-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cc9RSZfOlumQ6/K1RJlyxah9wYil/qSHaz5C01YXOYpD9ZNvknfwjmL9iKHLEaIS x/Dnf7dbAwdgPUmUHoqIkA== 0000891092-05-000310.txt : 20050214 0000891092-05-000310.hdr.sgml : 20050214 20050214171642 ACCESSION NUMBER: 0000891092-05-000310 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050214 DATE AS OF CHANGE: 20050214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEL INSTRUMENT ELECTRONICS CORP CENTRAL INDEX KEY: 0000096885 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 221441806 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31990 FILM NUMBER: 05612408 BUSINESS ADDRESS: STREET 1: 728 GARDEN ST CITY: CARLSTADT STATE: NJ ZIP: 07072 BUSINESS PHONE: 2019331600 MAIL ADDRESS: STREET 1: 728 GARDEN ST CITY: CARLSTADT STATE: NJ ZIP: 07072 10-Q 1 e20451_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, 2004 __ 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: 2,192,831 shares of Common stock, $.10 par value as of February 7, 2005. TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS PAGE ---- Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Comparative Balance Sheets December 31, 2004 and March 31, 2004 1 Condensed Consolidated Comparative Statements of Operations - Three and Nine Months Ended December 31, 2004 and 2003 2 Condensed Consolidated Comparative Statements of Cash Flows - Nine Months Ended December 31, 2004 and 2003 3 Notes to Condensed Consolidated Financial Statements 4-7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8-11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 Item 4. Controls and Procedures 12 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 13 Signatures 13 Certifications 14-17 Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
ASSETS (Unaudited) December 31, 2004 March 31, 2004 ----------------- -------------- Current assets: Cash $ 464,409 $1,509,828 Accounts receivable, net 2,096,691 1,266,905 Inventories 2,772,980 2,202,143 Taxes receivable 161,695 161,695 Prepaid expenses and other current assets 123,175 102,039 Deferred income tax benefit - current 571,301 581,348 ---------- ---------- Total current assets 6,190,251 5,823,958 Property, plant, and equipment, net 883,490 867,886 Intangible assets, net 348,400 413,047 Other assets 296,682 287,610 ---------- ---------- Total assets $7,718,823 $7,392,501 ========== ========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Note payable - related party - current portion $ 50,000 $ 250,000 Convertible subordinated notes - related party 7,500 7,500 Notes payable - other 87,000 87,000 Capitalized lease obligations - current portion 7,853 24,768 Accounts payable 485,220 346,169 Deferred revenues 80,507 44,663 Accrued payroll, vacation pay, profit sharing and payroll taxes 388,094 333,180 Accrued expenses 991,709 963,528 ---------- ---------- Total current liabilities 2,097,883 2,056,808 Notes payable - related party - non-current portion 200,000 -- Deferred taxes - long-term 48,000 48,000 ---------- ---------- Total liabilities 2,345,883 2,104,808 Stockholders' equity: Common stock 218,786 214,418 Additional paid-in capital 4,026,298 3,960,886 Retained earnings 1,127,856 1,112,389 ---------- ---------- Total stockholders' equity 5,372,940 5,287,693 ---------- ---------- Total liabilities and stockholders' equity $7,718,823 $7,392,501 ========== ==========
See accompanying notes to condensed consolidated financial statements. 1 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited) Three Months Ended Nine Months Ended Dec. 31, 2004 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2003 ------------- ------------- ------------- ------------- Net sales 2,782,090 2,914,271 7,833,840 8,588,893 Cost of sales 1,232,404 1,417,825 3,594,055 3,897,156 ----------- ----------- ----------- ----------- Gross margin 1,549,686 1,496,446 4,239,785 4,691,737 Operating expenses: Selling, general & administrative 844,758 715,465 2,486,711 2,165,055 Amortization of intangibles 21,549 -- 64,647 -- Engineering, research, & development 610,781 551,869 1,653,277 1,619,917 ----------- ----------- ----------- ----------- Total operating expenses 1,477,088 1,267,334 4,204,635 3,784,972 Income from operations 72,598 229,112 35,150 906,765 Other income (expense): Interest income 2,387 3,928 9,137 19,838 Interest expense (5,214) (4,587) (18,776) (22,529) ----------- ----------- ----------- ----------- Income before taxes 69,771 228,453 25,511 904,074 Provision for income taxes 27,725 91,266 10,044 361,177 ----------- ----------- ----------- ----------- Net income $ 42,046 $ 137,187 $ 15,467 $ 542,897 =========== =========== =========== =========== Basic income per common share $ 0.02 $ 0.06 $ 0.01 $ 0.25 Diluted income per common share $ 0.02 $ 0.06 $ 0.01 $ 0.24 Dividends per share None None None None Weighted average shares outstanding Basic 2,156,771 2,144,151 2,149,199 2,141,896 Diluted 2,272,473 2,232,820 2,264,901 2,230,565
