10-Q 1 e16930_10q.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, 2003 |_| 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: 2,144,151 shares of Common stock, $.10 par value as of February 9, 2004. TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS PAGE ---- Item 1. Financial Statements (Unaudited): Condensed Comparative Balance Sheets December 31, 2003 and March 31, 2003 1 Condensed Comparative Statements of Operations - Three and Nine Months Ended December 31, 2003 and 2002 2 Condensed Comparative Statements of Cash Flows - Nine Months Ended December 31, 2003 and 2002 3 Notes to Condensed Financial Statements 4-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11 Item 4. Controls and Procedures 11 Part II Other Information Item 4. Submission of matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Certifications 14-17 Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED COMPARATIVE BALANCE SHEETS December 31, 2003 and March 31, 2003
ASSETS (Unaudited) December 31, 2003 March 31, 2003 ----------------- -------------- Current assets: Cash $1,976,723 $1,680,124 Accounts receivable, net of allowance for doubtful accounts of $36,598 at December 31, 2003 and March 31, 2003 2,002,004 1,966,815 Inventories 1,880,015 2,262,147 Prepaid expenses and other current assets 85,773 42,587 Deferred income tax benefit - current 622,348 535,448 ---------- ---------- Total current assets 6,566,863 6,487,121 Property, plant, and equipment, net 700,253 726,594 Other assets 297,293 97,462 ---------- ---------- Total assets $7,564,409 $7,311,177 ========== ========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Note payable - related party - current portion $ 200,000 $ 200,000 Convertible subordinated notes - related party 7,500 7,500 Capitalized lease obligations - current portion 28,231 28,637 Accounts payable 371,337 503,216 Accrued payroll, vacation pay, deferred wages, and payroll taxes 383,191 436,630 Income taxes payable -- 103,924 Accrued expenses 1,056,017 1,052,327 ---------- ---------- Total current liabilities 2,046,276 2,332,234 Notes payable - related party - non-current portion 50,000 50,000 Capitalized lease obligations - excluding current portion 453 21,069 ---------- ---------- Total liabilities 2,096,729 2,403,303 Stockholders' equity: Common stock 214,418 213,583 Additional paid-in capital 3,960,886 3,944,812 Retained earnings 1,292,376 749,479 ---------- ---------- Total stockholders' equity 5,467,680 4,907,874 ---------- ---------- Total liabilities and stockholders' equity $7,564,409 $7,311,177 ========== ========== 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, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002 ------------- ------------- ------------- ------------- Sales Government, net $ 2,002,133 $ 2,435,114 $ 5,634,389 $ 7,448,690 Commercial, net 912,138 631,689 2,954,504 1,450,748 ----------- ----------- ----------- ----------- Total Sales 2,914,271 3,066,803 8,588,893 8,899,438 Cost of sales 1,417,825 1,437,563 3,897,156 4,209,428 ----------- ----------- ----------- ----------- Gross margin 1,496,446 1,629,240 4,691,737 4,690,010 Operating expenses: Selling, general & administrative 715,465 803,872 2,165,055 2,167,533 Engineering, research, & development 551,869 391,690 1,619,917 1,260,736 ----------- ----------- ----------- ----------- Total operating expenses 1,267,334 1,195,562 3,784,972 3,428,269 Income from operations 229,112 433,678 906,765 1,261,741 Other income (expense): Interest income 3,928 17,954 19,838 33,743 Interest expense (4,587) (15,653) (22,529) (48,941) ----------- ----------- ----------- ----------- Income before taxes 228,453 435,979 904,074 1,246,543 Provision for income taxes, net 91,266 174,173 361,177 497,993 ----------- ----------- ----------- ----------- Net income $ 137,187 $ 261,806 $ 542,897 $ 748,550 =========== =========== =========== =========== Basic income per common share $ 0.06 $ 0.12 $ 0.25 $ 0.35 Diluted income per common share $ 0.06 $ 0.12 $ 0.24 $ 0.35 Dividends per share None None None None Weighted average shares outstanding Basic 2,144,151 2,135,801 2,141,896 2,135,536 Diluted 2,232,820 2,159,985 2,230,565 2,158,985 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, 2003 December 31,2002 ----------------- ---------------- Cash flows from operating activities Net income $ 542,897 $ 748,550 Adjustments to reconcile net income to cash used In operating activities: Deferred income taxes (86,900) 107,371 Depreciation 196,487 188,135 Reserve for obsolescence 40,000 45,000 Changes in assets or liabilities: Increase in accounts receivable, net (35,189) (941,560) Decrease in inventories, net 342,132 626,796 Increase in prepaid expenses and other current assets (43,186) (8,244) Increase in other assets (199,831) (5,575) (Decrease) increase in accounts payable (131,879) 335,382 Increase in accrued payroll, vacation pay, deferred wages, and payroll taxes (53,439) 64,302 Decrease in income taxes payable (103,924) -- Increase in accrued expenses 3,690 374,521 ----------- ----------- Net cash provided by operations 470,858 1,534,678 ----------- ----------- Cash flows from investing activities: Cash purchases of property, plant and equipment (170,146) (90,537) ----------- ----------- Net cash used in investing activities (170,146) (90,537) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 16,909 3,090 Repayment of note payable - related party -- (100,000) Repayment of capitalized lease obligations (21,022) (97,336) ----------- ----------- Net cash used in financing activities (4,113) (194,246) ----------- ----------- Net increase in cash 296,599 1,249,895 Cash at beginning of period 1,680,124 1,198,191 ----------- ----------- Cash at end of period $ 1,976,723 $ 2,448,086 =========== =========== Supplemental Cash Flow Information: Interest paid $ 26,105 $ 77,243 =========== =========== Taxes paid $ 462,029 $ 428,029 =========== ===========
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, 2003, the results of operations for the three and nine months ended December 31, 2003 and December 31, 2002, and statements of cash flows for the nine months ended December 31, 2003 and December 31, 2002. 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, 2003 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, 2003. Note 2 Accounts Receivable The following table sets forth the components of accounts receivable: December 31, 2003 March 31, 2003 ----------------- -------------- Commercial $ 919,998 $ 555,076 Government 1,118,604 1,448,337 Allowance for Bad Debts (36,598) (36,598) ----------- ----------- Total $ 2,002,004 $ 1,966,815 =========== =========== Note 3 Inventories Inventories consist of: December 31, 2003 March 31, 2003 ---------------- -------------- Purchased Parts $ 645,632 $ 1,074,442 Work-in-Process 1,290,763 1,289,578 Finished Goods 96,433 10,940 Less: Reserve for Obsolescence (152,813) (112,813) ----------- ----------- Total $ 1,880,015 $ 2,262,147 =========== =========== 4 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED FINANCIAL STATEMENTS Note 4 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 5 Stock Options The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 and 148, "Accounting for Stock-Based Compensation" ("SFAS 123 and 148"). Under SFAS 123 and 148 the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants made since fiscal 1996 as if the fair-value-based method as defined in SFAS No. 123 had been applied. The Company currently does not plan to adopt the fair value based method prescribed by SFAS 123. 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 3.5, volatility at 50% and an expected life of 5 years. Had the Company determined compensation cost based on the fair market value at the grant date for its stock options under SFAS No. 123, the pro forma amounts are indicated below:
Nine Months Ended Nine Months Ended December 31, 2003 December 31, 2002 ----------------- ----------------- Net income - as reported $ 542,897 $ 748,550 Less fair value of stock options (60,750) (58,082) --------- --------- Net income - pro forma 482,147 690,468 ========= ========= Basic earnings per share - as reported 0.25 0.35 Basic earnings per share - pro forma 0.23 0.32 Diluted earnings per share - as reported 0.24 0.35 Diluted earnings per share - pro forma 0.22 0.32
During the nine months ended December 31, 2003, the Company sold 8,350 shares of common stock upon exercise of previously granted employee options, pursuant to the exemption from registration provided by Sec. 4(2) of the Securities Act of 1933. 5 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED FINANCIAL STATEMENTS 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 of sales of test equipment to domestic and foreign airlines and to commercial distributors. The commercial market also includes sales related to repairs and calibration which have a lower gross margin. The Company primarily develops and designs test equipment for the avionics industry and, as such, the Company's products and designs may be sold in 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, 2003 December 31, 2002 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $2,002,133 $912,138 $2,435,114 $631,689 Cost of Sales 906,451 511,374 1,126,062 311,501 ---------- -------- ---------- -------- Gross Margin $1,095,682 $400,764 $1,309,052 $320,188 ========== ======== ========== ======== Three Months Ended Three Months Ended December 31, 2003 December 31, 2002 Government Commercial Government Commercial ---------- ---------- ---------- ---------- Sales $5,634,389 $2,954,504 $7,448,690 $1,450,748 Cost of Sales 2,382,096 1,515,060 3,436,478 772,950 ---------- ---------- ---------- ---------- Gross Margin $3,252,293 $1,439,444 $4,012,212 $ 677,798 ========== ========== ========== ==========
