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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 26, 1998
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
Series D Junior Participating Preferred Stock
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant outstanding as
of September 11, 1998 held by non-affiliates of the registrant was approximately
$19,073,000. 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 11, 1998 was 7,667,269.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 1998 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
PART I
Item 1. Business
General
TII designs, manufactures and markets overvoltage surge protectors, network
interface devices ("NIDs"), station electronics and fiber optic products for use
in the communications industry. The Company sells its products to United States
telephone operating companies ("Telcos"), original equipment manufactures
("OEMs"), cable TV ("CATV") providers and competitive access providers ("CAPs")
of communications services. The Company believes that the performance of its
products, together with its commitment to quality and service, has fostered
strong customer loyalty, leading four of the five regional bell operating
companies ("RBOCs") and most of the 1,300 independent Telcos to specify one or
more of the Company's overvoltage surge protectors for use at their subscriber
station locations.
TII has been a leading supplier of subscriber station overvoltage surge
protectors to U.S. Telcos for over 25 years. The Company believes that its
proprietary overvoltage surge protectors offer superior, cost-effective
performance features and characteristics, including high reliability, long life
cycles and advanced protection against adverse environmental conditions.
Overvoltage surge protectors are mandated in the United States by the national
electric code ("NEC") to be installed on subscriber telephone lines to prevent
injury to users and damage to their equipment due to surges caused by lightning
and other hazardous overvoltages. While similar requirements exist in most other
developed countries, a significant portion of the world's communications
networks remains unprotected from the effects of overvoltage surges.
The Company also markets a complete line of NIDs tailored to customer
specifications. NIDs house the FCC mandated demarcation point between
Telco-owned and subscriber-owned property. NIDs typically also enclose
overvoltage surge protectors and various station electronic products, which,
among other things, allow a Telco to remotely test the integrity of its lines,
thereby minimizing costly maintenance dispatches. To address the demand for
voice, high-speed data and interactive video services, Telcos and other
communications providers are expanding and upgrading their networks to
accommodate the higher bandwidth necessary to transmit these services. To meet
its customers' needs, TII has introduced an innovative broadband NID product
line specifically designed to house the Telcos' technology of choice, whether
traditional twisted pair lines or high-bandwidth coaxial cable or fiber optic
lines.
As an integral part of the Company's broadband NID product line, the Company
recently developed a high-performance patented coaxial overvoltage surge
protector to safeguard coaxial cable lines. While providing overvoltage surge
protection, the Company's in-line coaxial overvoltage surge protector is
virtually transparent to the network, permitting high-bandwidth signals to be
transmitted without adversely affecting the signal. The Company also markets its
coaxial overvoltage surge protector to CATV providers of interactive services.
Proposed revisions to the NEC, currently anticipated to take effect in 1999,
would require overvoltage surge protection on all new or existing CATV lines
intended to carry voice, data or interactive video services.
2
Through its subsidiary, TII-Ditel, Inc. ("TII-Ditel"), the Company also produces
and sells a line of fiber optic products, including interconnect hardware
components, high performance cable assemblies, a line of enclosures, both
wall-mount and rack-mount, and two unique cable management systems used to route
sensitive fiber optic cable throughout a facility, LIGHTRAX(TM) and FiberTray.
LIGHTRAX(TM) is a proprietary system, while FiberTray is offered under a private
label agreement. These products are used used connect the Telcos' local and long
distance network to their central offices, as well as to route fiber optic lines
throughout subscriber locations.
The Company's strategy for participating in the rapid growth of the
communications industry includes: (i) growing its core business by capitalizing
on its reputation as a manufacturer of quality, high-performance products; (ii)
introducing new and innovative products that are complementary to its current
products; and (iii) expanding into new markets, including CATV, international
and wireless markets.
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 and
potential investors to take advantage of the "safe harbor" provisions of that
Act. Such forward-looking statements are subject to a number of known and
unknown risks and uncertainties that could cause the Company's actual results,
performance or achievements to differ materially from those described or implied
in the forward-looking statements. These factors include, but are not limited
to, general economic and business conditions, including the regulatory
environment applicable to the telecommunications industry; weather and similar
conditions (including the effects of hurricanes in the Caribbean where the
Company's principal manufacturing facilities are located); 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 and uncertainty of customer acceptance; dependence on third parties for
its product components (see
3
"Raw Materials"); the Company's ability to attract and retain technologically
qualified personnel (see "Employees"); 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.
Products
Overvoltage Surge Protectors. The Company designs, manufactures and markets
overvoltage surge protectors primarily for use by Telcos on their subscribers'
home or business telephone lines. Surge protectors: (i) protect the subscribers
and their equipment; (ii) reduce the subscribers' loss of service; (iii) reduce
the Telcos' loss of revenue due to subscriber outages; and (iv) reduce the Telco
costs to replace or repair damaged Telco-owned equipment. Overvoltage surge
protectors differ in power capacity, application, configuration and price to
meet varying needs.
In the United States, overvoltage surge protectors are required by the NEC to be
installed on the subscriber's telephone lines. While similar requirements exist
in most other developed countries, a significant portion of the world's
communications networks remains unprotected from the effects of overvoltage
surges.
Gas Tube Protectors: The Company's gas tubes represent the foundation
upon which most of the Company's current overvoltage surge protector products
are based. The principal component of the Company's overvoltage surge protector
is a proprietary two or three electrode gas tube. Overvoltage surge protection
is provided when the voltage on a 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.
Modular Station Protectors: One of the Company's most advanced
overvoltage surge protectors, marketed under the trademark Totel Failsafe (R)
("TFS"), combines the Company's three electrode gas tube with a thermally
operated failsafe mechanism. The three electrode gas tube is designed to protect
equipment from hazardous overvoltage surges and the failsafe mechanism is
designed to insure that, under sustained overvoltage conditions, the protector
will become permanently grounded. The TFS module's protector element is
environmentally sealed to prevent damage to the protector from severe moisture
and industrial pollution. Another advanced overvoltage surge protector, jointly
manufactured with Raychem Corporation ("Raychem"), combines the Company's TFS
protection element with Raychem's proprietary gel technology making this modular
surge protector virtually impervious to environmental contamination while
providing advanced overvoltage surge protection.
4
Coaxial Protectors: In October 1996, TII was granted a U.S. patent for
its new coaxial transmission line surge protector. The patent provides broad
coverage for its in-line overvoltage surge protection on coaxial cable, an
alternate method of providing high-bandwidth signals. TII's gas tube coaxial
surge protector is an in-line protector that provides superior overvoltage surge
protection for the connected equipment while remaining virtually transparent to
the signal on the network. This permits high-bandwidth signals to be transmitted
without adversely affecting the signal. The coaxial overvoltage surge protector
is also marketed to CATV providers and to the rapidly expanding wireless
communications market, including, cellular, microwave, satellite and digital
personal communications systems.
Solid State and Hybrid Overvoltage Surge Protectors: Using purchased
solid state components, the Company has developed a line of solid state
overvoltage surge protectors. While solid state overvoltage surge protectors are
faster than gas tube overvoltage surge protectors at reacting to surges, a
feature that some Telcos believe important in protecting certain of their
sensitive equipment, they have lower energy handling capability than gas tubes.
When an overvoltage surge exceeds the energy handling capacity of the solid
state protector, it fails in a shorted mode causing the telephone to cease
operating. Therefore, the Company principally targets customers for its solid
state surge protectors in regions where there is a low incidence of lightning,
the source of the highest voltage surges on a communications line. As
communications equipment becomes more complex, a protector's reaction speed to a
surge may be perceived to be more critical than its energy handling
capabilities. In response, the Company is also combining solid state protectors
with the Company's gas tubes in hybrid overvoltage surge protectors. While
generally more expensive and complex than gas tube surge protectors, the hybrid
surge protector can provide the speed of solid state protectors with the energy
handling capability of a gas tube surge protector.
AC Powerline Protectors: TII's powerline surge protectors utilize the
Company's gas tubes and solid state surge protection technology and are
principally used by Telcos at their central office locations. These devices
protect the connected communication equipment against damage or destruction
caused when overvoltage surges enter equipment through the powerline.
Overvoltage surge protectors sold separately from NIDs accounted for
approximately 65%, 65% and 55% of the Company's net sales during the Company's
fiscal years 1996, 1997 and 1998, respectively.
Network Interface Devices. The Company designs, molds, assembles and markets
various NIDs. The Company's NIDs house the FCC mandated demarcation point
between Telco-owned and subscriber-owned property. The Company's NIDs typically
also enclose its overvoltage surge protectors and various station electronic
products, which, among other things, allow Telcos to remotely test the integrity
of their lines, thereby minimizing costly maintenance dispatches.
To address the demand for voice, high-speed data and interactive video services,
Telcos and other communications providers are expanding and upgrading their
networks to accommodate the higher bandwidth necessary to transmit these
services. In response, TII has recently developed a line of patented broadband
NIDs designed to enclose the Telcos' technology of choice needed to accommodate
higher bandwidth signals, whether traditional twisted pair lines or
high-bandwidth coaxial cable or fiber optic lines. The Company's broadband NID
product line is modular in design and thus facilitates expansion to accommodate
additional access lines subscribers may request in
5
the future. For use in various markets, the NID product line currently consists
of enclosures which will accommodate up to two, four, six or twelve access lines
and the Company is presently developing enclosures which will accommodate up to
twenty-five access lines. Designed with future technologies in mind, the
Company's broadband NIDs also accommodates TII's patented coaxial overvoltage
surge protector, as well as high-performance fiber optic cable assemblies,
produced by, among others, the Company's subsidiary, TII-Ditel.
NID sales represented approximately 21%, 23% and 30% of the Company's net sales
during fiscal 1996, 1997 and 1998, respectively.
Station Electronics and Other Products. The Company designs, manufactures and
markets station electronic products. Most subscriber electronic devices are
designed to be installed with an overvoltage surge 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-owned or subscriber-owned equipment before dispatching a
costly 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 from NIDs accounted for
approximately 11%, 6% and 7% of the Company's net sales in fiscal 1996, 1997 and
1998, respectively.
Fiber Optic Products. The Company's fiber optic product lines, sold and marketed
primarily to the RBOCs, OEMs and long distance companies under the name
TII-Ditel, include enclosures, splice trays, high performance cable assemblies,
and LIGHTRAX and FiberTray, unique fiber management systems used to route
sensitive fiber optic lines throughout a facility in which the fiber optic cable
is being installed. LIGHTRAX(TM) is a proprietary system while FiberTray is
offered under a private label agreement. The Company integrates these products
with purchased fiber optic components to design and produce customized fiber
optic cable assemblies for the various interconnection points which join and
extend fiber optic lines.
