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, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-18978
TEL-INSTRUMENT ELECTRONICS CORP.
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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.[ ]
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
----- -----
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
2,344,861 shares of Common stock, $.10 par value as of August 6, 2007.
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, 2007 and March 31, 2007 1
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2007 and 2006 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2007 and 2006 3
Notes to Condensed Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 8-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
Part II - Other Information
Item 1. Legal Proceedings 13
Item 1A. Risk Factors 13
Item 2. Unregistered sales of Equity Securities and Use of Proceeds
Item 6. Exhibits 13
Signatures 14
Certifications
- i -
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, March 31,
2007 2007
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 353,000 $ 655,836
Accounts receivable, net 1,971,604 982,214
Inventories, net 2,175,766 2,460,642
Taxes receivable 28,776 28,776
Prepaid expenses and other 104,047 98,053
Deferred income tax asset 451,224 395,756
----------- -----------
Total current assets 5,084,417 4,621,277
Equipment and leasehold improvements, net 568,705 625,247
Deferred income tax asset - non-current 800,000 800,000
Other assets 83,832 81,318
----------- -----------
Total assets $ 6,536,954 $ 6,127,842
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Line of credit 250,000 --
Accounts payable 449,538 372,106
Deferred revenues 102,077 115,409
Accrued payroll, vacation pay and payroll taxes 360,384 353,727
Accrued expenses 766,170 608,692
----------- -----------
Total current liabilities 1,978,169 1,499,934
Deferred revenues 23,656 23,656
Convertible note payable - related party-non-current 50,000 50,000
----------- -----------
Total liabilities 2,051,825 1,573,590
----------- -----------
Commitments -- --
Stockholders' equity:
Common stock, par value $.10 per share, 2,344,861
and 2,341,861 issued and outstanding as of June 30,
2007 and March 31, 2007, respectively 234,486 234,186
Additional paid-in capital 4,394,100 4,380,149
Accumulated deficit (143,457) (60,083)
----------- -----------
Total stockholders' equity 4,485,129 4,554,252
----------- -----------
Total liabilities and stockholders' equity $ 6,536,954 $ 6,127,842
=========== ===========
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
------------------
June 30, 2007 June 30, 2006
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Net sales $ 3,081,052 $ 1,765,051
Cost of sales 1,830,835 959,473
----------- -----------
Gross margin 1,250,217 805,578
Operating expenses:
Selling, general and administrative 581,107 622,123
Engineering, research and development 802,163 645,181
----------- -----------
Total operating expenses 1,383,270 1,267,304
----------- -----------
Loss from operations (133,053) (461,726)
Interest income (expense):
Interest income 3,161 12,450
Interest expense (8,947) (2,270)
----------- -----------
Loss before income taxes (138,839) (451,546)
Income tax benefit (55,465) (180,392)
----------- -----------
Net loss $ (83,374) $ (271,154)
=========== ===========
Basic and diluted loss per common share $ (0.04) $ (0.12)
=========== ===========
Weighted average shares outstanding
Basic and diluted 2,342,581 2,283,256
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
------------------
June 30, 2007 June 30, 2006
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Cash flows from operating activities:
Net loss $ (83,374) $ (271,154)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (55,465) (180,392)
Depreciation 60,076 66,783
Non-cash stock-based compensation 7,501 --
Changes in assets and liabilities:
Increase in accounts receivable (989,390) (245,412)
Decrease (increase) in inventories 284,876 (32,668)
(Increase) decrease in prepaid expenses & other (5,997) 19,021
Increase in other assets (2,514) (3,054)
Increase in accounts payable 77,432 73,623
(Increase) decrease in accrued payroll, vacation pay
and payroll taxes 6,657 (12,104)
Decrease in deferred revenues (13,332) (17,402)
Increase (decrease) in accrued expenses 157,478 (88,120)
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Net cash used in operating activities (556,052) (690,879)
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Cash flows from investing activities:
Purchases of equipment (3,534) (42,667)
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Net cash used in investing activities (3,534) (42,667)
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Cash flows from financing activities:
Proceeds from the exercise of stock options 6,750 27,900
Proceeds from borrowings from line of credit 250,000 --
----------- -----------
Net cash provided by financing activities 256,750 27,900
----------- -----------
Net decrease in cash and cash equivalents (302,836) (705,646)
Cash and cash equivalents at beginning of period 655,836 1,934,541
----------- -----------
Cash and cash equivalents at end of period $ 353,000 $ 1,228,895
=========== ===========
Taxes paid $ -- $ --
Interest paid $ -- $ --
See accompanying notes to condensed financial statements
- 3 -
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
------ ---------------------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Tel-Instrument Electronics Corp. as of June 30, 2007, the
results of operations for the three months ended June 30, 2007 and June 30,
2006, and statements of cash flows for the three months ended June 30, 2007 and
June 30, 2006. These results are not necessarily indicative of the results to be
expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. The March 31, 2007 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, 2007.
