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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, 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:
2,192,831 shares of Common stock, $.10 par value as of February 7, 2005.
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, 2004 and March 31, 2004 1
Condensed Consolidated Comparative Statements of Operations -
Three and Nine Months Ended December 31, 2004 and 2003 2
Condensed Consolidated Comparative Statements of Cash Flows -
Nine Months Ended December 31, 2004 and 2003 3
Notes to Condensed Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
Part II Other Information
Item 4. Submission of matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
Certifications 14-17
Item 1 - Financial Statements
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
ASSETS (Unaudited)
December 31, 2004 March 31, 2004
----------------- --------------
Current assets:
Cash $ 464,409 $1,509,828
Accounts receivable, net 2,096,691 1,266,905
Inventories 2,772,980 2,202,143
Taxes receivable 161,695 161,695
Prepaid expenses and other current assets 123,175 102,039
Deferred income tax benefit - current 571,301 581,348
---------- ----------
Total current assets 6,190,251 5,823,958
Property, plant, and equipment, net 883,490 867,886
Intangible assets, net 348,400 413,047
Other assets 296,682 287,610
---------- ----------
Total assets $7,718,823 $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 7,853 24,768
Accounts payable 485,220 346,169
Deferred revenues 80,507 44,663
Accrued payroll, vacation pay, profit sharing
and payroll taxes 388,094 333,180
Accrued expenses 991,709 963,528
---------- ----------
Total current liabilities 2,097,883 2,056,808
Notes payable - related party - non-current portion 200,000 --
Deferred taxes - long-term 48,000 48,000
---------- ----------
Total liabilities 2,345,883 2,104,808
Stockholders' equity:
Common stock 218,786 214,418
Additional paid-in capital 4,026,298 3,960,886
Retained earnings 1,127,856 1,112,389
---------- ----------
Total stockholders' equity 5,372,940 5,287,693
---------- ----------
Total liabilities and stockholders' equity $7,718,823 $7,392,501
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
TEL-INSTRUMENT ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
Dec. 31, 2004 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2003
------------- ------------- ------------- -------------
Net sales 2,782,090 2,914,271 7,833,840 8,588,893
Cost of sales 1,232,404 1,417,825 3,594,055 3,897,156
----------- ----------- ----------- -----------
Gross margin 1,549,686 1,496,446 4,239,785 4,691,737
Operating expenses:
Selling, general & administrative 844,758 715,465 2,486,711 2,165,055
Amortization of intangibles 21,549 -- 64,647 --
Engineering, research, & development 610,781 551,869 1,653,277 1,619,917
----------- ----------- ----------- -----------
Total operating expenses 1,477,088 1,267,334 4,204,635 3,784,972
Income from operations 72,598 229,112 35,150 906,765
Other income (expense):
Interest income 2,387 3,928 9,137 19,838
Interest expense (5,214) (4,587) (18,776) (22,529)
----------- ----------- ----------- -----------
Income before taxes 69,771 228,453 25,511 904,074
Provision for income taxes 27,725 91,266 10,044 361,177
----------- ----------- ----------- -----------
Net income $ 42,046 $ 137,187 $ 15,467 $ 542,897
=========== =========== =========== ===========
Basic income per common share $ 0.02 $ 0.06 $ 0.01 $ 0.25
Diluted income per common share $ 0.02 $ 0.06 $ 0.01 $ 0.24
Dividends per share None None None None
Weighted average shares outstanding
Basic 2,156,771 2,144,151 2,149,199 2,141,896
Diluted 2,272,473 2,232,820 2,264,901 2,230,565
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, 2004 December 31,2003
----------------- -----------------
Cash flows from operating activities
Net income $ 15,467 $ 542,897
Adjustments to reconcile net income to cash used
In operating activities:
Deferred income taxes 10,047 (86,900)
Depreciation 217,462 196,487
Amortization of intangibles 64,647 --