TII-Ditel develops markets for its products by encouraging its technical
personnel to work closely with the engineering staffs of its customers to
provide applications assistance and formulate unique solutions to consumer
needs.
Sales of fiber optic products represented approximately 3%, 6% and 8% of the
Company's net sales during fiscal 1996, 1997 and 1998, respectively.
Research and Development
As the Telcos and other communications providers upgrade and expand their
networks to provide advanced telecommunications 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:
6
Expanding the broadband NID product line to address anticipated
future requirements of the Telcos and other competitive access
providers.
Further developing coaxial cable overvoltage surge protectors for
Telcos, CATV providers and wireless broadband communications
markets.
Expanding the Company's fiber optic product line of enclosures
and fiber optic cable management systems to meet the growing
needs of existing and potential customers.
Designing custom overvoltage surge protectors for OEMs for
installation throughout Telco and other communications networks.
Designing gas tube, solid state and hybrid overvoltage surge
protectors for the varying specifications of the worldwide
communications markets.
The Company's R&D department currently consists of 30 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 in order to develop and test its
existing and current products.
The Company's R&D expense was $2.8 million, $3.1 million and $3.3 million during
fiscal 1996, 1997 and 1998, respectively. All of such R&D was Company sponsored.
Marketing and Sales
Prior to selling its products to an RBOC or other Telco, the Company must
undergo a potentially lengthy product qualification process. Thereafter, the
Company continually submits successive generations of current products, as well
as new products, to such customers for qualification. The Company believes that
its 25 years as a leading supplier of overvoltage surge protectors, its current
designation as a supplier to four of the five RBOCs of subscriber overvoltage
surge protectors and its strategy for developing products by working closely
with its customers provide a strong position from which it can market its
current and new products.
The Company sells to Telcos primarily through its direct sales force, as well as
through a network of distributors. TII also sells to long distance carriers,
CATV providers and OEMs, including other NID suppliers, which incorporate the
Company's overvoltage surge protectors into their products for resale to Telcos.
The following customers accounted for more than 10% of the Company's
consolidated revenues during one or more of the years presented below:
7
YEAR ENDED
----------------------------
June 28, June 27, June 26,
1996 1997 1998
------ ------- -------
Bell Atlantic Corporation 15% 18% 24%
Siecor Corporation (1) 26% 20% 14%
GTE Communications Systems Corporation 4% 5% 12%
Keptel, Inc. (1) 12% 11% 6%
(1) Siecor Corporation and Keptel, Inc. are OEMs that supply NIDs to RBOCs.
Siecor Corporation and Keptel, Inc. are required by certain RBOCs to
purchase TII overvoltage surge protectors for inclusion into their NIDs.
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.
The Company's international sales equaled approximately $2.6 million in fiscal
1998 (5% of net sales), $1.3 million in fiscal 1997 (3% of net sales), and $1.6
million in fiscal 1996 (4% of net sales). International sales have been made
primarily to countries in the Caribbean, South and Central America, Canada and
Western Europe. Additionally, the Company believes that certain of its products
which are sold to distributors and OEMs are embodied in products which are sold
abroad. The Company requires foreign sales to be paid for in U.S. currency, and
generally requires such payments to be made in advance, by letter of credit or
by U.S. affiliates of the customer.
International sales are affected by such factors as exchange rates, changes in
protective tariffs and foreign government import controls. The Company believes
international markets offer substantial opportunities. While the Company intends
to devote additional sales and marketing efforts toward increasing its
international sales, there can be no assurance that these efforts will be
effective or that the Company will achieve significant international sales.
Manufacturing
The Company produces its overvoltage surge protectors, NIDs and station
electronics at its facilities in Puerto Rico and the Dominican Republic. The
Company's facilities in Puerto Rico and the Dominican Republic have been ISO
9002 accredited since October 1994 and June 1995, respectively. The ISO
establishes global standards for manufacturing and quality. The Company
manufactures its fiber optic products at its facility in North Carolina.
The Company believes that the vertical integration of its manufacturing
processes provide both cost and delivery advantages. 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
in Puerto Rico. Many of the Company's products contain numerous metal components
produced with the Company's metal stamping and forming equipment.
8
As a result of the award of new contracts, including contracts for the Company's
broadband NIDs, in fiscal years 1997 and 1998, the Company expanded its
manufacturing facilities to increase its gas tube overvoltage surge protector
and thermoplastic molding capacities, and purchased the molds, test equipment
and other equipment to meet the needs under these contracts.
The Company's fiber optic products are assembled principally from outside
purchased components and plastic parts molded at its facility in North Carolina.
On September 21 and 22, 1998 the Company's principal operating facilities in Toa
Ata, Puerto Rico and San Pedro De Macoris, Dominican Republic sustained business
interruption and significant inventory, equipment and facility damages as a
result of Hurricane Georges. Management and the Company's insurance advisors are
assessing the full extent of the damages. Management and the Company's insurance
advisors believe that the majority of the loss will be covered by insurance.
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 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 surge protectors, NIDs, other molded plastic housings
and fiber optic products. In manufacturing certain overvoltage surge 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 jointly manufacturing the modular
surge protector product with Raychem, the Company utilizes a proprietary gel
which is supplied exclusively by Raychem. While 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 the raw materials
it uses will continue to be available in sufficient supply at competitive
prices.
Competition
The Company faces significant competition across all of its product lines. In
the overvoltage surge (station) protector market, the Company competes
principally with Siecor Corporation and AMP Incorporated. In the NID and station
electronic markets, the Company's principal competitors are Siecor Corporation
and Keptel, Inc., a subsidiary of Antec Corporation (see "Marketing and Sales").
The Company's gas tube overvoltage surge protectors not only compete with other
companies' gas tube overvoltage surge protectors, but also with solid state
overvoltage surge protectors. While solid state surge protectors react faster to
surges, gas tube overvoltage surge protectors have generally remained the
subscriber overvoltage surge protection technology of choice by virtually all
Telcos because of the gas tube's ability to repeatedly withstand significantly
higher energy surges than solid state surge protectors. This enables gas tubes
to survive longer in the field than solid state surge protectors, reducing loss
of service and costs in dispatching a maintenance vehicle to replace the failed
surge protector. Solid state overvoltage surge protectors are used principally
in Telcos' central office switching centers where speed is perceived to be more
critical than energy handling capabilities and in regions where there is a low
incidence of lightning. While the Company believes that, for the foreseeable
future, both gas tube and solid state protectors will continue to be used as
overvoltage surge protectors within the telecommunication market, solid state
surge protectors may gain market share from gas tube surge protectors,
especially where high speed response is critical. Solid state and gas tube
protectors are produced from different raw materials, manufacturing
9
processes and equipment. The Company has begun developing and marketing
overvoltage surge protectors incorporating purchased solid state protectors 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.
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, manufacturing and research and
development resources than the Company. The Company believes that its sales,
marketing and R&D departments, its high quality, low-cost production facilities
and its overvoltage surge protection technology enable it to maintain its
competitive position.
Patents and Trademarks
The Company owns or has applied for a number of patents relating to certain of
its products or components thereof and owns a number of registered trademarks
which are considered to be of value principally in identifying the Company and
its products. However, to maintain its industry position, the Company relies
primarily on technical leadership, trade secrets and nondisclosure agreements of
its proprietary rights. While the Company considers its patents and trademarks
to be important, especially in the early stages of product marketing, it
believes that, because of technological advances in its industry, its success
depends primarily upon its sales, engineering and manufacturing skills.
The Company has entered into a license agreement with Citel S.A. pursuant to
which the Company is the sole licensee of a patent for a coaxial overvoltage
surge protector. This license supplements the Company's use of its own coaxial
surge protector patent. Pursuant to this agreement the Company paid a one-time
payment and will remit a royalty based on net revenues, subject to minimum
annual payments. The term of the licensing agreement continues until the
expiration of the patent under the license in 2004 and may be terminated earlier
according to the provisions therein. TII, Ditel, LIGHTRAX and Totel Failsafe are
registered trademarks of the Company.
Government Regulation
The telecommunications industry is subject to regulation in the United States
and in other countries. In the United States, the FCC and various state public
service or utility commissions regulate most of the Telcos and other
communications access providers who use the Company's products. While such
regulations do not typically apply directly to the Company, the effects of such
regulations, which are under continuous review and subject to change, could
adversely affect the Company's customers and, therefore, the Company.
The NEC requires that an overvoltage surge protector listed by Underwriters
Laboratories or another qualified electrical testing laboratory be installed on
virtually all subscriber telephone lines. Listing by Underwriters Laboratories
has been obtained by the Company where required.
10
Compliance with applicable federal, state and local environmental regulations
has not had, and the Company does not believe that compliance in the future will
have, a material adverse effect on its earnings, capital expenditures or
competitive position.
Certain Tax Attributes
The Company is incorporated in Delaware with its principal operations office
located in the Commonwealth of Puerto Rico. The Company has elected the
application of Section 936 of the U.S. 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 U.S. federal income 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 is 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 1998 levels of qualified wages, fringe benefits, depreciation and
taxes in Puerto Rico, the Company's economic activity based credit limitation is
approximately $3,383,000 per annum.
Although the Section 936 credit has generally been repealed, the Company
continues to be eligible 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 (or has a new line of business that becomes
substantial), 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 an additional
limitation calculated for the Company to be $4,520,000 of taxable income. 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
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.
11
The Company also has 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 2005 to offset any remaining Puerto Rico
taxable income. There are no limitations on the Company's ability to utilize
such net operating loss carryforwards to reduce its Puerto Rico income tax.
Furthermore, the Company's subsidiary operating in the Dominican Republic is
exempt from taxation in that country.
Employees
On September 11, 1998, the Company had approximately 1,472 full-time employees,
of whom 1,361 were engaged in manufacturing, 53 in engineering and new product
development and 58 in executive, sales and administrative positions. Of these
employees, approximately 260 are employed at the Company's Puerto Rico
facilities and approximately 1,140 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. The
Company is not a party to any collective bargaining agreements.
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 expires in April 2006.
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 in
April 2000. This facility houses certain of the Company's manufacturing
activities.
The Company leases a single story, 10,000 square foot facility in Hickory, North
Carolina under a lease expiring December 1998, which houses its fiber optic
manufacturing facilities as well as certain research and development and
administrative offices. The Company believes it will be able to extend the lease
on terms substantially similar to those contained within the existing lease or
find suitable space on terms not materially different from the existing lease.
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 1999. 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.
12
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 1998.
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 1998 and fiscal 1997, the high and low sales prices of the
Company's Common Stock, as reported by Nasdaq. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark up, mark down or
commission and may not necessarily represent actual transactions.