Note 2 Revenue Recognition - Percentage-of-Completion - ITATS
------ ------------------------------------------------------
Due to the unique nature of the ITATS program wherein a significant portion of
this contract will not be delivered for over a year, revenues under this
contract are recognized on a percentage-of-completion basis. All expenses
related to this contract are charged to cost of sales. The Company also receives
progress billings on this program, which is a funding mechanism by the
government to assist contractors on long-term contracts prior to delivery.
Note 3 Accounts Receivable, net
------ ------------------------
Accounts receivable, net consist of:
June 30, 2007 March 31, 2007
----------- -----------
Commercial $ 369,954 $ 678,688
Government 927,117 338,070
Unbilled government receivables* 708,919 --
Less: Allowance for doubtful accounts (34,386) (34,544)
----------- -----------
$ 1,971,604 $ 982,214
=========== ===========
* Unbilled government receivables represent the sales accrued on a
percentage-of-completion basis less amounts invoiced to government
Note 4 Inventories, net
------ ----------------
Inventories, net consist of: June 30, 2007 March 31, 2007
----------- -----------
Purchased parts $ 1,312,605 $ 1,414,558
Work-in-process 872,957 1,171,998
Finished goods 352,014 220,896
Less: Reserve for obsolescence (361,810) (346,810)
----------- -----------
$ 2,175,766 $ 2,460,642
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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 5 Earnings Per Share
------ ------------------
The Company's basic loss per common share is based on net loss for the relevant
period, divided by the weighted average number of common shares outstanding
during the period. Diluted loss per common share is based on net loss, divided
by the weighted average number of common shares outstanding during the period.
Diluted loss per share for the periods ended June 30, 2007 and 2006 does not
include common stock equivalents, as these would be antidilutive.
Three Months Ended Three Months Ended
------------------ ------------------
June 30, 2007 June 30, 2006
------------- -------------
Basic net loss per share computation:
Net loss attributable to common stockholders $ (83,374) $ (271,154)
Weighted-average common shares outstanding 2,342,581 2,283,256
Basic net loss per share attributable to common stockholders $ (0.04) $ (0.12)
Diluted net loss per share computation
Net loss attributable to common stockholders $ (83,374) $ (271,154)
Weighted-average common shares outstanding 2,342,581 2,283,256
Incremental shares attributable to the assumed exercise of
outstanding stock options -- --
Total adjusted weighted-average shares 2,342,581 2,283,256
Diluted net loss per share attributable to common stockholders $ (0.04) $ (0.12)
Note 6 Stock Options
------ -------------
Effective April 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), utilizing the modified
prospective method. SFAS 123R requires the measurement of stock-based
compensation based on the fair value of the award on the date of grant. Under
the modified prospective method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption. The Company recognizes compensation cost on
awards on a straight-line basis over the vesting period, typically four years.
As a result of adopting SFAS 123(R), the loss before taxes was charged $7,501
and $-0- for three months ended June 30, 2007 and 2006, respectively. Prior to
the adoption of SFAS 123R, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
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 4.77%, volatility at 50.16%
to 56.94%, and an expected life of 5 years for the three months ended June 30,
2007; expected dividend yield of 0.0%, risk-free interest rate of 5%, volatility
at 50% and an expected life of 5 years for the three months ended June 30, 2006.
The Company estimates forfeiture rate based on historical data. Based on an
analysis of historical information, the Company has applied a forfeiture rate of
15%.
- 5 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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Note 7 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.
