10-Q 1 telinstrument10q123108.txt PERIOD ENDED 12-31-08 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, 2008 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 33-18978 TEL-INSTRUMENT ELECTRONICS CORP. ---------------------------------------------------- (Exact name of the Registrant as specified in Charter) New Jersey 22-1441806 ---------------------- ------------------------- (State of Incorporation) (I.R.S. Employer ID Number) 728 Garden Street, Carlstadt, New Jersey 07072 -------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone No. including Area Code: 201-933-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definitions of "Large Accelerated Filer", "Accelerated Filer" and "Smaller Reporting Company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date: 2,456,261 shares of Common stock, $.10 par value as of February 9, 2009. 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, 2008 and March 31, 2008 (Audited) 1 Condensed Consolidated Statements of Operations - Three and Nine Months Ended December 31, 2008 and 2007 2 Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2008 and 2007 3 Notes to Condensed Consolidated Financial Statements 4-11 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition 12-18 Item 4 (T). Controls and Procedures 19 Part II - Other Information Item 1. Legal Proceedings 19 Item 2. Unregistered sales of Equity Securities and Use of Proceeds 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits 20 Signatures 20 Certifications
Item 1 - Financial Statements TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS December 31, 2008 March 31, 2008 ------ ----------------- -------------- (Unaudited) Current assets: Cash and cash equivalents $ 220,037 $ 469,906 Accounts receivable, net 2,304,733 1,223,753 Unbilled government receivables 1,311,239 1,100,323 Inventories, net 2,533,327 2,075,542 Prepaid expenses and other current assets 58,588 141,446 Deferred income taxes 223,512 531,975 ----------- ----------- Total current assets 6,651,436 5,542,945 Property, plant and equipment, net 450,295 532,240 Deferred income taxes - non-current 900,221 900,221 Other assets 73,411 142,069 ----------- ----------- Total assets $ 8,075,363 $ 7,117,475 =========== =========== LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Convertible note payable - related party $ 50,000 $ 50,000 Line of credit 450,000 350,000 Accounts payable 919,885 928,367 Deferred revenues 46,204 55,014 Accrued payroll, vacation pay, and payroll taxes 309,195 348,683 Accrued expenses 1,486,886 1,129,370 ----------- ----------- Total current liabilities 3,262,170 2,861,434 Deferred revenues 46,973 43,818 ----------- ----------- Total liabilities 3,309,143 2,905,252 ----------- ----------- Commitments Stockholders' equity: Common stock, par value $.10 per share, 2,456,261 and 2,428,261 issued and outstanding as of December 30, 2008, and March 31, 2008, respectively 245,626 242,826 Additional paid-in capital 4,712,163 4,611,262 Accumulated deficit (191,569) (641,865) ----------- ----------- Total stockholders' equity 4,766,220 4,212,223 ----------- ----------- Total liabilities and stockholders' equity $ 8,075,363 $ 7,117,475 =========== =========== See accompany notes to condensed consolidated financial statements - 1 -
TEL-INSTRUMENT ELECTRONICS CORPORATION -------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (Unaudited) Three Months Ended Nine Months Ended ------------------ ----------------- December 31, December 31, December 31, December 31, ------------ ------------ ------------ ------------ 2008 2007 2008 2007 ---- ---- ---- ---- Net sales $ 2,915,428 $ 3,088,334 $ 10,322,524 $ 8,888,765 Cost of sales 1,490,161 1,763,605 5,268,841 5,117,525 ------------ ------------ ------------ ------------ Gross margin 1,425,267 1,324,729 5,053,683 3,771,240 Operating expenses: Selling, general and administrative 709,534 682,045 2,181,676 1,851,520 Engineering, research and development 684,017 654,526 2,133,021 2,044,810 ------------ ------------ ------------ ------------ Total operating expenses 1,393,551 1,336,571 4,314,697 3,896,330 ------------ ------------ ------------ ------------ Income (loss) from continuing operations 31,716 (11,842) 738,986 (125,090) Interest income (expense): Interest income 1,710 4,694 3,783 14,380 Interest expense (11,248) (11,711) (36,103) (31,456) ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes 22,178 (18,859) 706,666 (142,166) Income tax provision (benefit) 8,861 (12,142) 326,926 (62,452) ------------ ------------ ------------ ------------ Net income (loss) from continuing operations, net of income taxes 13,317 (6,717) 379,740 (79,714) Income (loss) from discontinued operations, net of income taxes 3,317 (29,242) 70,556 (62,736) ------------ ------------ ------------ ------------ Net income (loss) $ 16,634 $ (35,959) $ 450,296 $ (142,450) ============ ============ ============ ============ Income (loss) from continuing operations, net of income taxes: Basic income (loss) per common share $ 0.01 $ 0.00 $ 0.16 $ (0.03) ============ ============ ============ ============ Diluted income (loss) per common share $ 0.01 $ 0.00 $ 0.15 $ (0.03) ============ ============ ============ ============ Income (loss) from discontinued operations, net of income taxes: Basic income (loss) per common share $ 0.00 $ (0.01) $ 0.03 $ (0.03) ============ ============ ============ ============ Diluted income (loss) per common share $ 0.00 $ (0.01) $ 0.03 $ (0.03) ============ ============ ============ ============ Net Income (loss): Basic income (loss) per common share $ 0.01 $ (0.02) $ 0.18 $ (0.06) ============ ============ ============ ============ Diluted income (loss) per common share $ 0.01 $ (0.02) $ 0.18 $ (0.06) ============ ============ ============ ============ Weighted average shares outstanding: Basic 2,452,511 2,387,681 2,443,861 2,364,561 Diluted 2,481,011 2,387,681 2,472,361 2,364,561 See accompanying notes to condensed consolidated financial statements - 2 -
