UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
|_| 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:
2,254,381 shares of Common stock, $.10 par value as of February 10, 2006.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Comparative Balance Sheets
December 31, 2005 and March 31, 2005 1
Condensed Consolidated Comparative Statements of Operations -
Three and Nine Months Ended December 31, 2005 and 2004 2
Condensed Consolidated Comparative Statements of Cash Flows -
Nine Months Ended December 31, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits 15
Signatures 15
Certifications 16-18
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
ASSETS
December 31, March 31,
2005 2005
------------ ---------
(Unaudited)
Current assets:
Cash and cash equivalents $1,416,378 $ 826,959
Accounts receivable, net 1,988,585 1,610,519
Inventories, net 2,186,003 2,926,011
Taxes receivable 125,674 125,674
Prepaid expenses and other current assets 178,514 124,946
Deferred income tax benefit - current 583,560 467,366
---------- ----------
Total current assets 6,362,520 6,197,669
Property, plant, and equipment, net 808,319 844,075
Intangible assets, net 262,205 326,851
Other assets 312,990 302,135
---------- ----------
Total assets $7,746,034 $7,670,730
========== ==========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Convertible note payable - related party - current portion $ 50,000 $ 50,000
Convertible subordinated note - related party 7,500 7,500
Notes payable - other 58,000 58,000
Capitalized lease obligations - current portion -- 2,323
Accounts payable 368,504 481,146
Deferred revenues 164,206 169,866
Accrued payroll, vacation pay, profit sharing
and payroll taxes 342,894 353,704
Accrued expenses 905,020 1,028,014
---------- ----------
Total current liabilities 1,896,124 2,150,553
Convertible notes payable - related party - non-current portion 150,000 150,000
Deferred taxes - long-term 43,000 43,000
---------- ----------
Total liabilities 2,089,124 2,343,553
Stockholders' equity:
Common stock, par value $.10 per share; 2,254,381 225,441 218,786
and 2,187,831 issued and outstanding as of
December 31, 2005, and March 31, 2005, respectively
Additional paid-in capital 4,196,180 4,024,910
Retained earnings 1,235,289 1,083,481
---------- ----------
Total stockholders' equity 5,659,910 5,327,177
---------- ----------
Total liabilities and stockholders' equity $7,746,034 $7,670,730
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004
------------- ------------- ------------- -------------
Net sales 3,008,995 2,782,090 9,254,415 7,833,840
Cost of sales 1,478,538 1,232,404 4,612,456 3,594,055
----------- ----------- ----------- -----------
Gross margin 1,530,457 1,549,686 4,641,959 4,239,785
Operating expenses:
Selling, general & administrative 743,894 844,758 2,416,742 2,486,711
Amortization of intangibles 21,549 21,549 64,647 64,647
Engineering, research, & development 609,842 610,781 1,881,942 1,653,277
----------- ----------- ----------- -----------
Total operating expenses 1,375,285 1,477,088 4,363,331 4,204,635
Income from operations 155,172 72,598 278,628 35,150
Other income (expense):
Interest income 6,683 2,387 13,073 9,137
Interest expense (4,436) (5,214) (11,407) (18,776)
----------- ----------- ----------- -----------
Income before taxes 157,419 69,771 280,294 25,511
Provision for income taxes 70,875 27,725 128,486 10,044
----------- ----------- ----------- -----------
Net income $ 86,544 $ 42,046 $ 151,808 $ 15,467
=========== =========== =========== ===========
Basic income per common share $ 0.04 $ 0.02 $ 0.07 $ 0.01
Diluted income per common share $ 0.04 $ 0.02 $ 0.07 $ 0.01
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,229,244 2,156,771 2,204,476 2,149,199
Diluted 2,296,385 2,272,473 2,271,617 2,264,901
See accompanying notes to condensed consolidated financial statements.
