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SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 28, 2002
COMMISSION FILE NUMBER 1-8048
TII NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0328885
--------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1385 Akron Street, Copiague, New York 11726
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(Address of principal executive offices) (Zip Code)
(631) 789-5000
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock. $.01 par value
Series D Junior Participating Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (l) 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant
outstanding as of September 9, 2002 held by non-affiliates of the registrant was
approximately $3.1 million. While such market value excludes the market value of
shares that may be deemed beneficially owned by executive officers and
directors, this should not be construed as indicating that all such persons are
affiliates.
The number of shares of the Common Stock of the registrant outstanding as
of September 9, 2002 was 11,682,284.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 2002 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Report.
FORWARD-LOOKING STATEMENTS
In order to keep the Company's stockholders and investors informed of the
Company's future plans, this Report contains and, from time to time, other
reports and oral or written statements issued by the Company or on its behalf by
its officers contain, forward-looking statements concerning, among other things,
the Company's future plans and objectives that are or may be deemed to be
"forward-looking statements." The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995 which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes that it is in the best interests of its stockholders and
potential investors to take advantage of the "safe harbor" provisions of that
Act. Such forward-looking statements are subject to a number of known and
unknown risks and uncertainties that could cause the Company's actual results,
performance or achievements to differ materially from those described or implied
in the forward-looking statements. These factors include, but are not limited
to, general economic and business conditions, including the regulatory
environment applicable to the communications industry; weather and similar
conditions; competition (see "Business - Competition"); potential technological
changes, including the Company's ability to timely develop new products and
adapt its existing products to technological changes (see "Business - Products"
and "Business - Research and Development"); potential changes in customer
spending and purchasing policies and practices; the level of inventories
maintained by the Company's customers; loss or disruption of sales to major
customers as a result of, among other things, third party labor disputes,
political unrest in or shipping disruptions from countries in which the
Company's contract manufacturers produce the Company's products; the Company's
ability to market existing and new products (see "Business- General" and
"Business - Marketing and Sales"); its ability to retain and win contracts;
risks inherent in new product introductions, such as start-up delays and
uncertainty of customer acceptance (see "Business - General"); dependence on
third parties for products and product components (see "Business - Raw
Materials" and "Business - Manufacturing"); the Company's ability to maintain
its relationship with or reduce its dependence upon one of its principal
contract manufacturers which is an affiliate of a customer (see "Business -
General"), the Company's ability to attract and retain technologically qualified
personnel (see "Business - Employees"); the Company's ability to fulfill its
growth strategies (see "Business - Research and Development"); the Company's
ability to maintain the listing of its Common Sock on the Nasdaq SmallCap market
(see "Market For Registrant's Common Equity and Related Stockholder Matters");
the availability of financing on satisfactory terms (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"); and
other factors discussed elsewhere in this Report and in other Company reports
hereafter filed with the Securities and Exchange Commission.
2
PART I
ITEM 1. BUSINESS
GENERAL
TII Network Technologies, Inc., formerly named TII Industries, Inc.
("Company" or "TII"), designs, produces and markets lightning and surge
protection products, network interface devices ("NIDs") and station electronic
and other products. The Company sells these products to United States telephone
operating companies ("Telcos"), including the Regional Bell Operating Companies
("RBOCs") and Independent Operating Companies (together, incumbent local
exchange carriers or "ILECs") and competitive local exchange carriers ("CLECs").
The Company also sells to original equipment manufacturers ("OEMs") and
multi-system operators ("MSOs") of communications services. The Company believes
that its products offer superior, cost-effective performance features and
characteristics, including high reliability, long life cycles, ease of
installation and optimum protection against adverse environmental conditions.
This has resulted in TII becoming a leading supplier of overvoltage surge
protectors to the ILECs for use at their subscriber locations.
Overvoltage surge protection is mandated in the United States by the
National Electrical Code ("NEC") to be installed on subscriber telephone lines
to prevent injury to users and damage to their equipment due to surges caused by
lightning and other hazardous overvoltages. The NEC is published by the National
Fire Protection Agency and typically is adopted by states and local
municipalities. While similar requirements exist in most other developed
countries, a significant portion of the world's communications networks remains
unprotected from the effects of overvoltage surges. The 1999 edition of the NEC
requires overvoltage surge protection to be included on network powered coax
lines, a technology that brings telephony and broadband services to homes and
businesses. The Company's patented broadband In-Line(R) coax protector product
line was designed to address this market. The Company also markets a line of
NIDs tailored to various customer specifications. NIDs house the FCC mandated
demarcation point between Telco-owned and subscriber-owned property. NIDs
typically also enclose overvoltage surge protectors and various station
electronic products that, among other things, allow a Telco to remotely test the
integrity of its lines, thereby minimizing costly maintenance dispatches.
To address the growing demands and complexities of communications' networks
in the home, the Company is currently bringing to market a multi-service
residential gateway through its traditional Telco distribution channels. This
new system, which is being jointly developed and marketed with a technology
partner of the Company, is expected to be introduced during the first half of
fiscal 2003.
As Telcos expand and upgrade their networks with new technologies to
provide users with the expanded bandwidth necessary for high-speed transmission
of data over traditional Telco lines, TII has developed several station
protection and electronic products for use on Telcos digital subscriber lines
("DSL"). DSL is superimposed over the existing telephone lines allowing
high-speed data to be transmitted over a telephone line.
RESTRUCTURING AND OTHER CHARGES
The continuing telecommunications industry-wide slowdown and resulting
cutbacks by the service providers in their construction and maintenance budgets,
actions taken by the service providers to reduce inventory levels, and a
reduction in the number of telephone access lines per subscriber being deployed
have had a negative impact on the sales of the Company's traditional products
over the last several years. Accordingly, during this period the Company has
been restructuring and downsizing its operations to reduce its cost structure to
enable it to operate profitably at lower sales levels and position itself for
profitable
3
growth with the recovery of the market for its products. Despite previous
industry predictions of a turnaround, this slowdown continued through the end of
fiscal 2002. As a result, in the fourth quarter of fiscal 2002 the Company took
additional actions to reduce costs and improve operating efficiencies.
Included in these actions was the further downsizing of the Company's
Puerto Rico operations with the objective of creating a quick-response, low-cost
assembly and specialty gas tube manufacturing operation and the further
expansion of the Company's outsourcing strategy. This action, combined with the
consolidation of certain functional departments and management responsibilities
into the Company's New York headquarters, resulted in additional workforce
reductions and the reevaluation of the Company's property, plant and equipment
requirements, whereby the Company retained only those assets consistent with
this strategy. Management also reevaluated its home networking strategy and made
the decision to discontinue the Digital Closet Product line, which, despite
receiving several industry awards, did not achieve expected results. Further, as
a result of the continuing telecommunications industry-wide slowdown, the
Company also reevaluated its inventories. As a result, the Company recorded
charges in the fourth quarter of fiscal 2002 of $4.1 million that consisted of
$1.9 million for the write-down of inventories determined to be excess or
obsolete, $1.7 million for the impairment of long-lived assets and $0.5 million
for severance and other costs.
PRODUCTS
LIGHTNING AND OVERVOLTAGE SURGE PROTECTION PRODUCTS. The Company designs,
produces and markets overvoltage surge protection products principally for the
Telco industry. The Company's surge protection products are primarily for use on
the subscribers' home or business telephone lines. Surge protectors: (i) protect
the subscribers and their equipment; (ii) reduce the subscribers' loss of
service; (iii) reduce the communications providers' loss of revenue due to
subscriber outages; and (iv) reduce the communications providers' costs to
replace or repair damaged equipment. Overvoltage surge protectors differ in
power capacity, application, configuration and price to meet varying needs.
In the United States, the NEC mandates overvoltage surge protectors to be
installed on all subscribers' telephone lines.
Gas Tubes: The Company's gas tubes represent the foundation upon which most
of the Company's overvoltage surge protector products are based. The principal
component of the Company's overvoltage surge protector is a proprietary two or
three electrode gas tube. Overvoltage surge protection is provided when the
voltage on a communication line elevates to a level preset in the gas tube, at
which time the gases in the tube instantly ionize, momentarily disconnecting the
phone or other equipment from the circuit while safely conducting the hazardous
surge to ground. When the voltage on the line drops to a safe level, the gases
in the tube return to their normal state, returning the phone and other
connected equipment to service. The Company's gas tubes are a standard in the
industry and have been designed to withstand multiple high-energy overvoltage
surges while continuing to operate over a long service life.
Modular Station Protectors: One of the Company's most advanced overvoltage
surge protectors, marketed under the trademark Totel Failsafe(R) ("TFS"),
combines the Company's three electrode gas tube with a thermally operated
failsafe mechanism. The three-electrode gas tube is designed to protect
equipment from hazardous overvoltage surges and the failsafe mechanism is
designed to insure that, under sustained overvoltage conditions, the protector
will become permanently grounded. In certain of its modular protectors the
Company combines the TFS protection element with a sealing gel making this
protector impervious to severe moisture or environmental contamination while
providing advanced overvoltage surge protection. The Company has developed
several overvoltage protectors for high-speed broadband applications.
4
Broadband Coaxial Protectors: The 1999 revision to the NEC requires
overvoltage surge protection on all network powered subscriber coax lines, a
cable technology that brings telephony and broadband services to homes and
businesses. As an integral part of the Company's broadband product line, the
Company has developed and patented a high-performance, 75-ohm Broadband Coax
Protector to safeguard coaxial cable lines. While providing overvoltage surge
protection, the Company's In-Line(R) Broadband Coax Protectors are virtually
transparent to the network, permitting high-bandwidth signals to be transmitted
without adversely affecting the signal.
Capitalizing on the Company's patent for In-Line(R) Coaxial Cable Surge
Protectors, the Company has also developed a 50-ohm Base Station Protector
product line which protects wireless service providers' cell sites from the
damaging effects of lightning and other surges.
Solid State and Hybrid Modular Station Protectors: Using solid-state
components, the Company has developed solid-state overvoltage surge protectors.
While solid-state overvoltage surge protectors are faster than gas tube
overvoltage surge protectors at reacting to surges, a feature that some
customers believe important in protecting certain of their sensitive equipment,
they have lower energy handling capability and higher capacitance than gas
tubes. When an overvoltage surge exceeds the energy handling capacity of the
solid-state protector, it fails, causing the telephone or other connected
equipment to cease operating. High capacitance on a communication line adversely
affects high-bandwidth transmission, distorting the signal. As a result, most
Telcos use high-energy handling, low capacitance gas tube protectors at the
subscriber location. In the Telco's switching center, where lower energy
handling and higher capacitance is not a major concern, solid-state protectors
are used more frequently. As communications equipment becomes more complex, a
protector's reaction speed to a surge may be perceived to be more critical than
its energy handling capabilities. In response, the Company has also combined
solid-state protectors with the Company's gas tubes in hybrid overvoltage surge
protectors. While generally more expensive and complex than gas tube surge
protectors, the hybrid surge protector can provide the speed of a solid-state
protector with the energy handling capability of a gas tube. (See "Business -
Competition.")
AC Powerline Protectors: TII's powerline surge protectors utilize the
Company's surge protection technology and are principally used by Telcos at
their central office ("CO") locations. These devices protect the connected
communication equipment against damage or destruction caused when overvoltage
surges enter equipment through the powerline. These products have superior surge
handling characteristics compared to the standard strip surge protectors that
plug into a homeowner's AC outlet.
AC Powerline/Dataline Protectors: The Company has recently developed and is
marketing a powerline/dataline Lightning and Power Surge Shield(TM). This
protector combines the Company's powerline protection technology with the
Company's proprietary protection for the telephone, DSL, Ethernet and universal
serial bus (USB) and coax lines. The powerline/dataline protector is intended
for the residential market and is initially planned to be sold through the
Company's traditional Telco distribution channels.
Lightning and overvoltage surge protection products, sold separately from
NIDs, accounted for approximately 31%, 56% and 59% of the Company's net sales
during the Company's fiscal years 2002, 2001 and 2000, respectively.
NETWORK INTERFACE DEVICES. The Company designs, produces and markets
various NIDs, which house the FCC mandated demarcation point between Telco-owned
and subscriber-owned property. The Company's NIDs typically also enclose its
overvoltage surge protectors and various station electronic products that, among
other things, allow Telcos to remotely test the integrity of their lines
minimizing costly maintenance dispatches.
5
To address the demand for voice, high-speed data and interactive video
services, Telcos and MSOs are expanding and upgrading their networks to
accommodate the higher bandwidth necessary to transmit these services. In
response, and with future technology in mind, TII has developed a line of
broadband NIDs designed to enclose the technology of choice needed to
accommodate higher bandwidth signals, whether traditional twisted pair lines,
high-bandwidth coaxial cable or fiber optic lines. The Company's broadband NID
product line is modular in design and thus facilitates expansion to accommodate
additional subscriber access lines. For use in various markets, the NID product
line currently consists of enclosures that accommodate from one to twenty-five
access lines. The Company's broadband NIDs can also accommodate TII's patented
coaxial overvoltage surge protector.
NID sales represented approximately 61%, 39% and 32% of the Company's net
sales during fiscal 2002, 2001 and 2000, respectively.
STATION ELECTRONIC AND OTHER PRODUCTS. The Company designs, produces and
markets station electronic products that are typically installed within a NID.
One of the Company's station electronic products allows a Telco to remotely test
the integrity of its lines, minimizing costly maintenance dispatches.
Additionally, as Telcos expand and upgrade their networks with new
technologies to provide users with the expanded bandwidth necessary for
high-speed transmission of data over traditional Telco lines, TII has developed
several DSL station electronic products for this market, including DSL filters
and splitters.