See accompanying notes to condensed consolidated financial statements. 2 TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended Nine Months Ended December 31, 2004 December 31,2003 ----------------- ----------------- Cash flows from operating activities Net income $ 15,467 $ 542,897 Adjustments to reconcile net income to cash used In operating activities: Deferred income taxes 10,047 (86,900) Depreciation 217,462 196,487 Amortization of intangibles 64,647 -- Reserve for obsolescence of inventories 45,000 40,000 Changes in assets and liabilities: Increase in accounts receivable (829,786) (35,189) (Increase) decrease in inventories (615,837) 342,132 Increase in prepaid expenses and other current assets (21,136) (43,186) Increase in other assets (9,072) (199,831) Increase (decrease) in accounts payable 139,051 (131,879) Increase in deferred revenues 88,549 6,792 Increase (decrease) in accrued payroll, vacation pay, and payroll taxes 54,914 (53,439) Decrease in income taxes payable -- (103,924) Decrease in accrued expenses (24,524) (3,102) ----------- ----------- Net cash (used in) provided by operations (865,218) 470,858 ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (233,066) (170,146) ----------- ----------- Net cash used in investing activities (233,066) (170,146) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 69,780 16,909 Repayment of capitalized lease obligations (16,915) (21,022) ----------- ----------- Net cash provided by (used in) financing activities 52,865 (4,113) ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,045,419) 296,599 Cash and cash equivalents at beginning of period 1,509,828 1,680,124 ----------- ----------- Cash and cash equivalents at end of period $ 464,409 $ 1,976,723 =========== =========== Supplemental Cash Flow Information: Interest paid $ 84,847 $ 26,105 =========== =========== Taxes paid $ -- $ 462,029 =========== ===========
See accompanying notes to condensed consolidated financial statements 3 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position of Tel-Instrument Electronics Corp as of December 31, 2004, the results of operations for the three and nine months ended December 31, 2004 and December 31, 2003, and statements of cash flows for the nine months ended December 31, 2004 and December 31, 2003. 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, 2004 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, 2004. Note 2 Accounts Receivable The following table sets forth the components of accounts receivable: December 31, 2004 March 31, 2004 ----------------- -------------- Commercial $ 1,019,986 $ 862,259 Government 1,120,803 446,244 Allowance for Bad Debts (44,098) (41,598) ----------- ----------- Total $ 2,096,691 $ 1,266,905 =========== =========== Note 3 Inventories Inventories consist of: December 31, 2004 March 31, 2004 ----------------- -------------- Purchased Parts $ 1,247,543 $ 846,782 Work-in-Process 1,642,236 1,401,722 Finished Goods 69,099 94,537 Less: Reserve for Obsolescence (185,898) (140,898) ----------- ----------- Total $ 2,772,980 $ 2,202,143 =========== =========== 4 TEL-INSTRUMENT ELECTRONICS CORP NOTES TO CONDENSED CONSOLIDATED 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 353,650 outstanding stock options under SFAS No. 123, the pro forma amounts are indicated below:
Nine Months Ended Nine Months Ended December 31, 2004 December 31, 2003 ----------------- ----------------- Net income - as reported $ 15,467 $ 542,987 Less fair value of stock options (44,986) (60,750) -------- -------- Net income (loss) - pro forma (29,519) 482,237 ======== ======= Basic earnings per share - as reported 0.01 0.25 Basic earnings (loss) per share - pro forma (0.01) 0.23 Diluted earnings per share - as reported 0.01 0.24 Diluted earnings (loss) per share - pro forma (0.01) 0.22 Three Months Ended Three Months Ended December 31, 2004 December 31, 2003 ------------------ ------------------ Net income - as reported $ 42,046 $ 137,187 Less fair value of stock options (14,996) (12,043) -------- -------- Net income - pro forma 27,050 125,144 ====== ======= Basic earnings per share - as reported 0.02 0.06 Basic earnings per share - pro forma 0.01 0.06 Diluted earnings per share - as reported 0.02 0.06 Diluted earnings per share - pro forma 0.01 0.06
