-----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, KwBsVgO9X6NBCi0wFDCb73GNi00YqhlwaGKGN/BS8LPUskygf2K3Op5wuW5lfud5 022dOdYbA9bbrwKGTDJCPA== 0001108890-07-000345.txt : 20071114 0001108890-07-000345.hdr.sgml : 20071114 20071114120423 ACCESSION NUMBER: 0001108890-07-000345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071114 DATE AS OF CHANGE: 20071114 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: 071242073 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 telinstrument10q093007.txt PERIOD ENDED 09-30-07 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, 2007 ___ 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. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes No X ----- ----- Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date: 2,379,831 shares of Common stock, $.10 par value as of November 7, 2007. 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, 2007 and March 31, 2007 (Audited) 1 Condensed Consolidated Statements of Operations - Three and Six Months Ended September 30, 2007 and 2006 2 Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2007 and 2006 3 Notes to Condensed Consolidated Financial Statements 4-8 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition 9-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Item 4. Controls and Procedures 16 Part II - Other Information Item 1. Legal Proceedings 16 Item 1A. Risk Factors 16 Item 2. Unregistered sales of Equity Securities and Use of Proceeds 16 Item 6. Exhibits 16 Signatures 17 Certifications i
Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS September 30, 2007 March 31, 2007 - ------ ------------------ -------------- (Unaudited) Current assets: Cash and cash equivalents $ 243,735 $ 655,836 Accounts receivable, net 2,620,575 982,214 Inventories, net 2,188,586 2,460,642 Taxes receivable 28,776 28,776 Prepaid expenses and other current assets 112,543 98,053 Deferred income taxes 469,370 395,756 ----------- ----------- Total current assets 5,663,585 4,621,277 Property, plant and equipment, net 545,217 625,247 Deferred income taxes - non-current 800,000 800,000 Other assets 84,632 81,318 ----------- ----------- Total assets $ 7,093,434 $ 6,127,842 =========== =========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Convertible note payable - related party - current portion $ 50,000 $ 50,000 Line of credit 350,000 -- Accounts payable 808,580 372,106 Deferred revenues 112,519 115,409 Accrued payroll, vacation pay, and payroll taxes 332,075 353,727 Accrued expenses 814,751 608,692 ----------- ----------- Total current liabilities 2,467,925 1,499,934 Deferred revenues 23,656 23,656 Convertible note payable - related party - long-term 50,000 50,000 ----------- ----------- Total liabilities 2,541,581 1,573,590 ----------- ----------- Commitments Stockholders' equity: Common stock, par value $.10 per share, 2,379,831 and 2,341,861 issued and outstanding as of September 30, 2007, and March 31, 2007, respectively 237,983 234,186 Additional paid-in capital 4,480,444 4,380,149 Accumulated deficit (166,574) (60,083) ----------- ----------- Total stockholders' equity 4,551,853 4,554,252 ----------- ----------- Total liabilities and stockholders' equity $ 7,093,434 $ 6,127,842 =========== =========== 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, 2007 Sept. 30, 2006 Sept. 30, 2007 Sept. 30, 2006 Net sales $ 2,968,247 $ 2,127,349 $ 6,049,299 $ 3,892,400 Cost of sales 1,709,460 1,056,189 3,540,295 2,015,662 ----------- ----------- ----------- ----------- Gross margin 1,258,787 1,071,160 2,509,004 1,876,738 Operating expenses Selling, general and administrative 648,445 649,966 1,229,552 1,272,089 Engineering, research and Development 644,561 569,919 1,446,724 1,215,100 ----------- ----------- ----------- ----------- Total operating expenses 1,293,006 1,219,885 2,676,276 2,487,189 ----------- ----------- ----------- ----------- Loss from operations (34,219) (148,725) (167,272) (610,451) Interest income (expense): Interest income 6,521 12,804 9,682 25,254 Interest expense (10,798) (2,264) (19,745) (4,534) ----------- ----------- ----------- ----------- Loss before taxes (38,496) (138,185) (177,335) (589,731) Income tax benefit (15,379) (55,207) (70,844) (235,599) ----------- ----------- ----------- ----------- Net loss $ (23,117) $ (82,978) $ (106,491) $ (354,132) Basic and diluted loss per common $ (0.01) $ (0.04) $ (0.05) $ (0.15) =========== =========== =========== =========== share Dividends per share None None None None Weighted average shares outstanding Basic and diluted 2,362,331 2,298,631 2,353,545 2,290,381 See accompanying notes to condensed financial statements - 2 -
