10-Q 1 telinstrument10q123107.txt PERIOD ENDED 12-31-07 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 December 31, 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.7 Yes X No ----- ----- 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: 2,401,031 shares of Common stock, $.10 par value as of February 4, 2008. TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- TABLE OF CONTENTS ----------------- PAGE Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Balance Sheets December 31, 2007 and March 31, 2007 (audited) 1 Condensed Consolidated Statements of Operations - Three and Nine Months Ended December 31, 2007 and 2006 2 Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2007 and 2006 3 Notes to Condensed Consolidated Financial Statements 4-9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Item 4. Controls and Procedures 16-17 Part II Other Information Item 1. Legal Proceedings 17 Item 1A. Risk Factors 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits 18 Signatures 18 Certifications 19-21
Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS December 31, 2007 March 31, 2007 ----------------- -------------- (Unaudited) Current assets: Cash and cash equivalents $ 699,097 $ 655,836 Accounts receivable, net 2,405,060 982,214 Inventories, net 2,081,607 2,460,642 Taxes receivable 28,776 28,776 Prepaid expenses and other 77,330 98,053 Deferred income tax benefit 494,375 395,756 ----------- ----------- Total current assets 5,786,245 4,621,277 Property, plant, and equipment, net 511,465 625,247 Other assets 83,748 81,318 Deferred income tax benefit 800,000 800,000 ----------- ----------- Total assets $ 7,181,458 $ 6,127,842 =========== =========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Convertible note payable - related party $ 50,000 $ 50,000 Line of credit 350,000 -- Accounts payable 817,659 372,106 Deferred revenues 95,136 115,409 Accrued payroll, vacation pay, and payroll taxes 246,432 353,727 Accrued expenses 963,220 608,692 ----------- ----------- Total current liabilities 2,522,447 1,499,934 Convertible note payable - related party - non-current portion 50,000 50,000 Deferred revenues 38,755 23,656 ----------- ----------- Total liabilities 2,611,202 1,573,590 ----------- ----------- Commitments Stockholders' equity: Common stock, par value $.10 per share; 2,401,031 and 2,341,861 issued and outstanding as of December 31, 2007, and March 31, 2007, respectively 240,103 234,186 Additional paid-in capital 4,532,686 4,380,149 Accumulated deficit (202,533) (60,083) ----------- ----------- Total stockholders' equity 4,570,256 4,554,252 ----------- ----------- Total liabilities and stockholders' equity $ 7,181,458 $ 6,127,842 =========== =========== See accompanying notes to condensed consolidated financial statements. 1
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (Unaudited) Three Months Ended Nine Months Ended Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 ------------- ------------- ------------- ------------- Net sales $ 3,244,939 $ 2,269,148 $ 9,294,238 $ 6,161,548 Cost of sales 1,892,682 1,005,243 5,432,977 3,020,905 ----------- ----------- ----------- ----------- Gross margin 1,352,257 1,263,905 3,861,261 3,140,643 ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative 704,711 730,200 1,934,263 2,002,289 Engineering, research and development 700,418 606,889 2,147,142 1,821,989 ----------- ----------- ----------- ----------- Total operating expenses 1,405,129 1,337,089 4,081,405 3,824,278 ----------- ----------- ----------- ----------- Loss from operations (52,872) (73,184) (220,144) (683,635) Interest income (expense): Interest income 4,698 10,195 14,380 35,449 Interest expense (11,711) (2,269) (31,456) (6,803) ----------- ----------- ----------- ----------- Loss before taxes (59,885) (65,258) (237,220) (654,989) Income tax benefit (23,926) (25,805) (94,770) (261,404) ----------- ----------- ----------- ----------- Net loss $ (35,959) $ (39,453) $ (142,450) $ (393,585) =========== =========== =========== =========== Basic and diluted loss per common share $ (0.02) $ (0.02) $ (0.06) $ (0.17) Weighted average shares outstanding Basic and diluted 2,387,681 2,307,969 2,364,571 2,296,466 See accompanying notes to condensed consolidated financial statements. 2
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) ----------- Nine Months Ended Nine Months Ended ----------------- ----------------- December 31, 2007 December 31,2006 ----------------- ---------------- Cash flows from operating activities Net loss $ (142,450) $ (393,585) Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes (98,619) (278,847) Depreciation 179,731 194,941 Non-cash stock-based compensation 27,654 -- Changes in assets and liabilities: (Increase) decrease in accounts receivable (1,422,846) 58,417 Decrease in inventories 379,035 271,340 Decrease in prepaid expenses and other 20,723 5,779 Increase in other assets (2,430) (13,182) Increase (decrease) in accounts payable 445,553 (19,128) Decrease in deferred revenues (5,174) (6,918) Decrease in accrued payroll, vacation pay, and payroll taxes (107,295) (75,380) Increase (decrease) in accrued expenses 354,528 (390,805) ----------- ----------- Net cash used in operating activities (371,590) (647,368) ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (65,949) (96,331) ----------- ----------- Net cash used in investing activities (65,949) (96,331) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 130,800 79,581 Proceeds from borrowings from line of credit 350,000 -- ----------- ----------- Net cash provided by financing activities 480,800 79,581 ----------- ----------- Net increase (decrease) in cash and cash equivalents 43,261 (664,118) Cash and cash equivalents at beginning of period 655,836 1,934,541 ----------- ----------- Cash and cash equivalents at end of period $ 699,097 $ 1,270,423 =========== =========== Supplemental Cash Flow Information: Interest paid $ 24,809 $ 3,375 =========== =========== Taxes paid $ 3,849 $ 14,170 =========== =========== See accompanying notes to condensed consolidated financial statements 3
TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- Note 1 Basis of Presentation ------ --------------------- In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position of Tel-Instrument Electronics Corp as of December 31, 2007, the results of operations for the three and nine months ended December 31, 2007 and December 31, 2006, and statements of cash flows for the nine months ended December 31, 2007 and December 31, 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 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 - AN/ARM-206) 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 ------ ------------------- Accounts receivable, net, consist of: December 31, 2007 March 31, 2007 ----------------- -------------- Commercial $ 342,346 $ 338,070 Government 962,535 678,688 Unbilled Government Receivables * 1,133,980 -- Allowance for Doubtful Accounts (33,801) (34,544) ------------ ------------ Total $ 2,405,060 $ 982,214 ============ ============ * Unbilled government receivables represents the sales accrued on a percentage-of-completion basis less amounts invoiced to the government. Note 4 Inventories ------ ----------- Inventories, net, consist of: December 31, 2007 March 31, 2007 ----------------- -------------- Purchased Parts $ 1,425,478 $ 1,414,558 Work-in-Process 1,012,105 1,171,998 Finished Goods 76,965 220,896 Less: Reserve for Obsolescence (a) (432,941) (346,810) ------------ ------------ Total $ 2,081,607 $ 2,460,642 ============ ============ (a) Reserve primarily relates to purchased parts 4
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 5 Loss Per Share ------ -------------- The Company's basic and diluted loss per common share is 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 common share for the periods ended December 31, 2007 and 2006 does not include common stock equivalents, as the effect would be antidilutive. Three Months Ended Three Months Ended ------------------ ------------------ December 31, 2007 December 31, 2006 ----------------- ----------------- Basic net loss per share computation: Net loss attributable to common stockholders $ (35,959) $ (39,453) Weighted-average common shares outstanding 2,387,681 2,307,969 Basic net loss per share attributable to common stockholders $ (0.02) $ (0.02) Diluted net loss per share computation Net loss attributable to common stockholders $ (35,959) $ (39,453) Weighted-average common shares outstanding 2,387,681 2,307,969 Incremental shares attributable to the assumed exercise of outstanding stock options -- -- Total adjusted weighted-average shares 2,387,681 2,307,969 Diluted net loss per share attributable to common stockholders $ (0.02) $ (0.02) Nine Months Ended Nine Months Ended ----------------- ----------------- December 31, 2007 December 31, 2006 ----------------- ----------------- Basic net loss per share computation: Net loss attributable to common stockholders $ (142,450) $ (393,585) Weighted-average common shares outstanding 2,364,571 2,296,466 Basic net loss per share attributable to common stockholders $ (0.06) $ (0.17) Diluted net loss per share computation Net loss attributable to common stockholders $ (142,450) $ (393,585) Weighted-average common shares outstanding 2,364,571 2,296,466 Incremental shares attributable to the assumed exercise of outstanding stock options -- -- Total adjusted weighted-average shares 2,364,571 2,296,466 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), loss before taxes includes $11,162 and $-0- for three months ended December 31, 2007 and 2006, respectively, and $27,654 and $-0- for the nine months ended December 31, 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 2.91% to 5.0%, volatility at 43.25% to 56.94%, and an expected life of 5 years for the nine months ended December 31, 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 nine months ended December 31, 2006. Based on an analysis of historical information, the Company has applied a forfeiture rate of 15%. 5
TEL-INSTRUMENT ELECTRONICS CORP ------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- 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 primarily consists of the design, manufacture, and sale of different products to hydrographic, oceanographic researchers, engineers, geophysicists and surveyors. The table below presents information about sales and gross margin. Costs of sales include certain allocation factors for indirect costs. Additionally, administrative expenses have been allocated between avionics and marine systems. Three Months Ended Avionics Avionics Avionics Marine Corporate ------------------ -------- -------- -------- ------ --------- December 31, 2007 Gov't Comm'l. Total Systems Items Total ----------------- ----- ------- ----- ------- ----- ----- Net sales $ 2,467,835 $ 620,500 $ 3,088,335 $ 156,604 $ 3,244,939 Cost of sales 1,398,171 377,935 1,776,106 116,576 1,892,682 ----------- ----------- ----------- ----------- ----------- Gross margin 1,069,664 242,565 1,312,229 40,028 1,352,257 ----------- ----------- ----------- ----------- ----------- Engineering, research, and development 644,959 55,459 700,418 Selling, general, and admin. 