During the nine months ended December 31, 2004, the Company sold 26,720 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 Segment Information Information is presented for the Company's three reportable activities, avionics government, avionics commercial and marine systems. The marine systems division was acquired on January 16, 2004, and, as such, no amounts are shown for fiscal year 2004 in the data below. There are no inter-segment revenues. The Company is organized primarily on the basis of its avionics and marine instrument products. The avionics government market consists primarily of the design, manufacture, and sale of test equipment to U.S. and foreign governments and militaries, either direct or through distributors. The avionics commercial market consists primarily of the design, manufacture, and sales of test equipment to domestic and foreign airlines, to commercial distributors, and to general aviation repair and maintenance shops. The avionics 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 cross segments. The marine instrumentation systems segment primarily consists of the design, manufacture, and sale of different products to hydrographic and oceanographic researchers, engineers, geophysicists, and surveyors. The table below presents information about sales and gross margin. Costs of sales include certain allocation factors for indirect costs. Additionally, administrative expenses have been allocated between avionics and marine systems.
Three Months Ended Avionics Avionics Avionics Marine Corporate December 31, 2004 Gov't Comm'l. Total Systems Items Total ----------------- ---------- -------- ----------- ---------- --------- ----------- Sales $1,667,293 $844,487 $ 2,511,780 $ 270,310 $ 2,782,090 Cost of sales 600,020 467,092 1,067,112 165,292 1,232,404 -------- -------- --------- ---------- --------- Gross margin 1,067,273 377,395 1,444,668 105,018 1,549,686 --------- ------- --------- ---------- --------- Engineering, research, and 522,044 88,737 610,781 Development Selling, general, and admin. 697,753 147,005 844,758 Amort. of intangibles - marine 21,549 21,549 Interest expense, net 3,006 (179) -- 2,827 ----- ---------- --------- ----------- Total expenses 1,222,803 235,563 21,549 1,479,915 --------- ---------- --------- ----------- Income (loss) before income taxes $ 221,865 $ (130,545) $ (21,549) $ 69,771 =========== ========== ========= =========== Three Months Ended Avionics Avionics Avionics Marine Corporate December 31, 2003 Gov't Comm'l. Total Systems Items Total ----------------- ---------- -------- ----------- ---------- --------- ----------- Sales $2,002,133 $912,138 $ 2,914,271 -- $ 2,914,271 Cost of sales 906,451 511,374 1,417,825 -- 1,417,825 -------- -------- ----------- ---------- ----------- Gross margin 1,095,682 400,764 1,496,446 -- 1,496,446 --------- ------- ----------- ---------- ----------- Engineering, research,& dev. 551,869 551,869 Selling, general, and admin. 715,465 715,465 Interest expense, net 659 659 ----------- ----------- Total expenses 1,267,993 1,267,993 ----------- ----------- Income before income taxes $ 228,453 -- $ 228,453 =========== ========== ===========
6 TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 6 Segment Information (continued)
Nine Months Ended Avionics Avionics Avionics Marine Corporate December 31, 2004 Gov't Comm'l. Total Systems Items Total ----------------- ---------- ---------- ----------- ----------- --------- ----------- Sales $4,952,143 $2,228,038 $ 7,180,181 $ 653,659 $ 7,833,840 Cost of sales 1,893,457 1,298,480 3,191,937 402,118 3,594,055 ---------- ---------- --------- ----------- ----------- Gross margin 3,058,686 929,558 3,988,244 251,541 4,239,785 ---------- ------- --------- ----------- ----------- Engineering, research, and 1,427,597 225,680 1,653,277 development Selling, general, and admin. 2,050,244 436,467 2,486,711 Amort. of intangibles - marine 64,647 64,647 Interest expense, net 9,382 257 -- 9,639 --------- ----------- --------- ----------- Total expenses 3,487,223 662,404 64,647 4,214,274 --------- ----------- --------- ----------- Income (loss) before income $ 501,021 $ (410,863) $ 64,647 $ 25,511 ======= =========== ========= ========== taxes Nine Months Ended Avionics Avionics Avionics Marine Corporate December 31, 2003 Gov't Comm'l. Total Systems Items Total ----------------- ---------- ---------- ----------- --------- --------- ----------- Sales $5,634,389 $2,954,504 $ 8,588,893 -- $ 8,588,898 Cost of sales 2,382,096 1,515,060 3,897,156 -- 3,897,156 ---------- ---------- ----------- --------- ----------- Gross margin 3,252,293 1,439,444 4,691,737 -- 4,691,737 ---------- ---------- ----------- --------- ----------- Engineering, research,& dev. 1,619,917 1,619,917 Selling, general, and admin. 2,165,055 2,165,055 Interest expense, net 2,691 2,691 ----------- ----------- Total expenses 3,787,663 3,787,663 ----------- ----------- Income before income taxes $ 904,074 -- $ 904,074 =========== ========= ===========