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) ----------- Six Months Ended Sept. 30, 2007 Sept. 30, 2006 -------------- -------------- Cash flows from operating activities: Net loss $ (106,491) $ (354,132) Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes (73,614) (235,599) Non-cash stock-based compensation 16,492 -- Depreciation 119,616 131,105 Changes in operating assets or liabilities: (Increase) in accounts receivable (1,638,361) (14,932) Decrease (increase) in inventories, net 272,056 (11,973) (increase)decrease in prepaid expenses and other current assets (14,490) 50,816 Increase in other assets (3,314) (8,549) Increase (decrease) in accounts payable 436,474 (5,550) Decrease in deferred revenues (2,890) (8,725) Decrease increase in accrued payroll, vacation pay, and payroll taxes (21,652) (37,522) (Decrease) increase in accrued expenses 206,059 (292,183) ----------- ----------- Net cash used in operating activities (810,115) (787,244) ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (39,586) (51,941) ----------- ----------- Net cash used in investing activities (39,586) (51,941) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 87,600 37,050 Proceeds from borrowings from line of credit 350,000 -- ----------- ----------- Net cash provided by financing activities 437,600 37,050 ----------- ----------- Net decrease in cash and cash equivalents (412,101) (802,135) Cash and cash equivalents at beginning of period 655,836 1,934,541 ----------- ----------- Cash and cash equivalents at end of period $ 243,735 $ 1,132,406 =========== =========== Supplemental information Interest paid $ 15,542 $ -- =========== Taxes paid $ -- $ -- =========== 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, 2007, the results of operations for the three and six months ended September 30, 2007 and September 30, 2006, and cash flows for the six months ended September 30, 2007 and September 30, 2006. 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, 2007 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 consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2007. Note 2 Revenue Recognition - Percentage-of-Completion - ITATS - ------ ------------------------------------------------------ Due to the unique nature of the ITATS (Intermediate Level TACAN Test Set) program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis. All expenses related to this contract are charged to cost of sales, and revenues are derived based on the incurred costs. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. See Critical Accounting Policies - Revenue Recognition. Note 3 Accounts Receivable, net - ------ ------------------------ Accounts receivable, net, consist of: September 30, 2007 March 31, 2007 Commercial $ 483,750 $ 338,070 Government 1,403,661 678,688 Unbilled government receivables * 766,965 -- Allowance for doubtful accounts (33,801) (34,544) ----------- ----------- Total $ 2,620,575 $ 982,214 =========== =========== * Unbilled government receivables represents the sales accrued on a percentage-of-completion basis less amounts invoiced to the government. - 4 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 4 Inventories, net Inventories, net, consist of: September 30, 2007 March 31, 2007 ------------------ -------------- Purchased parts $ 1,383,116 $ 1,414,558 Work-in-process 973,733 1,171,998 Finished goods 199,678 220,896 Less: Reserve for obsolescence (a) (367,941) (346,810) ----------- ------------ Total $ 2,188,586 $ 2,460,642 =========== ============ (a) Reserve primarily relates to purchased parts Note 5 Loss Per Share - ------ -------------- Both the Company's basic loss per common share and its diluted loss per common share are based on the net loss for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted loss per share for the periods ended September 30, 2007 and 2006 does not include common stock equivalents, as these would be antidilutive. Three Months Ended Three Months Ended ------------------ ------------------ September 30, 2007 September 30, 2006 ------------------ ------------------ Basic net loss per share computation: Net loss attributable to common stockholders $ (23,117) $ (82,978) Weighted-average common shares outstanding 2,362,331 2,298,631 Basic net loss per share attributable to common stockholders $ (0.01) $ (0.04) Diluted net loss per share computation Net loss attributable to common stockholders $ (23,117) $ (82,978) Weighted-average common shares outstanding 2,362,331 2,298,631 Incremental shares attributable to the assumed exercise of outstanding stock options -- -- Total adjusted weighted-average shares 2,362,331 2,298,631 Diluted net loss per share attributable to common stockholders $ (0.01) $ (0.04) Six Months Ended Six Months Ended ---------------- ---------------- September 30, 2007 September 30, 2006 ------------------ ------------------ Basic net loss per share computation: Net loss attributable to common stockholders $ (106,491) $ (354,132) Weighted-average common shares outstanding 2,353,545 2,290,381 Basic net loss per share attributable to common stockholders $ (0.05) $ (0.15) Diluted net loss per share computation Net loss attributable to common stockholders $ (106,491) $ (354,132) Weighted-average common shares outstanding 2,353,545 2,290,381 Incremental shares attributable to the assumed exercise of outstanding stock options -- -- Total adjusted weighted-average shares 2,353,545 2,290,381 Diluted net loss per share attributable to common stockholders $ (0.05) $ (0.15) - 5 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 6 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. As a result of adopting SFAS 123(R), the loss before taxes was charged $8,991 and $-0- for three months ended September 30, 2007 and 2006, respectively, and $16,492 and $-0- for the six months ended September 30, 2007, and 2006, respectively. 