UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
----------------------------------------------------
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1441806
---------------------- -------------------------
(State of Incorporation) (I.R.S. Employer ID Number)
728 Garden Street, Carlstadt, New Jersey 07072
-------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 201-933-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,299,906 shares of Common stock, $.10 par value as of November 7, 2006.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
September 30, 2006 and March 31, 2006 1
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 2006 and 2005 3
Notes to Condensed Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 10-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
Item 4. Controls and Procedures 16
Part II - Other Information
Item 6. Exhibits 16
Signatures 16
Certifications
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS September 30, 2006 March 31, 2006
(Unaudited)
Current assets:
Cash and cash equivalents $1,132,406 $1,934,541
Accounts receivable, net 1,064,510 1,049,578
Inventories, net 2,114,253 2,102,280
Taxes receivable 82,488 82,488
Prepaid expenses and other current assets 87,225 138,041
Deferred income taxes 955,681 720,082
---------- ----------
Total current assets 5,436,563 6,027,010
Property, plant and equipment, net 695,901 775,065
Other assets 323,056 314,507
---------- ----------
Total assets $6,455,520 $7,116,582
========== ==========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Notes payable - other 29,000 29,000
Accounts payable 282,975 288,525
Deferred revenues 50,477 59,202
Accrued payroll, vacation pay, and payroll taxes 353,540 391,062
Accrued expenses 614,669 906,852
---------- ----------
Total current liabilities 1,380,661 1,724,641
Deferred revenues 80,875 80,875
Convertible note payable - related party - long-term 100,000 100,000
Deferred taxes - long-term 43,000 43,000
---------- ----------
Total liabilities 1,604,536 1,948,516
========== ==========
Stockholders' equity:
Common stock, par value $.10 per share, 2,299,906 and
2,279,381 issued and outstanding as of September 30,
2006, and March 31, 2006, respectively 229,991 227,941
Additional paid-in capital 4,286,180 4,251,180
Retained earnings 334,813 688,945
---------- ----------
Total stockholders' equity 4,850,984 5,168,066
---------- ----------
Total liabilities and stockholders' equity $6,455,520 $7,116,582
========== ==========
See accompanying notes to condensed financial statements
- 1 -
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $ 2,127,349 $ 3,094,442 $ 3,892,400 $ 6,245,420
Cost of sales 1,056,189 1,589,623 2,015,662 3,133,918
----------- ----------- ----------- -----------
Gross margin 1,071,160 1,504,819 1,876,738 3,111,502
Operating expenses
Selling, general and administrative 649,966 774,853 1,272,089 1,672,848
Amortization of intangibles -- 21,549 -- 43,098
Engineering, research and
development 569,919 643,578 1,215,100 1,272,100
----------- ----------- ----------- -----------
Total operating expenses 1,219,885 1,439,980 2,487,189 2,988,046
----------- ----------- ----------- -----------
Income (loss) from operations (148,725) 64,839 (610,451) 123,456
Interest income (expense):
Interest income 12,804 3,300 25,254 6,390
Interest expense (2,264) (3,255) (4,534) (6,971)
----------- ----------- ----------- -----------
Income (loss) before taxes (138,185) 64,884 (589,731) 122,875
Provision (benefit) for income taxes- (55,207) 28,768 (235,599) 57,611
----------- ----------- ----------- -----------
Net income (loss) $ (82,978) $ 36,116 $ (354,132) $ 65,264
=========== =========== =========== ===========
Basic income (loss) per common share $ (0.04) $ 0.02 $ (0.15) $ 0.03
=========== =========== =========== ===========
Diluted income (loss) per common share $ (0.04) $ 0.02 $ (0.15) $ 0.03
=========== =========== =========== ===========
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,298,631 2,190,006 2,290,381 2,189,074
Diluted 2,298,631 2,302,015 2,290,381 2,301,083
See accompanying notes to condensed financial statements
- 2 -
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Six Months Ended
Sept. 30, Sept. 30,
2006 2005
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (354,132) $ 65,264
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes (235,599) 57,356
Depreciation 131,105 136,829
Amortization of intangibles -- 43,098
Non-cash stock-based compensation -- 43,230
Changes in operating assets or liabilities:
(Increase) decrease in accounts receivable, net (14,932) 232,424
(Increase) decrease in inventories, net (11,973) 514,807
Decrease (increase) in prepaid expenses and
other current assets 50,816 (28,808)
Increase in other assets (8,549) (5,997)
Decrease in accounts payable (5,550) (198,363)
Decrease in deferred revenues (8,725) (19,875)
Decrease increase in accrued payroll, vacation pay,
and payroll taxes (37,522) (24,889)
(Decrease) increase in accrued expenses (292,183) 47,594
----------- -----------
