-----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, GGt4WD11suzb1I/pYXEersG/mo2n7aNgN2R1Trb36wl56wF8/9oEAbYmqmnoEIvp gcaltuye768spNeQjZfJCg== 0000891092-05-001627.txt : 20050819 0000891092-05-001627.hdr.sgml : 20050819 20050819115409 ACCESSION NUMBER: 0000891092-05-001627 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050819 DATE AS OF CHANGE: 20050819 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: 051037688 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 e22353_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 June 30, 2005 |_| 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date: 2,187,831 shares of Common stock, $.10 par value as of August 9, 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 June 30, 2005 and March 31, 2005 1 Condensed Consolidated Comparative Statements of Operations - Three Months Ended June 30, 2005 and 2004 2 Condensed Consolidated Comparative Statements of Cash Flows - Three Months Ended June 30, 2005 and 2004 3 Notes to Condensed Consolidated Financial Statements 4-6 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Conditions 7-11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 Item 4. Controls and Procedures 12 Part II - Other Information Item 6. Exhibits 12 Signatures 12 Certifications Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS June 30, 2005 March 31, 2005 ------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 562,044 $ 826,959 Accounts receivable, net 1,848,724 1,610,519 Inventories, net 2,848,007 2,926,011 Taxes receivable 125,674 125,674 Prepaid expenses and other current assets 111,943 124,946 Deferred income tax benefit 553,801 583,560 ---------- ---------- Total current assets 6,050,193 6,197,669 Equipment and leasehold improvements, net 811,625 844,075 Intangible assets, net 305,302 326,851 Other assets 306,822 302,135 ---------- ---------- Total assets $7,473,942 $7,670,730 ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Convertible note payable - related party - current portion $ 50,000 $ 50,000 Convertible subordinated note payable - related party 7,500 7,500 Notes payable - other 58,000 58,000 Capitalized lease obligations -- 2,323 Accounts payable 349,055 481,146 Deferred revenues 158,836 169,866 Accrued payroll, vacation pay payroll taxes 340,227 353,704 Accrued expenses 935,061 1,028,014 ---------- ---------- Total current liabilities 1,898,679 2,150,553 Convertible notes payable - related party-non-current portion 150,000 150,000 Deferred taxes 43,000 43,000 ---------- ---------- Total liabilities 2,091,679 2,343,553 Stockholders' equity: Common stock, par value $.10 per share, 2,187,831 issued and outstanding as of June 30, 2005 and March 31, 2005, respectively 218,786 218,786 Additional paid-in capital 4,050,848 4,024,910 Retained earnings 1,112,629 1,083,481 ---------- ---------- Total stockholders' equity 5,382,263 5,327,177 ---------- ---------- Total liabilities and stockholders' equity $7,473,942 $7,670,730 ========== ========== See accompanying notes to condensed financial statements - 1 - TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended ---------------------------- June 30, 2005 June 30, 2004 ------------- ------------- Net sales $3,150,978 $2,812,800 Cost of sales 1,544,295 1,335,240 ---------- ---------- Gross margin 1,606,683 1,477,560 Operating expenses: Selling, general and administrative 897,995 833,211 Amortization of intangibles 21,549 21,549 Engineering, research and development 628,522 532,450 ---------- ---------- Total operating expenses 1,548,066 1,387,210 ---------- ---------- Income from operations 58,617 90,350 Other income (expense): Interest income 3,090 3,504 Interest expense (3,716) (6,337) ---------- ---------- Income before income taxes 57,991 87,517 Provision for income taxes 28,843 34,963 ---------- ---------- Net income 29,148 52,554 ========== ========== Basic income per common share $ 0.01 $ 0.02 ========== ========== Diluted income per common share $ 0.01 $ 0.02 ========== ========== Dividends per share None None Weighted average shares outstanding Basic 2,187,831 2,144,151 Diluted 2,337,848 2,270,496 See accompanying notes to condensed financial statements - 2 - TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited) Three Months ended ---------------------------- June 30, 2005 June 30, 2004 ------------- ------------- Cash flows from operating activities: Net income $ 29,148 $ 52,554 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 29,759 34,964 Depreciation 68,499 74,907 Amortization of acquired intangibles 21,549 21,549 Non-cash stock-based compensation 25,938 -- Changes in assets and liabilities: Increase in accounts receivable (238,205) (1,107,128) Decrease in inventories 78,004 28,825 Decrease (increase) in prepaid expenses & other current assets 13,003 (1,982) Increase in other assets (4,687) -- (Decrease) increase in accounts payable (132,091) 