HOME NETWORKING SYSTEMS. To address the growing demands and complexities of
communications' networks in the home, the Company developed the Digital Closet
that integrates several of the Company's and other manufacturers' products and
technologies into a multi-service residential gateway for the home.
The Digital Closet was to be distributed through national retail outlets
and independent installers but the Company was not successful in finding the
right partners to develop this distribution channel due, in part, to weak
economic conditions. Although the Company received several industry awards for
the Digital Closet, sales of the Digital Closet did not achieve expected
results. As a result, the Company has decided to discontinue the Digital Closet
product line.
The Company is currently working with a technology partner to develop a
lower cost residential gateway system for distribution through the Company's
traditional Telco distribution channels. It is anticipated that this new system
will be introduced during the first half of fiscal 2003.
RESEARCH AND DEVELOPMENT
New product opportunities continue to arise in the Company's traditional
Telco markets as well as in the OEM and MSO markets. The Company has also begun
to evaluate the residential, commercial, industrial and international markets.
Currently, the Company's research and development ("R&D") and related marketing
efforts are focused on several projects including:
o Refining the design of TII's new line of powerline/dataline protectors
that are initially planned to be distributed through the Company's
traditional Telco distribution channels.
o Expanding and enhancing the broadband NID product line to address
anticipated future requirements of Telcos.
o Further developing DSL and coaxial cable overvoltage surge protectors
and station electronics for the growing broadband communications
markets, including Telcos and MSOs.
6
The Company's R&D department currently consists of persons skilled and
experienced in various technical disciplines, including physics, electrical and
mechanical engineering, with specialization in such fields as electronics,
metallurgy and plastics. The Company utilizes advanced computer aided design
equipment networked with collaborative partners and directly linked to stereo
lithographic modeling capability to accelerate time-to-market.
The Company's R&D expense was $1.8 million, $2.9 million and $3.1 million
during fiscal years 2002, 2001 and 2000, respectively. The decrease in both
fiscal years 2002 and 2001 were due to the Company's ability to reduce these
expenses through the use of collaborative engineering efforts with its contract
manufacturers. (See "Business - Manufacturing")
MARKETING AND SALES
Prior to selling its products to a customer, the Company must typically
undergo a potentially lengthy product qualification process involving approval
agencies designated by law, codes and/or customers. Thereafter, the Company
continually submits successive generations of products, as well as new products,
to its customers for qualification. The Company believes that being a leading
supplier of overvoltage surge protectors for over 30 years, its current position
as a leading supplier to the Telcos and its strategy for developing products by
working closely with its customers provide a strong position from which it can
market its current and anticipated new products.
The Company sells to its customers primarily through its direct sales
force, a network of distributors and sales representatives. TII also sells to
competitive NID suppliers, who incorporate the Company's overvoltage surge
protectors into their products for resale to Telcos.
The following customers accounted for more than 10% of the Company's
consolidated net sales during one or more of the years presented below. The loss
of, or the disruption of shipments to, a customer that accounts for greater than
10% of the Company's net sales could have a material adverse effect on the
Company's results of operations and financial condition.
Year Ended
----------------------------------------
June 28, June 29, June 30,
2002 2001 2000
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Verizon Corporation (1) 57 % 33 % 25 %
Tyco Electronics Corporation (2) 11 % 26 % 19 %
Corning Cable Systems LLC (3) 2 % 7 % 12 %
Telco Sales, Inc. 6 % 7 % 12 %
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(1) On June 30, 2000, a wholly-owned subsidiary of Bell Atlantic
Corporation was merged with and into GTE Corporation resulting in GTE
Corporation becoming a wholly-owned subsidiary of Bell Atlantic. The
combined company is doing business as Verizon Communications. The
Company has made sales to Bell Atlantic and a subsidiary of GTE
Corporation. The Company is operating under a supply agreement with
Verizon that expires in April 2004 and provides for a possible
extension for up to one year from that date.
(2) Tyco Electronics Corporation (a successor to Raychem Corporation) is
an OEM that purchases overvoltage protection products from the Company
for inclusion within their products, including NIDs. The Company has
received a letter from Tyco, that also owns a company that is a
competitor and customer of the Company, alleging that a product of the
Company infringes on one or more of Tyco's patents and that Tyco would
be willing to license the patents to the Company. The Company has
consulted its outside counsel and believes there is no patent
infringement.
(3) Corning Cable Systems LLC (formerly Siecor Corporation) is an OEM that
supplies NIDs to Telcos and is required by certain Telcos to purchase
TII's overvoltage surge protectors for inclusion within their NIDs.
7
Purchases of the Company's products are generally based on individual
customer purchase orders for delivery from inventory or within up to thirty days
under general supply contracts. The Company, therefore, has no material firm
backlog of orders.
The Company's international sales were approximately $1.3 million in fiscal
2002 (4% of sales), $1.9 million in fiscal 2001 (5% of sales) and $1.2 million
in fiscal 2000 (2% of net sales). International sales have been made primarily
to countries in the Caribbean, South and Central America, Canada, the Pacific
Rim and Europe. The Company requires foreign sales to be paid for in U.S.
currency. International sales are affected by such factors as NAFTA requirements
exchange rates, changes in protective tariffs and foreign government import
controls. The Company believes international markets continue to offer
additional opportunities for its products and continues to seek methods to
increase these sales.
MANUFACTURING
While the Company maintains a quick-response, low-cost assembly and
specialty gas tube manufacturing operation at its facility in Puerto Rico, with
the re-alignment of the Company's operations, significantly all the high volume
production has been outsourced and is now being produced by contract
manufacturers within the Pacific Rim, principally Malaysia and China, utilizing,
in most cases, the Company's equipment and processes. The Company maintains all
final quality assurance approval for all products prior to shipment.
The Company's contract manufacturers' facilities are listed by UL and are
ISO 9000 registered. The Company continually evaluates its current and potential
contract manufacturers to assure the highest quality product, best delivery and
most competitive pricing.
One of the Company's contract manufacturers is a subsidiary of Tyco
Electronics Corporation that also owns a company that is a competitor and
customer of the Company. A second contract manufacturer produces a significant
portion of the Company's proprietary gas tubes. This company also sells its own
gas tubes to competitors of the Company. There are strict non-disclosure
agreements with each of these contract manufacturers and through fiscal 2002,
the Company's relationship with each of these manufacturers has had a positive
impact on the Company's business.
RAW MATERIALS
The primary components of the Company's products are stamped, drawn and
formed parts made out of a variety of commonly available metals, ceramics and
plastics. The manufacture of the Company's overvoltage surge protectors and
station electronic products use commonly available components, printed circuit
boards and standard electrical components, such as resistors, diodes and
capacitors. While the Company has no orders with suppliers of the components
utilized in the manufacture of its products with delivery scheduled later than a
year, the Company believes that the raw materials used will continue to be
available in sufficient supply at competitive prices. The Company depends on its
contract manufacturers to produce the majority of its products for sale to
customers. These manufacturers are responsible for the purchase of raw
materials, which must meet the Company's specifications.
COMPETITION
The Company faces significant competition across all of its product lines.
Its principal competitors within the Telco market are Corning Cable Systems LLC
and Tyco Electronics Corporation, which are customers of the Company, and Bourns
Inc. (see "Business - Marketing and Sales").
8
The Company's gas tube overvoltage surge protectors not only compete with
other companies' gas tube overvoltage surge protectors, but also with
solid-state overvoltage surge protectors. While solid-state surge protectors
react faster to surges, gas tube overvoltage surge protectors have generally
remained the overvoltage surge protection technology of choice at the
subscribers location by virtually all Telcos because of the gas tube's ability
to repeatedly withstand significantly higher energy surges than solid-state
surge protectors. This enables gas tubes to survive longer in the field than
solid-state surge protectors, reducing loss of service and costs in dispatching
a maintenance vehicle to replace the failed surge protector. Further, solid
state protectors have significantly higher capacitance than gas tube protectors.
Higher capacitance adversely affects transmission on a high bandwidth
communication line by distorting the signal. Solid state overvoltage surge
protectors are used principally in Telcos' central office switching centers
where speed is perceived to be more critical than energy handling capabilities
and in regions where there is a low incidence of lightning. The Company believes
that, for the foreseeable future, both gas tube and solid state protectors will
continue to be used as overvoltage surge protectors within the Telco market.
Solid state and gas tube protectors are produced from different raw materials,
manufacturing processes and equipment.
The Company's reputation among its customers is one of providing swift
responses to their needs with creative and effective solutions using products
compliant with, and in most cases superior in performance to, the demanding
specifications of customers. This approach, combined with the Company's history
of continually improving technology, improved operations and effective
collaborations, allows the Company to bring product solutions to its customers
faster, more effectively and more competitively priced.
Principal competitive factors within the Company's Telco markets include
price, technology, product features, service, quality, reliability and bringing
new products to market on time. Most of the Company's competitors have
substantially greater financial, sales, manufacturing and product development
resources than the Company. The Company believes that its sales, marketing and
research and development departments, its high quality products, its contract
manufacturers low cost production capabilities and their engineering resources
combined with the Company's overvoltage surge protection technology, enable it
to maintain its competitive position.
PATENTS AND TRADEMARKS
The Company owns or has applied for a number of patents relating to certain
of its products or components thereof and owns a number of registered trademarks
which are considered to be of value principally in identifying the Company and
its products. The Company also has a number of patents covering various of its
products. TII, In-Line(R), Totel Failsafe(R) and Angle Driver(R) are among the
registered trademarks of the Company. While the Company considers its patents
and trademarks to be important, especially in the early stages of product
marketing, it believes that, because of technological advances in its industry,
its success depends primarily upon its sales, engineering and manufacturing
skills and the effective collaborations which have accelerated time-to-market of
improved and new products. To maintain its industry position, the Company relies
primarily on technical leadership, trade secrets, its proprietary technology and
its contract manufacturers low cost production capabilities and their
engineering resources.
GOVERNMENT REGULATION
The Telco industry is subject to regulation in the United States and in
other countries. In the United States, the FCC and various state public service
or utility commissions regulate most of the Telcos and other communications
access providers who use the Company's products. While such regulations do not
typically apply directly to the Company, the effects of such regulations, which
are under continuous review and subject to change, could adversely affect the
Company's customers and, therefore, the Company.
9
The NEC requires that an overvoltage surge protector listed by Underwriters
Laboratories or another qualified electrical testing laboratory be installed on
virtually all subscriber telephone lines. Listing by Underwriters Laboratories
has been obtained by the Company where required.
Compliance with applicable federal, state and local environmental
regulations has not had, and the Company does not believe that compliance in the
future will have, a material adverse effect on its earnings, capital
expenditures or competitive position.
CERTAIN TAX ATTRIBUTES
Prior to July 1, 2000, the Company had elected the application of Section
936 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). Under that
section, the Company was entitled to a federal tax credit in an amount equal to
the lesser of the United States federal tax attributable to its taxable income
arising from the active conduct of its business within Puerto Rico or the
economic activity based credit limitation (on a non-consolidated basis),
provided that in its current and two preceding tax years at least 80% of its
gross income and at least 75% of its gross income from the active conduct of a
trade or business were from Puerto Rico sources. Principally as a result of the
Company's restructurings, the potential for benefits under Section 936 for the
Company was substantially reduced. Accordingly, in order to optimize the
Company's tax structure, during fiscal 2001 the Company ended its election under
Section 936 of the Code. (See Note 4 of Notes to Consolidated Financial
Statements for information relating to the Company's Net Operating Loss
Carryforwards.)
EMPLOYEES
On September 6, 2002, the Company had approximately 102 full-time
employees, of whom 56 were employed at the Company's Puerto Rico facility. The
Company has not experienced any work stoppage as a result of labor difficulties
and believes it has satisfactory employee relations. The Company is not a party
to any collective bargaining agreements.
ITEM 2. PROPERTIES
The Company occupies a single story building and a portion of another
building, consisting of an aggregate of approximately 14,000 square feet in
Copiague, New York under leases, which expire in July 2003. These facilities
house the Company's principal research and development activities, marketing,
administrative and executive offices.
The Company also leases a 20,000 square foot facility in Toa Alta, Puerto
Rico, which is approximately 20 miles southwest of San Juan, under an agreement
that expires in April 2006. This facility contains certain of the Company's
assembly and manufacturing, warehousing, research and development, and quality
assurance resources.
The Company believes that its facilities and equipment are well maintained
and adequate to meet its current requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq SmallCap Market under the
symbol "TIII". The Company's stock currently trades below $1.00 and as such, is
not in compliance with that market's minimum bid price requirement. The Company
has until mid-February 2003 to re-gain compliance before it faces the potential
de-listing of its stock from that market. The following table sets forth, for
each quarter during fiscal 2002 and 2001, the high and low sales prices of the
Company's common stock on that market:
Fiscal 2002 High Low
---------- ----------
First Quarter Ended September 28, 2001 $ 1.11 $ .51
Second Quarter Ended December 28, 2001 .90 .40
Third Quarter Ended March 29, 2002 .85 .38
Fourth Quarter Ended June 28, 2002 .54 .35
Fiscal 2001 High Low
---------- ----------
First Quarter Ended September 29, 2000 $ 3.00 $ 1.63
Second Quarter Ended December 29, 2000 2.00 .94
Third Quarter Ended March 30, 2001 1.91 1.00
Fourth Quarter Ended June 29, 2001 1.50 .93
As of September 9, 2002, the Company had approximately 407 holders of
record of its common stock.
To date, the Company has paid no cash dividends. For the foreseeable
future, the Company intends to retain all earnings generated from operations for
use in the Company's business. Additionally, the Company's borrowing
arrangements prohibit the payment of dividends.
