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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-8048
TII INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 66-0328885
- ------------------------------- ------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1385 Akron Street, Copiague, New York 11726
- ------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-789-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 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 13, 1996 held by non-affiliates of the registrant
was approximately $34,905,000. While such market value excludes shares which may
be deemed beneficially owned by executive officers and directors and their
associates, this should not be construed as indicating that all such persons are
affiliates.
The number of shares of Common Stock of the registrant outstanding
as of September 13, 1996 was 7,429,338.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 1996
Annual Meeting of Stockholders are incorporated by reference into Part III of
this report.
PART I
ITEM 1. BUSINESS
GENERAL
TII is a leading supplier to United States telephone operating
companies ("Telcos") of overvoltage surge protectors. Overvoltage protectors are
required by the National Electric Code to be installed on the subscriber's
(user's) home or office telephone lines to prevent injury to telecommunication
users and damage to telecommunication equipment due to overvoltage surges caused
by lightning and other hazardous electrical occurrences. The Company's other
products include network interface devices ("NIDs") and station electronics,
which may be incorporated in NIDs together with the Company's overvoltage
protectors. Further, during the second quarter of fiscal 1994, the Company
introduced a line of fiber optic products in order to participate in the growing
fiber optic market. The Company markets its products, directly or indirectly, to
the U.S. Telcos including seven Regional Bell Operating Companies ("RBOCs") and
GTE Corporation ("GTE"), which collectively service over 85% of the over 150
million subscriber lines in the United States, as well as original equipment
suppliers who sell to the global Telco marketplace.
The Company's strategy is to develop new products which are
complementary to its current products, expand into new markets and capitalize on
its reputation as a quality manufacturer among the Telcos.
The Company is a Delaware corporation organized in 1971 and as a
result of an election to apply Section 936 of the United States Internal Revenue
Code of 1986, as amended (the "Code"), a tax exemption under Puerto Rico's
Industrial Incentive Act of 1963, and the availability of net operating loss and
tax credit carryovers, most of the Company's income is presently not taxed. (See
"Tax Attributes")
The Company's principal executive office is located at 1385 Akron
Street, Copiague, New York 11726 (telephone number (516) 789-5000) and its
principal operations office is located at Rd. 165, Kilometer 1.6, Toa Alta,
Puerto Rico 00953 (telephone number (809) 870-2700).
PRODUCTS
TII has been a manufacturer of overvoltage protection devices based
on gas tube technology for over 30 years. This core gas tube technology
represents the foundation upon which certain new products and technological
enhancements of the Company's traditional products are to be based. In addition,
the Company has expanded its research and development efforts to accelerate the
development of additional products for its established, as well as new customers
and its new fiber optic product lines.
OVERVOLTAGE SURGE PROTECTORS. The Company designs, manufactures and
markets overvoltage protectors primarily for use by the Telco industry on the
subscriber's home or office telephone lines. These overvoltage protectors differ
in power capacity, application, configuration and price to meet the Telco's
varying needs.
The heart of the TII overvoltage protector is its proprietary two
or three electrode gas tube. Overvoltage protection is provided when the
voltage on a telephone 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
into the ground. When the voltage on the Telco's 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
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gas tubes have been designed to withstand multiple high energy overvoltage
surges while continuing to operate over a long service life with minimal failure
rates.
One of the Company's most advanced overvoltage protectors, embodied
in its Totel Failsafe(R) series, combines the Company's three electrode gas tube
with a patented, thermally operated, failsafe mechanism, encapsulated in an
environmentally sealed module. The three electrode gas tube protects the
equipment from hazardous overvoltage surges and the failsafe mechanism is
designed to insure that, under sustained overvoltage conditions, the protector
will become permanently grounded. The sealed module is designed to prevent
damage to the overvoltage protector elements from moisture and industrial
pollution. The module is connected to the Telco's network with wires connected
to binder posts on the module.
In August 1995, the Company entered into a long-term strategic
agreement to develop and manufacture advanced technology protectors for sale
into global telecommunications markets. (See "ANT Agreement", below.)
TII also designs, manufactures and markets special purpose models of
powerline protectors, utilizing the Company's protection technology, principally
for use by the Company's Telco customers. TII's powerline protectors protect the
connected Telco equipment against damage or destruction caused when overvoltage
surges enter equipment through the powerline.
Overvoltage protectors sold separately accounted for approximately
65%, 68% and 76% of the Company's net sales during the Company's fiscal years
1996, 1995 and 1994, respectively.
NETWORK INTERFACE DEVICES ("NIDS"). The Company designs, molds,
assembles and markets various NIDs which typically contain wire terminals to
connect a subscriber's telephone, one or more overvoltage protectors and a
demarcation point to clearly separate the Telco's wires from the subscriber's
wires. NIDs were developed to establish a separation point between Telco
property and subscriber property in response to Federal Communication Commission
and state public service commission requirements. Certain Telcos are also
installing various station electronic products in NIDs, including remote testing
devices, through which the Telcos are able to automatically test the integrity
of their lines.
The Company's NIDs principally incorporate station protectors, and
to a lesser extent, electronics. The Company also offers a line of retrofit NIDs
for existing subscriber installations. These units are designed to meet industry
requirements by simply removing the cover of existing station protectors and
replacing that cover with an easy-to-install retrofit NID. Utilizing the
existing station protector benefits the Telco by reducing installation time and
material costs. These NIDs, together with NIDs sold without protection or
electronics, represented approximately 21%, 20% and 14% of the Company's net
sales during fiscal 1996, 1995 and 1994, respectively.
STATION ELECTRONICS AND OTHER PRODUCTS. The Company designs,
manufactures and markets special purpose station electronic products that are
included in NIDs or sold separately. Most subscriber electronic devices are
designed to be installed with an overvoltage protector, typically in a NID. The
Company's station electronics products are designed to interface with the
Telco's central office test equipment. The Company also designs, manufactures
and markets other products, including plastic housings, wire terminals,
enclosures, cabinets and various hardware products principally for use by the
Telco industry. Station electronics and other products sold separately, and
payments from AT&T Corporation ("AT&T") under an agreement with the Company
which expired on December 31, 1995 (with the final payment received in March
1996), accounted for approximately 11%, 9% and 8% of the Company's net sales in
fiscal 1996, 1995 and 1994, respectively. (See "AT&T Agreement" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this Report).
3
FIBER OPTIC PRODUCTS. In order to participate in the growing fiber
optic market and help expand TII into new markets including the long distance
service providers, TII began to design and develop various fiber optic products
in fiscal 1994. To accelerate its entry into this market, in September 1993, the
Company acquired 98.5% (and subsequently acquired an additional 1.1%) of Ditel,
Inc. ("Ditel") for a purchase price which was not material to the Company.
Ditel, a North Carolina-based company, designs, manufactures and supplies fiber
optic products for markets similar to those in which the Company sells its
current products.
The Company's fiber optic products include enclosures, cabinets,
splice trays and a fiber optic cable management system. The Company integrates
these products with purchased fiber optic components to design and produce
customized fiber optic cable assemblies for the various interconnection points
which join and extend fiber optic cables from the Telcos long distance networks
to central offices and subscriber locations. Sales of fiber optic products,
which commenced in the beginning of the second quarter of fiscal 1994, were 3%,
3% and 2% of the Company's net sales during fiscal 1996, 1995 and 1994,
respectively.
MARKETING AND CUSTOMERS
The Company sells overvoltage protectors, NIDs, station electronics
and other products to Telcos principally through its direct sales force, but
also through distributors who are both affiliated and unaffiliated with Telcos
in the United States. TII also sells its protectors to telecommunications
equipment manufacturers, including other NID suppliers, which incorporate the
Company's protectors into their products for resale to the Telcos. With the
entry of the Company into the fiber optic market, the Company also is broadening
its customer base to traditional users of fiber optic products, including long
distance carriers and cable television providers.
The following customers are the only customers who accounted for
more than 10% of the Company's consolidated revenues during any of the periods
listed below:
Percentage of Net Sales (1)
for Year Ended
------------------------------------------
June 28, June 30, June 24,
1996 1995 1994
------------------------------------------
BellSouth Corporation (2) * * 11%
Keptel, Inc. (3) 12% * *
Siecor Corporation (3) 26% 30% 34%
Telesector Resources Group
(a subsidiary of NYNEX) 15% 13% 14%
- ------------------------------
(1) Asterisk denotes less than 10% for the period presented.
(2) Due to a determination made by BellSouth Corporation ("BellSouth") to have
the Company's overvoltage protectors inserted into NIDs produced for
BellSouth by Siecor Corporation , ("Siecor"), certain purchases previously
made directly by BellSouth were shifted to Siecor during fiscal 1996, 1995
and 1994. The Company believes that, with sales through Siecor and
BellSouth's direct purchases, BellSouth's use of the Company's overvoltage
protectors has not diminished since fiscal 1993.
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(3) Keptel, Inc., a subsidiary of Antec Corporation, and Siecor Corporation
are telecommunications equipment manufacturers that supply NIDs to the
Telcos. Many Telcos have made a determination to have overvoltage
protectors installed into NIDs by NID manufacturers. As a result, certain
purchases of the Company's overvoltage protectors previously made directly
by Telcos were shifted to NID manufacturers.
Purchases of the Company's products are generally based on
individual customer purchase orders for delivery within thirty days under
general supply contracts. The Company, therefore, has no material firm backlog
of orders.
ANT AGREEMENT
In August 1995, the Company entered into a long-term strategic
agreement ("ANT Agreement") with Access Network Technologies ("ANT") to develop
and manufacture advanced technology products for sale into the global
telecommunications markets. ANT is a joint venture between Lucent Technologies
Inc. (formerly AT&T Network Cable Systems) and Raychem Corporation. The first
products developed under the ANT Agreement are proprietary gel-filled
overvoltage protector terminal blocks and modular station protectors. While
TII's current modular protectors encapsulate the Company's overvoltage protector
elements in environmentally sealed modules, these modules are connected to the
Telcos with wire binding posts. Using ANT's proprietary gel technology, the new
products developed with ANT have eliminated the exposed binding posts, replacing
them with insulation displacement connectors in a gel filled enclosure.
Customers for the products developed under the ANT Agreement are expected to be
Telcos throughout the United States, the local exchange carriers and network
operators around the world, including telecommunications companies, military,
law enforcement, customs, finance, transportation and utility networks.
EXPORT SALES
The Company's sales of its products in foreign countries aggregated
approximately $1,565,000 in fiscal 1996 (4% of net sales), $969,000 in fiscal
1995 (2% of net sales), and $744,000 in fiscal 1994 (2% of net sales). Foreign
sales have been made primarily within countries in the Caribbean, South and
Central America, Canada and Western Europe. The Company requires foreign sales
to be paid for in U.S. currency. Foreign sales are affected by such factors as
exchange rates, changes in protective tariffs and foreign government import
controls.
MANUFACTURING
The Company produces its overvoltage protectors, NIDs and station
electronics at its facilities in Puerto Rico and the Dominican Republic, and its
fiber optic products at its facility in North Carolina.
The manufacture of the Company's gas tubes requires vacuum ovens,
specialized test equipment and various processes developed by the Company. The
assembly and the test equipment used in the manufacture of the gas tube
overvoltage protectors and other Company products was developed and built by the
Company or by various equipment manufacturers to the Company's specifications.
TII produces a substantial portion of its NIDs and other plastic enclosures in
its thermoplastic molding facility. Many of the Company's products contain
numerous metal components produced with the Company's metal stamping and forming
equipment. The Company believes that this vertical integration of its
manufacturing processes gives the Company both cost and delivery advantages.
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The Company's fiber optic products are assembled principally from
outside purchased components, and to a lesser extent, plastic parts molded at
its facility in North Carolina.
TII uses a statistical process control method within its
manufacturing and engineering operations to establish quality standards, qualify
vendors, inspect incoming components, maintain in-process inspection and lot
control and perform final testing of finished goods.