Net cash (used in) provided by operating activities (787,244) 862,670
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (51,941) (112,685)
----------- -----------
Net cash used in investing activities (51,941) (112,685)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 37,050 14,220
Payment of capitalized lease obligations -- (2,323)
----------- -----------
Net cash provided by financing activities 37,050 11,897
----------- -----------
Net increase (decrease) in cash and cash equivalents (802,135) 761,882
Cash and cash equivalents at beginning of period 1,934,541 826,959
----------- -----------
Cash and cash equivalents at end of period $ 1,132,406 $ 1,588,841
=========== ===========
Supplemental information
Interest paid $ -- $ 4,500
=========== ===========
See accompanying notes to condensed financial statements
- 3 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1 Basis of Presentation
------ ---------------------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position of
Tel-Instrument Electronics Corp as of September 30, 2006, the results of
operations for the three and six months ended September 30, 2006 and September
30, 2005, and cash flows for the six months ended September 30, 2006 and
September 30, 2005. These results are not necessarily indicative of the results
to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. The March 31, 2006 results included herein have been
derived from the audited financial statements included in the Company's annual
report on Form 10-K. Accordingly, the financial statements included herein
should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2006.
Note 2 Accounts Receivable, net
------ ------------------------
Accounts receivable, net, consist of:
September 30, March 31,
2006 2006
---------- ----------
Commercial $ 414,654 $ 548,083
Government 689,919 542,489
Allowance for doubtful accounts (40,063) (40,994)
---------- ----------
Total $1,064,510 $1,049,578
========== ==========
Note 3 Inventories, net
------ ----------------
Inventories, net, consist of:
September 30, March 31,
2006 2006
---------- ----------
Purchased parts $1,229,576 $1,409,502
Work-in-process 987,585 723,782
Finished goods 131,124 212,100
Less: Reserve for obsolescence (234,032) (243,104)
---------- ----------
Total $2,114,253 $2,102,280
========== ==========
- 4 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 4 Earnings Per Share
------ ------------------
The Company's basic income (loss) per common share is based on net income for
the relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted income per common share is based on net
income (loss), divided by the weighted average number of common shares
outstanding during the period, including common share equivalents, such as
outstanding stock options. Common share equivalents are not included in the
calculation for the three and six months ended September 30, 2006 since the
effect would be antidilutive.
Three Months Ended Three Months Ended
------------------ ------------------
September 30, 2006 September 30, 2005
------------------ ------------------
Basic net income (loss) per share computation:
Net income (loss) for common stockholders $ (82,978) $ 36,116
Weighted-average common shares outstanding 2,298,631 2,190,006
Basic net income (loss) per share for common stockholders $ (0.04) $ 0.02
Diluted net income (loss) per share computation
Net income (loss) for common stockholders $ (82,978) $ 36,116
Weighted-average common shares outstanding 2,298,631 2,190,006
Incremental shares attributable to the assumed exercise of
outstanding stock options - 112,009
Total adjusted weighted-average shares 2,298,631 2,302,015
Diluted net income (loss) per share for common stockholders $ (0.04) $ 0.02
Six Months Ended Six Months Ended
---------------- ----------------
September 30, 2006 September 30, 2005
------------------ ------------------
Basic net income (loss) per share computation:
Net income (loss) for common stockholders $ (354,132) $ 65,264
Weighted-average common shares outstanding 2,290,381 2,189,074
Basic net income (loss) per share for common stockholders $ (0.15) $ 0.03
Diluted net income (loss) per share computation
Net income (loss) for common stockholders $ (354,132) $ 65,264
Weighted-average common shares outstanding 2,290,381 2,189,074
Incremental shares attributable to the assumed exercise of
outstanding stock options - 112,009
Total adjusted weighted-average shares 2,290,381 2,301,083
Diluted net income (loss) per share for common stockholders $ (0.15) $ 0.03
- 5 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 5 Stock Options
------ -------------
Effective April 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified
prospective method. SFAS 123R requires the measurement of stock-based
compensation based on the fair value of the award on the date of grant. Under
the modified prospective method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption. The Company recognizes compensation cost on
awards on a straight-line basis over the vesting period, typically four years.
