-----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, Vtn8n+9Jg+edvxtvYBZ+ZQpMzFYfSnxq20b739U1Fa8yAE0Dw3BUaYkrOPzqSIba 7vFTl3or7iSgNyNXSB/mPg== 0000891092-05-002261.txt : 20051114 0000891092-05-002261.hdr.sgml : 20051111 20051114151421 ACCESSION NUMBER: 0000891092-05-002261 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 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: 051200745 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 e22814_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 September 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 the number of shares outstanding of the issuer's common stock, as of the latest practical date: 2,210,731 shares of Common stock, $.10 par value as of November 7, 2005. TEL-INSTRUMENT ELECTRONICS CORPORATION TABLE OF CONTENTS PAGE ---- Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Balance Sheets September 30, 2005 and March 31, 2005 1 Condensed Consolidated Statements of Operations - Three and Six Months Ended September 30, 2005 and 2004 2 Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2005 and 2004 3 Notes to Condensed Consolidated Financial Statements 4-8 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition 9-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 4. Controls and Procedures 14 Part II - Other Information Item 6. Exhibits 14 Signatures 14 Certifications 15-17 Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2005 March 31, 2005 ------------------ -------------- (Unaudited) Current assets: Cash and cash equivalents $1,588,841 $ 826,959 Accounts receivable, net 1,378,095 1,610,519 Inventories, net 2,411,204 2,926,011 Taxes receivable 125,674 125,674 Prepaid expenses and other current assets 153,754 124,946 Deferred income taxes 526,203 583,560 ---------- ---------- Total current assets 6,183,771 6,197,669 Property, plant and equipment, net 819,931 844,075 Intangible assets, net 326,851 283,754 Other assets 308,132 302,135 ---------- ---------- Total assets $7,595,588 $7,670,730 ========== ========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Convertible note payable - related party - current portion $ 50,000 $ 50,000 Convertible subordinated notes - related party 7,500 7,500 Notes payable - other 58,000 58,000 Capitalized lease obligations - current portion -- 2,323 Accounts payable 282,783 481,146 Deferred revenues 149,991 169,866 Accrued payroll, vacation pay, profit sharing and payroll taxes 328,815 353,704 Accrued expenses 1,075,608 1,028,014 ---------- ---------- Total current liabilities 1,952,697 2,150,553 Convertible notes payable - related party - long-term 150,000 150,000 Deferred taxes - long-term 43,000 43,000 ---------- ---------- Total liabilities 2,145,697 2,343,553 Stockholders' equity: Common stock, par value $.10 per share, 2,195,731 and 2,187,831 issued and outstanding as of September 30, 2005, and March 31, 2005, respectively 219,576 218,786 Additional paid-in capital 4,081,570 4,024,910 Retained earnings 1,148,745 1,083,481 ---------- ---------- Total stockholders' equity 5,449,891 5,327,177 ---------- ---------- Total liabilities and stockholders' equity $7,595,588 $7,670,730 ========== ==========
See accompanying notes to condensed financial statements -1- TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004 -------------- -------------- -------------- -------------- Net sales $ 3,094,442 $ 2,238,950 $ 6,245,420 $ 5,051,750 Cost of sales 1,589,623 1,026,411 3,133,918 2,361,651 ----------- ----------- ----------- ----------- Gross margin 1,504,819 1,212,539 3,111,502 2,690,099 Operating expenses Selling, general and administrative 774,853 808,742 1,672,848 1,641,953 Amortization of intangibles 21,549 21,549 43,098 43,098 Engineering, research and development 643,578 510,046 1,272,100 1,042,496 ----------- ----------- ----------- ----------- Total operating expenses 1,439,980 1,340,337 2,988,046 2,727,547 ----------- ----------- ----------- ----------- Income (loss) from operations 64,839 (127,798) 123,456 (37,448) Other income (expense): Interest