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, which required supplemental disclosure, but did not impact the financial statements. The Company estimates the fair value of each option granted using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate 3.99% to 5.0%, volatility at 45.53% to 56.94%, and an expected life of 5 years for the six months ended September 30, 2007; expected dividend yield of 0.0%, risk-free interest rate of 5%, volatility at 50% and an expected life of 5 years for the six months ended September 30, 2006. The Company estimates forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 15%. - 6 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 7 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, 2007 Gov't Comm'l. Total Systems Items Total ------------------ ----- ------- ----- ------- ----- ----- Net sales $ 1,984,511 $ 860,181 $ 2,844,692 $ 123,555 $ 2,968,247 Cost of sales 1,126,868 497,115 1,623,983 85,477 1,709,460 --------- ------- --------- ------ --------- Gross margin 857,643 363,066 1,220,709 38,078 1,258,787 ------- ------- --------- ------ --------- Engineering, research, & dev. 607,721 36,840 644,561 Selling, general, and admin. 318,521 42,939 $ 286,985 648,445 Interest expense, net 4,277 -- -- 4,277 ----- ------ ----------- ----- Total expenses 930,519 79,779 286,985 1,297,283 ------- ------ ------- --------- Income (loss) before taxes $ 290,190 $ (41,701) $ (286,985) $ (38,496) =========== =========== =========== =========== Segment assets $ 2,588,035 $ 530,587 $ 3,118,622 $ 515,592 $ 3,459,220 $ 7,093,434 =========== =========== =========== =========== =========== =========== Three Months Ended Avionics Avionics Avionics Marine Corporate ------------------ -------- -------- -------- ------ --------- September 30, 2006 Gov't Comm'l. Total Systems Items Total ------------------ ----- ------- ----- ------- ----- ----- Net 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 Interest income, net (10,540) -- -- (10,540) ------- ------ ------- --------- Total expenses 830,712 79,832 298,801 1,209,345 ------- ------ ------- --------- Income (loss) before taxes $ 168,034 $ (7,418) $ (298,801) $ (138,185) =========== =========== =========== =========== - 7 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 7 Segment Information (continued) - ------ ------------------------------- Six Months Ended Avionics Avionics Avionics Marine Corporate ---------------- -------- -------- -------- ------ --------- September 30, 2007 Gov't Comm'l. Total Systems Items Total ------------------ ----- ------- ----- ------- ----- ----- Net sales $ 4,044,818 $ 1,755,613 $ 5,800,431 $ 248,868 $ 6,049,299 Cost of sales 2,391,194 987,726 3,378,920 161,375 3,540,295 --------- ------- --------- ------- --------- Gross margin 1,653,624 767,887 2,421,511 87,493 2,509,004 --------- ------- --------- ------ --------- Engineering, research, & dev. 1,371,095 75,629 1,446,724 Selling, general, and admin. 607,030 76,645 $ 545,877 1,229,552 Interest expense, net 10,063 -- -- 10,063 ------ ------- ------- --------- Total expenses 1,988,188 152,274 545,877 2,686,339 --------- ------- ------- --------- Income (loss) before taxes $ 433,323 $ (64,781) $ (545,877) $ (177,335) =========== =========== =========== =========== Six Months Ended Avionics Avionics Avionics Marine Corporate ---------------- -------- -------- -------- ------ --------- September 30, 2006 Gov't Comm'l. Total Systems Items Total ------------------ ----- ------- ----- ------- ----- ----- Net 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 Interest income, net (20,720) -- -- (20,720) -------- ------- ------- -------- Total expenses 1,710,543 185,201 570,725 2,466,469 --------- ------- ------- --------- Income (loss) before taxes $ 63,579 $ (82,585) $ (570,725) $ (589,731) =========== =========== =========== =========== Note 8 Income Taxes - ------ ------------ The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109, on April 1, 2007. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48. The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company's deferred tax asset in the accompanying September 30, 2007 and March 31, 2007 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. Note 9 Stock Options - ------ ------------- During the quarter ended September 30, 2007 stock options for 35,000 shares were exercised for total proceeds of $80,850. For the six months ended September 30, 2007 stock options for 38,000 shares were exercised for total proceeds of $87,600. For the six months ended September 30, 2007, options for 40,250 shares expired. - 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 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 for the fiscal year ended March 31, 2007. The Company's accounting policies that require a higher degree of judgment and complexity used in the preparation of financial statements include: Revenue recognition - revenues are recognized at the time of shipment to, or acceptance by customer provided title and risk of loss are transferred to the customer. Provisions, when appropriate, are made where the right to return exists. Revenues under short-term service contracts are recognized when the services are performed. Due to the unique nature of the ITATS program wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as it is earned, rather than at the time of shipment. All expenses related to this contract are charged to cost of sales. The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery. Shipping and handling costs charged to customers are not material. The revenues and related shipping and handling costs are included in selling, general and administrative expenses. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. Inventory reserves - inventory reserves or write-downs (primarily for purchased parts) 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. - 9 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE - ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Critical Accounting Policies (continued) - ---------------------------------------- Accounts receivable - the Company performs ongoing credit evaluations of its customers and adjusts credit limits based on customer payment and current credit worthiness, as determined by review of their current credit information. The Company continuously monitors credit and payments from its customers and maintains a 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 expectation and the provision established, the Company cannot guarantee that this will continue. 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 expectations and the provisions established, future warranty/enhancement costs could be in excess of the Company's warranty/enhancement reserves. A significant increase in these costs could adversely affect the Company's operating results for the period and the periods these additional costs materialize. Warranty/enhancement reserves are adjusted from time to time when actual warranty/enhancement claim experience differs from estimates. Income taxes - deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when such differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that such tax rate changes are enacted. General - ------- Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiary. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2007. The Company's avionics business is conducted in the Government and Commercial and General Aviation markets (see Note 7 of Notes to Financial Statements for segment financial information). The Company's subsidiary Innerspace Technology, Inc. ("ITI") sells products to the marine industry, and ITI's financial statements have been consolidated with the Company's financial statements. - 10 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE - ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations - --------------------- Overview - -------- For the six months ended September 30, 2007, total revenues increased approximately 55% to over $6 million, and the loss before taxes decreased from approximately $590,000 to $177,000, though the Company's gross margin percentage declined (see below). The increase in gross margin dollars, associated with the increase in revenues, was offset partially by an increase in engineering, research and development expenditures, primarily associated with the Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline Tester ("CRAFT") program. This increase in sales is primarily attributed to the following: o In fiscal year 2007, the Company was awarded the AN/ARM-206 Intermediate Level TACAN Test Set (ITATS) contract for $4.4 million. Since this contract has a long duration, revenues under this contract have been recognized on a percentage-of-completion basis. For the first six months of fiscal year 2008, revenues under this contract were approximately $1,389,000. However, the gross profit margin (9.6%) for this contract is significantly less than the Company's historical gross profit margin due to use of an engineering subcontractor, and the competitiveness of the bidding process. o The shipment of T-47N test sets to the Royal Australian Air Force (through the Company's distributor) for approximately $600,000. o The shipment of T-30CM test sets under a contract from the U.S. Navy for approximately $255,000. o Increase in shipments of the TR-220 Multi-Function test set for approximately $289,000. Over the last two calendar years, the Company has won competitive awards for two major contracts, CRAFT and ITATS, from the U.S. Navy. These contracts include multi-year production deliveries, commencing late in calendar year 2008 or early 2009, and