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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1997
Commission file number 1-8048
TII INDUSTRIES, INC
(Exact Name of registrant AS specified in its charter)
State of incorporation: DELAWARE I.R.S. Employer Identification No.66-0328885
1385 Akron Street, Copiague, New York 11726
(516) 789-5000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the voting stock of the registrant outstanding as
of September 12, 1997 held by non-affiliates of the registrant was approximately
$53,000,000. While such market value excludes the market value of shares which
may be deemed beneficially owned by executive officers and directors, this
should not be construed as indicating that all such persons are affiliates.
The number of shares of the Common Stock of the registrant outstanding
as of September 12, 1997 was 7,513,640.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 1997
Annual Meeting of Stockholders are incorporated by reference into Part III of
this report.
PART I
ITEM 1. BUSINESS
GENERAL
TII Industries, Inc. has been a leading supplier to United States
telephone operating companies ("Telcos") of overvoltage surge protectors for
over 25 years. Overvoltage protectors are required by the National Electric Code
to be installed on the subscriber'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. Building on its sales and marketing base, the Company has added a
line of network interface devices (NIDs) to establish a separation point between
Telco property and subscriber property in response to Federal Communication
Commission and state public service commission requirements. In addition,
through a subsidiary acquired in September of 1993, the Company has begun
producing, selling and marketing a line of fiber optic enclosure products. The
Company markets its products to the Regional Bell Operating Companies ("RBOCs"),
independent phone companies and original equipment suppliers who sell to the
global telecommunication 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.
The Company is a Delaware corporation organized in 1971. Unless the
context otherwise requires, the term "Company" or TII as used herein refers to
TII Industries, Inc. and its subsidiaries. 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 (787)
870-2700).
FORWARD-LOOKING STATEMENTS
In order to keep the Company's stockholders and investors informed of the
Company's future plans, this Report contains (and, from time to time, other
reports and oral or written statements issued by the Company or on its behalf by
its officers contain) forward-looking statements concerning, among other things,
the Company's future plans and objectives that are or may be deemed to be
"forward-looking statements". The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995 which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes that it is in the best interests of its stockholders to take
advantage of the "safe harbor" provisions of that Act. Such forward-looking
statements are subject to a number of known and unknown risks and uncertainties
that could cause the Company's actual results, performance or achievements to
differ materially from those described or implied in the forward-looking
statements. These factors include, but are not limited to, general economic and
business conditions, including the regulatory environment applicable to the
telecommunications industry; competition (see "Competition"); potential
technological changes (see "Research and Development"), including the Company's
ability to timely develop new products and adapt its existing products to
technological changes (see "Products" and "Research and Development"); potential
changes in customer spending and purchasing policies and practices, as well as
the Company's ability to market its existing, recently developed and new
products (see "Marketing and Customers"); the risks inherent in new product
introductions, such as start-up delays, uncertainty of customer acceptance;
dependence on third parties for its product components (see "Raw Materials");
the Company's ability to attract and retain technologically qualified personnel
(see "Employees"); the renewal of the Company's lease for its manufacturing
facilities in Puerto Rico on satisfactory terms or ability to find replacement
facilities in Puerto Rico (see "Properties"); the retention of the tax benefits
provided by its Puerto Rico and Dominican Republic operations (see "Certain Tax
Attributes" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Income Taxes"); the Company's ability to fulfill its
growth strategies (see "Research and Development"); the availability of
financing on satisfactory terms to support the Company's growth (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources"); and other factors discussed
elsewhere in this report and in other Company reports hereafter filed with the
Securities and Exchange Commission.
2
PRODUCTS
TII is the premier manufacturer of overvoltage protection devices based
on gas tube technology. This core gas tube technology represents the foundation
upon which certain new products and technological enhancements of the Company's
traditional products are based. The Company's research and development efforts
are focused on the development of additional products for its overvoltage surge
protection, NIDs and fiber optic product lines.
OVERVOLTAGE SURGE PROTECTORS. The Company designs, manufactures and
markets overvoltage protectors primarily for use by the Telcos 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 a 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 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 thermally operated, failsafe mechanism, encapsulated in an
environmentally sealed module. The three electrode gas tube is designed to
protect 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 protector from moisture and industrial pollution. Another
advanced overvoltage protector, jointly manufactured with Raychem Corporation
(Raychem), is the sealed modular station protector (MSP). This product is
designed to withstand multiple high energy surges and be virtually impervious to
moisture and pollution by combining TII's Totel Failsafe protection element with
Raychem's proprietary gel technology which seals all wire termination points.
In October 1996, TII was granted a US patent for its new coaxial
transmission line surge arrestor. The patent provides broad coverage for
overvoltage protection on coaxial cable, which is becoming an alternate method
of providing high-bandwidth signals to residential and business users. TII's gas
tube coaxial surge protector is an in-line protector which is virtually
transparent to the network in which it is installed.
TII also designs, manufactures and markets special purpose models of
powerline protectors, utilizing the Company's gas tubes and solid state
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.
3
Overvoltage protectors sold separately accounted for approximately 65%,
65% and 68% of the Company's net sales during the Company's fiscal years 1997,
1996 and 1995, respectively.
NETWORK INTERFACE DEVICES. 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 have also begun
installing various station electronic products in NIDs, through which the Telcos
are able to remotely test the integrity of their lines.
To meet increasing customer demand for advanced voice, video and data
services, Telcos are expanding and upgrading their network infrastructure. In
response, TII has recently developed a line of patented broadband network
interface devices ("BNIDs). TII's BNIDs are designed to be installed by Telcos
at homes and businesses to provide multiple access lines, advanced overvoltage
protection and remote electronics. Designed with future technologies in mind,
the Company's BNIDs can also accommodate TII's patented Coaxial overvoltage
protector, as well as high performance fiber optic connectors, produced by the
Company's subsidiary TII-Ditel. This will allow for future upgrades by Telcos to
broadband services over twisted pair, coaxial or fiber optic lines.
NID sales represented approximately 23%, 21% and 20% of the Company's
net sales during fiscal 1997, 1996 and 1995, 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 include maintenance termination units
designed to interface with the Telco's central office test equipment, offering
the Telco remote testing capabilities. With this product installed at the
subscriber's home or business, a Telco can determine whether a defect or fault
is in Telco or subscriber-owned equipment before dispatching a maintenance
vehicle. Another product automatically identifies the calling party on a party
line (located primarily in rural areas of the United States and Canada) without
operator assistance. 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, accounted for approximately 6%,
11% and 9% of the Company's net sales in fiscal 1997, 1996 and 1995,
respectively.
4
FIBER OPTIC PRODUCTS. The Company's fiber optic product lines, sold and
marketed under the name TII-Ditel, include closures, splice trays, high
performance cable assemblies, and the LIGHTRAX cable management system. Using
its own manufactured products, as well as purchased components, the Company's
fiber subsidiary provides a totally protected environment for Telcos inside
cable systems from points along the long distance network to both the central
office and customer premise locations.
