ended December 31, 2001 and December 31, 2000. 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, 2001 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, 2001. Note 2 Accounts Receivable The following table sets forth the components of accounts receivable: Dec. 31, 2001 March 31, 2001 ------------- -------------- Commercial $ 354,910 $ 392,214 Government 1,047,621 883,767 Allowance for bad debts (11,598) (11,598) ---------- ---------- Total $1,390,933 $1,264,383 ========== ========== Note 3 Inventories Inventories consist of: Dec. 31, 2001 March 31, 2001 ------------- -------------- Purchased Parts $1,277,083 $1,072,191 Work-in-process 1,351,514 1,352,252 Less: Reserve for Obsolescence (72,795) (72,795) ---------- ---------- Total $2,555,802 $2,351,648 ========== ========== 4 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED FINANCIAL STATEMENTS 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 before they expire and benefit from the reversal of tax asset temporary difference. For the nine months ended December 31, 2001, the company recorded a tax provision of $373,405, which represents the effective federal and state tax rate on the Company's net income before taxes of $934,679. The Company does not pay significant federal taxes as a result of its net operating loss carryforwards. 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, such as outstanding stock options. Note 6 Government and Commercial Sales The Company is organized 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 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. Cost of sales includes certain allocation factors for indirect costs. Three Months Ended Three Months Ended December 31, 2001 December 31, 2000 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $1,601,158 $438,195 $1,454,141 $822,015 Cost of Sales 819,142 190,594 770,399 387,624 ---------- -------- ---------- -------- Gross Margin $ 782,016 $247,601 $ 683,742 $434,391 ========== ======== ========== ======== Nine Months Ended Nine Months Ended December 31, 2001 December 31, 2000 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $ 5,061,879 $ 1,725,645 $ 3,304,339 $ 2,214,074 Cost of Sales 2,648,907 788,006 1,769,559 1,071,727 ----------- ----------- ----------- ----------- Gross Margin $ 2,412,972 $ 937,639 $ 1,534,780 $ 1,142,347 =========== =========== =========== =========== 5 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 nine months ended December 31, 2001, sales increased 23% to $6,787,524 and net income before taxes increased 32% to $934,679. Deferred revenues of approximately $578,000, for units requiring a software upgrade prior to shipment, were recorded in third quarter of the current fiscal year and are included in deferred revenues in the accompanying balance sheet in accordance with of Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements" ("SAB101"). The Company has begun shipment of these units in the fourth quarter and expects to recognize all of these sales in the fourth quarter of the current fiscal year. The Company had no significant deferred revenues for the same period in the prior fiscal year. Deliveries of the AN/APM 480 IFF (Identification, Friend or Foe) Transponder Test Set to the U.S. Navy continue and accounted for 46.4% of total sales for the nine months ended December 31, 2001. The U.S. Navy's option to purchase additional units of the Company's AN/APM 480 has been extended from December 31, 2001 to August 11, 2002. The Company has received orders for 1,059 units and there are 241 units remaining subject to the U.S. Navy's option under the contract. Any options not exercised by August 11, 2002 will then expire. 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 evaluation of these markets. The Company has been active in responding to customer requests for quotation, in addition to adapting its product designs to respond to these requests. Exploration of opportunities in other government and commercial markets also continues in an attempt to broaden the Company's product line. As previously announced, the Company has engaged Crary Partners LLC to render investment-banking services to the Company by helping pursue growth through acquisitions and alliances and advising on financing and strategic investment options. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Sales For the three months ended December 31, 2001, net sales decreased $236,803 (10.4%) as compared to the three months ended December 31, 2000. In addition, during the quarter ended December 31, 2001, the Company deferred revenues of approximately $578,000 in accordance with SAB 101. The Company expects to recognize this amount as sales in the fourth of the current fiscal year. Government sales increased $147,017 (10.1%) to $1,601,158 as compared to $1,454,141 for the three months ended December 31, 2000. The increase in government sales is mainly attributed to the shipment of the AN/APM 480 to the U.S. Navy, which accounted for 50.7% of the total sales for the current quarter as compared to 36.6% for the same quarter last year. Government sales in the third quarter also increased as a result of shipments of the new T-47SH. Commercial sales decreased $383,820 (46.7%) for the third quarter ended December 31, 2001 as compared to the third quarter of the previous fiscal year. This decrease is primarily the result of the completion of a contract to a major freight carrier, and the inability to replace this contract with a new contract due to the financial difficulties encountered within the commercial airline industry and the consequences of the September 11th tragedy. For the nine months ended December 31, 2001, net sales increased $1,269,111 (23%) to $6,787,524 as compared to $5,518,413 for the nine months ended December 31, 2000. Government sales increased $1,757,540 (53.2%) to $5,061,869, as compared to $3,304,339 for the first nine months of the prior fiscal year. The increase in