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 June 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
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(Exact name of the Registrant as specified in Charter)
New Jersey 22-1441806
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(State of Incorporation) (I.R.S. Employer ID Number)
728 Garden Street, Carlstadt, New Jersey 07072
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(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 No
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
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
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Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,294,881 shares of Common stock, $.10 par value as of August 7, 2006.
TEL-INSTRUMENT ELECTRONICS CORPORATION
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TABLE OF CONTENTS
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PAGE
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Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
June 30, 2006 and March 31, 2006 1
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2006 and 2005 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Conditions 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information
Item 1. Legal Proceedings 15
Item 1A. Risk Factors 15
Item 6. Exhibits 15
Signatures 16
Certifications
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, March 31,
2006 2006
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(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,228,895 $1,934,541
Accounts receivable, net 1,294,990 1,049,578
Inventories, net 2,134,948 2,102,280
Taxes receivable 82,488 82,488
Prepaid expenses and other current assets 119,020 138,041
Deferred income tax benefit 900,474 720,082
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Total current assets 5,760,815 6,027,010
Equipment and leasehold improvements, net 750,949 775,065
Other assets 317,561 314,507
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Total assets $6,829,325 $7,116,582
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Notes payable - other 29,000 29,000
Accounts payable 362,148 288,525
Deferred revenues 41,800 59,202
Accrued payroll, vacation pay
payroll taxes 378,958 391,062
Accrued expenses 818,732 906,852
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Total current liabilities 1,680,638 1,724,641
Deferred revenues 80,875 80,875
Convertible notes payable - related party-non-current 100,000 100,000
Deferred income taxes 43,000 43,000
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Total liabilities 1,904,513 1,948,516
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Stockholders' equity:
Common stock, par value $.10 per share, 2,294,881
and 2,279,381issued and outstanding as of June 30,
2006 and March 31, 2006, respectively 229,488 227,941
Additional paid-in capital 4,277,533 4,251,180
Retained earnings 417,791 688,945
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Total stockholders' equity 4,924,812 5,168,066
Total liabilities and stockholders' equity $6,829,325 $7,116,582
========== ==========
See accompanying notes to condensed financial statements
-1-
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
Three Months Ended
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June 30, June 30,
2006 2005
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Net sales $ 1,765,051 $ 3,150,978
Cost of sales 959,473 1,544,295
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Gross margin 805,578 1,606,683
Operating expenses:
Selling, general and administrative 622,123 897,995
Amortization of intangibles -- 21,549
Engineering, research and development 645,181 628,522
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Total operating expenses 1,267,304 1,548,066
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Income (loss) from operations (461,726) 58,617
Interest income (expense):
Interest income 12,450 3,090
Interest expense (2,270) (3,716)
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Income (loss) before income taxes (451,546) 57,991
Income tax (benefit) expense (180,392) 28,843
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Net income (loss) $ (271,154) $ 29,148
Basic income (loss) per common share $ (0.12) $ 0.01
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Diluted income (loss) per common share $ (0.12) $ 0.01
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Dividends per share None None
Weighted average shares outstanding
Basic 2,283,256 2,187,831
Diluted 2,283,256 2,337,848
See accompanying notes to condensed financial statements
-2-
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
Three Months ended
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June 30, June 30,
2006 2005
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Cash flows from operating activities:
Net income (loss) $ (271,154) $ 29,148
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Deferred income taxes (180,392) 29,759
Depreciation 66,783 68,499
Amortization of acquired intangibles -- 21,549
Non-cash stock-based compensation -- 25,938
Changes in assets and liabilities:
Increase in accounts receivable (245,412) (238,205)
(Increase) decrease in inventories (32,668) 78,004
Decrease in prepaid expenses & other current assets 19,021 13,003
Increase in other assets (3,054) (4,687)
Increase (decrease) in accounts payable 73,623 (132,091)
Decrease in accrued payroll, vacation pay
and payroll taxes (12,104) (13,477)
Decrease in deferred revenues (17,402) (11,030)
Decrease in accrued expenses (88,120) (92,953)
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Net cash used in operating activities (690,879) (226,543)
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Cash flows from investing activities:
Purchases of property, plant and equipment (42,667) (36,049)
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Net cash used in investing activities (42,667) (36,049)
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Cash flows from financing activities:
Proceeds from the exercise of stock options 27,900 --
Payment of capitalized lease obligations -- (2,323)
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Net cash provided by (used in) financing activities 27,900 (2,323)
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Net decrease in cash and cash equivalents (705,646) (264,915)
Cash and cash equivalents at beginning of period 1,934,541 826,959
----------- -----------
Cash and cash equivalents at end of period $ 1,228,895 $ 562,044
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Taxes paid $ -- $ --
Interest paid $ -- $ --
See accompanying notes to condensed financial statements
-3-
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Note 1 Basis of Presentation
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In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Tel-Instrument Electronics Corp. as of June 30, 2006, the
results of operations for the three months ended June 30, 2006 and June 30,
2005, and statements of cash flows for the three months ended June 30, 2006 and
June 30, 2005. These results are not necessarily indicative of the results to be
expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. The March 31, 2006 balance sheet included herein was
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2006.
