SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1997
Commission file number 1-8048
TII INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: Delaware IRS Employer Identification No: 66-0328885
1385 Akron Street, Copiague, New York 11726
----------------------------------------------------
(Address and zip code of principal executive office)
(516) 789-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of October 31, 1997 was 7,601,139.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September June 27,
26, 1997 1997
-------- --------
ASSETS (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 856 $ 247
Marketable securities available for sale 2,692 3,552
Receivables 7,731 7,388
Inventories 14,649 15,574
Prepaid expenses 358 402
-------- --------
Total current assets 26,286 27,163
-------- --------
Fixed Assets
Property, plant and equipment 39,130 37,812
Less: Accumulated depreciation and amortization (24,077) (23,768)
-------- --------
Net fixed assets 15,053 14,044
-------- --------
Other Assets 1,532 1,616
-------- --------
TOTAL ASSETS $ 42,871 $ 42,823
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and obligation under
capital leases $ 554 $ 537
Accounts payable 5,361 5,833
Accrued liabilities 1,253 1,138
-------- --------
Total current liabilities 7,168 7,508
-------- --------
Long-Term Debt 836 839
Long-Term Obligation Under Capital Leases 1,328 1,465
-------- --------
2,164 2,304
-------- --------
Stockholders' Investment
Preferred Stock, par value $1.00 per share;
1,000,000 authorized and issuable in series -- --
Common Stock, par value $.01 per share;
30,000,000 shares authorized (with one vote per share);
7,593,077 and 7,488,473 shares issued at September 26,
1997 and June 27, 1997, respectively 76 75
Warrants outstanding 159 159
Capital in excess of par value 29,733 29,052
Retained earnings 3,839 3,999
Valuation adjustment to record marketable securities
available for sale at fair value 13 7
-------- --------
33,820 33,292
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
-------- --------
Total stockholders' investment 33,539 33,011
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 42,871 $ 42,823
======== ========
</TABLE>
See notes to consolidated financial statements
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<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 26, 1997 AND
SEPTEMBER 27, 1996 (unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 13,503 $ 12,040
Cost of sales 11,053 8,856
-------- --------
Gross profit 2,450 3,184
-------- --------
Operating expenses
Selling, general and administrative 1,854 1,634
Research and development 776 744
-------- --------
Total operating expenses 2,630 2,378
-------- --------
Operating (loss) income (180) 806
Interest expense (54) (120)
Interest income 59 108
Other income 15 6
-------- --------
(Loss) income before provision for income taxes (160) 800
Provision for income taxes -- 48
-------- --------
Net (loss) income $ (160) $ 752
======== ========
Net (loss) income per share - primary $ (.02) $ .10
======== ========
Weighted average shares outstanding - primary 7,476 7,808
======== ========
Net (loss) income per share - fully diluted $ (.02) $ .10
======== ========
Weighted average shares outstanding - fully diluted 7,476 8,108
======== ========
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 26, 1997 (unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Valuation
Adjustment
to record
Marketable
securities
Capital in available
Common Warrants excess of Retained for sale at Treasury
Stock Outstanding par value Earnings fair value Stock
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 27, 1997 $ 75 $ 159 $ 29,052 $ 3,999 $ 7 $ (281)
Exercise of stock options 1 -- 681 -- -- --
Unrealized gain on marketable
securities available for sale -- -- -- -- 6 --
Net loss for the three months
ended September 26, 1997 -- -- -- (160) -- --
-------- -------- -------- -------- -------- --------
BALANCE, September 26, 1997 $ 76 $ 159 $ 29,733 $ 3,839 $ 13 $ (281)
======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidate financial statements
-4-
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 26, 1997
AND SEPTEMBER 27, 1996 (unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $ (160) $ 752
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 309 279
Provision for inventory allowance, net 99 100
Amortization of other assets, net 59 25
Changes in assets and liabilities
Increase in receivables (343) (1,004)
Decrease (increase) in inventories 826 (1,791)
Decrease (increase) in prepaid expenses and other assets 69 (34)
(Decrease) increase in accounts payable and accrued liabilities (357) 2,087
------- -------
Net cash provided by operating activities 502 414
------- -------
Cash Flows from Investing Activities:
Capital expenditures (1,318) (1,005)
Purchases of marketable securities available for sale (2,108) (2,436)
Sales and maturities of marketable securities available for sale 2,974 1,084
------- -------
Net cash used in investing activities (452) (2,357)
------- -------
Cash flows from Financing Activities:
Proceeds from exercise of options and warrants 682 5
Payment of long-term debt and obligations under capital leases (123) (62)
------- -------
Net cash provided by (used in) financing activities 559 (57)
------- -------
Net increase (decrease) in cash and cash equivalents 609 (2,000)
Cash and Cash Equivalents, at beginning of period 247 2,883
------- -------
Cash and Cash Equivalents, at end of period $ 856 $ 883
======= =======
SUPPLEMENTAL DISCLOSURE:
Non-cash transactions:
Capital leases entered into $ -- $ 21
======= =======
Valuation adjustment to record marketable
securities available for sale at fair value $ 6 $ (51)
======= =======
Cash paid during period for:
Income taxes $ 112 $ 24
======= =======
Interest $ 53 $ 60
======= =======
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements presented herein have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Regulation S-X
pertaining to interim financial statements. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. The financial statements reflect all
adjustments, consisting of normal recurring adjustments and accruals which, in
the opinion of management, are considered necessary for a fair presentation of
financial position at September 26, 1997 and results of operations and cash
flows for the three months ended September 26, 1997 and September 27, 1996. The
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended June 27,
1997. The results of operations for the three months ended September 26, 1997
are not necessarily indicative of the results that may be expected for the full
year ending June 26, 1998.