11
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data has been derived from the Company's
consolidated financial statements for the five years ended June 28, 2002 and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated Financial
Statements and the related notes thereto, included elsewhere in this Report:
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
June 28, June 29, June 30, June 25, June 26,
2002(a) 2001(a) 2000 1999 1998
-------------- ------------- ------------- -------------- -------------
Statements of Operations Data(b)
----------------------------------------
Net sales $ 29,801 $ 39,323 $ 49,635 $ 49,284 $ 50,548
Operating loss $ (6,865) $ (7,589) $ (743) $ (9,211) $ (4,542)
Net loss attributable
to common stockholders $ (6,541) $ (7,540) $ (1,018) $ (6,402) $ (5,142)
Basic and diluted net loss attributable
to common stockholders, per share $ (0.56) $ (0.65) $ (0.11) $ (0.79) $ (0.68)
Balance Sheet Data
----------------------------------------
Working capital $ 8,224 $ 13,910 $ 19,123 $ 16,488 $ 15,994
Total assets $ 18,528 $ 30,762 $ 37,316 $ 41,230 $ 47,564
Debt $ 489 $ 1,463 $ 1,567 $ 3,077 $ 5,729
Redeemable preferred stock $ - $ 1,626 $ 1,626 $ 2,850 $ 4,738
Stockholders' equity $ 14,779 $ 21,224 $ 28,761 $ 24,893 $ 28,973
- ------------------------
(a) See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of several factors that
affected the Company's results of operations in fiscal 2002 and 2001.
(b) No cash dividends were declared in any of the reported periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Financial Data and the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Report.
BUSINESS
TII Network Technologies, Inc., formerly named TII Industries, Inc.
("Company" or "TII"), designs, produces and markets lightning and surge
protection products, network interface devices ("NIDs") and station electronic
and other products. The Company has been a leading supplier of overvoltage surge
protectors to U.S. telephone operating companies ("Telcos") for over 30 years.
RESTRUCTURING AND OTHER CHARGES
The continuing telecommunications industry-wide slowdown and resulting
cutbacks by the service providers in their construction and maintenance budgets,
actions taken by the service providers to reduce inventory levels, and a
reduction in the number of telephone access lines per subscriber being deployed
have had a negative impact on the sales of the Company's traditional products
over the last several years. Accordingly, during this period the Company has
been restructuring and downsizing its operations to reduce its cost structure to
enable it to operate profitably at lower sales levels and position itself for
profitable growth with the recovery of the market for its products. Despite
previous industry predictions of a
12
turnaround, this slowdown continued through the end of fiscal 2002. As a result,
in the fourth quarter of fiscal 2002, the Company took additional actions to
reduce costs and improve operating efficiencies.
Included in these actions was the further downsizing of the Company's
Puerto Rico operations with the objective of creating a quick-response, low-cost
assembly and specialty gas tube manufacturing operation and the further
expansion of the Company's outsourcing strategy. This action, combined with the
consolidation of certain functional departments and management responsibilities
into the Company's New York headquarters, resulted in additional workforce
reductions and the reevaluation of the Company's property, plant and equipment
requirements, whereby the Company retained only those assets consistent with
this strategy. Management also reevaluated its home networking strategy and made
the decision to discontinue the Digital Closet Product line, which, despite
receiving several industry awards, did not achieve expected results. Further, as
a result of the continuing telecommunications industry-wide slowdown, the
Company also reevaluated its inventories. As a result, the Company recorded
charges in the fourth quarter of fiscal 2002 of $4.1 million that consisted of
$1.9 million for the write-down of inventories determined to be excess or
obsolete, $1.7 million for the impairment of long-lived assets and $0.5 million
for severance and other costs.
In the third quarter of fiscal 2001, as part of management's continuing
strategy to improve profit margins by finding more cost-effective alternative
ways of producing its products, and also as a result of the successes under a
fiscal 1999 re-alignment plan, management committed to a plan to further
re-align its operations. A key element of the 2001 plan was the expansion of the
Company's outsourcing strategy with contract manufacturers to produce a
substantial portion of the remaining components and subassemblies that the
Company was still manufacturing. Included in this plan, were workforce and
production facility reductions, the write-down of certain inventories and
manufacturing machinery, equipment and leasehold improvements related to
manufacturing activities conducted in Puerto Rico that were outsourced or were
used for products that were eliminated, and other cost saving measures.
Accordingly, during the third quarter of fiscal 2001, the Company recorded a net
re-alignment of operations charge of approximately $6.1 million, including an
inventory write-down of approximately $2.7 million (net of a reversal of a
remaining allowance of $96,000 from a fiscal 1999 re-alignment charge), $2.9
million for the write-down of net fixed assets, a charge of $300,000 for
employee termination benefits for a workforce reduction of 70 employees and
$300,000 for a lease commitment for excess manufacturing space. (See Note 2 of
Notes to Consolidated Financial Statements.)
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
TII's consolidated financial statements have been prepared in accordance
with accounting principles that are generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and judgments. The Company believes that the issues associated
with determining the carrying value of the Company's inventories and the
carrying value of its long-lived assets are the most critical areas where
management's judgments and estimates affect the Company's reported results.
Inventories are required to be stated at the lower of cost or market. In
establishing appropriate inventory reserves management assesses the ultimate
recoverability of the inventory considering such issues as technological
advancements in products as required by the Company's customers, changes within
the marketplace and general economic conditions. While the Company believes its
estimates are reasonable, misinterpretation of prevailing conditions could
result in actual results varying from reported results that are based on the
Company's estimates, assumptions and judgments as of the balance sheet date.
The Company reviews long-lived assets, such as fixed assets to be held and
used or disposed of, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may
13
not be recoverable. If the sum of the expected cash flows undiscounted and
without interest is less than the carrying amount of the asset, an impairment
loss is recognized in the amount by which the carrying amount of the asset
exceeds its fair value.
FISCAL YEARS ENDED JUNE 28, 2002, JUNE 29, 2001 AND JUNE 30, 2000
Net sales for fiscal 2002 decreased $9.5 million or 24.2% to $29.8 million
from $39.3 million in fiscal 2001. The decrease was primarily due to the
continuing telecommunications industry-wide slowdown, cutbacks by
telecommunications service providers in their construction and maintenance
budgets, actions taken by the service providers to reduce inventory levels and a
reduction in the number of telephone access lines per subscriber being deployed.
Net sales for fiscal 2001 decreased $10.3 million or 20.8% to $39.3 million from
$49.6 million in fiscal 2000. The decrease was principally due to the
telecommunications industry-wide slowdown and actions taken by customers to
reduce inventory levels. Also contributing to the lower revenue level in fiscal
2001 was the loss of sales as a result of the divestiture of the Company's metal
stamping business in fiscal 2000. Additionally, the Company experienced reduced
orders early in fiscal 2001 from a significant customer as a result of technical
problems the customer had with its product that was unrelated to the Company's
components and which has since been resolved.
Gross profit in fiscal 2002 was $5.3 million, or 17.8% of sales ($7.2
million, or 24.2% of sales, excluding a $1.9 million inventory write-down for
excess and obsolete inventory), compared to $6.5 million, or 16.5% of sales
($9.2 million, or 23.3% of sales, excluding the $2.7 million inventory
write-down as a result of the operations re-alignment in fiscal 2001). The
improved gross profit margins, are principally due to the success of the
Company's continuing cost reduction efforts, including the 2001 operations
re-alignment, its outsourcing strategy and an increased level of sales of
technologically advanced, higher margin products. Gross profit in fiscal 2001
was $9.2 million, or 23.3% of sales, excluding the $2.7 million inventory
write-down as a result of the operations re-alignment, compared to $9.5 million,
or 19.1% of sales, in fiscal 2000. The improved gross profit margin, excluding
the inventory write-down, is principally due to the success of the Company's
fiscal 1999 operations re-alignment and the introduction of technically
advanced, higher margin versions of certain mature products.
Selling, general and administrative expenses in fiscal 2002 increased
$906,000, or 11.6%, to $8.7 million, from $7.8 million in fiscal 2001. Selling,
general and administrative expenses for fiscal 2001 increased $706,000, or
10.0%, to $7.8 million from $7.1 million in fiscal 2000. The increase in both
years was principally due to increased marketing expenses related to the
introduction and marketing of the Company's Digital Closet product line, which
was discontinued in the fourth quarter of fiscal 2002, and, in fiscal 2002,
$500,000 of severance and other charges.
Research and development expenses for fiscal 2002 decreased by $1.1
million, or 38.9%, to $1.8 million from $2.9 million in fiscal 2001. Research
and development expenses for fiscal 2001 decreased by $254,000, or 8.1%, to $2.9
million from $3.1 million in fiscal 2000. The decreases in both fiscal years
2002 and 2001 were due to the Company's ability to reduce these expenses through
the use of collaborative engineering efforts with its contract manufacturers.
The Company recorded a charge of $1.7 million in the fourth quarter of
fiscal 2002 for the impairment of long-lived assets it no longer used. See
"Restructuring and Other Charges," above, for information concerning this charge
and the charge for fiscal 2001 operations re-alignment costs, net of reversals.
Interest expense in fiscal 2002 decreased $30,000 to $70,000 due to
decreased borrowings under the Company's credit facilities and lower prevailing
interest rates. Interest expense in fiscal 2001 decreased
14
$114,000 to $100,000 due to decreased borrowings under the Company's credit
facilities and a reduction in interest rates.
Interest income in fiscal 2002 decreased $139,000 to $8,000 from $147,000
in fiscal 2001 and by $57,000 to $147,000 from $204,000 in fiscal 2000. The
decline in both years was due primarily to lower comparable average cash and
marketable securities balances held by the Company during the respective fiscal
years.
In the fourth quarter of fiscal 2000, the holder of the Company's $750,000
unsecured subordinated note converted that note into 428,571 shares of Common
Stock at a reduced conversion price. This transaction resulted in a charge of
approximately $332,000 that was recorded in other income (expense).
INCOME TAXES
Due to the Company's pre-tax losses, there was no tax provision for the
three years ended June 28, 2002. Prior to July 1, 2000, the Company had elected
the application of Section 936 of the U.S. Internal Revenue Code of 1986, as
amended ("Code"). Under that section, the Company was entitled to a federal tax
credit in an amount equal to the lesser of the United States federal tax
attributable to its taxable income arising from the active conduct of its
business within Puerto Rico or the economic activity based credit limitation (on
a non-consolidated basis), provided that in its current and two preceding tax
years at least 80% of its gross income and at least 75% of its gross income from
the active conduct of a trade or business were from Puerto Rico sources.
Principally as a result of the Company's restructurings, the potential for
benefits under Section 936 for the Company was substantially reduced.
Accordingly, in order to optimize the Company's tax structure, during fiscal
2001 the Company ended its election under Section 936 of the Code. (See Note 4
of Notes to Consolidated Financial Statements for information relating to the
Company's net operating loss carryforwards.)
IMPACT OF INFLATION
The Company does not believe its business is affected by inflation to a
greater extent than the general economy. The Company monitors the impact of
inflation and attempts to adjust prices where market conditions permit.
Inflation has not had a significant effect on the Company's operations during
any of the reported periods.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2002 COMPARED TO FISCAL 2001
-----------------------------------
The Company's cash and cash equivalents balance increased to $868,000 at
the end of fiscal 2002 from $233,000 at the end of fiscal 2001. The increase
resulted from net cash flows from operations of $2.9 million partially offset by
cash outflows from investing activities of $136,000 and financing activities of
$2.2 million. Working capital decreased to $8.2 million at the end of fiscal
2002 from $13.9 million at the end of fiscal 2001. This decrease was due
primarily to a reduction in accounts receivable of $3.7 million and inventories
of $6.4 million offset, in part, by an increase in cash of $635,000, a reduction
in short-term borrowings of $721,000 and a reduction of $3.1 million in accounts
payable and accrued liabilities.
During fiscal 2002, the Company generated $2.9 million of net cash from
operating activities, compared to net cash used in operating activities in
fiscal 2001 and 2000 of $2.1 million and $5.4 million, respectively. The cash
generated from operating activities in fiscal 2002 was produced from cash
provided
15
by changes in operating assets and liabilities ($4.8 million) exceeding the
Company's net cash loss ($1.9 million). The cash produced by changes in
operating assets and liabilities resulted from a decrease of $3.7 million in
accounts receivable from the prior year balance to $3.5 million due to improved
collections and lower sales and inventory decreases of $4.5 million primarily
due to the fulfillment of sales orders with existing inventory and improved
inventory management practices, partially offset by a decrease in accounts
payable and accrued expenses due to the lower sales volume and cost reduction
efforts implemented during the year. The Company used cash to fund a net loss
from operations of $1.8 million, excluding non-cash charges of $1.9 million for
inventory losses, $1.7 million for the impairment of long-lived assets, and $1.4
million for depreciation and amortization.
Net cash used in investing activities was $136,000 in fiscal 2002 compared
to $2.0 million and $591,000 of net cash used in fiscal 2001. The comparative
reduction in net cash used for investing activities during fiscal 2002 was
principally the result of the purchases of capital equipment in fiscal 2001 for
new gas tube manufacturing lines at the outsourcing facilities.
Net cash used in financing activities was $2.2 million in fiscal 2002
compared to $102,000 in fiscal 2001. The net cash used in financing activities
in fiscal 2002 resulted from the repurchase of the Company's Series C
Convertible Redeemable Preferred Stock with a face value of $1.6 million for
cash of $1.2 million and the issuance of a warrant, the repayment of borrowings
under the Company's revolving credit facility of $721,000 and payments of
long-term debt and capital leases of $253,000.