Note 2 Accounts Receivable, net
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Accounts receivable, net consist of:
June 30, March 31,
2006 2006
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Commercial $ 397,734 $ 548,083
Government 938,250 542,489
Less: Allowance for doubtful debts (40,994) (40,994)
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$ 1,294,990 $ 1,049,578
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Note 3 Inventories, net
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June 30, March 31,
Inventories, net consist of: 2006 2006
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Purchased parts $ 1,286,004 $ 1,409,502
Work-in-process 901,159 723,782
Finished Goods 183,455 212,100
Less: Reserve for obsolescence (235,670) (243,104)
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$ 2,134,948 $ 2,102,280
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-4-
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 4 Earnings Per Share
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The Company's basic income (loss) per common share is based on net income for
the relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted income per common share is based on net
income, divided by the weighted average number of common shares outstanding
during the period, including common share equivalents, such as outstanding stock
options. Diluted income per share for the period ended June 30, 2006 does not
include common stock equivalents, as these shares would be antidilutive.
Three Months Ended Three Months Ended
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June 30, 2006 June 30, 2005
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Basic net income (loss) per share computation:
Net income (loss) attributable to common stockholders $ (271,154) $ 29,148
Weighted-average common shares outstanding 2,283,256 2,187,831
Basic net income (loss) per share attributable to common stockholders $ (0.12) $ 0.01
Diluted net income (loss) per share computation
Net income (loss) attributable to common stockholders $ (271,154) $ 29,148
Weighted-average common shares outstanding 2,283,256 2,187,831
Incremental shares attributable to the assumed exercise of
outstanding stock options -- 150,017
Total adjusted weighted-average shares 2,283,256 2,337,848
Diluted net income(loss) per share attributable to common stockholders $ (0.12) $ 0.01
Note 5 Stock Options
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Effective April 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified
prospective method. SFAS 123R requires the measurement of stock-based
compensation based on the fair value of the award on the date of grant. Under
the modified prospective method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption. The Company recognizes compensation cost on
awards on a straight-line basis over the vesting period, typically four years.
The impact to the Company for the three months ended June 30, 2006 was not
material. Prior to the adoption of SFAS 123R, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123 and 148, "Accounting for
Stock-Based Compensation" ("SFAS 123 and 148"). Under SFAS 123 and 148 the
Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made since fiscal 1996 as if the
fair-value-based method as defined in SFAS No. 123 had been applied. The Company
estimates the fair value of each option using the Black Scholes option-pricing
model with the following weighted-average assumptions: expected dividend yield
of 0.0%, risk-free interest rate of 5%, volatility at 50% and an expected life
of 5 years for 2007 and 2006, and an expected dividend yield of 0.0%, risk-free
interest rate of 3.5% and volatility at 50% and an expected life of 5 years for
2005.