income 3,300 3,246 6,390 6,750 Interest expense (3,255) (7,225) (6,971) (13,562) ----------- ----------- ----------- ----------- Income (loss) before taxes 64,884 (131,777) 122,875 (44,260) Provision (benefit) for income taxes- 28,768 (52,644) 57,611 (17,681) ----------- ----------- ----------- ----------- Net income (loss) $ 36,116 $ (79,133) $ 65,264 $ (26,579) =========== =========== =========== =========== Basic income (loss) per common share $0.02 $(0.04) $0.03 $(0.01) ===== ====== ===== ====== Diluted income (loss) per common share $0.02 $(0.04) $0.03 $(0.01) ===== ====== ===== ====== Dividends per share None None None None Weighted average shares outstanding Basic 2,190,006 2,144,301 2,189,074 2,144,237 Diluted 2,302,015 2,144,301 2,301,083 2,144,237
See accompanying notes to condensed financial statements -2- TEL-INSTRUMENT ELECTRONICS CORPORATION CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended Sept. 30, 2005 Sept. 30, 2004 -------------- -------------- Cash flows from operating activities: Net income (loss) $ 65,264 $ (26,579) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes 57,356 (17,681) Depreciation 136,829 130,414 Amortization of intangibles 43,098 43,098 Non-cash stock-based compensation 43,230 -- Changes in operating assets or liabilities: Decrease (increase) in accounts receivable, net 232,424 (521,449) Decrease (increase) in inventories, net 514,807 (331,814) (Increase) decrease in prepaid expenses and other current assets (28,808) 32,292 (Increase) decrease in other assets (5,997) 1,835 (Decrease) increase in accounts payable (198,363) 253,044 (Decrease) increase in deferred revenues (19,875) 33,154 (Decrease) increase in accrued payroll, vacation pay, and payroll taxes (24,889) 55,666 Increase in accrued expenses 47,594 44,249 ----------- ----------- Net cash provided by (used in) operating activities 862,670 (303,771) ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (112,685) (168,536) ----------- ----------- Net cash used in investing activities (112,685) (168,536) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 14,220 1,080 Payment of capitalized lease obligations (2,323) (10,931) ----------- ----------- Net cash provided by (used in) financing activities 11,897 (9,851) ----------- ----------- Net increase (decrease) in cash and cash equivalents 761,882 (482,158) Cash and cash equivalents at beginning of period 826,959 1,509,828 ----------- ----------- Cash and cash equivalents at end of period $ 1,588,841 $ 1,027,670 =========== =========== Supplemental information Interest paid $ 4,500 $ 2,383 =========== ===========
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 (consisting primarily of normal recurring accruals) necessary to present fairly the financial position of Tel-Instrument Electronics Corp as of September 30, 2005, the results of operations for the three and six months ended September 30, 2005 and September 30, 2004, and statements of cash flows for the six months ended September 30, 2005 and September 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 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, 2005. Note 2 Accounts Receivable, net Accounts receivable, net, consist of: September 30, 2005 March 31, 2005 Commercial $ 718,119 $ 642,954 Government 703,004 1,013,771 Allowance for doubtful accounts (43,028) (46,206) ----------- ----------- Total $ 1,378,095 $ 1,610,519 =========== =========== Note 3 Inventories, net Inventories, net, consist of: September 30, 2005 March 31, 2005 Purchased parts $ 1,457,761 $ 1,452,080 Work-in-process 1,052,761 1,532,535 Finished goods 92,901 112,036 Less: Reserve for obsolescence (192,219) (170,640) ----------- ----------- Total $ 2,411,204 $ 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 (loss) 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 (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Common share equivalents are not included in the calculation for the three and six months ended September 30, 2004 since the effect would be antidilutive.