2
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Nine Months Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Cash flows from operating activities
Net income $ 151,808 $ 15,467
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income taxes 116,194 10,047
Depreciation 205,862 217,462
Amortization of intangibles 64,646 64,647
Non-cash stock-based compensation 43,230 --
Changes in assets and liabilities:
Increase in accounts receivable (378,066) (829,786)
Decrease (increase) in inventories 740,008 (570,837)
Increase in prepaid expenses and other current assets (53,568) (21,136)
Increase in other assets (10,855) (9,072)
(Decrease) increase in accounts payable (112,642) 139,051
(Decrease) increase in deferred revenues (5,660) 88,549
(Decrease) increase in accrued payroll, vacation pay,
and payroll taxes (10,810) 54,914
Decrease in accrued expenses (122,994) (24,524)
----------- -----------
Net cash (used in) provided by operations 627,153 (865,218)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (170,106) (233,066)
----------- -----------
Net cash used in investing activities (170,106) (233,066)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 134,695 69,780
Repayment of capitalized lease obligations (2,323) (16,915)
----------- -----------
Net cash provided by financing activities 132,372 52,865
----------- -----------
Net increase (decrease) in cash and cash equivalents 589,419 (1,045,419)
Cash and cash equivalents at beginning of period 826,959 1,509,828
----------- -----------
Cash and cash equivalents at end of period $ 1,416,378 $ 464,409
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 84,847 $ 84,847
=========== ===========
Taxes paid $ 12,038 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position of
Tel-Instrument Electronics Corp as of December 31, 2005, the results of
operations for the three and nine months ended December 31, 2005 and December
31, 2004, and statements of cash flows for the nine months ended December 31,
2005 and December 31, 2004. 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, 2005 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, 2005.
Note 2 Accounts Receivable
The following table sets forth the components of accounts receivable:
December 31, 2005 March 31, 2005
----------------- --------------
Commercial $ 477,120 $ 642,954
Government 1,554,493 1,013,771
Allowance for Bad Debts (43,028) (46,206)
----------- -----------
Total $ 1,988,585 $ 1,610,519
=========== ===========
Note 3 Inventories
Inventories consist of:
December 31, 2005 March 31, 2005
----------------- --------------
Purchased Parts $ 1,294,038 $ 1,452,080
Work-in-Process 889,096 1,532,535
Finished Goods 168,288 112,036
Less: Reserve for Obsolescence (165,419) (170,640)
----------- -----------
Total $ 2,186,003 $ 2,926,011
=========== ===========
4
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 Earnings Per Share
The Company's basic income 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.
Three Months Ended Three Months Ended
December 31, 2005 December 31, 2004
------------------ ------------------
Basic net income per share computation:
Net income for common stockholders $ 86,544 $ 42,046
Weighted-average common shares outstanding 2,229,244 2,156,771
Basic net income per share for common stockholders $ 0.04 $ 0.02
Diluted net income per share computation
Net income for common stockholders $ 86,544 $ 42,046
Weighted-average common shares outstanding 2,229,244 2,156,771
Incremental shares attributable to the assumed exercise of
outstanding stock options (exercise price below market) 67,141 115,702
Total adjusted weighted-average shares 2,296,385 2,272,473
Diluted net income per share for common stockholders $ 0.04 $ 0.02
Nine Months Ended Nine Months Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Basic net income per share computation:
Net income for common stockholders $ 151,808 $ 15,467
Weighted-average common shares outstanding 2,204,476 2,149,199
Basic net income per share for common stockholders $ 0.07 $ 0.01
Diluted net income per share computation
Net income for common stockholders $ 151,808 $ 15,467
Weighted-average common shares outstanding 2,204,476 2,149,199
Incremental shares attributable to the assumed exercise of
outstanding stock options (exercise price below market) 67,141 115,702
Total adjusted weighted-average shares 2,271,617 2,264,901
Diluted net income per share for common stockholders $ 0.07 $ 0.01
5
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 Stock Options
The Company accounts 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 has 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 currently plans to adopt the fair value based method
prescribed by SFAS 123R for the fiscal year ended March 31, 2007.
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 5.0%, volatility at 50% and
an expected life of 5 years. Had the Company determined compensation cost based
on the fair market value at the grant date for its 359,100 outstanding stock
options under SFAS No. 123R, the pro forma amounts are indicated below:
Nine Months Ended Nine Months Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Net income - as reported $ 151,808 $ 15,467
Add: Stock-based compensation expense included
in reported net income, net of taxes 25,960 --
Less fair value of stock options (54,265) (44,986)
----------- -----------
Net income (loss) - pro forma 123,503 (29,519)
=========== ===========
Basic earnings per share - as reported 0.07 0.01
Basic earnings (loss) per share - pro forma 0.06 (0.01)
Diluted earnings per share - as reported 0.07 0.01
Diluted earnings (loss) per share - pro forma 0.05 (0.01)
Three Months Ended Three Months Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Net income - as reported $ 86,544 $ 42,046
Less fair value of stock options (18,088) (14,996)
----------- -----------
Net income - pro forma 68,456 27,050
=========== ===========
Basic earnings per share - as reported 0.04 0.02
Basic earnings per share - pro forma 0.03 0.01
Diluted earnings per share - as reported 0.04 0.02
Diluted earnings per share - pro forma 0.03 0.01
6
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 primarily consists of the
design, manufacture, and sale of different products to hydrographic,
oceanographic researchers, engineers, geophysicists, and surveyors.