349,724 31,547 323,440 704,711 Interest expense, net 7,013 -- -- 7,013 ----------- ----------- ----------- ----------- Total expenses 1,001,696 87,006 323,440 1,412,142 ----------- ----------- ----------- ----------- Income (loss) before taxes $ 310,533 $ (46,978) $ (323,440) $ (59,885) =========== =========== =========== =========== Segment assets at 12/31/07 $ 3,277,641 $ 805,754 $ 4,083,995 $ 409,919 $ 2,688,144 $ 7,181,458 =========== =========== =========== =========== =========== =========== Three Months Ended Avionics Avionics Avionics Marine Corporate ------------------ -------- -------- -------- ------ --------- December 31, 2006 Gov't Comm'l. Total Systems Items Total ----------------- ----- ------- ----- ------- ----- ----- Net sales $ 1,405,585 $ 691,843 $ 2,097,428 $ 171,720 $ 2,269,148 Cost of sales 482,116 407,237 889,353 115,890 1,005,243 ----------- ----------- ----------- ----------- ----------- Gross margin 923,469 284,606 1,208,075 55,830 1,263,905 ----------- ----------- ----------- ----------- ----------- Engineering, research, and Development 557,493 49,396 606,889 Selling, general, and admin. 349,028 39,493 341,679 730,200 Interest income, net (7,926) -- -- (7,926) ----------- ----------- ----------- ----------- Total expenses 898,595 88,889 341,679 1,329,163 ----------- ----------- ----------- ----------- Income (loss) before taxes $ 309,480 $ (33,059) $ (341,679) $ (65,258) =========== ========== ========== =========== 6
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 7 Segment Information (continued) ------ ------------------------------- Nine Months Ended Avionics Avionics Avionics Marine Corporate ----------------- -------- -------- -------- ------ --------- December 31, 2007 Gov't Comm'l. Total Systems Items Total ----------------- ----- ------- ----- ------- ----- ----- Net sales $ 6,512,652 $ 2,376,113 $ 8,888,765 $ 405,473 $ 9,294,238 Cost of sales 3,789,365 1,365,660 5,155,025 277,952 5,432,977 ----------- ----------- ----------- ----------- ----------- Gross margin 2,723,287 1,010,453 3,733,740 127,521 3,861,261 ----------- ----------- ----------- ----------- ----------- Engineering, research, and Development 2,016,053 131,089 2,147,142 Selling, general, and admin. 956,754 108,192 869,317 1,934,263 Interest expense, net 17,076 -- -- 17,076 ----------- ----------- ----------- ----------- Total expenses 2,989,883 239,281 869,317 4,098,481 ----------- ----------- ----------- ----------- Income (loss) before taxes $ 743,857 $ (111,760) $ (869,317) $ (237,220) =========== =========== =========== =========== Nine Months Ended Avionics Avionics Avionics Marine Corporate ----------------- -------- -------- -------- ------ --------- December 31, 2006 Gov't Comm'l. Total Systems Items Total ----------------- ----- ------- ----- ------- ----- ----- Net sales $ 3,651,501 $ 1,933,401 $ 5,584,902 $ 576,646 $ 6,161,548 Cost of sales 1,435,052 1,167,653 2,602,705 418,200 3,020,905 ----------- ----------- ----------- ----------- ----------- Gross margin 2,216,449 765,748 2,982,197 158,446 3,140,643 ----------- ----------- ----------- ----------- ----------- Engineering, research, and Development 1,673,444 148,545 1,821,989 Selling, general, and admin. 964,340 125,545 912,404 2,002,289 Interest income, net (28,646) -- -- (28,646) ----------- ----------- ----------- ----------- Total expenses 2,609,138 274,090 912,404 3,795,632 ----------- ----------- ----------- ----------- Income (loss) before taxes $ 373,059 $ (115,644) $ (912,404) $ (654,989) =========== =========== =========== =========== 7
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 8 New Accounting Pronouncements ------ ----------------------------- 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 future financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- An Amendment of FASB Statements No. 87, 88, 106, and 132R." This standard requires an employer to: (a) recognize in its statement of financial position an asset for a plan's over funded status or a liability for a plan's underfunded status; (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. This Statement is not applicable to the Company at this time. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157"). The Company believes that the adoption of SFAS 159 will not have a material impact on the Company's financial position or results of operations. In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 "Accounting for Nonrefundable Payments for Goods and Services to be Used in Future Research and Development Activities" (EITF 07-04), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expenses as the related goods are delivered or the related services performed. The statement is effective for fiscal years beginning after December 15, 2007. This EITF is not applicable to the Company at this time. 8 TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 8 New Accounting Pronouncements (continued) ------ ----------------------------------------- In June 2007, the FASB ratified Issue No. 06-11 "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (ETIF 06-11), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those years. Since the Company declares no dividends, this EITF is not applicable to the Company at this time. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements within equity, but separate from the parent's equity. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 will be effective for the Trust beginning January 1, 2009. The Company has no noncontrolling interest in subsidiaries; therefore SFAS 160 is not applicable to the Company at this time. In December 2007, the FASB issued FASB 141(R), "Business Combinations" of which the objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual meeting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company will apply SFAS 141(R) on future business combinations. 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 and statements as to future matters contain a measure of uncertainty and accordingly, actual results could differ materially and adversely. Among the factors that could cause a difference are: changes in the general economy; changes in demand for the Company's products or in the cost and availability of its raw materials; the actions of its competitors; the success of our customers; technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials; transportation; environmental matters; and other unforeseen circumstances. A number of these factors are discussed in the Company's previous filings with the Securities and Exchange Commission. Critical Accounting Policies ---------------------------- In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in Note 2 of our Notes to Financial Statements included in our Form 10-K for the 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 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. 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 they are 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. 10 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 credits and payments from its customers and maintains provision for estimated credit losses based on its historical experience and any specific customer issues that have been identified. While such credit losses have historically been within our expectation and the provision established, the Company cannot guarantee that this 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 our expectations and the provisions established, future warranty/enhancement costs could be in excess of our warranty/enhancement reserves. A significant increase in these costs could adversely affect our operating results for the period and the periods these additional costs materialize. Warranty/enhancement reserves are adjusted from time to time when actual warranty/enhancement claim experience differs from estimates. Income taxes - deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when such differences are expected to reverse. These amounts are periodically evaluated. The deferred tax asset is reduced, if necessary, by a valuation allowance for any tax benefit which is not more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in the period that such tax rate changes are enacted. 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. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Overview -------- For the nine months ended December 31, 2007, total revenues increased approximately 51% to over $9 million, and the loss before taxes decreased from approximately $655,000 to $237,000, 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 18% increase in engineering, research and development expenditures, primarily associated with the AN/USM-708 Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline Tester ("CRAFT") program. Sales from the Company's traditional products increased substantially for the nine months ended December 31, 2007 over the same period in the prior year as a result of an increase in government spending for the Company's products and increased marketing efforts for these contracts. Major sales increases are as follows: 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 nine months of fiscal year 2008, revenues under this contract were approximately $2,039,000. However, the gross profit margin (9.7%) 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. Engineering expenditures should decline after CRAFT is completed, and gross margin on ITATS should also improve when the Company gets into production. Over the last few 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, and the Company expects that shipments under these programs will commence early in calendar year 2009. If the production options are exercised in full, these programs 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 Government Funded Equipment ("GFE") 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 this 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 Company has also responded to a solicitation to the Navy 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. 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- 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 this 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 continue to decline. 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 the avionics markets, management remains optimistic about the Company's prospects and improving results, primarily as a result of the two major programs discussed above, the increase in commercial sales, the increase in government sales as the result of the award of contracts for the Company's standard products, as well as the anticipated reduction in costs discussed above. 