The fiber subsidiary develops niche markets by concentrating on a
technical method of generating sales. Technical personnel work closely with the
engineering staffs of its customers to provide applications help and formulate
unique solutions to fiber issues.
Primary customers for the fiber division include the RBOCs, original
equipment suppliers and interexchange carriers. Sales of fiber optic products
represented approximately 6%, 3% and 3% of the Company's net sales during fiscal
1997, 1996 and 1995, respectively.
MARKETING AND CUSTOMERS
The Company sells to Telcos both directly and through distributors. TII
also sells to long distance carriers, cable television providers and
telecommunication equipment manufacturers, including other NID suppliers, which
incorporate the Company's protectors into their products for resale to Telcos.
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.
EXPORT SALES
The Company's export sales equaled approximately $1.3 million in fiscal
1997 (3% of net sales), $1.6 million in fiscal 1996 (4% of net sales), and $1.0
million in fiscal 1995 (2% of net sales). Export sales have been made primarily
to 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. The
Company manufactures 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. TII
produces a substantial portion of its NIDs and other plastic enclosures in its
thermoplastic molding facility. All 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.
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. In manufacturing its modular station protector, the
Company utilizes Gelguard(R) (a registered trademark of Raychem Corporation)
which is supplied exclusively by Raychem. 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 it
uses will continue to be available in sufficient supply from a number of sources
at competitive prices.
5
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 advanced
telecommunication services, new product opportunities continue to arise for the
Company. Currently, the Company's research and development (R&D) and related
marketing efforts are focused on several major projects including:
* Developing broadband network interface devices (BNID) to
address anticipated future requirements of the Telcos.
* Developing coaxial overvoltage protectors for the cable TV and
broadband communication 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.
* Designing custom overvoltage protectors for original equipment
manufacturers for installation throughout Telco and other
communication networks.
* Designing gas tube, solid state and hybrid overvoltage
protectors for the worldwide telecommunication markets.
The Company's research and development ("R&D") department currently
consists of 24 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 $3,085,000, $2,820,000, and $2,619,000
during fiscal 1997, 1996 and 1995, respectively.
COMPETITION
The Company faces significant competition, including competition from
NID manufacturers which have introduced their own line of overvoltage
protectors. The Company expects competition to continue in overvoltage
protectors and NIDs as well as the Company's other products.
Principal competitive factors include price, technology, delivery,
quality and reliability. Most of the Company's competitors have substantially
greater assets and financial resources, as well as larger sales forces,
manufacturing facilities and R&D staffs, than the Company.
6
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 reacting
to surges, gas tube overvoltage protectors have generally remained the
subscriber overvoltage protection technology of choice by virtually all Telcos
because of the gas tube's ability to repeatedly withstand significantly higher
energy surges while adding virtually no capacitance to 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 telecommunication 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. The Company has
begun developing and marketing overvoltage protectors incorporating purchased
solid state devices on a limited basis.
The fiber optic market is characterized by innovation, rapidly changing
technology and new product development. The Company's success in this area
depends upon its ability to identify customer needs, develop new products and
keep pace with continuing changes in technology and customer preferences.
The Company believes that its present sales, marketing and R&D
departments, its high quality low-cost production facilities, and its present
protection technology, enable it to meet the competition.
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.
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
The Company is incorporated in Delaware with its principal operations
office located in the Commonwealth of Puerto Rico. Its income would normally be
subject to income tax by both the United States and Puerto Rico. 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 has elected the application of Section 936 of the US
Internal Revenue Code (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. To the extent the Company has taxable
income arising from United States sources (e.g., income from investment or
operating 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.
7
The economic activity limitation on the amount of allowable credits
under Section 936 is based upon qualified wages paid for services performed in
Puerto Rico, fringe benefits, depreciation deductions and taxes in Puerto Rico.
Based on fiscal 1997 levels of qualified wages, fringe benefits, depreciation
and taxes in Puerto Rico, the Company's economic activity based credit
limitation is approximately $3,550,000 per annum. The amount of the economic
activity based Section 936 credit limitation available for fiscal 1997 will be
sufficient to offset the United States federal income tax on Puerto Rico source
income for the Company's 1997 fiscal year.
Legislation included in the Minimum Wage/Small Business Job Protection
Act of 1996 repealed the Section 936 credit for taxable years beginning after
December 31, 1995, the Company's 1997 fiscal year. However, since the Company's
Section 936 election was in effect for its fiscal 1996 tax year, it is eligible
to continue to claim a Section 936 credit until the year ended June 2006 under a
special grandfather rule. If, however, the Company adds a substantial new line
of business, 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).
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 does not 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.
The Company also has been granted exemptions under Puerto Rico's
Industrial Incentive Act of 1963 until June 2009 for income tax and 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.
8
EMPLOYEES
On September 12, 1997, the Company had approximately 985 employees, of
whom 881 were engaged in manufacturing and 44 in engineering and new product
development, with the balance being employed in executive, sales and
administrative activities. Of these employees, approximately 300 are employed at
the Company's Puerto Rico facilities and approximately 615 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.
RECENT DEVELOPMENTS
COST REDUCTION PLAN. During the third quarter of fiscal year 1997, the
Company put into effect certain measures in accordance with a plan to reduce
costs and enhance profitability. This plan included the reduction of personnel,
movement of certain production processes to the Company's lower cost facility in
the Dominican Republic, outsourcing certain manufacturing steps, re-aligning its
sales and marketing forces and ceasing the sale of lower margin products. This
action resulted in non-recurring charges of $3.0 million, which consisted of an
increase to the allowance for inventory, severance related costs and costs to
close or move certain production processes.
ANT AGREEMENT. In August 1995, TII entered into a long-term strategic
agreement with Access Network Technologies (ANT) to develop and manufacture
advanced protectors for sale into the global telecommunication market. ANT was a
joint venture between Lucent Technologies, Inc. and Raychem Corporation. The
first products introduced by the joint venture, MSPS, combined TII's overvoltage
protection with a proprietary gel sealing technology (from Raychem) that makes
these products impenetrable by weather. During the third quarter of fiscal 1997
ANT dissolved. The Company and Raychem have agreed to continue to manufacture
and market the products, without Lucent Technologies.
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 43,000 square feet of space. These facilities also contain certain
of the Company's warehousing facilities and certain of its administrative,
research and development, quality assurance, sales and executive offices. These
buildings are leased under an agreement with the Puerto Rico Industrial
Development Company ("PRIDCO") which expired. The Company and PRIDCO have
continued operating under the terms of the lease while they have been
negotiating an extension of the lease. The Company believes it will be able to
extend on terms substantially similar to those contained in the existing leases.
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.
9
The Company leases a single story, 10,000 square foot facility in
Hickory, North Carolina under a lease expiring December 1998, which houses its
fiber optic manufacturing facilities as well as certain research and development
and administrative offices.