Note 7 Acquisition On January 16, 2004, the Company acquired Innerspace Technology, Inc. ("ITI") for $547,000, including a note, and employment agreements with principals. The following table represents the unaudited consolidated results of operations as though the acquisition of ITI occurred on April 1, 2003, utilizing ITI's unaudited financial statements for the December 31, 2003 period. Three Months Ended Nine Months Ended December 31, 2003 December 31, 2003 ------------------ ------------------ (pro forma) (pro forma) Net sales $3,126,234 $9,241,490 Income before taxes 151,867 752,223 Net income 91,196 451,710 Basic income per common share 0.04 0.21 Diluted income per common share 0.04 0.20 7 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 and statements as to future matters contain a measure of uncertainty and accordingly, actual results could differ materially and adversely. 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 the 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. 8 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 and income decreased for the three and nine months ended December 31, 2004. As previously reported, sales and operating income declined because of delays in deliveries under existing contracts and in the awarding of new contracts, and as a result of the losses attributed to the marine systems division, as a result of the planned additional marketing and development costs for ITI. In addition, the Company, in agreement with the U.S. Navy, has temporarily stopped shipment of the AN/APM-480 in anticipation of these units being returned for up-grades and enhancements. However, the total number of units under contract has not changed and approximately 90 units remain to be shipped under this contract. Commercial sales also declined during this period primarily as a result of a successful sales promotion in the prior year which was not continued in the current year, and the generally weak financial condition of the airline industry. Fortunately, these declines were partially offset by the shipment of the T-36M pursuant to a $1,600,000 contract (previously announced) from the Army National Guard. The Company expects to complete delivery of all units under this contract during the current fiscal year. Sales also increased T-47G, T-30CM and the TR-220/210 family of products for the first nine months of the current fiscal year. The Company has been encouraged by the award of two new contracts, in addition to the one received in September from the Army National Guard. In December 2004, the Company received an order, through its distributor, to supply T-47NH's to the Royal Australian Air Force in the amount of $694,350. In February 2005, the Company received a contract in the amount of $1,815,000 to supply the T-36M and the T-47NH to the U.S. Army. Investment in new product development continues for both avionics and marine systems in anticipation of expected customer needs and to remain as leaders in the respective industries. For the avionics division, the Company continues its work on the next generation of IFF (Identification, Friend or Foe) test sets in anticipation of U.S. and NATO requirements for more sophisticated IFF testing. The Company anticipates that most of the AN/APM-480's, previously sold by the Company, will be returned and modified to accommodate this more sophisticated IFF test capabilities. Although there is no assurance that the Company will receive any such modification contracts, the Company believes that it is well positioned to obtain them. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview (continued) For marine systems, the Company has made improvements to its tide gauge, and is upgrading its sounders with a new Windows operating system which will allow for improvements to the hardware. The Company has been active in responding to requests for quotation for new government programs, which could award new test equipment contracts, and is currently in the process of submitting proposals for large government programs. The Company continues actively to pursue opportunities in both the commercial and government avionics and marine systems markets, both domestically and internationally. The Company continues its efforts with Semaphore Capital Advisors LLC to pursue growth through acquisitions and alliances of compatible businesses or technologies. Results of Operations Sales Sales of avionics products declined for the three and nine months ended December 31, 2004, as compared to the same periods in the prior year $402,491 (13.8%) and $1,408,712 (16.4%), respectively, mainly for the reasons discussed above under Overview. Government sales declined $682,246 (12.1%) for the nine months ended December 