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. At December 31, 2007, the Company had positive working capital of $3,263,798, 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 December 31, 2007, remaining availability under this modified line is approximately $677,000. 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. (See Liquidity and capital Resources) The amounts received from the exercise of stock options partially offset the reduction in cash and stockholders' equity caused by the Company's net loss for the period. At December 31, 2007, the Company's revenue backlog was approximately $5.8 million as compared to approximately $9.5 million at December 31, 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 CRAFT and ITATS, are received and shipped within the year and, as such, backlog is not completely indicative of future sales activity. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- Results of Operations --------------------- Sales ----- Total net sales increased $975,791 (43%) to $3,244,939 and $3,132,690 (50.8%) to $9,294,238, respectively, for the three and nine months ended December 31, 2007 as compared to the same periods in the prior fiscal year. Sales from the Company's traditional products increased substantially for the nine months ended December 31, 2007 over the same period in the prior year as a result of an increase in government spending for the Company's products and increased marketing efforts for these contracts. Net sales of avionics products increased $990,907 (47.2%) to $3,088,335 and $3,303,863 (59.2%) to $8,888,765 for the three and nine months ended December 31, 2007, respectively, as compared to the same periods in the prior year. Marine systems sales decreased $15,116 (8.8%) to $156,604 and $171,173 (29.7%) to $405,473 for the three and nine months ended December 31, 2007, respectively, as compared to the same periods in the prior year. Avionics commercial sales decreased from prior year by $71,343 (10.3%) to $620,500 for the three months ended December 31, 2007 as compared to the same period in the prior year. This decrease is attributed to lower sales of the TR-220 offset partially an increase in sales related to product repairs and calibrations. Avionics commercial sales increased $442,712 (22.9%) to $2,376,113 for the nine months ended December 31, 2007 as compared to the nine months ended December 31, 2006. This increase is mostly attributed to an increase in sales of the TR-220 Multi-Function Test set, and the T-36C Nav/Comm, test set 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 $1,062,250 (75.6%) to $2,467,835 and $2,861,151 (78.4%) to $6,512,652, respectively, for the three and nine months ended December 31, 2007 as compared to the same periods in the prior fiscal year. The increase in avionics government sales for the quarter ended December 31, 2007 is largely attributable to revenues of approximately $650,000 from the ITATS contract, which is recognized on a percentage-of-completion basis and an increase in sales of the T-760, T-30CM, TR-100, and AN/APM-480 offset partially a decline in sales of the TR-401. For the nine months ended December 31, 2007, government revenues increased largely as a result of revenues of approximately $2,039,000 from the ITATS contract, which are recognized on a percentage-of-completion basis, and an increase in sales of the T-47N, T-30CM, T-760 and the AN/APM-480 offset partially by lower sales of the TR-401. Marine systems sales decreased $15,116 (8.8%) to $171,720 and $171,173 (29.7%) to $405,473, respectively, for the same periods, primarily as a result of lower sales of specialty systems to the dredging industry. Gross Margin ------------ Gross margin increased $88,352 (7%) to $1,352,257 and $720,618 (22.9%) to $3,861,261 for the three and nine months ended December 31, 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 December 31, 2007 was 41.7% as compared to 55.7% for the three months ended December 31, 2006. The gross margin percentage for the nine months ended December 31, 2007 was 41.5% as compared to 51% for the nine months ended December 31, 2006. The decrease in gross profit percentage is primarily attributed to the lower gross profit percentage on the current ITATS contract discussed above. During the third quarter of the prior fiscal year, the Company reversed it remaining liability of approximately $125,000 relating to its upgrade liability, which also favorably impacted the gross margin percentage in the prior fiscal year. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- Results of Operations (continued) --------------------------------- Operating Expenses ------------------ Selling, general and administrative expenses decreased $25,489 (3.5%) to $704,711 and $68,026 (3.4%) to $1,934,263 for the three months and nine months ended December 31, 2007, respectively, as compared to the three and nine months ended December 31, 2006. For the three months ended December 31, 2007 as compared to the three months ended December 31, 2006, selling, general, and administrative expenses decreased primarily as a result of lower recruitment and professional fees partially offset by higher outside commissions and salaries for avionics marketing and sales, attributed mostly to the addition of a new Director of Business Development. For the nine