RAW MATERIALS
The Company uses stamped, drawn and formed parts made out of a
variety of commonly available metals, ceramics and plastics as the primary
components of its gas tubes, overvoltage protectors, NIDs, other molded plastic
housings and fiber optic products. In manufacturing certain protectors and
station electronic products, the Company purchases commonly available solid
state components, printed circuit boards and standard electrical components such
as resistors, diodes and capacitors. The Company has no contracts with suppliers
of the components utilized in the manufacture of its products which extend for
more than one year. The Company believes that all raw materials used by it will
continue to be readily available in sufficient supply from a number of sources
at competitive prices.
PATENTS AND TRADEMARKS
The Company owns or has applied for a number of patents relating to
its products, and owns a number of registered trademarks which are considered to
be of value principally in identifying the Company and its products. While the
Company considers these important, it believes that, because of technological
advances in its industry, its success depends primarily upon its sales,
engineering and manufacturing skills.
RESEARCH AND DEVELOPMENT
As the Telcos upgrade and expand their networks to provide the
telecommunications services of the future, new product opportunities continue to
arise for the Company. Currently, the Company's research and development and
related marketing efforts are focused on several major projects including:
* Designing gas tube, solid state and hybrid overvoltage
protectors for the world wide telecommunication markets.
* Designing custom overvoltage protectors pursuant to the ANT
Agreement as well as for other original equipment
manufacturers for installation throughout the Telco and other
communications networks.
* Developing coaxial overvoltage protectors for the cable TV and
broadband communications markets.
* Expanding the Company's fiber optic product line of enclosures
and fiber optic cable management systems to meet the growing
needs of existing and potential customers.
* Developing enhanced station protectors and network interface
devices to address anticipated future requirements of the
Telcos.
* Developing products related to the protection of
telecommunications equipment connected to commercial power.
6
The Company's research and development ("R&D") department currently
consists of 29 persons skilled and experienced in various technical disciplines,
including physics, electrical and mechanical engineering, with specialization in
such fields as electronics, metallurgy, plastics and fiber optics. The Company
maintains computer aided design equipment and laboratory facilities, which
contain sophisticated equipment, in order to develop and test its existing and
new products.
The Company's R&D expense was $2,820,000, $2,619,000, and $2,100,000
during fiscal 1996, 1995 and 1994, respectively. The increases were primarily
due to staff increases, increased costs of development projects and an increase
in research projects.
COMPETITION
Although TII is a leading supplier to Telcos of overvoltage
protectors for use at subscriber premises, in NIDs and station protectors,
overvoltage protectors are subject to significant competition, including
competition from NID manufacturers (including Siecor, a major customer of the
Company) which have introduced their own line of overvoltage protectors. The
Company expects this significant competition to continue in the Company's
overvoltage protectors as well as the Company's other products. Principal
competitive factors include technology, delivery, price, quality and
reliability. Most of the Company's competitors have substantially greater assets
and financial resources, and have larger sales forces, manufacturing facilities
and R&D staffs than those of the Company. The Company believes that its present
sales, marketing and R&D departments, its low-cost high quality production
facilities and strategic agreement with ANT, as well as its present protection
technology, enable it to meet competition.
The Company's gas tube overvoltage protectors not only compete with
other companies' gas tube overvoltage protectors, but also with solid state
overvoltage protection devices. While solid state protectors are faster at
reacting to surges, gas tube overvoltage protectors have generally remained the
subscriber overvoltage protection technology of choice by most Telcos because of
the gas tube's ability to repeatedly withstand significantly higher energy
surges while adding virtually no capacitance onto the communication line. Solid
state overvoltage protectors are used principally in Telco's central office
switching centers where speed is perceived to be more critical than energy
handling capabilities. While the Company believes that, for the foreseeable
future, both gas tube and solid state devices will continue to be used as
overvoltage protectors within the telecommunications market, solid state
protectors may gain market share from gas tube protectors, especially where high
speed response is critical. Solid state and gas tube devices are produced from
different raw materials, manufacturing processes and equipment. On a limited
basis, the Company has begun developing and marketing overvoltage protectors
incorporating purchased solid state devices.
As a relatively recent entrant into the fiber optic market, the
Company expects to meet significant competition from companies with greater
financial and R&D resources. The market in this area is characterized by
innovation, rapidly changing technology and new product development. The
Company's success in this area will depend, in large measure, upon its ability
to identify customer needs and develop new products to keep pace with continuing
changes in technology and customer preferences.
REGULATION
The National Electrical Code requires that an overvoltage 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.
7
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 effect on its earnings, capital expenditures or
competitive position.
CERTAIN TAX ATTRIBUTES
Because the Company is incorporated in the United States and
operates primarily in the Commonwealth of Puerto Rico, its income would normally
be subject to income tax by both the United States and Puerto Rico. At the
present time, however, as explained more fully below, the Company does not pay
United States federal or Puerto Rico income tax on most of its income. The
Company is, however, subject to United States federal and applicable state
income taxes with respect to its non-Puerto Rico operations, including those of
Ditel.
The Company has elected the application of Section 936 of the Code
and presently intends to continue to operate in a fashion that will enable it to
qualify for the Section 936 election. Under that section, as long as the Company
(on a non-consolidated basis) has cumulatively derived, in its current and two
preceding tax years, at least 80% of its gross income from sources within Puerto
Rico and at least 75% of its gross income from the active conduct of a trade or
business within Puerto Rico, as defined in the Code, the Company is 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, as further discussed below (since the Company did not elect the
alternative percentage limitation). To the extent the Company has taxable income
arising from United States sources (e.g., income from investment activity in the
U.S.), the Company would not be entitled to offset the related tax on such
income with the Section 936 tax credit.
The economic activity limitation on the amount of allowable credits
under Section 936, as added by the Revenue Reconciliation Act of 1993, is based
upon qualified wages and fringe benefits paid for services performed in Puerto
Rico, depreciation deductions and taxes in Puerto Rico and, in the case of the
Company, is effective beginning with its 1995 fiscal year. Based on fiscal 1996
levels of qualified wages, fringe benefits and depreciation in Puerto Rico, the
Company's economic activity based credit limitation is approximately $3,091,000
per annum. The amount of the economic activity based Section 936 credit
limitation available for fiscal 1996 will be sufficient to offset the United
States federal income tax on Puerto Rico source income for the Company's 1996
fiscal year, as computed after utilization of the Company's available net
operating loss carry forwards of approximately $334,000.
Legislation included in the Minimum Wage/Small Business Job
Protection Act of 1996, enacted August 20, 1996, repeals the Section 936 credit
for taxable years beginning after December 31, 1995. However, since the
Company's Section 936 election was in effect for its tax year that includes
October 13, 1995, it is eligible to continue to claim a Section 936 credit for
an additional 10 years under a special grandfather rule. If the Company adds a
substantial new line of business after October 13, 1995, the Company would cease
to be eligible to claim the Section 936 credit beginning with the taxable year
in which such new line of business is added. Because the Company uses the
economic activity limitation, possession income eligible for the Section 936
credit in any tax year beginning after December 31, 2001 and before January 1,
2006 is subject to a cap equal to the Company's average inflation-adjusted
possession income for the three of the five most recent years ending before
October 14, 1995 determined by excluding the years in which the Company's
adjusted possession income was the highest and the lowest. In lieu of using a
five-year period to determine the base period years, the Company may elect to
use its last tax year ending in 1992 or a deemed taxable year which includes the
first ten months of the calendar year 1995. The Company's Section 936 credit for
each year during the grandfather period would continue to be subject to the
economic activity limitation (as discussed above). This legislation is effective
for the
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Company's 1997 fiscal year. Based on the Company's current level of
possession income and business plans, the Company believes that it will be
eligible to claim a Section 936 credit under the grandfather rule discussed
above.
As long as the Company's election under Section 936 is in effect,
the Company cannot file a consolidated tax return with any of its subsidiaries
for United States income tax purposes, and the filing of consolidated returns is
not permitted under Puerto Rico income tax laws. Consequently, should the
Company itself sustain losses, those losses could not be used to offset the
federal taxable income of its subsidiaries; and, conversely, should the
Company's subsidiaries sustain losses, those losses could not be used to offset
the federal taxable income of the Company.
As a result of a private placement consummated in August 1992 (the
"Private Placement"), there has been an "ownership change" of TII and its
subsidiaries within the meaning of Section 382 of the Code, which significantly
limits the ability of the Company and its subsidiaries to utilize their net
operating losses and tax credit carryovers. At June 28, 1996, the Company had
net operating loss carryforwards aggregating approximately $15,460,000 which
expire periodically through 2006, and along with its subsidiaries had combined
net operating loss carryforwards aggregating approximately $25,540,000 which
expire periodically through 2011 and general business tax credit carryforwards
of approximately $322,000 which expire periodically through 2011. However, as a
result of the "ownership change", the maximum amount of net operating loss and
tax credit equivalent carryforwards which may be utilized in any year (and which
is utilized to offset income prior to the utilization of a credit available
under Section 936 of the Code) is approximately $334,000 per year for the
possessions corporation and approximately $377,000 per year for the United
States subsidiaries. The effect of the "ownership change" is somewhat mitigated
with respect to the Company as a result of its Section 936 election since United
States federal income tax is payable only to the extent such tax exceeds the
Company's Section 936 credit. In addition, net operating losses generated
subsequent to the "ownership change" are not subject to limitation and may
therefore be fully utilized. As of June 28, 1996, the Company's United States
subsidiaries have approximately $2,453,000 of net operating losses that were
generated subsequent to the "ownership change" and remain available for use
through 2011. In addition, the Company's United States subsidiaries have
available approximately $1,470,000 in unused Section 382 annual net operating
loss limitation carryforwards.
The Company also has been granted exemptions under Puerto Rico's
Industrial Incentive Act of 1963 until June 2009 for income tax purposes and for
property tax purposes. In each case the level of exemption is 90%. The Company
also has substantial net operating loss carryforwards available through fiscal
1998 to offset any remaining Puerto Rico taxable income. There are no
limitations on the Company's ability to utilize such net operating loss
carryforwards to reduce its Puerto Rico income tax. Furthermore, the Company's
subsidiary operating in the Dominican Republic is exempt from taxation in that
country.
EMPLOYEES
On September 13, 1996, the Company had approximately 1,196
employees, of whom 1,100 were engaged in manufacturing and 51 in engineering and
new product development, with the balance being employed in executive, sales and
administrative activities. Of these employees, approximately 375 are employed at
the Company's Puerto Rico facilities and 740 are employed at its Dominican
Republic facilities. The Company has not experienced any work stoppage as a
result of labor difficulties and believes it has satisfactory employee
relations.
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ITEM 2. PROPERTIES
The Company manufactures its non-fiber optic products in its
facilities in Puerto Rico and the Dominican Republic. The Company's facility in
Puerto Rico is in Toa Alta, approximately 20 miles southwest of San Juan, in a
single story building which, together with several smaller buildings, contain an
aggregate of approximately 30,000 square feet of space. These facilities also
contain certain of the Company's warehousing facilities and certain of its
administrative, research and development, quality control, sales and executive
offices. These buildings are leased under an agreement with the Puerto Rico
Industrial Development Company ("PRIDCO") which expired October 31, 1994, but
operates under the same terms, and requires the employment of a minimum of 185
persons at this facility. In addition, the Company leases from PRIDCO a single
story building of approximately 8,800 square feet in Caguas, Puerto Rico under a
lease which expired in August 1995. This building houses Crown Tool & Die
Company, Inc., the Company's metal stamping subsidiary. The Company is currently
negotiating with PRIDCO for a ten year extension of the lease on the existing
Toa Alta facility, a ten year lease on an additional 20,000 square feet building
adjacent to the existing Toa Alta facility and the cancellation of the lease on
the Caguas facility. The Company believes it will be able to successfully
negotiate the transaction on terms favorable to both PRIDCO and the Company.