have an aggregate revenue value of approximately $30 million. The products under these contracts represent cutting edge technology, and should provide Tel with a competitive advantage for years to come. Research and development expenditures will continue to remain high for the next several quarters to support the CRAFT program (AN/USM-708). Despite ongoing changes in the Mode 5 technology and limited hardware availability for design validation, Tel has successfully demonstrated Mode 5 testing capability to the U.S. Navy and is preparing to ship several IFF/Mode 5 prototype variants of the AN/USM-708 to other military services later this calendar year. The AN/USM-708 engineering hardware design has been largely completed and the fabrication of 15 pilot production units is now in process. The Company still has to finalize some non-IFF software and conduct systems integration testing. These units are currently scheduled to undergo design validation testing and U.S. Navy TECHEVAL next summer with production currently scheduled to begin late in the 2008 calendar year or early 2009. The Navy has options for up to 750 AN/USM-708 units which, if exercised, would add about $14 million to Tel's backlog and to projected revenues over a several year period. The Navy has also announced plans to possibly purchase up to 450 additional units on a sole source basis. Given the unique nature of the design, this unit could also generate significant sales to other military customers, both domestically and overseas. - 11 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE - ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Overview (continued) - -------------------- 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 is working with an engineering sub-contractor on this project and this program entails substantially less Tel engineering effort than the AN/USM-708. The development work remains on schedule with pilot production expected to take place next summer and production expected to commence following Navy TECHEVAL. Given the unique nature of the design, this unit could also generate significant sales to other military customers, both domestically and overseas. Sales of marine products in our subsidiary ITI declined in the second quarter and the first six months of fiscal year 2008 as compared to the same periods of the prior year. Although the Company reduced expenses pursuant to its profit improvement plan, current sales volume remains inadequate to cover existing expenses. ITI's sales have not grown as expected and the Company is closely monitoring its performance, and is evaluating its future. While the near-term competitive and economic situation remains difficult for both the avionics and marine system markets, management remains optimistic about the Company's prospects and improving results. Tel has significantly upgraded its management team and engineering staff over the last several years and the new digital technology incorporated into the AN/USM-708 and AN/ARM-206 units could have applications outside of Tel's traditional avionics business as well as increasing opportunities in regular markets. As a consequence of operating losses, stockholders' equity, and cash have declined. At September 30, 2007, the Company had positive working capital of $3,195,660, as compared to $3,121,343 at March 31, 2007, principally as a result of the increase in accounts receivable. The Company's credit agreement with Bank of America remains at $1,750,000, against which $350,000 has been drawn down. The bank has agreed to extend the credit agreement until September 30, 2008, and the new agreement includes a new borrowing base calculation tied to working capital. As of September 30, 2007, remaining availability under this modified line is approximately $700,000. Based upon its working capital, backlog, and credit agreement, management believes the Company has adequate funding for its operations for at least the next twelve months. At September 30, 2007, the Company's backlog was approximately $7.3 million as compared to approximately $8.7 million at September 30, 2006. These amounts do not include any production options for CRAFT or ITATS. Historically, commercial and government orders received by the Company, other than for larger programs like the AN/APM-480 or AN/USM-708, are received and shipped within the year and, as such, backlog may not necessarily be indicative of future sales activity. - 12 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE - ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Net Sales - --------- Total net sales increased $840,898 (39.5%) to $2,968,247 and $2,156,899 (55.4%) to $6,049,299, respectively, for the three and six months ended September 30, 2007 as compared to the same periods in the prior fiscal year. Net sales of avionics products increased $1,000,836 (54.3%) to $2,844,692 and $2,312,957 (66.3%) to 5,800,431 for the three and six months ended September 30, 2007, respectively, as compared to the same periods in the prior year. Marine systems sales