Fiscal 1998 High Low
---- ---
First Quarter Ended September 26, 1997 9 1/2 5 1/8
Second Quarter Ended December 26, 1997 8 5/16 4 1/4
Third Quarter Ended March 27, 1998 6 1/8 4 1/4
Fourth Quarter Ended June 26, 1998 6 11/16 3 7/8
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
As of September 11, 1998, the Company had approximately 584 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.
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.
13
Item 6. Selected Financial Data
The following Selected Financial Data has been derived from the Company's
consolidated financial statements for the five years in the period ended June
26, 1998 and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the Consolidated
Financial Statements and the related notes thereto.
Selected Financial Data
(Dollars in thousands, except per share data)
June 24, June 30, June 28, June 27, June 26,
1994 1995 1996 1997 1998
------------- -------------- ------------- ------------- --------------
Statements of Operations Data
- - ----------------------------------------------
Net sales $40,147 $43,830 $44,513 $50,675 $50,548
Operating income (loss) $3,066 $3,602 $3,856 ($892) ($4,542)
Net income (loss) applicable
to common stockholders $2,389 $2,942 $3,737 ($856) ($5,142)
Net income (loss) per share - diluted $0.42 $0.52 $0.47 ($0.12) ($0.68)
Balance Sheet Data
- - ----------------------------------------------
Working capital $6,734 $15,947 $23,801 $19,655 $15,994
Total assets $29,378 $34,414 $42,823 $42,823 $47,564
Debt and capital leases $7,552 $2,767 $2,739 $2,841 $5,729
Redeemable preferred stock - - - - $4,738
Stockholders' investment $15,137 $25,183 $33,862 $33,011 $28,973
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.
Overview
TII designs, manufactures and markets overvoltage surge protectors, network
interface devices ("NIDS"), station electronics and fiber optic products for use
in the communications industry. The Company has been a leading supplier of
overvoltage surge protectors to U.S. telephone operating companies ("Telcos")
for over 25 years.
The Company's results of operations were affected by several factors in the 1997
and 1998 fiscal years.
During the third quarter of fiscal 1997, Access Network Technologies ("ANT"), a
joint venture between Lucent Technologies, Inc. ("Lucent") and Raychem
Corporation ("Raychem"), was dissolved. The Company had entered into a strategic
agreement with ANT in 1995 to develop
14
and manufacture advanced overvoltage surge protectors. The products developed by
the joint venture combined TII overvoltage surge protectors with a proprietary
gel sealing technology from Raychem that makes these products virtually
impenetrable by weather. Following such dissolution, the Company increased its
allowance for the inventory that was produced for ANT. In addition, during the
third quarter of fiscal 1997, the Company put into effect certain measures to
reduce costs. These measures included a reduction of personnel, the movement of
certain production processes to the Company's lower cost facility in the
Dominican Republic, the outsourcing of certain manufacturing steps, the
realignment of the Company's sales and marketing force and the discontinuance of
certain lower margin products. These actions resulted in non-recurring charges
of $3.0 million ($2.9 million of which was charged to cost of sales, $50,000 to
selling, general and administrative expense and $50,000 to research and
development expense) in the third quarter of fiscal 1997, consisting of an
increase to the allowance for inventory primarily related to the ANT joint
venture product line (approximately $2.7 million), as well as severance related
costs (approximately $250,000) and costs to close or move certain production
processes (approximately $50,000). The Company and Raychem agreed to continue to
manufacture and market the products without the participation of Lucent. The
Company does not expect to incur any other charges as a result of the effects of
the dissolution of the ANT joint venture.
To meet its customers' needs, the Company introduced a line of broadband NIDS
with features and functionality that the Company believes were instrumental in
its winning two major contracts in July and September of 1997 with an RBOC and
an independent Telco, respectively, each of which was a pre-existing
unaffiliated customer. For strategic purposes, the Company accepted orders under
one of these contracts which it believed it could fulfill under an aggressive
delivery time schedule that mandated it to seek to accelerate production.
Beginning in the fourth quarter of fiscal 1997 and continuing through fiscal
1998, the Company incurred additional manufacturing expenses in gearing up
toward the accelerated production of its new broadband NID product line,
compounded, in the second quarter of fiscal 1998, by production disruptions as
the Company sought to meet a customer's requested delivery schedules. These
additional manufacturing costs included the hiring of temporary personnel during
the initial phases of production, the outsourcing of certain production
processes, initial purchases of materials in smaller than usual quantities for
which volume discounts were not available, lower initial manufacturing yields
and additional freight and other expediting costs. Additionally, results were
also adversely affected by continuing expenditures relating to the Company's
movement of certain production processes to the Company's lower cost facility in
the Dominican Republic. The disruptions were primarily caused by the failure of
certain vendors to, in turn, meet the Company's delivery requirements for
required molds and inventory components, production breakdowns which produced
significant delays and yield losses during the initial production process and
delays in completing the training of permanent employees for both the Company's
Puerto Rico and Dominican Republic facilities, as well as temporary
manufacturing employees hired at its Puerto Rico facilities to meet the
accelerated production schedule.
As a result, in the second quarter of fiscal 1998, the Company's net sales
decreased to $10.1 million (compared to $13.0 million in the comparable period
in fiscal 1997), its gross profit margin was $493,000 (compared to $3.4 million
in the second quarter of fiscal 1997) and the Company experienced a net loss of
$2.5 million (compared to net income of $905,000 in the second
15
quarter of fiscal 1997). While the Company resolved most of the production
disruption issues toward the end of the second quarter, during the third and
fourth quarters of fiscal 1998 the Company continued to experience certain yield
losses, costs associated with outsourcing the production of certain injection
molded parts and added costs to air freight products to meet customer delivery
requirements.
Therefore, in fiscal 1997 and 1998 the Company's gross profit percentage was
below levels in effect prior to fiscal 1997. While the Company expects sales and
gross profit margins to increase from fiscal 1998 levels, the Company does not
anticipate that its gross profit margins will return to levels in effect prior
to fiscal 1997 in the foreseeable future.
Fiscal Years Ended June 26, 1998, June 27, 1997 and June 28, 1996
Net sales for fiscal 1998 decreased by $127,000 or .3% to $50.5 million from
$50.7 million in fiscal 1997. The decline relates primarily to a decrease in
product shipped due to the Company's production disruptions in the second and,
to a significantly lesser degree, third quarters of fiscal 1998, partially
offset by an increase in sales of its fiber optic product line. Net sales for
fiscal 1997 increased by $6.2 million or 13.8% to $50.7 million from $44.5
million in fiscal 1996. The Company experienced growth in its overvoltage surge
protector, NID and fiber optic product lines.
As a result of increased freight costs, increased overtime, the hiring of
additional temporary personnel, outsourcing certain production functions, lower
initial manufacturing yields, and other expediting costs to meet customers'
desired delivery schedules, gross profit margins in fiscal 1998 were 13.9% of
net sales versus 24.0% of net sales for fiscal 1997 (before the non-recurring
$2.9 million in fiscal 1997 charged to cost of sales related to the Company's
program to reduce costs and to an inventory charge due to the dissolution of ANT
discussed above in "Overview"). Gross profit margins decreased for fiscal 1997
to 24.0% (before non-recurring charges of $2.9 million) from 28.2% for fiscal
1996. Excluding the $875,000 shortfall payment received from AT&T Corp. during
fiscal 1996, the Company's fiscal 1996 gross margin would have been 26.2%. The
Company's fiscal 1997 gross profit margin was impacted by higher raw material
and manufacturing costs and, during the fourth quarter of fiscal 1997, by costs
associated with the accelerated production startup of several new products,
including the Company's new broadband NIDs, and expenditures relating to the
movement of certain production processes to the Company's lower cost facility in
the Dominican Republic.
Selling, general and administrative expenses for fiscal 1998 increased $1.2
million or 17.4% to $8.3 million, or 16.4% of sales, from $7.1 million in fiscal
1997. The increase resulted primarily from legal, accounting, printing and other
expenses incurred in connection with a withdrawn public offering of Common Stock
in the second quarter of fiscal 1998 and additional personnel, promotion and
other costs associated with the Company's efforts to obtain and fulfill new
sales contracts. During fiscal 1997, selling, general and administrative
expenses increased to $7.1 million, or 13.9% of sales, from $5.9 million, or
13.2% of sales, during fiscal year 1996. The increase resulted primarily from
legal costs of an action in which the Company was a plaintiff and from
personnel, promotion and other costs associated with the Company's increased
efforts to win supply contracts for its new broadband NID product line.
16
Absent the $50,000 non-recurring charge in the third quarter of fiscal 1997,
research and development expenses for fiscal 1998 increased by $261,000 or 8.5%
to $3.3 million, due primarily to higher costs associated with product
development for the expansion of the Company's broadband NID product line.
Research and development expenses for fiscal 1997 increased by $265,000 or 9.4%,
to $3.1 million from $2.8 million in fiscal 1996. The increase relates to
$50,000 of non-recurring charges in fiscal 1997 and costs associated with the
development of the broadband NID product line and new overvoltage surge
protectors.
Interest expense in fiscal 1998 was $47,000 lower than in fiscal 1997. Interest
expense in fiscal 1997 included amortization of debt origination costs that
ceased during the first quarter of fiscal 1997. Interest expense for fiscal 1997
declined by $129,000 to $287,000 from $416,000 in fiscal 1996 due to reduced
debt levels and the absence of amortization of debt origination costs that
ceased in the first quarter of fiscal 1997.
The Company accrued a tax provision for fiscal 1997 for the settlement of an
audit performed by the Internal Revenue Service, resulting in a net provision of
$63,000 for the year.
Income Taxes
Due to its election to operate under Section 936 of the Internal Revenue Code
and 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
credit utilizing the economic activity based credit. Based on fiscal 1998 levels
of qualified wages, fringe benefits and depreciation in Puerto Rico, the
Company's economic activity based credit limitation is approximately $3,383,000
per annum.
Although the Section 936 credit has generally been repealed, the Company
continues to be eligible to claim a Section 936 credit until the year ended June
2006 under a special grandfather rule subject to limitation calculated to be
$4,520,000 of taxable income. If, however, the Company adds a substantial new
line of business (or has a new line of business that becomes substantial), 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. 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 9 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Company's cash, cash equivalents and marketable securities decreased to
$377,000 at the end of fiscal 1998 from $3.8 million at the end of fiscal 1997.
Working capital decreased to $16.0 million at the end of fiscal 1998 from $19.7
million at the end of fiscal 1997.
During fiscal 1998, $6.1 million of cash was used in operations, primarily to
fund an increase in inventories of $3.3 million and a net loss of $4.7 million.