Reserve for obsolescence of inventories 45,000 40,000
Changes in assets and liabilities:
Increase in accounts receivable (829,786) (35,189)
(Increase) decrease in inventories (615,837) 342,132
Increase in prepaid expenses and other current assets (21,136) (43,186)
Increase in other assets (9,072) (199,831)
Increase (decrease) in accounts payable 139,051 (131,879)
Increase in deferred revenues 88,549 6,792
Increase (decrease) in accrued payroll, vacation pay,
and payroll taxes 54,914 (53,439)
Decrease in income taxes payable -- (103,924)
Decrease in accrued expenses (24,524) (3,102)
----------- -----------
Net cash (used in) provided by operations (865,218) 470,858
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (233,066) (170,146)
----------- -----------
Net cash used in investing activities (233,066) (170,146)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 69,780 16,909
Repayment of capitalized lease obligations (16,915) (21,022)
----------- -----------
Net cash provided by (used in) financing activities 52,865 (4,113)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,045,419) 296,599
Cash and cash equivalents at beginning of period 1,509,828 1,680,124
----------- -----------
Cash and cash equivalents at end of period $ 464,409 $ 1,976,723
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 84,847 $ 26,105
=========== ===========
Taxes paid $ -- $ 462,029
=========== ===========
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, 2004, the results of
operations for the three and nine months ended December 31, 2004 and December
31, 2003, and statements of cash flows for the nine months ended December 31,
2004 and December 31, 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
The following table sets forth the components of accounts receivable:
December 31, 2004 March 31, 2004
----------------- --------------
Commercial $ 1,019,986 $ 862,259
Government 1,120,803 446,244
Allowance for Bad Debts (44,098) (41,598)
----------- -----------
Total $ 2,096,691 $ 1,266,905
=========== ===========
Note 3 Inventories
Inventories consist of:
December 31, 2004 March 31, 2004
----------------- --------------
Purchased Parts $ 1,247,543 $ 846,782
Work-in-Process 1,642,236 1,401,722
Finished Goods 69,099 94,537
Less: Reserve for Obsolescence (185,898) (140,898)
----------- -----------
Total $ 2,772,980 $ 2,202,143
=========== ===========
4
TEL-INSTRUMENT ELECTRONICS CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 Earnings Per Share
The Company's basic income per 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 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 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 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 353,650 outstanding stock options under SFAS No. 123, the pro forma
amounts are indicated below:
Nine Months Ended Nine Months Ended
December 31, 2004 December 31, 2003
----------------- -----------------
Net income - as reported $ 15,467 $ 542,987
Less fair value of stock options (44,986) (60,750)
-------- --------
Net income (loss) - pro forma (29,519) 482,237
======== =======
Basic earnings per share - as reported 0.01 0.25
Basic earnings (loss) per share - pro forma (0.01) 0.23
Diluted earnings per share - as reported 0.01 0.24
Diluted earnings (loss) per share - pro forma (0.01) 0.22
Three Months Ended Three Months Ended
December 31, 2004 December 31, 2003
------------------ ------------------
Net income - as reported $ 42,046 $ 137,187
Less fair value of stock options (14,996) (12,043)
-------- --------
Net income - pro forma 27,050 125,144
====== =======
Basic earnings per share - as reported 0.02 0.06
Basic earnings per share - pro forma 0.01 0.06
Diluted earnings per share - as reported 0.02 0.06
Diluted earnings per share - pro forma 0.01 0.06
During the nine months ended December 31, 2004, the Company sold 26,720 shares
of common stock upon exercise of previously granted employee options, pursuant
to the exemption from registration provided by Sec. 4(2) of the Securities Act
of 1933.