-5-
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 5 Stock Options (continued)
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Had the Company determined compensation cost based on the fair market value at
the grant date for its 399,850 outstanding stock options under SFAS No. 123, the
pro forma amounts are indicated below:
Three Months Ended Three Months Ended
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June 30, 2006 June 30, 2005
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Net income (loss) - as reported $ (271,154) $ 29,148
Add: Stock-based employee compensation expense included
In reported net income, net of taxes -- 10,375
Less: Total stock based employee compensation, net of taxes (17,446) (27,137)
-------- --------
Net income - pro forma (288,600) 12,386
======== ========
Basic earnings (loss) per share - as reported (0.12) 0.01
Basic earnings (loss) per share - pro forma (0.13) 0.01
Diluted earnings (loss) per share - as reported (0.12) 0.01
Diluted earnings (loss) per share - pro forma (0.13) 0.01
Note 6 Segment Information
------ --------------------
Information is presented for the Company's three reportable segments, 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 lower gross
margins. The Company primarily develops and designs test equipment for the
avionics industry and, as such, the Company's products and designs cross
segments. The marine instrumentation systems segment consists of sales to
hydrographic, oceanographic, researchers, engineers, geophysicists, and
surveyors.
-6-
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 6 Segment Information (continued)
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The table below presents information about sales and gross margin. Cost of sales
includes indirect costs based on allocation factors. Engineering, research and
development expenses, and marketing and selling expenses represent direct
expenses for the avionics and marine segments.
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
June 30, 2006 Gov't Comm'l. Total Systems Items Total
------------- ----- ------- ----- ------- ----- -----
Revenues $1,003,550 $ 640,068 $1,643,618 $ 121,433 $1,765,051
Cost of Sales 456,587 411,655 868,242 91,231 959,473
---------- ---------- ---------- ---------- ----------
Gross Margin 546,963 228,413 775,376 30,202 805,578
---------- ---------- ---------- ---------- ----------
Engineering, research, and
development 592,097 53,084 645,181
Selling, general, and admin. 297,914 52,285 $ 271,924 622,123
Amortization of intangibles -- -- -- --
Interest (income) expense, net (10,180) -- -- (10,180)
---------- ---------- ---------- ----------
Total expenses 879,831 105,369 271,924 1,257,124
---------- ---------- ---------- ----------
Income (loss) before income
Taxes $ (104,455) $ (75,167) $ (271,924) $ (451,546)
========== ========== ========== ==========
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
June 30, 2005 Gov't Comm'l. Total Systems Items Total
------------- ----- ------- ----- ------- ----- -----
Revenues $2,373,035 $ 562,072 $2,935,107 $ 215,871 $3,150,978
Cost of Sales 978,394 418,775 1,397,169 147,126 1,544,295
---------- ---------- ---------- ---------- ----------
Gross Margin 1,394,641 143,297 1,537,938 68,745 1,606,683
---------- ---------- ---------- ---------- ----------
Engineering, research, and
development 586,698 41,824 628,522
Selling, general, and admin. 418,198 85,713 $ 394,084 897,995
Amortization of intangibles 21,549 21,549
Interest (income) expense, net 429 197 -- 626
---------- ---------- ---------- ----------
Total expenses 1,005,325 127,734 415,633 1,548,692
---------- ---------- ---------- ----------
Income before income taxes $ 532,613 $ (58,989) $ (415,633) $ 57,991
========== ========== ========== ==========
-7-
TEL-INSTRUMENT ELECTRONICS CORP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 7 New Accounting Pronouncements
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On December 16, 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets", which is an amendment to APB Opinion No. 29. It states that the
exchanges on nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, FSAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
"commercial substance". SFAS No. 153 is effective for financial statements for
fiscal years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date that this statement is issued. Management believes the adoption of this
Statement will not have an effect on the consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires retrospective application as the
required method for reporting a change in accounting principle, unless
impracticable or a pronouncement includes specific transition provisions. SFAS
No. 154 also requires that a change in depreciation, amortization or depletion
method for long-lived, nonfinancial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. This statement
carries forward the guidance in APB Opinion No. 20, "Accounting Changes," for
the reporting of the correction of an error and a change in accounting estimate.
SFAS No. 154 is effective beginning January 1, 2006. SFAS No. 154 is not
expected to have a significant impact on our financial position, results of
operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140". SFAS
No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets". SFAS No. 155 will become effective for the Company's fiscal year after
September 15, 2006. The impact of SFAS No. 155 will depend upon the nature and
extent of any new derivative instruments entered into after the effective date.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-An Amendment of FASB No. 140", with respect to the accounting
for separately recognized servicing assets and servicing liabilities. This
statement does not currently apply to the Company.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." FIN 48 establishes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the adoption
of this interpretation will have on its consolidated financial statements
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Forward Looking Statements
--------------------------
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in demand
for the Company's products or in the cost and availability of its raw materials;
the actions of its competitors; the success of our customers; technological
change; changes in employee relations; government regulations; litigation,
including its inherent uncertainty; difficulties in plant operations and
materials; transportation, environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the Company's filings
with the Securities and Exchange Commission.