decreased $159,938 (56.4%) to $123,555 and $156,058 (38.5%) to $248,868 for the three and six months ended September 30, 2007, respectively, as compared to the same periods in the prior year. Avionics commercial sales increased from prior year by $258,691 (43%) to $860,181 and $514,055 (41.4%) to $1,755,613, respectively, for the same periods. This increase is mostly attributed to an increase in sales of the TR-220 Multi-Function Test set, and the T-36C, as a result of efforts of the Company's domestic distributors, as well as an increase in repair and parts sales. The weak financial condition of the commercial airline industry continues. Avionics government sales increased $742,145 (59.7%) to $1,984,511 and $1,798,902 (80.1%) to $4,044,818, respectively, for the three and six months ended September 30, 2007 as compared to the same periods in the prior fiscal year. The increase in avionics government sales for the quarter ended September 30, 2007 is largely attributable to revenues of approximately $653,000 from the ITATS contract, which is recognized on a percentage-of-completion basis and the shipment of T-30CM under a contract with the U.S. Navy. For the six months ended September 30, 2007, government revenues increased largely as a result of revenues of approximately $1,389,000 from the ITATS contract, which are recognized on a percentage-of-completion basis, the shipment of T-30CM under a contract with the U.S. Navy the shipment of T-47NC test sets to the Royal Australian Air Force (through the Company's distributor) for approximately $600,000, partially offset by lower revenues associated with the test and documentation phase of the CRAFT program and other products. Gross Margin - ------------ Gross margin dollars increased $187,627 (17.5%) to $1,258,787 and $632,266 (33.7%) to $2,509,004 for the three and six months ended September 30, 2007, respectively, as compared to the same period in the prior fiscal year. The increase in gross margin is attributed to the increase in volume. The gross margin percentage for the three months ended September 30, 2007 was 42.4% as compared to 50.4% for the three months ended September 30, 2006. The gross margin percentage for the six months ended September 30, 2007 was 41.5% as compared to 48.2% for the six months ended September 30, 2006. The decrease in gross profit percentage is primarily attributed to the lower gross profit percentage on the ITATS contract. - 13 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE - ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) - --------------------------------- Operating Expenses - ------------------ Selling, general and administrative expenses decreased $1,521 (0.2%) to $648,445 and $42,537 (3.3%) to $1,229,552 for the three months and six months ended September 30, 2007, respectively, as compared to the three and six months ended September 30, 2006. For the quarter ended September 30, 2007 as compared to the same quarter last year the decrease in selling, general, and administrative expenses was not significant. For the six months ended September 30, 2007 as compared to the same six month period in the prior fiscal year, selling, general, and administrative expenses decreased primarily as a result of charging of related expenses to the CRAFT and ITATS programs ($51,000), lower expenses for avionics sales and marketing related to outside commissions, group insurance, freight and recruitment ($56,000), partially offset by higher salaries for avionics marketing and sales ($61,000), attributed mostly to the addition of a new Director of Business Development. Engineering, research and development expenses increased $74,642 (13.1%) to $644,561 and $231,624 (19.1%) to $1,446,724 for the three and six months ended September 30, 2007, respectively, as compared to the same periods in the prior fiscal year. These increases are primarily attributed to efforts related to the CRAFT program. Income Taxes - ------------ An income tax benefit in the amount of $70,844 was recorded for the six months ended September 30, 2007 as a result of the loss before taxes as compared to an income tax benefit for income taxes in the amount of $235,599 for the six months ended September 30, 2006. These amounts represent the effective federal and state tax rate of approximately 40% on the Company's net loss before taxes. Net Loss - -------- As a result of the above, the Company incurred net losses of $23,117 and $106,491 for the three and six months ended September 30, 2007 as compared to net losses of $82,978 and $354,132 for for the three and six months ended September 30, 2006. - 14 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE - ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Liquidity and Capital Resources - ------------------------------- At September 30, 2007 the Company had working capital of $3,195,660 as compared to $3,121,343 at March 31, 2007. For the six months ended September 30, 2007, the Company used $810,115 of cash for operations as compared to $787,244 for the six months ended