-----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, Rsy3jBsDljqSMEbRCBC59xeMRFzMuTXMwU7yHKX/2MzvmcUIah4Mgxv+kgAm55UL /LPN9Q+kd8ajYk4ZHeEZbQ== 0001108890-06-000390.txt : 20061114 0001108890-06-000390.hdr.sgml : 20061114 20061114134256 ACCESSION NUMBER: 0001108890-06-000390 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-31990 FILM NUMBER: 061213439 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 10QSB 1 telinstrument10qsb093006.txt PERIOD ENDED 09-30-06 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, 2006 [_] 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: 2,299,906 shares of Common stock, $.10 par value as of November 7, 2006. 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, 2006 and March 31, 2006 1 Condensed Consolidated Statements of Operations - Three and Six Months Ended September 30, 2006 and 2005 2 Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2006 and 2005 3 Notes to Condensed Consolidated Financial Statements 4-9 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition 10-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Item 4. Controls and Procedures 16 Part II - Other Information Item 6. Exhibits 16 Signatures 16 Certifications
Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS September 30, 2006 March 31, 2006 (Unaudited) Current assets: Cash and cash equivalents $1,132,406 $1,934,541 Accounts receivable, net 1,064,510 1,049,578 Inventories, net 2,114,253 2,102,280 Taxes receivable 82,488 82,488 Prepaid expenses and other current assets 87,225 138,041 Deferred income taxes 955,681 720,082 ---------- ---------- Total current assets 5,436,563 6,027,010 Property, plant and equipment, net 695,901 775,065 Other assets 323,056 314,507 ---------- ---------- Total assets $6,455,520 $7,116,582 ========== ========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Convertible note payable - related party - current portion $ 50,000 $ 50,000 Notes payable - other 29,000 29,000 Accounts payable 282,975 288,525 Deferred revenues 50,477 59,202 Accrued payroll, vacation pay, and payroll taxes 353,540 391,062 Accrued expenses 614,669 906,852 ---------- ---------- Total current liabilities 1,380,661 1,724,641 Deferred revenues 80,875 80,875 Convertible note payable - related party - long-term 100,000 100,000 Deferred taxes - long-term 43,000 43,000 ---------- ---------- Total liabilities 1,604,536 1,948,516 ========== ========== Stockholders' equity: Common stock, par value $.10 per share, 2,299,906 and 2,279,381 issued and outstanding as of September 30, 2006, and March 31, 2006, respectively 229,991 227,941 Additional paid-in capital 4,286,180 4,251,180 Retained earnings 334,813 688,945 ---------- ---------- Total stockholders' equity 4,850,984 5,168,066 ---------- ---------- Total liabilities and stockholders' equity $6,455,520 $7,116,582 ========== ========== 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, Sept. 30, Sept. 30, Sept. 30, 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Net sales $ 2,127,349 $ 3,094,442 $ 3,892,400 $ 6,245,420 Cost of sales 1,056,189 1,589,623 2,015,662 3,133,918 ----------- ----------- ----------- ----------- Gross margin 1,071,160 1,504,819 1,876,738 3,111,502 Operating expenses Selling, general and administrative 649,966 774,853 1,272,089 1,672,848 Amortization of intangibles -- 21,549 -- 43,098 Engineering, research and development 569,919 643,578 1,215,100 1,272,100 ----------- ----------- ----------- ----------- Total operating expenses 1,219,885 1,439,980 2,487,189 2,988,046 ----------- ----------- ----------- ----------- Income (loss) from operations (148,725) 64,839 (610,451) 123,456 Interest income (expense): Interest income 12,804 3,300 25,254 6,390 Interest expense (2,264) (3,255) (4,534) (6,971) ----------- ----------- ----------- ----------- Income (loss) before taxes (138,185) 64,884 (589,731) 122,875 Provision (benefit) for income taxes- (55,207) 28,768 (235,599) 57,611 ----------- ----------- ----------- ----------- Net income (loss) $ (82,978) $ 36,116 $ (354,132) $ 65,264 =========== =========== =========== =========== Basic income (loss) per common share $ (0.04) $ 0.02 $ (0.15) $ 0.03 =========== =========== =========== =========== Diluted income (loss) per common share $ (0.04) $ 0.02 $ (0.15) $ 0.03 =========== =========== =========== =========== Dividends per share None None None None Weighted average shares outstanding Basic 2,298,631 2,190,006 2,290,381 2,189,074 Diluted 2,298,631 2,302,015 2,290,381 2,301,083 See accompanying notes to condensed financial statements - 2 -
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) ----------- Six Months Ended Sept. 30, Sept. 30, 2006 2005 ----------- ----------- Cash flows from operating activities: Net income (loss) $ (354,132) $ 65,264 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes (235,599) 57,356 Depreciation 131,105 136,829 Amortization of intangibles -- 43,098 Non-cash stock-based compensation -- 43,230 Changes in operating assets or liabilities: (Increase) decrease in accounts receivable, net (14,932) 232,424 (Increase) decrease in inventories, net (11,973) 514,807 Decrease (increase) in prepaid expenses and other current assets 50,816 (28,808) Increase in other assets (8,549) (5,997) Decrease in accounts payable (5,550) (198,363) Decrease in deferred revenues (8,725) (19,875) Decrease increase in accrued payroll, vacation pay, and payroll taxes (37,522) (24,889) (Decrease) increase in accrued expenses (292,183) 47,594 ----------- ----------- Net cash (used in) provided by operating activities (787,244) 862,670 ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (51,941) (112,685) ----------- ----------- Net