The Company also leases a building consisting of approximately
73,000 square feet, in San Pedro De Macoris, Dominican Republic under a lease
which expires on November 1, 1998. This facility houses certain of the Company's
manufacturing activities.
The Company leases a single story, 10,000 square foot facility in
Hickory, North Carolina under a lease expiring in December 1998, which houses
its fiber optic manufacturing facilities as well as certain administrative
offices.
In addition, the Company leases a single story building and a
portion of another building, consisting of an aggregate of approximately 14,000
square feet in Copiague, Long Island, New York which expires in July 1998. These
facilities house the Company's principal research and development activities and
certain of its marketing, administrative and executive offices, as well as a
warehouse for customer products and record storage.
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 1996.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market's
National Market System under the symbol "TIII". The following table sets forth,
for each quarter during fiscal 1996 and fiscal 1995, the high and low sales
prices of the Company's Common Stock.
Fiscal 1996 High Low
---- ---
First Quarter Ended September 29, 1995 10 1/8 6 5/8
Second Quarter Ended December 29, 1995 8 7/8 6 3/4
Third Quarter Ended March 29, 1996 9 1/8 6 3/8
Fourth Quarter Ended June 28, 1996 7 3/4 5 7/8
Fiscal 1995 High Low
---- ---
First Quarter Ended September 30, 1994 7 4 1/4
Second Quarter Ended December 30, 1994 6 5/8 5 3/8
Third Quarter Ended March 31, 1995 6 1/8 4 3/4
Fourth Quarter Ended June 30, 1995 7 1/2 4 1/2
As of September 13, 1996, the Company had approximately 700 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 until such indebtedness has been
repaid in full.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived
from the Company's consolidated financial statements for the five years ended
June 28, 1996, which statements have been audited by Arthur Andersen LLP,
independent public accountants. The following selected consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the consolidated financial
statements and the related notes thereto and other financial information
included elsewhere in this report.
June 28, 1996 June 30, 1995 June 24, 1994 June 25, 1993 June 26, 1992
---------- ---------- ---------- ---------- ---------
(amounts in thousands except per share data)
STATEMENTS OF OPERATIONS DATA
Net sales $ 44,513 $ 43,830 $ 40,147 $ 33,474 $ 29,742
========= ========= ========== ========== ========
Operating profit $ 3,856 $ 3,602 $ 3,066 $ 1,987 $ 610
========= ========= ========== ========== ========
Net profit (loss) $ 3,737 $ 2,942 $ 2,389 $ 1,212 $ (2)
========= ========= ========== ========== ========
Net profit per
share-Primary $ 0.48 $ 0.52 $ 0.45 $ 0.28 $ 0.00
========= ========= ========== ========== ========
Net profit per
share-Fully Diluted $ 0.47 $ 0.51 $ 0.41 $ 0.28 $ 0.00
========= ========= ========== ========== ========
BALANCE SHEET DATA
Working capital $ 23,801 $ 15,947 $ 6,734 $ 10,212 $ 6,995
========= ========= ========== ========== ========
Total assets $ 42,823 $ 34,414 $ 29,378 $ 28,066 $ 24,782
========= ========= ========== ========== ========
Long-term debt and capital
leases, including current
portion $ 2,739 $ 2,767 $ 7,552 $ 10,263 $ 12,240
========= ========= ========== ========== ========
Stockholders' investment $ 33,862 $ 25,183 $ 15,137 $ 12,439 $ 7,067
========= ========= ========== ========== ========
- -------------------------
(1) The Company has not paid cash dividends on its Common Stock or former
Class B Stock in any of the periods presented.
12
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 Selected Financial Data and the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Report.
Key financial information follows:
June 28, June 30, June 24,
1996 1995 1994
------- ------- -------
(amounts in thousands)
Net sales $44,513 $43,830 $40,147
Cost of sales (as a
percentage of sales) 71.8% 70.2% 73.0%
Selling, general and
administrative expenses $ 5,881 $ 6,827 $ 5,666
Research and development $ 2,820 $ 2,619 $ 2,100
Interest expense $ 416 $ 718 $ 711
Net profit $ 3,737 $ 2,942 $ 2,389
FISCAL YEARS ENDED JUNE 28, 1996, JUNE 30, 1995 AND JUNE 24, 1994
Net sales for fiscal 1996 increased by $683,000 to $44,513,000 from
$43,830,000 in fiscal 1995 as the Company shipped principally the same mix of
overvoltage protectors and network interface products to its telephone operating
company customers during these periods. Net sales for fiscal 1995 increased by
$3,683,000 to $43,830,000 from $40,147,000 in fiscal 1994 primarily due to
increased unit sales of the Company's network interface products. During the
first quarter of fiscal 1996, the Company signed a long-term strategic agreement
(the "ANT Agreement") with Access Network Technologies ("ANT"), a joint venture
between Lucent Technologies Inc. (formerly AT&T Network Cable Systems) and
Raychem Corporation, to develop and manufacture advanced technology products for
sale into the global telecommunications market. The first products developed
pursuant to the ANT Agreement combine TII's overvoltage protection with a unique
gel sealing technology designed to make these products virtually impervious to
the damaging effects of weather. During fiscal 1996, limited shipments of these
products occurred while TII and ANT addressed joint development and production
start-up as well as marketing and sales issues. The Company believes that volume
production of these new products will begin during fiscal 1997. This is a
forward looking statement under federal securities laws. The generation of
significant revenues under the ANT Agreement may be subject to, among other
factors, general economic conditions, the needs of the telephone operating
companies, competition, the development of new technologies and reliance upon
third parties to market certain new products. Included in net sales in the third
quarters of fiscal years 1996, 1995 and 1994 are payments of $875,000, $777,000
and $680,000, respectively, received from AT&T Corporation for sales shortfalls
corresponding to the contract years ended December 31, 1995, 1994 and 1993,
respectively, under an agreement which has now been completed. See "AT&T
Agreement," below.
13
Cost of sales, as a percentage of sales, increased during fiscal
1996 to 71.8% from 70.2% during fiscal 1995 principally due to increases in raw
materials and other manufacturing costs. Additionally, during fiscal 1996, cost
of sales was adversely affected by manufacturing start-up costs associated with
the introduction of several new products, including the ANT products. The
Company expects these additional costs to continue into fiscal 1997 on these new
products and other new products to be introduced during the fiscal year and
thereby cost of sales, as a percentage of sales, may continue to be somewhat
impacted during the year. During fiscal 1995, cost of sales improved as a
percentage of sales, decreasing to 70.2% from 73.0% during fiscal 1994, due
primarily to the higher sales volume which enabled the Company to improve the
absorption of fixed expenses together with the effect of improved manufacturing
efficiencies.
During fiscal 1996, selling, general and administrative expenses
decreased to $5,881,000 (or 13.2% of sales) from $6,827,000 during fiscal 1995
principally due to administrative staff and expense reductions. As a result of
the anticipated introduction of new products in 1997, the Company believes
selling, general and administrative expenses incurred to introduce and promote
these new products will be higher in dollar amount in 1997 than in 1996. The
percentage relationship of such expenses to sales will depend upon the degree of
success the Company has in selling such products and increasing its sales
volume. During fiscal 1995, selling, general and administrative expenses
increased by $1,161,000 (a 20.5% increase) over fiscal 1994 levels primarily due
to increasing the size of the Company's marketing and sales forces and the
higher sales commissions associated with increased sales volume.
Research and development expenses increased to $2,820,000 in fiscal
1996 from $2,619,000 and $2,100,000 during fiscal 1995 and 1994 respectively,
due to staff increases and other expenses associated with the development of new
products, including the ANT Agreement products.
Total other expense (net) during fiscal 1996 decreased to $119,000
from $660,000 and $677,000 during fiscal years 1995 and 1994, respectively, due
principally to an increase in funds available to pay off debt and for
investment. The increase in funds arose from exercises, primarily during the
fourth quarter of fiscal 1995 and first quarter of fiscal 1996, of warrants and
options issued in connection with an August 1992 private placement, as well as
from funds generated from the Company's operations.
As a result of the foregoing, the Company's net profit during fiscal
1996 increased to $3,737,000 from $2,942,000 during fiscal 1995 and $2,389,000
during fiscal 1994. During fiscal years 1996, 1995 and 1994 the Company received
sales shortfall payments of $875,000, $777,000 and $680,000, respectively, under
an agreement with AT&T. (See "AT&T Agreement") Sales shortfall payments
associated with the AT&T Agreement, which had a significant positive impact on
the Company's net profit in each of the last three fiscal years, concluded in
fiscal 1996.
As a result of the effects of the exercise of previously outstanding
warrants and options, and assumptions used in the methodology under the modified
treasury method for calculating earnings per share, despite the Company's
$795,000 or 27% increase in net income during fiscal 1996 over fiscal 1995
levels, primary earnings per share decreased $.04 or 8% for fiscal 1996 from
fiscal 1995.
INCOME TAXES
Due to its election to operate under Section 936 of the Internal
Revenue Code, the availability of certain net operating loss carryforwards and
exemptions from income taxes in Puerto Rico (until March 1998) and in the
Dominican Republic, the Company has not been required to pay any United States
federal, Puerto Rico or Dominican Republic taxes on most of its income. The
Revenue Reconciliation Act of 1993 imposed additional limits on the amount of
credit available to the Company under Section 936. Based on fiscal 1996 levels
of qualified wages, fringe benefits and
14
depreciation in Puerto Rico, the Company's economic activity based credit
limitation under the new law is approximately $3,091,000. The amount of the
economic activity based Section 936 credit limitation available for fiscal 1996
will be sufficient to offset the United States federal income tax onPuerto Rico
source income for the Company's 1996 fiscal year, as computed after utilization
of the Company's available net operating loss carryforwards of approximately
$334,000.
Legislation enacted in the Minimum Wage/Small Business Job
Protection Act of 1996 repeals the Section 936 credit for taxable years
beginning after December 31, 1995. However, since the Company had elected the
Section 936 credit, it is eligible to continue to claim a Section 936 credit for
an additional 10 years under a special grandfather rule subject to a maximum
limitation. If the Company adds a substantial new line of business after October
13, 1995, it would cease to be eligible to claim the Section 936 credit
beginning with the taxable year in which such new line of business is added.
This legislation is effective for the Company's 1997 fiscal year. Based on the
Company's current level of possession income and business plans, the Company
believes that it will be eligible to claim a Section 936 credit under the
grandfather rule discussed above. See Note 6 of the Notes to Consolidated
Financial Statements.
The Company is subject to United States federal and applicable state
income taxes with respect to its non-Puerto Rico operations.
AT&T AGREEMENT
Included in net sales in each of the above reported periods is an
annual payment from AT&T under the AT&T Agreement, which was entered into in
fiscal 1989 as part of a settlement of an arbitration proceeding related to a
dispute under a 1981 supply agreement. Under the AT&T Agreement, seven annual
payments totalling $4,800,000, commencing for the contract year ended December
31, 1989 and increasing in amount over the term of the agreement, were made to
the Company. In March 1996, AT&T paid its final payment relating to this
agreement and presently the Company has no right to any future payments.