TEL-INSTTRUMENT ELECTRONICS CORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended December 31, 2008 December 31, 2007 ----------------- ----------------- Cash flows from operating activities: Net income (loss) $ 450,296 $ (142,450) Adjustments to reconcile net income (loss) to net cash used in operating activities: Deferred income taxes 308,463 (98,619) Non-cash stock-based compensation 38,971 27,654 Depreciation 140,474 179,731 Changes in operating assets or liabilities: Increase in accounts receivable (1,080,980) (288,866) Increase in unbilled government receivables (210,916) (1,133,980) (Increase) decrease in inventories, net (435,013) 379,035 Decrease in prepaid expenses and other current assets 82,858 20,723 Decrease (increase) in other assets 1,080 (2,430) (Decrease) increase in accounts payable (8,482) 445,553 Decrease in deferred revenues (5,655) (5,174) Decrease in accrued payroll, vacation pay, and payroll taxes (39,488) (107,295) Increase in accrued expenses 357,516 354,528 ----------- ----------- Net cash used in operating activities (400,876) (371,590) ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (81,301) (65,949) ----------- ----------- Net cash used in investing activities (81,301) (65,949) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options 64,730 130,800 Proceeds from loan on life insurance policy 67,578 -- Proceeds from borrowings from line of credit, net 100,000 350,000 ----------- ----------- Net cash provided by financing activities 232,308 480,800 ----------- ----------- Net increase (decrease) in cash and cash equivalents (249,869) 43,261 Cash and cash equivalents at beginning of period 469,906 655,836 ----------- ----------- Cash and cash equivalents at end of period $ 220,037 $ 699,097 =========== =========== Supplemental information Interest paid $ 23,178 $ 24,809 =========== =========== Taxes paid $ 20,790 $ 3,849 =========== =========== 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, and its marine systems subsidiary whose operations are being accounted for as a discontinued operation, as of December 31, 2008, the results of operations for the three and nine months ended December 31, 2008 and December 31, 2007, and statements of cash flows for the nine months ended December 31, 2008 and December 31, 2007. 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, 2008 results included herein have been derived from the audited financial statements included in the Company's annual report on Form 10-K as of that date. 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, 2008. Note 2 Revenue Recognition - Percentage-of-Completion - ITATS ------ ------------------------------------------------------ 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. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion. The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. 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 Note 4 and Critical Accounting Policies - Revenue Recognition) Note 3 Accounts Receivable, net ------ ------------------------ Accounts receivable, net, consist of: December 31, 2008 March 31, 2008 ----------------- -------------- Commercial $ 265,100 $ 647,063 Government 2,070,839 607,896 Allowance for doubtful accounts (31,206) (31,206) ----------- ----------- Total $ 2,304,733 $ 1,223,753 =========== =========== Note 4 Unbilled Government Receivables ------ ------------------------------- Unbilled government receivables represent unbilled costs and accrued profits primarily related to revenues on long-term contracts that have been recognized on a percentage-of-completion basis for accounting purposes, but not yet billed to customers. As revenues are recognized, performance-based payments and progress payments are charged as an offset to the related receivables balance. - 4 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 5 Inventories, net ------ ---------------- Inventories, net, consist of: December 31, 2008 March 31, 2008 ----------------- -------------- Purchased parts $ 1,659,749 $ 1,246,733 Work-in-process 1,183,556 881,472 Finished goods 29,941 224,284 Less: Reserve for obsolescence (339,919) (276,947) ----------- ----------- Total $ 2,533,327 $ 2,075,542 =========== =========== Note: Inventories over one year are immaterial. Note 6 Earnings Per Share ------ ------------------ SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS"). The Company's basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the periods ended December 31, 2007 do not include common stock equivalents, as these equivalents would be anti-dilutive. Three Months Ended Three Months Ended ------------------ ------------------ December 31, 2008 December 31, 2007 ----------------- ----------------- Basic net income (loss) per share computation: Net income (loss) attributable to common stockholders $ 16,634 $ (35,959) Weighted-average common shares outstanding 2,452,511 2,387,681 Basic net income(loss) per share attributable to common stockholders $ 0.01 $ (0.02) Diluted net income (loss) per share computation Net income(loss) attributable to common stockholders $ 16,634 $ (35,959) Weighted-average common shares outstanding 2,452,511 2,387,681 Incremental shares attributable to the assumed exercise of Outstanding stock options 28,500 -- Total adjusted weighted-average shares 2,481,011 2,387,681 Diluted net income(loss) per share attributable to common stockholders $ 0.01 $ (0.02) Nine Months Ended Nine Months Ended ----------------- ----------------- December 31, 2008 December 31, 2007 ----------------- ----------------- Basic net income (loss) per share computation: Net income (loss) attributable to common stockholders $ 450,296 $ (142,450) Weighted-average common shares outstanding 2,443,861 2,364,561 Basic net income(loss) per share attributable to common stockholders $ 0.18 $ (0.06) Diluted net income (loss) per share computation Net income(loss) attributable to common stockholders $ 450,296 $ (142,450) Weighted-average common shares outstanding 2,443,861 2,364,561 Incremental shares attributable to the assumed exercise of outstanding stock options 28,500 -- Total adjusted weighted-average shares 2,472,361 2,364,561 Diluted net income(loss) per share attributable to common stockholders $ 0.18 $ (0.06) - 5 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 7 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), operations was charged $14,205 and $11,162 for three months ended December 31, 2008 and 2007, respectively, and $38,971 and $27,654 for the nine months ended December 31, 2008 and 2007, respectively. The Company estimates the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.07% to 3.16%, volatility at 37.67% to 40.35%, and an expected life of 5 years for the nine months ended December 31, 2008; expected dividend yield of 0.0%, risk-free interest rate of 2.91% to 5%, volatility at 43.25% to 56.94%, and an expected life of 5 years for the nine months ended December 31, 2007. 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% for both periods. Note 8 Segment Information ------ ------------------- As a result of the classification of its marine systems division as discontinued operations in accordance with FAS No. 131, "Disclosures about Segments of an Enterprise and related information", the Company determined it has two reportable segments for continuing operations - avionics government and avionics commercial. There are no inter-segment revenues. The Company is organized primarily on the basis of its avionics products. The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors. The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops. The Company develops and designs test equipment for the avionics industry and as such, the Company's products and designs cross segments. Management evaluates the performance of its segments and allocates resources to them based on gross margin. The Company's general and administrative costs and sales and marketing expenses are not segment specific. As a result, all operating expenses are not managed on a segment basis. Net interest includes expenses on debt and income earned on cash balances. Segment assets include accounts receivable, unbilled government receivables and inventories. Asset information, other than accounts receivable, unbilled government receivables and inventories, is not reported, since the Company does not produce such information internally. All long-lived assets are located in the U.S. - 6 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 8 Segment Information (continued) ------ ------------------------------- The table below presents information about reportable segments within the avionics business for the periods ending December 31, 2008 and 2007: Three Months Ended Avionics Avionics Avionics Corporate ------------------ -------- -------- -------- --------- December 31, 2008 Gov't Comm'l. Total Items Total ----------------- ----- ------- ----- ----- ----- Net sales $ 2,526,036 $ 389,392 $ 2,915,428 $ 2,915,428 Cost of sales 1,230,636 259,525 1,490,161 1,490,161 --------- ------- --------- --------- Gross margin 1,295,400 129,867 1,425,267 1,425,267 --------- ------- --------- --------- Engineering, research, & dev. 684,017 684,017 Selling, general, and admin. 374,185 $ 335,349 709,534 Interest expense, net 9,538 -- 9,538 --------- --------- --------- Total expenses 1,067,740 335,349 1,403,089 --------- --------- --------- Income (loss) from continuing operations before taxes $ 357,527 $ (335,349) $ 22,178 ========= ========= ========= Segment assets $ 5,809,904 $ 339,395 $ 6,149,299 $ 1,926,064 $ 8,075,363 ========= ========= ========= ========= ========= Three Months Ended Avionics Avionics Avionics Corporate ------------------ -------- -------- -------- --------- December 31, 2007 Gov't Comm'l. Total Items Total ----------------- ----- ------- ----- ----- ----- Net sales $ 2,467,834 $ 620,500 $ 3,088,334 $ 3,088,334 Cost of sales 1,385,671 377,934 1,763,605 1,763,605 --------- ------- --------- --------- Gross margin 1,082,163 242,566 1,324,729 1,324,729 --------- ------- --------- --------- Engineering, research, & dev. 654,526 654,526 Selling, general, and admin. 332,044 $ 350,001 682,045 Interest expense, net 7,017 -- 7,017 --------- --------- --------- Total expenses 993,587 350,001 1,343,588 ========= ========= ========= Income (loss) from continuing operations before taxes $ 331,142 $ (350,001) $ (18,859) ========= ========= ========= Nine Months Ended Avionics Avionics Avionics Corporate ----------------- -------- -------- -------- --------- December 31, 2008 Gov't Comm'l. Total Items Total ----------------- ----- ------- ----- ----- ----- Net sales $ 8,843,166 $ 1,479,358 $10,322,524 $10,322,524 Cost of sales 4,396,054 872,787 5,268,841 5,268,841 --------- ------- --------- --------- Gross margin 4,447,112 606,571 5,053,683 5,053,683 --------- ------- --------- --------- Engineering, research, & dev. 2,133,021 2,133,021 Selling, general, and admin. 1,049,281 $ 1,132,395 2,181,676 Interest expense, net 32,320 -- 32,320 --------- --------- --------- Total expenses 3,214,622 1,132,395 4,347,017 --------- --------- --------- Income (loss) from continuing operations before taxes $ 1,839,061 $(1,132,395) $ 706.666 ========= ========= ========= Nine Months Ended Avionics Avionics Avionics Corporate ----------------- -------- -------- -------- --------- December 31, 2007 Gov't Comm'l. Total Items Total ----------------- ----- ------- ----- ----- ----- Net sales $ 6,512,652 $ 2,376,113 $ 8,888,765 $ 8,888,765 Cost of sales 3,751,865 1,365,660 5,117,525 5,117,525 --------- --------- --------- --------- Gross margin 2,760,787 1,010,453 3,771,240 3,771,240 --------- --------- --------- --------- Engineering, research, & dev. 2,044,810 2,044,810 Selling, general, and admin. 