SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 27, 2002
Commission file number 1-8048
TII NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: DELAWARE IRS Employer Identification No: 66-0328885
1385 AKRON STREET, COPIAGUE, NEW YORK 11726
(Address and zip code of principal executive office)
(631) 789-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 5, 2003 was 11,682,284
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December June 28,
27,2002 2002
-------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,074 $ 868
Accounts receivable, net 1,865 3,518
Inventories 7,251 7,362
Other current assets 272 212
-------------- ------------
Total current assets 11,462 11,960
-------------- ------------
Property, plant and equipment, net 5,555 5,846
Other assets 588 722
-------------- ------------
TOTAL ASSETS $ 17,605 $ 18,528
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 72 $ 476
Accounts payable and accrued liabilities 3,389 3,260
-------------- ------------
Total current liabilities 3,461 3,736
-------------- ------------
Long-term debt 34 13
-------------- ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, par value $1.00 per share; 1,000,000 shares
authorized;
Series D Junior Participating, 30,000 shares authorized, 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 37,867
Accumulated deficit (23,593) (22,924)
-------------- ------------
14,391 15,060
Less: Treasury stock, at cost; 17,637 common shares (281) (281)
-------------- ------------
Total stockholders' equity 14,110 14,779
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,605 $ 18,528
============== ============
See Notes to Consolidated Financial Statements
2
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended Six months ended
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
------------ ------------ ------------ ----------
(Unaudited) (Unaudited)
Net sales $ 5,536 $ 6,432 $ 12,610 $ 15,530
Cost of sales 4,364 5,041 9,594 11,869
------------ ------------ ------------ ----------
Gross profit 1,172 1,391 3,016 3,661
------------ ------------ ------------ ----------
Operating expenses:
Selling, general and
administrative 1,513 2,154 2,951 4,073
Research and development 382 426 736 987
------------ ------------ ------------ ----------
Total operating expenses 1,895 2,580 3,687 5,060
------------ ------------ ------------ ----------
Operating loss (723) (1,189) (671) (1,399)
Interest expense (13) (12) (23) (40)
Interest income 5 - 9 1
Other income 1 2 16 2
------------ ------------ ------------ ----------
Net loss $ (730) $ (1,199) $ (669) $ (1,436)
============ ============ ============ ==========
Net loss per common share:
Basic $ (0.06) $ (0.10) $ (0.06) $ (0.12)
============ ============ ============ ==========
Diluted $ (0.06) $ (0.10) $ (0.06) $ (0.12)
============ ============ ============ ==========
Weighted average common shares outstanding:
Basic and Diluted 11,682 11,682 11,682 11,682
See Notes to Consolidated Financial Statements
3
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Common Common Additional Total
Stock Stock Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
----------- ---------- ------------ ------------- --------- --------------
Balance, June 28, 2002 11,682,284 $ 117 $ 37,867 $ (22,924) $ (281) $ 14,779
Net loss for the six
months ended December
27, 2002 - - - (669) - (669)
----------- ---------- ------------ ------------- --------- --------------
Balance, December 27,
2002 11,682,284 $ 117 $ 37,867 $ (23,593) $ (281) $ 14,110
=========== ========== ============ ============= ========= ==============
See Notes to Consolidated Financial Statements
4
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the six months ended
December 27, December 28,
2002 2001
------------------ ----------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (669) $ (1,436)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 557 673
Gain from sale of condominium (107) -
Changes in operating assets and liabilities:
Accounts receivables 1,653 3,369
Inventories 111 752
Other assets (9) (98)
Accounts payable and accrued liabilities 129 (3,025)
------------------ ----------------
Net cash provided by operating activities 1,665 235
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds from dispositions (248) (174)
Net proceeds from sale of condominium 172 -
------------------ ----------------
Net cash used in investing activities (76) (174)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and obligations under capital leases (383) (127)
Net borrowings under revolving credit facility - 19
------------------ ----------------
Net cash used in financing activities (383) (108)
------------------ ----------------
Net increase (decrease) in cash and cash equivalents 1,206 (47)
Cash and cash equivalents, at beginning of period 868 233
------------------ ----------------
Cash and cash equivalents, at end of period $ 2,074 $ 186
================== ================
SUPPLEMENTAL DISCLOSURE OF CASH TRANSACTIONS:
Cash paid during the period for interest $ 13 $ 48
================== ================
See Notes to Consolidated Financial Statements
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5
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM FINANCIAL STATEMENTS: The unaudited interim consolidated
financial statements presented herein have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial statements and in accordance with the instructions to Form 10-Q and
Regulation S-X pertaining to interim financial statements. Accordingly, they do
not include all information and notes required by accounting principles
generally accepted in the United States for complete financial statements. The
consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments and accruals which, in the opinion of management, are
considered necessary for a fair presentation of the Company's financial position
and results of operations and cash flows for the interim periods presented. The
consolidated financial statements should be read in conjunction with the summary
of significant accounting policies and notes to consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 28, 2002. Results of operations for interim periods are not
necessarily indicative of the results that may be expected for the full fiscal
year.