FISCAL 2001 COMPARED TO FISCAL 2000
-----------------------------------
The Company's cash and cash equivalents balance decreased to $233,000 at
the end of fiscal 2001 from $4.4 million at the end of fiscal 2000. The decrease
resulted from net cash outflows from operations of $2.1 million, investing
activities of $2.0 million and financing activities of $102,000. Working capital
decreased to $13.9 million at the end of fiscal 2001 from $19.1 million at the
end of fiscal 2000 due to the effects of the re-alignment charge recorded in the
fiscal 2001 third quarter, the reduction in cash and the increase in accounts
payable and borrowings under the revolving credit facility.
Operations used $2.1 million of cash during fiscal 2001, $3.9 million was
used to fund a net increase in inventories, resulting primarily from the
industry-wide slowdown in capital spending and the actions taken to reduce
inventory levels by telecommunications service providers. This increase was
partially offset by, among other items, an increase in accounts payable and
accrued liabilities of $952,000. Additionally, the Company incurred a net loss
of $7.5 million that was offset by non-cash charges including $6.1 million for
the operations re-alignment charge, which includes a write-down of inventories
of $2.7 million, and $1.7 million for depreciation and amortization
During fiscal 2001, investing activities used cash of $2.0 million for
capital expenditures and financing activities used cash of $105,000 to repay
debt and obligations under capital leases partially offset by $3,000 received
from the exercise of stock options.
CAPITAL RESOURCES
-----------------
The Company has a credit facility ("Credit Facility") that consists of a
$6.0 million revolving credit facility and a term loan. The revolving credit
facility enables the Company to have up to $6.0 million of revolving credit
loans outstanding at any one time, limited by a borrowing base equal to 85% of
the eligible accounts receivable and 50% of the eligible inventory, subject to
certain reserves. As a result of this limitation, the maximum borrowings
available to the Company was $5.0 million as of June 28, 2002. Subject to
extension in certain instances, the scheduled maturity date of revolving credit
loans was April 30, 2003, while the term loan is to be repaid in equal
installments through March 31, 2003 with a final payment
16
of $175,000, subject to mandatory repayments from asset disposition proceeds. As
of June 28, 2002, $455,000 was outstanding under the term loan. Due to the
repurchase of preferred stock and the loss incurred in the fourth quarter, the
Company was not in compliance with its tangible net worth covenant at June 28,
2002. On September 24, 2002 the lender amended the loan agreement so that the
Company was in compliance with the revised covenant and also agreed to an
extension of the credit facility until September, 2003.
Funds anticipated to be generated from operations, together with available
cash and borrowings under the Credit Facility, are considered to be adequate to
finance the Company's current operational and capital needs. If the slowdown in
the telecommunications industry continues or worsens for an extended period of
time, or if the Company cannot extend or secure a new Credit Facility under
similar terms, the Company may need to seek additional capital to support its
operations.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth a schedule of payments required under the
Company's contractual obligations and includes the maximum potential payments
that may be required under the Company's other commercial commitments:
Due by Period
--------------------------------------------------------------
Contractual Obligations Total Less
Than After
1 Year 1 - 3 years 4 - 5 years 5 years
Term loan $ 455,000 $ 455,000 $ - $ - $ -
Capital lease obligations 13,000 3,000 10,000 - -
Operating leases 468,000 226,000 242,000 - -
Other long-term obligations 21,000 18,000 3,000 - -
------------------------------------------------------------------------------
Total contractual cash obligations $ 957,000 $ 702,000 $ 255,000 $ - $ -
==============================================================================
The Company has no commitments for capital expenditures, but expects to
purchase new equipment and incur leasehold improvements in the normal course of
business, subject to the maximum amount permitted under its revolving credit
facility.
OFF-BALANCE SHEET FINANCING
Except for the operating leases, the Company has no off-balance sheet
contractual arrangements.
TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
The Company entered into an agreement with David Garwood, a member of the
Board of Directors, to provide strategic planning consulting services from April
1, 2002 to March 31, 2003 at $10,000 per quarter.
Since fiscal year 1982, the Company has leased equipment from PRC Leasing,
Inc., a corporation owned by Alfred J. Roach, the Chairman of the Board of
Directors of the Company. This lease was amended on June 5, 2002 to reduce the
annual rental to $50,000 per annum. The rental paid prior to the amendment was
$139,000 per annum.
The Company leases two houses near the Company's Copiague, New York
facility from Timothy J. Roach, President and Chief Executive Officer of the
Company, at an aggregate annual rental of $31,000. The Company also bears
insurance and maintenance costs which approximate $10,000 per year. The houses
17
are used by Alfred J. Roach and other executives, directors and employees when
visiting the Company's New York facility.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 may not be amortized.
Amortization of existing goodwill will cease upon implementation of SFAS No.
142. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The Company does not have any recorded goodwill or other
intangible assets associated with business combinations. Therefore, the
implementation of SFAS No. 142, which is effective at the beginning of fiscal
2003 for the Company, is not expected to have a material impact on the Company's
consolidated statement of operations or consolidated balance sheet.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. These new rules on asset impairment supersede
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30, "Reporting
the Results of Operations." This Statement provides a single accounting model
for long-lived assets to be disposed of and significantly changes the criteria
that would have to be met to classify an asset as held-for-sale. Classification
as held-for-sale is an important distinction since such assets are not
depreciated and are stated at the lower of fair value and carrying amount. This
Statement also requires expected future operating losses from discontinued
operations to be recorded in the period(s) in which the losses are incurred,
rather than as of the measurement date as previously required. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The Company is required to adopt SFAS No. 144 effective at the beginning
of fiscal 2003. Management does not expect the adoption of SFAS No. 144 to have
a material impact on the Company's consolidated financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. SFAS No. 146, which is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
applies to costs associated with an exit activity, including restructurings, or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts and relocating
plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs
be recorded as an operating expense when the liability is incurred and can be
measured at fair value. Commitment to an exit plan or a plan of disposal by
itself will not meet the requirement for recognizing a liability and the related
expense under SFAS No. 146. SFAS No.146 grandfathers the accounting for
liabilities that were previously recorded under EITF Issue 94-3. Therefore, the
accounting for the costs associated with the Company's exit and disposal
activities during the three years ended June 28, 2002 will be unaffected upon
adoption of SFAS No. 146.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risks, including changes in U.S. dollar
interest rates. The interest payable under the Company's credit agreement is
principally between 250 and 275 basis points above the London Interbank Offered
Rate ("LIBOR") and, therefore, affected by changes in market interest rates.
Historically, the effects of movements in the market interest rates have been
immaterial to the consolidated operating results of the Company.
18
The Company requires foreign sales to be paid for in U.S. currency and is
billed by its contract manufacturers in U.S. Currency.
Historically, the Company has not purchased or entered into interest rate
swaps or future, forward, option or other instruments designed to hedge against
changes in interest rates, the price of materials it purchases or the value of
foreign currencies.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
TII Network Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of TII Network
Technologies, Inc. and Subsidiary as of June 28, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. In connection with our audit of the consolidated financial
statements, we have also audited the financial statement schedule for the year
ended June 28, 2002. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The consolidated
balance sheet of TII Network Technologies, Inc. and Subsidiary as of June 29,
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows and financial statement schedules for each of the two
years in the period ended June 29, 2001 were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements and financial statement schedules in their report dated
September 26, 2001.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TII Network
Technologies, Inc. and Subsidiary as of June 28, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related 2002 financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material aspects, the information set forth therein.
KPMG LLP
Melville, New York
September 12, 2002, except for note 3,
which is as of September 24, 2002
20
THE FOLLOWING IS A COPY OF THE LATEST SIGNED AND DATED ACCOUNTANT'S REPORT
ISSUED BY ARTHUR ANDERSEN LLP COVERING, AMONG OTHER THINGS, THE COMPANY'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 29, 2001 AND EACH OF THE TWO YEARS
IN THE PERIOD ENDED JUNE 29, 2001. ARTHUR ANDERSEN LLP HAS NOT REISSUED THAT
ACCOUNTANT'S REPORT. THE COMPANY'S NAME AT THE TIME OF THAT ACCOUNTANT'S REPORT
WAS TII INDUSTRIES, INC.
To TII Industries, Inc.:
We have audited the accompanying consolidated balance sheets of TII Industries,
Inc. and subsidiaries as of June 29, 2001 and June 30, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 29, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TII Industries, Inc. and
subsidiaries as of June 29, 2001 and June 30, 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 29, 2001, in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
San Juan, Puerto Rico
September 26, 2001
Stamp No. 1759707 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
21
TII NETWORK TECHNOLOGIES INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 28, June 29,
2002 2001
-------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 868 $ 233
Accounts receivable, net 3,518 7,190
Inventories 7,362 13,800
Other current assets 212 109
------------- -----------
Total current assets 11,960 21,332
------------- -----------
Property, plant and equipment, net 5,846 8,398
Other assets 722 1,032
------------- -----------
Total Assets $ 18,528 $ 30,762
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 476 $ 252
Borrowings under revolving credit facility - 721
Accounts payable and accrued liabilities 3,062 6,112
Accrued re-alignment expenses 198 337
------------- -----------
Total current liabilities 3,736 7,422
------------- -----------
Long-term debt 13 490
------------- -----------
Series C convertible redeemable preferred stock, none and 1,626 shares
outstanding at June 28, 2002 and June 29, 2001, respectively; liquidation
preference of $1,150 per share - 1,626
------------- -----------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized;
Series C, none and 1,626 shares outstanding at June 28, 2002 and June
29, 2001, respectively, and Series D Junior Participating, no shares
outstanding - -
Common stock, par value $.01 per share; 30,000,000 shares authorized;
11,699,921 shares issued and 11,682,284 shares outstanding 117 117
Additional paid-in capital 37,867 37,491
Accumulated deficit (22,924) (16,103)
------------- -----------
15,060 21,505
Less: treasury stock, at cost; 17,637 common shares (281) (281)
------------- -----------
Total stockholders' equity 14,779 21,224
------------- -----------
Total Liabilities and Stockholders' Equity $ 18,528 $ 30,762
============= ===========
See notes to consolidated financial statements
22
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended
-----------------------------------------------------------
June 28, June 29, June 30,
2002 2001 2000
----------------- ----------------- -----------------
Net sales $ 29,801 $ 39,323 $ 49,635
Cost of sales (includes inventory write-downs of $1,915 and
$2,700 in fiscal 2002 and 2001, respectively) 24,493 32,845 40,166
----------------- ----------------- -----------------
Gross profit 5,308 6,478 9,469
----------------- ----------------- -----------------
Operating expenses:
Selling, general and administrative 8,702 7,796 7,087
Research and development 1,755 2,871 3,125
Impairment of long-lived assets 1,716 - -
Operations re-alignment cost, net of reversals - 3,400 -
----------------- ----------------- -----------------
Total operating expenses 12,173 14,067 10,212
----------------- ----------------- -----------------
Operating loss (6,865) (7,589) (743)
Interest expense (70) (100) (214)
Interest income 8 147 204
Other income (expense) 106 2 (265)
----------------- ----------------- -----------------
Net loss $ (6,821) $ (7,540) $ (1,018)
Excess of carrying value over consideration to repurchase
preferred stock 280 - -
----------------- ----------------- -----------------
Net loss attributable to common stockholders $ (6,541) $ (7,540) $ (1,018)
================= ================= =================
Basic and diluted net loss attributable to
common stockholders per share $ (0.56) $ (0.65) $ (0.11)
================= ================= =================
Basic and diluted weighted average shares outstanding 11,682 11,682 9,198
================= ================= =================
See notes to consolidated financial statements
23
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Additional Total
Common Stock Common Stock Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
------------ ----------- ----------- ------------ ------------ ------------
Balance June 25, 1999 8,832,898 $ 89 $ 32,630 $ (7,545) $ (281) $ 24,893
Exercise of stock options 34,200 - 53 - - 53
Conversion of Series C
preferred stock 584,815 6 1,218 - - 1,224
Sale of common stock 1,800,000 18 2,509 - - 2,527
Conversion of debt 428,571 4 1,078 - - 1,082
Net loss for the year - - - (1,018) - (1,018)
------------ ----------- ----------- ------------ ------------ ------------
Balance June 30, 2000 11,680,484 117 37,488 (8,563) (281) 28,761
Exercise of stock options 1,800 - 3 - - 3
Net loss for the year - - - (7,540) - (7,540)
------------ ----------- ----------- ------------ ------------ ------------
Balance June 29, 2001 11,682,284 117 37,491 (16,103) (281) 21,224
Repurchase of Series C
preferred stock - - 376 - - 376
Net loss for the year - - - (6,821) - (6,821)
------------ ----------- ----------- ------------ ------------ ------------
Balance June 28, 2002 11,682,284 $ 117 $ 37,867 $ (22,924) $ (281) $ 14,779
============ =========== =========== ============ ============ ============
See notes to consolidated financial statements
24
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended
----------------------------------------------
June 28, June 29, June 30,
2002 2001 2000
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,821) $ (7,540) $ (1,018)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,402 1,709 1,659
Provision for inventory losses 1,915 2,898 396
Induced debt conversion cost - - 332
Operations re-alignment - 6,100 (3)
Impairment of long-lived assets 1,716 - -
Gain on sale of condominium (79) - -
Changes in operating assets and liabilities:
Accounts receivable 3,672 56 (1,657)
Inventories 4,523 (6,828) (70)
Other assets (144) 194 (5)
Accounts payable and accrued liabilities (3,100) 952 (3,538)
Accrued re-alignment expenses (139) 135 (1,507)
------------ ------------- -------------
Net cash provided by (used in) operating activities 2,945 (2,126) (5,411)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from dispositions (266) (1,985) (1,138)
Net proceeds from sale of condominium 130 - -
Net proceeds from sale of subsidiary's assets - - 547
------------ ------------- -------------
Net cash used in investing activities (136) (1,985) (591)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 3 53
Repurchase of Series C preferred stock (1,200) - -
Net repayments of borrowings under revolving credit facility (721) - -
Repayment of debt and obligations under capital leases (253) (105) (782)
Net proceeds from sale of common stock - - 2,527
------------ ------------- -------------
Net cash (used in) provided by financing activities (2,174) (102) 1,798
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 635 (4,213) (4,204)
Cash and cash equivalents, at beginning of year 233 4,446 8,650
------------ ------------- -------------
Cash and cash equivalents, at end of year $ 868 $ 233 $ 4,446
============ ============= =============
Non-cash investing and financing activities:
Issuance of warrants as partial consideration for repurchase
of Series C preferred stock $ 96 $ - $ -
============ ============= =============
Cash paid during the year for interest $ 71 $ 87 $ 215
============ ============= =============
See notes to consolidated financial statements
25
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: TII Network Technologies, Inc. and Subsidiary (the "Company") design,
produce and market lightning and surge protection products, network interface
devices ("NIDs") and station electronic and other products principally to the
Telco industry.