956,754 $ 894,766 1,851,520 Interest expense, net 17,076 -- 17,076 --------- --------- --------- Total expenses 3,018,640 894,766 3,913,406 --------- --------- --------- Income (loss) from continuing operations before taxes $ 752,600 $ (894,766) $ (142,166) ========= ========= ========= - 7 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- Note 9 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 does not believe it has any unrecognized tax benefits and there was no effect on its 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 December 31, 2008 and March 31, 2008 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 10 Stock Options ------- ------------- During the quarter ended December 31, 2008, stock options for 8,000 shares were exercised for total proceeds of $18,950. For the nine months ended December 31, 2008, stock options for 28,000 shares were exercised for total proceeds of $64,730. Note 11 Fair Value Measurements ------- ----------------------- On April 1, 2008, the Company adopted SFAS No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. SFAS 157's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy: Level 1 Inputs- Quoted prices for identical instruments in active markets. Level 2 Inputs- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 Inputs- Instruments with primarily unobservable value drivers. At December 31, 2008, the Company had no financial assets or liabilities that required fair value reporting. - 8 - TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- (Unaudited) Note 12 New Accounting Pronouncements ------- ----------------------------- 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. The adoption of SFAS No. 159 had no impact on the Company's financial position or results of operations. In December 2007, the FASB issued SFAS No 141(R), "Business Combinations." This statement provides new accounting guidance and disclosure requirements for business combinations. SFAS No 141(R) is effective for business combinations which occur in the first fiscal year beginning on or after December 15, 2008. The adoption of SFAS No 141 (R) will not have a material impact on the Company's financial statements.. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 requires all entities to report noncontrolling interests as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not expect the adoption of this statement will have a significant impact on its financial position or results of operations. In December 2007, the FASB finalized the provisions of the Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This EITF Issue provides guidance and requires financial statement disclosures for collaborative arrangements. EITF Issue No. 07-1 is in effect for financial statements issued for fiscal years beginning after December15, 2008. The adoption of EITF Issue No. 07-1 will not have a material impact on the Company's financial statements.. In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on the Company's financial statements. - 9 - TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- (Unaudited) ----------- Note 12 New Accounting Pronouncements (continued) ------- ----------------------------------------- In May 2008, the FASB issued SFAS No. 162, "Hierarchy of Generally Accepted Accounting Principles" (SFAS 162). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendment to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company believes that SFAS 162 will have no effect on its condensed consolidated financial statements. In April 2008, the FASB issued FASB Staff Position ("FSP") Financial Accounting Standard 142-3, Determination of the Useful Life of Intangible Assets ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142. In developing assumptions about renewal or extension, FSP FAS 142-3 requires an entity to consider its own historical experience (or, if no experience, market participant assumptions) adjusted for relevant entity-specific factors in paragraph 11 of SFAS No. 142. FSP FAS 142-3 expands the disclosure requirements of SFAS No. 142 and is effective for the Company beginning April 1, 2009. The guidance for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The Company does not expect the adoption of FSP FAS 142-3 on April 1, 2009 to have a material impact on the Company's consolidated financial position or results of operations. In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements ("EITF 08-3"). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. The adoption of this EITF will not have a material effect on the Company's consolidated financial statements. - 10 -
TEL-INSTRUMENT ELECTRONICS CORP. -------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ---------------------------------------------------------------- (Unaudited) ----------- Note 13 Discontinued Operations ------- ----------------------- As of March 2008, the Board of Directors approved categorizing the Company's marine systems division as a discontinued operation. The Company's decision to discontinue its marine operations was based primarily on the historical losses sustained and management's intent to focus on its avionics business The Company wrote-off fixed assets of approximately $77,000 and inventories of approximately $151,000 in 2008. The Company continues to sell and service these products while sales options for the division are explored. As a result, all results for this operation are recorded separately as results from discontinued operations. The following tables reflect sales, costs and expenses, and income (loss) from