251,179 (Decrease) increase in accrued payroll, vacation pay and payroll taxes (13,477) 52,933 (Decrease) increase in deferred revenues (11,030) 25,875 (Decrease) increase in accrued expenses (92,953) 59,937 ---------- ---------- Net cash used in operating activities (226,543) (506,387) ---------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment (36,049) (127,715) ---------- ---------- Net cash used in investing activities (36,049) (127,715) ---------- ---------- Cash flows from financing activities: Payment of capitalized lease obligations (2,323) (7,664) ---------- ---------- Net cash used in financing activities (2,323) (7,664) ---------- ---------- Net decrease in cash and cash equivalents (264,915) (641,766) Cash and cash equivalents at beginning of period 826,959 1,509,828 ---------- ---------- Cash and cash equivalents at end of period $ 562,044 $ 868,062 ========== ========== Taxes paid -- -- Interest paid $ -- $ 2,591 See accompanying notes to condensed 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 necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2005, the results of operations for the three months ended June 30, 2005 and June 30, 2004, and statements of cash flows for the three months ended June 30, 2005 and June 30, 2004. 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, 2005 balance sheet included herein was 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, 2005. Note 2 Accounts Receivable, net Accounts receivable, net consist of: June 30, 2005 March 31, 2005 ------------- -------------- Commercial $ 511,893 $ 642,954 Government 1,383,037 1,013,771 Less: Allowance for doubtful debts (46,206) (46,206) ----------- ----------- $ 1,848,724 $ 1,610,519 =========== =========== Note 3 Inventories, net Inventories, net consist of: June 30, 2005 March 31, 2005 ------------- -------------- Purchased parts $ 1,587,411 $ 1,452,080 Work-in-process 1,337,650 1,532,535 Finished Goods 108,586 112,036 Less: Reserve for obsolescence (185,640) (170,640) ----------- ----------- $ 2,848,007 $ 2,926,011 =========== =========== - 4 - TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 4 Earnings Per Share The Company's basic income per common 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 common 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.
Three Months Ended Three Months Ended June 30, 2005 June 30, 2004 ------------------ ------------------ Basic net income per share computation: Net income attributable to common stockholders $ 29,148 $ 52,554 Weighted-average common shares outstanding 2,187,831 2,144,151 Basic net income per share attributable to common stockholders $ 0.01 $ 0.02 Diluted net income per share computation Net income attributable to common stockholders $ 29,148 $ 52,554 Weighted-average common shares outstanding 2,187,831 2,144,151 Incremental shares attributable to the assumed exercise of outstanding stock options 150,017 126,345 Total adjusted weighted-average shares 2,337,848 2,270,496 Diluted net income per share attributable to common stockholders $ 0.01 $ 0.02
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 plans to adopt the fair value based method prescribed by SFAS No. 123R for the fiscal year ended March 31, 2007. 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 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 394,900 outstanding stock options under SFAS No. 123, the pro forma amounts are indicated below:
Three Months Ended Three Months Ended June 30, 2005 June 30, 2004 ------------------ ------------------ Net income - as reported $ 29,148 $ 52,554 Add: Stock-based employee compensation expense included In reported net income, net of taxes 10,375 -- Less: Total stock based employee compensation, net of taxes (27,137) (11,318) ---------- ---------- Net income - pro forma 12,386 41,236 ========== ========== Basic earnings per share - as reported 0.01 0.02 Basic earnings per share - pro forma 0.01 0.02 Diluted earnings per share - as reported 0.01 0.02 Diluted earnings per share - pro forma 0.01 0.02
Note 6 Reclassifcation Certain prior year amounts have been reclassified to conform to the current year presentation. - 5 - TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 7 Segment Information Information is presented for the Company's three reportable segments, avionics government, avionics commercial and marine systems. 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 lower gross margins. 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 consists of sales to hydrographic, oceanographic, researchers, engineers, geophysicists, and surveyors. The table below presents information about sales and gross margin. Cost of sales includes certain allocation factors for indirect costs. Engineering, research and development expenses and marketing and selling expenses represent direct expenses for the avionics and marine segments.