NOTE 2 - COMPREHENSIVE LOSS: For the six months ended December 27, 2002 and
December 28, 2001, comprehensive loss equaled net loss.
NOTE 3 - FISCAL YEAR: The Company reports on a 52-53 week fiscal year ending on
the last Friday in June, with fiscal quarters ending on the last Friday of each
calendar quarter. The Company's fiscal year ending June 27, 2003 will contain 52
weeks. Fiscal 2002 had 52 weeks.
NOTE 4 - NET (LOSS) EARNINGS PER COMMON SHARE: Basic net (loss) earnings per
common share are computed using the weighted average number of common shares
outstanding. Diluted earnings per share are computed based on the weighted
average number of common shares outstanding increased by dilutive common stock
warrants and options. As of December 27, 2002, there were 7,051,041 options and
warrants outstanding that were exercisable for the Company's common stock. Since
the Company incurred a loss in all reported periods, all securities exercisable
for the Company's common stock were anti-dilutive. Therefore, diluted loss per
share equals basic loss per share.
The following table sets forth the computation of basic and diluted loss per
share:
For the three months ended For the six months ended
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands) (In thousands)
Numerator for diluted calculation:
Net loss $ (730) $ (1,199) $ (669) $ (1,436)
======== ======== ======== ========
Denominator:
Weighted average common shares outstanding 11,682 11,682 11,682 11,682
Dilutive effect of stock warrants and options - - - -
-------- -------- -------- --------
Denominator for diluted calculation 11,682 11,682 11,682 11,682
======== ======== ======== ========
6
NOTE 5 - INVENTORIES: Inventories consisted of the following major
classifications:
Dec. 27, June 28,
2002 2002
-------------- ------------
(In thousands)
Raw materials and subassemblies $ 2,981 $ 3,851
Work in process 420 144
Finished goods 3,850 3,367
-------------- ------------
$ 7,251 $ 7,362
============== ============
NOTE 6 - REVOLVING CREDIT FACILITY: The Company has a credit facility ("Credit
Facility") that consists of a $6.0 million revolving line of credit 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
eligible inventory, subject to certain reserves. As a result of such limitation,
the maximum borrowings available to the Company was $3.6 million as of December
27, 2002. Subject to extension in certain instances, the scheduled maturity date
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
$51,000, subject to mandatory repayments from asset disposition proceeds. At
December 27, 2002 and June 28, 2002, there were no borrowings outstanding under
the revolving credit facility. There was $51,000 and $455,000 outstanding under
the term loan as of December 27, 2002 and June 28, 2002, respectively. As a
result of the loss during the period, the Company's consolidated tangible net
worth was $150,000 below the $14.0 million minimum amount required by the loan
agreements. The Company has received a waiver of this requirement from its
lender until March 28, 2003.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: 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 pre-January 1, 2003 exit and disposal activities will be unaffected
upon adoption of SFAS No. 146.
NOTE 8 - SIGNIFICANT CUSTOMERS: For the periods ended December 27, 2002 and
December 28, 2001, one customer accounted for approximately 56% and 57%,
respectively, of the Company's consolidated net sales.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
foregoing consolidated financial statements and notes thereto.