FISCAL YEAR: The Company reports on a 52-53 week fiscal year ending on the last
Friday in June. Fiscal 2002 and fiscal 2001 contained 52 weeks, while fiscal
2000 contained 53 weeks.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of TII Network Technologies, Inc. and its wholly owned subsidiary. All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
INVENTORIES: Inventories (materials, direct labor and applicable overhead
expenses) are stated at the lower of cost or market, on the first-in, first-out
basis.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at cost
and depreciated on the straight-line method over the estimated useful life of
the related asset (generally between 5 and 10 years). Leasehold improvements are
amortized on a straight-line basis over the term of the respective leases or
over their estimated useful lives, whichever is shorter.
REVENUE RECOGNITION: Sales are recorded as products are shipped and title passes
to customers.
OTHER ASSETS: Included in other assets are $279,000 and $482,000 of patent costs
deemed recoverable by the Company, which are amortized on a straight-line basis
over the lesser of the life of the related product or the patent and the cash
surrender value of key-man life insurance of approximately $145,000 and $91,000
at June 28, 2002 and June 29, 2001, respectively.
LONG-LIVED ASSETS: The Company reviews long-lived assets, such as fixed assets
to be held and used or disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows undiscounted and without
interest is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.
The telecommunications industry-wide downturn continued through the end of
fiscal 2002, despite previous industry predictions of a turnaround, and as a
result, in the fourth quarter of fiscal 2002 the Company took additional actions
to reduce costs and improve operating efficiencies. Included in these actions
was the further downsizing of the Company's Puerto Rico operations with the
objective of creating a quick-response, low-cost assembly and specialty gas tube
manufacturing operation and the further expansion of the Company's outsourcing
strategy. This action, combined with the consolidation of certain functional
departments and management responsibilities into the Company's New York
headquarters, resulted in additional workforce reductions and the reevaluation
of the Company's property, plant and equipment,
26
whereby the Company retained only those assets consistent with this strategy.
Management also reevaluated its home networking strategy and discontinued the
Digital Closet product line. As a result, the Company performed a review of the
recoverability of its property, plant and equipment and recorded an impairment
charge of $1,716,000, primarily for machinery and equipment, molds and computer
equipment that will no longer be used.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. A deferred tax asset
has not been recorded as of June 28, 2002 and June 29, 2001 due to uncertainty
of its recoverability in future periods.
NET EARNINGS (LOSS) PER COMMON SHARE: Basic earnings (loss) per share are
computed based on the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed based on the weighted average
number of common shares outstanding increased by dilutive common stock options
and warrants and the effect of assuming the conversion of outstanding
convertible preferred stock, if dilutive. Since the Company incurred losses in
all reported periods, all securities convertible into, or exercisable for, the
Company's common stock were anti-dilutive. Therefore, diluted loss per share
equals basic loss per share. The following table summarizes outstanding
securities that were convertible into, or exercisable for, the Company's common
stock:
June 28, 2002 June 29, 2001 June 30, 2000
---------------------------- ---------------------------- --------------------------
Exercise Exercise Exercise
Quantity Price Quantity Price Quantity Price
------------- ------------ ------------- ------------- ------------ ------------
Stock option plans (a) 3,420,341 $1.79 3,263,241 $1.90 2,757,941 $ 2.08
Investor Option 100,000 2.50 100,000 2.50 100,000 2.50
Warrants - - - - 200,000 7.03
Warrants - - 10,000 6.15 10,000 6.15
Warrants (b) 2,214,000 2.79 2,214,000 2.79 2,214,000 2.79
Unit Purchase Options (b) 414,000 2.69 414,000 2.69 414,000 2.69
Warrant (c) 750,000 1.00 - - - -
Convertible preferred stock (d) - - 1,578,641 - 850,474 -
------------- ------------- ------------
6,898,341 7,579,882 6,546,415
============= ============= ============
- -----------------------------------
(a) Weighted average exercise price of outstanding stock options at
year-end.
(b) In June 2000, the Company completed a private placement of 1,800,000
units, each unit consisting of one share of common stock and one
warrant to purchase one share of common stock, at $2.79 per share. In
connection with this private placement, the Company issued to certain
employees of the placement agent 414,000 Unit Purchase Options ("UPO")
with an exercise price of $2.69 per UPO. Each UPO consists of one
share of common stock and one warrant to purchase one share of common
stock at $2.79 per share.
(c) This warrant was issued in June 2002 as partial consideration to
repurchase all outstanding convertible preferred stock.
(d) All outstanding Series C convertible redeemable preferred stock was
repurchased in June 2002. For fiscal 2001 and 2000, assumes conversion
of the Series C preferred shares at 95% of the average of the closing
bid prices of the Company's common stock during the ten consecutive
trading days immediately preceding the applicable fiscal year end.
CASH EQUIVALENTS: All highly liquid investments with an original maturity at the
time of purchase of three months or less are considered cash equivalents.
27
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash
equivalents, receivables and other current assets, accounts payable, accrued
liabilities and accrued realignment expenses approximate fair value because of
the short-term nature of these instruments. The carrying amount of the Company's
term loan and borrowings under the revolving credit facility approximates fair
value because these instruments have a prime or LIBOR based interest rate that
is adjusted for market rate fluctuations.
STOCK BASED COMPENSATION: The Company applies the intrinsic value method in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for options granted to employees or directors with an exercise
price at least equal to the market value of the underlying common stock at the
date of grant.
COMPREHENSIVE LOSS: Other comprehensive loss was immaterial for the two years
ended June 29, 2001 and comprehensive loss equaled net loss for the year ended
June 28, 2002.
SEGMENT INFORMATION: The Company utilizes the "management" approach prescribed
in Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," to assess its segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The Company has evaluated the provisions of SFAS No. 131 and, based on the
management approach, has determined that its operating decisions and performance
measures are geared towards one segment. The Company however, has disclosed the
geographic and major customers' requirements of SFAS No. 131. See Note 7.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial
Accounting Standards Board approved SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated after June 30, 2001. Any goodwill resulting from acquisitions
completed after June 30, 2001 may not be amortized. Amortization of existing
goodwill will cease upon implementation of SFAS No. 142. SFAS No. 142 also
establishes a new method of testing goodwill for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. The Company
does not have any recorded goodwill or other intangible assets associated with
business combinations. Therefore, the implementation of SFAS No. 142, which is
effective at the beginning of fiscal 2003 for the Company, is not expected to
have a material impact on the Company's consolidated statement of operations or
consolidated balance sheet.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. These new rules on asset impairment supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and portions of APB Opinion 30, "Reporting the Results of
Operations." This Statement provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that would have
to be met to classify an asset as held-for-sale. Classification as held-for-sale
is an important distinction since such assets are not depreciated and are stated
at the lower of fair value and carrying amount. This Statement also requires
expected future operating losses from discontinued operations to be recorded in
the period(s) in which the losses are incurred, rather than as of the
measurement date as previously required. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The Company is
required to adopt SFAS No. 144 effective at the beginning of fiscal 2003.
Management does not expect the adoption of SFAS No. 144 to have a material
impact on the Company's consolidated financial statements.
28
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in July 2002. SFAS No. 146, which is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
applies to costs associated with an exit activity, including restructurings, or
with a disposal of long-lived assets. Those activities can include eliminating
or reducing product lines, terminating employees and contracts and relocating
plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs
be recorded as an operating expense when the liability is incurred and can be
measured at fair value. Commitment to an exit plan or a plan of disposal by
itself will not meet the requirement for recognizing a liability and the related
expense under SFAS No. 146. SFAS No.146 grandfathers the accounting for
liabilities that were previously recorded under EITF Issue 94-3. Therefore, the
accounting for the costs associated with the Company's exit and disposal
activities during the three years ended June 28, 2002 will be unaffected upon
adoption of SFAS No. 146.
NOTE 2 - OPERATIONS RE-ALIGNMENT
In the third quarter of fiscal 2001, as part of management's continuing strategy
to improve profit margins by finding more cost-effective alternative ways of
producing its products, and also as a result of the successes under a fiscal
1999 re-alignment plan, management committed to a plan to further re-align its
operations. A key element of the 2001 plan was the expansion of the Company's
outsourcing strategy with contract manufacturers to produce a substantial
portion of the remaining components and subassemblies that the Company was still
manufacturing. Included in this plan, were workforce and production facility
reductions, the write-down of certain inventories and manufacturing machinery,
equipment and leasehold improvements related to manufacturing activities
conducted in Puerto Rico that were outsourced or products that were eliminated,
and other cost saving measures. Accordingly, during the third quarter of fiscal
2001, the Company recorded a net re-alignment of operations charge of
approximately $6.1 million, including an inventory write-down of approximately
$2.7 million (net of a reversal of a remaining allowance of $96,000 from a
fiscal 1999 re-alignment charge), $2.9 million for the write-down of net fixed
assets, a charge of $300,000 for employee termination benefits for a workforce
reduction of 70 employees and $300,000 for a lease commitment for excess
manufacturing space. The corresponding cash activity for the fiscal years ended
June 29, 2001 and June 28, 2002 and the remaining allowance balances which are
reflected in "accrued re-alignment expenses" in the accompanying consolidated
balance sheets, are as follows:
Fixed Employee Excess
Asset Inventory Termination Manufacturing
Write-downs Write-down Benefits Space Total
------------- -------------- ----------------- -------------------- ----------------
Fiscal 2001 restructuring costs
and asset write-downs $ 2,900,000 $ 2,700,000 $ 300,000 $ 300,000 $ 6,200,000
Cash payments during fiscal 2001 - - (224,000) (39,000) (263,000)
Non-cash activity (2,900,000) (2,700,000) - - (5,600,000)
------------- -------------- ----------------- -------------------- ----------------
Balance June 29, 2001 $ - $ - $ 76,000 $ 261,000 $ 337,000
Cash payments during fiscal 2002 - - (76,000) (63,000) (139,000)
------------- -------------- ----------------- -------------------- ----------------
Balance June 28, 2002 $ - $ - $ - $ 198,000 $ 198,000
============= ============== ================= ==================== ================
As of June 28, 2002 there were accrued severance costs of $283,000 that were
principally paid during the first two months of fiscal 2003.
29
NOTE 3 - LONG-TERM DEBT AND BORROWINGS UNDER REVOLVING CREDIT FACILITY:
The composition of long-term debt is as follows:
June 28, June 29,
2002 2001
------------------ ----------------
Term loan $ 455,000 $ 683,000
Obligations under capital leases, payable through 2004, bearing interest from
11.0% to 12.0%, secured by assets with a net book value of $31,000 13,000 20,000
Installment notes payable through 2004, bearing interest from 8.0% to 9.5% 21,000 39,000
------------------ ----------------
489,000 742,000
Current portion (476,000) (252,000)
------------------ ----------------
$ 13,000 $ 490,000
================== ================
The Company has a credit facility that consists of a $6.0 million revolving
line of credit and a term loan. The revolving line of credit enables the Company
to have up to $6.0 million of revolving credit loans outstanding at any one
time, limited by a borrowing base equal to 85% of eligible accounts receivable
and 50% of eligible inventory, subject to certain reserves. As a result of such
limitations, the maximum borrowings available to the Company was limited to $5.0
million as of June 28, 2002. Subject to extension in certain instances, the
scheduled maturity of revolving credit loans is September 30, 2003, while the
term loan is to be repaid in equal installments through March 31, 2003 with a
final payment of $175,000, subject to mandatory repayments from certain asset
disposition proceeds. As of June 28, 2002, $455,000 was outstanding under the
term loan. As of June 28, 2002 the Company had no borrowings under the revolving
line of credit and at June 29, 2001 there were $721,000 of such borrowings
outstanding.
Outstanding revolving line of credit loans bear interest at a rate per
annum based on: (a) a floating rate equal to the greater of the bank's prime
rate, or 0.5% per annum in excess of a specified weighted average of rates on
overnight Federal funds transactions plus, in either case, 0.25% per annum; (b)
to the extent selected by the Company, a fixed rate based upon the bank's LIBOR
rate for specified loan periods plus 2.50% per annum; or (c) to the extent
selected by the Company, a rate equal to the daily average of a published
"one-month" LIBOR rate plus 2.50% per annum. Outstanding term loans bear
interest based at the same rates per annum as revolving line of credit loans
plus 0.25% per annum (5.25% at June 28, 2002 and 7.25% at June 29, 2001). The
loan agreements also require the payment by the Company of specified fees. The
credit facility is secured by a lien and security interest against substantially
all of the assets of the Company and its subsidiary, regardless of whether
comprising a part of the borrowing base, and a pledge of all the subsidiary's
capital stock.