31, 2004 as compared to the same period in the prior fiscal year. Lower sales of the AN/APM-480 to the U.S. Navy was partially offset by increases in sales of the T-36M, T-47G, and AN/APM-480 to customers other than the U.S. Navy, and of the T-30CM. For the three months ended December 31, 2004, avionics government sales decreased $334,840 (16.7%), Lower sales of the AN/APM-480 to the U.S. Navy were partially offset by increases in sales of the T-36M, T-47NH , and the T-76. Commercial sales decreased $726,466 (24.6%) and $67,651 (7.4%), respectively, for the nine and three months ended December 31, 2004 as compared to the same periods last year, primarily as a result of a sales promotion in the prior year that was not continued in the current year. Gross Margin Gross margin decreased $451,952 (9.6%) for the nine months ended December 31, 2004, as compared to the same period last year, primarily as a result of the lower sales volume. Gross margin increased $53,240 (3.6%) for the three months because of a change in sales mix, but which was offset by the lower sales volume. The gross margin percentage for the nine months ended December 31, 2004 was 54.1% compared to 54.6% for the nine months ended December 31, 2003. The gross margin percentage for the three months ended December 31, 2004 was 55.7% as compared to 51.3% for the three months ended December 31, 2003. Operating Expenses Selling, general and administrative expenses increased $129,293 (18.1%) and $321,656 (14.9%) for the three and nine months ended December 31, 2004, respectively, as compared to the three and nine months ended December 31, 2003. This increase is primarily attributed to added selling expenses for the marine systems division, which expenses were not included in the nine months ended December 31, 2003, and to higher avionics commission expenses offset partially by lower recruitment and relocation expenses and decreased consulting and professional fees. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations (continued) Operating Expenses (continued Engineering, research and development expenses increased $58,912 (10.7%) and $33,360 (2.1%) for the three and nine months ended December 31, 2004, as compared to the same periods in the prior fiscal year. Engineering expenditures associated with the marine systems division, higher recruitment fees and an increases in salaries and materials were mostly offset by lower outside contract labor expenditures. Income Taxes Income taxes decreased $63,541 and $351,133, respectively, for the three and nine months ended December 31, 2004 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. Liquidity and Capital Resources At December 31, 2004, the Company had working capital of $4,092,368 as compared to $3,767,150 at March 31, 2004 and cash declined $1,045,419 during this same period due to matters discussed in the Overview. For the nine months ended December 31, 2004, the Company used $865,218 of cash for operating activities as compared to the cash provided by operations of $470,858 for the nine months ended December 31, 2003. This decline in cash from operations is primarily attributed to a substantial increase in accounts receivable and in inventories, as well as the decrease in net income caused by the previously noted delays. In May 2004, the Company and its Chairman/President renegotiated the terms of the notes payable-related party, resulting in $200,000 of these notes being re-classified as long-term and improving the working capital by this amount. The Notes now become due in consecutive years beginning March 31, 2005. The Company has a line of credit of $1,750,000 from Bank of America (previously Fleet Bank). The line of credit bears an interest rate of 0.5% above the lender's prevailing base rate, based upon the outstanding balance. The Company does not pay to maintain this open line. At December 31, 2004, 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, 2004, the Company was in compliance with all financial covenants. The line of credit expires at September 30, 2005. Based upon the current backlog, which had increased to $4,800,000 at December 31, 2004, 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 when these opportunities arise. 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 until needed. There was no significant impact on the Company's operations as a result of inflation for the nine months ended December 31, 2004. 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, 2004. 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company, at this time, is generally not exposed to financial market risks, including changes in interest rates, foreign currency exchange rates, and marketable equity security prices. 