Three Months Ended Three Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Basic net income (loss) per share computation: Net income (loss) for common stockholders $ 36,116 $ (79,133) Weighted-average common shares outstanding 2,190,006 2,144,301 Basic net income (loss) per share for common stockholders $ 0.02 $ (0.04) Diluted net income (loss) per share computation Net income (loss) for common stockholders $ 36,116 $ (79,133) Weighted-average common shares outstanding 2,190,006 2,144,301 Incremental shares attributable to the assumed exercise of outstanding stock options 112,009 -- Total adjusted weighted-average shares 2,302,015 2,144,301 Diluted net income (loss) per share for common stockholders $ 0.02 $ (0.04) Six Months Ended Six Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Basic net income (loss) per share computation: Net income (loss) for common stockholders $ 65,264 $ (26,579) Weighted-average common shares outstanding 2,189,074 2,144,237 Basic net income (loss) per share for common stockholders $ 0.03 $ (0.01) Diluted net income (loss) per share computation Net income (loss) for common stockholders $ 65,264 $ (26,579) Weighted-average common shares outstanding 2,189,074 2,144,237 Incremental shares attributable to the assumed exercise of outstanding stock options 112,009 -- Total adjusted weighted-average shares 2,301,083 2,144,237 Diluted net income (loss) per share for common stockholders $ 0.03 $ (0.01)
-5- TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 has been applied. The Company currently plans to adopt the fair value based method prescribed by SFAS 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 408,500 outstanding stock options under SFAS No. 123R, the pro forma amounts are indicated below:
Six Months Ended Six Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Net income (loss) - as reported $ 65,264 $ (26,579) Add: Stock-based compensation expense included in reported net income, net of taxes 25,960 -- Less fair value of stock options, net of taxes (35,009) (13,156) ------ ------- Net income (loss)- pro forma 56,215 (39,735) ====== ======= Basic earnings (loss) per share - as reported 0.03 (0.01) Basic earnings (loss) per share - pro forma 0.03 (0.02) Diluted earnings (loss) per share - as reported 0.03 (0.01) Diluted earnings (loss) per share - pro forma 0.02 (0.02) Three Months Ended Three Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Net income (loss) - as reported $ 36,116 $ (79,133) Add: Stock-based compensation expense included in reported net income, net of taxes 10,321 -- Less fair value of stock options, net of taxes (17,505) (1,838) ------ ------- Net income (loss)- pro forma 28,932 (80,971) ====== ======= Basic earnings (loss) per share - as reported 0.02 (0.04) Basic earnings (loss) per share - pro forma 0.01 (0.04) Diluted earnings (loss) per share - as reported 0.02 (0.04) Diluted earnings (loss) per share - pro forma 0.01 (0.04)
-6- TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 6 Segment Information Information is presented for the Company's three reportable activities, 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 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 consists of sales of different products to hydrographic, 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 September 30, 2005 Gov't Comm'l. Total Systems Items Total - ------------------ ----- ------- ----- ------- ----- ----- Sales $ 1,832,373 $ 917,352 $ 2,749,725 $ 344,717 $ 3,094,442 Cost of sales 833,272 543,166 1,376,438 213,185 1,589,623 ----------- ----------- ----------- ----------- ----------- Gross margin 999,101 374,186 1,373,287 131,532 1,504,819 ----------- ----------- ----------- ----------- ----------- Engineering, research, & dev. 592,793 50,785 643,578 Selling, general, and admin. 330,078 91,652 $ 353,123 774,853 Amortization of intangibles 21,549 21,549 Interest,, net (45) -- -- (45) ----------- ----------- ----------- ----------- Total expenses 922,826 142,437 374,672 1,439,935 ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 450,461 $ (10,905) $ (374,672) $ 64,884 ============ =========== =========== ========== Three Months Ended Avionics Avionics Avionics Marine Corporate September 30, 2004 Gov't Comm'l. Total Systems Items Total - ------------------ ----- ------- ----- ------- ----- ----- Sales $ 1,382,992 $ 702,338 $ 2,085,330 $ 153,620 $ 2,238,950 Cost of sales 505,861 425,210 931,071 95,340 1,026,411 ----------- ----------- ----------- ----------- ----------- Gross margin 877,131 277,128 1,154,259 58,280 1,212,539 ----------- ----------- ----------- ----------- ----------- Engineering, research, & dev. 414,688 95,358 510,046 Selling, general, and admin. 326,268 100,927 $ 381,547 808,742 Amortization of intangibles 21,549 21,549 Interest expense, net 3,800 179 -- 3,979 ----------- ----------- ----------- ----------- Total expenses 744,756 196,464 403,096 1,344,316 ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 409,503 $ (138,184) $ (403,096) $ (131,777) =========== =========== =========== ===========