The loan agreements, as amended, require, among other things, that: (a)
the Company maintain a consolidated tangible net worth of at least $14.0 million
at June 28, 2002 (with such minimum amount to be increased each fiscal quarter
thereafter by an amount equal to 50% of the Company's consolidated net income
for the preceding quarter); (b) capital expenditures not to exceed $5.8 million
for any fiscal year; and (c) no new operating leases be entered into if, after,
giving effect thereto, the aggregate annual rental payments for all leased
property (excluding capital leases) would exceed $750,000 in any one fiscal
year. The loan agreements also impose limitations on, among other things,
dividends on and redemptions (and repurchases) of equity securities and the
incurrence of additional indebtedness. Due to the repurchase of Series C
Convertible Redeemable preferred stock and the loss incurred in the fourth
quarter, the Company was not in compliance with its tangible net worth covenant
at June 28, 2002. On September 24, 2002 the lender amended the loan agreement so
that the Company was in compliance with the revised covenant and also agreed to
an extension of the credit facility until September, 2003.
30
Future payments for long-term debt are as follows:
Fiscal Year Amount
---------------------------------------- -----------------
2003 $ 476,000
2004 13,000
-----------------
489,000
Less: current portion (476,000)
-----------------
$ 13,000
=================
In the fourth quarter of fiscal 2000, the holder of the Company's $750,000
unsecured subordinated note converted that note into 428,571 shares of common
stock at a reduced conversion price. This transaction resulted in a charge of
approximately $332,000 that was recorded in other income (expense).
NOTE 4 - INCOME TAXES
The tax effects of temporary differences and net operating loss and credit
carryforwards that give rise to the net deferred tax assets are as follows:
June 28,
2002
-------------
Inventory $ 1,829,000
Accounts receivable 35,000
Property, plant and equipment depreciation and impairment charges 4,155,000
Accrued expenses 271,000
Federal net operating loss carryforwards 10,338,000
Business credit carryforwards 574,000
-------------
17,202,000
Less: valuation allowance (17,202,000)
-------------
$ -
=============
At June 28, 2002, for U.S. Federal income tax purposes, the Company had net
operating loss carryforwards of approximately $29,538,000, which expire from
2008 to 2022. At June 28, 2002, the Company has provided a valuation allowance
against all its net deferred tax assets due to the uncertainty of realizing any
benefit therefrom in the future.
Prior to July 1, 2000, the Company had elected the application of Section
936 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). Under that
section, the Company was entitled to a federal tax credit in an amount equal to
the lesser of the United States federal tax attributable to its taxable income
arising from the active conduct of its business within Puerto Rico or the
economic activity based credit limitation (on a non-consolidated basis),
provided that in its current and two preceding tax years at least 80% of its
gross income and at least 75% of its gross income from the active conduct of a
trade or business were from Puerto Rico sources. Principally as a result of the
Company's restructurings, the potential for benefits under Section 936 for the
Company was substantially reduced. Accordingly, in order to optimize the
Company's tax structure, during fiscal 2001 the Company ended its election under
Section 936 of the Code.
NOTE 5 - COMMON STOCK, STOCK OPTIONS AND WARRANTS:
STOCK OPTION PLANS: The Company's 1995 Stock Option Plan and 1998 Stock
Option Plan permit each of the Board of Directors and the Compensation Committee
of the Board of Directors to grant, until September 2005 and October 2008,
respectively, options to employees (including officers and directors who
31
are employees) and consultants covering 1,250,000 and 2,500,000 shares,
respectively, of common stock. The Board of Directors or the Compensation
Committee determines vesting periods, option terms, which may not exceed 10
years, and exercise prices. At June 28, 2002, options to purchase 1,194,500 and
1,833,841 shares were outstanding under the 1995 Plan and 1998 Plan,
respectively. Additionally, 47,000 options are outstanding under the Company's
1986 Stock Option Plan, although no further options may be granted under that
plan.
The 1994 Non-Employee Director Stock Option Plan covers an aggregate of
700,000 shares of common stock (with 345,000 options outstanding as of June 28,
2002) and provides that (i) non-employee directors are granted options to
purchase 25,000 shares of common stock upon their initial election to the Board
and following each annual meeting of stockholders thereafter; (ii) all options
vest in full immediately following their grant; (iii) the term of options
granted is ten years; and (iv) the period following termination of service
during which a non-employee director may exercise an option is twelve months,
except that an option shall automatically terminate upon cessation of service as
a non-employee director for cause.
The exercise price of all options granted under all the plans has equaled
at least the market value of the common stock on the dates of grants.
Certain information relating to the employee stock option plans and the
director plan for the years ended June 28, 2002, June 29, 2001 and June 30, 2000
follows:
Fiscal Year Ended
-------------------------------------------------------------------------------------------
June 28, 2002 June 29, 2001 June 30, 2000
--------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ------------- ------------
Outstanding at beginning of year 3,263,241 $1.90 2,757,941 $2.08 2,474,501 $2.18
Granted 280,000 0.63 759,000 1.39 534,000 1.60
Exercised - - (1,800) 1.56 (34,200) 1.56
Canceled or expired (122,900) 1.97 (251,900) 2.43 (216,360) 2.10
------------ ----------- ------------ ----------- ------------- ------------
Outstanding at end of year 3,420,341 $1.79 3,263,241 $1.90 2,757,941 $2.08
============ =========== ============ =========== ============= ============
Options exercisable at end of
period 2,062,358 859,900 773,369
Shares available for future grant
at end of period 1,018,459 1,177,959 196,059
The following is additional information relating to options outstanding as
of June 28, 2002:
Weighted Weighted Weighted
Average Average Number Average
Exercise Number Exercise Remaining of Shares Exercise
Price Range of Shares Price Life (Years) Exercisable Price
- ----------------------------- --------------- -------------- --------------- -------------- --------------
$0.41 - $1.50 912,500 $0.97 7.9 451,000 $0.98
1.51 - 2.00 1,475,500 1.64 6.0 906,653 1.63
2.01 - 2.50 905,341 2.31 6.1 577,705 2.31
2.51 - 8.25 127,000 5.70 3.0 127,000 5.70
--------------- -------------- --------------- -------------- --------------
3,420,341 $1.10 6.3 2,062,358 $1.73
=============== ============== =============== ============== ==============
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date, as prescribed by SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated in the table below.
32
Fiscal Year Ended
---------------------------------------------------------------------
June 28, 2002 June 29, 2001 June 30, 2001
-------------------- ------------------- ---------------------
Net loss:
As reported $ (6,821,000) $ (7,540,000) $ (1,018,000)
Pro Forma $ (7,662,000) $ (8,619,000) $ (2,105,000)
Diluted loss per share:
As reported $ (0.56) $ (0.65) $ (0.11)
Pro Forma $ (0.63) $ (0.74) $ (0.23)
The weighted average fair value of options granted were determined based on
the Black-Scholes option-pricing model, utilizing the following assumptions:
June 28, June 29, June 30,
2002 2001 2000
---------------- ------------------ -----------------
Expected term 5 years 5 Years 5 Years
Interest rate 3.1% 5.4% 6.0%
Volatility 88.1% 65.1% 62.3%
Dividends 0% 0% 0%
Weighted average fair value of options granted $0.44 $0.83 $0.93
OTHER OPTIONS AND WARRANTS OUTSTANDING: As of June 28, 2002, the Company
had outstanding an option exercisable into 100,000 shares of common stock at
$2.50 per share that expires in July 2003.
In June 2000, the Company completed a private placement of 1,800,000 units
at $1.75 per unit, each unit consisting of one share of common stock and one
warrant to purchase one share of common stock, for net proceeds of $2,527,000.
Each warrant entitles its holder to purchase, until December 8, 2004, one share
of common stock at an exercise price of $2.79. In connection with this private
placement, the Company issued to certain employees of the placement agent
414,000 Unit Purchase Options (UPO). Each UPO can be exercised at an exercise
price of $2.69 per UPO until December 8, 2004. Each UPO consists of one share of
common stock and one warrant to purchase one share of common stock at $2.79.
Both the warrants and UPOs are subject to possible adjustment of the number of
shares issuable upon their exercise and their exercise prices if certain events
occur.
In June 2002, the Company issued a warrant to purchase 750,000 shares of
common stock (see Note 6.)
NOTE 6 - PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock in series, with each series having such powers, rights, preferences,
qualifications and restrictions as determined by the Board of Directors.
SERIES C CONVERTIBLE PREFERRED STOCK: In January 1998, the Company
completed a private placement of 5,000 shares of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") and warrants to purchase an aggregate of
200,000 shares of its common stock at an exercise price of $7.03 per share, all
of which warrants expired unexercised on January 25, 2001, for an aggregate
purchase price of $5.0 million. The Series C Preferred Stock bore no dividends,
were convertible into shares of the Company's common stock at a conversion price
equal to the lower of $5.58 per share or 95% of the average of the closing bid
prices of the Company's common stock during the ten consecutive trading days
immediately preceding the conversion date of the Series C Preferred Stock. The
Series C Preferred Stock was redeemable at the option of the holders at a price
equal to $1,150 per share in certain events, including the failure of the
Company to maintain the listing of the Company's common stock on the Nasdaq
National Market. Because
33
the Series C Preferred Stock had conditions for redemption that were not solely
within the control of the Company, they were classified outside of stockholders'
equity in the accompanying consolidated balance sheets. During fiscal 2002 and
2001, no shares were converted. During fiscal 2000, 1,224 shares were converted
into 584,815 shares of common stock.
On June 21, 2002, the Company repurchased all of the remaining outstanding
Series C Preferred Stock in exchange for $1.2 million in cash and a warrant to
purchase 750,000 shares of common stock at $1.00 per share exercisable until
June 2005. Costs associated with the transaction were $50,000. The fair value of
the warrant was $96,000 based on the Black Scholes option-pricing model. The
excess of the carrying value of the Series C Preferred Stock of $1,626,000 over
the fair value of the consideration paid to repurchase the Series C Preferred
Stock and costs of the transaction, amounting to $280,000, was recorded as an
increase to additional paid-in capital.
SERIES D JUNIOR PARTICIPATING PREFERRED STOCK: In May 1998, the Company
adopted a Stockholder Rights Plan providing for the distribution to the
Company's stockholders of one Right ("Right") for each share of the Company's
common stock issued and outstanding at the opening of business on May 21, 1998
(the "Distribution Date") and each subsequent share of common stock issued. Each
Right entitles the registered holder of a share of common stock to purchase from
the Company 1/1000 of a share of Series D Junior Participating Preferred Stock
of the Company, at a price of $30 per Right (the "Purchase Price"), subject to
adjustment. The Rights have a term of ten years, have no voting power or rights
to dividends, are not detachable and not separately transferable from the
Company's common stock until they become exercisable. In general, the Rights
become exercisable following an announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") owns, or the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning, at least 20% of the Company's outstanding common
stock. If any person becomes an Acquiring Person by acquiring beneficial
ownership of at least 20% of the Company's common stock, each outstanding Right
(other than those owned by an Acquiring Person) will "flip in" and become a
right to buy, at the Purchase Price, that number of shares of common stock of
the Company that will have a market value of two times the Purchase Price. After
a person becomes an Acquiring Person (but before such Acquiring Person owns 50%
or more of the outstanding common stock), the Company may permit each Right
(other than those owned by an Acquiring Person) to be exchanged, without payment
of the Purchase Price, for one share of common stock. If (i) the Company is
acquired in a merger or other business combination transaction and the Company
does not survive or the Company merges, consolidates or engages in a share
exchange with another person and does survive but all or part of its stock is
changed or (ii) at least 50% of the Company's assets or earning power is sold or
transferred, then each outstanding Right will "flip over" and become a right to
buy, at the Purchase Price, that number of shares of common stock of the
acquiring company that will have a market value of two times the Purchase Price.
The Company may redeem the Rights in whole, but not in part, at a price of $.01
per Right at any time prior to the time a person acquires beneficial ownership
of at least 20% of the Company's common stock and, if certain conditions are
met, within ten days following the time a person has acquired 20% or more of the
common stock.
34
NOTE 7 - SIGNIFICANT CUSTOMERS, EXPORT SALES AND GEOGRAPHICAL SEGMENTS:
SIGNIFICANT CUSTOMERS
The following customers accounted for more than 10% of the Company's
consolidated net sales during one or more of the years presented below:
Fiscal Year Ended
----------------------------------------------------
June 28, June 29, June 30,
2002 2001 2000
--------------- ------------- ----------------
Verizon Corporation (1) 57% 33% 25%
Tyco Electronics Corporation (2) 11% 26% 19%
Corning Cable Systems LLC (3) 2% 7% 12%
Telco Sales, Inc. 6% 7% 12%
- ------------------------------
(1) On June 30, 2000, a wholly-owned subsidiary of Bell Atlantic
Corporation was merged with and into GTE Corporation resulting in GTE
Corporation becoming a wholly-owned subsidiary of Bell Atlantic. The
combined company is doing business as Verizon Communications. The
Company has made sales to Bell Atlantic and a subsidiary of GTE
Corporation. The Company is operating under a supply agreement with
Verizon that expires in April 2004 and provides for a possible
extension for up to one year from that date.