Three Months Ended Avionics Avionics Avionics Marine Corporate June 30, 2005 Gov't Comm'l. Total Systems Items Total - ------------------ ---------- ---------- ---------- ---------- ---------- ---------- Revenues $2,373,035 $ 562,072 $2,935,107 $ 215,871 $3,150,978 Cost of Sales 978,394 418,775 1,397,169 147,126 1,544,295 ---------- ---------- ---------- ---------- ---------- Gross Margin 1,394,641 143,297 1,537,938 68,745 1,606,683 ---------- ---------- ---------- ---------- ---------- Engineering, research, and development 586,698 41,824 628,522 Selling, general, and admin. 418,198 85,713 394,084 897,995 Amortization of intangibles 21,549 21,549 Interest expense, net 429 197 -- 626 ---------- ---------- ---------- ---------- Total expenses 1,005,325 127,734 415,633 1,548,692 ---------- ---------- ---------- ---------- Income before income taxes $ 532,613 $ (58,989) $ (415,633) $ 57,991 ========== ========== ========== ========== Three Months Ended Avionics Avionics Avionics Marine Corporate June 30, 2004 Gov't Comm'l. Total Systems Items Total - ------------------ ---------- ---------- ---------- ---------- ---------- ---------- Revenues $1,901,858 $ 681,213 $2,583,071 $ 229,729 $2,812,800 Cost of Sales 787,576 406,178 1,193,754 141,486 1,335,240 ---------- ---------- ---------- ---------- ---------- Gross Margin 1,114,282 275,035 1,389,317 88,243 1,477,560 ---------- ---------- ---------- ---------- ---------- Engineering, research, and Development 496,008 36,442 532,450 Selling, general, and admin. 345,758 96,128 391,325 833,211 Amortization of intangibles 21,549 21,549 Interest expense, net 2,576 257 -- 2,833 ---------- ---------- ---------- ---------- Total expenses 844,342 132,827 412,874 1,390,043 ---------- ---------- ---------- ---------- Income before income taxes $ 544,975 $ (44,584) $ (412,874) $ 87,517 ========== ========== ========== ==========
- 6 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations A number of the statements made by the Company in this report may be regarded as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among others, statements concerning the Company's outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially. Among the factors that could cause a difference are: changes in the general economy; changes in demand for the Company's products or in the cost and availability of its raw materials; the actions of its competitors; the success of our customers; technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials; transportation, environmental matters; and other unforeseen circumstances. A number of these factors are discussed in the Company's filings with the Securities and Exchange Commission. Critical Accounting Policies In preparing the 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. Shipping and handling costs charged to customers are not material. Payments received prior to the delivery of units or services performed are recorded as deferred revenues on the accompanying balance sheets. The Company has an existing contract with the U.S. Navy for the delivery of test equipment (AN/APM-480). The AN/APM-480 is a catalog product, which the Company also sells to civilian and other government customers. While the Company sells this product to the U.S. Navy, the proprietary rights to the technology are retained by the Company. Since the AN/APM-480 was a significant product, and the Company's premier IFF test set, the Company continued to improve the product to meet the needs of its other customers, to increase product performance, and to improve the manufacturing process. Further, although the AN/APM-480 was accepted and used by the Navy, since it was in substantial compliance with the specification, there were limited areas where the AN/APM-480 did not operate at maximum performance according to the specification. Since U.S. Navy was a significant customer and because of these minor specification issues, the Company agreed in fiscal year 2002 to provide enhancements at no additional cost to the customer. - 7 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations Critical Accounting Policies (continued) The Company, beginning in fiscal year 2002, began to accrue the cost of these enhancements as the units were shipped in order to properly match the revenues with the expenses. The Company considers this accrual similar to a warranty expense. The Company recorded the liability and the expense to cost of sales. The enhancements made, and to be made to the product, the Company believes, are relatively insignificant. The Company has shipped and has been paid for over 1,100 units (approximately $17,000,000 in revenues) through the period ended June 30, 2005, and the cost of these enhancements is less than 3% of the revenues. The customer continues to use the original product in the field, because the enhancements are not essential to the unit to perform the major functions of the delivered products. We continue to ship the units in accordance with the original contract, and are being paid in accordance with the terms of the original contract. Revenue was recognized because we substantially completed and fulfilled the terms specified in the original contract, the Navy took delivery and the Armed Forces are using the product in the field. There was no obligation to perform any enhancements at the time the original contract was signed in 2000, and when the first shipments were made in our fiscal year ended March 31, 2001. The costs, estimated to be approximately $450 per unit are for labor and material, based upon our experience manufacturing the product, and our standard costing information. The Company is charging costs of performing the enhancement to the accrued liability as the units are shipped. 