The table below presents information about sales and gross margin. Costs of
sales include certain allocation factors for indirect costs. Additionally,
administrative expenses have been allocated between avionics and marine systems.
Three Months Ended Avionics Avionics Avionics Marine Corporate
December 31, 2005 Gov't Comm'l. Total Systems Items Total
----------------- ----------- ----------- ----------- ----------- --------- -----------
Sales $ 2,136,714 $ 699,118 $ 2,835,832 $ 173,163 $ 3,008,995
Cost of sales 904,016 443,688 1,347,704 130,834 1,478,538
----------- ----------- ----------- ----------- -----------
Gross margin 1,232,698 255,430 1,488,128 42,329 1,530,457
----------- ----------- ----------- ----------- -----------
Engineering, research, and 562,066 47,776 609,842
development
Selling, general, and admin 297,325 84,189 362,380 743,894
Amort. of intangibles 21,549 21,549
Interest expense, net (2,394) 147 -- (2,247)
----------- ----------- ----------- -----------
Total expenses 856,997 132,112 383,929 1,373,038
----------- ----------- ----------- -----------
Income (loss) before income $ 631,131 $ (89,783) $ (383,929) $ 157,419
taxes =========== =========== =========== ===========
Three Months Ended Avionics Avionics Avionics Marine Corporate
December 31, 2004 Gov't Comm'l. Total Systems Items Total
----------------- ----------- ----------- ----------- ----------- --------- -----------
Sales $ 1,667,293 $ 844,487 $ 2,511,780 $ 270,310 $ 2,782,090
Cost of sales 600,020 467,092 1,067,112 165,292 1,232,404
------------ ----------- ----------- ----------- -----------
Gross margin 1,067,273 377,395 1,444,668 105,018 1,549,686
------------ ----------- ----------- ----------- -----------
Engineering, research,& dev 522,044 88,737 610,781
Selling, general, and admin 361,492 105,934 377,332 844,758
Interest expense, net -- -- 21,549 21,549
Amort. of intangibles 3,006 (179) -- 2,827
----------- ----------- ----------- -----------
Total expenses 886,542 199,492 398,881 1,479,915
----------- ----------- ----------- -----------
Income (loss) before income $ 558,126 $ (89,474) $ (398,881) $ 69,771
taxes =========== =========== =========== ===========
7
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 Segment Information (continued)
Nine Months Ended Avionics Avionics Avionics Marine Corporate
December 31, 2005 Gov't Comm'l. Total Systems Items Total
----------------- ------------ ------------ ----------- ----------- ------------ -----------
Sales $ 6,342,122 $ 2,178,542 $ 8,520,664 $ 733,751 $ 9,254,415
Cost of sales 2,715,682 1,405,629 4,121,311 491,145 4,612,456
------------ ------------ ----------- ----------- -----------
Gross margin 3,626,440 772,913 4,399,353 242,606 4,641,959
------------ ------------ ----------- ----------- -----------
Engineering, research, and 1,741,557 140,385 1,881,942
development
Selling, general, and admin 1,045,601 261,554 1,109,587 2,416,742
Amort. of intangibles -- -- 64,647 64,647
Interest expense, net (1,813) 147 -- (1,666)
----------- ----------- ------------ -----------
Total expenses 2,785,345 402,086 1,174,234 4,361,665
----------- ----------- ------------ -----------
Income (loss) before income $ 1,614,008 $ (159,480) $ (1,174,234) $ 280,294
taxes =========== =========== ============ ===========
Nine Months Ended Avionics Avionics Avionics Marine Corporate
December 31, 2004 Gov't Comm'l. Total Systems Items Total
------------ ------------ ----------- ----------- ------------ -----------
Sales $ 4,952,143 $ 2,228,038 $ 7,180,181 $ 653,659 $ 7,833,840
Cost of sales 1,893,457 1,298,480 3,191,937 402,118 3,594,055
------------ ------------ ----------- ----------- -----------
Gross margin 3,058,686 929,558 3,988,244 251,541 4,239,785
------------ ------------ ----------- ----------- -----------
Engineering, research,& dev. 1,427,597 225,680 1,653,277
Selling, general, and admin 1,033,519 302,990 1,150,202 2,486,711
Amort. of intangibles 64,647 64,647
Interest expense, net 9,382 257 -- 9,639
----------- ----------- ------------ -----------
Total expenses 2,470,498 528,927 1,214,849 4,214,274
----------- ----------- ------------ -----------
Income (loss) before income $ 1,517,746 $ (277,386) $ (1,214,849) $ 25,511
taxes =========== =========== ============ ===========
Note 7 Reclassifcation
Certain prior year amounts have been reclassified to conform to the current year
presentation
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions and statements as to future matters contain a measure of
uncertainty and accordingly, actual results could differ materially and
adversely. Among the factors that could cause a difference are: changes in the
general economy; changes in demand for the Company's products or in the cost and
availability of its raw materials; the actions of its competitors; the success
of our customers; technological change; changes in employee relations;
government regulations; litigation, including its inherent uncertainty;
difficulties in plant operations and materials; transportation; environmental
matters; and other unforeseen circumstances. A number of these factors are
discussed in the Company's previous filings with the Securities and Exchange
Commission.