The impact to the Company for the six months ended September 30, 2006 was not
material. Prior to the adoption of SFAS 123R, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123 and 148, "Accounting for
Stock-Based Compensation" ("SFAS 123 and 148"). Under SFAS 123 and 148 the
Company provides pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made since fiscal 1996 as if the
fair-value-based method as defined in SFAS No. 123 had been applied. The Company
estimates the fair value of each option using the Black Scholes option-pricing
model with the following weighted-average assumptions: expected dividend yield
of 0.0%, risk-free interest rate of 5%, volatility at 50% and an expected life
of 5 years for 2007 and 2006.
Compensation costs based on the fair market value at the grant date for its
364,850 outstanding stock options under SFAS No. 123 are set forth below:
Three Months Ended Three Months Ended
------------------ ------------------
September 30, 2006 September 30, 2005
------------------ ------------------
Net income (loss) - as reported $ (82,978) $ 36,116
Add: Stock-based compensation expense included
in reported net income, net of taxes - 10,321
Less fair value of stock options, net of taxes (17,446) (27,826)
-------- --------
Net income (loss)- pro forma (100,424) 18,611
======== ========
Basic earnings (loss) per share - as reported (0.04) 0.02
Basic earnings (loss) per share - pro forma (0.04) 0.01
Diluted earnings (loss) per share - as reported (0.04) 0.02
Diluted earnings (loss) per share - pro forma (0.04) 0.01
Six Months Ended Six Months Ended
---------------- ----------------
September 30, 2006 September 30, 2005
------------------ ------------------
Net income (loss) - as reported $ (354,132) $ 65,264
Add: Stock-based compensation expense included
in reported net income, net of taxes - 25,960
Less fair value of stock options, net of taxes (34,892) (60,969)
-------- --------
Net income (loss)- pro forma (389,024) 30,255
======== ========
Basic earnings (loss) per share - as reported (0.15) 0.03
Basic earnings (loss) per share - pro forma (0.17) 0.01
Diluted earnings (loss) per share - as reported (0.15) 0.03
Diluted earnings (loss) per share - pro forma (0.17) 0.01
- 6 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 6 Segment Information
------ -------------------
Information is presented for the Company's three reportable activities, avionics
government, avionics commercial, and marine systems. There are no inter-segment
revenues.
The Company is organized primarily on the basis of its avionics and marine
instrument products. The avionics government market consists primarily of the
design, manufacture, and sale of test equipment to U.S. and foreign governments
and militaries, either direct or through distributors. The avionics commercial
market consists primarily of the design, manufacture, and sales of test
equipment to domestic and foreign airlines, to commercial distributors, and to
general aviation repair and maintenance shops. The avionics commercial market
also includes sales related to repairs and calibration which have a lower gross
margin. The Company primarily develops and designs test equipment for the
avionics industry and, as such, the Company's products and designs cross
segments. The marine instrumentation systems segment consists of sales of
different products to hydrographic, oceanographic, researchers, engineers,
geophysicists, and surveyors.
The table below presents information about sales and gross margin. Costs of
sales include certain allocation factors for indirect costs. Engineering,
research and development expenses, and marketing and selling expenses represent
direct expenses for the avionics and marine segments.