months ended December 31, 2007 as compared to the same period in the prior year, selling, general, and administrative expenses decreased primarily as a result of reclassifying related expenses to the CRAFT and ITATS programs, lower recruitment and professional fees partially offset by higher salaries for avionics marketing and sales, attributed mostly to the addition of a new Director of Business Development. Engineering, research and development expenses increased $93,529 (15.4%) to $700,418 and $325,153 (17.8%) to $2,147,142 for the three and nine months ended December 31, 2007, respectively, as compared to the same periods in the prior fiscal year. These increases are primarily attributed to development of the CRAFT program. Income Taxes ------------ An income tax benefit in the amount of $94,770 was recorded for the nine months ended December 31, 2007 as a result of the loss before taxes as compared to an income tax benefit for income taxes in the amount of $261,404 for the nine months ended December 31, 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 $35,959 and $142,450 for the three and nine months ended December 31, 2007 as compared to net losses of $39,453 and $393,585 for the three and nine months ended December 31, 2006. Liquidity and Capital Resources ------------------------------- At December 31, 2007, the Company had working capital of $3,263,798 as compared to $3,121,343 at March 31, 2007. For the nine months ended December 31, 2007, the Company used $371,590 of cash for operations as compared to $647,368 for the nine months ended December 31, 2006. This improvement in cash used for operations is primarily attributed to the substantial increase in accounts receivable offset partially by a lower loss for the period and a substantial increase in accounts payable and accrued expenses. Net cash used in investing activities decreased from $96,331 for the nine months ended December 31, 2006 to $65,949 for the nine months ended December 31, 2007 due to lower volume of purchases of equipment. Net cash provided by financing activities increased to $480,800 for the nine months ended December 31, 2007 as compared to $79,581 for the nine months ended December 31, 2006 due to the borrowing from the line of credit in the amount of $350,000, and an increase over last year in the cash proceeds from the exercise of stock options in the amount of $51,219. 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. 15 Liquidity and Capital Resources (continued) ------------------------------------------- At December 31, 2007 the Company had an outstanding balance of $350,000 on which it currently pays 7.75% 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 extended the credit agreement until September 30, 2008, and the new agreement includes a new borrowing base calculation tied to working capital. As of December 31, 2007, remaining availability under this modified line is approximately $677,000 based upon receivables and inventories at December 31, 2007. 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 nine months ended December 31, 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. 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 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 December 31, 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 December 31, 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 Tel's last fiscal quarter and which have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting. It should be noted that while the Company's management, including the Chief Executive Officer and the Chief Financial Officer, believe that the Company's disclosure controls and procedures provide a reasonable level of assurance, they do not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. 16 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 third quarter ended December 31, 2007. Item 4 Submission of Matters to a Vote of Security Holders ------ --------------------------------------------------- (a) The Annual Meeting of Shareholders was held on December 5, 2007 (the "Annual Meeting"). (b) Not applicable because (1) proxies were solicited pursuant to Regulation 14; (ii) there was no solicitation in opposition to management's nominees; and (iii) all of such nominees who were directors, previously reported to the Commission, were re-elected. (c) At the Annual Meeting, the Company's shareholders voted in favor of re-electing management's nominees for election as directors of the Company as follows: For Against --- ------- Harold K. Fletcher 1,990,463 196,144 George J. Leon 2,093,463 93,144 Robert J. Melnick 2,075,463 111,144 Jeff C. O'Hara 2,075,463 111,144 Robert A. Rice 2,086,791 99,816 Robert H. Walker 2,093,463 93,144 The shareholders also voted 2,093,647 shares in favor of ratifying the audit committee's appointment of BDO Seidman, LLP, as the Company's independent registered public accountants for the fiscal year ending March 31, 2008. Shareholders owning 92,960 shares voted against this proposal. (d) Not applicable 17 Part II Other Information (continued) ------------------------------------- Item 6. Exhibits ------- -------- a. 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: February 13, 2008 By: /s/ Harold K. Fletcher -------------------------------- Harold K. Fletcher Chairman and CEO Date: February 13, 2008 By: /s/ Joseph P. Macaluso -------------------------------- Joseph P. Macaluso Principal Accounting Officer 18