Such net loss included non-cash charges of $1.8 million for depreciation and
amortization.
17
Cash of $1.3 million was used in investing activities for capital expenditures
($4.9 million) offset, in part, by $3.6 million in proceeds from sales and
maturities of marketable securities in excess of amounts reinvested.
Financing activities provided $7.6 million of cash, with $4.6 million being
raised through the sale of Series C Convertible Preferred Stock, $2.2 million
being provided by a net increase in debt and obligations under capital leases,
and $861,000 being provided by the exercise of stock options.
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 facility.
In April 1998, the Company established credit facilities with BNY Financial
Corporation, an affiliate of the Bank of New York, in an aggregate principal
amount of $12.5 million (the "Credit Facility"). The credit Facility enables the
Company to have up to $6.0 million of revolving credit loans outstanding at any
one time, limited by a borrowing base equal to 85% of eligible accounts
receivable and 50% of eligible inventory, subject to certain reserves. In
addition, the Company may also borrow up to $6.5 million, limited by a borrowing
base not exceeding 75% of the purchase price of new equipment or the orderly
liquidation value of eligible equipment already owned. Any portion of the
aggregate $6.5 million commitment for capital expenditure loans not borrowed by
December 31, 1998 will then be extinguished. Subject to extension in certain
instances, the scheduled maturity date of revolving credit loans is April 30,
2003, while capital expenditure loans are to be repaid through March 31, 2003,
subject to mandatory repayments from disposition proceeds and insurance proceeds
in certain circumstances.
The Credit Facility requires that the Company maintain tangible net worth (as
defined) of $30.0 million. As of June 26, 1998, the Company's tangible net worth
(as defined) was approximately $32.1 million. The Company believes it incurred
operating losses during the quarter ended September 25, 1998. If the operating
losses were to continue, or events occurred causing additional losses, the
Company may cease to be in compliance with this convenant. If the Company is
unable to obtain a waiver or amendment of this provision, it may be unable to
borrow under, and the lender would be able to accelerate payment of outstanding
borrowings under the Credit Facility. Management believes, however, that the
Company would be able to secure alternate sources of financing. 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.
18
Year 2000
In fiscal 1997 the Company commenced, and in fiscal 1998, continued a program to
assess and address in a timely manner all its information systems, including
customer service, production, distribution and financial systems in conjunction
with the year 2000. A significant portion of the Company's year 2000 program has
been implemented as part of its program to upgrade its information systems,
which the Company had committed to do regardless of the year 2000 issue. In
addition, the Company was assesed the impact of the year 2000 on non-information
technology systems. The Company has spent approximately $800,000 on computer
hardware, software and related support for this information systems upgrade
program and expects to spend approximately $250,000 complete its year 2000
compliance program. If it becomes necessary to dedicate additional financial and
other resources to complete the Company's information systems upgrade program
and to complete the conversion of non-information technology equipment to year
2000 compliant by the end of fiscal year 1999 (the Company's estimated year 2000
program completion date), of shortly thereafter, the Company will do so.
The Company is also communicating with its suppliers, customers, distributors,
and others with whom it conducts business to coordinate year 2000 compliance and
to identify alternative sources of supply for materials if necessary. The
implementation of these plans is not expected to have a material adverse effect
on the results of operations or the financial condition of the Company. The
Company presently believes alternative sources of supply will be available in
the event of unforeseen year 2000 compliance issues that affect suppliers'
abilities to fulfill requirements. If production and other plans need to be
modified because of unforeseen year 2000 issues at vendors, distributors and
others with whom the Company conducts business, the Company will do so when the
need for such modification becomes apparent.
If the Company or its suppliers, distributors or others with whom it conducts
business are unable to identify and address the system issues related to the
year 2000 risk on a timely basis, there could be a material adverse effect on
its results of operations, liquidity and financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The Company is exposed to market risks, including changes in U.S. dollar
interest rates. The interest payable in the Company's credit agreement is
principally between 250 and 275 basis points above the London Interbank Offered
Rate ("LIBOR") and therefore affected by changes in market interest rates.
Historically, the effects of movements in the market interest rates have been
immaterial to the consolidated operating results of the Company.
The Company requires foriegn sales to be paid in U.S. currency and generally
requires such payments to be made in advance by letter of credit or by United
States affiliates of the customer.
19
Item 8. Financial Statements and Supplemental Data
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 26, 1998, and the related
consolidated statements of operations, stockholders' investment and cash flows
for each of the three years in the period ended June 26, 1998. 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 26, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 26, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Juan, Puerto Rico
September 25, 1998.
Stamp No. 1532784 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
20
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 27, 1997 AND JUNE 26, 1998
(Dollars in Thousands)
June 27, June 26,
1997 1998
-------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 247 $ 377
Marketable securities available for sale 3,552 -
Receivables 7,388 8,110
Inventories 15,574 18,619
Prepaid expenses 402 375
-------------- -------------
Total current assets 27,163 27,481
-------------- -------------
Fixed Assets
Property, plant and equipment 37,812 43,430
Less: Accumulated depreciation and amortization (23,768) (25,398)
-------------- -------------
Net fixed assets 14,044 18,032
-------------- -------------
Other Assets 1,616 2,051
-------------- -------------
TOTAL ASSETS $ 42,823 $ 47,564
============== =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and obligations under capital leases $ 537 $ 3,363
Accounts payable 5,833 6,528
Accrued liabilities 1,138 1,596
-------------- -------------
Total current liabilities 7,508 11,487
-------------- -------------
Long-Term Debt 839 1,855
Long-Term Obligations Under Capital Leases 1,465 511
-------------- -------------
2,304 2,366
-------------- -------------
Series C Convertible Redeemable Preferred Stock, no shares issued
at June 27, 1997 and 5,000 shares issued at June 26, 1998, respectively;
liquidation preference of $1,150 per share - 4,738
-------------- -------------
Commitments and Contingencies (Note 13)
Stockholders' Investment
Preferred Stock, par value $1.00 per share; 1,000,000 authorized;
Series C Convertible Redeemable, no shares issued at
June 27, 1997 and 5,000 shares issued at June 26, 1998 - -
Series D Junior Participating, no shares issued (Note 11) - -
Common Stock, par value $.01 per share; 30,000,000 shares authorized;
7,448,473 and 7,631,801 shares issued at June 27, 1997 and
June 26, 1998, respectively (Note 10) 75 76
Warrants outstanding 159 159
Capital in excess of par value 29,052 30,162
Retained earnings (deficit) 3,999 (1,143)
Valuation adjustment to record marketable securities available
for sale at fair value 7 -
-------------- -------------
33,292 29,254
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
-------------- -------------
Total stockholders' investment 33,011 28,973
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 42,823 $ 47,564
============== =============
See notes to consolidated financial statements
21
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 26, 1998
(In Thousands, except per share data)
June June June
28, 1996 27, 1997 26, 1998
-------------- -------------- --------------
Net sales $ 44,513 $ 50,675 $ 50,548
Cost of sales 31,956 41,421 43,504
-------------- -------------- --------------
Gross profit 12,557 9,254 7,044
-------------- -------------- --------------
Operating expenses
Selling, general and administrative 5,881 7,061 8,290
Research and development 2,820 3,085 3,296
-------------- -------------- --------------
Total operating expenses 8,701 10,146 11,586
-------------- -------------- --------------
Operating income (loss) 3,856 (892) (4,542)
Interest expense (416) (287) (240)
Interest income 191 314 122
Other income (expense) 106 72 (44)
-------------- -------------- --------------
Income (loss) before provision for income taxes 3,737 (793) (4,704)
Provision for income taxes - 63 -
-------------- -------------- --------------
Net income (loss) 3,737 (856) (4,704)
Preferred stock embedded dividend - - (438)
-------------- -------------- --------------
Net income (loss) applicable
to common stockholders $ 3,737 $ (856) $ (5,142)
============== ============== ==============
Net income (loss) per share:
Basic $0.53 ($0.12) ($0.68)
============== ============== ==============
Diluted $0.47 ($0.12) ($0.68)
============== ============== ==============
Weighted average shares outstanding:
Basic 7,111 7,430 7,572
============== ============== ==============
Diluted 8,179 7,430 7,572
============== ============== ==============
See notes to consolidated financial statements
22
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 26, 1998
(Dollars in thousands)
Valuation
Adjustment
to record
Marketable
Capital Securities
Class B in excess Retained available for
Preferred Common Common Warrants of par Earnings sale at Treasury
Stock Stock Stock Outstanding value (Deficit) fair value Stock
----------- ----------- ----------- --------- -------- ----------- -------------- ---------
BALANCE, June 30, 1995 $2,763 $55 $4 $120 $21,394 $1,118 $10 ($281)
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 income 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 - 75 - 159 29,052 3,999 7 (281)
Exercise of stock options - 1 - - 860 - - -
Issuance of Series C Preferred
Stock (Note 11) - - - - 250 - - -
Embedded dividend on Series
C Preferred Stock - - - - - (438) - -
Unrealized loss on marketable
securities available for sale - - - - - - (7) -
Net loss for the year - - - - - (4,704) - -
----------- ----------- ----------- --------- ----------- ----------- -------------- --------
BALANCE, June 26, 1998 $- $76 $- $159 $ 30,162 ($1,143) $- ($281)
=========== =========== =========== ========= =========== =========== ============== ========
See notes to consolidated financial statements
23
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 26, 1998
(Dollars in thousands)
June 28, June 27, June 26,
1996 1997 1998
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $3,737 ($856) ($4,704)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,727 1,745 1,631
Provision for inventory allowance, net 568 2,896 206
Amortization of other assets, net 278 180 194
Changes in assets and liabilities
Increase in receivables (951) (304) (722)
Increase in inventories (2,322) (4,438) (3,251)
Decrease (increase) in prepaid expenses and other assets 257 (362) (602)
(Decrease) increase in accounts payable and accrued liabilities (242) 787 1,153
----------- ----------- -----------
Net cash provided by (used in) operating activities 3,052 (352) (6,095)
----------- ----------- -----------
Cash Flows from Investing Activities:
Capital expenditures (549) (4,267) (4,890)
Purchases of marketable securities available for sale (6,533) (24,488) (3,572)
Proceeds from sales and maturities of marketable securities
available for sale 1,645 26,895 7,124
----------- ----------- -----------
Net cash used in investing activities (5,437) (1,860) (1,338)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from exercise of options and warrants 7,656 6 861
Net proceeds from short-term borrowings - - 3,912
Net proceeds from issuance of preferred stock - - 4,550
Payment of long-term debt and obligations under capital leases (1,969) (430) (1,760)
Redemption of Preferred Stock (2,763) - -
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,924 (424) 7,563
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 539 (2,636) 130
Cash and cash equivalents, at beginning of year 2,344 2,883 247
----------- ----------- -----------
Cash and cash equivalents, at end of year $2,883 $247 $377
=========== =========== ===========
Supplemental disclosure of non-cash transactions:
Capital leases entered into $1,938 $533 $729
=========== =========== ===========
Embedded dividend on Series C Preferred Stock - - $438
=========== =========== ===========
Valuation adjustment to record marketable securities
available for sale at fair value $37 ($40) ($7)
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $0 $42 $112
=========== =========== ===========
Cash paid for interest $174 $241 $212
=========== =========== ===========
See notes to consolidated financial statements
24
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 26, 1998 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 wholly-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, 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 is 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 between 5 and 10 years). Leasehold improvements are
amortized on a straight-line basis over the term of the respective leases, or
over their estimated useful lives, whichever is shorter.
