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, 2002
[ ] 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:
2,135,751 shares of Common stock, $.10 par value as of August 8, 2002.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
June 30, 2002 and March 31, 2002 1
Condensed Comparative Statements of Operations -
Three Months Ended June 30, 2002 and 2001 2
Condensed Comparative Statements of Cash Flows -
Three Months Ended June 30, 2002 and 2001 3
Notes to Condensed Financial Statements 4-5
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Conditions 6-9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
ASSETS June 30, 2002 March 31, 2002
------------- --------------
Current assets:
Cash and cash equivalents $ 1,930,219 $ 1,198,191
Accounts receivable, net of allowance
for doubtful accounts of $36,598 at
June 30, 2002 and March 31, 2002 1,128,722 937,849
Inventories, net 2,183,933 2,481,680
Prepaid expenses and other current assets 44,831 47,956
Deferred income tax benefit - current 611,310 669,000
------------ ------------
Total current assets 5,899,015 5,334,676
Property, plant and equipment, net 796,053 822,010
Other assets 73,743 76,886
------------ ------------
Total assets 6,768,811 6,233,572
============ ---=========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Note payable - related party -
current portion 250,000 250,000
Convertible subordinated notes -
related party 7,500 7,500
Capitalized lease obligations -
current portion 88,890 108,845
Deferred revenues 574,907 518,103
Accrued payroll, deferred wages,
vacation pay and payroll taxes 455,161 399,437
Accounts payable and accrued expenses 1,098,016 896,710
------------ ------------
Total current liabilities 2,474,474 2,180,595
Notes payable - related party -
non-current portion 100,000 100,000
Capitalized lease obligations -
excluding current portion 33,096 52,183
------------ ------------
Total liabilities 2,607,570 2,332,778
Stockholders' equity:
Common stock 213,578 213,338
Additional paid-in capital 3,944,727 3,941,967
Retained earnings (accumulated deficit) 2,936 (254,511)
------------ ------------
Total stockholders' equity 4,161,241 3,900,794
------------ ------------
Total liabilities and stockholders' equity $ 6,768,811 $ 6,233,572
============ ---=========
See accompanying notes to condensed financial statements
-1-
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
---------------------------------
June 30, 2002 June 30, 2001
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Sales - government $2,405,708 $ 1,808,671
Sales - commercial 444,025 753,018
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Total sales 2,849,733 2,561,689
Cost of sales 1,385,283 1,314,306
---------- ------------
Gross margin 1,464,450 1,247,383
Operating expenses:
Selling, general and administrative 573,068 398,612
Engineering, research and development 451,727 415,171
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Total operating expenses 1,024,795 813,783
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Income from operations 439,655 433,600
Other income (expense):
Interest income 6,476 4,592
Interest expense (17,408) (18,612)
---------- ------------
Income before taxes 428,723 419,580
Provision for income taxes 171,276 170,880
---------- ------------
Net income 257,447 248,700
========== ============
Basic and diluted income per common share $ 0.12 $ 0.12
========== ============
Dividends per share None None
Weighted average shares outstanding
Basic 2,135,151 2,125,251
Diluted 2,161,770 2,162,197
See accompanying notes to condensed financial statements
-2-
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months ended
-----------------------------
June 30, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net income $ 257,447 $ 248,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes 57,690 122,213
Depreciation and amortization 62,636 45,507
Changes in assets and liabilities:
Increase in accounts receivable (190,873) (32,562)
Decrease (increase) in inventories 297,747 (122,373)
Decrease (increase) in prepaid expenses
& other current assets 3,125 (33,374)
Decrease (increase) in other assets 3,143 (6,450)
Increase in accrued payroll, deferred
wages, vacation pay and payroll taxes 55,724 18,166
Increase (decrease) in accounts payable,
deferred revenues and accrued expenses 258,110 (111,340)
----------- ----------
Net cash provided by operating activities 804,749 128,487
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (36,679) (96,634)
----------- ----------
Net cash used in investing activities (36,679) (96,634)
----------- ----------
Cash flows from financing activities:
Proceeds from the exercise of stock
options 3,000 2,592
Repayment of capitalized lease obligations (39,042) (26,352)
----------- ----------
Net cash used in financing activities (36,042) (23,760)
----------- ----------
Net increase in cash and cash equivalents 732,028 8,093
Cash and cash equivalents at beginning
of period 1,198,191 433,438
----------- ----------
Cash and cash equivalents at end of period $ 1,930,219 $ 441,531
=========== ==========
Taxes paid -- $ 89,305
Interest paid $ 16,327 $ 30,811
Assets acquired through capital leases -- $ 61,857
See accompanying notes to condensed financial statements
-3-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments necessary to present fairly the financial
position of Tel-Instrument Electronics Corp. as of June 30, 2002 the results of
operations for the three months ended June 30, 2002 and June 30, 2001, and
statements of cash flows for the three months ended June 30, 2002 and June 30,
2001. 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, 2002 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, 2002.