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
September 30, 2006 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Sales $1,242,366 $ 601,490 $1,843,856 $ 283,493 $2,127,349
Cost of sales 496,349 348,761 845,110 211,079 1,056,189
---------- ---------- ---------- ---------- ----------
Gross margin 746,017 252,729 998,746 72,414 1,071,160
---------- ---------- ---------- ---------- ----------
Engineering, research, & dev. 523,854 46,065 569,919
Selling, general, and admin. 317,398 33,767 $ 298,801 649,966
Amortization of intangibles - -
Interest,, net (10,540) - - (10,540)
---------- ---------- ---------- ----------
Total expenses 830,712 79,832 298,801 1,209,345
---------- ---------- ---------- ----------
Income (loss) before income $ 168,034 $ (7,418) $ (298,801) $ (138,185)
taxes ========== ========== ========== ==========
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
September 30, 2005 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Sales $1,832,373 $ 917,352 $2,749,725 $ 344,717 $3,094,442
Cost of sales 833,272 543,166 1,376,438 213,185 1,589,623
---------- ---------- ---------- ---------- ----------
Gross margin 999,101 374,186 1,373,287 131,532 1,504,819
---------- ---------- ---------- ---------- ----------
Engineering, research, & dev. 592,793 50,785 643,578
Selling, general, and admin. 330,078 91,652 $ 353,123 774,853
Amortization of intangibles 21,549 21,549
Interest,, net (45) - - (45)
---------- ---------- ---------- ----------
Total expenses 922,826 142,437 374,672 1,439,935
---------- ---------- ---------- ----------
Income (loss) before income taxes $ 450,461 $ (10,905) $ (374,672) $ 64,884
========== ========== ========== ==========
- 7 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 6 Segment Information (continued)
------ -------------------------------
Six Months Ended Avionics Avionics Avionics Marine Corporate
---------------- -------- -------- -------- ------ ---------
September 30, 2006 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- ----- -----
Sales $2,245,916 $1,241,558 $3,487,474 $ 404,926 $3,892,400
Cost of sales 952,936 760,416 1,713,352 302,310 2,015,662
---------- ---------- ---------- ---------- ----------
Gross margin 1,292,980 481,142 1,774,122 102,616 1,876,738
---------- ---------- ---------- ---------- ----------
Engineering, research, & dev. 1,115,951 99,149 1,215,100
Selling, general, and admin. 615,312 86,052 $ 570,725 1,272,089
Amortization of intangibles - -
Interest (income) expense, net (20,720) - - (20,720)
---------- ---------- ---------- ----------
Total expenses 1,710,543 185,201 570,725 2,466,469
---------- ---------- ---------- ----------
Income (loss) before income taxes $ 63,579 $ (82,585) $ (570,725) $ (589,731)
========== ========== ========== ==========
Six Months Ended Avionics Avionics Avionics Marine Corporate
---------------- -------- -------- -------- ------ ---------
September 30, 2005 Gov't Comm'l. Total Systems Items Total
------------------ ----- ------- ----- ------- -----
Sales $4,205,408 $1,479,424 $5,684,832 $ 560,588 $6,245,420
Cost of sales 1,811,666 961,941 2,773,607 360,311 3,133,918
---------- ---------- ---------- ---------- ----------
Gross margin 2,393,742 517,483 2,911,225 200,277 3,111,502
---------- ---------- ---------- ---------- ----------
Engineering, research, & dev. 1,179,491 92,609 1,272,100
Selling, general, and admin. 748,276 177,365 $ 747,207 1,672,848
Amortization of intangibles 43,098 43,098
Interest expense, net 581 - - 581
---------- ---------- ---------- ----------
Total expenses 1,928,348 269,974 790,305 2,988,627
---------- ---------- ---------- ----------
Income (loss) before income taxes $ 982,877 $ (69,697) $ (790,305) $ 122,875
========== ========== ========== ==========
- 8 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 7 New Accounting Pronouncements
------ -----------------------------
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140". SFAS
No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets". SFAS No. 155 will become effective for the Company's fiscal year after
September 15, 2006. The impact of SFAS No. 155 will depend upon the nature and
extent of any new derivative instruments entered into after the effective date.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB No. 140", with respect to the accounting
for separately recognized servicing assets and servicing liabilities. The impact
of SFAS No. 156 will depend upon the nature and extent of any new derivative
instruments entered into after the effective date.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" (FIN 48), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." FIN 48 establishes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the adoption
of this interpretation will have on its future consolidated financial
statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." This Bulletin provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a material assessment.
The guidance in this Bulletin must be applied to financial reports covering the
first fiscal year ending after November 15, 2006. This statement does not
currently apply to the Company since the Company has had no misstatements.
Also in September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements." This SFAS defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement applies to accounting
pronouncements that require or permit fair value measurements, except for
share-based payments transactions under SFAS No. 123. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. As SFAS No. 157 does not require any new fair value
measurements or measurements of previously computed fair values, the Company
does not believe adoption of this Statement will have a material effect on its
financial statements.
- 9 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in demand
for the Company's products or in the cost and availability of its raw materials;
the actions of its competitors; the success of our customers; technological
change; changes in employee relations; government regulations; litigation,
including its inherent uncertainty; difficulties in plant operations and
materials; transportation, environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the Company's previous
filings with the Securities and Exchange Commission.