Critical Accounting Policies
----------------------------
In preparing the financial statements and accounting for the underlying
transactions and balances, the Company applies its accounting policies as
disclosed in Note 2 of our Notes to Financial Statements included in our Form
10-K. The Company's accounting policies that require a higher degree of judgment
and complexity used in the preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment to, or
acceptance by customer provided title and risk of loss is transferred to the
customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under service contracts are recognized when the services are
performed. Shipping and handling costs charged to customers are not material.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
Since 2001, the Company had a contract with the U.S. Navy for the delivery of
test equipment (AN/APM-480). The AN/APM-480 is a catalog product, which the
Company also sells to civilian and other government customers. While the Company
sells this product to the U.S. Navy, the proprietary rights to the technology
are retained by the Company. Since the AN/APM-480 was a significant product, and
the Company's premier IFF test set, the Company continued to improve the product
to meet the needs of its other customers, to increase product performance, and
to improve the manufacturing process. Further, although the AN/APM-480 had been
accepted and used by the Navy, since it was in substantial compliance with the
specification, there were limited areas where the AN/APM-480 did not operate at
maximum performance according to the specification. Since the U.S. Navy was a
significant customer and because of these minor specification issues, the
Company agreed in fiscal year 2002 to provide enhancements at no additional cost
to the customer.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations
---------------------
Critical Accounting Policies (continued)
----------------------------------------
Beginning in fiscal year 2002, the Company began to accrue the cost of these
enhancements as the units were shipped in order to properly match the revenues
with the expenses. The Company considers this accrual similar to a warranty
expense. The Company recorded the liability and the expense to cost of sales.
The enhancements made, and to be made to the product, the Company believes, are
relatively insignificant. The Company has shipped and has been paid for all
1,300 units (approximately $18,200,000 in revenues) through the fiscal year
ended March 31, 2006, and the cost of these enhancements is approximately 3% of
the revenues. The customer continues to use the original product in the field,
because the enhancements are not essential for the unit to perform the major
functions of the delivered products. The Company continued to ship the units in
accordance with the original contract, and was paid, after the Company agreed to
perform the enhancements. Revenue was recognized because the Company
substantially completed and fulfilled the terms specified in the original
contract, the Navy took delivery and the Armed Forces are using the product in
the field. In the case of these enhancements, there was no obligation to perform
any enhancements at the time the original contract was signed in 2000, and when
the first shipments were made in the fiscal year ended March 31, 2001.
The costs, estimated to be approximately $480 per unit are for labor, material
and overhead, based upon the Company's experience manufacturing the product, and
standard costing information. The Company is charging costs of performing the
enhancement to the accrued liability as the units are shipped. As of June 30,
2006, 715 of the total 1,159 units requiring upgrade have been completed.
Inventory reserves - inventory reserves or write-downs are estimated for excess,
slow-moving and obsolete inventory as well as inventory whose carrying value is
in excess of net realizable value. These estimates are based on current
assessments about future demands, market conditions and related management
initiatives. If market conditions and actual demands are less favorable than
those projected by management, additional inventory write-downs may be required
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.
Warranty/enhancement reserves - warranty/enhancement reserves are based upon
historical rates and specific items that are identifiable and can be estimated
at time of sale. While warranty/enhancement costs have historically been within
our expectations and the provisions established, future warranty/enhancement
costs could be in excess of our warranty/enhancement reserves. A significant
increase in these costs could adversely affect our operating results for the
period and the periods these additional costs materialize. Warranty/enhancement
reserves are adjusted from time to time when actual warranty/enhancement claim
experience differs from estimates.
-10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations
---------------------
Critical Accounting Policies (continued)
----------------------------------------
Income taxes - deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefit which is
not more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in the period that such tax
rate changes are enacted.
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 financial notes in the Company's Annual Report on
Form 10-K for the year ended March 31, 2006.