discontinued operations, net of taxes for the three and nine months ended December 31, 2008 and 2007, respectively. ------------------------------------------------------------- ---------------------- --------------------- Three Months Three Months ------------ ------------ Ended Ended ----- ----- December 31, 2008 December 31, 2007 ----------------- ----------------- ------------------------------------------------------------- ---------------------- --------------------- Discontinued Operations: ------------------------------------------------------------- ---------------------- --------------------- Sales $ 46,848 $ 156,605 ------------------------------------------------------------- ---------------------- --------------------- Costs and expenses 41,325 197,635 ---------- ---------- ------------------------------------------------------------- ---------------------- --------------------- Income (loss) from operations of discontinued operations 5,523 (41,030) ------------------------------------------------------------- ---------------------- --------------------- Income tax provision (benefit) 2,206 (11,788) ---------- ---------- ------------------------------------------------------------- ---------------------- --------------------- Net income (loss) from discontinued operations $ 3,317 $ (29,242) ========== ========== ------------------------------------------------------------- ---------------------- --------------------- ------------------------------------------------------------- ---------------------- --------------------- Nine Months Nine Months ----------- ----------- Ended Ended ----- ----- December 31, 2008 December 31, 2007 ----------------- ----------------- ------------------------------------------------------------- ---------------------- --------------------- Discontinued Operations: ------------------------------------------------------------- ---------------------- --------------------- Sales $ 233,449 $ 405,473 ------------------------------------------------------------- ---------------------- --------------------- Costs and expenses 115,954 500,527 ------------------ ---------- ---------- ------------------------------------------------------------- ---------------------- --------------------- Income (loss) from operations of discontinued operations 117,495 (95,054) ------------------------------------------------------------- ---------------------- --------------------- Income tax provision (benefit) 46,939 (32,318) ---------- ---------- ------------------------------------------------------------- ---------------------- --------------------- Net income (loss) from discontinued operations $ 70,556 $ (62,736) ========== ========== ------------------------------------------------------------- ---------------------- --------------------- Note 14 Reclassifications ------- ----------------- Certain prior year amounts have been reclassified to conform to the current year presentation, relating primarily to discontinued operations. - 11 -
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 its 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 in accordance with generally accepted principles, and accounting for the underlying transactions and balances, we are required to makes estimates and judgments which affect the amounts reported in the financial statements and the notes and 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, 2008. 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 on repairs and calibrations are recognized at the time the repaired or calibrated unit is shipped, as it is at this time that the work is completed. 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. Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to date to our estimate of total costs at completion. The ratio of costs incurred to our estimate of total costs at completion is applied to the contract value to determine the revenues and profits. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. 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 classified as revenue, and the shipping and handling costs incurred are included in cost of goods sold. Payments received prior to the delivery of units or services performed are recorded as deferred revenues. - 12 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Critical Accounting Policies (continued) ---------------------------------------- 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. 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 of 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 reserves - warranty reserves are based upon historical rates and specific items that are identifiable and can be estimated at time of sale. While warranty costs have historically been within expectations and the provisions established, future warranty costs could be in excess of the Company's warranty 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 reserves are adjusted from time to time when actual warranty claim experience differs from estimates. Income taxes - deferred tax assets arise from a variety of sources, the most significant being: a) tax losses that can be carried forward to be utilized against profits in future years; b) expenses recognized in the books but disallowed in the tax return until the associated cash flow occurs; and c) valuation changes of assets which need to be tax effected for book purposes but are taxable only when the valuation change is realized. 