-7- TEL-INSTRUMENT ELECTRONICS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 Segment Information (continued) Six Months Ended Avionics Avionics Avionics Marine Corporate September 30, 2005 Gov't Comm'l. Total Systems Items Total - ------------------ ----- ------- ----- ------- ----- ----- Sales $ 4,205,408 $ 1,479,424 $ 5,684,832 $ 560,588 $ 6,245,420 Cost of sales 1,811,666 961,941 2,773,607 360,311 3,133,918 ----------- ----------- ----------- ----------- ----------- Gross margin 2,393,742 517,483 2,911,225 200,277 3,111,502 ----------- ----------- ----------- ----------- ----------- Engineering, research, & dev. 1,179,491 92,609 1,272,100 Selling, general, and admin. 748,276 177,365 $ 747,207 1,672,848 Amortization of intangibles 43,098 43,098 Interest expense, net 581 -- -- 581 ----------- ----------- ----------- ----------- Total expenses 1,928,348 269,974 790,305 2,988,627 ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 982,897 $ (69,697) $ (790,305) $ 122,875 =========== =========== =========== =========== Six Months Ended Avionics Avionics Avionics Marine Corporate September 30, 2004 Gov't Comm'l. Total Systems Items Total - ------------------ ----- ------- ----- ------- ----- ----- Sales $ 3,284,850 $ 1,383,551 $ 4,668,401 $ 383,349 $ 5,051,750 Cost of sales 1,293,437 831,388 2,124,825 236,826 2,361,651 ----------- ----------- ----------- ----------- ----------- Gross margin 1,991,413 552,163 2,543,576 146,523 2,690,099 ----------- ----------- ----------- ----------- ----------- Engineering, research, & dev. 905,553 136,943 1,042,496 Selling, general, and admin. 672,026 197,056 $ 772,871 1,641,953 Amortization of intangibles 43,098 43,098 Interest expense, net 6,376 436 -- 6,812 ----------- ----------- ----------- ----------- Total expenses 1,583,955 334,435 815,969 2,734,359 ----------- ----------- ----------- ----------- Income (loss) before income taxes $ 959,621 $ (187,912) $ (815,969) $ (44,260) =========== =========== =========== ===========
Note 7 Reclassifcation Certain prior year amounts have been reclassified to conform to the current year presentation. -8- 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 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. 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. The Company, beginning in fiscal year 2002, began to accrue the cost of these enhancements as the original units were shipped in order to properly match the revenues with the expenses. The Company considers this accrual similar to a warranty expense, and 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 1,200 units (approximately $17,000,000 in revenues) -9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Critical Accounting Policies (continued) through the period ended September 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 Tel 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 $480 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. This accrual is being reduced as the units are enhanced and returned to the military. 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. 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. -10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Critical Accounting Policies (continued) 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. Results of Operations Overview 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. In August 2005, this contract was modified to include testing of the next generation of IFF in this state-of-the-art multi-function test set. 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 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. This contract currently has production options totaling 750 units, which if exercised, would result in deliveries beginning in early fiscal year 2008. The Company believes the CRAFT technology is a significant advance on current products in the marketplace and will form the basis for a new family of test instruments which will diversify and modernize our product line and could lead to additional sales. Tel is actively pursuing other major government contracts and is continuing its efforts to broaden its markets and products. Sales and operating results for the first six months of the 2006 fiscal year have improved as compared to the same six months in fiscal year 2005, although near-to-mid-term commercial and military orders have continued to be below expectations. For the six months ended September 30, 2005, total sales increased 24% to $6,245,420 as compared to the same period in the prior year, and net income for the six months ended September 30, 2005 was $65,264 as compared to a loss of $26,579 for the first six months of the prior fiscal year. 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. Gross profit declined as a percentage from the same period in the last fiscal year primarily as a result of a change in product mix, lower pricing on commercial products and lower gross margin on billings related to the documentation and test activities for CRAFT and on the initial shipments of the TR-401. In the second quarter of fiscal year 2006, the marine systems showed improvement. The introduction, production, and shipment of new products significantly increased sales, but decreased the product backlog as new orders have been below expectations. As of September 30, 2005, cash increased to $1,588,841 from $826,959 at March 31, 2005 as a result of reductions in inventories and accounts receivable. -11- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Results of Operations (continued) Sales Sales of avionics products increased $664,395 (31.9%) and $1,016,431 (21.8%) for the three and six months ended September 30, 2005, respectively, as compared to the same periods in the prior year. Avionics commercial sales increased $215,014 (30.6%) for the three months ended September 30, 2005, which is attributed to sales of the new TB-2100 Bench Test set, an increase in sales for the TR-220 line of Multi-Function Test sets and the T-30D, partially offset by lower sales for repairs and calibrations. For the six months ended September 30, 2005, avionics commercial sales increased $95,873 (6.9%) as a result of sales for the new TB-2100 Bench Test set and increased sales of the T-30D, partially offset by lower sales of the TR-220 line of Multi-Function Test sets. The weak financial condition of the commercial airline industry continues to curtail significant growth in this segment. Avionics government sales increased $449,381 (32.5%) for the second quarter of fiscal year 2006 as compared to the second quarter last year. Shipments of the AN/APM-480 to the U.S. Navy, an increase in sales of the T-47N associated with a contract with the U.S. Military, sales of the TR-401, and billings