SEASONALITY
While the Company's business is not seasonal in nature, since the
annual payments from AT&T are based on the level of AT&T's purchases from the
Company during calendar years, any shortfall payments from AT&T had been
determined and recorded as sales during the third quarter (which ends in March)
of the Company's fiscal year. As a result, the Company's sales and income had
generally (absent other factors) been highest in that fiscal quarter. As noted
above, the final payment was received in March 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth the Company's working capital,
current ratio and total debt to equity ratio as of the following dates:
As of
-----------------------------------------
June 28, June 30, June 24
1996 1995 1994
---------- ---------- ---------
(dollars in thousands)
Working capital $ 23,801 $ 15,947 $ 6,734
Current ratio 4.61 3.44 1.54
Total debt to equity ratio .27 .37 .94
15
The Company's cash and marketable securities position increased by
$5,464,000 in fiscal 1996. Operations contributed $3,052,000 of the increase
with the Company's net profit of $3,737,000 and non-cash charge for depreciation
of $1,727,000 being partially offset by certain changes in operating assets,
primarily an increase in inventories of $2,322,000 (preparation for sales under
the ANT Agreement) and receivables of $951,000 (principally due to the timing of
sales within the fourth quarter of 1996). Proceeds from the exercise of Warrants
and Unit Purchase Options issued in the Company's 1992 private placement (which
resulted in the issuance of 1,130,000 shares of Common Stock) contributed
approximately $5,500,000 (similar exercises in fiscal 1995 resulted in the
issuance of 1,582,000 shares and contributed approximately $7,100,000 to that
year's cash flows. Of such funds, $2,763,000 was used primarily to redeem all
outstanding shares of the Company's Series A Preferred Stock (at its liquidation
value and redemption price) and fully paying down the outstanding balance under
the Company's revolving credit loan agreement, leaving the full facility
available for future borrowing.
The Company has no commitments for capital expenditures, but expects
to purchase new equipment and leasehold improvements in the normal course of
business, subject to the maximum amounts permitted under its revolving credit
arrangement.
Funds anticipated to be generated from operations, together with
available cash and marketable securities and borrowings available under the
Company's revolving credit loan agreement, are considered to be adequate to
finance the Company's operational and capital needs for the foreseeable future.
On January 31, 1995, a subsidiary of the Company entered into a
Revolving Credit Loan Agreement with The Chase Manhattan Bank, formerly Chemical
Bank (guaranteed by the Company and other subsidiaries) which originally
entitled the subsidiary to borrow, from time to time, up to $8,000,000, reduced
by $400,000 on the last day of each fiscal quarter of the Company commencing on
March 25, 1995, through the final maturity date of January 31, 2000. As a
result, at June 28, 1996, the subsidiary was entitled to borrow up to
$5,600,000.
The Company may seek additional financings for acquisitions
including new product lines or additional products for its existing product
lines should any such acquisition opportunities present themselves to the
Company in the future and to meet working capital needs from time to time. Any
such financings may involve borrowings from banks or institutional lenders or
the sale and issuance of debt or equity securities from private sources or in
public markets. The Company's ability to obtain such financings will be affected
by such factors as its results of operations, financial condition, business
prospects and restrictions contained in credit facilities. There can be no
assurances that the Company will be able to, or the terms on which it may be
able to, obtain any such financings.
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 sales levels during any of the
reported periods.
16
ITEM 8. FINANCIAL STATEMENTS
TII INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Report of Independent Public Accountants 18
Consolidated Balance Sheets -
June 28, 1996 and June 30, 1995 19 to 20
Consolidated Statements of Operations for the
Three Years in the Period Ended June 28, 1996 21
Consolidated Statements of Stockholders'
Investment for the Three Years in the Period Ended
June 28, 1996 22
Consolidated Statements of Cash Flows for the
Three Years in the Period Ended June 28, 1996 23
Notes to Consolidated Financial Statements 24 to 36
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TII Industries, Inc.:
We have audited the accompanying consolidated balance sheets of TII Industries,
Inc. (a Delaware corporation) and subsidiaries as of June 28, 1996 and June 30,
1995, and the related consolidated statements of operations, stockholders'
investment and cash flows for each of the three years in the period ended June
28, 1996. 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 generally accepted auditing
standards. 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 28, 1996 and June 30, 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 28, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
San Juan, Puerto Rico
September 18, 1996.
Stamp No. 1381557 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
18
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 28, 1996 AND JUNE 30, 1995
(Amounts in thousands except share and per share data)
June 28, June 30,
ASSETS 1996 1995
-------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 2,883 $ 2,344
Marketable securities available for sale 5,999 1,074
Receivables 7,084 6,133
Inventories 14,032 12,278
Prepaid expenses 388 645
------- -------
Total current assets 30,386 22,474
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 17,472 16,228
Tools, dies and molds 6,673 6,027
Leasehold improvements 5,965 5,655
Office fixtures, equipment and other 2,908 2,606
------- -------
33,018 30,516
Less - Accumulated depreciation
and amortization 22,029 20,302
------- -------
10,989 10,214
------- -------
OTHER ASSETS 1,448 1,726
------- -------
$42,823 $34,414
======= =======
19
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF JUNE 28, 1996 AND JUNE 30, 1995
(Amounts in thousands except share and per share data)
June 28, June 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 1996 1995
-------- ---------
CURRENT LIABILITIES:
Current portion of long-term debt
and obligation under capital leases $ 363 $ 63
Accounts payable 5,185 4,851
Accrued liabilities 1,037 1,613
------- -------
Total current liabilities 6,585 6,527
------- -------
LONG-TERM DEBT 853 2,678
LONG-TERM OBLIGATION UNDER CAPITAL LEASES 1,523 26
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' INVESTMENT:
Preferred Stock, par value $1.00 per share;
1,000,000 authorized and issuable in series:
Series A Cumulative Convertible Redeemable
Preferred Stock, 100,000 shares authorized;
no shares outstanding and 27,626 shares
outstanding at June 28, 1996 and June 30,
1995, respectively (valued at liquidation
value of $100.00 per share) -- 2,763
Series B Cumulative Redeemable Preferred
Stock, 20,000 shares authorized; no shares
outstanding at June 28, 1996 and
June 30, 1995 -- --
Common Stock, par value $.01 per share;
30,000,000 shares authorized (with one vote
per share): 7,446,975 and 5,496,229 shares
issued at June 28, 1996 and June 30, 1995,
respectively 75 55
Class B Stock, par value $.01 per share;
10,000,000 shares authorized (with each
share having ten votes and convertible into
one share of Common Stock); no shares
outstanding and 370,366 shares outstanding
at June 28, 1996 and June 30, 1995,
respectively -- 4
Class C Stock, par value $.01 per share;
100,000 shares authorized (non-voting);
no shares issued -- --
Warrants outstanding 120 120
Capital in excess of par value 29,046 21,394
Retained earnings 4,855 1,118
Valuation adjustment to record marketable
securities available for sale at fair value 47 10
------- -------
34,143 25,464
Less: 17,637 common shares in treasury, at cost 281 281
------- -------
33,862 25,183
------- -------
$42,823 $34,414
======= =======
The accompanying notes to consolidated financial
statements are an integral part of these statements
20
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 28, 1996
(Amounts in thousands except per share data)
June 28, June 30, June 24,
1996 1995 1994
-------- -------- --------
NET SALES $ 44,513 $ 43,830 $ 40,147
-------- -------- --------
COSTS AND EXPENSES
Cost of sales 31,956 30,782 29,315
Selling, general and
administrative expenses 5,881 6,827 5,666
Research and development expenses 2,820 2,619 2,100
-------- -------- --------
Total costs and expenses 40,657 40,228 37,081
-------- -------- --------
Operating income 3,856 3,602 3,066
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (416) (718) (711)
Other income, net 297 58 34
-------- -------- --------
Total other expense, net (119) (660) (677)
-------- -------- --------
Net profit $ 3,737 $ 2,942 $ 2,389
======== ======== ========
NET PROFIT PER SHARE - PRIMARY $ 0.48 $ 0.52 $ 0.45
======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,853 7,989 6,726
======== ======== ========
NET PROFT PER SHARE
- FULLY DILUTED $ 0.47 $ 0.51 $ 0.41
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 8,179 8,402 7,943
======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
21
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 28, 1996
(Amounts in thousands)
Valuation
Adjustment
to record
Marketable
Capital securities
Class B in excess Retained available
Preferred Common Common of par Earnings for sale at Treasury
Stock Stock Stock Warrants Value (Deficit) fair value Stock
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, June 25, 1993 $ 2,763 $ 37 $ 4 -- $14,129 ($4,213) -- $ 281
Conversion of Class B
Stock into Common Stock -- -- -- -- -- -- -- --
Exercise of stock options -- 1 -- -- 188 -- -- --
Warrants issued for financial
consulting services -- -- -- 120 -- -- -- --
Net profit for the year -- -- -- -- -- 2,389 -- --
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, June 24, 1994 2,763 38 4 120 14,317 (1,824) -- 281
Issuance of Common Stock from
exercise of private placement
Warrants and Unit Purchase Options
net of $571 expenses -- 16 -- -- 6,802 -- -- --
Exercise of stock options -- 1 -- -- 275 -- -- --
Unrealized gain on marketable securities
available for sale -- -- -- -- -- -- 10 --
Net profit for the year -- -- -- -- -- 2,942 -- --
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, June 30, 1995 2,763 55 4 120 21,394 1,118 10 281
Issuance of Common Stock from exercise of
private placement Warrants and Unit
Purchase Options net of $128 expenses -- 12 -- -- 5,421 -- -- --
Conversion of Class B Common Stock -- 4 (4) -- -- -- -- --
Redemption of Series A Preferred
Stock (2,763) -- -- -- -- -- -- --
Exercise of stock options -- 4 -- -- 2,231 -- -- --
Unrealized gain on marketable securities
available for sale -- -- -- -- -- -- 37 --
Net profit for the year -- -- -- -- -- 3,737 -- --
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, June 28, 1996 $ 0 $ 75 $ 0 $ 120 $29,046 $ 4,855 $ 47 $ 281
======= ======= ======= ======= ======= ======= ======= =======
The accompanying notes to consolidated financial
statements are an integral part of these statements.
22
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 28, 1996
(Amounts in thousands)
June 28, June 30, June 24,
1996 1995 1994
-------- -------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net profit $ 3,737 $ 2,942 $ 2,389
-------- -------- --------
Adjustments to reconcile net profit to net cash
provided by operating activities
Depreciation and amortization 1,727 1,761 1,668
Provision for inventory obsolescence, net 568 300 100
Gain on sale of marketable securities -- -- (458)
Financial consulting services paid through
the issuance of warrants -- -- 120
Amortization of other assets, net 278 241 150
Changes in assets and liabilities net of effects
from acquisition of affiliate
Increase in receivables (951) (554) (1,003)
Increase in inventories (2,322) (2,901) (206)
Decrease (increase) in prepaid expenses
and other assets 257 (895) (989)
(Decrease) increase in accounts payable
and accrued liabilities (242) (225) 1,129
-------- -------- --------
Total adjustments (685) (2,273) 511
-------- -------- --------
Net cash provided by operating activities 3,052 669 2,900
-------- -------- --------
CASH FLOWS USED BY INVESTING ACTIVITIES
Capital expenditures, net (549) (3,060) (1,506)
Purchases of marketable securities (6,533) -- --
Sales of marketable securities 1,645 1,327 1,415
-------- -------- --------
Net cash used by investing activities (5,437) (1,733) (91)
-------- -------- --------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Redemption of Preferred Stock (2,763) -- --
Proceeds from long-term financing -- 6,039 --
Payment of long-term debt (1,969) (10,824) (2,724)
Proceeds from exercise of options and warrants 7,656 7,094 189
-------- -------- --------
Net cash provided (used) by financing activities 2,924 2,309 (2,535)
-------- -------- --------
Net increase in cash and cash equivalents 539 1,245 274
Cash and cash equivalents at beginning of year 2,344 1,099 825
-------- -------- --------
Cash and cash equivalents at end of year $ 2,883 $ 2,344 $ 1,099
======== ======== ========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
23
TII INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of significant accounting policies:
Business
TII Industries, Inc. and subsidiaries (the "Company")
are engaged in the design, manufacture and sale of
overvoltage surge protectors, network interface devices,
fiber optic products, and station electronics, which may
be incorporated in network interface devices together
with the Company's overvoltage protectors. The majority
of the Company's consolidated sales for each of the
three years ended June 28, 1996 resulted from sales of
overvoltage protector products in the United States,
which are primarily manufactured in the Company's plants
in Puerto Rico and the Dominican Republic.