In addition, the Company occupies a single story building and a portion
of another building, consisting of an aggregate of approximately 14,000 square
feet in Copiague, New York under a lease 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.
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 1997.
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 - National
Market System under the symbol "TIII". The following table sets forth, for each
quarter during fiscal 1997 and fiscal 1996, the high and low sales prices of the
Company's Common Stock.
Fiscal 1997 High Low
---- ---
First Quarter Ended September 27, 1996 7 1/8 4 1/2
Second Quarter Ended December 27, 1996 7 1/8 5 1/4
Third Quarter Ended March 28, 1997 7 4 1/8
Fourth Quarter Ended June 27, 1997 5 7/8 4 5/16
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
As of September 12, 1997, the Company had approximately 620 holders of
record of its Common Stock, exclusive of stockholders whose shares were held by
brokerage firms, depositories or other institutional firms in street name for
their customers.
10
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.
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 27, 1997. The following Selected Financial Data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the Consolidated Financial Statements and the related
notes thereto.
June 27, June 28, June 30, June 24, June 25,
1997(1) 1996 1995 1994 1993
-------- -------- -------- -------- --------
(amounts in thousands except per share data)
STATEMENTS OF OPERATIONS DATA
- -----------------------------
Net sales $ 50,675 $ 44,513 $ 43,830 $ 40,147 $ 33,474
======== ======== ======== ======== ========
Operating (loss) income ($ 892) $ 3,856 $ 3,602 $ 3,066 $ 1,987
======== ======== ======== ======== ========
Net (loss) income ($ 856) $ 3,737 $ 2,942 $ 2,389 $ 1,212
======== ======== ======== ======== ========
Net (loss) income per
share-Primary ($ 0.12) $ 0.48 $ 0.52 $ 0.45 $ 0.28
======== ======== ======== ======== ========
Net (loss) income per
share-Fully Diluted ($ 0.12) $ 0.47 $ 0.51 $ 0.41 $ 0.28
======== ======== ======== ======== ========
BALANCE SHEET DATA
- ------------------
Working capital $ 19,654 $ 23,801 $ 15,947 $ 6,734 $ 10,212
======== ======== ======== ======== ========
Total assets $ 42,823 $ 42,823 $ 34,414 $ 29,378 $ 28,066
======== ======== ======== ======== ========
Long-term debt and capital
leases, including current
portion $ 2,841 $ 2,739 $ 2,767 $ 7,552 $10,263
======== ======= ======= ======= =======
Stockholders' investment $33,011 $33,862 $25,183 $15,137 $12,439
======== ======= ======= ======= =======
- --------------
(1) Includes non-recurring charges of $3.0 million, which consisted of an
increase to the allowance for inventory, severance related costs and
costs to close or move certain production processes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
11
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 27, 1997 June 28, 1996 June 30, 1995
(amounts in thousands)
Net sales $ 50,675 $ 44,513 $43,830
Cost of sales (as a
percentage of sales) 81.7% 71.8% 70.2%
Selling, general and
administrative expenses $ 7,061 $ 5,881 $ 6,827
Research and development $ 3,085 $ 2,820 $ 2,619
Interest expense $ 287 $ 416 $ 718
Net (loss) income ($ 856) $ 3,737 $ 2,942
FISCAL YEARS ENDED JUNE 27, 1997, JUNE 28, 1996 AND JUNE 30, 1995
Net sales for fiscal 1997 increased by $6.2 million or 14% to $50.7
million from $44.5 million in fiscal 1996. Sales of overvoltage surge protectors
increased $4.3 million over last year's sales, principally as a result of
increased sales of the Company's recently introduced Modular Station Protector.
Network Interface Device sales increased $2.2 million due to increased purchases
by Telco customers. Fiber related products increased from $1.5 million in 1996
to $3.1 million in fiscal 1997 due to wider acceptance of recently introduced
products. These increases were partially offset by a decline of $1.9 million in
sales of station electronics and other products. In fiscal 1996, AT&T
Corporation (AT&T) paid the Company $0.9 million as a final payment under a
contract that expired in fiscal year 1996, the absence of which contributed to
the decline in other sales in fiscal 1997. Net sales for fiscal 1996 increased
by $0.7 million from $43.8 million in fiscal 1995 as the Company shipped
principally the same mix of product to its customers during these periods.
During the third quarter of fiscal 1997, the Company initiated a
program to improve its operational efficiency in order to reduce costs and
enhance profitability. This plan included the reduction of personnel, moving
certain production processes to lower cost areas, outsourcing certain
manufacturing steps, re-aligning its sales and marketing forces and ceasing the
sale of certain lower margin products. This program resulted in non-recurring
charges of $3.0 million, which consisted of an increase to the allowance for
inventory, severance related costs and costs to close or move certain production
processes. Of the charges, $2.9 million was charged to cost of sales.
Cost of sales as a percentage of sales increased in fiscal 1997 to
81.7% (76.0% before the non-recurring charges) from 71.8% in the year earlier
period, as a result of the one time charges and higher raw material and
manufacturing overhead costs. Additionally, the Company's gross
12
profit margin in fiscal 1996 was positively impacted by 1.4 percentage points by
the inclusion in sales of the final AT&T payment without any related cost of
sales. Furthermore, during the fourth quarter of fiscal 1997, cost of sales was
adversely affected by manufacturing costs associated with the accelerated
production startup of several new products, including the Company's new
broadband network interface device (BNIDs), and continuing transition
expenditures relating to the Company's cost reduction plan. The Company expects
these additional costs to continue during the first half of fiscal 1998.
Accordingly, cost of sales, as a percentage of sales, should continue to be
impacted during the fiscal year. During fiscal 1996, cost of sales, as a
percentage of sales, increased to 71.8% from 70.2% in fiscal 1995 due primarily
to increases in raw material and other manufacturing costs.
Selling, general and administrative expenses for fiscal 1997 increased
$1.2 million or 20% to $7.0 million, or 13.9% of sales, from $5.9 million in
fiscal 1996. The increase resulted primarily from legal costs in an action in
which the Company was a plaintiff and from costs associated with the Company's
heightened efforts to win supply contracts for its new BNID product line. During
fiscal 1996, selling, general and administrative expenses decreased to $5.9
million, or 13.2% of sales, from $6.8 million, or 15.6% of sales, during fiscal
year 1995 principally due to administrative staff and expenses reductions.
Research and development expenses increased by 9% to $3.1 million in
fiscal 1997 and by 8% to $2.8 million in fiscal 1996 due principally to
increases in costs associated, in the case of fiscal 1997, with the development
of the new BNID product line, and, to a lesser extent, increases in costs
associated with the development of new overvoltage protection devices, and, in
the case of fiscal 1996, several new products including the new overvoltage
protection devices for the ANT joint venture.