Critical Accounting Policies
----------------------------
In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies as disclosed in Note
2 of our Notes to Financial Statements included in our Form 10-K. The Company's
accounting policies that require a higher degree of judgment and complexity used
in the preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment to, or
acceptance by the customer provided title and risk of loss is transferred to the
customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under service contracts are recognized when the services are
performed. Shipping and handling costs are not material.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
Since 2001, the Company had a contract with the U.S. Navy for the delivery of
test equipment (AN/APM-480). The AN/APM-480 is a catalog product, which the
Company also sells to civilian and other government customers. While the Company
sells this product to the U.S. Navy, the proprietary rights to the technology
are retained by the Company. Since the AN/APM-480 was a significant product, and
the Company's premier IFF test set, the Company continued to improve the product
to meet the needs of its other customers, to increase product performance, and
to improve the manufacturing process. Further, although the AN/APM-480 was
accepted and used by the Navy, since it was in substantial compliance with the
specification, there were limited areas where the AN/APM-480 did not operate at
maximum performance according to the specification. Since the U.S. Navy was a
significant customer and because of these minor specification issues, the
Company agreed in fiscal year 2002 to provide enhancements at no additional cost
to the customer.
- 10 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
Beginning in fiscal year 2002, the Company began to accrue the cost of these
enhancements as the original units were shipped in order to properly match the
revenues with the expenses. The Company considers this accrual similar to a
warranty expense, and recorded the liability and the expense to cost of sales.
The enhancements made, and to be made to the product, the Company believes, are
relatively insignificant. The Company has shipped and has been paid for all
1,300 units (approximately $18,200,000 in revenues) through the fiscal year
ended March 31, 2006, and the cost of these enhancements is less than 3% of the
revenues. The customer continues to use the original product in the field,
because the enhancements are not essential to the unit to perform the major
functions of the delivered products. The Company continued to ship the units in
accordance with the original contract, and was paid. Revenue was recognized
because Tel substantially completed and fulfilled the terms specified in the
original contract, the Navy took delivery and the Armed Forces are using the
product in the field. In the case of these enhancements, there was no obligation
to perform any enhancements at the time the original contract was signed in
2000, and when the first shipments were made in our fiscal year ended March 31,
2001.
The costs, estimated to be approximately $480 per unit are for labor and
material, based upon our experience manufacturing the product, and our standard
costing information. The Company is charging costs of performing the enhancement
to the accrued liability as the units are shipped. This accrual is being reduced
as the units are enhanced and returned to the military. As of September 30,
2006, 879 of the total 1,159 units requiring upgrade have been completed.
Inventory reserves - inventory reserves or write-downs are estimated for excess,
slow-moving and obsolete inventory as well as inventory whose carrying value is
in excess of net realizable value. These estimates are based on current
assessments about future demands, market conditions and related management
initiatives. While reserves have historically been within expectation, if market
conditions and actual demands are less favorable than those projected by
management, additional reserves or inventory write-downs may be required.
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.
Warranty/enhancement reserves - warranty/enhancement reserves are based upon
historical rates and specific items that are identifiable and can be estimated
at time of sale. While warranty/enhancement costs have historically been within
our expectations and the provisions established, future warranty/enhancement
costs could be in excess of our warranty/enhancement reserves. A significant
increase in these costs could adversely affect our operating results for the
period and the periods these additional costs materialize. Warranty/enhancement
reserves are adjusted from time to time when actual warranty/enhancement claim
experience differs from estimates.
- 11 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
Income taxes - deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefit which is
not more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in the period that such tax
rate changes are enacted.
Results of Operations
---------------------
Overview
--------
As previously reported, the Company is in a transition phase between the
conclusion of deliveries under its previous AN/APM-480 multi year contract with
the U.S. Navy and commencement of deliveries under its new, multi year contract
to deliver AN/US-708 units. As a result of this interval in deliveries and
sales, as well as weakness in the commercial aviation industry and lower sales
in the marine systems division, the revenues were down significantly in the
three and six-month periods ended September 30, 2006.
Although research and development expenditures remain high, in order to support
the two new large contract awards, discussed below, the Company adopted a Profit
Improvement Plan in March of this year, which resulted in substantial operating
expense reductions for the six months ended September 30, 2006 as compared to
the previous fiscal year. The Company's gross profit has not improved because of
the lower volume of sales and competitive pressures.
As a consequence of the temporary significant decline in revenues exceeding the
reduction in operating costs, operating profits and cash have declined. However,
the Company has working capital in excess of $4 million, cash in excess of $1
million, and an unused credit line of $1.75 million, and believes that it has
adequate liquidity, resources and backlog to fund operating plans during this
interval, and until deliveries of its new units commence in calendar 2008.