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 reserves or inventory write-downs may be required. 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 it will continue to receive positive results. - 8 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations Critical Accounting Policies (continued) Warranty/enhancement reserves - warranty/enhancement reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty/enhancement costs have historically been within our expectations and the provisions established, future warranty/enhancement costs could be in excess of our warranty/enhancement reserves. A significant increase in these costs could adversely affect our operating results for the period and the periods these additional costs materialize. Warranty/enhancement reserves are adjusted from time to time when actual warranty/enhancement claim experience differs from estimates. 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. The measurement of deferred tax assets 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 For the first quarter ended June 30, 2005, total sales increased 12% to $3,150,978 as compared to the same quarter in the prior year, and net income decreased from $52,554 to $29,148 for the same period. The increase in sales is primarily attributed to the increase in avionics government sales. The increase in sales was offset by an increase in engineering, research and development expenditures for avionics in the first quarter of the current fiscal year as compared to the same period last year, and the loss for the marine systems division, resulting in a decrease in net income. Gross profit declined as a percentage from the same period in the last fiscal year due to lower gross profit on sales related to repairs and calibration. Operating expenses increased primarily due to increased SG&A and engineering, research and development expenses, resulting primarily from higher commission expenses and increased engineering efforts associated with new contracts and technology improvements discussed below. The Company is reviewing its gross profit and operating expenses in an effort to reduce cost. Marine systems sales and gross profit decreased as a result of new product delays. Marine systems backlog has increased to approximately $117,000 at June 30, 2005 as compared to approximately $44,000 at June 30, 2004. The Company continues to closely monitor its operations. Although cash declined in the June 30, 2005 quarter, the Company does not believe that cash and working capital will decline materially during the balance of fiscal year 2006. In March 2005, the Company won a competitive procurement and was awarded a $17,344,853 multi-year, firm-fixed-price, indefinite-delivery/indefinite- quantity contract for the systems engineering, design and integration, fabrication, testing, and production of a Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline Tester (CRAFT) with sonobuoy simulator capabilities. This contract is expected to be completed in March 2010. The CRAFT combines advanced navigation, communication, IFF, and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal-processing-based architecture. The CRAFT is another significant milestone for the Company, because the development of this technology will help solidify the Company as one of the - 9 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Overview (continued) leaders in the industry, and will meet the U.S. Navy's test requirements for years to come. The Company will continue funding the development of this product with shipments to begin in 2-3 years. 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 test sets in anticipation of U.S. and NATO requirements for more sophisticated IFF testing. In addition, the Company continues the development of a foundation technology for future products, and the incorporation of other product enhancements in existing designs. The Company continues development of CRAFT (see above). Sales For the three months ended June 30, 2005, total avionics sales increased $352,036 (13.6%) to $2,935,107 as compared to the three months ended June 30, 2004. Avionics commercial sales decreased $119,141 (17.5%) to $562,072 for the quarter ended June 30, 2005 as compared to $681,213 for the same period in the prior fiscal year, primarily as a result of lower sales of the TR-220, and the weak financial condition of the airline industry. Avionics government sales increased $471,177 (24.8%) to $2,373,035 as compared to $1,901,858 for the first three months of the prior fiscal year. Shipments of the T-36M and the T-47N under a contract with the U.S. Army and sales of the T-47N to Royal Australian Air Force, through our distributor, was partially offset by lower sales of the AN/APM-480. Marine systems sales declined slightly from $229,729 for the quarter ended June 30, 2004 to $215,871 in the current quarter. Marine systems sales decreased as a result of new product delays. Marine systems backlog has increased to approximately $117,000 at June 30, 2005 as compared to approximately $44,000 at June 30, 2004. Gross Margin Gross margin increased $129,123 (8.7%) for the three months ended June 30, 2005 as compared to the same three months in the prior fiscal year. The increase in gross margin is primarily attributed to the higher sales volume. The gross margin percentage for the three months ended June 30, 2005 was 51.0% as compared to 52.5% for the three months ended June 30, 2004. The decrease in gross profit percentage is primarily