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, 2007 Gov't Comm'l. Total Systems Items Total
------------- ----- ------- ----- ------- ----- -----
Net sales $ 2,060,307 $895,432 $ 2,955,739 $ 125,313 $ 3,081,052
Cost of Sales 1,264,326 490,611 1,754,937 75,898 1,830,835
---------- -------- ----------- --------- -----------
Gross Margin 795,981 404,821 1,200,802 49,415 1,250,217
------- ------- --------- ------ ---------
Engineering, research, and
development 763,374 38,789 802,163
Selling, general, and admin. 288,509 33,706 $ 258,892 581,107
Interest (income) expense,net 5,786 -- -- 5,786
----- ----- ----- -----
Total expenses 1,057,669 72,495 258,892 1,389,056
--------- ------ ------- ---------
Income (loss) before income
taxes $ 143,133 $ (23,080) $(258,892) $ (138,839)
========= ========= ========= ==========
Segment assets $ 1,910,624 $390,254 $ 2,300,878 $ 483,809 $3,752,267 $ 6,536,954
=========== ======== =========== ========= ========== ===========
Three Months Ended Avionics Avionics Avionics Marine Corporate
------------------ -------- -------- -------- ------ ---------
June 30, 2006 Gov't Comm'l. Total Systems Items Total
------------- ----- ------- ----- ------- ----- -----
Net sales $ 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
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)
========== ========= ========= ==========
- 6 -
TEL-INSTRUMENT ELECTRONICS CORP.
--------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------
Note 8 Income Taxes
------ ------------
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes- an Interpretation of FASB Statement No. 109, on April 1, 2007. The
Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The Company did not have any unrecognized
tax benefits and there was no effect on our financial condition or results of
operations as a result of implementing FIN 48.
The tax effect of temporary differences, primarily net operating loss
carryforwards, asset reserves and accrued liabilities, gave rise to the
Company's deferred tax asset in the accompanying June 30, 2007 and March 31,
2007 consolidated balance sheets. Deferred income taxes are recognized for the
tax consequence of such temporary differences at the enacted tax rate expected
to be in effect when the differences reverse.
Note 9 Stock Options
------ -------------
During the quarter ended June 30, 2007 stock options for 3,000 shares were
exercised for total proceeds of $6,750.
- 7 -
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 short-term service contracts are recognized when the
services are performed.
Due to the unique nature of the ITATS program wherein a significant portion of
this contract will not be delivered for over a year, revenues under this
contract are recognized on a percentage-of-completion basis, which recognizes
sales and profit as it is earned. All expenses related to this contract are
charged to cost of sales. The Company also receives progress billings on this
program, which is a funding mechanism by the government to assist contractors on
long-term contracts prior to delivery.
Shipping and handling costs charged to customers are not material. The revenues
and related shipping and handling costs are included in selling, general and
administrative expenses.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues.
Inventory reserves - inventory reserves or write-downs 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.
- 8 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
Accounts receivable - the Company performs ongoing credit evaluations of its
customers and adjusts credit limits based on customer payment and current credit
worthiness, as determined by review of their current credit information. The
Company continuously monitors credits and payments from its customers and
maintains provision for estimated credit losses based on its historical
experience and any specific customer issues that have been identified. While
such credit losses have historically been within expectation and the provision
established, the Company cannot guarantee that this will continue.
Warranty/enhancement reserves - warranty/enhancement reserves are based upon
historical rates and specific items that are identifiable and can be estimated
at time of sale. While warranty/enhancement costs have historically been within
expectations and the provisions established, future warranty/enhancement costs
could be in excess of the Company's warranty/enhancement reserves. A significant
increase in these costs could adversely affect the Company's operating results
for the period and the periods these additional costs materialize.
Warranty/enhancement reserves are adjusted from time to time when actual
warranty/enhancement claim experience differs from estimates.
Income taxes - deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
such differences are expected to reverse. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for any tax benefit which is
not more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in the period that such tax
rate changes are enacted.
General
-------
Management's discussion and analysis of results of operations and financial
condition is intended to assist the reader in the understanding and assessment
of significant changes and trends related to the results of operations and
financial position of the Company together with its subsidiary. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and accompanying financial notes in the Company's Annual Report on
Form 10-K for the year ended March 31, 2007.
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.
