UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
|_| 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:
2,144,751 shares of Common stock, $.10 par value as of November 7, 2004.
TEL-INSTRUMENT ELECTRONICS CORPORATION
TABLE OF CONTENTS
PAGE
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Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Comparative Balance Sheets
September 30, 2004 and March 31, 2004 1
Condensed Consolidated Comparative Statements of Operations -
Three and Six Months Ended September 30, 2004 and 2003 2
Condensed Consolidated Comparative Statements of Cash Flows -
Six Months Ended September 30, 2004 and 2003 3
Notes to Condensed Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Conditions 8-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Certifications 14-17
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
September 30, March 31,
ASSETS 2004 2004
------------- ----------
Current assets:
Cash and cash equivalents $1,027,670 $1,509,828
Accounts receivable, net 1,788,354 1,266,905
Inventories, net 2,533,957 2,202,143
Taxes receivable 161,695 161,695
Prepaid expenses and other current assets 69,747 102,039
Deferred income taxes 599,029 581,348
---------- ----------
Total current assets 6,180,452 5,823,958
Property, plant and equipment, net 906,008 867,886
Intangible assets 369,949 413,047
Other assets 285,775 287,610
---------- ----------
Total assets $7,742,184 $7,392,501
========== ==========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Note payable - related party - current portion $ 50,000 $ 250,000
Convertible subordinated notes - related party 7,500 7,500
Notes payable - other 87,000 87,000
Capitalized lease obligations - current portion 13,837 24,768
Accounts payable 599,213 346,169
Deferred revenues 77,817 44,663
Accrued payroll, vacation pay, profit sharing
and payroll taxes 388,846 333,180
Accrued expenses 1,007,777 963,528
---------- ----------
Total current liabilities 2,231,990 2,056,808
Notes payable - related party - long-term 200,000 --
Deferred taxes - long-term 48,000 48,000
---------- ----------
Total liabilities 2,479,990 2,104,808
Stockholders' equity:
Common stock 214,478 214,418
Additional paid-in capital 3,961,906 3,960,886
Retained earnings 1,085,810 1,112,389
---------- ----------
Total stockholders' equity 5,262,194 5,287,693
---------- ----------
Total liabilities and stockholders' equity $7,742,184 $7,392,501
========== ==========
See accompanying notes to condensed financial statements
-1-
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
-------------- -------------- -------------- --------------
Net sales $ 2,238,950 $ 2,616,716 $ 5,051,750 $ 5,674,622
Cost of sales 1,026,411 1,192,809 2,361,651 2,479,331
----------- ----------- ----------- -----------
Gross margin 1,212,539 1,423,907 2,690,099 3,195,291
Operating expenses
Selling, general and administrative 808,742 714,591 1,641,953 1,449,590
Amortization of intangibles 21,549 -- 43,098 --
Engineering, research and development 510,046 500,138 1,042,496 1,068,048
----------- ----------- ----------- -----------
Total operating expenses 1,340,337 1,214,729 2,727,547 2,517,638
----------- ----------- ----------- -----------
Income (loss) from operations (127,798) 209,178 (37,448) 677,653
Other income (expense):
Interest income 3,246 5,188 6,750 15,910
Interest expense (7,225) (8,957) (13,562) (17,942)
----------- ----------- ----------- -----------
Income (loss) before taxes (131,777) 205,409 (44,260) 675,621
Provision (benefit) for income taxes (52,644) 81,642 (17,681) 269,911
----------- ----------- ----------- -----------
Net (loss) income $ (79,133) $ 123,767 $ (26,579) $ 405,710
=========== =========== =========== ===========
Basic income (loss) per common share $ (0.04) $ 0.06 $ (0.01) $ 0.19
=========== =========== =========== ===========
Diluted income (loss) per common share $ (0.04) $ 0.06 $ (0.01) $ 0.18
=========== =========== =========== ===========
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,144,301 2,143,776 2,144,237 2,140,930
Diluted 2,144,301 2,202,281 2,144,237 2,199,435
See accompanying notes to condensed financial statements
-2-
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Sept. 30, 2004 Sept. 30, 2003
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (26,579) $ 405,710
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes (17,681) (144,166)
Depreciation 130,414 129,270
Amortization of intangibles 43,098 --
Changes in operating assets or liabilities:
(Increase) decrease in accounts receivable, net (521,449) 84,819
Increase in inventories, net (331,814) (90,054)
Decrease (increase) in prepaid expenses and other current assets 32,292 (34,474)
Decrease (increase) in other assets 1,835 (192,456)
Increase in accounts payable 253,044 18,392