September 30, 2006. This increase in cash used for operations is primarily attributed to the increase in accounts receivable, offset partially by an increase in accounts payable and accrued expenses, a reduced loss for the period, and a reduction in inventories. Net cash used in investing activities decreased from $51,941 for the six months ended September 30, 2006 to $39,586 for the six months ended September 30, 2007 due to lower volume of purchases of equipment. Net cash provided by financing activities increased to $437,600 for the six months ended September 30, 2007 as compared to $37,050 for the six months ended September 30, 2006 due to the borrowing from the line of credit in the amount of $350,000, and an increase in the cash proceeds from the exercise of stock options in the amount of $87,600. 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, and is payable monthly based upon the outstanding balance. The Company does not pay to maintain this open line. At September 30, 2007 the Company had an outstanding balance of $350,000 on which it currently pays 8.25% interest. The line of credit is collateralized by substantially all of the assets of the Company. The line of credit expired on September 30, 2007. The bank has agreed to extend the credit agreement until September 30, 2008, and the new agreement includes a new borrowing base calculation tied to working capital. As of September 30, 2007, remaining availability under this modified line is approximately $700,000, based upon receivables and inventories at September 30, 2007. As a consequence of operating losses, stockholders' equity, and cash have declined. However, the Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for the at least the next twelve months, and until deliveries of its new units commence. Currently, the Company has no material capital expenditure requirements. There was no significant impact on the Company's operations as a result of inflation for the six months ended September 30, 2007. 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, 2007. - 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 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, 2007 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, 2007 by the Chief Executive Officer and Principal Accounting Officer, required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15, which occurred during our last fiscal quarter and which have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. Part II. Other Information - --------------------------- Item 1. Legal Proceedings - ------- ----------------- None. Item 1A. Risk Factors - -------- ------------ Information related to our risk factors are disclosed under Item 1A to Part I of our Annual Report on Form 10-K for the year ended March 31, 2007. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - ------- ----------------------------------------------------------- There were no unregistered sales of equity securities and there were no repurchases of equity securities during the Company's six months ended September 30, 2007. 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. - 16 - 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, 2007 By: /s/ Harold K. Fletcher -------------------------------- Harold K. Fletcher CEO Date: November 13, 2007 By: /s/ Joseph P. Macaluso -------------------------------- Joseph P. Macaluso Principal Accounting Officer - 17 - EX-31.1 2 telinstrumentexhib311-093007.txt CERTIFICATION OF CEO PER SECTION 302 Tel-Instrument Electronics Corp ------------------------------- CEO Certification EXHIBIT 31.1 ----------------- ------------ I, Harold K. Fletcher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tel-Instrument Electronics Corp; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such control and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 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, 2007 /s/ Harold K. Fletcher ----------------------------------- Harold K. Fletcher CEO EX-31.2 3 telinstrumentexhib312-093007.txt CRETIFICATION OF PRINCIPAL ACCOUNTING OFFICER PER SECTION 302 Tel-Instrument Electronics Corp ------------------------------- Principal Accounting Officer Certification EXHIBIT 31.2 ------------------------------------------ ------------ 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, 2007 /s/ Joseph P. Macaluso ----------------------------------- Joseph P. Macaluso Principal Accounting Officer EX-32.1 4 telinstrumentexhib321-093007.txt CERTIFICATIONS OF CEO & PAO PER SECTION 906 Tel-Instrument Electronics Corp ------------------------------- EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tel-Instrument Electronics Corp (the "Company"), on Form 10-Q for the period ending 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. November 13, 2007 By: /s/ Harold K. Fletcher ----------------------------------- Harold K. Fletcher CEO /s/ Joseph P. Macaluso --------------------------------- Joseph P. Macaluso Principal Accounting Officer 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-----