Fiscal Year
The Company reports on a 52-53 week year ending on the
last Friday in June.
Consolidation
The consolidated financial statements include the
accounts of TII Industries, Inc. and its majority-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles 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.
Marketable Securities Available for Sale
Prior to fiscal 1995, the portfolio of marketable
securities was valued at the lower of cost or market.
Effective for fiscal 1995, SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities,
requires the Company to categorize its investments as:
held-to-maturity securities, reported at cost; trading
securities, reported at fair value; or
available-for-sale securities, reported at fair value.
Changes in the fair value of trading securities are
included in earnings, while changes in the unrealized
gains and losses of available-for-sale securities are
reported as a separate component of stockholders'
investment. All of the Company's marketable securities
are classified as available-for-sale. At June 28, 1996
and June 30, 1995 the portfolio
24
was valued at market of $5,999,000 and $1,074,000,
respectively, and consisted of U.S. Treasury Bills and
Notes, other federal backed agency bonds and notes and
other liquid investment grade investments with
maturities ranging from three months to one year, with
the primary investment goal being near-term liquidity
and safety of principal.
Inventories
Inventories are stated at the lower of cost (materials,
direct labor and applicable overhead expenses on the
first-in, first-out basis) or market.
Property and equipment
Depreciation of property and equipment is recorded on
the straight-line method over the estimated useful life
of the related property and equipment (generally 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.
Patent costs
The Company follows the policy of deferring certain
patent costs which are amortized on a straight-line
basis over the lesser of the life of the product or the
patent.
Net profit per common share
Net profit per common and common equivalent share is
calculated using the weighted average number of common
shares outstanding and the net additional number of
shares which would be issuable upon the exercise of
dilutive stock options and warrants assuming that the
Company used the proceeds received to purchase
additional shares (up to 20% of shares outstanding) at
market value, retire debt and invest any remaining
proceeds in U.S. government securities. The effect on
net profit of these assumed transactions is considered
in the computation.
Statements of Cash Flows
All highly liquid instruments with a maturity of three
months or less, when purchased, are considered cash
equivalents. At June 28, 1996 and June 30, 1995, the
Company had cash equivalents of $2,305,000 and
$1,192,000, respectively.
During 1996, 1995 and 1994, the Company entered into
capital leases amounting to approximately $1,938,000,
$52,000 and $5,000, respectively. In addition the
Company has recorded an unrealized gain of approximately
$37,000 in 1996 and $10,000 in 1995 on its marketable
securities available for sale outstanding as of June
25
28, 1996 and June 30, 1995, respectively. Since these
transactions did not involve cash, their effect has been
excluded from the accompanying consolidated statements
of cash flows.
During fiscal 1996, 1995 and 1994, the Company made cash
payments of $174,000, $762,000, and $699,000,
respectively, for interest.
Reclassifications
Certain reclassifications have been made in the
accompanying consolidated financial statements for the
year ended June 30, 1995, to conform with the
presentation used in the June 28, 1996 consolidated
financial statements.
Pending Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board
issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which is effective for the Company on June
29, 1996. The statement sets forth guidelines regarding
when to recognize an impairment of long-lived assets,
including goodwill, and how to measure such impairment.
The Company does not expect that SFAS No. 121 will have
a significant effect on the Company's consolidated
financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
will be effective for the Company, for the fiscal year
ended June 27, 1997 and after. SFAS No. 123 permits, but
does not require, a fair value-based method of
accounting for such plans. As required by this
statement, the Company will provide pro forma disclosure
of net income and earnings per share in the notes to
future consolidated financial statements as if the fair
value-based method of accounting had been applied to
awards covered by SFAS No. 123.
Fair Value of Financial Instruments
The carrying amounts of cash, receivables, accounts
payable, and accrued liabilities approximate fair value
because of the short-term nature of these items. The
carrying amount of the long term debt approximates fair
value because the interest rate this instrument bears is
equivalent to the current rates offered for debt of
similar nature and maturity.
(2) Receivables:
Receivables consist of the following:
June 28, June 30,
1996 1995
---- ----
(amounts in thousands)
Trade receivables $6,685 $5,786
Other receivables 521 478
-------- --------
7,206 6,264
Less: allowance for doubtful accounts (122) (131)
-------- --------
$7,084 $6,133
======== ========
26
(3) Inventories:
Inventories consisted of the following at:
June 28, June 30,
1996 1995
-------- --------
(amounts in thousands)
Raw materials $ 6,973 $ 7,454
Work-in-process 4,879 2,593
Finished goods 4,214 3,697
-------- --------
$ 16,066 $ 13,744
Less: Reserve (2,034) (1,466)
-------- --------
$ 14,032 $ 12,278
======== ========
(4) Agreement with AT&T:
On September 13, 1988, the Company and AT&T entered into
an agreement (the "1988 Agreement") settling all
disputes related to a prior agreement which the Company
considered to have been breached. The 1988 Agreement
provided for annual payments to the Company which were
subject to reduction as a result of AT&T purchases.
During fiscal 1996, 1995 and 1994, the Company received
payments of $875,000, $777,000 and $680,000,
respectively, for the sales shortfall corresponding to
the contract years ended December 31, 1995, 1994 and
1993, respectively. These receipts are included in net
sales. As of June 28, 1996, there are no remaining
payments scheduled to be received.
(5) Long-Term Debt:
The composition of long-term debt is as follows:
June 28, June 30,
1996 1995
-------- --------
(amounts in thousands)
Revolving credit loan, bearing interest
at a rate of 10%, secured by assets with
a net book value of approximately $13,500 $ -- $ 1,800
Unsecured subordinated note payable on
July 19, 2001, bearing interest at 10%
Convertible into 100,000 share of common
stock at a conversion price of $2.50 per share 750 750
Installment notes payable through 2004,
bearing interest ranging from 8.0% to
9.5% Secured by assets with net book value of
approximately $321 116 128
------- -------
866 2,678
Less current portion (13) --
------- -------
Long-term debt $ 853 $ 2,678
======= =======
27
The Company is a party to a Revolving Credit Loan Agreement with The
Chase Manhattan Bank (formerly Chemical Bank), which, at June 28,
1996, entitled the Company to have outstanding borrowings of up to
$5,600,000, reducing by $400,000 each calendar quarter thereafter.
At June 28, 1996, there were no outstanding borrowings under the
revolving loan facility and at June 30, 1995 outstanding borrowings
were $1.8 million. Loans bear interest equal to (a) the greater of
1% above the bank's prime rate, 2% above a certificate of deposit
rate or 1.5% in excess of a federal funds rate or (b) 3% above the
LIBOR rate for periods selected by the Company. A commitment fee of
1/4 of 1% is payable on the unused portion of the bank's commitment.
The loan is secured primarily by the Company's accounts receivable
and the Company's continental United States assets. The Revolving
Credit Loan Agreement requires the Company to maintain a minimum net
worth of $17,500,000 in fiscal 1996 and $20,000,000 thereafter,
current ratio of 1.25 through fiscal 1997 and 1.50 thereafter and
debt service ratio of 1.35 and maximum ratio of debt to equity of
1.0, all as defined, limits capital expenditures generally to
$3,500,000 per annum and lease obligations to $400,000 per annum
(excluding rentals for the Company's Dominican Republic facilities
and the Company's equipment lease with PRC, each of which is
discussed in Note 11). In addition, the Company may not incur a
consolidated net loss for any two fiscal quarters in any four
consecutive quarters and may not pay cash dividends or repurchase
capital stock without the consent of the bank.
Future minimum payments for long term debt are as follows:
Fiscal year Amount
1997 $ 13,000
1998 14,000
1999 15,000
2000 17,000
2001 768,000
Thereafter 39,000
----------
Total minimum payments: 866,000
Less: current portion ( 13,000)
----------
$ 853,000
==========
(6) Obligation under capital leases:
The Company leases equipment and vehicles for its operations. These
leases have been capitalized using interest rates ranging from 8.30%
to 22.00%. Future minimum payments under these leases are as
follows:
28
Fiscal year Amount
1997 $ 489,000
1998 477,000
1999 478,000
2000 433,000
2001 285,000
Thereafter 139,000
-----------
Total minimum
lease payments: 2,301,000
Less: Amount
representing interest (428,000)
-----------
Present value of
net minimum lease payments 1,873,000
Less: Current portion of obligations
under capital lease (350,000)
-----------
$ 1,523,000
===========
(7) Income taxes:
The Company's policy is to provide for income taxes based on
reported income, adjusted for differences that are not expected to
ever enter into the computation of taxes under applicable tax laws.
Net income from Puerto Rico operations, as determined under the
provisions of Section 936 of the U.S. Internal Revenue Code, is not
subject to U.S. federal income taxes. However, beginning in fiscal
1995 the Revenue Reconciliation Act of 1993 limits the amount of
allowable credit to a percentage of the qualified wages and fringe
benefits for services performed in Puerto Rico and depreciation in
Puerto Rico, as defined (since the Company has not elected the
alternative percentage limit). Based on its fiscal 1996 levels of
qualified wages, fringe benefits and depreciation in Puerto Rico,
the Company's economic activity based credit limitation is
approximately $3,091,000 per annum. The amount of the economic
activity based Section 936 credit limitation available for fiscal
1996 will be sufficient to offset the United States federal income
tax on Puerto Rico source income for the Company's 1996 fiscal year,
as computed after utilization of the Company's available net
operating loss carry-forwards of approximately $334,000.
Legislation included in the Minimum Wage/Small Business Job
Protection Act of 1996, enacted August 20, 1996, repeals the Section
936 credit for taxable years beginning after December 31, 1995.
However, since the Company's Section 936 election was in effect for
its tax year that includes October 13, 1995, it is eligible to
continue to claim a Section 936 credit for an additional 10 years
under a special grandfather rule. If the Company adds a substantial
new line of business after October 13, 1995, the Company would cease
to be
29
eligible to claim the Section 936 credit beginning with the taxable
year in which such new line of business is added. Because the
Company uses the economic activity limitation, possession income
eligible for the Section 936 credit in any tax year beginning after
December 31, 2001 and before January 1, 2006 is subject to a cap
equal to the Company's average inflation-adjusted possession income
for the three of the five most recent years ending before October
14, 1995 determined by excluding the years in which the Company's
adjusted possession income was the highest and the lowest. In lieu
of using a five-year period to determine the base period years, the
Company may elect to use its last tax year ending in 1992 or a
deemed taxable year which includes the first ten months of the
calendar year 1995. The Company's Section 936 credit for each year
during the grandfather period would continue to be subject to the
economic activity limitation (as discussed above). This legislation
is effective for the Company's 1997 fiscal year. Based on the
Company's current level of possession income and business plans, the
Company believes that it will be eligible to claim a Section 936
credit under the grandfather rule discussed above.
The Company has exemptions until June 2009 for Puerto Rico income
tax and Puerto Rico property tax purposes. The level of exemption is
90% for all purposes. The Company has substantial net operating loss
carryforwards available through fiscal 1998 to offset any remaining
Puerto Rico taxable income. There are no Puerto Rican tax law
provisions which limit the Company's ability to utilize such net
operating loss carryforwards. Furthermore, the Company's United
States based subsidiary operating in the Dominican Republic is
exempt from taxation in that country.
In each of the years in the three-year period ended June 28, 1996,
the Company's U.S. based subsidiaries either generated operating
losses or had net operating loss carryforwards available to offset
taxable income; therefore, for each of these years there is no
federal income tax provision.
As long as the Company's election under Section 936 is in effect,
the Company cannot be included in a consolidated federal income tax
return with its subsidiaries. As a result, losses from subsidiaries
cannot be used to offset the Company's income and vice versa.