Increase (decrease) in deferred revenues 33,154 (2,440)
Increase in accrued payroll, vacation pay,
and payroll taxes 55,666 49,331
Decrease in income taxes payable -- (103,924)
Increase (decrease) in accrued expenses 44,249 (46,686)
----------- -----------
Net cash provided by (used in) operating activities (303,771) 73,322
----------- -----------
Cash flows from investing activities:
Cash purchases of property, plant and equipment (168,536) (111,395)
----------- -----------
Net cash used in investing activities (168,536) (111,395)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,080 16,913
Payment of capitalized lease obligations (10,931) (14,486)
----------- -----------
Net cash provided by (used in) financing activities (9,851) 2,427
----------- -----------
Net decrease in cash and cash equivalents (482,158) (35,646)
Cash and cash equivalents at beginning of period 1,509,828 1,680,124
----------- -----------
Cash and cash equivalents at end of period $ 1,027,670 $ 1,644,478
=========== ===========
Supplemental information
Interest paid $ 2,383 $ 23,269
=========== ===========
Income taxes paid $ -- $ 518,000
=========== ===========
See accompanying notes to condensed financial statements
-3-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position of
Tel-Instrument Electronics Corp as of September 30, 2004, the results of
operations for the three and six months ended September 30, 2004 and September
30, 2003, and statements of cash flows for the six months ended September 30,
2004 and September 30, 2003. 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, 2004 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, 2004.
Note 2 Accounts Receivable, net
Accounts receivable, net, consist of:
September 30, 2004 March 31, 2004
------------------ --------------
Commercial $ 623,294 $ 862,259
Government 1,206,658 446,244
Allowance for doubtful accounts (41,598) (41,598)
----------- -----------
Total $ 1,788,354 $ 1,266,905
=========== ===========
Note 3 Inventories, net
Inventories, net, consist of:
September 30, 2004 March 31, 2004
------------------ --------------
Purchased parts $ 1,079,547 $ 846,782
Work-in-process 1,557,567 1,401,722
Finished goods 67,741 94,537
Less: Reserve for obsolescence (170,898) (140,898)
----------- -----------
Total $ 2,533,957 $ 2,202,143
=========== ===========
-4-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4 Earnings Per Share
The Company's basic income (loss) per share is based on net income (loss) for
the relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per share is based on net
income (loss), divided by the weighted average number of common shares
outstanding during the period, including common share equivalents, such as
outstanding stock options. Common share equivalents are not included in the
calculation for the three and six months ended September 30, 2004 since the
effect would be antidilutive, but are included for the fiscal year 2004 periods.
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 has
been applied. The Company currently does not plan to adopt the fair value based
method prescribed by SFAS 123.
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 3.5%, 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 347,200 outstanding stock
options under SFAS No. 123, the pro forma amounts are indicated below:
Six Months Ended Six Months Ended
September 30, September 30,
2004 2003
---------------- ----------------
Net income (loss) - as reported $ (26,579) $405,710
Less fair value of stock options (13,156) (38,507)
--------- --------
Net income (loss)- pro forma (39,735) 367,203
========= ========
Basic earnings (loss) per share - as reported (0.01) 0.19
Basic earnings (loss) per share - pro forma (0.02) 0.17
Diluted earnings (loss) per share - as reported (0.01) 0.18
Diluted earnings (loss) per share - pro forma (0.02) 0.17
Three Months Ended Three Months Ended
September 30, September 30,
2004 2003
------------------ ------------------
Net income (loss) - as reported $ (79,133) $123,767
Less fair value of stock options (1,838) (21,174)
---------- --------
Net income (loss)- pro forma (80,971) 102,593
========== ========
Basic earnings (loss) per share
- as reported (0.04) 0.06
Basic earnings (loss) per share
- pro forma (0.04) 0.05
Diluted earnings (loss) per share
- as reported (0.04) 0.06
Diluted earnings (loss) per share
- pro forma (0.04) 0.05
-5-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 Segment Information
Information is presented for the Company's three reportable activities, avionics
government, avionics commercial and marine systems. The marine systems division
was acquired on January 16, 2004, and, as such, no amounts are shown for fiscal
year 2004 in the data below. There are no inter-segment revenues.