Critical Accounting Policies
In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies as disclosed in Note
2 of our Notes to Financial Statements included in our Form 10-K. 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.
Payments received prior to the delivery of units or services performed are
recorded as deferred revenues on the accompanying balance sheets.
The Company has a contract with the U.S. Navy for the delivery of test equipment
(AN/APM-480), which will expire in June 2006. 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 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.
The Company, in fiscal year 2002, 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 over 1,200 units
(approximately $17,000,000 in revenues) through the period
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Critical Accounting Policies (continued)
ended December 31, 2005, 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. We continue to ship the units in accordance
with the original contract, and are being paid in accordance with the terms of
the original contract. 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. 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. The units are enhanced
as the U.S. Navy returns the original units. As of December 31, 2005,
approximately 484 units have been enhanced and shipped. The Company anticipates
that the balance will be shipped by December 31, 2006.
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.
Property, Plant and equipment - property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets over periods
ranging from three to eight years. Useful lives are estimated at the time the
asset is acquired and are based upon historical experience with similar assets
as well as taking into account anticipated technological or other changes.
Leasehold improvements are amortized over the term of the lease or the useful
life of the asset, whichever is shorter.
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 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.
10
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. These amounts are periodically
evaluated. The deferred tax asset is reduced, if necessary, by a valuation
allowance for any tax benefit which is not more likely than not to be realized.
The effect on deferred tax assets and liabilities of a change in tax rate is
recognized in the period that such tax rate changes are enacted.
Overview
In March 2005, the Company won a competitive procurement and was awarded a
$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. In August 2005, this contract was modified to include testing
function for the next generation of IFF in this state-of-the-art multi-function
test set. This contract 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. The CRAFT is another significant
milestone for the Company, because the development of this technology will
establish the Company's position as a leader in the industry, and will meet the
U.S. Navy's test requirements for years to come. Part of the increase in
engineering costs for the nine months ended December 31, 2005 is due to the
Company internally funding the CRAFT development. This contract currently has
production options totaling 750 units, which if exercised, would result in
deliveries beginning in early fiscal year 2008. The Company believes the CRAFT
technology is a significant advance on current products in the marketplace and
will form the basis for a new family of test instruments which will diversify
and modernize our product line and could lead to additional sales.
Sales and operating results for the first nine months of the 2006 fiscal year
have improved as compared to the same nine months in fiscal year 2005. However,
near-to-mid-term commercial and military orders have continued to be well below
expectations. If this decline continues, and taking into account the continued
funding of CRAFT, sales and earnings for the next year are likely to be
unfavorably affected. The backlog, including orders for the test and
documentation phase of CRAFT, decreased approximately $1,000,000 from March 31,
2005 to December 31, 2005 to approximately $3,700,000. Tel is actively pursuing
other major government contracts and is continuing its efforts to broaden its
markets and products. The Company is also reviewing its operating costs, and
will take the appropriate measures to maintain its strong financial position.
For the nine months ended December 31, 2005, sales of marine systems products
increased, even though sales were delayed as engineering made improvements to
the product, and the loss before taxes also decreased as compared to the same
period in the prior fiscal year. However, new orders have remained below
expectations.