The Company's avionics business is conducted in the Government, Commercial and
General aviation markets (see Note 6 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 have been consolidated with the Company's financial
statements since then.
Overview
--------
Tel is in a transitional phase between the completion of deliveries in fiscal
year 2006, pursuant to its multi-year AN/APM-480 contract, and the commencement
of production deliveries under its previously announced multi-year AN/USM-708
contract (the "CRAFT contract"), which the Company won in March 2005 in a
competitive procurement. The Navy technical evaluation process for AN/USM-708
(CRAFT) is scheduled to begin in April 2007 and product deliveries are currently
expected to begin at the start of the 2008 calendar year. The Company was
awarded the $17,344,853 multi-year, firm-fixed-price,
indefinite-delivery/indefinite-quantity contract for the systems engineering,
design and integration, fabrication, testing, and production of a
Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flightline
Tester (CRAFT) with sonobuoy simulator capabilities, which is expected to be
completed in March 2010. The CRAFT combines advanced navigation, communication,
IFF, and sonobuoy test capabilities in a portable test set, which will utilize a
flexible and expandable digital-signal-processing-based architecture, and is
another significant milestone for the Company, because the development of this
technology will help solidify the Company as one of the one of the leaders in
the industry, and will meet the U.S. Navy's test requirements for years to come.
In July 2006, the Company was awarded another major contract for Intermediate
Level TACAN (Tactical Air Navigation) Testers ("ITATS"). The award value for the
firm-fixed price indefinite-delivery/indefinite quantity is $12,724,750,
including future deliverables. The Company received its first delivery order
valued at $4,443,816 for systems engineering, design and integration,
fabrication, testing, and associated logistics costs for the six First Article
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Overview (continued)
--------------------
Test Units, which is expected to be completed in the next 18 to 24 months. The
Company, together with DRS Sustainment Systems, Inc., an operating unit of DRS
Technologies, Inc. (NYSE: DRS) and KLJ Instruments, developed the innovative all
digital Intermediate Level TACAN solution that is derived from Tel's TB-2100
bench test product. The ITATS test units will be used at Navy intermediate
maintenance activities, both ashore and afloat, in addition to Navy repair
depots.
As a result of being in this transitional phase, government revenues decreased
significantly for the quarter ended June 30, 2006, in turn resulting in a
reduction in gross profit as well as cash on hand. In recognition of this
situation, the Company adopted, in March 2006, a profit improvement plan to
reduce expenses during this transitional phase, which reduced S,G& A expenses
during the quarter.
Sales of marine products also declined in the first quarter. The Company reduced
expenses pursuant to its profit improvement plan, but reduced sales and the
consequent gross profit resulted in a quarterly loss for this division. The
Company is taking steps to improve marketing and sales of this division.
With the notable exception of the ITATS award, commercial and military orders
are below expectations. The timing of government orders, increased competition,
and the continued financial difficulties within the commercial airline industry
have contributed to the decline in business. The Company continues to pursue all
opportunities. Currently, the backlog exceeds $8,000,000, including ITATS.
Research and development expenditures are expected to remain high through fiscal
year 2007. The Company believes that revenues in each of the last three quarters
of the current fiscal year, while not at the levels of the previous fiscal year,
should exceed those of the current first quarter. Furthermore, as a result of
the anticipated increase in sales and the expected expense reductions, the
Company currently expects an improvement in its financial results for the
balance of the fiscal year.
While the near-term competitive and economic situation remains difficult for
both the avionics and marine system markets, management remains optimistic about
the Company's prospects. Tel continues to upgrade its management team and
engineering staff over the last several years and the new digital technology
incorporated into the AN/USM-708 could have applications outside of Tel's
traditional avionics business.
At June 30, 2006, the Company had available cash of about $1.2 million, an
unused Bank line of credit of $1.75 million, and positive working capital of $4
million, including accounts receivable and inventories of $3.4 million. The
Company does not expect to experience the substantial decline in cash that
occurred in the first quarter in the remaining quarters of the current fiscal
year as a result of the facts noted above. The Company believes it has
sufficient working capital to fund its operating plans at least for the next
twelve months (See Liquidity and Capital Resources).