government sales is mainly attributed to the shipment of the AN/APM 480 to the U.S. Navy. Sales of the AN/APM 480 to the U.S. Navy accounted for 46.4% of the sales for the first nine months of the current fiscal year as compared to 27.3% for the same period last year. The increase in government sales is also attributed to the introduction of the T-47SH and sales of the Company's ILS (Instrument Landing System) test sets. Commercial sales decreased $488,429 (22.1%) to $1,725,645 as compared to $2,214,074 for the nine months ended December 31, 2000. This decrease is primarily the result of the completion of a contract to a major freight carrier, and the inability to replace this contract with a new contract due to the financial difficulties encountered within the commercial airline industry and the consequences of the September 11th tragedy. Gross Margin Gross margin dollars decreased $88,516 (7.9%) for the three months ended December 31, 2001 as compared to the same period last year as a result of the lower recorded sales. Gross margin dollars increased $673,484 for the nine months ended December 31, 2001 as compared to the nine months ended December 31, 2000. The increase in gross margin, for the most part, is attributed to an increase in sales volume. The gross margin percentage for the three months ended December 31, 2001 was 50.5% as compared to 49.1% for the three months ended December 31, 2000. The gross margin percentage for the nine months ended December 31, 2001 was 49.4% as compared to 48.5% for the nine months ended December 31, 2000. 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Operating Expenses Selling, general and administrative expenses decreased $37,320 (8.5%) for the quarter ended December 31, 2001 as compared to the previous fiscal year. This decrease is associated with lower accrued compensation expenses, offset partially by an increase in sales and marketing expenses. Selling, general and administrative expenses increased $96,286 (8.3%) for the nine months ended December 31, 2001 as compared to the nine months ended December 31, 2000. This increase is attributed to an increase in sales and marketing activities, higher professional fees, and an increase in facility costs associated with the Company adding the lower level of the building to its lease. These increases were offset partially by lower accrued compensation expense. Engineering, research and development expenses increased $24,593 (8.4%) and $378,851 (51.6%) for the same periods. The higher level of expenditures is associated with an increase in research and development activities, including the completion of the design of the T-47SH test set, development of a commercial bench test, and new products for other targeted markets. The Company has also begun work on the next generation of IFF test sets. Income Taxes In accordance with SFAS 109, a provision for income taxes was recognized in the amount of $373,405 for the nine months ended December 31, 2001, which represents the effective federal and state tax rate on the company's income before taxes of $934,679. The Company does not pay significant federal taxes as a result of its net operating loss carryforwards. For the nine months ended December 31, 2000, the Company 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. Liquidity and Capital Resources At December 31, 2001 the Company had positive working capital of $2,464,513 as compared to $1,766,360 at March 31, 2001. For the nine months ended September 30, 2001, cash provided by operations was $847,755 as compared to $262,525 for the nine months ended December 31, 2001. This increase in cash from operations is primarily attributed to the improvement in the Company's operating income. This increase was partially offset by a reduction in accounts payable and accrued expenses and an increase in inventories and accounts receivable. The Company has a line of credit in the amount of $600,000 from Fleet 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, 2001, the company had borrowed $100,000 against its line of credit. This amount was repaid in January 2002. The line of credit is collateralized by substantially all of the assets of the company. The credit facility requires the Company to maintain certain financial covenants. As of December 31, 2001, the Company was in compliance with all financial covenants. While the credit line 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Liquidity and Capital Resources (continued) formally expired at August 30, 2001, the loan was not called. The Company has since repaid the loan as a result of its improved financial position. The line of credit is still available, if needed, while the Company negotiates an increase in the line of credit. Based upon the current backlog, its existing credit line, and cash balance, the Company believes that it has sufficient working capital to fund its operating plans for the next twelve months. At present, the Company does not anticipate significant long-term needs for capital. There was no significant impact on the Company's operations as a result of inflation for the nine months ended December 31, 2001. 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, 2001. 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, 2001 (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 1,611,790 0 George J. Leon 1,611,790 0 Robert J. Melnick 1,611,790 0 Jeff C. O'Hara 1,611,790 0 Robert J. Walker 1,611,790 0 The shareholders also voted all 1,611,790 shares in favor of ratifying PricewaterhouseCoopers L.L.P. as the Company's independent accountants for the fiscal year ending March 31, 2002. (d) Not applicable 9 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, 2002 By: /s/ Harold K. Fletcher ---------------------- /s/ Harold K. Fletcher Chairman and President Date: February 13, 2002 By: /s/ Joseph P. Macaluso ----------------------- /s/ Joseph P. Macaluso Principal Accounting Officer 10