Note 7 Subsequent Events In January 2004, the Company acquired privately held Innerspace Technology, Inc. (ITI) of Waldwick, NJ. ITI has been in business for over 30 years designing, manufacturing and distributing a variety of shipboard and underwater instruments to support hydrographers, oceanographers, researchers, engineers, geophysicists, and surveyors worldwide. ITI has total annual sales of approximately $1 million dollars, and the purchase price was $547,000 and employment contracts were signed with the principals. This acquisition was financed internally from available funds, and, as such, the Company's cash balance was reduced in January 2004. The Company hopes to significantly increase the sales of ITI's products by expanding distribution and enhancing marketing and product development; however, there can be no assurance. The Company has been approved for listing of its common stock on the American Stock Exchange (Amex). The Company began trading on the Amex on February 10, 2004 with the stock symbol TIK. 6 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 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 previous filings with the Securities and Exchange Commission. Critical Accounting Policies In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in Note 2 of our Notes to Financial Statements included in our Form 10-K. 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 is transferred to the customer. Provisions, when appropriate, are made where the right to return exists. Revenues under service contracts are recognized when the services are performed. Property and equipment - property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets over periods ranging from three to eight years. Useful lives are estimated at the time the asset is acquired and are based upon historical experience with similar assets as well as taking into account anticipated technological or other changes. Leasehold improvements are amortized over the term of the lease or the useful life of the asset, whichever is shorter. Inventory reserves - inventory reserves or write-downs 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. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. Warranty reserves - warranty reserves are estimated 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 our expectations and the provisions established, future warranty costs could be in excess of our warranty reserves. A significant increase in these costs could adversely affect our 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. 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Critical Accounting Policies (continued) Accounts receivable - the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credits and payments from its customers and maintains 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 our expectation and the provision established, the Company cannot guarantee that this positive trend will continue. Income taxes - deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when such differences are expected to reverse. These amounts are periodically evaluated. The deferred tax asset is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that such tax rate changes are enacted. Overview Sales for the three and nine months ended December 31, 2003 decreased 5% and 3.5%, respectively. The decrease in sales is primarily attributed to the reduced shipments of the AN/APM-480 to the U.S. Navy. The Company, in agreement with the U.S. Navy, has temporarily decreased the number of units it is currently shipping in anticipation of these units being returned for up-grades and enhancements. The total number of units under contract has not changed. However, this decline was partially offset by an increase in commercial sales for both periods, primarily as a result of the introduction of the TR-220/210 family of products, and the T-47G and the T-30D. The decline in sales of the AN/APM-480 for the nine months ended December 31, 2003 was also partially offset by the increase in the shipment of DME test sets. The Company continues to invest in new product development. Engineering, research, and development expenditures increased 28% for the nine months ended December 31, 2003, as compared to the same period in the prior fiscal year, and represented 19% of total sales for the nine months ended December 31, 2003 as compared to 14% for the same period last year. The introduction of the TR-220/TR-210 Multi-Function test sets was very successful. These products accounted for 16% and 12% of total sales, respectively, for the three and nine months ended December 31, 2003. The Company continues to evaluate and develop new products. Research and development activities include the design of the next generation of IFF test sets, development of a foundation technology for future products, and incorporation other product enhancements. The Company is also developing a multi-function bench test set, which will add a new market and a diversification opportunity for the future. In January 2004, the Company acquired privately held Innerspace Technology, Inc. (ITI) of Waldwick, NJ. ITI has been in business for over 30 years designing, manufacturing and distributing a variety of shipboard and underwater instruments to support hydrographers, oceanographers, researchers, engineers, geophysicists, and surveyors worldwide. ITI has total annual sales of approximately $1 million dollars, and the purchase price was $547,000 and the Company signed employment contracts with the principals. The Company hopes to significantly increase the sales of ITI's products by expanding distribution and enhancing marketing and product development; however, there can be no assurance (see Note 7 to Financial Statements). 