In March 2005, the Company was awarded a $17.3 million multi-year,
firm-fixed-price, indefinite-delivery/indefinite-quantity contract for the
systems engineering, design and integration, fabrication, testing, and
production of a Communications/Navigation (COMM/NAV) Radio Frequency (RF)
Avionics Flightline Tester (CRAFT) with sonobuoy simulator capabilities, since
designated the AN/USM-708. The AN/USM-708
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Overview (continued)
--------------------
CRAFT combines advanced navigation, communication, Mode 5 IFF ("Identification,
Friend, or Foe"), and sonobuoy test capabilities in a portable test set, which
will utilize a flexible and expandable digital-signal- processing-based
architecture. This unit is the only Mode 5 IFF ("Identification, Friend, or
Foe") flight line tester now under government contract. The engineering design
is being completed, and the fabrication of 15 prototype units will be completed
shortly. These units will undergo design validation testing beginning in spring
2007, with full rate production to begin in spring 2008. This contract currently
has production options totaling 750 units, which if exercised, would generate
approximately $14 million to revenues over a several year period. The contract
for the AN/USM-708 is a significant milestone for the Company, because the
development of this technology will help solidify the Company as one of the
leaders in the industry, and will meet the U.S. Navy's test requirements for
years to come. The Company will continue funding the development of this
product. The Company believes, given the unique nature of the design, this unit
could generate additional sales to other military customers. The AN/USM-708
contract includes optional requirements for testing encrypted communications,
which, if exercised, could represent a major expansion in the Company's core
business.
In July 2006, Tel was awarded a second major US Navy contract for an
Intermediate Level TACAN Test Set (ITATS). This contract has options for
approximately 150 units with a total value of over $12 million; the initial work
authorization was $4.4 million. Tel will be working with two designated
sub-contractors and, as a result, this program will not entail the same level of
Tel engineering effort as the AN/USM-708. This award has been challenged to the
General Accountability Office by an unsuccessful bidder for this project and,
consequently, our contract is currently on hold while the Navy responds to the
GAO. While the Company remains optimistic as to the outcome of this protest, it
will at least, delay deliveries until calendar year 2008. Given the unique
nature of the design, this unit could also generate significant sales to other
military customers, both domestically and overseas.
Commercial and military orders continue to be below expectations. The timing of
government orders, increased competition, and the continued financial
difficulties within the commercial airline industry have contributed to the
decline in business. Currently, the backlog approximates $4,3 million, excluding
ITATS. Research and development expenditures are expected to remain high through
the balance of fiscal year 2007.
- 13 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Sales
-----
Total sales decreased $967,093 (31.3%) to $2,127,349 and $2,353,020 (37.7%) to
$3,892,400, respectively, for the three and six months ended September 30, 2006
as compared to the same periods in the prior fiscal year.
Sales of avionics products decreased $905,869 (32.9%) to $1,843,856 and
$2,197,358 (38.7%) to $3,487,474 for the three and six months ended September
30, 2006, respectively, as compared to the same periods in the prior year.
Avionics commercial sales decreased from prior year by $315,862 (34.4%) to
$601,490 and $237,866 (16.1%) to $1,241,558, respectively, for the same periods.
This decrease is mostly attributed to a decline in sales of the TR-220 line of
Multi-Function Test sets. The weak financial condition of the commercial airline
industry continues to limit significant growth in this segment.
Avionics government sales decreased $590,007 (32.2%) to $1,242,366 and
$1,959,492 (46.6%) to $2,245,916, respectively, for the three and six months
ended September 30, 2006 as compared to the same periods in the prior fiscal
year. In the prior fiscal year, the Company had contracts for shipment of the
T-36M and the T-47N with the U.S. Army and shipment of the T-47N to Royal
Australian Air Force, through our distributor, which accounted for the higher
sales in fiscal 2006. The decrease was partially offset by revenues associated
with the test and documentation on the CRAFT program. Marine systems sales
decreased $61,224 (17.8%) to $283,493 and $155,662 (27.8%) to $404,926,
respectively, for the same periods, as a result of lower sales of specialty
systems to the dredging industry.
Gross Margin
------------
Gross margin decreased $433,659 (28.8%) to $1,071,160 and $1,234,764 (39.7%) to
$1,876,738 for the three and six months ended September 30, 2006, respectively,
as compared to the same period in the prior fiscal year. This decrease in gross
margin is primarily attributed to the lower sales volume.