cash used in investing activities (51,941) (112,685) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 37,050 14,220 Payment of capitalized lease obligations -- (2,323) ----------- ----------- Net cash provided by financing activities 37,050 11,897 ----------- ----------- Net increase (decrease) in cash and cash equivalents (802,135) 761,882 Cash and cash equivalents at beginning of period 1,934,541 826,959 ----------- ----------- Cash and cash equivalents at end of period $ 1,132,406 $ 1,588,841 =========== =========== Supplemental information Interest paid $ -- $ 4,500 =========== =========== 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, 2006, the results of operations for the three and six months ended September 30, 2006 and September 30, 2005, and cash flows for the six months ended September 30, 2006 and September 30, 2005. 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, 2006 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, 2006. Note 2 Accounts Receivable, net - ------ ------------------------ Accounts receivable, net, consist of: September 30, March 31, 2006 2006 ---------- ---------- Commercial $ 414,654 $ 548,083 Government 689,919 542,489 Allowance for doubtful accounts (40,063) (40,994) ---------- ---------- Total $1,064,510 $1,049,578 ========== ========== Note 3 Inventories, net - ------ ---------------- Inventories, net, consist of: September 30, March 31, 2006 2006 ---------- ---------- Purchased parts $1,229,576 $1,409,502 Work-in-process 987,585 723,782 Finished goods 131,124 212,100 Less: Reserve for obsolescence (234,032) (243,104) ---------- ---------- Total $2,114,253 $2,102,280 ========== ========== - 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, 2006 since the effect would be antidilutive. Three Months Ended Three Months Ended ------------------ ------------------ September 30, 2006 September 30, 2005 ------------------ ------------------ Basic net income (loss) per share computation: Net income (loss) for common stockholders $ (82,978) $ 36,116 Weighted-average common shares outstanding 2,298,631 2,190,006 Basic net income (loss) per share for common stockholders $ (0.04) $ 0.02 Diluted net income (loss) per share computation Net income (loss) for common stockholders $ (82,978) $ 36,116 Weighted-average common shares outstanding 2,298,631 2,190,006 Incremental shares attributable to the assumed exercise of outstanding stock options - 112,009 Total adjusted weighted-average shares 2,298,631 2,302,015 Diluted net income (loss) per share for common stockholders $ (0.04) $ 0.02 Six Months Ended Six Months Ended ---------------- ---------------- September 30, 2006 September 30, 2005 ------------------ ------------------ Basic net income (loss) per share computation: Net income (loss) for common stockholders $ (354,132) $ 65,264 Weighted-average common shares outstanding 2,290,381 2,189,074 Basic net income (loss) per share for common stockholders $ (0.15) $ 0.03 Diluted net income (loss) per share computation Net income (loss) for common stockholders $ (354,132) $ 65,264 Weighted-average common shares outstanding 2,290,381 2,189,074 Incremental shares attributable to the assumed exercise of outstanding stock options - 112,009 Total adjusted weighted-average shares 2,290,381 2,301,083 Diluted net income (loss) per share for common stockholders $ (0.15) $ 0.03 - 5 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 5 Stock Options - ------ ------------- Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified prospective method. SFAS 123R requires the measurement of stock-based compensation based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of SFAS 123R apply to all awards granted after the date of adoption. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years. The impact to the Company for the six months ended September 30, 2006 was not material. Prior to the adoption of SFAS 123R, the Company accounted 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 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 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 for 2007 and 2006. Compensation costs based on the fair market value at the grant date for its 364,850 outstanding stock options under SFAS No. 123 are set forth below: Three Months Ended Three Months Ended ------------------ ------------------ September 30, 2006 September 30, 2005 ------------------ ------------------ Net income (loss) - as reported $ (82,978) $ 36,116 Add: Stock-based compensation expense included in reported net income, net of taxes - 10,321 Less fair value of stock options, net of taxes (17,446) (27,826) -------- -------- Net income (loss)- pro forma (100,424) 18,611 ======== ======== Basic earnings (loss) per share - as reported (0.04) 0.02 Basic earnings (loss) per share - pro forma (0.04) 0.01 Diluted earnings (loss) per share - as reported (0.04) 0.02 Diluted earnings (loss) per share - pro forma (0.04) 0.01 Six Months Ended Six Months Ended ---------------- ---------------- September 30, 2006 September 30, 2005 ------------------ ------------------ Net income (loss) - as reported $ (354,132) $ 65,264 Add: Stock-based compensation expense included in reported net income, net of taxes - 25,960 Less fair value of stock options, net of taxes (34,892) (60,969) -------- -------- Net income (loss)- pro forma (389,024) 30,255 ======== ======== Basic earnings (loss) per share - as reported (0.15) 0.03 Basic earnings (loss) per share - pro forma (0.17) 0.01 Diluted earnings (loss) per share - as reported (0.15) 0.03 Diluted earnings (loss) per share - pro forma (0.17) 0.01 - 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. 