5
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. 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 primarily consists of the
design, manufacture, and sale of different products to hydrographic and
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, 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, and 522,044 88,737 610,781
Development
Selling, general, and admin. 697,753 147,005 844,758
Amort. of intangibles - marine 21,549 21,549
Interest expense, net 3,006 (179) -- 2,827
----- ---------- --------- -----------
Total expenses 1,222,803 235,563 21,549 1,479,915
--------- ---------- --------- -----------
Income (loss) before income taxes $ 221,865 $ (130,545) $ (21,549) $ 69,771
=========== ========== ========= ===========
Three Months Ended Avionics Avionics Avionics Marine Corporate
December 31, 2003 Gov't Comm'l. Total Systems Items Total
----------------- ---------- -------- ----------- ---------- --------- -----------
Sales $2,002,133 $912,138 $ 2,914,271 -- $ 2,914,271
Cost of sales 906,451 511,374 1,417,825 -- 1,417,825
-------- -------- ----------- ---------- -----------
Gross margin 1,095,682 400,764 1,496,446 -- 1,496,446
--------- ------- ----------- ---------- -----------
Engineering, research,& dev. 551,869 551,869
Selling, general, and admin. 715,465 715,465
Interest expense, net 659 659
----------- -----------
Total expenses 1,267,993 1,267,993
----------- -----------
Income before income taxes $ 228,453 -- $ 228,453
=========== ========== ===========
6
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, 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, and 1,427,597 225,680 1,653,277
development
Selling, general, and admin. 2,050,244 436,467 2,486,711
Amort. of intangibles - marine 64,647 64,647
Interest expense, net 9,382 257 -- 9,639
--------- ----------- --------- -----------
Total expenses 3,487,223 662,404 64,647 4,214,274
--------- ----------- --------- -----------
Income (loss) before income $ 501,021 $ (410,863) $ 64,647 $ 25,511
======= =========== ========= ==========
taxes
Nine Months Ended Avionics Avionics Avionics Marine Corporate
December 31, 2003 Gov't Comm'l. Total Systems Items Total
----------------- ---------- ---------- ----------- --------- --------- -----------
Sales $5,634,389 $2,954,504 $ 8,588,893 -- $ 8,588,898
Cost of sales 2,382,096 1,515,060 3,897,156 -- 3,897,156
---------- ---------- ----------- --------- -----------
Gross margin 3,252,293 1,439,444 4,691,737 -- 4,691,737
---------- ---------- ----------- --------- -----------
Engineering, research,& dev. 1,619,917 1,619,917
Selling, general, and admin. 2,165,055 2,165,055
Interest expense, net 2,691 2,691
----------- -----------
Total expenses 3,787,663 3,787,663
----------- -----------
Income before income taxes $ 904,074 -- $ 904,074
=========== ========= ===========
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 December
31, 2003 period.
Three Months Ended Nine Months Ended
December 31, 2003 December 31, 2003
------------------ ------------------
(pro forma) (pro forma)
Net sales $3,126,234 $9,241,490
Income before taxes 151,867 752,223
Net income 91,196 451,710
Basic income per common share 0.04 0.21
Diluted income per common share 0.04 0.20
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 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.
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 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 reserves 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
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 this positive trend
will continue.
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
Sales and income decreased for the three and nine months ended December 31,
2004. As previously reported, sales and operating income declined because of
delays in deliveries under existing contracts and in the awarding of new
contracts, and as a result of the losses attributed to the marine systems
division, as a result of the planned additional marketing and development costs
for ITI. In addition, the Company, in agreement with the U.S. Navy, has
temporarily stopped shipment of the AN/APM-480 in anticipation of these units
being returned for up-grades and enhancements. However, the total number of
units under contract has not changed and approximately 90 units remain to be
shipped under this contract.
Commercial sales also declined during this period primarily as a result of a
successful sales promotion in the prior year which was not continued in the
current year, and the generally weak financial condition of the airline
industry. Fortunately, these declines were partially offset by the shipment of
the T-36M pursuant to a $1,600,000 contract (previously announced) from the Army
National Guard. The Company expects to complete delivery of all units under this
contract during the current fiscal year. Sales also increased T-47G, T-30CM and
the TR-220/210 family of products for the first nine months of the current
fiscal year.
The Company has been encouraged by the award of two new contracts, in addition
to the one received in September from the Army National Guard. In December 2004,
the Company received an order, through its distributor, to supply T-47NH's to
the Royal Australian Air Force in the amount of $694,350. In February 2005, the
Company received a contract in the amount of $1,815,000 to supply the T-36M and
the T-47NH to the U.S. Army.
Investment in new product development continues for both avionics and marine
systems in anticipation of 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 to accommodate this more sophisticated
IFF test capabilities. Although there is no assurance that the Company will
receive any such modification contracts, the Company believes that it is well
positioned to obtain them.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview (continued)
For marine systems, the Company has made improvements to its tide gauge, and is
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 could 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.