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview (continued) The Company has been active in responding to customer requests for quotation, and continues to pursue opportunities in both the commercial and government markets, both domestically and internationally. Exploration of opportunities in non-avionic government and commercial markets also continues in an attempt to broaden the Company's product line. The Company continues its efforts with Semaphore Capital Advisors LLC to pursue growth through acquisitions and alliances of compatible businesses or technologies. In addition, the Company is working with Investment Partners Group, exploring the licensing of compatible technologies. Results of Operations Sales For the nine months ended December 31, 2003, net sales decreased $310,545 (3.5%) as compared to the nine months ended December 31, 2002. Government sales decreased $1,814,301 (24.4%) for the nine months ended December 31, 2003 as compared to the nine months ended December 31, 2002. The decrease in sales is primarily attributed to the reduced shipments of the AN/APM-480 to the U.S. Navy. The Company, in agreement with the U.S. Navy, has temporarily decreased the number of units it is currently shipping in anticipation of these units being returned for up-grades and enhancements. The total number of units under contract has not changed. This decrease in sales was partially offset by an increase in the shipment of Precision DME test sets. Commercial sales increased $1,503,756 (103.7%) for the nine months ended December 31, 2003 as compared to the same period last year. The introduction of the TR-220 Multi-Function test set and a sales promotion of the T-49C Transponder/TCAS test set accounted for this increase. The Company's repairs and calibration business also increased in this period. However, the commercial market remains uncertain, primarily as a result of the weak financial position of most commercial airlines. For the three months ended December 31, 2003, net sales decreased $152,532 (5.0%) as compared to the three months ended December 31, 2002. Government sales decreased $432,981 (17.8%) for the three months ended December 31, 2003 as compared to the three months ended December 31, 2002. The decrease in sales is primarily attributed to the reduced shipments of the AN/APM-480 to the U.S. Navy as discussed above. This decrease was partially offset by a net increase in other government products. Commercial sales increased $280,449 (44.4%) for the three months ended December 31, 2003 as compared to the same period last year. The introduction of the TR-220/TR-210 Multi-Function test sets accounted for most of this increase. The Company's repairs and calibration business also increased in this period. This increase in commercial sales were partially offset by a decrease in the sale of the Company's T-49C Transponder/TCAS ramp test set as a result of ending a sales promotion. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Gross Margin Gross margin dollars decreased $1,727 for the nine months ended December 31, 2003 as compared to the same period last year. This decrease, for the most part, is attributed to the lower overall sales volume, and the higher percentage of sales to distributors, who are sold to at a discount, partially offset by higher gross profit on certain products. The gross margin percentage for the nine months ended December 31, 2003 was 54.6% compared to 52.7% for the nine months ended December 31, 2002. Gross margin dollars decreased $132,794 (8.2%) for the three months ended December 31, 2003 as compared to the same period last year. This decrease in gross margin, for the most part, is attributed to the lower sales volume. The gross margin percentage for the three months ended December 31, 2003 was 51.3% as compared to 53.1% for the three months ended December 31, 2002. Operating Expenses Selling, general and administrative expenses decreased $2,478 (0.1%) for the nine months ended December 31, 2003 as compared to the nine months ended December 31, 2002. Lower relocation, recruitment, selling commissions, and professional fees were mostly offset by an increase in personnel and related salaries, benefits and travel expenses. Selling, general and administrative expenses decreased $88,407 (11.0%) for the three months ended December 31, 2003 as compared to the three months ended December 31, 2002. This decrease is mainly attributed to lower professional fees, and relocation expenses. Engineering, research and development expenses increased $160,179 (40.9%) and $359,181 (28.5%), respectively, for