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 are expected to 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. In assessing the need for a valuation allowance, future taxable income is estimated, considering the realization of tax loss carryforwards. Valuation allowances related to deferred tax assets can also be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it was determined that the Company would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. In its evaluation of a valuation allowance the Company takes into account existing contracts and backlog, and the probability that options under these contract awards will be exercised as well as sales of existing products. The Company prepares profit projections based on the revenue and expenses forecast to determine that such revenues will produce sufficient taxable income to realize the deferred tax assets. - 13 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- 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. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in the Company's Annual Report on Form 10-K for the year ended March 31, 2008. The Company's avionics business is conducted in the Government, Commercial and General aviation markets (see Note 8 of Notes to Financial Statements for segment financial information). In January 2004, the Company completed its acquisition of ITI, a company selling products to the marine industry, and ITI's financial statements were consolidated with the Company's financial statements until the Company considered it a discontinued operation as of March 31, 2008 (see Note 13 to Financial Statements). Results of Operations --------------------- Overview -------- Tel's financial results for the nine months ended December 31, 2008 significantly improved with revenues, profits and working capital improving over last year's comparable period. Shareholders' equity also increased significantly from March 31, 2008. The current quarter showed a slight dip in sales and a modest profit as a result of shipments related to the CRAFT program moving to the next quarter, but was an improvement over the loss in the comparable period last year. Revenues from continuing operations increased 16% to $10.3 million for the nine months ended December 31, 2008 and pretax profits from continuing operations also increased to $706,666 as compared to a loss of $142,166 for the same period in the prior fiscal year. Net income for the nine months ended December 31, 2008 increased as a result of: (1) an increase in product shipments; (2) a negotiated billing to the government in the amount of $406,000 for additional work previously performed and expensed on the CRAFT program; (3) increased billings for revenues associated with the test and documentation phase of the CRAFT program; and (4) increase in shipments of the T-47NH as a result of a contract with the U.S. Government. Since fiscal year 2007, the Company has been awarded several large contracts, which required significant engineering. The Company has completed much of the engineering and began shipping some of the units (AN/APM-719) under the contract during the nine months ended December 31, 2008. Significant shipments should occur in subsequent years when the Company receives production orders for these units. However there can be no assurance that the U.S. Government will exercise all of its options under the contract. Despite an uncertain economic situation, which is adversely affecting the Company's commercial sales, the Company anticipates a profitable result for fiscal year 2009 primarily due to a strong increase and projected increases in military sales of its legacy products, and the recent commencement of deliveries of the AN/USM-719 test set. - 14 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) --------------------------------- Overview (continued) -------------------- TIC was previously awarded the US Navy AN/USM-708 (CRAFT) contract for a multi-functional flight-line test set. This unit combines the function of five different test sets into one and is the only Mode 5 IFF ("Identification, Friend, or Foe") flight-line test unit now under government contract. The Navy subsequently amended the contract to provide for an IFF only variant called the AN/USM-719 and increased the total IDIQ (Indefinite Quantity - Indefinite Delivery) order quantity from 750 to 1,200 units. These IDIQ options for the AN/USM-708 and 719 units, if exercised, would add up to $23 million to the Company's backlog and projected revenues. To date, the Company has received a delivery order for 83 AN/USM-719 units and has shipped 23 units. The AN/USM-708 engineering hardware design has been largely completed and the fabrication of 15 pilot production units is expected to take place during calendar year 2009. These units are currently scheduled to undergo design validation testing and Navy TECHEVAL in the next six months with production currently scheduled in the 2010 calendar year. In July 2006 the Company was awarded a second major U.S. Navy contract for an Intermediate Level TACAN Test Set AN/APM-206 (ITATS). This contract has options for up to 180 units with a total value of over $12 million; the initial work authorization was $4.4 million. The Company has been working with an engineering sub-contractor on this project and this program has entailed substantially less of the Company's engineering effort than the AN/USM-708. The design has now been completed and the product should begin the Navy TECHEVAL process this summer. Given the unique nature of the design of the AN/USM-708 and the AN/APM-206, these units could also generate significant sales to other military customers, both domestically and overseas, and the Company is working on other products derived from them. In February 2009, the Company was awarded a five year firm fixed price indefinite-delivery/indefinite-quantity (IDIQ) contract by the U.S. Army Aviation and Missile Command with a maximum dollar value of $44,046,886, depending on the number of units purchased. This contract entails production of at least 20 Mode 5 conversion kits for the Army's TS-4530 IFF test set and 20 new Mode 5 test sets. The IDIQ portion of the contract will entail