Interest expense in fiscal 1997 declined by $129,000 to $287,000 from
$416,000 in fiscal 1996 due to reduced debt levels declined and the absence of
amortization of debt origination costs that ceased in September 1996. Interest
expense in fiscal 1996 declined by $302,000 to $416,000 from $718,000 in fiscal
1995 as debt levels declined significantly due to cash received from the
exercise of warrants and options in the fourth quarter of fiscal 1995 and the
first quarter of fiscal 1996.
The Company accrued a provision for fiscal 1997 for the settlement of
an investigation performed by the Internal Revenue Service, resulting in a net
provision of $63,000 for the year.
The Company incurred a net loss of $856,000 during fiscal 1997, versus
net income of $3.7 million during fiscal 1996 and $2.9 million during fiscal
1995. Fully diluted net loss per share equaled $.12 per share in fiscal 1997
versus fully diluted net income per share of $.47 and $.51 in fiscal years 1996
and 1995, respectively. During fiscal years 1996 and 1995 the Company received
sales shortfall payments of $875,000 and $777,000 respectively, under an
agreement with AT&T (See AT&T Agreement). Sales shortfall payments associated
with the AT&T Agreement, which had a positive impact on the Company's net profit
in fiscal years 1996 and 1995, concluded in fiscal 1996.
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 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 Company calculates its
Section 936 utilizing the economic activity based credit. Based on fiscal 1997
levels of qualified wages, fringe benefits and depreciation in Puerto Rico, the
Company's
13
economic activity based credit limitation is approximately $3,550,000 per annum.
The amount of the economic activity based Section 936 credit limitation
available for fiscal 1997 will be sufficient to offset the United States federal
income tax on Puerto Rico source income for the Company's 1997 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, however, 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 7 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.
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 27, June 28, June 30,
1997 1996 1995
-------- -------- --------
(dollars in thousands)
Working capital $ 19,654 $ 23,801 $ 15,947
Current ratio 3.62 4.61 3.44
Total liabilities to equity ratio .30 .27 .37
During fiscal 1997, $0.4 million of cash was used in operations,
primarily to fund increases in inventories (approximately $4.4 million or $1.5
million net of $2.9 million of allowances established). While the Company had a
net loss of $0.9 million, such loss included non-cash charges, including $1.9
million for depreciation and amortization.
Cash of $1.9 million was used in investing activities for capital
expenditures ($4.3 million) offset, in part, by $2.4 million in proceeds from
sales and maturities of marketable securities in excess of amounts reinvested.
Financing activities used $.4 million of cash for the payment of long term debt
and obligations under capital leases.
14
As a result of the non-recurring charge of $3.0 million and the
heightened level of investment in capital equipment during fiscal 1997, the
Company was not in compliance with the debt service ratio, capital expenditure,
and net income covenants contained in its Revolving Credit Agreement. There is
no loan amount outstanding under the agreement and the Company has received a
waiver from compliance to retain the borrowing availability.
The Company has no commitments for capital expenditures, but expects to
purchase new equipment and incur leasehold improvements in the normal course of
business, subject to the maximum amounts permitted under its Revolving Credit
Agreement.
Funds anticipated to be generated from operations, together with
available cash, marketable securities and borrowings available under the
Company's Revolving Credit Agreement, are considered to be adequate to finance
the Company's operational and capital needs for the foreseeable future. However,
the Company may seek additional financing for the acquisition of new product
lines or additional products for its existing product lines should any such
acquisition opportunity present itself. Any such financing 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 financing 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 financing.
IMPACT OF INFLATION
The Company does not believe its business is affected by inflation to a
greater extent than the general economy. The Company monitors the impact of
inflation and attempts to adjust prices where market conditions permit.
Inflation has not had a significant effect on the Company's operations during
any of the reported periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1997
Annual Meeting of Stockholders.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
(a) Exhibits, Financial Statements and Schedule
1. Financial Statements
See Index to Consolidated Financial Statements on
page F-1.
2. Financial Statement Schedules
The following consolidated financial statement schedule is
filed herewith;
Page
----
Report of Independent Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
Information required by other schedules called for by
Regulation S-X is either not applicable or the information
required therein is included in the financial statements or
notes thereto
3. Exhibits
3(a)(1) Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of the State of Delaware on
December 10, 1996. Incorporated by reference to Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 27, 1996 (File No. 1-8048).
3(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 28, 1996 (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. Incorporated by reference to Exhibit 4(a)(1)(C)
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 28, 1996 (File No. 1-8048).
4(a)(1)(D) Third Amendment dated as of December 27, 1995 to the Revolving
Credit Agreement among International, the Company and the
Bank. Incorporated by reference to Exhibit 4(a)(1)(D) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 28, 1996 (File No. 1-8048).
4(a)(1)(E) Fourth Amendment dated May 2, 1997 to the Revolving Credit
Agreement among International, the Company and the Bank.
Incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 1997 (File No. 1-8048).
4(a)(1)(F)* Fifth Amendment and Waiver dated as of September 23, 1997 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.(since dissolved), Ditel, Inc.(now TII-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).
16
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).
4(a)(7) Security Agreement dated January 31, 1995 between Ditel,
Inc.(now TII-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. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 27, 1996 (File No. 1-8048).
10(a)(2)+ 1986 Stock Option Plan of the Company, as amended.
Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 27, 1996 (File No. 1-8048).
10(a)(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. Incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 1996 (File No. 1-8048).
10(b)(1)*+ Amended and Restated Employment Agreement dated as of August
1, 1997 between the Company and Timothy J Roach.
10(b)(2)*+ Amended and Restated Employment Agreement dated as of May 1,
1997 between the Company and Carl H. Meyerhoefer.
10(b)(3)(A)*+ Employment Agreement dated September 23, 1993 between the
Company and Dare P. Johnston.
10(b)(3)(B)*+ Extention dated as of June 2, 1997 to the Employment Agreement
dated September 23, 1993 between the Company and Dare P.
Johnston.
10(c)(1)(A)+ Equipment Lease dated July 18, 1991 between PRC Leasing, Inc.
("PRC") and the Company. Incorporated by reference to Exhibit
10(b)(57) to the Company's Current Report on Form 8-K for the
month of July 1991 (File No. 1-8048).
10(c)(1)(B)+ Amendment dated July 18, 1992 to Equipment Lease dated July
18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 10(b)(67) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 25, 1993 (File No.
1- 8048).
10(c)(1)(C)+ Second Amendment dated February 25, 1993 to Equipment Lease
dated July 18, 1991 between the Company and PRC. Incorporated
by reference to Exhibit 10(b)(7) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 25, 1993
(File No. 1-8048).
10(c)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment
Lease dated July 18, 1991 between the Company and PRC.
Incorporated by reference to Exhibit 4(d) to Amendment No. 2
to the Schedule 13D filed by Alfred J. Roach (File No.
1-8048).
10(d)(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(d)(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).
17
11* Calculation of earnings per share.