Revenue Recognition: Sales are recorded as products are shipped and title
passes.
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 $259,000 relating to key-man life insurance policies with a
face amount in excess of $2,000,000.
25
Net Income (Loss) per Common Share: In 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share". Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
Pending Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting of comprehensive income and its
components in financial statements. Comprehensive income is the total of net
income and all other nonowner changes in equity. The Company is required to
adopt SFAS No. 130 in the first quarter of fiscal 1999. Reclassification of
comparative financial statements provided for earlier periods will be required.
The Company believes that the display of comprehensive income will not differ
materially from the currently reported net income (loss) attributable to common
stockholders.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Reporting About Segments of an Enterprise and Related Information". This
statement requires disclosure related to each segment of an enterprise's
operations similar to those required under current standards with the addition
of quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company is required to adopt SFAS No. 131 for the fiscal year
ending June 25, 1999.
Statements of Cash Flows: All highly liquid instruments with an original
maturity of three months or less are considered cash equivalents. The Company
had cash equivalents of approximately $84,000 at June 26, 1998 and June 27,
1997.
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) Non-recurring Charge in Fiscal 1997
During the third quarter of fiscal 1997, Access Network Technologies ("ANT"), a
joint venture between Lucent Technologies, Inc. ("Lucent") and Raychem
Corporation ("Raychem"), was dissolved. The Company had entered into a strategic
agreement with ANT in 1995 to develop and manufacture advanced overvoltage surge
protectors. The first products introduced by the joint venture combined TII
overvoltage surge protectors with a proprietary gel sealing technology from
Raychem that makes these products virtually impenetrable by weather. Following
such dissolution, the Company increased its allowance for the inventory which
was produced for ANT. The Company and Raychem have agreed to continue to
manufacture and market the products without the participation of Lucent. In
addition, during the third quarter of fiscal 1997, the Company put into effect
certain measures to reduce costs and enhance profitability. These measures
included a reduction of personnel, the movement of certain production processes
to the Company's lower cost facility in the Dominican Republic, the outsourcing
of certain manufacturing steps, the re-alignment of the Company's sales and
marketing force and the discontinuance of certain lower margin products. These
actions resulted in non-recurring charges of $3.0 million ($2.9 million of which
was charged to cost of sales and $50,000 was charged to each of selling, general
and administrative expense and research and development expense) in the third
quarter of fiscal 1997, consisting of an increase to the allowance for inventory
primarily related to the ANT joint venture product line (approximately $2.7
million), as well as severance related costs (approximately $250,000) and costs
to close or move certain production processes (approximately $50,000).
26
(3) Receivables. Receivables consist of the following:
June 27, June 26,
1997 1998
------------------- ------------------
Trade receivables $6,897,000 $7,923,000
Other receivables 544,000 249,000
------------------- ------------------
7,441,000 8,172,000
Less: allowance for doubtful accounts (53,000) (62,000)
------------------- ------------------
$7,388,000 $8,110,000
=================== ==================
(4) Inventories. Inventories consist of the following:
June 27, June 26,
1997 1998
------------------- ------------------
Raw materials $7,426,000 $11,880,000
Work in process 4,584,000 5,586,000
Finished goods 5,994,000 3,789,000
------------------- ------------------
18,004,000 21,255,000
Less: allowance for inventory (2,430,000) (2,636,000)
------------------- ------------------
$15,574,000 $18,619,000
=================== ==================
(5) Fixed Assets: Fixed Assets consists of property, plant and equipment as
follows:
June 27, June 26,
1997 1998
------------------- ------------------
Machinery and equipment $ 20,478 $ 23,983
Tools, dies and molds 8,038 9,919
Leashold improvements 6,166 6,241
Office fixtures, equipment and other 3,130 3,287
------------------- ------------------
Total Property plant and equip. 37,812 43,430
Less: Accumulated depreciation (23,768) (25,398)
Property, plant and equipment, net $ 14,044 $ 18,032
=================== ==================
During fiscal year 1998, the Company refinanced some of its machinery and
equipment under a sale/lease back arrangement. The machinery and equipment was
sold for approximately $729,000. The transaction was accounted for as a
financing, wherein the machinery and equipment remains on the books of the
Company and continues to be depreciated. A finacing obligation representing the
proceeds was recorded, and is reduced based on payments under the loan. The
payments are reflected in the minimum lease payments of the Company's
obligations under capital leases (Note 8).
(6) Accrued Liabilities: Accrued liabilities consist of the following:
June 27, June 26,
1997 1998
------------------- ------------------
Payroll, incentive and vacation $672,000 $924,000
Accrued payroll taxes 91,000 129,000
Legal and professional fees 135,000 457,000
Accrued rent 100,000 -
Other 140,000 86,000
------------------- ------------------
$1,138,000 $1,596,000
=================== ==================
27
(7) Long-term Debt. The composition of long-term debt is as follows:
June 27, June 26,
1997 1998
------------- --------------
Revolving credit loan, bearing interest at a rate described below (8.75% at
June 26, 1998) $ - $ 2,801,000
Term loan, bearing interest at a rate described below (9% at June 26, 1998) - 1,111,000
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. 750,000 750,000
Installment notes payable through 2004, bearing interest ranging from 8.0% to 9.5%
secured by assets with a net book value of approximately $285,000 103,000 89,000
------------- --------------
853,000 4,751,000
Less current portion (14,000) (2,896,000)
============= ==============
Long-term debt $ 839,000 $ 1,855,000
============= ==============
On April 30, 1998, the Company and certain of its subsidiaries entered into a
Revolving Credit, Term Loan and Security Agreements with BNY Financial
Corporation, an affiliate of The Bank of New York, which established three
related credit facilities in an aggregate principal amount of $12.5 million
("Credit Facility"). The Credit Facility enables the Company to have up to $6.0
million of revolving credit loans outstanding at any one time, limited by a
borrowing base equal to 85% of the eligible accounts receivable and 50% of the
eligible inventory, subject to certain reserves. The Credit Facility also
provides for loans for the purpose of acquiring eligible equipment or financing
or refinancing eligible equipment previously acquired. The aggregate principal
amount of all such loans may not exceed $6.5 million, limited by a borrowing
base not exceeding 75% of the purchase price of new equipment or the orderly
liquidation value of eligible equipment already owned. Any portion of the
aggregate $6.5 million commitment for capital expenditure loans not borrowed by
December 31, 1998 will then be extinguished.
The final scheduled maturity date of the revolving credit loans is April 30,
2003. Capital expenditure loans are to be repaid through March 31, 2003, subject
to mandatory prepayments from disposition proceeds and insurance proceeds in
certain circumstances. The maturity dates of revolving credit loans and capital
expenditure borrowings may be extended in certain instances.
Outstanding revolving credit loans bear interest at a rate per annum based on:
(a) a floating rate (in general, equal to the greater of the bank's prime rate
and 0.50% per annum in excess of a specified weighted average of rates on
overnight Federal funds transactions), plus, in either case, 0.25% per annum;
(b) to the extent selected by the Company, a fixed rate based upon the bank's
LIBOR rate for specified loan periods plus 2.50% per annum; and (c) to the
extent selected by the Company, a rate equal to the daily average of a published
"one-month" LIBOR rate plus 2.50% per annum. Outstanding capital expenditure
loans bear interest based at the same rates per annum plus 0.25% per annum. The
loan agreements also require the payment by the Company of specified fees.
The loan agreements require, among other things, that: (a) the Company maintain
a consolidated tangible net worth, which includes the Series C Redeemable
Preferred Stock, of at least $30.0 million (with such minimum amount to be
increased each fiscal quarter, commencing June 27, 1998, by an amount equal to
50% of the Company's consolidated net income for such quarter); (b) capital
expenditures of the Company and its
28
subsidiaries not to exceed in the aggregate $6.0 million for the fiscal year
ending June 1998, $5.0 million for the fiscal year ending June 1999 or $5.8
million for any fiscal year ending thereafter; and (c) no new operating leases
be entered into by the Company or its subsidiaries if, after giving effect
thereto, the aggregate annual rental payments for all leased property (excluding
capital leases) would exceed $750,000 in any one fiscal year. The loan
agreements also impose limitations on, among other things, dividends on and
redemptions (and repurchases) of equity securities and the incurrence of
additional indebtedness. The Company believes it incurred operating losses
during the quarter ended September 25, 1998. If the operating losses were to
continue, or an event occurred causing additional losses, the Company may cease
to be in compliance with this tangible net worth convenant.
The Company and each of its subsidiaries has collateralized their respective
obligations by a grant of a lien and security interest against substantially all
of their respective assets and properties, regardless of whether comprising a
part of the borrowing base and pledge of all (or in one case 65%) of each
subsidiaries' capital stock.
Future payments for long term debt are as follows:
Fiscal year Amount
- - ----------------------- -------------------
1999 $2,896,000
2000 175,000
2001 927,000
2002 198,000
2003 555,000
-------------------
Total payments 4,751,000
Less: current portion (2,896,000)
-------------------
$ 1,855,000
===================
(8) 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:
29
Fiscal year Amount
- - ----------------------- -------------------
1999 $ 495,000
2000 397,000
2001 123,000
2002 2,000
-------------------
Total minimum lease payments 1,017,000
Less: amount representing interest (39,000)
-------------------
978,000
Less: current portion (467,000)
-------------------
$ 511,000
===================
(9) 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 U.S. 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.
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 1998 levels of qualified wages, fringe benefits, depreciation and
taxes in Puerto Rico, the Company's economic activity based credit limitation is
approximately $3,383,000 per annum.
Although the Section 936 credit was generally repealed, the Company continues to
be eligible 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 (or has a new line of business that becomes substantial), 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 an additional limitation calculated to be
$4,520,000 of taxable income. 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
30
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 2005
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.