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 ------------------ -------- -------- -------- ------ --------- September 30, 2006 Gov't Comm'l. Total Systems Items Total ------------------ ----- ------- ----- ------- ----- ----- Sales $1,242,366 $ 601,490 $1,843,856 $ 283,493 $2,127,349 Cost of sales 496,349 348,761 845,110 211,079 1,056,189 ---------- ---------- ---------- ---------- ---------- Gross margin 746,017 252,729 998,746 72,414 1,071,160 ---------- ---------- ---------- ---------- ---------- Engineering, research, & dev. 523,854 46,065 569,919 Selling, general, and admin. 317,398 33,767 $ 298,801 649,966 Amortization of intangibles - - Interest,, net (10,540) - - (10,540) ---------- ---------- ---------- ---------- Total expenses 830,712 79,832 298,801 1,209,345 ---------- ---------- ---------- ---------- Income (loss) before income $ 168,034 $ (7,418) $ (298,801) $ (138,185) taxes ========== ========== ========== ========== 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 ========== ========== ========== ========== - 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, 2006 Gov't Comm'l. Total Systems Items Total ------------------ ----- ------- ----- ------- ----- ----- Sales $2,245,916 $1,241,558 $3,487,474 $ 404,926 $3,892,400 Cost of sales 952,936 760,416 1,713,352 302,310 2,015,662 ---------- ---------- ---------- ---------- ---------- Gross margin 1,292,980 481,142 1,774,122 102,616 1,876,738 ---------- ---------- ---------- ---------- ---------- Engineering, research, & dev. 1,115,951 99,149 1,215,100 Selling, general, and admin. 615,312 86,052 $ 570,725 1,272,089 Amortization of intangibles - - Interest (income) expense, net (20,720) - - (20,720) ---------- ---------- ---------- ---------- Total expenses 1,710,543 185,201 570,725 2,466,469 ---------- ---------- ---------- ---------- Income (loss) before income taxes $ 63,579 $ (82,585) $ (570,725) $ (589,731) ========== ========== ========== ========== 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 $ 982,877 $ (69,697) $ (790,305) $ 122,875 ========== ========== ========== ========== - 8 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 7 New Accounting Pronouncements - ------ ----------------------------- In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140". SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets". SFAS No. 155 will become effective for the Company's fiscal year after September 15, 2006. The impact of SFAS No. 155 will depend upon the nature and extent of any new derivative instruments entered into after the effective date. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB No. 140", with respect to the accounting for separately recognized servicing assets and servicing liabilities. The impact of SFAS No. 156 will depend upon the nature and extent of any new derivative instruments entered into after the effective date. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 establishes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact the adoption of this interpretation will have on its future consolidated financial statements. In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a material assessment. The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006. This statement does not currently apply to the Company since the Company has had no misstatements. Also in September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value Measurements." This SFAS defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies to accounting pronouncements that require or permit fair value measurements, except for share-based payments transactions under SFAS No. 123. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. As SFAS No. 157 does not require any new fair value measurements or measurements of previously computed fair values, the Company does not believe adoption of this Statement will have a material effect on its financial statements. - 9 - 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. Shipping and handling costs are not material. Payments received prior to the delivery of units or services performed are recorded as deferred revenues on the accompanying balance sheets. Since 2001, the Company had a 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 the 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. - 10 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Critical Accounting Policies (continued) - ---------------------------------------- Beginning in fiscal year 2002, the Company 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 all 1,300 units (approximately $18,200,000 in revenues) through the fiscal year ended March 31, 2006, 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. The Company continued to ship the units in accordance with the original contract, and was paid. 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. In the case of these enhancements, 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. As of September 30, 2006, 879 of the total 1,159 units requiring upgrade have been completed. 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. While reserves have historically been within expectation, 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. 