21* Subsidiaries of the Company.
23* Consent of independent public accountants.
27* Financial data schedule (filed electronically 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 last quarter of the year
ended June 27, 1997.
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.
18
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 24, 1997 By /s/ Paul G. Sebetic
--------------------------
Paul G. Sebetic,
Vice President-Finance and
Chief Financial 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 24, 1997 /s/ Alfred J. Roach
--------------------------
Alfred J. Roach, Chairman
of the Board of Directors
and Director
September 24, 1997 /s/ Timothy J. Roach
--------------------------
Timothy J. Roach, President,
Chief Executive Officer and
Director
September 24, 1997 /s/ Paul G. Sebetic
--------------------------
Paul G. Sebetic,
Vice President-Finance and
Chief Financial Officer
September 24, 1997 /s/ C. Bruce Barksdale
--------------------------
C. Bruce Barksdale, Director
September 24, 1997 /s/ Dorothy Roach
--------------------------
Dorothy Roach, Director
September 24, 1997 /s/ Joseph C. Hogan
--------------------------
Joseph C. Hogan, Director
September 24, 1997 /s/ James R. Grover, Jr.
--------------------------
James R. Grover, Jr., Director
September 24, 1997 /s/ William G. Sharwell
--------------------------
William G. Sharwell, Director
19
TII INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
-----------
Report of Independent Public Accountants F-2
Consolidated Balance Sheets -
June 27, 1997 and June 28, 1996 F-3
Consolidated Statements of Operations for each of the
Three Years in the Period Ended June 27, 1997 F-4
Consolidated Statements of Stockholders'
Investment for each of the Three Years in the
Period Ended June 27, 1997 F-5
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended June 27, 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-16
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TII Industries, Inc.:
We have audited the accompanying consolidated balance sheets of TII Industries,
Inc. and subsidiaries as of June 27, 1997 and June 28, 1996, and the related
consolidated statements of operations, stockholders' investment and cash flows
for each of the three years in the period ended June 27, 1997. 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 27, 1997 and June 28, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 27, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Juan, Puerto Rico
September 19, 1997.
Stamp No. 1454624 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
F-2
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 27, 1997 AND JUNE 28, 1996
(Dollars in Thousands)
June 27, June 28,
1997 1996
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 247 $ 2,883
Marketable securities available for sale 3,552 5,999
Receivables 7,388 7,084
Inventories 15,574 14,032
Prepaid expenses 402 388
-------- --------
Total current assets 27,163 30,386
-------- --------
Fixed Assets
Property, plant and equipment 37,812 33,018
Less: Accumulated depreciation and amortization (23,768) (22,029)
-------- --------
Net fixed assets 14,044 10,989
-------- --------
Other Assets 1,616 1,448
-------- --------
TOTAL ASSETS $ 42,823 $ 42,823
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and obligations under
capital leases $ 537 $ 363
Accounts payable 5,833 5,185
Accrued liabilities 1,138 1,037
-------- --------
Total current liabilities 7,508 6,585
-------- --------
Long-Term Debt 839 853
Long-Term Obligations Under Capital Leases 1,465 1,523
-------- --------
2,304 2,376
-------- --------
Commitments and Contingencies (Note 11)
Stockholders' Investment
Preferred Stock, par value $1.00 per share; 1,000,000
authorized and issuable in series (Note 10)
Series A Cumulative Covertible Preferred Stock, 100,000
shares authorized; no shares outstanding at June 27, 1997
and June 28, 1996 -- --
Series B Cumulative Redeemable Preferred Stock, 20,000
shares authorized; no shares outstanding at June 27, 1997
and June 28, 1996 -- --
Common Stock, par value $.01 per share; 30,000,000 shares
authorized; 7,448,473 and 7,446,975 shares issued at
June 27, 1997 and June 28, 1996, respectively (Note 9) 75 75
Warrants outstanding 159 120
Capital in excess of par value 29,052 29,046
Retained earnings 3,999 4,855
Valuation adjustment to record marketable securities available
for sale at fair value 7 47
-------- --------
33,292 34,143
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
-------- --------
Total stockholders' investment 33,011 33,862
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 42,823 $ 42,823
======== ========
See notes to consolidated financial statements
F-3
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997
(Dollars in Thousands, except per share data)
June June June
27, 1997 28, 1996 30, 1995
-------- -------- --------
Net sales $ 50,675 $ 44,513 $ 43,830
-------- -------- --------
Cost of sales 41,421 31,956 30,782
Gross profit 9,254 12,557 13,048
-------- -------- --------
Operating expenses
Selling, general and administrative 7,061 5,881 6,827
Research and development 3,085 2,820 2,619
-------- -------- --------
Total operating expenses 10,146 8,701 9,446
-------- -------- --------
Operating (loss) income (892) 3,856 3,602
-------- -------- --------
Interest expense (287) (416) (718)
Interest income 314 191 --
Other income 72 106 58
-------- -------- --------
(Loss) income before provision for income tax (793) 3,737 2,942
Provision for income taxes 63 -- --
-------- -------- --------
Net (loss) income $ (856) $ 3,737 $ 2,942
======== ======== ========
Net (loss) income per share - primary $ (.12) $ .48 $ .52
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding - primary 7,430 7,853 7,989
======== ======== ========
Net (loss) income per share - fully diluted $ (.12) $ .47 $ .51
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding - fully diluted 7,430 8,179 8,402
======== ======== ========
See notes to consolidated financial statements
F-4
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997
(Dollars in thousands)
Valuation
Adjustment
to record
Marketable
Capital Securities
Class B in excess Retained available
Preferred Common Common Warrants of par (Deficit) for sale at Treasury
Stock Stock Stock Outstanding value Earnings fair value Stock
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, June 24, 1994 $ 2,763 $ 38 $ 4 $ 120 $14,317 ($1,824) $ 0 ($ 281)
------- ------- ------- ------- ------- ------- ------- -------
Issuance of Common Stock from
exercise of private placement
Warrants and Unit Purchase
Options net of $571 of 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 of 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 -- 75 -- 120 29,046 4,855 47 (281)
Exercise of stock options -- -- -- -- 6 -- -- --
Warrants issued for financial
Advisory services -- -- -- 39 -- -- -- --
Unrealized loss on marketable
securities available for sale -- -- -- -- -- -- (40) --
Net loss for the year -- -- -- -- -- (856) -- --
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, June 27, 1997 $ 0 $ 75 $ 0 $ 159 $29,052 $ 3,999 $ 7 ($ 281)
See notes to consolidated financial statements
F-5
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 27, 1997
(Dollars in thousands)
June 27, June 28, June 30,
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($ 856) $ 3,737 $ 2,942
-------- -------- --------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities
Depreciation and amortization 1,745 1,727 1,761
Increase in allowance for inventory 2,896 568 30
Amortization of other assets, net 180 278 241
Changes in assets and liabilities
Increase in receivables (304) (951) (554)
Increase in inventories (4,438) (2,322) (2,901)
(Increase) decrease in prepaid expenses and other assets (362) (257) (895)
Increase (decrease) in accounts payable and
accrued liabilities 787 (242) (225)
-------- -------- --------
Net cash (used in) provided by operating activities (352) 3,052 669
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,267) (549) (3,060)
Purchases of marketable securities available for sale (24,488) (6,533) --
Proceeds from sales and maturities of marketable securities
available for sale 26,895 1,645 1,327
-------- -------- --------
Net cash used by investing activities (1,860) (5,437) (1,733)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants 6 7,656 7,094
Payment of long-term debt and obligations under capital leases (430) (1,969) (10,824)
Proceeds from issuance of long-term debt -- -- 6,039
Redemption of Preferred Stock -- (2,763) --
-------- -------- --------
Net cash (used in) provided by financing activities (424) 2,924 2,309
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,636) 539 1,245
Cash and Cash equivalents, at beginning of year 2,883 2,344 1,099
-------- -------- --------
Cash and Cash equivalants, at end of year $ 247 $ 2,883 $ 2,344
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Capital leases entered into $ 533 $ 1,938 $ 52
======== ======== ========
Valuation adjustment to record marketable securities
available for sale at fair value ($ 40) $ 37 $ 10
======== ======== ========
Cash paid during the period for income taxes $ 42 $ 0 $ 0
======== ======== ========
Cash paid during the period for interest $ 241 $ 174 $ 762
======== ======== ========
See notes to consolidated financial statements
F-6
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, station electronics, and fiber optic enclosure products. The
majority of the Company's consolidated sales for each of the three years ended
June 27, 1997 resulted from sales of overvoltage protector products, 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from such estimates.