For the nine months ended December 31, 2005, net sales increased 18% to
$9,254,415 as compared to the same period in the prior year, and net income for
the nine months ended December 31, 2005 was $151,808 as compared to $15,467 for
the first nine months of the prior fiscal year. The increase in sales is
primarily attributed to the increase in avionics government sales. The increase
in sales was offset by an increase in engineering, research and development
expenditures for avionics. Gross profit declined as a percentage as
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview (continued)
compared to the same period in the last fiscal year primarily as a result of a
change in product mix, lower pricing on commercial products and lower gross
margin on billings related to the documentation and test activities for CRAFT
and on the initial shipments of a new military product, the TR-401.
As of December 31, 2005, cash increased to $1,416,378 from $826,959 at March 31,
2005 primarily as a result of a reduction in inventories.
The Company continues actively to pursue opportunities, including new government
programs, in both the commercial and government avionics and marine systems
markets, both domestically and internationally.
Results of Operations
Sales
Sales of avionics products increased $324,052 (12.9%) and $1,340,483 (18.7% for
the three and nine months ended December 31, 2005, respectively, as compared to
the same periods in the prior year . Avionics government sales increased
$469,421 (28.2%) for the three months ended December 31, 2005 as compared to the
same period in the prior fiscal year. Increased shipments of the AN/APM-480 to
the U.S. Navy (6 more units remain to be shipped under this contract as of
December 31, 2005), T-760 and billings related to the documentation and test
activities for CRAFT were partially offset by lower shipments of the T-36M,
T-30CM, T-30D and the AN/APM-480 to customers other than the U.S. Navy. For the
nine months ended December 31, 2005, avionics government sales increased
$1,389,979 (28.1%). An increase in shipments of the T-47N and the T-36M,
associated with a contract to the U.S. Military, was partially offset by lower
shipments of the T-30CM and the AN/APM-480 to customers other than the U.S.
Navy. Avionics commercial sales decreased $145,369 (17.2%), for the three months
ended December 31, 2005 as compared to the same period last year, primarily as a
result of lower prices due to more intense competition. For the nine months
ended December 31, 2005, avionics commercial sales decreased $49,496 (2.2%) as
compared to the nine months ended December 31, 2004; lower prices due to more
intense competition were partially offset by increases in shipments of the T-30D
and the T-36C.
Marine systems sales decreased $97,147 from $270,310 for the three months ended
December 31, 2004 to $173,163 for the three months ended December 31, 2005, but
increased $80,092 to $733,751 for the nine months ended December 31, 2005, as
compared to $653,659 for the same period in the last year, as new orders have
been below expectations.
Gross Margin
Gross margin decreased $19,229 (1.2%) for the three months ended December 31,
2005, as compared to the same period last year. The decrease in gross profit is
attributable to lower pricing on commercial products, change in product mix,
lower gross margin on billings related to the documentation activities for
CRAFT, and lower gross margins on calibration and repair sales. These declines
were partially offset by the increase in volume. The gross margin percentage for
the three months ended December 31, 2005 was 50.9 as compared to 55.7% for the
three months ended December 31, 2004. Gross margin increased $402,174 (9.5%) for
the nine months ended December 31, 2005 as compared to the same nine months in
the previous year. The increase is primarily attributed to the increase in sales
volume, partially offset lower pricing on commercial products, change in product
mix, lower gross margin on billings related to the documentation activities for
CRAFT, the initial shipment of the TR-401, and lower gross margins on
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations (continued)
Gross Margin (continued)
calibration and repair sales. The gross margin percentage for the nine months
ended December 31, 2005 was 50.1% compared to 54.1% for the nine months ended
December 31, 2004.
Operating Expenses
Selling, general and administrative expenses decreased $100,864 (11.9%) for the
three months ended December 31, 2005 as compared to the three months ended
December 31, 2004. For the three month period, lower administrative salaries,
selling commissions, travel expenses, and marketing consulting expenses for the
avionics division and lower advertising for marine systems were offset partially
by an increase in salaries for marketing and sales for the avionics division, in
addition to higher professional fees. For the nine months ended December 31,
2005, selling, general and administrative expenses decreased $69,969 (2.8%) as
compared to the nine months ended December 31, 2004. For the nine month period
lower marketing consulting and travel expenses for the avionics division and
lower advertising expenses for marine systems was partially offset by an
increase in selling commissions and salaries for marketing and sales for the
avionics division.
For the nine months ended December 31, 2005, engineering, research, and
development expenditures increased $228,665 (13.8%) as compared to the same nine
months in the prior year as a result of CRAFT, enhancements to the TB-2100, and
the TR-401 for the avionics division offset partially by a decrease in
expenditures for the marine systems division.