the production quantity of -0- to 2,980 Mode 5 conversion kits and a quantity of -0- to 1,980 new production test sets. These Mode 5 conversion kits and new IFF test sets will incorporate Tel's proprietary electronics and IFF technology in addition to EHS test functionality. The systems engineering, design and integration, fabrication, testing, and associated logistics effort will take place in Carlstadt, N.J. As revenues and profits have increased this year, cash and working capital have improved from March 31, 2008. The Company's bank loan has also been extended until September 2009. The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for the next 12 months, and until substantial deliveries of its new units commence. Net Sales --------- Total net sales decreased $172,206 (5.6%) to $2,915,428 for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. Total net sales increased $1,433,759 (16.1%) to $10,322,424 nine months ended December 31, 2008 as compared to the same periods in the prior fiscal year. - 15 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) --------------------------------- Net Sales (continued) --------------------- Avionics government sales increased $58,202 (2.4%) to $2,526,036 and $2,330,514 (35.8%) to $8,843,166, respectively, for the three and nine months ended December 31, 2008 as compared to the same periods in the prior fiscal year. The increase in avionics government sales for the quarter ended December 31, 2008 is primarily attributed to: increased shipments of the T-47N as a result of a large contract from the U.S. Army, the T-76, and the AN/APM-719 (CRAFT variant) partially offset by lower revenues associated with the ITATS programs and reduced revenues on other military/government products. For the nine months ended December 31, 2008 Avionics government sales increased primarily as a result of; increased shipments of the T-30D as a result of a large contract from the U.S. Army, a negotiated billing to the government in the amount of $406,000 for additional work previously performed and expensed on the CRAFT program:, increased billings for revenues associated with the test and documentation phase of the CRAFT program, the shipment of T-47G test sets to the Canadian Air Force (through our distributor in Canada) and shipments of the AN/APM-719 (Craft variant) and the Company's new TR-420, as well as increases in other legacy products. These increases were partially offset by lower shipments of the T-30CM and AN/APM-480 and lower revenues associated with the ITATS program. Avionics commercial sales decreased $231,108 (37.2%) to $389,392 and $896,755 (37.7%) to $1,479,358, respectively, for the same periods. This decrease is mostly attributed to decreases in sales of the TR-220 Multi-Function Test set and the T-36C, as a result of the continued weak financial condition of the commercial airline industry. Revenues associated with repairs and calibrations increased $7,002 (1%) to $710,686 for the nine months ended December 31, 2008. Gross Margin ------------ Gross margin dollars increased $100,538 (7.6%) to $1,425,267 and $1,284,443 (34%) to $5,053,683 for the three and nine months ended December 31, 2008, respectively, as compared to the same period in the prior fiscal year. For the three months ended December 31, 2008, the increase in gross margin is attributed to the increase in volume and higher gross profit percentage resulting from a change in the sales mix. The increase in gross profit dollars and percentage for the nine months ended December 31, 2008 is also attributed to a negotiated billing to the government in the amount of $406,000 for additional work previously performed and expensed on the CRAFT program and higher profitability on the revenues associated with the test and documentation phase of the CRAFT program. The gross margin percentage for the three months ended December 31, 2008 was 48.9% as compared to 42.9% for the three months ended December 31, 2007. The gross margin percentage for the nine months ended December 31, 2008 was 49.0% as compared to 42.4% for the nine months ended December 31, 2007. - 16 - 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 increased $27,489 (4%) to $709,534 and $330,156 (17.8%) to $2,181,676 for the three months and nine months ended December 31, 2008, respectively, as compared to the three and nine months ended December 31, 2007. This increase is attributed mainly to an increase in sales commissions to independent representatives. Engineering, research and development expenses increased $29,491 (4.5%) to $684,017 and $88,211 (4.3%) to $2,133,021 for the three and nine months ended December 31, 2008, respectively, as compared to the same periods in the prior fiscal year. Engineering, research and development expenses are mostly attributed to efforts related to the CRAFT program. Interest, net ------------- Interest income decreased as a result of lower average cash balances. Interest expense increased as a result of the increased borrowings associated with the line of credit and the loan against the cash surrender value of the keyman life insurance policy. However, for the three months ended December 31, 2008, interest expense was slightly lower as a result of the lower interest rate associated with the line of credit. Income (Loss) from Continuing Operations before Income Taxes ------------------------------------------------------------ As a result of the above, the Company recorded income from continuing operations before income taxes of $22,178 and $706,666 for the three and nine months ended December 31, 2008, respectively, as compared to losses from continuing operations before income taxes of $18,859 and $142,166 for the three and nine months ended December 31, 2007, respectively. Income Taxes ------------ An income tax provision in the amount of $8,861 