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Sales
-----
For the first quarter ended June 30, 2006, total sales decreased 44.0% to
$1,765,051 as compared to the same quarter in the prior year. Avionics sales
decreased $1,291,489 (44.0%) and marine systems sales decreased $94,438 (43.7%)
for the quarter ended June 30, 2006 as compared to the quarter ended June 30,
2005. Avionics Government sales decreased $1,369,485 (57.7%) for the period. In
fiscal year 2006, the Company had contracts for shipment of the T-36M and the
T-47N with the U.S. Army and shipment of the T-47N to Royal Australian Air
Force, through our distributor, which accounted for the higher sales in fiscal
2006. This decrease was partially offset by revenues associated with the test
and documentation on the CRAFT program. The marine systems decrease in sales of
specialty systems to the dredging industry was partially offset by an increase
in the sale of sounders.
Gross Margin
------------
Gross margin decreased $801,105 (49.9%) for the three months ended June 30, 2006
as compared to the same three months in the prior fiscal year. This decrease in
gross margin is primarily attributed to the lower sales volume. The gross margin
percentage for the three months ended June 30, 2006 was 45.6% as compared to
51.0% for the three months ended June 30, 2005. The decrease in gross profit
percentage is primarily attributed to the lower sales volume and, to a lesser
extent, the change in sales mix.
Operating Expenses
------------------
Selling, general and administrative expenses decreased $275,872 (30.7%) for the
three months ended June 30, 2006, as compared to the three months ended June 30,
2005. This decrease is attributed to lower administrative salaries, commission,
travel and consulting expenses in the avionics division, and a decrease in
marketing and sales salaries in the marine systems division.
Engineering, research and development expenses increased $16,659 (2.7%).
Research and development efforts are mostly related to the CRAFT program.
Income Taxes
------------
An income tax benefit in the amount of $180,392 was recorded for the quarter
ended June 30, 2006 as a result of the loss before taxes as compared to a
provision for income taxes in the amount of $28,843 for the three months ended
June 30, 2005. These amounts represent the effective federal and state tax rate
of approximately 40% on the Company's net income before taxes.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
At June 30, 2006 the Company had working capital of $4,080,177 as compared to
$4,302,369 at March 31, 2006. For the three months ended June 30, 2006, the
Company used $690,879 in operations as compared to $226,543 for the three months
ended June 30, 2005. The increase in cash used in operations is primarily
attributed to the Company's loss for the current quarter.
The Company has a line of credit of $1,750,000 from Bank of America. The line of
credit bears an interest rate of 0.5% above the lender's prevailing base rate,
which is payable monthly, based upon the outstanding balance. The Company does
not pay to maintain this open line. At June 30, 2006 the Company had no
outstanding balance. The line of credit is collateralized by substantially all
of the assets of the Company and expires in September 2005.
Based upon the current backlog, its existing credit line, and cash balance, the
Company believes that it has sufficient working capital, including accounts
receivable and inventories of $3.4 million, to fund its operating plans for at
least the next twelve months. The Company does not expect to experience the
substantial decline in cash that occurred in the first quarter in the remaining
quarters of the current fiscal year as a result of the facts noted above.
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 three months ended June 30, 2006. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K to
the Securities and Exchange Commission for the fiscal year ended March 31, 2006.
-14-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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The Company, as in prior periods, is generally not exposed to financial market
risks, including changes in interest rates, foreign currency exchange rates, and
marketable equity security prices.
Item 4. Controls and Procedures
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The Company adopted disclosure controls and procedures, as called for by the
recently adopted legislation and rules of the Securities and Exchange
Commission. Under Rules promulgated by the SEC, disclosure controls and
procedures are defined as "those controls or other procedures of the issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
commission's rules and forms." The Chief Executive Officer and Principal
Accounting Officer evaluated the Company's Disclosure Controls and Procedures at
June 30, 2006 and have concluded that they are effective, based on their
evaluation of these controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of June 30, 2006 by the Chief Executive
Officer and Principal Accounting Officer, required by paragraph (d) of Exchange
Act Rules 13a-15 or 15d-15, which occurred during our last fiscal quarter and
which have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
Part II. Other Information
---------------------------
Item 1. Legal Proceedings
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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, 2006.
Item 6. Exhibits
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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.
-15-
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: August 14, 2006 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
Chairman and President
Date: August 14, 2006 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
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