The Company's federal income tax liability is the greater of the tax
computed using either the regular tax method or an alternative
minimum tax method (AMT). Under the AMT method only 90% of the U.S.
based subsidiaries' taxable income can be offset by net operating
loss carryforwards. To date, the U.S. subsidiaries have not been
subject to AMT.
At June 28, 1996, the Company had net operating loss carryforwards
aggregating approximately $15,460,000 which expire periodically
through 2006 and, along with its subsidiaries, had consolidated net
operating loss carryforwards aggregating approximately $25,540,000
which expire periodically through 2011 and general business tax
credit carryforwards of approximately $322,000 which expire
periodically through 2001. As a result of the private placement
described in Note 9, there has been an "ownership change", within
the meaning of Section 382 of the Code, which limits the maximum
amount of net operating loss and tax credit equivalent carryforwards
which may be utilized in any year (and which is utilized to offset
income prior to the utilization of a credit available under Section
936 of the Code) is approximately $334,000 per year for the
possessions corporation and approximately $380,000 per year for the
United States subsidiaries. The effect of the "ownership change" is
somewhat mitigated with respect to the Company as a result of its
Section 936 election since United States federal income tax is
payable only to the extent such
30
tax exceeds the Company's Section 936 credit. In addition, net
operating losses generated subsequent to the "ownership change" are
not subject to limitations and may therefore be fully utilized. As
of June 28, 1996, the Company's United States subsidiaries have
approximately $3,453,000 of net operating losses that were generated
subsequent to the "ownership change" and remain available for use
through 2010. In addition, the Company's United States subsidiaries
have available approximately $1,470,000 in unused Section 382 annual
net operating loss limitation carryforwards.
The Company recognizes income tax benefits for loss carryforwards,
credit carryforwards and certain temporary differences for which tax
benefits have not previously been recorded. The tax benefits
recognized must be reduced by a valuation allowance in certain
circumstances.
Effective June 26, 1993, the beginning of the first quarter of
fiscal 1994, the Company adopted the provisions of SFAS No. 109,
Accounting for Income Taxes. As of such date, no financial statement
benefit was recognized for the net operating loss carryforwards due
to "ownership change" limitations, the fact that carryforward
allocations to Section 936 income provide no tax benefits and
uncertainty as to the realization of any tax benefit from
carryforwards of loss-generating U.S. based subsidiaries.
Temporary differences between income tax and financial reporting
assets and liabilities (primarily inventory valuation allowances,
property and equipment and accrued employee benefits) and net
operating loss carryforwards give rise to deferred tax assets in the
amount of approximately $3,872,000 for which an offsetting valuation
allowance has been provided due to the uncertainty of realizing any
benefit in the future.
(8) Common stock:
The Company is authorized to issue 30,000,000 shares of Common
Stock, 10,000,000 shares of Class B Stock and 100,000 shares of
Class C Stock.
On September 27, 1995, 321,284 shares of Class B Stock were
converted into Common Stock resulting in a reduction in outstanding
Class B Stock to a level that all remaining Class B Stock were
automatically converted into Common Stock.
The Class C Stock is issuable to management employees who are
residents of Puerto Rico. The shares may be redeemed at the
discretion of the Company at $.01 per share. There are no shares of
Class C Stock issued.
Employee stock option plans
The Company's 1995 Stock Option Plan (the "1995 Plan") permits the
Board of Directors or Compensation Committee of the Board of
Directors to grant, until September 2005, options to employees,
officers and consultants to purchase up to 500,000 shares. Option
terms (not to exceed 10 years), exercise prices (at least 100% of
the fair market value of the Company's Common Stock on the date of
grant) and exercise dates are determined by the Board or
Compensation Committee. Options are also outstanding under the
Company's 1983 Stock Option Incentive Plan and 1986 Stock Option
Plan, although no further options may be granted under these plans.
31
A summary of activity under the employee stock option plans and
information relating to shares subject to option under the employee
stock option plans for the years ended June 28, 1996, June 30, 1995
and June 24, 1994 follows:
June 28, 1996 June 30, 1995 June 24, 1994
---------- ---------- ----------
Shares under option at beginning of period 1,269,387 501,415 454,595
Options granted during period 113,200 868,000 150,000
Options exercised during period (80,380) (94,028) (62,280)
Options canceled/expired during period (64,000) (6,000) (40,900)
---------- ---------- ----------
Shares under option at end of period 1,238,207 1,269,387 501,415
========== ========== ==========
Options exercisable at end of period 501,454 336,634 318,915
Shares available for future grant at end of period 469,000 126,257 138,257
Exercise price per share for options exercised
during period $2.50-6.09 $2.50-4.63 $2.50-5.31
Exercise price per share for options outstanding
at end of period $2.50-9.69 $2.50-9.69 $2.50-9.69
Other Options Granted
The Company granted to the holder of its unsecured subordinated note
(see Note 5) an option to purchase up to 100,000 shares of Common
Stock on or before July 18, 2001 at $2.50 per share. This option is
non-transferable and non-assignable and can be cancelled by the
Company prior to its expiration if, with the prior written consent
of the note holder, the note is repaid.
In October 1995, a firm which provided financial public relations
services to the Company exercised an option, which was granted in
1992, to purchase 50,000 shares of Common Stock at $4.125 per share
and continues to hold an option to purchase up to a maximum of
150,000 shares of Common Stock on or before August 31, 1997 at $7.50
per share.
On December 6, 1995, stockholders approved amendments to the 1994
Non-Employee Director Stock Option Plan, covering an aggregate of
200,000 shares of Common Stock, which provided (i) that the number
of shares of Common Stock subject to the automatic grant of options
provided for in the Non-Employee Director Plan be increased to
10,000 shares from 5,000 shares; (ii) all previously granted options
and all options granted in the future under the Non-Employee
Director Plan vest in full immediately following their grant in lieu
of annual vesting at the rate of 25% per annum on the first four
anniversaries of the date of grant; (iii) the term of all previously
granted options and all options granted in the future under the
Non-Employee Director Plan be for a term of ten years in lieu of
five years; and (iv) the period following termination of service
during which an Outside Director may exercise an option previously
granted or granted in the future shall be twelve months in lieu of
three months, except that an option shall automatically terminate
upon cessation of service as an Outside Director for cause (such
twelve month period being the same period following an Outside
Director's death or disability during which an option may be
exercised).
See also Note 9 with respect to certain options granted and warrants
issued as part of the Private Placement.
32
(9) 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. At June 28, 1996, the Company had
authorized 100,000 shares of Series A Cumulative Convertible
Redeemable Preferred Stock ("Series A Preferred Stock"), of which no
shares were outstanding. During the 1996 fiscal year all 27,626
shares were redeemed by the Company for the liquidation value and
required redemption amount of $2,763,000.
(10) Private placement:
Effective August 7, 1992, following stockholder approval, the
Company completed a private placement of 2,200,000 units (originally
5,500,000 units, reverse split on a 1 for 2.5 basis in April of 1994
to 2,200,000 units) of the Company's securities, consisting of
2,200,000 shares of Common Stock and 2,200,000 Common Stock Purchase
Warrants to purchase a like number of shares of Common Stock during
a three-year period at an exercise price of $5.00 per share. The
Common Stock and the Common Stock Purchase Warrants have
registration rights. The amount placed included 400,000 shares of
Common Stock and Common Stock Purchase Warrants issued in exchange
for all of the Company's Series B Preferred Stock which had been
purchased in February 1992 for $1,000,000 by Alfred J. Roach and
Timothy J. Roach, officers, directors and principal stockholders of
the Company, and another employee of the Company. Except therefore,
the privately placed securities were sold to investors not
previously affiliated with the Company.
The Company also granted to certain designee employees of the
private placement selling agent, options to purchase in units
("UPOs") one share and one warrant, 256,000 shares of Common Stock
and Common Stock Purchase Warrants at a price of $2.833. The
placement agent received 4% of all proceeds received by the Company
in the private placement and from the exercise of certain warrants.
During fiscal 1995, Common Stock Purchase Warrants and UPOs issued
in the private placement were exercised for 1,582,000 shares of
Common Stock. Net proceeds to the Company from such exercises
aggregated approximately $7,100,000. During fiscal 1996, the
remaining Common Stock Purchase Warrants and UPOs were exercised for
1,130,000 shares of Common Stock and the Company received additional
net proceeds of approximately $5,500,000.
In addition, in 1992 the Company entered into a Consulting Agreement
with WinStar Services, Inc. ("WinStar"), for WinStar to provide
financial consulting services to the Company through, as amended,
July 31, 1995, including identifying and analyzing potential
acquisitions and mergers, and evaluating potential investments and
other financing arrangements. For its services WinStar received
$7,500 per month and $80,000 in connection with the Company's
entering into the Revolving Credit Loan Agreement in January 1995.
In connection with the consulting arrangement, the Company issued to
WinStar options to purchase an aggregate of 400,000 shares of Common
Stock, of which options to purchase 320,000 shares were exercised
during fiscal 1996 for an aggregate of $1,712,500 by three employees
of WinStar (to whom the options had been transferred), two of whom
are directors of the Company.
33
The Company filed a registration statement related to the resale of
the Common Stock issued in its August 1992 private placement, the
Common Stock issued upon exercise of Warrants, UPOs and the options
granted to WinStar. The registration statement became effective in
August 1994.
Other warrants, for the purchase of 60,000 shares of Common Stock at
an exercise price of $6.56 per share and expiring in August 1998,
have been issued for consulting services.
(11) Significant customers, export sales and foreign components of income:
Significant customers
The following customers accounted for more than 10% of the Company's
consolidated revenues during one or more of the years presented
below:
Percentage of Net Sales
for Year Ended
--------------------------------
June 28, June 30, June 24,
1996 1995 1994
--------------------------------
BellSouth Corporation * * 11%
Keptel, Inc. 12% * *
Siecor Corporation 26% 30% 34%
Telesector Resources Group 15% 13% 14%
(a subsidiary of NYNEX)
* denotes less than 10% for that year.
Export sales
For each of the three years ended June 28, 1996 export sales were
less than 10% of consolidated net sales.
Foreign components of income
Certain subsidiaries and components of the Company operate outside
the United States and Puerto Rico. The net profit earned by these
subsidiaries is not material relative to the Company's consolidated
net profit.
34
(12) Commitments and contingencies and related party transactions:
The Company leases real property and equipment with terms expiring
through 2004. Substantially all of the real property leases contain
escalation clauses related to increases in property taxes. The
leases require minimum annual rentals, exclusive of real property
taxes, as follows: approximately $84,000 in 1997, $83,000 in 1998,
$23,000 in 1999, $19,000 in 2000, $19,000 in 2001 and $80,000
thereafter.
On February 1, 1994, the Company entered into an agreement to extend
the term of the lease for its Dominican Republic manufacturing
facilities to November 1998 at the same base rental as in effect at
June 25, 1993. In connection therewith, the Company advanced
approximately $634,000 toward the construction of an annex to two
existing buildings that continue to be leased. The annex replaced
two other buildings leased and occupied by the Company in the same
industrial park. The total space occupied by the Company increased
to approximately 73,000 from 70,000 square feet. The amount advanced
for construction is being offset against future rentals.
Since fiscal year 1982, the Company has leased equipment from PRC, a
corporation owned by the Chairman of the Board of Directors of the
Company. As required by a loan restructuring in July 1991, all
leases with PRC were replaced by an agreement to lease certain
equipment as a group at the rate of $200,000 per year. The lease was
amended in February 1993 to extend its term until July 17, 1996 and
provide for extensions until July 17, 1999 and July 17, 2001 unless
cancelled by either party upon notice prior to the scheduled renewal
period, with rentals at the rate of $200,000 for each year of the
lease. At June 28, 1996, accrued rent owed under this agreement
totalled $100,000 which was subsequently paid. Although neither the
Company nor PRC is obligated to renew the equipment lease beyond
July 17, 1996, it is the Company's intention to seek renewals of the
equipment lease for at least the next five years.