Note 2 Accounts Receivable, net
Accounts receivable, net consists of:
June 30, 2002 March 31, 2002
------------- --------------
Commercial $ 207,534 $ 238,690
Government 957,786 735,757
Allowance for bad debts (36,598) (36,598)
----------- ------------
$ 1,128,722 $ 937,849
=========== ============
Note 3 Inventories, net
Inventories, net consist of: June 30, 2002 March 31, 2002
------------- --------------
Purchased parts $ 852,684 $ 913,917
Work-in-process 1,402,434 1,584,701
Finished Goods 34,128 68,375
Less: Reserve for obsolescence (105,313) (85,313)
----------- ------------
$ 2,183,933 $ 2,481,680
=========== ============
-4-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED 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.
Note 5 Government and Commercial Sales
Information has been presented for the Company's two reportable activities,
government and commercial.
The Company is organized primarily on the basis of its avionics products. The
government market consists primarily of the sale of test equipment to U.S. and
foreign governments and militaries either direct or through distributors. The
commercial market consists of sales of test equipment to domestic and foreign
airlines and to commercial distributors. The 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 may be sold in the government
and commercial markets.
The table below presents information about sales and gross margin. Cost of sales
includes certain allocation factors for indirect costs.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
Government Commercial Government Commercial
---------- ---------- ---------- ----------
Sales $ 2,405,708 444,025 $ 1,808,671 753,018
Cost of sales 1,133,885 251,398 965,303 349,003
------------- ------- ------------ -------
Gross margin $ 1,271,823 192,627 $ 843,368 404,015
============= ======= ============= =======
-5-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
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 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 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.
Property 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 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.
-6-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (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 our expectation and the
provision established, the Company cannot guarantee that it will continue to
receive positive results.
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.
Overview
For the first quarter ended June 30, 2002, sales increased 11.2% to $2,849,733
and net income before taxes increased 2.2% to $428,723. Deliveries of the
AN/APM-480 IFF (Identification, Friend or Foe) Transponder Set Test Set (TSTS)
to the U.S. Navy continue and accounted for 64.9% of sales for the quarter ended
June 30, 2002 as compared to 41.8% of sales for the quarter ended June 30, 2001.
While government sales remain strong as a result of deliveries of the AN/APM-480
to the U.S. Navy, the commercial market remains weak. In August 2002 the Company
received an order from the U.S. Navy for an additional 105 AN/APM-480's. The
Company has now received orders for 1,182 units from the U.S. Navy and there are
118 units remaining subject to the option under the contract. Any options not
exercised by the U.S. Navy by February 11, 2003 will expire. The Company has
shipped 637 units through June 30, 2002 and expects shipments under this
contract to continue through August of next year, unless the balance of the 118
units are exercised, in which case deliveries will continue until later in the
year. This program firmly established the Company as one of the leading
suppliers in the avionics test equipment industry, and improved its market
position.
The Company continues to invest heavily in new product development to meet the
expected needs of its customers and remain as one of the leaders in the
industry. The Company continues its work on the next generation of IFF test sets
in anticipation of U.S. and NATO requirements for more sophisticated IFF
testing. The Company anticipates that most of the AN/APM-480's will need to be
upgraded, in the future, to accommodate the more sophisticated IFF testing. The
Company recently introduced the T-36C, Nav/Comm ramp test set, into the
commercial market, and the T-47S Multi-Function ramp tester into the military
market. New products soon to be introduced include the TR-220, a commercial
Multi-Function ramp test set, and the T-462, the Company's new bench test set.
The T-462 capitalizes on the Company's technology and is part of the plan to
expand into new markets.
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Overview (continued)
The Company has been active in responding to customer requests for quotation, in
addition to adapting its product designs to respond to these requests. The
Company continues actively to pursue opportunities in both the commercial and
government markets, both domestically and internationally.