- 9 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations
---------------------
Overview
--------
In the first quarter of fiscal year 2008 sales increased over sales for each
quarter of the prior fiscal year to over $3 million, and the loss before taxes
was reduced to approximately $140K. This increase in sales is primarily
attributed to the following:
o In fiscal year 2007, the Company was awarded the AN/ARM-206
Intermediate Level TACAN Test Set (ITATS) contract for $4.4 million.
Since this contract has a long duration, revenues under this contract
have been recognized on a percentage-of-completion basis. For the
first three months of fiscal year 2008, revenues under this contract
were approximately $736,000. However, the gross profit (approximately
71K) for this contract is significantly less than the Company's
historical gross profit due to use of an engineering subcontractor,
and the competitiveness of the bidding process.
o The shipment of T-47N test sets to the Royal Australian Air Force
(through the Company's distributor) for approximately $600,000.
o Increase in shipments of the TR-220 Multi-Function test set.
Over the last two calendar years the Company has won competitive awards for two
major contracts, CRAFT and ITATS, from the U.S. Navy. These contracts include
multi-year production deliveries, commencing late in calendar year 2008, and
have an aggregate value of approximately $30 million. The products under these
contracts represent cutting edge technology, and should provide Tel with a
competitive advantage for years to come. Shipments under the Company's long-term
An/APM-480 contract concluded in December 2006.
Research and development expenditures will continue to remain high for the next
several quarters to support the CRAFT program that is expected to be in
environmental testing in the fall of 2007, and to further improve existing
products. The Company has been able to partially offset some of the research and
development expenditures by implementing a Profit Improvement Plan, which
resulted in reductions in operating expenses.
Sales of marine products remained flat for the first quarter of fiscal year 2008
as compared to the same period of the prior year. The Company reduced expenses
pursuant to its profit improvement plan, but current sales volume remains
inadequate to cover existing expenses. ITI's sales have not grown as expected
and the Company is closely monitoring its performance, and is evaluating its
future potential.
While the near-term competitive and economic situation remains difficult for
both the avionics and marine system markets, management remains optimistic about
the Company's prospects and improving results. Tel has significantly upgraded
its management team and engineering staff over the last several years and the
new digital technology incorporated into the AN/USM-708 and AN/ARM-206 units
could have applications outside of Tel's traditional avionics business as well
as increasing opportunities in regular markets.
As a consequence of operating losses, working capital, stockholders' equity, and
cash have declined. However, the Company believes that it has adequate
liquidity, resources and backlog to fund operating plans for the next 12 months,
and until deliveries of its new units commence.
- 10 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------ -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Overview (continued)
--------------------
At June 30, 2007, the Company's backlog was approximately $8.7 million as
compared to approximately $8.8 million at June 30, 2006, which also included
$4.4 million for the ITATS program. Historically, commercial and government
orders received by the Company, other than for larger programs, like the
AN/APM-480 or AN/USM-708, are received and shipped within the year and, as such,
are not reflected in year-end backlog.
Sales
-----
For the first quarter ended June 30, 2007, total sales increased $1,316,001
(74.6%) to $3,081,052 as compared to $1,765,051 for the same quarter in the
prior year. Avionics sales increased $1,312,121 (79.8%) to $2,955,739 and marine
systems sales increased $3,880 (3.2%) to $125,313 for the quarter ended June 30,
2007 as compared to the quarter ended June 30, 2006. Avionics Government sales
increased $1,056,757 (105.3%) to $2,060,307 for the period as compared to
$1,003,550 for the same period last year. The increase in Avionics Government
sales is attributed to revenues of approximately $736,000 from the ITATS
contract, which are recognized on a percentage-of-completion basis and the
shipment of T-47N test sets to the Royal Australian Air Force (through the
Company's distributor) for approximately $600,000, partially offset by lower
revenues in other products. Avionics Commercial sales increased $255,364 (39.9%)
to $895,432 for the three months ended June 30, 2007 as compared to $640,068 in
the same period in the prior year, attributed mostly to an increase in shipments
of the TR-220 Multi-Function Test set.