The Company is organized primarily on the basis of its avionics and marine
instrument products. The avionics government market consists primarily of the
design, manufacture, and sale of test equipment to U.S. and foreign governments
and militaries, either direct or through distributors. The avionics commercial
market consists primarily of the design, manufacture, and sales of test
equipment to domestic and foreign airlines, to commercial distributors, and to
general aviation repair and maintenance shops. The avionics commercial market
also includes sales related to repairs and calibration which have a lower gross
margin. The Company primarily develops and designs test equipment for the
avionics industry and, as such, the Company's products and designs cross
segments. The marine instrumentation systems segment consists of sales of
different products to hydrographic, oceanographic, researchers, engineers,
geophysicists, and surveyors.
The table below presents information about sales and gross margin. Costs of
sales include certain allocation factors for indirect costs. Additionally,
administrative expenses have been allocated between avionics and marine systems.
Three Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2004 Gov't Comm'l. Total Systems Items Total
- ------------------ -------- -------- -------- ------ --------- -----
Sales $ 1,382,992 $ 702,338 $ 2,085,330 $ 153,620 $ 2,238,950
Cost of sales 505,861 425,210 931,071 95,340 1,026,411
----------- ----------- ----------- ----------- -----------
Gross margin 877,131 277,128 1,154,259 58,280 1,212,539
----------- ----------- ----------- ----------- -----------
Engineering, research, and 414,688 95,358 510,046
development
Selling, general, and admin 667,134 141,608 808,742
Amortization of intangibles 21,549 21,549
Interest expense, net 3,800 179 -- 3,979
----------- ----------- -------- -----------
Total expenses 1,085,622 237,145 21,549 1,344,317
----------- ----------- -------- -----------
Income before income taxes $ 68,637 $ (178,865) $(21,549) $ (131,777)
=========== =========== ======== ===========
Three Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2003 Gov't Comm'l. Total Systems Items Total
-------- -------- -------- ------ --------- -----
Sales $ 1,762,767 $ 853,949 $ 2,616,716 -- $ 2,616,716
Cost of sales _748,719 _444,090 1,192,809 -- 1,192,809
----------- ----------- ----------- ----------- -----------
Gross margin 1,014,048 409,859 1,423,907 -- 1,423,907
----------- ----------- ----------- ----------- -----------
Engineering, research,& dev 714,591 714,591
Selling, general, and admin 500,138 500,138
Interest expense, net 3,769 3,769
----------- -----------
Total expenses 1,218,498 1,218,498
----------- -----------
Income before income taxes $ 205,409 -- $ 205,409
=========== =========== ===========
-6-
TEL-INSTRUMENT ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6 Segment Information (continued)
Six Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2004 Gov't Comm'l. Total Systems Items Total
- ------------------ -------- -------- -------- ------ --------- -----
Sales $ 3,284,850 $ 1,383,551 $ 4,668,401 $ 383,349 $ 5,051,750
Cost of sales 1,293,437 831,388 2,124,825 236,826 2,361,651
----------- ----------- ----------- ----------- -----------
Gross margin 1,991,413 552,163 2,543,576 146,523 2,690,099
----------- ----------- ----------- ----------- -----------
Engineering, research, and 905,553 136,943 1,042,496
Development
Selling, general, and admin 1,352,491 289,462 1,641,953
Amortization of intangibles 43,098 43,098
Interest expense, net 6,376 436 -- 6,812
----------- ----------- -------- -----------
Total expenses 2,264,420 426,841 43,098 2,734,359
----------- ----------- -------- -----------
Income before income taxes $ 279,156 $ (280,318) $(43,098) $ (44,260)
=========== =========== ======== ===========
Six Months Ended Avionics Avionics Avionics Marine Corporate
September 30, 2003 Gov't Comm'l. Total Systems Items Total
- ------------------ -------- -------- -------- ------ --------- -----
Sales $ 3,632,256 $ 2,042,366 $ 5,674,622 -- $ 5,674,622
Cost of sales 1,475,645 1,003,686 2,479,331 -- 2,479,331
----------- ----------- ----------- ----------- -----------
Gross margin 2,156,611 1,038,680 3,195,291 -- 3,195,291
----------- ----------- ----------- ----------- -----------
Engineering, research,& dev 1,068,048 1,068,048
Selling, general, and admin 1,449,590 1,449,590
Interest expense, net 2,032 2,032
----------- -----------
Total expenses 2,519,670 2,519,670
----------- -----------
Income before income taxes $ 675,621 -- $ 675,621
=========== =========== ===========
Note 7 Acquisition
On January 16, 2004, the Company acquired Innerspace Technology, Inc.