Exploration of opportunities in other government and commercial markets also
continues in an attempt to broaden the Company's product line. The Company
continues its efforts with Semaphore Capital Advisors LLC to pursue growth
through acquisitions and alliances of compatible businesses or technologies.
Sales
For the three months ended June 30, 2002, total sales increased $288,044 (11.2%)
to $2,849,733 as compared to the three months ended June 30, 2001. Government
sales increased $597,037 (33%) to $2,405,708 as compared to $1,808,671 for the
first three months of the prior fiscal year. The increase in government sales is
mainly attributed to the shipment of the AN/APM 480 to the U.S. Navy (64.9% of
total sales). Commercial sales decreased (41%) to $444,025 as compared to
$753,018 for the three months ended June 30, 2001. The decrease in commercial
sales is primarily the result of the drop in airline orders, as the result of
the September 11th tragedy, financial difficulties in the commercial airline
industry, and completion of a major contract with a freight carrier.
Gross Margin
Gross margin dollars increased $217,067 (17.4%) for the three months ended June
30, 2002 as compared to the same three months in the prior fiscal year. The
increase in gross margin, for the most part, is attributed to an increase in
sales volume, higher prices on orders for limited units of the AN/APM-480 and,
to a lesser extent, to production efficiencies obtained as a result of the
higher volume. These amounts were partially offset by higher warranty costs. The
gross margin percentage for the three months ended June 30, 2002 was 51.4% as
compared to 48.7% for the three months ended June 30, 2001. The gross margin
percentage in the next few quarters will not be as high as the first quarter as
a result of lower selling prices on the AN/APM-480 for the units remaining under
the U.S. Navy contract.
Operating Expenses
Selling, general and administrative expenses increased $174,456 (43.8%) for the
three months ended June 30, 2002, as compared to the three months ended June 30,
2001. This increase is attributed to added sales and marketing activities,
higher sales commission expense, recruitment fees for a Chief Operating Officer,
and an increase in professional fees, including investment-banking services. The
Company is actively recruiting a Chief Operating Officer and a Director of
Business Development. The addition of these personnel will add to the Company's
operating expenses in the near future, but management believes these additions
are necessary for the Company to continue its growth and provide for the orderly
succession of key personnel.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Operating Expenses
Engineering, research and development expenses increased $36,556 (8.8%). The
higher level of expenditures is associated with an increase in research and
development activities, including the TR-220, a multi-function ramp test set,
and the T-462, the Company's new bench test set, as well as continued effort on
the next generation of IFF test sets.
Income Taxes
A provision for income taxes was recorded in the amount of $171,276 for the
three months ended June 30, 2002 as compared to a tax provision of $170,880 for
the three months ended June 30, 2001. These amounts represent the effective
federal and state tax rate on the Company's net income before taxes. The Company
has used its net operating loss carryforwards and the Company will pay federal
taxes this fiscal year.
Liquidity and Capital Resources
At June 30, 2002 the Company had working capital of $3,424,541 as compared to
$3,154,081 at March 31, 2002. For the three months ended June 30, 2002, cash
provided by operations was $804,749 as compared to $128,487 for the three months
ended June 30, 2001. This increase in cash from operations is primarily
attributed to a decrease in inventories and an increase in accounts payable and
accrued expenses.
The Company has a line of credit of $1,000,000 from Fleet Bank. 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. As of June 30,
2002 the Company had no outstanding balance. The line of credit is
collateralized by substantially all of the assets of the Company and expires in
August 2002. The credit facility requires the Company to maintain certain
financial covenants. As of June 30, 2002, the Company was in compliance with all
financial covenants. The Company is in the process of renewing this line.
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. However, as the Company pursues
additional opportunities, the need for additional capital may arise. The Company
will evaluate its alternatives when these opportunities arise. The Company has
also retained Semaphore Capital Advisors as its investment bankers to help
pursue acquisitions and alliances and, if needed, to help raise capital. The
Company maintains its cash balance primarily in a money market account in the
event the cash is needed for acquisition. There was no significant impact on the
Company's operations as a result of inflation for the three months ended June
30, 2002.
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 June 30, 2001.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K.
None.
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 13, 2002 By: /s/ Harold K. Fletcher
----------------------
/s/ Harold K. Fletcher
Chairman and President
Date: August 13, 2002 By: /s/ Joseph P. Macaluso
----------------------
/s/ Joseph P. Macaluso
Principal Accounting Officer
-10-