MARKETABLE SECURITIES: The Company categorizes its marketable security
investments as available-for-sale securities, reported at fair value. Unrealized
gains and losses of available-for-sale securities are reported as a separate
component of stockholders' investment. At June 27, 1997 and June 28, 1996 the
portfolio consisted of federal backed agency bonds and notes and other liquid
investment grade investments with maturities ranging from three months to one
year. 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.
OTHER ASSETS: 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. Included within other assets is the cash surrender value
of approximately $50,000 relating to key-man life insurance policy with a face
amount in excess of $2,000,000.
NET (LOSS) PROFIT PER COMMON SHARE: Net (loss) 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
F-7
securities. The effect on net (loss) profit of these assumed transactions is
considered in the computation.
PENDING ACCOUNTING PRONOUNCEMENTS: The FASB issued SFAS No. 128, Earnings per
Share, which will be effective with the Company's consolidated financial
statements for the fiscal year ending June 28, 1998. Under this standard, the
Company will replace its disclosure of primary earnings per share with basic
earnings per share and fully diluted will be replaced with dilutive earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Upon adoption of the standard, prior period
amounts must be restated. The impact on previously reported primary and fully
diluted earnings per share will be immaterial.
STATEMENTS OF CASH FLOWS: All highly liquid instruments including those with an
original maturity of three months or less are considered cash equivalents. The
Company had cash equivalents of approximately $84,000 and $2,305,000 at June 27,
1997 and June 28, 1996, respectively.
RECLASSIFICATIONS: Certain reclassifications have been made in the accompanying
consolidated financial statements for the years ended June 28, 1996 and June 30,
1995 to conform with the presentation used in the June 27, 1997 consolidated
financial statements.
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) COST REDUCTION PLAN. During the third quarter of fiscal year 1997, the
Company put into effect certain measures in accordance with a plan to reduce
costs and enhance profitability. This plan included the reduction of personnel,
movement of certain production processes to the Company's lower cost facility in
the Dominican Republic, outsourcing certain manufacturing steps, re-aligning its
sales and marketing forces and ceasing the sale of lower margin products. This
action resulted in non-recurring charges of $3.0 million, which consisted of an
increase to the allowance for inventory, severance related costs and costs to
close or move certain production processes.
(3) RECEIVABLES. Receivables consist of the following:
June 27, June 28,
1997 1996
-------- --------
(amounts in thousands)
Trade receivables $ 6,897 $ 6,685
Other receivables 544 521
------- -------
7,441 7,206
Less: allowance for
doubtful accounts (53) (122)
------- -------
$ 7,388 $ 7,084
======= =======
F-8
(4) INVENTORIES. Inventories consisted of the following:
June 27, June 28,
1997 1996
------- -------
(amounts in thousands)
Raw materials $ 7,426 $ 6,973
Work-in-process 4,584 4,879
Finished goods 5,994 4,214
------- -------
18,004 16,066
Less: Allowance for inventory (2,430) (2,034)
------- -------
$15,574 $14,032
======= =======
(5) ACCRUED LIABILITIES: Accrued liabilities consist of the following:
June 27, June 28,
1997 1996
(amounts in thousands)
Payroll, incentive and vacation $ 672 $ 603
Accrued payroll taxes 91 153
Legal and professional fees 135 113
Accrued rent 100 100
Other 140 68
------ ------
$1,138 $1,037
====== ======
(6) LONG-TERM DEBT. The composition of long-term debt is as follows:
June 27, June 28,
1997 1996
(amounts in thousands)
Unsecured subordinated note payable on
July 19, 2001, bearing interest at 10%.
Convertible into 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 $299. 103 116
---- ----
853 866
Less current portion (14) (13)
---- ----
Long-term debt $839 $853
==== ====
The Company is also a party to a Revolving Credit Loan Agreement with Chase
Manhattan Bank, which, at June 27, 1997, entitled the Company to have
outstanding borrowings of up to $4,000,000, reducing by $400,000 each calendar
quarter thereafter. At June 27, 1997 and June 28, 1996, there were no
outstanding borrowings under the revolving loan facility. Loans bear interest at
(a) the greater
F-9
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. Loans are secured primarily by the
Company's accounts receivable and continental United States assets. The loan
agreement requires the Company to maintain a minimum net worth of $31,400,000,
current ratio of 1.25 through fiscal 1997 and 1.50 thereafter, 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 Leasing, Inc.). 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. The Company received a
waiver from compliance with the debt service ratio, capital expenditure and net
loss covenants for fiscal 1997.
Future minimum payments for long term debt are as follows:
Fiscal year Amount
1998 $ 14,000
1999 15,000
2000 17,000
2001 768,000
2002 17,000
Thereafter 22,000
---------
Total minimum payments 853,000
Less: current portion (14,000)
---------
$ 839,000
=========
(7) Obligation under capital leases: The Company leases equipment and vehicles
for its operations. These leases have been capitalized using interest rates
ranging from 7.9% to 14.9%. Future minimum payments under these leases are as
follows:
Fiscal year Amount
1998 $ 654,000
1999 652,000
2000 557,000
2001 288,000
2002 89,000
Thereafter 51,000
----------
Total minimum lease payments 2,291,000
Less: Amount representing interest (303,000)
----------
Present value of
net minimum lease payments 1,988,000
Less: Current portion of obligations
under capital lease (523,000)
----------
$1,465,000
==========
(8) 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.