Income Taxes
Income taxes increased $43,150 and $118,442, respectively, for the three and
nine months ended December 31, 2005 as compared to the same periods last year as
a result of the increase in profit. These amounts represent the effective
federal and state tax rate of approximately 40% on the Company's net income
before taxes, plus additional New Jersey state taxes for the avionics business.
Under New Jersey law, losses in the marine systems subsidiary cannot be applied
to reduce taxes on the avionics business
Liquidity and Capital Resources
At December 31, 2005, the Company had working capital of $4,466,396 as compared
to $4,047,116 at March 31, 2005, and cash increased to $1,416,378 from $826,959
at March 31, 2005. For the nine months ended December 31, 2005, the Company
generated $627,153 of cash from operating activities as compared to using
$865,218 for the nine months ended December 31, 2004. This improvement in cash
from operating activities is primarily attributed to a reduction in inventories
and accounts receivable, and an increase in profit, partially offset by a
reduction in accounts payable and other accrued expenses. Stockholders' equity
increased to $5,659,910 at December 31, 2005 from $5,327,177 at March 31, 2005.
The Company has a line of credit of $1,750,000 from Bank of America (previously
Fleet Bank). The line of credit bears an interest rate of 0.5% above the
lender's prevailing base rate, based upon the outstanding balance. The Company
does not pay any fees to maintain this open line. At December 31, 2005, the
Company had no outstanding balance. The line of credit is collateralized by
substantially all of the assets of the Company.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Liquidity and Capital Resources (continued)
The credit facility requires the Company to maintain certain financial
covenants. As of December 31, 2005, the Company was in compliance with all
financial covenants. The line of credit expires at September 30, 2006.
Based upon the current backlog, its existing credit line, and cash balance, the
Company believes that it has sufficient working capital to fund its operating
plans for at least the next twelve months. The Company maintains its cash
balance primarily in a money market account until needed.
There was no significant impact on the Company's operations as a result of
inflation for the nine months ended December 31, 2005. 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, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company, at this time, 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
The Company adopted disclosure controls and procedures, as called for by
legislation and by the rules of the Securities and Exchange Commission. Under
Rules promulgated by the SEC, disclosure controls and procedures are defined as
"those controls or other procedures of the issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports filed or
submitted by it under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the commission's rules and
forms." The Chief Executive Officer and Principal Accounting Officer evaluated
the Company's Disclosure Controls and Procedures at December 31, 2005 and have
concluded that they are effective, based on their evaluation of these controls
and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of December 31, 2005 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 2 Unregistered sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities and there were no
repurchases of equity securities during the Company's third quarter ended
December 31, 2005.
14
Part II Other Information (continued)
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on December 7, 2004 (the
"Annual Meeting").
(b) Not applicable because (i) there was no solicitation in opposition to
management's nominees as listed in the Company's proxy statement pursuant
to Regulation 14; and (ii) all of such nominees who were directors,
previously reported to the Commission, were re-elected.
(c) At the Annual Meeting, the Company's shareholders voted in favor of
re-electing management's nominees for election as directors of the Company
as follows:
For Against
--------- -------
Harold K. Fletcher 2,002,878 18,366
George J. Leon 2,020,848 366
Robert J. Melnick 2,002,878 18,366
Jeff C. O'Hara 2,002,878 18,366
Robert A. Rice 2,020,848 366
Robert H. Walker 2,020,848 366
The shareholders also voted 2,020,115 shares in favor of ratifying the audit
committee's appointment of BDO Seidman LLP, as the Company's independent
auditors for the fiscal year ending March 31, 2006. Shareholders totaling 366
shares withheld their vote, and shareholders totaling 733 shares abstained.
(d) Not applicable
Item 6. Exhibits
a. Exhibits
31.1 Certification by CEO pursuant to Rule 13a-14 under the
Securities Exchange Act.
31.2 Certification by CFO pursuant to Rule 13a-14 under the
Securities Exchange Act.
32.1 Certifications by CEO and CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEL-INSTRUMENT ELECTRONICS CORP.
Date: February 13, 2006 By: /s/ Harold K. Fletcher
---------------------------
/s/ Harold K. Fletcher
Chairman and President
Date: February 13, 2006 By: /s/ Joseph P. Macaluso
---------------------------
/s/ Joseph P. Macaluso
Principal Accounting Officer
15