(2) Tyco Electronics Corporation (a successor to Raychem Corporation) is
an OEM that purchases overvoltage protection products from the Company
for inclusion within their products, including NIDs. The Company has
received a letter from Tyco, that also owns a company that is a
competitor and customer of the Company, alleging that a product of the
Company infringes on one or more of Tyco's patents and that Tyco would
be willing to license the patents to the Company. The Company has
consulted its outside counsel and believes there is no patent
infringement.
(3) Corning Cable Systems LLC (formerly Siecor Corporation) is an OEM that
supplies NIDs to Telcos and is required by certain Telcos to purchase
TII's overvoltage surge protectors for inclusion within their NIDs.
EXPORT SALES: For each of the three years ended June 28, 2002, export sales
were less than 10% of consolidated net sales.
GEOGRAPHICAL SEGMENTS: The Company does not have any operating facilities
or producing assets outside the United States and Puerto Rico, except certain
equipment owned by the Company in those geographic areas is utilized by the
Company's outsource manufacturers in Asia. The net book value of such equipment
held by the Company's outsource manufacturers was approximately $2.6 million at
June 28, 2002. Consequently, the Company's operations located in Puerto Rico and
New York are managed as one geographic segment.
On May 3, 2000 the Company entered into an agreement with a contract
manufacturer in Asia to outsource the manufacture of certain of its gas tubes
used in its products. The agreement is for ten years, but may be terminated by
either party after four years with one year's advance notice. On November 24,
1998 the Company entered into an agreement with an indefinite term with another
contract manufacturer in Asia, to manufacture and supply products to the
Company.
NOTE 8 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company leases real property and equipment under various leases with
terms expiring through April 2006. The leases require minimum annual rentals,
exclusive of real property taxes, of approximately $226,000, $86,000, $78,000
and $78,000 in fiscal years 2003, 2004, 2005 and 2006 respectively.
Substantially all of the real property leases contain escalation clauses related
to increases in property taxes.
35
The Company has received a letter from Tyco that also owns a Company that
is a competitor and customer of the Company, alleging that a product of the
Company infringes on one or more of Tyco's patents and that Tyco would be
willing to license the patents to the Company. The Company has consulted its
outside counsel and believes there is no patent infringement.
The Company entered into an agreement with David Garwood, a member of the
Board of Directors, to provide strategic planning consulting services from April
1, 2002 to March 31, 2003 at $10,000 per quarter.
Since fiscal year 1982, the Company has leased equipment from PRC Leasing,
Inc., a corporation owned by Alfred J. Roach, the Chairman of the Board of
Directors of the Company. This lease was amended on June 5, 2002 to reduce the
annual rental to $50,000 per annum. The rental paid prior to the amendment was
$139,000 per annum.
The Company leases two houses near the Company's Copiague, New York
facility from Timothy J. Roach, President and Chief Executive Officer of the
Company, at an aggregate annual rental of $31,000. The Company also bears
insurance and maintenance costs which approximate $10,000 per year. The houses
are used by Alfred J. Roach and other executives, directors and employees when
visiting the Company's New York facility.
Rental expense, including property taxes, for fiscal 2002, 2001 and 2000
was approximately $578,000, $584,000 and $681,000 respectively, including
$139,000 for fiscal 2002 and 2001, and $200,000 for fiscal 2000 relating to the
equipment leases with PRC.
NOTE 9 - EMPLOYEE BENEFITS
The Company has a defined contribution plan which qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. The plan
covers substantially all U.S. and Puerto Rico employees who meet the eligibility
requirements and requires the Company to match employees' contributions up to
specified limitations and subject to certain vesting schedules. The matching
expense for the Company due to these plans was $26,000, $25,000 and $25,000 for
the fiscal years ended June 28, 2002, June 29, 2001 and June 30, 2000,
respectively.
The Company does not provide its employees any other post-retirement or
post-employment benefits, except discretionary severance payments upon
termination of employment.
NOTE 10 - SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
June 28, June 29,
2002 2001
-------------------- --------------------
Accounts receivable:
Trade accounts receivable $ 3,602,000 $ 7,150,000
Other receivables 16,000 98,000
Less: allowance for doubtful accounts (100,000) (58,000)
-------------------- --------------------
$ 3,518,000 $ 7,190,000
==================== ====================
Inventories:
Raw materials and subassemblies $ 4,101,000 $ 3,967,000
Work in progress 144,000 2,649,000
Finished goods 3,617,000 7,824,000
-------------------- --------------------
7,862,000 14,440,000
Less: write-down to net realizable value (500,000) (640,000)
-------------------- --------------------
$ 7,362,000 $ 13,800,000
==================== ====================
Property, plant and equipment:
Machinery and equipment $ 5,636,000 $ 18,405,000
Tools, dies and molds 1,308,000 6,757,000
Leasehold improvements 1,126,000 3,924,000
Office fixtures, equipment and other 326,000 2,092,000
-------------------- --------------------
8,396,000 31,178,000
36
Less: accumulated depreciation (2,550,000) (22,780,000)
-------------------- --------------------
$ 5,846,000 $ 8,398,000
==================== ====================
Accounts payable and accrued liabilities:
Accounts payable $ 1,853,000 $ 4,984,000
Accrued payroll, incentive and vacation 763,000 375,000
Accrued payroll taxes 4,000 30,000
Accrued legal and professional fees 202,000 348,000
Other accrued expenses 240,000 375,000
-------------------- --------------------
$ 3,062,000 $ 6,112,000
==================== ====================
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED) AND FOURTH QUARTER CHARGES
The following table reflects the unaudited quarterly results of the Company
for the fiscal years ended June 28, 2002 and June 29, 2001:
Diluted
Operating Net (Loss)
Gross (Loss) Net (Loss) Income
Quarter Ended Net Sales Profit (Loss) Income Income Per Share
- ----------------------------- --------------- ---------------- ---------------- --------------- -----------------
2002 FISCAL YEAR
September 28, 2001 $9,098,000 $2,270,000 $ (210,000) $ (237,000) $(0.02)
December 28, 2001 6,432,000 1,391,000 (1,189,000) (1,199,000) (0.10)
March 29, 2002 6,988,000 1,679,000 (857,000) (848,000) (0.07)
June 28, 2002 (a) 7,283,000 (32,000) (4,609,000) (4,537,000) (0.36)
2001 FISCAL YEAR
September 29, 2000 $10,510,000 $2,388,000 $ 33,000 $ 50,000 $ 0.00
December 29, 2000 10,805,000 2,442,000 36,000 70,000 0.01
March 30, 2001 (b) 8,228,000 (748,000) (6,960,000) (6,937,000) (0.59)
June 29, 2001 9,780,000 2,396,000 (698,000) (723,000) (0.06)
(a) During the fourth quarter of fiscal 2002, as a result of new product
configurations and the notification from certain customers that
certain products would no longer be ordered, the Company reevaluated
excess and obsolete inventory and also made the decision to
discontinue the Digital Closet product line. As a result, in the
fourth quarter of fiscal 2002, the Company recorded a charge of $1.9
million for the write-down of inventories. The Company also recorded a
charge of $1,716,000 for the impairment of long-lived assets in the
fourth quarter of fiscal 2002 (see Note 1).
(b) The net loss includes a net charge of $6.1 million for costs to
re-align operations, $2.7 million of which was due to the related
inventory write-down and has been reflected as a reduction of gross
profit (see Note 2).
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
As recommended by the Company's Audit Committee, the Company's Board of
Directors on April 9, 2002 decided to no longer engage Arthur Andersen LLP
("Andersen") as the Company's independent public accountants and engaged KPMG
LLP ("KPMG") to serve as the Company's independent public accountants. While the
Company's stockholders, at the Annual Meeting of Stockholders held on December
5, 2001, ratified the appointment of Andersen as the Company's independent
public accountants for the fiscal year ending June 28, 2002, the Company's Board
of Directors retained the right to select different auditors should it then deem
it in the Company's interests. The selection of KPMG was based on, among other
factors, KPMG's industry expertise and the engagement team's experience and
qualifications.
Andersen's report on the financial statements of the Company for each of
the past two fiscal years did not contain any adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
During the Company's two most recent fiscal years, and the subsequent
interim period through the date of termination of Andersen's engagement, there
were no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Andersen, would have
caused Andersen to make reference to the subject matter of the disagreements in
connection with their report on the Company's consolidated financial statements
for such years.
During the Company's two most recent fiscal years, and the subsequent
interim period through the date of termination of Andersen's engagement, there
was no "reportable event," as that term is defined in Item 304(a)(1)(v) of
Regulation S-K, and there was no disagreement or difference of opinion with
Andersen regarding any "reportable event."
During the two most recent fiscal years and the subsequent interim period
through the date of this Report, neither the Company nor anyone on behalf of the
Company consulted KPMG regarding either the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the financial statements of the Company or any
matter that was either the subject of a disagreement, within the meaning of Item
304(a)(1)(iv) of Regulation S-K, or any reportable event, as that term is
defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Andersen with a copy of the foregoing statements and
requested that Andersen furnish the Company with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the statements
made by the Company. By letter dated April 12, 2002 to the Commission, Andersen
advised that it was in agreement with the statements contained above, except for
the information contained in the first and fifth paragraphs which did not relate
to Andersen.
PART III
The information called for by Part III (Items 10, 11, 12 and 13 of Form
10-K) is incorporated herein by reference to such information which will be
contained in the Company's Proxy Statement to be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934 with respect to the Company's 2002
Annual Meeting of Stockholders.
38
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
(a) Not applicable to this Report.
(b) There were no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the most recent evaluation of those controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Reports of Independent Public Accountants.............................20
Consolidated Balance Sheets at June 28, 2002 and June 29,
2001.............................................................22
Consolidated Statements of Operations for each of the three years
in the period ended June 28, 2002................................23
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 28, 2002....................24
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 28, 2002..........................25
Notes to Consolidated Financial
Statements.......................................................26
(a)(2) Schedule II - Valuation and Qualifying Accounts.....................S-1
(3) Exhibits
--------
Exhibit
Number Description
- ------ -----------
2 Asset Purchase Agreement, dated February 26, 1999, by and between
TII-Ditel, Inc. and Ditel, Inc. Incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated (date
of earliest event reported) February 26, 1999. (File No. 1-8048).
3(a)(1) Restated Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on December 10,
1996. Incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December
27, 1996 (File No. 1-8048).
3(a)(2) Certificate of Designation, as filed with the Secretary of State of
the State of Delaware on January 26, 1998. Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form
8-K dated (date of earliest event reported) January 26, 1998 (File
No. 1-8048).
3(a)(3) Certificate of Designation, as filed with the Secretary of State of
the State of Delaware on May 15, 1998. Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date
of earliest event reported) May 7, 1998 (File No. 1-8048).
3(a)(4) Certificate of Amendment of the Company's Certificate of
Incorporation, as filed with the Secretary of State of the State of
Delaware on December 5, 2001. Incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated (date of
earliest event reported) December 5, 2001 (File No. 1-8048).
3(b) By-laws of the Company, as amended. Incorporated by reference to
Exhibit 4.02 to Amendment No. 1 to the Company's Registration
Statement on Form S-3 (File No. 33- 64980).
39
4(a) Rights Agreement dated as of May 15, 1998 between the Company and
Harris Trust & Savings Bank formerly Harris Trust of Chicago).
Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated (date of earliest event reported) May 7,
1998 (File No. 1-8048).
4(b)(1) Revolving Credit, Term Loan and Security Agreement dated April 30,
1998 among Company, TII Corporation and GMAC Commercial Credit LLC
(successor of BNY Financial Corporation) ("Lender"). Incorporated
by reference to Exhibit 4(a)(i) to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No.
1-8048).
4(b)(2) Consent and Amendment dated as of July 22, 1999 between the
Company, TII Corporation and the Lender. Incorporated by reference
to Exhibit 4(b)(1)B to the Company's Annual Report on Form10-K for
the fiscal year ended June 25, 1999 (File No. 1-8048).
4(b)(3) Consent and Amendment dated as of September 26, 2001 between the
Company and the Lender. Incorporated by reference to Exhibit
4(b)(1)(C) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 29, 2001 (File No. 1-8048).
4(b)(4)* Amendment dated as of September 26, 2001 between the Company and
the Lender.
4(b)(5)* Amendment dated as of June 7, 2002 between the Company and the
Lender.
4(b)(6)* Amendment dated as of September 24, 2002 between the Company and
the Lender.
4(b)(7) Patent Collateral Assignment and Security Agreement between Company
and Lender. Incorporated by reference to Exhibit 4(e)(i) to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(8)* Amended and Restated Patent Collateral Assignment and Security
Agreement between Company and Lender dated as of December 10, 2001.
4(b)(9) Trademark Collateral Assignment and Security Agreement between
Company and Lender. Incorporated by reference to Exhibit 4(e)(ii)
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(10)* Amended and Restated Trademark Collateral Assignment and Security
Agreement between Company and Lender dated as of December 10, 2001.
10(a)(1)+ 1986 Stock Option Plan of the Company, as amended. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 27, 1996 (File No.
1-8048).
10(a)(2)+ 1994 Non-Employee Director Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 29, 2001
(File No. 1-8048).
10(a)(3)+ 1995 Stock Option Plan, as amended. Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 26, 1997 (File No. 1-8048).
10(a)(4)+ 1998 Stock Option Plan, as amended. Incorporated by reference to
Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 29, 2001 (File No. 1-8048).
10(b)(1)+ Amended and Restated Employment Agreement dated as of August 1,
1997 between the Company and Timothy J Roach. Incorporated by
reference to Exhibit 10(b)(1) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 1997 (File No.