BUSINESS
TII Network Technologies, Inc. and subsidiary, formerly named TII Industries,
Inc. (collectively, the "Company" or "TII"), designs, produces and markets
lightning and surge protection products, network interface devices ("NIDs"),
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.
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 long-lived
assets are the most critical areas where management's judgments and estimates
affect the Company's reported results. While the Company believes its estimates
are reasonable, misinterpretation of the conditions that effect the valuation of
these assets could result in actual results varying from reported results, which
are based on the Company's estimates, assumptions and judgments as of the
balance sheet date.
Inventories are required to be stated at the lower of cost or market. In
establishing the 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.
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.
GENERAL
Over the last several years, the Company restructured and downsized its
operations to reduce its cost structure, for which the Company recognized
significant charges at the time (including in the fourth quarter of fiscal
2002). These actions included outsourcing the majority of the Company's
manufacturing to Pacific Rim contract manufacturers, a significant reduction of
manufacturing and other personnel, the consolidation of certain functional
departments from Puerto Rico to the Company's New York headquarters, the writing
down of certain assets and the discontinuance of the Digital Closet product
line. These actions enabled the Company to operate profitably for the first
quarter of fiscal 2003. However, during the second quarter of fiscal 2003, the
continuation of an inventory reduction plan and a work slowdown at the Company's
principal customer were primarily responsible for a decline in sales from the
first quarter levels resulting in a loss for the quarter. In response to this
further sales decline, the Company has taken additional steps to lower its cost
structure including a workforce reduction of approximately twenty people in
December 2002.
8
RESULTS OF OPERATIONS
Net sales for the fiscal 2003 second quarter were $5.5 million compared to $6.4
million for the comparative prior year period, a decrease of approximately
$896,000 or 13.9 percent. Net sales for the first six months of fiscal 2003 were
$12.6 million compared to $15.5 million for the similar prior year period, a
decrease of approximately $2.9 million or 18.8 percent. The decrease in both
fiscal 2003 periods is 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, a reduction in the number of telephone access lines per
subscriber being deployed and, in the second quarter of fiscal 2003, a work
slowdown at the Company's principal customer. The Company has not seen an
improvement in these trends and expects the slowdown in the telecommunications
industry and the work slowdown at its principal customer continue to negatively
impact sales through fiscal 2003.
Gross profit for the fiscal 2003 second quarter was $1.2 million compared to
$1.4 million for the comparative prior year period, a decrease of approximately
$219,000 or 15.7 percent, while gross profit margins for the comparative
quarters were 21.2% and 21.6%, respectively. Gross profit for the six months
ended December 27, 2002 was $3.0 million compared to $3.7 million for the same
prior year period, a decrease of approximately $645,000 or 17.6%, while gross
profit margins for the comparable periods were 23.9% and 23.6%, respectively.
The lower gross profit levels in both fiscal 2003 periods were due to the lower
sales levels. Gross margins were essentially at the same levels as in the prior
year comparable periods, despite the lower sales levels, due to the actions
taken by the Company to reduce its cost structure and an improved mix of sales
of higher margin products.
Selling, general and administrative expenses for the second quarter of fiscal
2003 were $1.5 million compared to $2.2 million for the comparable prior year
period, a decrease of approximately $641,000 or 29.8%. Included in the fiscal
2003 second quarter and six-month results was a gain of $107,000 from the sale
of a condominium and severance expenses of $165,000 for a workforce reduction
that occurred in the second quarter. For the six months ended December 27, 2002,
selling, general and administrative expenses were $3.0 million compared to $4.1
million for the same prior year period, a decrease of approximately $1.1 million
or 27.6%. The overall expense decreases reflect the actions taken by the Company
to reduce its cost structure and the effect of the lower sales on variable
expenses.
Research and development expenses for the second quarter of fiscal 2003 were
$382,000 compared to $426,000 for the comparable prior year period, a decrease
of approximately $44,000 or 10.3%. For the six months ended December 27, 2002,
research and development expenses were $736,000 compared to $987,000 for the
same prior period, a decrease of $251,000 or 25.4%. The Company has been able to
reduce its direct outlays for these expenses through the use of collaborative
engineering efforts with its contract manufacturers.