The Company has elected the application of Section 936 of the US Internal
Revenue Code (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
F-10
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. To the extent the Company has taxable
income arising from United States sources (e.g., income from investment or
operating 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 is based upon qualified wages paid for services performed in Puerto
Rico, fringe benefits, depreciation deductions and taxes in Puerto Rico. Based
on fiscal 1997 levels of qualified wages, fringe benefits, depreciation and
taxes in Puerto Rico, the Company's economic activity based credit limitation is
approximately $3,550,000 per annum. The amount of the economic activity based
Section 936 credit limitation available for fiscal 1997 will be sufficient to
offset the United States federal income tax on Puerto Rico source income for the
Company's 1997 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 repealed 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 fiscal 1996 tax year, it is eligible to continue to claim a Section 936
credit until the year ended June 2006 under a special grandfather rule. If,
however, the Company adds a substantial new line of business, 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 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
may not 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.
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 also has net operating loss carryforwards available through fiscal 2004
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 United States based
subsidiary operating in the Dominican Republic is exempt from taxation in that
country.
F-11
In each of the years in the three-year period ended June 27, 1997, 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.
At June 27, 1997, the Company had net operating loss carryforwards aggregating
approximately $15,126,000 which expire periodically through 2006, and along with
its subsidiaries had consolidated net operating loss carryforwards aggregating
approximately $24,439,000 which expire periodically through 2012 and general
business tax credit carryforward of approximately $343,000 which expire
periodically through 2012. As a result of a private placement in fiscal 1993
there was an ownership change within the meaning of Section 382 of the Code,
which limits the ability of the Company and its subsidiaries to utilize their
net operating losses and tax credit carryforwards. 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 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 27, 1997, the Company's United
States subsidiaries have approximately $2,060,000 of net operating losses that
were generated subsequent to the ownership change and remain available for use
through 2012. In addition, the Company's United States subsidiaries have
available approximately $1,852,000 in unused Section 382 annual net operating
loss limitation carryforwards.
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 $3,695,000 for which an
offsetting valuation allowance has been provided due to the uncertainty of
realizing any benefit in the future.
(9) COMMON STOCK: The Company is authorized to issue 30,000,000 shares of Common
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. On December 4, 1996, at the 1996 Annual Meeting of Stockholders,
stockholders voted to approve an amendment to the Company's Certificate of
Incorporation which removed the Company's Class B Stock and Class C Stock from
shares which the Company is authorized to issue.
EMPLOYEE STOCK OPTION PLANS: The Company's 1995 Stock Option Plan (the "1995
Plan") permits the Compensation Committee of the Board of Directors to grant,
until September 2005, options to employees, officers, consultants and certain
members of the Board of Directors. 500,000 shares were reserved for issuance
under the 1995 Plan. 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 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.
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 27, 1997, June 28, 1996 and June 30, 1995 follows:
F-12
June 27, 1997 June 28, 1996 June 30, 1995
---------- ---------- ----------
Shares under option at beginning of period 1,238,207 1,269,387 501,415
Options granted during period 383,000 113,200 868,000
Options exercised during period (1,500) (80,380) (94,028)
Options canceled/expired during period (83,500) (64,000) (6,000)
---------- ---------- ----------
Shares under option at end of period 1,536,207 1,238,207 1,269,387
========== ========== ==========
Options exercisable at end of period 648,344 501,454 336,634
Shares available for future grant at end of period 112,500 469,000 126,257
Exercise price per share for options exercised
during period $2.50-4.63 $2.50-6.09 $2.50-4.63
Exercise price per share for options outstanding
at end of period $2.50-9.38 $2.50-9.69 $2.50-9.69
The 1994 Non-Employee Director Stock Option Plan covers an aggregate of 200,000
shares of Common Stock and provides (i) Non-Employee Directors are granted
options to purchase 10,000 share of Common Stock annually upon their re-election
to the Board; (ii) all options granted vest in full immediately following their
grant; (iii) the term of options granted shall be for a term of ten years; and
(iv) the period following termination of service during which an Outside
Director may exercise an option shall be twelve 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).
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option plans
as Accounting Principles Board (APB) Opinion 25 and related interpretations in
accounting for stock options plans is followed. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net (loss) income would have been
(increased) reduced to the pro forma amounts indicated in the table below.
Fiscal Year Ended June
27, 1997 28, 1996
-------- --------
Net (loss) income
As reported ($856,000) $3,737,000
Pro forma ($1,161,000) $3,629,000
Primary (loss) income per share
As reported ($0.12) $0.48
Pro forma ($0.16) $0.46
The fair value of stock options granted during fiscal years 1997 and 1996 were
determined by using the Black Scholes option-pricing model which values options
based on the stock price at the date of grant, the expected life of the option,
the estimated volatility of the stock, expected dividend payments, and the risk
free interest rate over the expected life of the option. The following
assumptions were used in the pricing model: risk free interest rate of 6.2%;
expected dividend yield of 0%; expected option life of seven years and expected
volatility of 42.9%. The weighted average fair value of options granted during
fiscal 1997 and 1996 were $2.58 and $3.44, respectively.
Under SFAS 123, stock options granted prior to fiscal year 1996 are not required
to be included as compensation in determining pro forma net earnings.
F-13
OTHER OPTIONS AND WARRANTS OUTSTANDING: The holder of the Company's unsecured
subordinated note (see Note 5) has 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 canceled by the Company prior to
its expiration if, with the prior written consent of the holder, the Company's
$750,000 ten-year convertible unsecured note payable is prepaid.
The Company also has an outstanding 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.
The Company also has warrants outstanding which allow the holder to purchase
60,000 shares of Common Stock at an exercise price of $6.56 per share which
expire in August 1998. During July 1996, the Company granted to a financial
advisory firm a warrant to purchase 20,000 shares of Common Stock at an exercise
price of $6.15 per share, which expires in July 2001.
(10) 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 27, 1997, 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.
(11) AGREEMENT WITH AT&T: On September 13, 1988, the Company and AT&T
Corporation 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 and 1995,
the Company received payments of $875,000 and $777,000, respectively, for the
sales shortfall corresponding to the contract years ended December 31, 1995 and
1994, respectively. These receipts are included in net sales. As of June 28,
1996, there are no remaining payments scheduled to be received.
(12) 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 27, June 28, June 30,
1997 1996 1995
-------------------------------
Siecor Corporation(a) 20% 26% 30%
NYNEX 18% 15% 13%
Keptel, Inc.(a) 11% 12% *
* Asterisk denotes less than 10% for the period presented.