NOTE 2 - NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common and common equivalent share is calculated using the
weighted average number of common shares outstanding and the net additional
number of shares that would be issuable upon the exercise of dilutive stock
options and warrants assuming that the Company used the proceeds received to
purchase additional shares (up to 20% of shares outstanding) at market value,
retire debt and invest any remaining proceeds in U.S. government securities. The
effect on net income (loss) of these assumed transactions is considered in the
computation. In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard 128 Earnings Per Share (SFAS
128). SFAS 128 modifies the methodology for calculating earnings per share and
is effective for periods ending after December 15, 1997. Upon adoption of the
standard, prior period amounts must be restated. The Companys management does
not expect SFAS 128 to have a material effect on the Companys earnings per
share.
NOTE 3 - INVENTORIES
Inventories, net of allowances, consisted of the following components:
September 26, June 27,
1997 1997
----------- -----------
Raw material $ 5,724,000 $ 4,996,000
Work in process 6,988,000 4,584,000
Finished goods 1,937,000 5,994,000
----------- -----------
$14,649,000 $15,574,000
=========== ===========
-6-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion and analysis should be read in conjunction with the
foregoing consolidated financial statements and notes thereto.
Net sales for the first quarter of fiscal 1998 increased $1.5 million (12.2%) to
$13.5 million from $12.0 million for the first quarter of fiscal 1997. Sales of
Network Interface Devices NIDs, increased by $887,000 due principally to an
increase in NID sales to a telephone operating company customer. Sales of fiber
optic related products increased by $516,000, primarily due to the continued
acceptance of the LIGHTRAXR product line. Sales of overvoltage surge protectors
sold separately from NIDs decreased by $140,000 primarily as a result of the
increase in sales of NIDs, which incorporate the Companys overvoltage surge
protectors. Included in overvoltage surge protector sales is a $389,000 increase
over the first quarter of fiscal 1997 in sales of modular station protectors
introduced in late fiscal 1995. Sales of station electronics and other products
increased by $223,000.
Gross profit for the first quarter of fiscal 1998 decreased by $734,000 (23.1%)
to $2.5 million from $3.2 million for the first quarter of fiscal 1997. Gross
profit as a percentage of sales decreased for the first quarter of fiscal 1998
to 18.1% from 26.4% for the first quarter of fiscal 1997. The Companys gross
profit margin for the first quarter of fiscal 1998 continued to be impacted by
additional material, labor and overhead costs associated with the accelerated
production startup of its broadband NID product line to meet delivery schedules
under recently awarded contracts. To a lesser extent, the Companys gross margin
was affected by moving costs relating to relocating production processes from
its Puerto Rico facility to its lower cost Dominican Republic facility. The
Company expects these activities will be substantially completed by the end of
the second quarter of fiscal 1998 and that volume deliveries of its broadband
NIDs under recently awarded contracts will begin during the second and third
quarters of fiscal 1998. The Company anticipates that the completion of its
relocation program and the commencement of volume deliveries of its broadband
NIDs will have a positive impact on the Companys gross profit margin beginning
in the third quarter of fiscal 1998.
Selling, general and administrative expenses for the first quarter of fiscal
1998 increased by $220,000 (13.5%) to $1.9 million from $1.6 million for the
first quarter of fiscal 1997. As a percentage of sales, selling, general and
administrative expenses increased slightly for the first quarter of fiscal 1998
to 13.7% from 13.6% for the first quarter of fiscal 1997. The increase resulted
primarily from personnel, promotion and other costs associated the Companys
efforts to obtain new sales contracts.
Research and development expenses for the first quarter of fiscal 1998 increased
$32,000 (4.3%) to $776,000 from $744,000 for the first quarter of fiscal 1997.
As a percentage of sales, research and development expenses for the first
quarter of fiscal 1998 decreased to 5.7% from 6.2% for the first quarter of
fiscal 1997. The slight dollar increase related primarily to higher personnel
and other costs associated with product development for expansion of the
Companys broadband NID product line.