1-8048).
40
10(b)(2)+ Employment Agreement dated as of September 5, 2000 between the
Company and Kenneth A. Paladino. Incorporated by reference to
Exhibit 10(b)(7) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000 (File No. 1-8048).
10(b)(3)+ Employment Agreement dated as of June 30, 2000 between the Company
and Thomas J. Guzek. Incorporated by reference to Exhibit 10(b)(8)
to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000 (File No. 1-8048).
10(b)(6)+* Consultant Agreement dated as of March 29, 2002 between the Company
and R. Dave Garwood.
10(c)(1)(A) Equipment Lease dated July 18, 1991 between PRC Leasing, Inc.
("PRC") and the Company. Incorporated by reference to Exhibit
10(b)(57) to the Company's Current Report on Form 8-K for the month
of July 1991 (File No. 1-8048).
10(c)(1)(B) Amendment dated July 18, 1992 to Equipment Lease dated July 18,
1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(b)(67) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 25, 1993 (File No. 1- 8048).
10(c)(1)(C) Second Amendment dated February 25, 1993 to Equipment Lease dated
July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 10(b)(7) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 25, 1993 (File No.
1-8048).
10(c)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment Lease
dated July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 4(d) to Amendment No. 2 to the Schedule 13D
filed by Alfred J. Roach (File No. 1-8048).
10(c)(1)(E) Fourth Amendment dated June 27, 2000 to Equipment Lease dated July
18, 1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(C)1(E) to the Company's Annual Report on Form10-K for
the fiscal year ended June 30, 2000 (File No.1-8048).
10(c)(1)(F) Fifth Amendment dated July 18, 2001 to Equipment Lease dated July
18, 1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(c)(1)(F) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 29, 2001 (File No. 1-8048).
10(c)(1)(G)* Sixth Amendment dated June 5, 2002 to Equipment Lease dated July
18, 1991 between the Company and PRC.
10(d)(1) Lease Contract dated April 27, 1998 between the Company and Puerto
Rico Industrial Development Company. Incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 27, 1998 (File No. 1-8048).
10(e)(1)* Exchange Agreement dated as of June 21, 2002 between the Company
and the remaining investor in the Company's January 26, 1998
private placement.
10(e)(2)* Warrant dated as of June 21, 2002 issued to the remaining investor
in the Company's June 26, 1998 private placement.
10(e)(3)* Registration Rights Agreement dated as of June 21, 2002 issued to
the remaining investor in the Company's June 26, 1998 private
placement.
10(f)(1) Form of Warrant issued to the investors in the Company's June 8,
2000 private placement and underlying the Unit Purchase Option.
Incorporated by reference to Exhibit 10(f)(1) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2000
(File No. 1-8048).
41
10(f)(2) Subscription Agreement and Investor Information Statement,
including registration rights undertaking of the Company, by and
among the Company and the investors in the Company's June 8, 2000
private placement. Incorporated by reference to Exhibit 10(f)(2) to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000 (File No. 1-8048).
10(f)(3) Placement Agent Agreement dated as of May 15, 2000 by and among the
Company and M.H. Meyerson & Co., Inc., as placement agent, with
respect to the Company's June 8, 2000 private placement.
Incorporated by reference to Exhibit 10(f)(3) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2000
(File No. 1-8048).
10(f)(4) Form of Unit Purchase Option issued to the placement agent for
Company's June 8, 2000 private placement. Incorporated by reference
to Exhibit 10(f)(4) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000 (File No. 1-8048).
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
99(a)* Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(b)* Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the fourth quarter of the Company's fiscal year ended June 28, 2002, the
Company filed the following Current Reports on Form 8-K dated (date of earliest
event reported):
(1) April 9, 2002 reporting under Item 4, Changes in Registrant's
Certifying Accountant, and Item 7, Financial Statements, Pro Forma Financial
Information and Exhibits.
(2) May 16, 2002 reporting under Item 5, Other Events, and Item 7,
Financial Statements, Pro Forma Financial Information and Exhibits.
(3) June 21, 2002 reporting under Item 5, Other Events, and Item 7,
Financial Statements, Pro Forma Financial Information and Exhibits.
Not financial statements were filed with any of the foregoing Current
Reports on Form 8-K.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
September 25, 2002
TII NETWORK TECHNOLOGIES, INC.
By: /s/ Timothy J. Roach
----------------------------------------
Timothy J. Roach, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
September 25, 2002 /s/ Alfred J. Roach
------------------------------------
Alfred J. Roach, Chairman
of the Board and Director
September 25, 2002 /s/ Timothy J. Roach
------------------------------------
Timothy J. Roach, President,
Chief Executive Officer (principal
executive officer) and Director
September 25, 2002 /s/ Kenneth A. Paladino
------------------------------------
Kenneth A. Paladino, Vice
President-Finance and Treasurer
(principal financial officer)
September 25, 2002 /s/ C. Bruce Barksdale
------------------------------------
C. Bruce Barksdale, Director
September 25, 2002 /s/ James R. Grover, Jr.
------------------------------------
James R. Grover, Jr., Director
September 25, 2002 /s/ Joseph C. Hogan
------------------------------------
Joseph C. Hogan, Director
September 25, 2002 /s/George S. Katsarake
------------------------------------
George S. Katsarakes, Executive
Vice President and Chief Operating
Officer and Director
September 25, 2002 /s/ Dorothy Roach
------------------------------------
Dorothy Roach, Director
September 25, 2002 /s/ R. D. Garwood
------------------------------------
R. D. Garwood, Director
September 25, 2002 /s/ Lawrence M. Fodrowski
------------------------------------
Lawrence M. Fodrowski, Director
43
I, Timothy J. Roach, certify that:
1. I have reviewed this annual report on Form 10-K of TII Network
Technologies, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 25, 2002
/s/ Timothy J. Roach
- -----------------------------------------
Timothy J. Roach
President and Principal Executive
Officer
I, Kenneth A. Paladino, certify that:
1. I have reviewed this annual report on Form 10-K of TII Network
Technologies, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 25, 2002
/s/ Kenneth A. Paladino
- --------------------------------
Kenneth A. Paladino,
Vice President - Finance,
Treasurer and Principal
Financial Officer
SCHEDULE II
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Balance
Beginning of at End of
Fiscal Year Ended Year Additions Dispositions Year
- -------------------------------------------- -------------------- ------------------- ------------------ -------------------
June 28, 2002 $ 58,000 73,000 (31,000) $ 100,000
June 29, 2001 144,000 - (86,000) 58,000
June 30, 2000 $116,000 44,000 (16,000) $ 144,000
S-1
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2 Asset Purchase Agreement, dated February 26, 1999, by and between
TII-Ditel, Inc. and Ditel, Inc. Incorporated by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated (date
of earliest event reported) February 26, 1999. (File No. 1-8048).
3(a)(1) Restated Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on December 10,
1996. Incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December
27, 1996 (File No. 1-8048).
3(a)(2) Certificate of Designation, as filed with the Secretary of State of
the State of Delaware on January 26, 1998. Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form
8-K dated (date of earliest event reported) January 26, 1998 (File
No. 1-8048).
3(a)(3) Certificate of Designation, as filed with the Secretary of State of
the State of Delaware on May 15, 1998. Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date
of earliest event reported) May 7, 1998 (File No. 1-8048).
3(a)(4) Certificate of Amendment of the Company's Certificate of
Incorporation, as filed with the Secretary of State of the State of
Delaware on December 5, 2001. Incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated (date of
earliest event reported) December 5, 2001 (File No. 1-8048).
3(b) By-laws of the Company, as amended. Incorporated by reference to
Exhibit 4.02 to Amendment No. 1 to the Company's Registration
Statement on Form S-3 (File No. 33- 64980).
4(a) Rights Agreement dated as of May 15, 1998 between the Company and
Harris Trust & Savings Bank formerly Harris Trust of Chicago).
Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated (date of earliest event reported) May 7,
1998 (File No. 1-8048).
4(b)(1) Revolving Credit, Term Loan and Security Agreement dated April 30,
1998 among Company, TII Corporation and GMAC Commercial Credit LLC
(successor of BNY Financial Corporation) ("Lender"). Incorporated
by reference to Exhibit 4(a)(i) to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No.
1-8048).
4(b)(2) Consent and Amendment dated as of July 22, 1999 between the
Company, TII Corporation and the Lender. Incorporated by reference
to Exhibit 4(b)(1)B to the Company's Annual Report on Form10-K for
the fiscal year ended June 25, 1999 (File No. 1-8048).
4(b)(3) Consent and Amendment dated as of September 26, 2001 between the
Company and the Lender. Incorporated by reference to Exhibit
4(b)(1)(C) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 29, 2001 (File No. 1-8048).
4(b)(4)* Amendment dated as of September 26, 2001 between the Company and
the Lender.
4(b)(5)* Amendment dated as of June 7, 2002 between the Company and the
Lender.
4(b)(6)* Amendment dated as of September 24, 2002 between the Company and
the Lender.
4(b)(7) Patent Collateral Assignment and Security Agreement between Company
and Lender. Incorporated by reference to Exhibit 4(e)(i) to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(8)* Amended and Restated Patent Collateral Assignment and Security
Agreement between Company and Lender dated as of December 10, 2001.
4(b)(9) Trademark Collateral Assignment and Security Agreement between
Company and Lender. Incorporated by reference to Exhibit 4(e)(ii)
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(10)* Amended and Restated Trademark Collateral Assignment and Security
Agreement between Company and Lender dated as of December 10, 2001.
10(a)(1)+ 1986 Stock Option Plan of the Company, as amended. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 27, 1996 (File No.
1-8048).
10(a)(2)+ 1994 Non-Employee Director Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 29, 2001
(File No. 1-8048).
10(a)(3)+ 1995 Stock Option Plan, as amended. Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 26, 1997 (File No. 1-8048).
10(a)(4)+ 1998 Stock Option Plan, as amended. Incorporated by reference to
Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 29, 2001 (File No. 1-8048).
10(b)(1)+ Amended and Restated Employment Agreement dated as of August 1,
1997 between the Company and Timothy J Roach. Incorporated by
reference to Exhibit 10(b)(1) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 1997 (File No.
1-8048).
10(b)(2)+ Employment Agreement dated as of September 5, 2000 between the
Company and Kenneth A. Paladino. Incorporated by reference to
Exhibit 10(b)(7) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000 (File No. 1-8048).
10(b)(3)+ Employment Agreement dated as of June 30, 2000 between the Company
and Thomas J. Guzek. Incorporated by reference to Exhibit 10(b)(8)
to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2000 (File No. 1-8048).
10(b)(6)+* Consultant Agreement dated as of March 29, 2002 between the Company
and R. Dave Garwood.
10(c)(1)(A) Equipment Lease dated July 18, 1991 between PRC Leasing, Inc.
("PRC") and the Company. Incorporated by reference to Exhibit
10(b)(57) to the Company's Current Report on Form 8-K for the month
of July 1991 (File No. 1-8048).
10(c)(1)(B) Amendment dated July 18, 1992 to Equipment Lease dated July 18,
1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(b)(67) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 25, 1993 (File No. 1- 8048).
10(c)(1)(C) Second Amendment dated February 25, 1993 to Equipment Lease dated
July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 10(b)(7) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 25, 1993 (File No.
1-8048).
10(c)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment Lease
dated July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 4(d) to Amendment No. 2 to the Schedule 13D
filed by Alfred J. Roach (File No. 1-8048).
10(c)(1)(E) Fourth Amendment dated June 27, 2000 to Equipment Lease dated July
18, 1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(C)1(E) to the Company's Annual Report on Form10-K for
the fiscal year ended June 30, 2000 (File No.1-8048).
10(c)(1)(F) Fifth Amendment dated July 18, 2001 to Equipment Lease dated July
18, 1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(c)(1)(F) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 29, 2001 (File No. 1-8048).
10(c)(1)(G)* Sixth Amendment dated June 5, 2002 to Equipment Lease dated July
18, 1991 between the Company and PRC.
10(d)(1) Lease Contract dated April 27, 1998 between the Company and Puerto
Rico Industrial Development Company. Incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 27, 1998 (File No. 1-8048).
10(e)(1)* Exchange Agreement dated as of June 21, 2002 between the Company
and the remaining investor in the Company's January 26, 1998
private placement.
10(e)(2)* Warrant dated as of June 21, 2002 issued to the remaining investor
in the Company's June 26, 1998 private placement.
10(e)(3)* Registration Rights Agreement dated as of June 21, 2002 issued to
the remaining investor in the Company's June 26, 1998 private
placement.
10(f)(1) Form of Warrant issued to the investors in the Company's June 8,
2000 private placement and underlying the Unit Purchase Option.
Incorporated by reference to Exhibit 10(f)(1) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2000
(File No. 1-8048).
10(f)(2) Subscription Agreement and Investor Information Statement,
including registration rights undertaking of the Company, by and
among the Company and the investors in the Company's June 8, 2000
private placement. Incorporated by reference to Exhibit 10(f)(2) to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000 (File No. 1-8048).
10(f)(3) Placement Agent Agreement dated as of May 15, 2000 by and among the
Company and M.H. Meyerson & Co., Inc., as placement agent, with
respect to the Company's June 8, 2000 private placement.
Incorporated by reference to Exhibit 10(f)(3) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2000
(File No. 1-8048).
10(f)(4) Form of Unit Purchase Option issued to the placement agent for
Company's June 8, 2000 private placement. Incorporated by reference
to Exhibit 10(f)(4) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000 (File No. 1-8048).
21* Subsidiaries of the Company.
23* Consent of KPMG LLP.
99(a)* Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(b)* Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.