Interest expense for the second quarter of fiscal 2003 was $13,000 compared to
$12,000 for the comparable prior year period. For the first six months of fiscal
2003 interest expense was $23,000 compared to $40,000 for the comparable prior
year period. The decline for the six months period was due to decreased
borrowings under the Company's credit facilities and lower prevailing interest
rates.
Interest income for the second quarter of fiscal 2003 was $5,000. The Company
had no interest income in the comparable prior year period. For the first six
months of fiscal 2003 interest income was $9,000 compared to $1,000 for the
comparable prior year period. The increases were due to higher average cash and
cash equivalent balances held by the Company.
9
The net loss for the second quarter and first six months of fiscal 2003 were
$730,000 and $669,000 respectively, compared to net losses in the comparable
prior fiscal 2002 periods of $1.2 million and $1.4 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance was $2.1 million at December 27,
2002 compared to $868,000 at the end of fiscal 2002, an increase of
approximately $1.2 million and, compared to $186,000 at December 28, 2001, an
increase of approximately $1.9 million. The increase during the six months ended
December 27, 2002 occurred primarily as a result of a higher rate of collections
of receivables and lower relative payments of accounts payable due to the timing
of these payments. In the third quarter of fiscal 2003, the Company expects that
cash levels will decrease as a result of higher relative payments of accounts
payable. The Company also anticipates that inventories will increase during the
third quarter of fiscal 2003 due to the timing of shipments from suppliers and
the anticipated lower sales levels. Working capital decreased to $8.0 million at
the end of the second quarter of fiscal 2003 from $8.2 million at the end of
fiscal 2002.
For the six months ended December 27, 2002, the Company generated $1.7 million
of net cash from operating activities compared to $235,000 for the six months
ended December 28, 2001. The cash generated from operating activities in the
current year's six month period primarily resulted from a higher rate of
collections of receivables and lower relative payments of accounts payable due
to the timing of these payments. The net cash generated from operating
activities in the fiscal 2002 period was due to a reduction in receivables of
$3.4 million and inventories of $752,000 offset, in large part, by the net cash
operating loss of $764,000 and a decrease in accounts payable and accrued
liabilities of $3.0 million.
Net cash of $76,000 was used in the first half of fiscal 2003 in investing
activities for net purchases of capital assets of $248,000, partially offset by
net cash realized from the sale of a long-lived asset of $172,000. For the six
months ended December 28, 2001 investing activities used $174,000 for purchases
of capital assets.
Net cash of $383,000 was used in financing activities in the first six months of
fiscal 2003 for debt repayments and payments of obligations under capital
leases. For the six months ended December 28, 2001 financing activities used
$108,000 for debt repayments.
Although the Company has no current material commitments for capital
expenditures, it 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 discussed below.
The Company has a credit facility ("Credit Facility") that consists of a $6.0
million revolving line of credit 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 eligible inventory, subject to certain
reserves. As a result of such limitation, the maximum borrowings available to
the Company was $3.3 million as of December 27, 2002. Subject to extension in
certain instances, the scheduled maturity date 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 $51,000, subject to mandatory
repayments from asset disposition proceeds. At December 27, 2002 and June 28,
2002, there were no borrowings outstanding under the revolving credit facility.
There was $51,000 and $455,000 outstanding under the term loan as of December
27, 2002 and June 28, 2002, respectively. As a result of the loss during the
period, the Company's consolidated tangible net worth was $150,000 below the
$14.0 million minimum amount required by the loan agreements. The Company has
received a waiver of this requirement from its lender until March 28, 2003.
10
If the Company's tangible net worth does not increase to at least $14.0 million
at March 28, 2003, the Company might not be entitled to further revolving credit
loans and the bank lender could require repayment of any revolving credit loans
outstanding as of that date (the remaining $51,000 of the Company's term loan is
due in any event on March 31, 2003). The Company has commenced negotiations with
its bank lender to amend and extend the Credit Facility past September 30, 2003.
There can be no assurance that the Company will be able to amend or extend the
Credit Facility to beyond September 2003 or obtain a substitute credit facility.