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 SEC, 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." Our Chief Executive Officer and Principal Accounting Officer evaluated the Company's Disclosure Controls and Procedures at January 31, 2005 and have concluded that they are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. There were no changes in our internal control over financial reporting identified in connection with the evaluation as of March 31, 2004 by the Chief Executive Officer and Principal Accounting Officer, required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. 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 8, 2004 (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 pursuant to Regulation 14; 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 1,604,622 19,106 George J. Leon 1,622,837 891 Robert J. Melnick 1,604,622 19,106 Jeff C. O'Hara 1,604,622 19,106 Robert A. Rice 1,622,837 891 Robert H. Walker 1,622,837 891 The shareholders also voted 1,622,338 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, 2005. Shareholders voted 1,000 shares against this proposal and shareholders totaling 390 shares withheld their vote. (d) Not applicable 12 Item 6. Exhibits and Reports on Form 8-K a. Exhibits 31.1 Certification by CEO pursuant to Rule 13a-14 under the Securities Exchange Act. 31.2 Certification by CFO pursuant to Rule 13a-14 under the Securities Exchange Act. 32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports on Form 8-K. Report on Form 8-K regarding press release announcing results for the quarter ended September 30, 2004 was submitted November 18, 2004 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, 2005 By: /s/ Harold K. Fletcher ----------------------------- Harold K. Fletcher Chairman and President Date: February 14, 2005 By: /s/ Joseph P. Macaluso ----------------------- Joseph P. Macaluso Principal Accounting Officer 13 EX-31.1 2 e20451ex31_1.txt CEO CERTIFICATION Exhibit 31.1 Tel-Instrument Electronics Corp CEO Certification I, Harold K. Fletcher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tel-Instrument Electronics Corp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure and controls procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of intrernal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 14, 2005 /s/ Harold K. Fletcher ---------------------- Harold K. Fletcher Chairman and President EX-31.2 3 e20451ex31_2.txt CFO CERTIFICATION Exhibit 31.2 Tel-Instrument Electronics Corp CFO Certification I, Joseph P. Macaluso, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tel-Instrument Electronics Corp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure and controls procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of intrernal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 14, 2005 /s/ Joseph P. Macaluso ---------------------- Joseph P. Macaluso Principal Accounting Officer EX-32.2 4 e20451ex32_2.txt CFO CERTIFICATION Exhibit 32.2 Tel-Instrument Electronics Corp CFO Certification CERTIFICATION PURSUANT TO 8 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tel-Instrument Electronics Corp. (the "Company"), on Form 10-Q for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph P. Macaluso, Principal Accounting Officer of the Company, certify, pursuant to and solely for the purpose of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge and based on my review of the Report: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: /s/ Joseph P. Macaluso ---------------------- Joseph P. Macaluso Principal Accounting Officer February 14, 2005 A signed original of this written statement required by Section 906 has been provided to Tel-Instrument Electronics Corp and will be retained by Tel-Instrument Electronics Corp and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.1 5 e20451ex32_1.txt CEO CERTIFICATION Exhibit 32.1 Tel-Instrument Electronics Corp CEO Certification CERTIFICATION PURSUANT TO 8 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tel-Instrument Electronics Corp. (the "Company"), on Form 10-Q for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harold K. Fletcher, President and Chief Executive Officer of the Company, certify, pursuant to and solely for the purpose of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge and based on my review of the Report: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: /s/ Harold K. Fletcher ---------------------- Harold K. Fletcher Chairman and President February 14, 2005 A signed original of this written statement required by Section 906 has been provided to Tel-Instrument Electronics Corp and will be retained by Tel-Instrument Electronics Corp and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----