In each of the years in the three-year period ended June 26, 1998, 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 U.S. federal income tax provision.
At June 26, 1998, for U.S. federal income tax purposes, the Company had net
operating loss carryforwards aggregating approximately $20,058,000 which expire
periodically through 2013, and along with its subsidiaries had consolidated net
operating loss carryforwards aggregating approximately $28,315,000 which expire
periodically through 2013 and general business tax credit carryforward of
approximately $466,000 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 $377,000 per year for the United States
subsidiaries. The effect of the ownership change is somewhat mitigated with
respect to the Company as a result of its Section 936 election since United
States federal income tax is payable only to the extent such tax exceeds the
Company's Section 936 credit. In addition, net operating losses generated
subsequent to the ownership change are not subject to limitations and may
therefore be fully utilized. As of June 26, 1998, the Company's United States
subsidiaries have approximately $2,487,000 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 $1,074,000 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
31
benefits) and net operating loss carryforwards give rise to deferred tax assets
in the amount of approximately $5,981,000 for which a full (100%) offsetting
valuation allowance has been provided due to the uncertainty of realizing any
benefit in the future.
(10) Common Stock: The Company is authorized to issue 30,000,000 shares of
Common Stock.
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 (including officers and directors who are
employees) and consultants covering 1,250,000 shares of Common Stock. Option
terms (not to exceed 10 years), exercise prices (at least 100% of the fair
market value of the Company's Common Stock on the date of grant) and exercise
dates are determined by the Board of Directors or the Compensation Committee of
the Board. 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 those plans.
The 1994 Non-Employee Director Stock Option Plan covers an aggregate of 200,000
shares of Common Stock and provides that (i) non-employee Directors are granted
options to purchase 10,000 shares of Common Stock upon their initial election to
the Board and 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 are for a term of ten years; and (iv) the period following
termination of service during which a non-employee Director may exercise an
option shall be twelve months, except that an option shall automatically
terminate upon cessation of service as a non-employee Director for cause.
Certain information relating to the employee stock option plans and the 1994
Non-Employee Director Stock Option Plan for the years ended June 28, 1996, June
27, 1997 and June 26, 1998 follows:
June 28, 1996 June 27, 1997 June 26, 1998
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
------------ ---------- ------------ ----------- ------------ -----------
Outstanding at beginning of period 1,289,387 $5.63 1,313,207 $5.06 1,661,207 $4.98
Granted 168,200 7.34 433,000 4.81 855,500 4.61
Exercised (80,380) 3.89 (1,500) 3.92 (168,828) 4.31
Canceled or expired (64,000) 5.00 (83,500) 5.44 (41,503) 4.87
------------ ---------- ------------ ----------- ------------ -----------
Outstanding at end of period 1,313,207 $5.06 1,661,207 $4.98 2,306,376 $4.89
============ ========== ============ =========== ============ ===========
Options exercisable at end of period 576,454 773,344 949,356
Shares available for future grant
at end of period 594,000 187,500 103,500
Exercise price per share for options
exercised during period $2.50-6.09 $2.50-4.63 $2.50-6.75
Exercise price per share for options
outstanding at end of period $2.50-9.69 $2.50-9.38 $2.50-9.38
The weighted average remaining contractual life of options outstanding as of
June 26, 1998 is 7.5 years.
32
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 income (loss) would have been
reduced (increased) to the pro forma amounts indicated in the table below.
Fiscal Year Ended June
---------------------------------------------------------
28, 1996 27, 1997 26, 1998
------------------ ----------------- --------------------
Net income (loss) applicable to common shareholders:
As reported $3,737,000 ($856,000) ($5,142,000)
Pro forma $3,629,000 ($1,161,000) ($5,817,000)
Net Income (loss) per share - diluted:
As reported $0.48 ($0.12) ($0.68)
Pro forma $0.46 ($0.16) ($0.77)
The fair value of stock options granted during fiscal years 1996, 1997 and 1998
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 5.6%;
expected dividend yield of 0%; expected option life of seven years and expected
volatility of 35.2%. The weighted average fair value of options granted during
fiscal 1998, 1997 and 1996 were $2.24, $2.34 and $3.56, respectively.
Other Options And Warrants Outstanding: The holder of the Company's unsecured
subordinated note (see Note 7) has an option to purchase up to 100,000 shares of
Common Stock on or before July 18, 2001 at $2.50 per share.
The Company has, in addition to the placed warrants described in Note 11,
warrants outstanding which allow the holders to purchase 60,000 shares of Common
Stock at an exercise price of $6.56 per share, which expire in August 1998; and
20,000 shares of Common Stock at an exercise price of $6.15 per share, which
expire in July 2001.
All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
Fiscal year ended
---------------------------------------------
June 28, June 27, June 26,
1996 1997 1998
----------- ----------- -----------
(In thousands, except per share amounts)
Net income (loss) per share basic - calculation:
Net income (loss) applicable to common stockholders $3,737 ($856) ($5,142)
=========== =========== ===========
Weighted average shares outstanding 7,111 7,430 7,572
=========== =========== ===========
Net income (loss) per share - basic $0.53 ($0.12) ($0.68)
=========== =========== ===========
Net income (loss) per share diluted - calculation:
Weighted average shares outstanding 7,111 7,430 7,572
Incremental shares from options and warrants 689 - -
Incremental shares from convertible note payable to
Overseas Private Investment Corporation 300 - -
Incremental shares from Preferred Stock conversion 79 - -
=========== =========== ===========
Weighted average shares outstanding - diluted 8,179 7,430 7,572
=========== =========== ===========
Net income (loss) $3,737 ($856) ($5,142)
Add: Effects of treasury stock method calculation
Reduction of interest expense from
convertible note payable to Overseas
Private Investment Corporation 75 - -
----------- ----------- -----------
Adjusted net income (loss) $3,812 ($856) ($5,142)
=========== =========== ===========
Net income (loss) per share - diluted $0.47 ($0.12) ($0.68)
=========== =========== ===========
33
The incremental shares from assumed conversions are not included in computing
the diluted shares amounts in the fiscal years ended June 27, 1997 and June 26,
1998 because the Company had a net loss and their inclusion would have been
antidilutive. The following table summarizes the outstanding convertible
securities:
June 27, 1997 June 26, 1998
------------------ -------------------
Exercise Exercise
Quantity Price Quantity Price
Options
Stock Option Plans (a) 1,661,207 $ 4.98 2,306,376 $ 4.89
Options 150,000 $ 7.50 - -
Options 100,000 $ 2.50 100,00 $ 2.50
Warrants
Warrants - - 200,000 $ 7.03
Warrants 60,000 $ 6.56 60,000 $ 6.56
Warrants 20,000 $ 6.15 20,000 $ 6.15
Other Convertible Securities
Unsecured Convertible Debt 300,000 $ 2.50 300,000 $ 2.50
Convertible Preferred Stock(b) - - 1,196,172 $ 4.18
--------- ----------
2,291,207 4,182,548
========= ==========
(a) Weighted average exercise price of outstanding stock options at year end.
(b) Asssuming conversion of the 5,000 Series C Preferred Shares at 95% of the
average of the closing bids of the prices of the Company's Comon Stock
during the ten consecutive trading days immediately preceding fiscal year
end.
(11) Preferred Stock: The Company is authorized to issue up to 1,000,000 shares
of Preferred Stock in series, with each series having such powers, rights,
preferences, qualifications and restrictions as determined by the Board of
Directors.
Series C Convertible Preferred Stock and Placed Warrants: On January 26, 1998,
the Company completed a private placement of 5,000 shares of its Series C
Convertible Preferred
Stock ("Preferred Shares") and Warrants to purchase an aggregate of 200,000
shares of the Company's Common Stock at an exercise price of $7.03 per share,
which expire in January 2001 ("Placed Warrants") for an aggregate purchase price
of $5,000,000. The Company incurred a commission and other issuance costs of
approximately $450,000 for net proceeds of approximately $4,550,000. The
Preferred Shares were issued with a beneficial conversion feature which has been
valued at $250,000 and recognized as additional paid in capital. The
amortization of both the issuance costs of $450,000 and the beneficial
conversion feature of $250,000 over the period to earliest conversion (eight
months) has been recognized as a non-cash preferred stock embedded dividend, has
increased the net loss applicable to common stockholders and has been added to
the Preferred Share Balance. The Preferred Shares bear no dividends, are
convertible into shares of the Company's Common Stock at a conversion price
equal to approximately $7.08 per share until July 25, 1998 and thereafter at a
conversion price equal to the lower of $7.08 or 95% of the average of the
closing bid prices of the Company's Common Stock during the ten consecutive
trading days immediately preceding the conversion date of the Preferred Shares.
The Preferred Shares are redeemable at the option of the holders at a price
equal to $1,150 per share in the event of certain business combinations of the
Company, the sale of substantially all of the Company's assets and in certain
other cases, including the failure of the Company to maintain the effectiveness
of a registration statement covering the resale of the Company's Common Stock
underlying both the Preferred Stock and Placed Warrants, to maintain the listing
of the Company's Common Stock on the Nasdaq National Market or the Company's
failure to convert the Preferred Stock. Because the Preferred Stock has
conditions for redemption that are not solely within the control of the Company,
they have been classified outside of stockholders investment in the accompanying
consolidated balance sheet.
34
Series D Junior Participating Preferred Stock: On May 7, 1998, the Company
adopted a Stockholder Rights Plan providing for the distribution to the
Company's stockholders of one Right (a "Right" and, collectively with all other
Rights to be issued, the "Rights") for each share of the Company's Common Stock
issued and outstanding at the opening of business on May 21, 1998 (the
"Distribution Date") and each subsequent share of Common Stock issued. Each
Right entitles the registered holder of a share of Common Stock to purchase from
the Company 1/1000 of a share of Series D Junior Participating Preferred Stock
of the Company, par value $1.00 per share, (the "Series D Preferred Stock") at a
price of $30 per Right (the "Purchase Price"), subject to adjustment. The Rights
have a term of ten years, have no voting power or rights to dividends, and are
not detachable and not separately transferable from the Company's Common Stock
until they become exercisable. In general, the Rights become exercisable
following an announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") owns, or the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning, at
least 20% of the Company's outstanding Common Stock. If any person becomes an
Acquiring Person by acquiring beneficial ownership of at least 20% of the
Company's Common Stock, each outstanding Right (other than those owned by an
Acquiring Person) will "flip in" and become a right to buy, at the Purchase
Price, that number of shares of Common Stock of the Company that will have a
market value of two times the Purchase Price. After a person becomes an
Acquiring Person (but before such Acquiring Person owns 50% or more of the
outstanding Common Stock), the Company may permit each Right (other than those
owned by an Acquiring Person) to be exchanged, without payment of the Purchase
Price, for one share of Common Stock. If (i) the Company is acquired in a merger
or other business combination transaction and the Company does not survive or
the Company merges, consolidates or engages in a share exchange with another
person and does survive but all or part of its stock is changed or (ii) at least
50% of the Company's assets or earning power is sold or transferred, then each
outstanding Right will "flip over" and become a right to buy, at the Purchase
Price, that number of shares of Common Stock of the acquiring company that will
have a market value of two times the Purchase Price. The Company may redeem the
Rights in whole, but not in part, at a price of $.01 per Right at any time prior
to the time a person acquires beneficial ownership of at least 20% of the
Company's Common Stock and, if certain conditions are met, within ten days
following the time a person has acquired 20% or more of the Common Stock.