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. - 11 - 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 - -------- As previously reported, the Company is in a transition phase between the conclusion of deliveries under its previous AN/APM-480 multi year contract with the U.S. Navy and commencement of deliveries under its new, multi year contract to deliver AN/US-708 units. As a result of this interval in deliveries and sales, as well as weakness in the commercial aviation industry and lower sales in the marine systems division, the revenues were down significantly in the three and six-month periods ended September 30, 2006. Although research and development expenditures remain high, in order to support the two new large contract awards, discussed below, the Company adopted a Profit Improvement Plan in March of this year, which resulted in substantial operating expense reductions for the six months ended September 30, 2006 as compared to the previous fiscal year. The Company's gross profit has not improved because of the lower volume of sales and competitive pressures. As a consequence of the temporary significant decline in revenues exceeding the reduction in operating costs, operating profits and cash have declined. However, the Company has working capital in excess of $4 million, cash in excess of $1 million, and an unused credit line of $1.75 million, and believes that it has adequate liquidity, resources and backlog to fund operating plans during this interval, and until deliveries of its new units commence in calendar 2008. In March 2005, the Company was awarded a $17.3 million 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, since designated the AN/USM-708. The AN/USM-708 - 12 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Overview (continued) - -------------------- CRAFT combines advanced navigation, communication, Mode 5 IFF ("Identification, Friend, or Foe"), and sonobuoy test capabilities in a portable test set, which will utilize a flexible and expandable digital-signal- processing-based architecture. This unit is the only Mode 5 IFF ("Identification, Friend, or Foe") flight line tester now under government contract. The engineering design is being completed, and the fabrication of 15 prototype units will be completed shortly. These units will undergo design validation testing beginning in spring 2007, with full rate production to begin in spring 2008. This contract currently has production options totaling 750 units, which if exercised, would generate approximately $14 million to revenues over a several year period. The contract for the AN/USM-708 is a 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. The Company believes, given the unique nature of the design, this unit could generate additional sales to other military customers. The AN/USM-708 contract includes optional requirements for testing encrypted communications, which, if exercised, could represent a major expansion in the Company's core business. In July 2006, Tel was awarded a second major US Navy contract for an Intermediate Level TACAN Test Set (ITATS). This contract has options for approximately 150 units with a total value of over $12 million; the initial work authorization was $4.4 million. Tel will be working with two designated sub-contractors and, as a result, this program will not entail the same level of Tel engineering effort as the AN/USM-708. This award has been challenged to the General Accountability Office by an unsuccessful bidder for this project and, consequently, our contract is currently on hold while the Navy responds to the GAO. While the Company remains optimistic as to the outcome of this protest, it will at least, delay deliveries until calendar year 2008. Given the unique nature of the design, this unit could also generate significant sales to other military customers, both domestically and overseas. Commercial and military orders continue to be below expectations. The timing of government orders, increased competition, and the continued financial difficulties within the commercial airline industry have contributed to the decline in business. Currently, the backlog approximates $4,3 million, excluding ITATS. Research and development expenditures are expected to remain high through the balance of fiscal year 2007. - 13 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Sales - ----- Total sales decreased $967,093 (31.3%) to $2,127,349 and $2,353,020 (37.7%) to $3,892,400, respectively, for the three and six months ended September 30, 2006 as compared to the same periods in the prior fiscal year. Sales of avionics products decreased $905,869 (32.9%) to $1,843,856 and $2,197,358 (38.7%) to $3,487,474 for the three and six months ended September 30, 2006, respectively, as compared to the same periods in the prior year. Avionics commercial sales decreased from prior year by $315,862 (34.4%) to $601,490 and $237,866 (16.1%) to $1,241,558, respectively, for the same periods. This decrease is mostly attributed to a decline in sales of the TR-220 line of Multi-Function Test sets. The weak financial condition of the commercial airline industry continues to limit significant growth in this segment. Avionics government sales decreased $590,007 (32.2%) to $1,242,366 and $1,959,492 (46.6%) to $2,245,916, respectively, for the three and six months ended September 30, 2006 as compared to the same periods in the prior fiscal year. In the prior fiscal year, the Company had contracts for shipment of the T-36M and the T-47N with the U.S. Army and shipment of the T-47N to Royal Australian Air Force, through our distributor, which accounted for the higher sales in fiscal 2006. The decrease was partially offset by revenues associated with the test and documentation on the CRAFT program. Marine systems sales decreased $61,224 (17.8%) to $283,493 and $155,662 (27.8%) to $404,926, respectively, for the same periods, as a result of lower sales of specialty systems to the dredging industry. Gross Margin - ------------ Gross margin