was recorded for the three months ended December 31, 2008 as compared to an income tax benefit of $12,142 for the three months ended December 31, 2007. An income tax provision in the amount of $326,926 was recorded for the nine months ended December 31, 2008 as compared to an income tax benefit of $62,452 for the nine months ended December 31, 2007. The change is due to the income before taxes for the three and nine months ended December 31, 2008 as compared to a loss before taxes for the three and nine months ended December 31, 2007. Net Income (Loss) from Continuing Operations, Net of Taxes ---------------------------------------------------------- As a result of the above, the Company recorded net income from continuing operations, net of taxes, of $13,317 and $379,740 for the three and nine months ended December 31, 2008, respectively, as compared to net losses from continuing operations, net of taxes of $6,717 and $79,714 for the three and nine months ended December 31, 2007, respectively. - 17 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------- ------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) --------------------------------------------------------- Results of Operations (continued) --------------------------------- Income (Loss) from Discontinued Operations, Net of taxes ------------------ ------------------------------------- For the three and nine months ended December 31, 2008, the Company recorded income from discontinued operations, net of taxes, of $3,317 and $70,556, respectively, as compared to losses from discontinued operations, net of taxes, of $29,242 and $62,736 for the three and nine months ended December 31, 2007, primarily as a result of the reclassification of certain allocated fixed costs to continuing operations and sales of products that were written-off in 2008, and the termination of marketing and engineering expenses Net Income (Loss) ----------------- As a result of the above, the Company recorded net income of $16,634 and $450,296 for the three and nine months ended December 31, 2008, respectively, as compared to net losses of $39,959 and $142,450 for the three and nine months ended December 31, 2007. Liquidity and Capital Resources ------------------------------- At December 31, 2008, the Company had working capital of $3,389,266 as compared to $2,681,511 at March 31, 2008. For the nine months ended December 31, 2008, the Company used $400,876 in cash for operating activities as compared to using $371,590 of cash for operating activities for the nine months ended December 31, 2007. This increase in cash used in operating activities is primarily attributed to the increase in inventories and accounts receivable offset mostly by the change in unbilled government receivables and the profit before taxes for the period. Net cash used in investing activities increased to $81,301 for the nine months ended December 31, 2008 from $65,949 for the nine months ended December 31, 2007 due to the increase in purchases of equipment. Net cash provided by financing activities decreased to $232,308 for the nine months ended December 31, 2008 from $480,800 for the nine months ended December 31, 2007 due to the lower borrowings and a decrease in proceeds from the exercise of stock options. At December 31, 2008 the Company had an outstanding loan balance of $450,000 on which it currently pays 3.75% interest (1/2% above the bank's prime rate). The line of credit is collateralized by substantially all of the assets of the Company. The credit agreement expires September 30, 2009, and the agreement now includes an expanded borrowing base calculation tied to working capital. As of December 31, 2008, remaining availability under this modified line was approximately $1,300,000 based upon defined eligible receivables and inventories at December 31, 2008. As a result of the increase in sales and profitability, the Company has improved its financial position. The Company believes that it has adequate liquidity, borrowing resources and backlog to fund operating plans for the next 12 months, and until deliveries of its new units commence. There was no significant impact on the Company's operations as a result of inflation for the nine months ended December 31, 2008. 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, 2008. - 18 - Item 4 (T). Controls and Procedures ----------- ----------------------- As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Part II. Other Information -------- ----------------- Item 1. Legal Proceedings ------- ----------------- None. 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 for nine months ended December 31, 2008. Item 4. Submission of Matters to a Vote of Security Holders ------- --------------------------------------------------- (a) The Annual Meeting of Shareholders was held on December 3, 2008 (the "Annual Meeting"). (b) Not applicable (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 2,273,409 28,024 George J. Leon 2,273,409 28,024 Robert J. Melnick 2,291,409 10,024 Jeff C. O'Hara 2,273,409 28,024 Robert A. Rice 2,199,737 101,696 Robert H. Walker 2,291,409 10,024 The shareholders also voted 2,297,953 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, 2009. Shareholders owning 3,480 shares voted against this proposal. (d) Not applicable - 19 - Item 6. Exhibits Exhibits 31.1 Certification by CEO pursuant to Rule 15d-14 under the Securities Exchange Act. 31.2 Certification by CFO pursuant to Rule 15d-14 under the Securities Exchange Act. 32.1 Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEL-INSTRUMENT ELECTRONICS CORP. Date: February 13, 2009 By: /s/ Harold K. Fletcher -------------------------------- Harold K. Fletcher CEO Date: February 13, 2009 By: /s/ Joseph P. Macaluso -------------------------------- Joseph P. Macaluso Principal Accounting Officer - 20 -