(12) Significant Customers, Export Sales and Geograhical Segments:
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:
YEAR ENDED
----------------------------
June 28, June 27, June 26,
1996 1997 1998
------ ------ -------
Bell Atlantic Corporation 15% 18% 24%
Siecor Corporation (1) 26% 20% 14%
GTE Communications Systems Corporation 4% 5% 12%
Keptel, Inc. (1) 12% 11% 6%
(1) 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.
35
Export Sales: For each of the three years ended June 26, 1998 export sales were
less than 10% of consolidated net sales.
Geograhical Segments: The Company's manuafacturing operations are divided into
four plant sites segregated into two geographical segments. The first
geographical segment includes the U.S. and Puerto Rico operations in which most
of the research and development is performed and the capital intensive products
are manufactured. The Dominican Republic operations are considered as the second
geographical segment. This segment manufactures labor intensive products and/ or
parts that are all transferred to the Puerto Rico faciity at an agreed to
transfer price. Although all inventory at the Dominican Republic plant is held
on consignment for the Puerto Rico plant, and therefore accounted for in the
Puerto Rico segment, the following table segregates the inventory balances as it
relates to its physical location.
Geographical Segments
------------------------------------------
U.S. Dominican
Puerto Rico Republic Consolidated
----------- ---------- ------------
As of June 26, 1998
Current assets $17,959,000 $9,522,000 $27,481,000
Property, plant & equipment 14,153,000 3,879,000 18,032,000
Other assets 1,944,000 107,000 2,051,000
----------- ---------- -----------
Total assets $34,056,000 $13,508,000 $47,564,000
=========== ========== ===========
Total liabilities $13,754,000 $ 99,000 $13,853,000
=========== ========== ===========
As of June 27, 1997
Current assets $21,675,000 $5,488,000 $27,163,000
Property, plant & equipment 11,204,000 2,840,000 14,044,000
Other assets 1,373,000 243,000 1,616,000
----------- ---------- -----------
Total assets $34,252,000 $8,571,000 $42,823,000
=========== =========== ===========
Total liabilities $ 9,398,000 $ 414,000 $ 9,812,000
=========== =========== ===========
36
(13) Commitments, Contingencies And Related Party Transactions: The Company
leases real property and equipment with terms expiring through April 2006.
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 $206,000, $140,000, $145,000,
$161,000, $161,000, and $456,000 in fiscal years 1999, 2000, 2001, 2002, 2003
and thereafter, respectively.
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, 1999 and provide for an extension until July 17, 2001 unless canceled by
either party upon notice prior to the scheduled renewal period. At June 26,
1998, there was no accrued rent owed under this agreement. 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 until at least July 2001.
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 26, 1998 was
approximately $2,803,000, with a current appraised fair market value of
$2,255,000 and a current net book value of approximately $106,000. 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 1998, 1997 and 1996 was
approximately $634,000, $682,000 and $636,000, 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.
(15) Subsequent Event: On September 21 and 22, 1998 the Company's principal
operating facilities in Toa Alta, Puerto Rico and San Pedro De Macoris,
Dominican Republic sustained business interruption and significant inventory,
equipment and facility damages as a result of Hurricane Georges. Management and
the Company's insurance advisors are continuing to assess the full extent of the
damages. Management and the Company's insurance advisors believe that the
majority of the above loss will be covered by insurance.
(16) Quarterly Results (Unaudited): The following table reflects the unaudited
quarterly results of the Company for the fiscal years ended June 27, 1997 and
June 26, 1998:
37
Net Income
(Loss) Diluted
Operating Applicable Net Income
Gross Income to Common (Loss)
Quarter Ended Net Sales Profit (Loss) Shareholders Per Share
- - ---------------------------- ------------------ ----------------- ------------------ ------------------ ---------------
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 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)
1998 Fiscal Year
September 26, 1997 $13,503,000 $2,450,000 ($180,000) ($160,000) ($0.02)
December 26, 1997 10,103,000 493,000 (2,414,000) (2,492,000) (0.33)
March 27, 1998 12,332,000 1,761,000 (1,070,000) (1,188,000) (0.16)
June 26, 1998 14,610,000 2,340,000 (878,000) (1,302,000) (0.17)
Item 9. Changes in and Disagreements with Accounts on Accounting and Financial
Disclosures
None.
PART III
The information called for by Part III (Items 10, 11, 12 and 13 of Form10-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 1998 Annual
Meeting of Stockholders.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Report of Independent Accountants...................................... 20
Consolidated Balance Sheets at June 27, 1997 and June 26, 1998......... 21
Consolidated Statements of Operations for each of the three years in
the period ended June 26, 1998....................................... 22
Consolidated Statements of Stockholders' Investment for each of the
three years in the period ended June 26, 1998........................ 23
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 26, 1998....................................... 24
Notes to Consolidated Financial Statements............................. 25
(a)(2) Report of Independent Public Accountants............................... S-1
Schedule II - Valuation and Qualifying Accounts........................ S-2
(3) Exhibits
Exhibit
Number Description
- - ------ -----------
3(a)(1) Restated Certificate of Incorporation of the Company,
as filed with the Secretary of State of the State of
Delaware on December 10, 1996. Incorporated by
reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
December 27, 1996 (File No. 1-8048).
3(a)(2) Certificate of Designation and Form of Right
Certificate, as filed with the Secretary of State of
the State of Delaware on January 26, 1998. Incorporated
by reference to Exhibit 4.1 to the Company's Report on
Form 8-K dated (date of earliest event reported)
January 26, 1998. (File No. 1-8048).
3(a)(3) Certificate of Designation as filed with the Secretary
of State of the State of Delaware on May 15, 1998.
Incorporated by reference to Exhibit 4.1 to the
Company's Report on Form 8-K dated (date of earliest
event reported) May 7, 1998 (File No. 1-8048).
3(b) By-laws of the Company, as amended. Incorporated by
reference to Exhibit 4.02 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (File No.
33- 64980).
4(a) Rights Agreement, dated as of May 15, 1998, between the
Company and Harris Trust of Chicago. Incorporated by
reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated (date of earliest event
reported) May 7, 1998 (File No. 1-8048).
4(b)(1) Revolving Credit, Term Loan and Security Agreement
among Company, TII Corporation and BNY Financial
Corporation ("Lender"). Incorporated by reference to
Exhibit 4(a)(i) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1998
(File No. 1-8048).
4(b)(2) Revolving Credit, Term Loan and Security Agreement
between Crown Tool & Die Company, Inc. and Lender.
Incorporated by reference to Exhibit 4(a)(ii) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(3) Guaranty of Company to Lender. Incorporated by
reference to Exhibit 4(b)(i) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
27, 1998 (File No. 1-8048).
4 (b)(4) Guaranty of TII International, Inc. to Lender.
Incorporated by reference to Exhibit 4(b)(ii) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(5) Guaranty of Telecommunications Industries, Inc. to
Lender. Incorporated by reference to Exhibit 4(b)(iii)
to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 27, 1998 (File No. 1-8048).
4(b)(6) Guaranty of TII Dominicana, Inc. to Lender.
Incorporated by reference to Exhibit 4(b)(iv) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(7) Guaranty of TII Corporation to Lender. Incorporated by
reference to Exhibit 4(b)(v) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
27, 1998 (File No. 1-8048).
4(b)(8) Guaranty of TII-Ditel, Inc. to Lender. Incorporated by
reference to Exhibit 4(b)(vi) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(9) General Security Agreement from Telecommunications
Industries, Inc. in favor of Lender. Incorporated by
reference to Exhibit 4(c)(i) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
27, 1998 (File No. 1-8048).
4(b)(10) General Security Agreement from TII International, Inc.
in favor of Lender. Incorporated by reference to
Exhibit 4(c)(ii) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1998
(File No. 1-8048).
4(b)(11) General Security Agreement from TII Dominicana, Inc. in
favor of Lender. Incorporated by reference to Exhibit
4(c)(iii) to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 27, 1998 (File
No. 1-8048).
4(b)(12) Stock Pledge and Security Agreement from Company in
favor of Lender. Incorporated by reference to Exhibit
4(d)(i) to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 27, 1998 (File No.
1-8048).
4(b)(13) Stock Pledge and Security Agreement from TII
Corporation in favor of Lender. Incorporated by
reference to Exhibit 4(d)(ii) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(14) Stock Pledge and Security Agreement from TII
International, Inc. in favor of Lender. Incorporated by
reference to Exhibit 4(d)(iii) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(15) Patent Collateral Assignment and Security Agreement
between Company and Lender. Incorporated by reference
to Exhibit 4(e)(i) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1998
(File No. 1-8048).
4(b)(16) Trademark Collateral Assignment and Security Agreement
between Company and Lender. Incorporated by reference
to Exhibit 4(e)(ii) to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 27,
1998 (File No. 1-8048).
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, as amended. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
December 26, 1997 (File No. 1-8048).
10(b)(1)+ Amended and Restated Employment Agreement dated as of
August 1, 1997 between the Company and Timothy J Roach.
Incorporated by reference to Exhibit 10(b)(1) to the
Company's Annual Report on Form 10-K for the fiscal
year ended June 27, 1997 (File No. 1-8048).
10(b)(2)+ Amended and Restated Employment Agreement dated as of
May 1, 1997 between the Company and Carl H.
Meyerhoefer. Incorporated by reference to Exhibit
10(b)(2) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 27, 1997 (File No.
1-8048).
10(b)(3)(A)+ Employment Agreement dated September 23, 1993 between
the Company and Dare P. Johnston. Incorporated by
reference to Exhibit 10(b)(3)(A) to the Company's
Annual Report on Form 10-K for the fiscal year ended
June 27, 1997 (File No. 1-8048).
10(b)(3)(B)+ Extension dated as of June 2, 1997 to the Employment
Agreement dated September 23, 1993 between the Company
and Dare P. Johnston. Incorporated by reference to
Exhibit 10(b)(3)(B) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 1997 (File
No. 1-8048).