the three and nine months ended December 31, 2003, as compared to same periods in the prior fiscal year. The higher level of expenditures is associated with an increase in research and development activities, including the next generation of IFF test sets, developing a foundation technology for future products, and incorporating other product enhancements. The Company is also developing a bench test set, which will add a new market and diversification opportunity for the future. Income Taxes Income taxes decreased $82,907 and $136,816, respectively, for the three and nine months ended December 31, 2003 as compared to the same periods last year as a result of the lower profit. The provision for income taxes represents the effective federal and state tax rate on the Company's income before taxes. The Company has utilized all its net operating loss carryforwards and the Company will pay federal taxes this fiscal year. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Liquidity and Capital Resources At December 31, 2003 the Company had positive working capital of $4,520,587 as compared to $4,154,887 at March 31, 2003. For the nine months ended December 31, 2003, cash provided by operations was $470,858 as compared to $1,534,678 for the nine months ended December 31, 2002. This decrease in cash from operations is primarily attributable to an increase in inventories, an increase in other assets, a decrease in accrued expenses, and payment of income taxes. The Company has a line of credit of $1,750,000 from Fleet Bank. The line of credit bears an interest rate of 0.5% above the lender's prevailing base rate, which is payable monthly, based upon the outstanding balance. At December 31, 2003, the Company had no outstanding balance. 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, 2003, the Company was in compliance with all financial covenants. The line of credit expires at September 30, 2004. 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 at least the next twelve months. However, as the Company pursues additional opportunities, the need for additional capital may arise. The Company will evaluate its alternatives at that time. The Company has also retained Semaphore Capital Advisors as its investment bankers to help pursue acquisitions and alliances and, if needed, to help raise capital. The Company maintains its cash balance primarily in a money market account in the event the cash is needed for an acquisition. Some of this cash was used to purchase Innerspace Technology, Inc. (see above). There was no significant impact on the Company's operations as a result of inflation for the nine months ended December 31, 2003. 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, 2003. Item 4. Controls and Procedures The Company adopted disclosure controls and procedures, as called for by the recently adopted legislation and rules of the Securities and Exchange Commission. Under rules promulgated by the S.E.C., disclosure controls and procedures are defined as "those controls or other procedures of the issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." The Chief Executive Officer and the Principal Accounting Officer of the Company evaluated the Company's disclosure controls and procedures at January 30, 2004, and concluded that they are effective. Furthermore, there were no significant changes in the Company's internal controls, or in other factors that could significantly affect these controls, after January 30, 2004, the date of the evaluation by the Chief Executive Officer and the Principal Accounting Officer. 11 Part II Other Information Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held on November 12, 2003 (the "Annual Meeting"). (b) Not applicable because (i) there was no solicitation in opposition to management's nominees as listed in the Company's proxy statement; and (ii) all of such nominees who were directors, previously reported to the Commission, were re-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 1,616,834 0 George J. Leon 1,616,834 0 Robert J. Melnick 1,616,834 0 Jeff C. O'Hara 1,616,834 0 Robert H. Walker 1,616,834 0 The shareholders also voted all 1,616,834 shares in favor of ratifying the audit committee's appointment of BDO Seidman LLP, as the Company's independent auditors for the fiscal year ending March 31, 2004. (d) Not applicable Item 6. Exhibits and Reports on Form 8-K a. 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 Cerification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002. 32.2 Cerification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sabanes-Oxley Act of 2002. b. Reports on Form 8-K. Report on Form 8-K regarding the acquisition of Innerspace Technology was submitted January 26, 2004 under Item 9. 12 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, 2004 By: /s/ Harold K. Fletcher ---------------------- Harold K. Fletcher Chairman and President Date: February 13, 2004 By: /s/ Joseph P. Macaluso ---------------------- Joseph P. Macaluso Principal Accounting Officer 13