Gross Margin
------------
Gross margin increased $444,639 (55.2%) to $1,250,217 for the three months ended
June 30, 2007 as compared to $805,578 in the same three months in the prior
fiscal year. The increase in gross margin is attributed to the increase in
volume. The gross margin percentage for the three months ended June 30, 2007 was
40.6% as compared to 45.6% for the three months ended June 30, 2006. The
decrease in gross profit percentage is primarily attributed to the lower gross
profit percentage on the ITATS contract.
Operating Expenses
------------------
Selling, general and administrative expenses decreased $41,016 (6.6%) to
$581,107 for the three months ended June 30, 2007, as compared to $622,123 for
the three months ended June 30, 2006. This decrease is attributed to lower
outside commissions ($25K), reduced sales/marketing expenses for the marine
systems division ($18K), and the transfer of certain costs for work associated
with the ITATS program ($17K), which are offset partially by an increase in
sales salaries for the avionics division ($24K).
Engineering, research and development expenses increased $156,982 (24.3%) to
$802,163,for three months ended June 30, 2007 as compared to $645,181 for the
three months ended June 30, 2006. This increase is mostly attributed to efforts
related to the CRAFT program.
- 11 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------- -------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
---------------------------------------------------------
Results of Operations (continued)
---------------------------------
Income Taxes
------------
An income tax benefit in the amount of $55,465 was recorded for the three months
ended June 30, 2007 as compared to an income tax benefit of $180,392 for the
quarter ended June 30, 2006 as a result of the losses before taxes. These
amounts represent the effective federal and state tax rate of approximately 40%
on the Company's net loss before taxes.
Net Loss
--------
As a result of the above, the Company incurred a net loss of $83,374 for the
quarter ended June 30, 2007 as compared to a net loss of $271,154 for the
quarter ended June 30, 2006.
Liquidity and Capital Resources
-------------------------------
At June 30, 2007 the Company had working capital of $3,106,248 as compared to
$3,121,343 at March 31, 2007. For the three months ended June 30, 2007, the
Company used $556,052 of cash in operations as compared to $690,879 for the
three months ended June 30, 2006. This decrease in cash used in operations is
primarily attributed to the reduced loss for the current quarter, a reduction in
inventories, and an increase in accrued expenses, offset in part by the increase
in accounts receivable.
Net cash used in investing activities decreased from $42,667 for the three
months ended June 30, 2006 to $3,534 at June 30, 2007 due to lower volume of
purchases of equipment.
Net cash provided by financing activities increased to $256,750 for the three
months ended June 30, 2007 as compared to $27,900 for the three months ended
June 30, 2006 due to the borrowing from the line of credit in the amount of
$250,000. The Company has a line of credit of $1,750,000 from Bank of America.
The line of credit bears an interest rate of 0.5% above the lender's prevailing
base rate, and is payable monthly based upon the outstanding balance. The
Company does not pay to maintain this open line. At June 30, 2007 the Company
had an outstanding balance of $250,000 on which it pays 8.75% interest. The line
of credit is collateralized by substantially all of the assets of the Company
and expires in September 2007.
As a consequence of operating losses, the working capital, stockholders' equity,
and cash have declined. However, the Company believes that it has adequate
liquidity, borrowing resources and backlog to fund operating plans for the next
twelve months, and until deliveries of its new units commence. Currently, the
Company has no material capital expenditure requirements.
There was no significant impact on the Company's operations as a result of
inflation for the three months ended June 30, 2007. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K to
the Securities and Exchange Commission for the fiscal year ended March 31, 2007.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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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
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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, 2007 and have concluded that they are effective, based on their
evaluation of these controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of June 30, 2007 by the Chief Executive
Officer and Principal Accounting Officer, required by paragraph (d) of Exchange
Act Rules 13a-15 or 15d-15, which occurred during our last fiscal quarter and
which have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
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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,
2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
There were no unregistered sales of equity securities and there were no
repurchases of equity securities during the Company's first quarter ended June
30, 2007.
Item 6. Exhibits
------- --------
Exhibits
31.1 Certification by CEO pursuant to Rule 15d-14 under the Securities
Exchange Act.
31.2 Certification by 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.
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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, 2007 By: /s/ Harold K. Fletcher
--------------------------------
Harold K. Fletcher
Chairman and President
Date: August 14, 2007 By: /s/ Joseph P. Macaluso
--------------------------------
Joseph P. Macaluso
Principal Accounting Officer
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