10(b)(4)+ Employment Agreement dated as of January 21, 1998
between the Company and James A. Roach. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
December 26, 1997 (File No. 1-8048).
10(b)(5)+ Amended and Restated Employment Agreement dated as of
May 1, 1997 between the Company and Paul G. Sebetic.
Incorporated by reference to Exhibit 10(b)(2) to the
Company's Registration Statement on Form S-2, No.
333-38467.
10(b)(6)+* Amended and Restated Employment Agreement dated as of
March 9, 1998 between the Company and George S.
Katsarakes.
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 April 27, 1998 between the Company
and Puerto Rico Industrial Development Company.
Incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
10(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).
10(e)(1) Form of Warrant issued to the investors in the
Company's January 26, 1998 private placement.
Incorporated by reference to Exhibit 99.1 to the
Company's Report on Form 8-K dated (date of earliest
event reported) January 26, 1998. (File No. 1-8048).
10(e)(2) Securities Purchase Agreement dated as of January 26,
1998 by and among the Company and the investors in the
Company's January 26, 1998 private placement.
Incorporated by reference to Exhibit 99.2 to the
Company's Report on Form 8-K/A dated (date of earliest
event reported) January 26, 1998. (File No. 1-8048).
10(e)(3) Registration Rights Agreement dated as of January 26,
1998 by and among the Company and the investors in the
Company's January 26, 1998 private placement.
Incorporated by reference to Exhibit 99.3 to the
Company's Report on Form 8-K/A dated (date of earliest
event reported) January 26, 1998. (File No. 1-8048).
21 Subsidiaries of the Company. Incorporated by reference
to Exhibit 21 to the Company's Annual Report on Form
10-K for the fiscal year ended June 27, 1997.
23* Consent of independent public accountants.
27* Financial data schedule (filed electronically only).
- - -----------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
Reports on Form 8-K
A Report on Form 8-K dated (date of earliest event reported) May 7,
1998 was filed during the last quarter of the year ended June 26, 1998.
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.
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 25, 1998 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 25, 1998 /s/ Alfred J. Roach
-------------------
Alfred J. Roach, Chairman
of the Board of Directors
and Director
September 25, 1998 /s/ Timothy J. Roach
------------------
Timothy J. Roach, President,
Chief Executive Officer and
Director
September 25, 1998 /s/ Paul G. Sebetic
-------------------
Paul G. Sebetic,
Vice President-Finance and
Chief Financial Officer
September 25, 1998 /s/ C. Bruce Barksdale
-------------------
C. Bruce Barksdale, Director
September 25, 1998 /s/ Dorothy Roach
---------------
Dorothy Roach, Director
September 25, 1998 /s/ Joseph C. Hogan
----------------
Joseph C. Hogan, Director
September 25, 1998 /s/ James R. Grover, Jr.
--------------------
James R. Grover, Jr., Director
September 25, 1998 /s/ William G. Sharwell
--------------------
William G. Sharwell, Director
SCHEDULE I
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
26, 1998 and June 27, 1997, and related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended June 26, 1998, included in this Form 10-K and have issued our
report thereon dated September ??, 1998. 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 26, 1998, June 27, 1997 and June 28, 1996
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 25, 1998.
Stamp No. 1532785 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
SCHEDULE II
TII INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR INVENTORY
Balance at Balance
Beginning of at End of
Fiscal Year Ended Year Additions Dispositions Year
- - --------------------- ----------------- ----------------- ------------------ -----------------
June 28, 1996 $1,466,000 568,000 - $2,034,000
June 27, 1997 $2,034,000 2,896,000 (2,500,000) $2,430,000
June 26, 1998 $2,430,000 206,000 - $2,636,000
EXHIBIT INDEX
-------------
Exhibit No. Description
- - ---------- ------------
3(a)(1) Restated Certificate of Incorporation of the Company,
as filed with the Secretary of State of the State of
Delaware on December 10, 1996. Incorporated by
reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
December 27, 1996 (File No. 1-8048).
3(a)(2) Certificate of Designation and Form of Right
Certificate, as filed with the Secretary of State of
the State of Delaware on January 26, 1998. Incorporated
by reference to Exhibit 4.1 to the Company's Report on
Form 8-K dated (date of earliest event reported)
January 26, 1998. (File No. 1-8048).
3(a)(3) Certificate of Designation as filed with the Secretary
of State of the State of Delaware on May 15, 1998.
Incorporated by reference to Exhibit 4.1 to the
Company's Report on Form 8-K dated (date of earliest
event reported) May 7, 1998 (File No. 1-8048).
3(b) By-laws of the Company, as amended. Incorporated by
reference to Exhibit 4.02 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (File No.
33- 64980).
4(a) Rights Agreement, dated as of May 15, 1998, between the
Company and Harris Trust of Chicago. Incorporated by
reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated (date of earliest event
reported) May 7, 1998 (File No. 1-8048).
4(b)(1) Revolving Credit, Term Loan and Security Agreement
among Company, TII Corporation and BNY Financial
Corporation ("Lender"). Incorporated by reference to
Exhibit 4(a)(i) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1998
(File No. 1-8048).
4(b)(2) Revolving Credit, Term Loan and Security Agreement
between Crown Tool & Die Company, Inc. and Lender.
Incorporated by reference to Exhibit 4(a)(ii) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(3) Guaranty of Company to Lender. Incorporated by
reference to Exhibit 4(b)(i) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
27, 1998 (File No. 1-8048).
4 (b)(4) Guaranty of TII International, Inc. to Lender.
Incorporated by reference to Exhibit 4(b)(ii) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(5) Guaranty of Telecommunications Industries, Inc. to
Lender. Incorporated by reference to Exhibit 4(b)(iii)
to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 27, 1998 (File No. 1-8048).
4(b)(6) Guaranty of TII Dominicana, Inc. to Lender.
Incorporated by reference to Exhibit 4(b)(iv) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
4(b)(7) Guaranty of TII Corporation to Lender. Incorporated by
reference to Exhibit 4(b)(v) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
27, 1998 (File No. 1-8048).
4(b)(8) Guaranty of TII-Ditel, Inc. to Lender. Incorporated by
reference to Exhibit 4(b)(vi) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(9) General Security Agreement from Telecommunications
Industries, Inc. in favor of Lender. Incorporated by
reference to Exhibit 4(c)(i) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
27, 1998 (File No. 1-8048).
4(b)(10) General Security Agreement from TII International, Inc.
in favor of Lender. Incorporated by reference to
Exhibit 4(c)(ii) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1998
(File No. 1-8048).
4(b)(11) General Security Agreement from TII Dominicana, Inc. in
favor of Lender. Incorporated by reference to Exhibit
4(c)(iii) to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 27, 1998 (File
No. 1-8048).
4(b)(12) Stock Pledge and Security Agreement from Company in
favor of Lender. Incorporated by reference to Exhibit
4(d)(i) to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 27, 1998 (File No.
1-8048).
4(b)(13) Stock Pledge and Security Agreement from TII
Corporation in favor of Lender. Incorporated by
reference to Exhibit 4(d)(ii) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(14) Stock Pledge and Security Agreement from TII
International, Inc. in favor of Lender. Incorporated by
reference to Exhibit 4(d)(iii) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1998 (File No. 1-8048).
4(b)(15) Patent Collateral Assignment and Security Agreement
between Company and Lender. Incorporated by reference
to Exhibit 4(e)(i) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1998
(File No. 1-8048).
4(b)(16) Trademark Collateral Assignment and Security Agreement
between Company and Lender. Incorporated by reference
to Exhibit 4(e)(ii) to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 27,
1998 (File No. 1-8048).
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, as amended. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
December 26, 1997 (File No. 1-8048).
10(b)(1)+ Amended and Restated Employment Agreement dated as of
August 1, 1997 between the Company and Timothy J Roach.
Incorporated by reference to Exhibit 10(b)(1) to the
Company's Annual Report on Form 10-K for the fiscal
year ended June 27, 1997 (File No. 1-8048).
10(b)(2)+ Amended and Restated Employment Agreement dated as of
May 1, 1997 between the Company and Carl H.
Meyerhoefer. Incorporated by reference to Exhibit
10(b)(2) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 27, 1997 (File No.
1-8048).
10(b)(3)(A)+ Employment Agreement dated September 23, 1993 between
the Company and Dare P. Johnston. Incorporated by
reference to Exhibit 10(b)(3)(A) to the Company's
Annual Report on Form 10-K for the fiscal year ended
June 27, 1997 (File No. 1-8048).
10(b)(3)(B)+ Extension dated as of June 2, 1997 to the Employment
Agreement dated September 23, 1993 between the Company
and Dare P. Johnston. Incorporated by reference to
Exhibit 10(b)(3)(B) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 1997 (File
No. 1-8048).
10(b)(4)+ Employment Agreement dated as of January 21, 1998
between the Company and James A. Roach. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
December 26, 1997 (File No. 1-8048).
10(b)(5)+ Amended and Restated Employment Agreement dated as of
May 1, 1997 between the Company and Paul G. Sebetic.
Incorporated by reference to Exhibit 10(b)(2) to the
Company's Registration Statement on Form S-2, No.
333-38467.
10(b)(6)+* Amended and Restated Employment Agreement dated as of
March 9, 1998 between the Company and George S.
Katsarakes.
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 April 27, 1998 between the Company
and Puerto Rico Industrial Development Company.
Incorporated by reference to Exhibit 10(a) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1998 (File No. 1-8048).
10(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).
10(e)(1) Form of Warrant issued to the investors in the
Company's January 26, 1998 private placement.
Incorporated by reference to Exhibit 99.1 to the
Company's Report on Form 8-K dated (date of earliest
event reported) January 26, 1998. (File No. 1-8048).
10(e)(2) Securities Purchase Agreement dated as of January 26,
1998 by and among the Company and the investors in the
Company's January 26, 1998 private placement.
Incorporated by reference to Exhibit 99.2 to the
Company's Report on Form 8-K/A dated (date of earliest
event reported) January 26, 1998. (File No. 1-8048).
10(e)(3) Registration Rights Agreement dated as of January 26,
1998 by and among the Company and the investors in the
Company's January 26, 1998 private placement.
Incorporated by reference to Exhibit 99.3 to the
Company's Report on Form 8-K/A dated (date of earliest
event reported) January 26, 1998. (File No. 1-8048).
21 Subsidiaries of the Company. Incorporated by reference
to Exhibit 21 to the Company's Annual Report on Form
10-K for the fiscal year ended June 27, 1997.
23* Consent of independent public accountants.
27* Financial data schedule (filed electronically only).
- - ---------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.