Funds anticipated to be generated from operations, together with available cash
and anticipated borrowings under the Credit Facility, are considered to be
adequate to finance the Company's operational and capital needs for the balance
of fiscal 2003. However, if the slowdown in the telecommunications industry and
the work slowdown at the Company's principal customer continues for an extended
period of time or should the Company cease having the availability of the Credit
Facility (by acceleration or at maturity), the Company will most likely need to
seek additional financing to support its operations.
FORWARD-LOOKING
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; the Company's ability to continue to make sales to its principal
customer at or above present levels; the Company's ability to develop additional
customers; competition; potential technological changes, including the Company's
ability to timely develop new products and adapt its existing products to
technological changes; 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, labor disputes at these customers, third party labor disputes,
political unrest in or shipping disruptions from countries in which the
Company's contract manufacturers produce the Company's products; labor disputes
at the ports from which the Company imports its products, the Company's ability
to market existing and new products; its ability to retain and win contracts;
risks inherent in new product introductions, such as start-up delays and
uncertainty of customer acceptance; dependence on third parties for products and
product components; the Company's ability to maintain its relationship with or
reduce its dependence upon one of its principal contract
11
manufacturers which is an affiliate of a customer, the Company's ability to
attract and retain technologically qualified personnel; the Company's ability to
fulfill its growth strategies; the Company's ability to maintain the listing of
its Common Sock on the Nasdaq SmallCap market; the availability of financing on
satisfactory terms; and other factors discussed elsewhere in this Report and in
other Company reports hereafter filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, is 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.
The Company requires foreign sales to be paid for in U.S. currency, and
generally requires such payments to be made in advance, by letter of credit or
by U.S. affiliates of the customer.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, an evaluation was carried out
of the effectiveness of the design and operation of the Company's "disclosure
controls and procedures," as defined in, and pursuant to, Rule 13a-14 of the
Securities Exchange Act of 1934 (the "Exchange Act") under the supervision and
with the participation of the Company's management, including, the Company's
President and principal executive officer and Vice President-Finance and
principal financial officer. Based on that evaluation the Company's President
and principal executive officer and Vice President-Finance and principal
financial officer concluded that, as of the date of their evaluation, the
Company's disclosure controls and procedures were effective to ensure that
material information relating to the Company and the Company's subsidiary is
made known to them.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the evaluation discussed above.
12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on December 4, 2002, the
Company's stockholders:
(a) Elected the following to serve as Class II directors of the Company
until the Company's Annual Meeting of Stockholders to be held in the
year 2005 and until their respective successors are elected and
qualified by the following votes:
For Withheld
--- --------
James R. Grover Jr. 9,483,571 253,675
George S. Katsarakes 9,501,696 235,550
(b) Ratified the selection by the Board of Directors of KPMG LLP as the
Company's independent public accountants for the Company's fiscal year
ending June 27, 2003 by the following votes:
For Against Abstain
--- ------- -------
9,610,092 124,620 2,534
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Waiver letter dated February 6, 2003 from GMAC Commercial
Credit LLC to the Company.
99.01 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.
99.02 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.
(b) Reports on Form 8-K:
During the quarter for which this Report is filed, the Company
filed a Current Report on Form 8-K dated (date of earliest event
reported) December 16, 2002 reporting under Item 5 - Other
Events. No financial statements were filed with that Report.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TII NETWORK TECHNOLOGIES, INC.
Date: February 10, 2003 By: /s/ Kenneth A. Paladino
-----------------------
Kenneth A. Paladino
Vice President-Finance, Treasurer and
Chief Financial Officer
14
I, Timothy J. Roach, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TII Network
Technologies, Inc.;
2. Based on my knowledge, this Quarterly 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 Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly 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 Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy J. Roach,
Date: February 10, 2003 ----------------------------
Timothy J. Roach,
President and Principal
Executive Officer
15
I, Kenneth A. Paladino, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of TII Network
Technologies, Inc.;
2. Based on my knowledge, this Quarterly 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 Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly 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 Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Kenneth A. Paladino,
Date: February 10, 2003 -----------------------------
Kenneth A. Paladino,
Vice President-Finance
and Principal Financial Officer
16
Exhibit Index
4 Waiver letter dated February 6, 2003 from GMAC Commercial
Credit LLC to the Company.
99.01 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.
99.02 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.
17