(a) Siecor Corporation and Keptel, Inc. are telecommunication equipment
companies that supply Network Interface Devices to Regional Bell Operating
Companies. Several Regional Bell Operating Companies have standardized on
TII station protectors and require Siecor and Keptel to purchase TII
station protectors for inclusion into their Network Interface Devices.
EXPORT SALES: For each of the three years ended June 27, 1997 export sales were
less than 10% of consolidated net sales.
F-14
FOREIGN COMPONENTS OF INCOME: Certain immaterial subsidiaries and components of
the Company operate outside the United States and Puerto Rico.
(13) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS: The Company
leases real property and equipment with terms expiring through December 1998.
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, of approximately $94,000 and $17,000 in fiscal
years 1998 and 1999, respectively. The Company has no lease commitments beyond
1998.
Since fiscal year 1982, the Company has leased equipment from PRC Leasing, Inc.
(PRC), a corporation owned by the Chairman of the Board 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
canceled 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 27, 1997,
accrued rent owed under this agreement totaled $100,000. Although neither the
Company nor PRC is obligated to renew the equipment lease, it is the Company's
intention to seek renewals of the equipment lease for at least the next four
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 27, 1997 was
approximately $2,803,000 with a current carrying value of approximately
$150,000. 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 four
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 1997, 1996 and 1995 was
approximately $682,000, $636,000 and $613,000, respectively, including $200,000
each year relating to the equipment leases with PRC.
(14) PROFIT SHARING PLAN: During fiscal 1997, the Company established a defined
contribution pension plan through a 401(k) profit sharing plan. The plan covers
substantially all employees and requires the Company to match employees'
contributions up to specified limitations and subject to certain vesting
schedules.
F-15
(15) QUARTERLY RESULTS (UNAUDITED): The following table reflects the unaudited
quarterly results of the Company for the fiscal years ended June 27, 1997 and
June 28, 1996:
Fully
Diluted
Net Income
Gross Operating Net Income (Loss)
Net Sales Profit Income (Loss) Per Share
----------- --------- ----------- ----------- --------
Quarter Ended
- --------------
1997 FISCAL YEAR
September 27, 1996 $12,040,000 3,184,000 $ 806,000 $ 752,000 $ 0.10
December 27, 1996 12,957,000 3,353,000 856,000 905,000 0.12
March 28, 1997(1) 12,535,000 357,000 (2,391,000) (2,325,000) (0.31)
June 27, 1997 13,143,000 2,360,000 (163,000) (188,000) (0.03)
1996 FISCAL YEAR
September 29, 1995 $ 9,600,000 2,566,000 $ 448,000 $ 439,000 $ 0.06
December 29, 1995 11,241,000 3,111,000 955,000 895,000 0.11
March 29, 1996(2) 12,136,000 4,190,000 1,852,000 1,781,000 0.22
June 28, 1996 11,536,000 2,690,000' 601,000 622,000 0.08
- --------------------------------------------------------------------------------
(1) Includes non-recurring charges of $3.0 million, which consisted of an
increase in the allowance for inventory, severance related costs, and costs
to close or move certain production processes.
(2) Includes payment received from AT&T Corporation of $875,000 in the third
quarter of fiscal 1996 for shortfalls of purchases by AT&T from the Company
under the Company's 1988 Agreement with AT&T.
F-16
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
27, 1997 and June 28, 1996, and related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended June 27, 1997, included in this Form 10-K and have issued our
report thereon dated September 19, 1997. 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 27, 1997, June 28, 1996 and June 30, 1995,
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 states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
San Juan, Puerto Rico
September 19, 1997.
Stamp No. 1454625 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 DISPOSITIONS PERIOD
---------- ---------- ---------- ----------
CLASSIFICATION
June 27, 1997
Inventory Reserve $2,034,000 $2,896,000 $2,500,000 $2,430,000
========== ========== ========== ==========
June 28, 1996
Inventory Reserve $1,466,000 $ 568,000 $ 0 $2,034,000
========== ========== ========== ==========
June 30, 1995
Inventory Reserve $1,166,000 $ 300,000 $ 0 $1,466,000
========== ========== ========== ==========
S-2
EXHIBIT INDEX
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3(a)(1) Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of the State of Delaware on
December 10, 1996. Incorporated by reference to Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 27, 1996 (File No. 1-8048).
3(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 28, 1996 (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. Incorporated by reference to Exhibit 4(a)(1)(C)
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 28, 1996 (File No. 1-8048).
4(a)(1)(D) Third Amendment dated as of December 27, 1995 to the Revolving
Credit Agreement among International, the Company and the
Bank. Incorporated by reference to Exhibit 4(a)(1)(D) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 28, 1996 (File No. 1-8048).
4(a)(1)(E) Fourth Amendment dated May 2, 1997 to the Revolving Credit
Agreement among International, the Company and the Bank.
Incorporated by reference to Exhibit 4 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 28, 1997 (File No. 1-8048).
4(a)(1)(F)* Fifth Amendment and Waiver dated as of September 23, 1997 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.(since dissolved), Ditel, Inc.(now TII-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).
4(a)(7) Security Agreement dated January 31, 1995 between Ditel,
Inc.(now TII-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. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 27, 1996 (File No. 1-8048).
10(a)(2)+ 1986 Stock Option Plan of the Company, as amended.
Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 27, 1996 (File No. 1-8048).
10(a)(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. Incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 1996 (File No. 1-8048).
10(b)(1)*+ Amended and Restated Employment Agreement dated as of August
1, 1997 between the Company and Timothy J Roach.
10(b)(2)*+ Amended and Restated Employment Agreement dated as of May 1,
1997 between the Company and Carl H. Meyerhoefer.
10(b)(3)(A)*+ Employment Agreement dated September 23, 1993 between the
Company and Dare P. Johnston.
10(b)(3)(B)*+ Extention dated as of June 2, 1997 to the Employment Agreement
dated September 23, 1993 between the Company and Dare P.
Johnston.
10(c)(1)(A)+ Equipment Lease dated July 18, 1991 between PRC Leasing, Inc.
("PRC") and the Company. Incorporated by reference to Exhibit
10(b)(57) to the Company's Current Report on Form 8-K for the
month of July 1991 (File No. 1-8048).
10(c)(1)(B)+ Amendment dated July 18, 1992 to Equipment Lease dated July
18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 10(b)(67) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 25, 1993 (File No.
1- 8048).
10(c)(1)(C)+ Second Amendment dated February 25, 1993 to Equipment Lease
dated July 18, 1991 between the Company and PRC. Incorporated
by reference to Exhibit 10(b)(7) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 25, 1993
(File No. 1-8048).
10(c)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment
Lease dated July 18, 1991 between the Company and PRC.
Incorporated by reference to Exhibit 4(d) to Amendment No. 2
to the Schedule 13D filed by Alfred J. Roach (File No.
1-8048).
10(d)(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(d)(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.
21* Subsidiaries of the Company.
23* Consent of independent public accountants.
27* Financial data schedule (filed electronically only).
- --------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.