attributed to lower gross profit on sales related to repairs and calibrations. Operating Expenses Selling, general and administrative expenses increased $64,784 (7.8%) for the three months ended June 30, 2005, as compared to the three months ended June 30, 2004. This increase is primarily attributed to higher commission expenses in the avionics division. Engineering, research and development expenses increased $96,072 (18%) as a result of the increased research and development efforts, including the next generation of IFF test sets, CRAFT, enhancements to the TB-2100, and the TR-401. - 10 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Income Taxes A provision for income taxes was recorded in the amount of $28,843 for the three months ended June 30, 2005 as compared to a tax provision of $34,963 for the three months ended June 30, 2004. These amounts represent the effective federal and state tax rate of approximately 40% on the Company's net income before taxes, plus additional New Jersey state taxes for the avionics business. Under New Jersey law, losses in the marine systems subsidiary cannot be applied to reduce taxes on the avionics business. Liquidity and Capital Resources At June 30, 2005 the Company had working capital of $4,168,806 as compared to $4,047,116 at March 31, 2005, but cash decreased. For the three months ended June 30, 2005, the Company used $226,543 in operations as compared to $506,387 for the three months ended June 30, 2004. This improvement in cash used in operations is primarily attributed to the change in accounts receivable, offset partially by a reduction in accounts payable. 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. The Company does not pay to maintain this open line. At June 30, 2005 the Company had no outstanding balance. The line of credit is collateralized by substantially all of the assets of the Company and expires in September 2005. The credit facility requires the Company to maintain certain financial covenants. As of June 30, 2005, the Company was in compliance with all financial covenants. 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. Currently, the Company has no material capital expenditure requirements. However, as the Company pursues additional opportunities, the need for additional capital may arise. The Company will evaluate its alternatives when they 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 in the event the cash is needed for acquisition. There was no significant impact on the Company's operations as a result of inflation for the three months ended June 30, 2005. 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, 2005. - 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." The Chief Executive Officer and Principal Accounting Officer evaluated the Company's Disclosure Controls and Procedures at June 30, 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 internal control over financial reporting identified in connection with the evaluation as of June 30, 2005 by the Chief Executive Officer and Principal Accounting Officer, required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15, which occurred during our last fiscal quarter and which have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. Part II. Other Information Item 6. Exhibits 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 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. 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: August 18, 2005 By: /s/ Harold K. Fletcher ---------------------------------- Harold K. Fletcher Chairman and President Date: August 18, 2005 By: /s/ Joseph P. Macaluso ---------------------------------- Joseph P. Macaluso Principal Accounting Officer - 12 - EX-31.1 2 e22353ex31_1.txt CERTIFICATION Tel-Instrument Electronics Corp CEO Certification Exhibit 31.1 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 control and 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; c) 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 d) Disclosed in this quarterly report any change 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 internal 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: August 18, 2005 /s/ Harold K. Fletcher ---------------------- Harold K. Fletcher Chairman and President EX-31.2 3 e22353ex31_2.txt CERTIFICATION Tel-Instrument Electronics Corp CFO Certification Exhibit 31.2 I, Joseph P. Macaluso, certify that: 1. I have reviewed this quarterly report on Form 10-K 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 control and 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; c) 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 d) Disclosed in this quarterly report any change 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 internal 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: August 18, 2005 /s/ Joseph P. Macaluso ----------------------------- Joseph P. Macaluso Principal Accounting Officer EX-32.1 4 e22353ex32_1.txt CERTIFICATION Tel-Instrument Electronics Corp Exhibit 32.1 CERTIFICATION PURSUANT TO 18 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 June 30, 2005, as filed with the Securities Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, each hereby 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 the best of their knowledge: 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 results of operations of the Company. By: /s/ Harold K. Fletcher ---------------------------- Harold K. Fletcher Chairman and President /s/ Joseph P. Macaluso ---------------------------- Joseph P. Macaluso Principal Accounting Officer August 18, 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-----