related to the test and documentation phase of the CRAFT program were offset by lower sales of the T-760 and sales of the AN/APM-480 to customers other than the U.S. Navy. Avionics government sales increased $920,558 (28%) for the six months ended September 30, 2005. An increase in sales of the T-47N and the T-36M associated with a contract with the U.S, Military was partially offset by lower sales of the AN/APM-480 to customers other than the U.S. Navy, the T-760 and the T-30CM. Marine Systems sales increased $191,097 and $177,239 for the three and six months ended September 30, 2005, respectively, as compared to the three and six months ended September 30, 2004. The introduction, production, and shipment of new products significantly increased sales, but decreased the product backlog as new orders have been below expectations. Gross Margin Gross margin increased $292,280 (24.1%) and $421,403 (15.7%) for the three and six months ended September 30, 2005, respectively, as compared to the same period 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 September 30, 2005 was 48.6% as compared to 54.2% for the three months ended September 30, 2004. The gross margin percentage for the six months ended September 30, 2005 was 49.8% as compared to 53.3% for the six months ended September 30, 2004. The decrease in gross margin percentage is primarily as a result of a change in product mix, lower pricing on commercial products and lower gross margin on billings related to the documentation and test activities for CRAFT, and the initial shipments of the TR-401. Operating Expenses Selling, general and administrative expenses decreased $33,889 (4.2%) for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004, primarily as a result of lower administrative salaries, and a decrease in advertising expenses for the marine systems division. Selling, general and administrative expenses increased $30,895 (1.9%) for the six months ended September 30, 2005 as compared to the same period last year, as the result of higher commission expenses for the avionics division and higher salaries which were partially offset by lower travel expenses for the avionics division and lower advertising expenses for the marine systems division. -12- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) Operating Expenses (continued) Engineering, research and development expenses increased $133,532 (26.2%) and $229,604 (22%) for the three and six months ended September 30, 2005, respectively, as compared to the same periods in the prior fiscal year as a result of increased research and development efforts, including CRAFT, enhancements to the TB-2100, and the TR-401. Income Taxes A provision for income taxes was recorded in the amount of $57,611 for the six months ended September 30, 2005 as compared to a tax benefit of $17,681 for the six months ended September 30, 2004 as a result of the loss for that period. 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 September 30, 2005, the Company had positive working capital of $4,231,074 as compared to $4,047,116 at March 31, 2005, and cash increased to $1,588,841 from $826,959 at March 31, 2005. For the six months ended September 30, 2005, the Company generated $862,670 in cash from operating activities as compared to using $303,771 for the same period last year. This improvement in cash from operating activities is primarily attributed to a reduction in inventories and accounts receivable, partially offset by a reduction in accounts payable. Stockholders' equity increased to $5,449,891 at September 30, 2005 from $5,327,177 at March 31, 2005. The Company has a line of credit of $1,750,000 from Bank of America. 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 any fees to maintain this open line. At September 30, 2005, the Company had no outstanding balance. The line of credit is collateralized by substantially all of the assets of the Company, and requires the Company to maintain certain financial covenants. As of September 30, 2005, the Company was in compliance with all financial covenants. The Company has received a commitment from the bank to renew this line for another year, and, as such, the line of credit will expire on November 30, 2006. Based upon the current backlog, which has increased to $6,400,000 at September 30, 2005 from $6,200,000 at March 31, 2005, 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 six months ended September 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. -13- 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 September 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 September 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 Tel's 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 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. 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: November 11, 2005 By: /s/ Harold K. Fletcher ---------------------------- /s/ Harold K. Fletcher Chairman and President Date: November 11, 2005 By: /s/ Joseph P. Macaluso ---------------------------- /s/ Joseph P. Macaluso Principal Accounting Officer -14- EX-31.1 2 e22814ex31_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 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: November 11, 2005 /s/ Harold K. Fletcher -------------------------- Harold K. Fletcher Chairman and President -15- EX-31.2 3 e22814ex31_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-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: November 11, 2005 /s/ Joseph P. Macaluso -------------------------------- Joseph P. Macaluso Principal Accounting Officer -16- EX-32.1 4 e22814ex32_1.txt CERTIFICATION Exhibit 32.1 Tel-Instrument Electronics Corp 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 September 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 November 11, 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. -17- -----END PRIVACY-ENHANCED MESSAGE-----