The equipment under lease from PRC was purchased by PRC at various
times since 1982 when the Company began leasing equipment from PRC.
The Company is advised that PRC employs a depreciation schedule that
fully depreciates assets over a maximum of 10 years or the asset's
useful life, whichever is shorter, and that the original cost of
assets under lease to the Company at June 28, 1996 was approximately
$2,803,000 with a current carrying value of approximately $195,000.
All equipment under lease has been of good quality and most, if not
all, equipment is expected to remain usable by the Company for at
least five more years. From time to time, new purchases of equipment
by PRC may replace or be added to the equipment under lease. It is
both the Company's and PRC's intention that these purchases will be
to maintain the level of performance of the equipment and not
increase the rentals paid by the Company.
Rental expense, including property taxes, for fiscal 1996, 1995 and
1994 was approximately $636,000, $613,000 and $556,000,
respectively, including $200,000 each year relating to the equipment
leases with PRC.
35
(13) Accrued liabilities:
Accrued liabilities consist of the following:
June 28, June 30,
1996 1995
-------- --------
(amounts in thousands)
Payroll, incentive and vacation $ 603 $ 532
Accrued payroll taxes 153 141
Legal and professional fees 113 400
Accrued rent 100 201
Other 68 339
-------- --------
$ 1,037 $ 1,613
======== ========
(14) Quarterly Results (unaudited):
The following table reflects the unaudited quarterly results of the
Company for the fiscal years ended June 28, 1996 and June 30, 1995:
Fully
Primary Diluted
Operating Net Profit Net Profit
Net Sales Gross Profit Income Net Profit Per Share Per Share
--------- ------------ ------ ---------- --------- ---------
Quarter Ended
September 29, 1995 $ 9,600,000 2,566,000 $ 448,000 $ 439,000 $ 0.06$ 0.06
December 29,1995 11,241,000 3,111,000 955,000 895,000 0.12 0.11
March 29, 1996 12,136,000(1) 4,190,000 1,852,000 1,781,000 0.23 0.22
June 28, 1996 11,536,000 2,690,000 601,000 622,000 0.08 0.08
Quarter Ended
September 30, 1994 $10,456,000 3,115,000 $ 700,000 $ 536,000 $ 0.10$ 0.10
December 30, 1994 10,661,000 3,177,000 760,000 607,000 0.11 0.11
March 31, 1995 11,502,000(1) 4,001,000 1,579,000 1,426,000 0.22 0.21
June 30, 1995 11,211,000 2,755,000 563,000 373,000 0.09 0.09
- ---------------------------------------------------------------------------------------------------
(1) Includes payments received from AT&T of $875,000 and $777,000 in the third
quarter of fiscal 1996 and 1995, respectively, for shortfalls of purchases
by AT&T from the Company under the Company's 1988 Agreement with AT&T. No
further payments will be made under this agreement. (See Note 3.)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
36
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 1996
Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of TII Industries,
Inc. and subsidiaries are included in Item 8 of this
report, at which point an Index thereof also appears.
2. Financial Statement Schedules
Report of Independent Public Accountants on
Schedules S-1
Schedule III - Valuation and Qualifying Accounts S-2
37
3. Exhibits
Exhibit Number Description
- -------------- -----------
3(a)(1) Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of the State of Delaware on
December 18, 1978. Incorporated by reference to Exhibit
3(a)(1) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 (File No. 1-8048).
3(a)(2) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on January 22, 1980.
Incorporated by reference to Exhibit 3(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 24,
1994 (File No. 1-8048).
3(a)(3) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on June 23, 1981. Incorporated
by reference to Exhibit 3(a)(3) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 24, 1994 (File No.
1-8048).
3(a)(4) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 4, 1981.
Incorporated by reference to Exhibit 3(a)(4) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 24,
1994 (File No. 1-8048).
3(a)(5) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 11, 1986.
Incorporated by reference to Exhibit 3(a)(5) to the Company's
Registration Statement on Form S-8 (File No. 33-11149).
3(a)(6) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 16, 1987.
Incorporated by reference to Exhibit 4.06 to the Company's
Registration Statement on Form S-8 (File No. 33-53180).
3(a)(7) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on January 10, 1990.
Incorporated by reference to Exhibit 4(c)(7) to the Company's
Registration Statement on Form S-8 (File No. 33-37310).
3(a)(8)(A) Certificate of Designations with respect to the Company's
Series A Cumulative Convertible Redeemable Preferred Stock, as
filed with the Secretary of State of the State of Delaware on
July 9, 1991. Incorporated by reference to Exhibit 4(b)(3) to
the Company's Current Report on Form 8-K for the month of July
1991 (File No. 1- 8048).
3(a)(8)(B) Certificate of Amendment to Certificate of Designations with
respect to the Company's Series A Cumulative Convertible
Redeemable Preferred Stock, as filed with the Secretary of
State of the State of Delaware on March 2, 1993. Incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 26, 1993 (File No.
1-8048).
38
Exhibit Number Description
- -------------- -----------
3(a)(9) Certificate of Amendment of Restated Certificate of
Incorporation of the Company as filed with the Secretary of
State of the State of Delaware on April 25, 1994. Incorporated
by reference to Exhibit 4.01(j) to Amendment No. 2 to the
Company's Registration Statement on Form S-3 (File No.
33-64980).
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)(1)(A) Revolving Credit Loan Agreement dated January 31, 1995 among
TII International, Inc. ("International"), the Company and
Chemical Bank (the "Bank"). Incorporated by reference to
Exhibit 4.1(a) to the Company's Current Report on Form 8-K
dated January 31, 1995 (date of earliest event reported) (File
No. 1-8048).
4(a)(1)(B) First Amendment dated as of August 3, 1995 to the Revolving
Credit Agreement among International, the Company and the
Bank. Incorporated by reference to Exhibit 4 (a)(1)(B) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 (File No. 1-8048).
4(a)(1)(C)* Second Amendment dated as of November 10, 1995 to the
Revolving Credit Agreement among International, the Company
and the Bank.
4(a)(1)(D)* Third Amendment dated as of December 27, 1995 to the Revolving
Credit Agreement among International, the Company and the
Bank.
4(a)(2) Joint and Several Guaranty of Payment dated January 31, 1995
executed in favor of the Bank by the Company and TII
Industries NC, Inc., TII Dominicana, Inc., TII Electronics,
Inc., Ditel, Inc., TII Corporation and Telecommunications
Industries, Inc., direct or indirect subsidiaries of the
Company. Incorporated by reference to Exhibit 4.1(b) to the
Company's Current Report on Form 8-K dated January 31, 1995
(date of earliest event reported) (File No. 1-8048).
4(a)(3) Pledge Agreement dated January 31, 1995 between International
and the Bank. Incorporated by reference to Exhibit 4.1(c) to
the Company's Current Report on Form 8-K dated January 31,
1995 (date of earliest event reported) (File No. 1-8048).
4(a)(4) Security Agreement dated January 31, 1995 between the Company
and the Bank. Incorporated by reference to Exhibit 4.1(d) to
the Company's Current Report on Form 8-K dated January 31,
1995 (date of earliest event reported) (File No. 1-8048).
4(a)(5) Assignment of Accounts Receivable Agreement dated January 31,
1995 executed by the Company in favor of the Bank.
Incorporated by reference to Exhibit 4.1(e) to the Company's
Current Report on Form 8-K dated January 31, 1995 (date of
earliest event reported) (File No. 1-8048).
4(a)(6) Stock Pledge Agreement dated January 31, 1995 between the
Company and the Bank. Incorporated by reference to Exhibit
4.1(f) to the Company's Current Report on Form 8-K dated
January 31, 1995 (date of earliest event reported) (File No.
1-8048).
39
Exhibit Number Description
- -------------- -----------
4(a)(7) Security Agreement dated January 31, 1995 between Ditel, Inc.,
an indirect subsidiary of the Company, and the Bank.
Incorporated by reference to Exhibit 4.1(g) to the Company's
Current Report on Form 8-K dated January 31, 1995 (date of
earliest event reported) (File No. 1-8048).
10(a)(1)*+ 1983 Employee Incentive Stock Option Plan of the Company, as
amended.
10(a)(2)*+ 1986 Stock Option Plan of the Company, as amended.
10(a)(3)+ 1994 Non-Employee Director Stock Option Plan, as amended.
Incorporated by reference to Exhibit 99.01 to the Company's
Registration Statement on Form S-8, No. 33-64965.
10(a)(4)*+ 1995 Stock Option Plan of the Company.
10(b)(1)+ Employment Agreement dated August 7, 1992 between the Company
and Timothy J. Roach. Incorporated by reference to Exhibit
10(b)(66) to the Company's Current Report on Form 8-K for the
month of August 1992 (File No. 1-8048).
10(c)(1)(A)+ Consulting Agreement dated June 2, 1992 between the Company
and WinStar Services, Inc. Incorporated by reference to
Exhibit 10(b)(63) to the Company's Current Report on Form 8-K
for the month of August 1992 (File No. 1-8048).
10(c)(1)(B)+ Letter Agreement dated September 21, 1993 between the Company
and WinStar Services, Inc. Incorporated by reference to
Exhibit 10(b)(63)(ii) 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)+ Letter Agreement dated September 14, 1994 between the Company
and WinStar Services, Inc. Incorporated by reference to
Exhibit 10(b)(63)(iii) to the Company's Annual Report on Form
10-K for the fiscal year ended June 24, 1994 (File No. 1-
8048).
10(c)(2)+ Form of Options issued to WinStar Services, Inc. Included as
Exhibit 4(b)(8) to the Company's Current Report on Form 8-K
for the month of August 1992 (File No. 1- 8048).
10(d)(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(d)(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(d)(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).
40
Exhibit Number Description
- -------------- -----------
10(d)(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(e)(1)(A) Finance Agreement dated June 26, 1991 between Overseas Private
Investment Corporation ("OPIC") and the Company. Incorporated
by reference to Exhibit 10(b)(53) to the Company's Current
Report on Form 8-K for the month of August 1992 (File No.
1-8048).
10(e)(1)(B) Amendment dated July 18, 1991 to Finance Agreement dated June
26, 1991 between OPIC and the Company. Incorporated by
reference to Exhibit 10(b)(56) to the Company's Current Report
on Form 8-K for the month of August 1992 (File No. 1- 8048).
10(e)(1)(C) Letter Agreement dated July 18, 1991 between the Company and
OPIC. Incorporated by reference to Exhibit 10(b)(62) to the
Company's Current Report on Form 8-K for the month of July
1991 (File No. 1-8048).
10(e)(2) Promissory Note dated July 19, 1991 for the principal amount
of $750,000 issued by the Company to OPIC. Incorporated by
reference to Exhibit 10(b)(55) to the Company's Current Report
on Form 8-K for the month of July 1991 (File No. 1- 8048).
10(e)(3) Option to Purchase 250,000 shares of Common Stock of the
Company granted to OPIC on July 18, 1991. Incorporated by
reference to Exhibit 10(a)(3) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 24, 1994 (File No.
1-8048).
10(f)(1) Lease Contract dated December 15, 1989 between the Company and
Puerto Rico Industrial Development Company. Incorporated by
reference to Exhibit 10(c)(1) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 29, 1990 (File No.
1-8048).
10(f)(2) Consolidated Contract of Lease Renewal and Construction dated
February 1, 1994 between TII Dominicana, Inc., a subsidiary of
the Company, and The Industrial Development Corporation of the
Dominican Republic. Incorporated by reference to Exhibit 10
(g)(2) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (File No. 1-8048).
11* Calculation of earnings per share.
41
Exhibit Number Description
- -------------- -----------
22 Subsidiaries of the Company. Incorporated by reference to
Exhibit 22 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994.
23* Consent of independent public accountants.
27 Financial data schedule. (EDGAR version only)
- ------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Report on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 28,
1996.