("ITI") for $547,000, including a note and employment agreements with
principals. The following table represents the unaudited consolidated
results of operations as though the acquisition of ITI occurred on April
1, 2003, utilizing ITI's unaudited financial statements for the September
2003 period.
Three Months Ended Six Months Ended
September 30, September 30,
2003 2003
------------------ ----------------
(pro forma) (pro forma)
Net sales $ 2,847,350 $ 6,115,256
Income (loss) before taxes 168,580 600,356
Net income (loss) 101,233 360,514
Basic income (loss) per common share 0.05 0.17
Diluted income (loss) per common share 0.05 0.16
-7-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
A number of the statements made by the Company in this report may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook, pricing trends and forces within the industry, the completion
dates of capital projects, expected sales growth, cost reduction strategies and
their results, long-term goals of the Company and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in demand
for the Company's products or in the cost and availability of its raw materials;
the actions of its competitors; the success of our customers; technological
change; changes in employee relations; government regulations; litigation,
including its inherent uncertainty; difficulties in plant operations and
materials; transportation, environmental matters; and other unforeseen
circumstances. A number of these factors are discussed in the Company's previous
filings with the Securities and Exchange Commission.
Critical Accounting Policies
In preparing our financial statements and accounting for the underlying
transactions and balances, we apply our accounting policies as disclosed in Note
2 of our Notes to Financial Statements included in our Form 10-K. The Company's
accounting policies that require a higher degree of judgment and complexity used
in the preparation of financial statements include:
Revenue recognition - revenues are recognized at the time of shipment to, or
acceptance by the customer provided title and risk of loss is transferred to the
customer. Provisions, when appropriate, are made where the right to return
exists. Revenues under service contracts are recognized when the services are
performed.
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 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.
Warranty reserves - warranty reserves are estimated based upon historical rates
and specific items that are identifiable and can be estimated at time of sale.
While warranty costs have historically been within our expectations and the
provisions established, future warranty costs could be in excess of our warranty
reserves. A significant increase in these costs could adversely affect our
operating results for the period and the periods these additional costs
materialize. Warranty cost accruals are adjusted from time to time when actual
warranty claim experience differs from estimates.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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 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.
Results of Operations
Overview
As previously reported, sales and operating income declined in the first six
months of fiscal year 2005, because of delays in deliveries under existing
contracts and in the awarding of new contracts, and as a result of planned
additional marketing and development costs for ITI. In September, the Company
received a $1,600,000 contract to supply T-36M ramp test sets to the Army
National Guard. The Company expects to complete delivery of all units under this
contract during the current fiscal year.
Investment in new product development continues for both avionics and marine
systems in order to meet the expected customer needs and to remain as leaders in
the respective industries. For the avionics division, the Company continues its
work on the next generation of IFF (Identification, Friend or Foe) 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 previously sold by the
Company, will be returned and modified, in the future, to accommodate more
sophisticated IFF testing. Although there is no assurance that the Company will
receive any such modification contracts, the Company believes that it is well
positioned to obtain such contracts. For marine systems, the Company is making
improvements to its tide gauge, and upgrading its sounders with a new Windows
operating system which will allow for improvements to the hardware.
The Company has been active in responding to requests for quotation for new
government programs, which will award new test equipment contracts, and is
currently in the process of submitting proposals for large government programs.
The Company continues actively to pursue opportunities in both the commercial
and government avionics and marine systems markets, both domestically and
internationally. The Company continues its efforts with Semaphore Capital
Advisors LLC to pursue growth through acquisitions and alliances of compatible
businesses or technologies.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Results of Operations (continued)
Sales
Sales of avionics products declined in the three and six months ended September
30, 2004, as compared to the same periods in the prior year, $531,386 (20.3%)
and $1,006,221 (17.7%), respectively, for the reasons discussed above under
Overview. Government sales of avionics products declined for the six months
ended September 30, 2004 as compared to the same period last year by
approximately $380,000, most of which decline occurred in the second quarter of
the current fiscal year. Commercial sales of avionics products declined $151,611
and $658,815, respectively, for the three and six months ended September 30,
2004 as compared to the same periods last year, primarily as a result of the
sales promotion in the prior fiscal year, which was not continued in the current
fiscal year, and the generally weak financial condition of the airline industry.
See Footnote 6 to the Financial Statements, Segment Information. Marine system
sales were $153,620 and $383,349 for the three and six months ended September
30, 2004, respectively.