Results of Operations
Sales
Sales of avionics products declined for the three and nine months ended December
31, 2004, as compared to the same periods in the prior year $402,491 (13.8%) and
$1,408,712 (16.4%), respectively, mainly for the reasons discussed above under
Overview. Government sales declined $682,246 (12.1%) for the nine months ended
December 31, 2004 as compared to the same period in the prior fiscal year. Lower
sales of the AN/APM-480 to the U.S. Navy was partially offset by increases in
sales of the T-36M, T-47G, and AN/APM-480 to customers other than the U.S. Navy,
and of the T-30CM. For the three months ended December 31, 2004, avionics
government sales decreased $334,840 (16.7%), Lower sales of the AN/APM-480 to
the U.S. Navy were partially offset by increases in sales of the T-36M, T-47NH ,
and the T-76. Commercial sales decreased $726,466 (24.6%) and $67,651 (7.4%),
respectively, for the nine and three months ended December 31, 2004 as compared
to the same periods last year, primarily as a result of a sales promotion in the
prior year that was not continued in the current year.
Gross Margin
Gross margin decreased $451,952 (9.6%) for the nine months ended December 31,
2004, as compared to the same period last year, primarily as a result of the
lower sales volume. Gross margin increased $53,240 (3.6%) for the three months
because of a change in sales mix, but which was offset by the lower sales
volume. The gross margin percentage for the nine months ended December 31, 2004
was 54.1% compared to 54.6% for the nine months ended December 31, 2003. The
gross margin percentage for the three months ended December 31, 2004 was 55.7%
as compared to 51.3% for the three months ended December 31, 2003.
Operating Expenses
Selling, general and administrative expenses increased $129,293 (18.1%) and
$321,656 (14.9%) for the three and nine months ended December 31, 2004,
respectively, as compared to the three and nine months ended December 31, 2003.
This increase is primarily attributed to added selling expenses for the marine
systems division, which expenses were not included in the nine months ended
December 31, 2003, and to higher avionics commission expenses offset partially
by lower recruitment and relocation expenses and decreased consulting and
professional fees.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations (continued)
Operating Expenses (continued
Engineering, research and development expenses increased $58,912 (10.7%) and
$33,360 (2.1%) for the three and nine months ended December 31, 2004, as
compared to the same periods in the prior fiscal year. Engineering expenditures
associated with the marine systems division, higher recruitment fees and an
increases in salaries and materials were mostly offset by lower outside contract
labor expenditures.
Income Taxes
Income taxes decreased $63,541 and $351,133, respectively, for the three and
nine months ended December 31, 2004 as compared to the same periods last year as
a result of the lower profit. The provision for income taxes represents the
effective federal and state tax rate on the Company's income before taxes.
Liquidity and Capital Resources
At December 31, 2004, the Company had working capital of $4,092,368 as compared
to $3,767,150 at March 31, 2004 and cash declined $1,045,419 during this same
period due to matters discussed in the Overview. For the nine months ended
December 31, 2004, the Company used $865,218 of cash for operating activities as
compared to the cash provided by operations of $470,858 for the nine months
ended December 31, 2003. This decline in cash from operations is primarily
attributed to a substantial increase in accounts receivable and in inventories,
as well as the decrease in net income caused by the previously noted delays.
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.
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 to maintain this open line. At December 31, 2004, the Company had
no outstanding balance. The line of credit is collateralized by substantially
all of the assets of the company. The credit facility requires the Company to
maintain certain financial covenants. As of December 31, 2004, the Company was
in compliance with all financial covenants. The line of credit expires at
September 30, 2005.
Based upon the current backlog, which had increased to $4,800,000 at December
31, 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 nine months ended December 31, 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." Our Chief Executive Officer and Principal
Accounting Officer evaluated the Company's Disclosure Controls and Procedures at
January 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 our internal control over financial reporting
identified in connection with the evaluation as of March 31, 2004 by the Chief
Executive Officer and Principal Accounting Officer, required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect our
internal controls over financial reporting.
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on December 8, 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 1,604,622 19,106
George J. Leon 1,622,837 891
Robert J. Melnick 1,604,622 19,106
Jeff C. O'Hara 1,604,622 19,106
Robert A. Rice 1,622,837 891
Robert H. Walker 1,622,837 891
The shareholders also voted 1,622,338 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, 2005. Shareholders voted 1,000
shares against this proposal and shareholders totaling 390 shares withheld their
vote.
(d) Not applicable
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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 September 30, 2004 was submitted November 18, 2004
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 14, 2005 By: /s/ Harold K. Fletcher
-----------------------------
Harold K. Fletcher
Chairman and President
Date: February 14, 2005 By: /s/ Joseph P. Macaluso
-----------------------
Joseph P. Macaluso
Principal Accounting Officer
13