decreased $433,659 (28.8%) to $1,071,160 and $1,234,764 (39.7%) to $1,876,738 for the three and six months ended September 30, 2006, respectively, as compared to the same period in the prior fiscal year. This decrease in gross margin is primarily attributed to the lower sales volume. Operating Expenses - ------------------ Selling, general and administrative expenses decreased $124,887 (16.1%) to $649,966 for the three months ended September 30, 2006 as compared to the three months ended September 30, 2005, resulting primarily from lower commission, and professional and consulting expenses in the avionics division, and a decrease in marketing and sales expenses for the marine systems division. Selling, general and administrative expenses decreased $400,759 (24%) to $1,272,089 for the six months ended September 30, 2006 as compared to the same period in the prior fiscal year, primarily as a result of lower administrative salaries, commission, travel, and professional and consulting expenses in the avionics division, and a decrease in marketing and sales expenses for the marine systems division. - 14 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Operating Expenses (continued) - ------------------------------ Engineering, research and development expenses decreased $73,659 (11.4%) to $569,919 and $57,000 (4.5%) to $1,215,100 for the three and six months ended September 30, 2006, respectively, as compared to the same periods in the prior fiscal year. Research and development efforts were mostly related to the CRAFT program. The decrease is mostly attributed to lower outside contract and purchased material costs. Income Taxes - ------------ An income tax benefit in the amount of $235,599 was recorded for the six months ended September 30, 2006 as a result of the loss before taxes as compared to a provision for income taxes in the amount of $57,611 for the six months ended September 30, 2005. These amounts represent the effective federal and state tax rate of approximately 40% on the Company's net income (loss) before taxes. Liquidity and Capital Resources - ------------------------------- At September 30, 2006, the Company had positive working capital of $4,055,902 as compared to $4,302,369 at March 31, 2006. For the six months ended September 30, 2006, the Company used $787,244 of cash for operations as compared to generating $862,670 in cash from operating activities for the six months ended September 30, 2005. The increase in cash used in operations is primarily attributed to the Company's loss for the year. In addition, for the six months ended September 30, 2006, accounts receivable and inventories increased by $26,905 as compared to declining $747,231 for the six months ended September 30, 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, 2006, 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 and expires September 30, 2006. The Company is 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 capital to fund its operating plans for at least the next twelve months. Currently, the Company has no material capital requirements. There was no significant impact on the Company's operations as a result of inflation for the six months ended September 30, 2006. 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, 2006. - 15 - Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------- ---------------------------------------------------------- The Company, at this time, is generally not exposed to material 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 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, 2006 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, 2006 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 15d-14 under the Securities Exchange Act. 31.2 Certification by Principal Accounting Officer pursuant to Rule 15d-14 under the Securities Exchange Act. 32.1 Certification by CEO and Principal Accounting Officer 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 13, 2006 By: /s/ Harold K. Fletcher --------------------------------- Harold K. Fletcher CEO Date: November 13, 2006 By: /s/ Joseph P. Macaluso --------------------------------- Joseph P. Macaluso Principal Accounting Officer - 16 - EX-31.1 2 telinstrexhib311-093006.txt CERTIFICATION OF CEO PER SECTION 302 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; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and c) Disclosed in this 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 13, 2006 /s/ Harold K. Fletcher ------------------------------------ Harold K. Fletcher Chairman and President EX-31.2 3 telinstrexhib312-093006.txt CERTIFICATION OF CFO PER SECTION 302 EXHIBIT 31.2 Tel-Instrument Electronics Corp ------------------------------- Principal Accounting Officer Certification ------------------------------------------ I, Joseph P. Macaluso, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tel-Instrument Electronics Corp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such 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; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and c) Disclosed in this 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 13, 2006 /s/ Joseph P. Macaluso ------------------------------------ Joseph P. Macaluso Principal Accounting Officer EX-32.1 4 telinstrexhib321-093006.txt CERTIFICATION OF CEO & CFO PER SECTION 906 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, 2006, 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 CEO /s/ Joseph P. Macaluso --------------------------------- Joseph P. Macaluso Principal Accounting Officer November 13, 2006 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-----