Operating Expenses
------------------
Selling, general and administrative expenses decreased $124,887 (16.1%) to
$649,966 for the three months ended September 30, 2006 as compared to the three
months ended September 30, 2005, resulting primarily from lower commission, and
professional and consulting expenses in the avionics division, and a decrease in
marketing and sales expenses for the marine systems division. Selling, general
and administrative expenses decreased $400,759 (24%) to $1,272,089 for the six
months ended September 30, 2006 as compared to the same period in the prior
fiscal year, primarily as a result of lower administrative salaries, commission,
travel, and professional and consulting expenses in the avionics division, and a
decrease in marketing and sales expenses for the marine systems division.
- 14 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Operating Expenses (continued)
------------------------------
Engineering, research and development expenses decreased $73,659 (11.4%) to
$569,919 and $57,000 (4.5%) to $1,215,100 for the three and six months ended
September 30, 2006, respectively, as compared to the same periods in the prior
fiscal year. Research and development efforts were mostly related to the CRAFT
program. The decrease is mostly attributed to lower outside contract and
purchased material costs.
Income Taxes
------------
An income tax benefit in the amount of $235,599 was recorded for the six months
ended September 30, 2006 as a result of the loss before taxes as compared to a
provision for income taxes in the amount of $57,611 for the six months ended
September 30, 2005. These amounts represent the effective federal and state tax
rate of approximately 40% on the Company's net income (loss) before taxes.
Liquidity and Capital Resources
-------------------------------
At September 30, 2006, the Company had positive working capital of $4,055,902 as
compared to $4,302,369 at March 31, 2006. For the six months ended September 30,
2006, the Company used $787,244 of cash for operations as compared to generating
$862,670 in cash from operating activities for the six months ended September
30, 2005. The increase in cash used in operations is primarily attributed to the
Company's loss for the year. In addition, for the six months ended September 30,
2006, accounts receivable and inventories increased by $26,905 as compared to
declining $747,231 for the six months ended September 30, 2005.
The Company has a line of credit of $1,750,000 from Bank of America. The line of
credit bears an interest rate of 0.5% above the lender's prevailing base rate,
which is payable monthly, based upon the outstanding balance. The Company does
not pay any fees to maintain this open line. At September 30, 2006, the Company
had no outstanding balance. The line of credit is collateralized by
substantially all of the assets of the Company, and requires the Company to
maintain certain financial covenants and expires September 30, 2006. The Company
is in compliance with all financial covenants.
Based upon the current backlog, its existing credit line, and cash balance, the
Company believes that it has sufficient capital to fund its operating plans for
at least the next twelve months. Currently, the Company has no material capital
requirements.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 2006. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K to the Securities and Exchange Commission for the fiscal year ended
March 31, 2006.
- 15 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------- ----------------------------------------------------------
The Company, at this time, is generally not exposed to material financial market
risks, including changes in interest rates, foreign currency exchange rates, and
marketable equity security prices.
Item 4. Controls and Procedures
------- -----------------------
The Company adopted disclosure controls and procedures, as called for by the
legislation and rules of the Securities and Exchange Commission. Under Rules
promulgated by the SEC, disclosure controls and procedures are defined as "those
controls or other procedures of the issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports filed or
submitted by it under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the commission's rules and
forms." The Chief Executive Officer and Principal Accounting Officer evaluated
the Company's Disclosure Controls and Procedures at September 30, 2006 and have
concluded that they are effective, based on their evaluation of these controls
and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of September 30, 2006 by the Chief Executive
Officer and Principal Accounting Officer, required by paragraph (d) of Exchange
Act Rules 13a-15 or 15d-15, which occurred during Tel's last fiscal quarter and
which have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
Part II. Other Information
---------------------------
Item 6. Exhibits
------- --------
Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the Securities
Exchange Act.
31.2 Certification by Principal Accounting Officer pursuant to Rule
15d-14 under the Securities Exchange Act.
32.1 Certification by CEO and Principal Accounting Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP.
Date: November 13, 2006 By: /s/ Harold K. Fletcher
---------------------------------
Harold K. Fletcher
CEO
Date: November 13, 2006 By: /s/ Joseph P. Macaluso
---------------------------------
Joseph P. Macaluso
Principal Accounting Officer
- 16 -