Gross Margin
Gross margin decreased $505,192 (15.8%) for the six months ended September 30,
2004, as compared to the same period in the prior fiscal year. The decrease in
gross margin, for the most part, is attributed to the lower sales volume. The
gross margin percentage for the six months ended September 30, 2004 was 53.3% as
compared to 56.3% for the six months ended September 30, 2003, primarily as a
result of a change in product mix and ITI's lower gross margin.
Gross margin decreased $211,368 (14.8%) for the three months ended September 30,
2004, as compared to the same period in the prior fiscal year. This decrease in
gross margin, for the most part, is attributed to the lower sales volume. The
gross margin percentage for the three months ended September 30, 2004 was 54.2%
as compared to 54.4% for the three months ended September 30, 2003, primarily as
a result a change in product mix and ITI's lower gross margin which were
partially offset by lower manufacturing overhead variances.
Operating Expenses
Selling, general and administrative expenses increased $94,151 (13.2%) and
$192,363 (13.3%) for the three and six months ended September 30, 2004,
respectively, as compared to the three and six months ended September 30, 2003.
This increase is primarily attributed to the selling expenses for the marine
systems division, which expenses were not included in the six months ended
September 30, 2003 and higher commission expenses offset partially by lower
recruitment and relocation expenses and decreased consulting and professional
fees.
Engineering, research and development expenses increased $9,908 (2.0%) for the
three months ended September 30, 2004 and decreased $25,552 (2.4%) for the six
months ended September 30, 2004 as compared to the same periods in the prior
fiscal year. Lower outside contract labor expenditures were partially offset by
engineering expenditures associated with the marine systems division and by
higher recruitment fees
-10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Operating Expenses (continued)
Income Taxes
A tax benefit of $17,681 was recorded for the six months ended September 30,
2004, as compared to a provision for income taxes of $269,911 for the six months
ended September 30, 2003. A tax benefit of $52,644 was recorded for the three
months ended September 30, 2004, as compared to a provision for income taxes of
$81,642 for the three months ended September 30, 2003. These amounts represent
the effective federal and state tax rate of approximately 40% on the Company's
net income (loss) before taxes.
Liquidity and Capital Resources
At September 30, 2004, the Company had positive working capital of $3,948,462 as
compared to $3,767,150 at March 31, 2004. In May 2004, the Company and its
Chairman/President renegotiated the terms of the notes payable-related party,
resulting in $200,000 of these notes being re-classified as long-term and
improving the working capital by this amount. The Notes now become due in
consecutive years beginning March 31, 2005. For the six months ended September
30, 2004, the Company used $303,771 of cash for operating activities as compared
to the cash provided by operations of $73,322 for the six months ended September
30, 2003. This decline in cash from operations is primarily attributed to a
substantial increase in accounts receivable, as a result of a significant amount
of sales being shipped at the end of the quarter, and inventories and the
decrease in net income partially offset by an increase in accounts payable and a
decrease in other assets from the prior year.
The Company has a line of credit of $1,750,000 from Fleet Bank, currently
expiring on November 30, 2004. 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 to maintain this open line. At September 30, 2004, the
Company had no outstanding balance. The line of credit is collateralized by
substantially all of the assets of the Company, and requires the Company to
maintain certain financial covenants. As of September 30, 2004, the Company was
in compliance with all financial covenants. The Company has received a
commitment from the bank to renew this line for another year beyond November 30,
2004.
Based upon the current backlog, which has increased to $4,400,000 at September
30, 2004, 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 until needed.
There was no significant impact on the Company's operations as a result of
inflation for the six months ended September 30, 2004. 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, 2004.
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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 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
September 30, 2004 and have concluded that they are effective, based on their
evaluation of these controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15.
There were no changes in internal control over financial reporting identified in
connection with the evaluation as of September 30, 2004 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 6. Exhibits and Reports on Form 8-K
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 Certification by CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by CFO 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.
Report on Form 8-K regarding press release announcing results for
the quarter ended June 30, 2004 was submitted on August 16,2004.
Report on Form 8-K regarding press release announcing the award of a
$1,600,000 contract to supply T-36M ramp test sets to the Army
National Guard was submitted on September 3, 2004.
Report on Form 8-K regarding press release relating to its September
30, 2004 quarter was submitted on October 1, 2004.
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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: November 12, 2004 By: /s/ Harold K. Fletcher
--------------------------------
/s/ Harold K. Fletcher
Chairman and President
Date: November 12, 2004 By: /s/ Joseph P. Macaluso
--------------------------------
/s/ Joseph P. Macaluso
Principal Accounting Officer
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