42
UNDERTAKING
The undersigned hereby undertakes to furnish to the Securities and
Exchange Commission, upon request, all constituent instruments defining the
rights of holders of long-term debt of the Registrant and its consolidated
subsidiaries not filed herewith. Such instruments have not been filed since none
are, nor are being, registered under Section 12 of the Securities and Exchange
Act of 1934 and the total amount of securities authorized under any of such
instruments does not exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis.
43
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.
TII INDUSTRIES, INC.
----------------------------
(Registrant)
September 18, 1996 By /s/ John T. Hyland
- -------------------------- ----------------------------
John T. Hyland, Treasurer,
Vice President-Finance and
CFO (Principal Financial and
Accounting Officer)
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 18, 1996 /s/ Alfred J. Roach
- -------------------------- ----------------------------
Alfred J. Roach, Chairman of
the Board of Directors and
Director
September 18, 1996 /s/ Timothy J. Roach
- -------------------------- ----------------------------
Timothy J. Roach, President
(Chief Executive Officer)
and Director
September 18, 1996 /s/ John T. Hyland, Jr.
- -------------------------- ----------------------------
John T. Hyland, Treasurer,
Vice President-Finance and
CFO (Principal Financial
and Accounting Officer)
September 18, 1996 /s/ C. Bruce Barksdale
- -------------------------- ----------------------------
C. Bruce Barksdale, Senior
Vice President and Director
44
September 18, 1996 /s/ Dorothy Roach
- -------------------------- ----------------------------
Dorothy Roach, Secretary
and Director
September 18, 1996 /s/ Joseph C. Hogan
- -------------------------- ----------------------------
Joseph C. Hogan, Director
September 18, 1996 /s/ James R. Grover, Jr.
- -------------------------- ----------------------------
James R. Grover, Jr.,
Director
September 18, 1996 /s/ William J. Rouhana, Jr.
- -------------------------- ----------------------------
William J. Rouhana, Jr.,
Director
September 18, 1996 /s/ Timothy R. Graham
- -------------------------- ----------------------------
Timothy R. Graham, Director
September 18, 1996 /s/ William G. Sharwell
- -------------------------- ----------------------------
William G. Sharwell,
Director
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TII Industries, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of TII Industries, Inc. and subsidiaries as of June
28, 1996 and June 30, 1995, and related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended June 28, 1996, included in this Form 10-K and have issued our
report thereon dated September 18, 1996. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule for the years ended June 28, 1996, June 30, 1995 and June 24, 1994,
listed under Item 14(a) of this Form 10-K is the responsibility of the Company's
management, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
San Juan, Puerto Rico
September 18, 1996.
Stamp No. 1381558 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
S-1
SCHEDULE II
TII INDUSTRIES, INC. AND SUBSIDIARIES
--------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------------
ADDITIONS BALANCE
BALANCE AT CHARGED TO AT
BEGINNING OF COST AND END OF
YEAR EXPENSES PERIOD
----------- ---------- ----------
CLASSIFICATION
JUNE 28, 1996
INVENTORY RESERVE $1,466,000 $ 568,000 $2,034,000
========== ========== ==========
JUNE 30, 1995
INVENTORY RESERVE $1,166,000 $ 300,000 $1,466,000
========== ========== ==========
JUNE 24, 1994 $1,066,000 $ 100,000 $1,166,000
INVENTORY RESERVE ========== ========== ==========
S-2
TII INDUSTRIES, INC.
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JUNE 28, 1996
S-3
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3(a)(1) Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of the State of Delaware on
December 18, 1978. Incorporated by reference to Exhibit
3(a)(1) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 (File No. 1-8048).
3(a)(2) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on January 22, 1980.
Incorporated by reference to Exhibit 3(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 24,
1994 (File No. 1-8048).
3(a)(3) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on June 23, 1981. Incorporated
by reference to Exhibit 3(a)(3) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 24, 1994 (File No.
1-8048).
3(a)(4) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 4, 1981.
Incorporated by reference to Exhibit 3(a)(4) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 24,
1994 (File No. 1-8048).
3(a)(5) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 11, 1986.
Incorporated by reference to Exhibit 3(a)(5) to the Company's
Registration Statement on Form S-8 (File No. 33-11149).
3(a)(6) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 16, 1987.
Incorporated by reference to Exhibit 4.06 to the Company's
Registration Statement on Form S-8 (File No. 33-53180).
3(a)(7) Certificate of Amendment of Restated Certificate of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on January 10, 1990.
Incorporated by reference to Exhibit 4(c)(7) to the Company's
Registration Statement on Form S-8 (File No. 33-37310).
3(a)(8)(A) Certificate of Designations with respect to the Company's
Series A Cumulative Convertible Redeemable Preferred Stock, as
filed with the Secretary of State of the State of Delaware on
July 9, 1991. Incorporated by reference to Exhibit 4(b)(3) to
the Company's Current Report on Form 8-K for the month of July
1991 (File No. 1- 8048).
3(a)(8)(B) Certificate of Amendment to Certificate of Designations with
respect to the Company's Series A Cumulative Convertible
Redeemable Preferred Stock, as filed with the Secretary of
State of the State of Delaware on March 2, 1993. Incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 26, 1993 (File No.
1-8048).
S-4
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3(a)(9) Certificate of Amendment of Restated Certificate of
Incorporation of the Company as filed with the Secretary of
State of the State of Delaware on April 25, 1994. Incorporated
by reference to Exhibit 4.01(j) to Amendment No. 2 to the
Company's Registration Statement on Form S-3 (File No.
33-64980).
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)(1)(A) Revolving Credit Loan Agreement dated January 31, 1995 among
TII International, Inc. ("International"), the Company and
Chemical Bank (the "Bank"). Incorporated by reference to
Exhibit 4.1(a) to the Company's Current Report on Form 8-K
dated January 31, 1995 (date of earliest event reported) (File
No. 1-8048).
4(a)(1)(B) First Amendment dated as of August 3, 1995 to the Revolving
Credit Agreement among International, the Company and the
Bank. Incorporated by reference to Exhibit 4 (a)(1)(B) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995 (File No. 1-8048).
4(a)(1)(C)* Second Amendment dated as of November 10, 1995 to the
Revolving Credit Agreement among International, the Company
and the Bank.
4(a)(1)(D)* Third Amendment dated as of December 27, 1995 to the Revolving
Credit Agreement among International, the Company and the
Bank.
4(a)(2) Joint and Several Guaranty of Payment dated January 31, 1995
executed in favor of the Bank by the Company and TII
Industries NC, Inc., TII Dominicana, Inc., TII Electronics,
Inc., Ditel, Inc., TII Corporation and Telecommunications
Industries, Inc., direct or indirect subsidiaries of the
Company. Incorporated by reference to Exhibit 4.1(b) to the
Company's Current Report on Form 8-K dated January 31, 1995
(date of earliest event reported) (File No. 1-8048).
4(a)(3) Pledge Agreement dated January 31, 1995 between International
and the Bank. Incorporated by reference to Exhibit 4.1(c) to
the Company's Current Report on Form 8-K dated January 31,
1995 (date of earliest event reported) (File No. 1-8048).
4(a)(4) Security Agreement dated January 31, 1995 between the Company
and the Bank. Incorporated by reference to Exhibit 4.1(d) to
the Company's Current Report on Form 8-K dated January 31,
1995 (date of earliest event reported) (File No. 1-8048).
S-5
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
4(a)(5) Assignment of Accounts Receivable Agreement dated January 31,
1995 executed by the Company in favor of the Bank.
Incorporated by reference to Exhibit 4.1(e) to the Company's
Current Report on Form 8-K dated January 31, 1995 (date of
earliest event reported) (File No. 1-8048).
4(a)(6) Stock Pledge Agreement dated January 31, 1995 between the
Company and the Bank. Incorporated by reference to Exhibit
4.1(f) to the Company's Current Report on Form 8-K dated
January 31, 1995 (date of earliest event reported) (File No.
1-8048).
4(a)(7) Security Agreement dated January 31, 1995 between Ditel, Inc.,
an indirect subsidiary of the Company, and the Bank.
Incorporated by reference to Exhibit 4.1(g) to the Company's
Current Report on Form 8-K dated January 31, 1995 (date of
earliest event reported) (File No. 1-8048).
10(a)(1)*+ 1983 Employee Incentive Stock Option Plan of the Company, as
amended.
10(a)(2)*+ 1986 Stock Option Plan of the Company, as amended.
10(a)(3)+ 1994 Non-Employee Director Stock Option Plan, as amended.
Incorporated by reference to Exhibit 99.01 to the Company's
Registration Statement on Form S-8, No. 33-64965.
10(a)(4)*+ 1995 Stock Option Plan of the Company.
10(b)(1)+ Employment Agreement dated August 7, 1992 between the Company
and Timothy J. Roach. Incorporated by reference to Exhibit
10(b)(66) to the Company's Current Report on Form 8-K for the
month of August 1992 (File No. 1-8048).
10(c)(1)(A)+ Consulting Agreement dated June 2, 1992 between the Company
and WinStar Services, Inc. Incorporated by reference to
Exhibit 10(b)(63) to the Company's Current Report on Form 8-K
for the month of August 1992 (File No. 1-8048).
10(c)(1)(B)+ Letter Agreement dated September 21, 1993 between the Company
and WinStar Services, Inc. Incorporated by reference to
Exhibit 10(b)(63)(ii) 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)+ Letter Agreement dated September 14, 1994 between the Company
and WinStar Services, Inc. Incorporated by reference to
Exhibit 10(b)(63)(iii) to the Company's Annual Report on Form
10-K for the fiscal year ended June 24, 1994 (File No. 1-
8048).
S-6
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10(c)(2)+ Form of Options issued to WinStar Services, Inc. Included as
Exhibit 4(b)(8) to the Company's Current Report on Form 8-K
for the month of August 1992 (File No. 1- 8048).
10(d)(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(d)(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(d)(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(d)(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(e)(1)(A) Finance Agreement dated June 26, 1991 between Overseas Private
Investment Corporation ("OPIC") and the Company. Incorporated
by reference to Exhibit 10(b)(53) to the Company's Current
Report on Form 8-K for the month of August 1992 (File No.
1-8048).
10(e)(1)(B) Amendment dated July 18, 1991 to Finance Agreement dated June
26, 1991 between OPIC and the Company. Incorporated by
reference to Exhibit 10(b)(56) to the Company's Current Report
on Form 8-K for the month of August 1992 (File No. 1- 8048).
10(e)(1)(C) Letter Agreement dated July 18, 1991 between the Company and
OPIC. Incorporated by reference to Exhibit 10(b)(62) to the
Company's Current Report on Form 8-K for the month of July
1991 (File No. 1-8048).
10(e)(2) Promissory Note dated July 19, 1991 for the principal amount
of $750,000 issued by the Company to OPIC. Incorporated by
reference to Exhibit 10(b)(55) to the Company's Current Report
on Form 8-K for the month of July 1991 (File No. 1- 8048).
S-7
10(e)(3) Option to Purchase 250,000 shares of Common Stock of the
Company granted to OPIC on July 18, 1991. Incorporated by
reference to Exhibit 10(a)(3) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 24, 1994 (File No.
1-8048).
10(f)(1) Lease Contract dated December 15, 1989 between the Company and
Puerto Rico Industrial Development Company. Incorporated by
reference to Exhibit 10(c)(1) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 29, 1990 (File No.
1-8048).
10(f)(2) Consolidated Contract of Lease Renewal and Construction dated
February 1, 1994 between TII Dominicana, Inc., a subsidiary of
the Company, and The Industrial Development Corporation of the
Dominican Republic. Incorporated by reference to Exhibit 10
(g)(2) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995 (File No. 1-8048).
11* Calculation of earnings per share.
22 Subsidiaries of the Company. Incorporated by reference to
Exhibit 22 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994.
23* Consent of independent public accountants.
27 Financial data schedule. (EDGAR version only)
- ------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
S-8