Interest expense for the first quarter of fiscal 1998 decreased by $66,000
(55.0%) to $54,000 from $120,000 in the first quarter of fiscal 1997. Interest
expense for the first quarter of fiscal 1997 included amortization of debt
origination costs that ceased during such period.
-7-
<PAGE>
Interest income for the first quarter of fiscal 1998 decreased by $49,000
(45.4%) to $59,000 from $108,000 in the first quarter of fiscal 1997. The
Company's use of cash and marketable securities since the first quarter of
fiscal 1997, primarily for capital expenditures, reduced funds available for
investment.
As a result of the foregoing, the Company incurred a net loss of $160,000 for
the first quarter of fiscal 1998 versus net income of $752,000 for the first
quarter of fiscal 1997. Net loss per share equaled $0.02 for the first quarter
of fiscal 1998 versus fully diluted net income per share of $0.10 for the first
quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Companys cash, cash equivalents and marketable securities decreased to $3.5
million at the end of the first quarter of fiscal 1998 from $3.8 million at the
end of fiscal 1997. Working capital decreased to $19.1 million at the end of the
first quarter of fiscal 1998 from $19.7 million at the end of fiscal 1997.
During the first quarter of fiscal 1998, $502,000 of cash was provided by
operations. While the Company had a net loss of $160,000 for the first quarter
of fiscal 1998, such loss included non-cash charges, including $368,000 for
depreciation and amortization. The remaining cash flow from operations resulted
primarily from an $826,000 decrease in inventories, which was partially offset
by a decrease in accounts payable and accrued liabilities of $357,000 and an
increase in receivables of $343,000.
During the first quarter of fiscal 1998, cash of $452,000 was used in investing
activities for capital expenditures of $1.3 million offset, in part by proceeds
from sales and maturities of marketable securities in excess of amounts
reinvested of $866,000. Additionally, during the first quarter of fiscal 1998,
financing activities provided $559,000, with $682,000 realized from the exercise
of stock options and warrants being partially offset by the payment of $123,000
of long-term debt and obligations under capital lease.
The Company is a party to a Revolving Credit Loan Agreement with The Chase
Manhattan Bank which, at September 26, 1997, entitled the Company to have
outstanding borrowings of up to $3.6 million, declining by $400,000 each
calendar quarter thereafter. As a result of the net loss for the first quarter
of fiscal 1998, the Company was not in compliance with the debt service ratio
and net income covenants contained in its Revolving Credit Loan Agreement. There
is no loan amount outstanding under the agreement and the Company has received a
waiver with respect to such no-compliance.
Funds anticipated to be generated from operations, together with available cash,
marketable securities and borrowings available under the Company's Revolving
Credit Agreement are considered to be adequate to finance the Company's
operational and capital needs over at least the next twelve months. The Company
filed a registration statement under the Securities Act of 1933, as amended, on
October 22, 1997 with respect to a proposed underwritten offering of Common
Stock to raise additional funds to purchase additional equipment and leasehold
improvements and for working capital.
-8-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 30, 1997, the Company received a complaint in an action brought in
the Superior Court of Bayamon, Puerto Rico by a former employee alleging
wrongful termination of his employment and seeking damages of $3.8 million. The
Company believes the case is without merit and will not have a material adverse
effect on the Companys financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 25, 1997, the Company sold 14,500 shares of its Common Stock, $.01 par
value per share (Common Stock), to Strategic Growth International, Inc.
(Strategic Growth) pursuant to Strategic Growths partial exercise of an option
to purchase up to 150,000 shares of Common Stock on or before August 31, 1997.
The remainder of the option expired unexercised. The exercise price was $7.50
per share (an aggregate of $108,750). No underwriting discounts or commissions
were paid in connection wth the issuance of the shares. In connection with the
issuance, Strategic Growth acknowledged that the shares issued could not be sold
or transferred in the absence of registration under the Securities Act of 1933,
as amended(the Securities Act), or an opinion of counsel that such registration
was not required. The Company believes that the exemption afforded by Section
4(2) of the Securities Act was applicable to the issuance of such shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
11. Statement Re: Computation of Per Share Earnings.
27. EDGAR financial data schedule.
(b) Reports on Form 8-K
-------------------
On August 7, 1997, the Company filed a report on Form 8-K dated July 29,
1997 (date of earliest event reported), reporting under Item 5 - Other Events.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TII INDUSTRIES, INC.
Date: November 5, 1997 /s/ Paul G. Sebetic
----------------------------
Paul G. Sebetic
Vice President-Finance and Chief
Financial Officer
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TII INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Three Months Three Months
Ended September Ended September
26, 1997 27, 1996
----------- -----------
PRIMARY EARNINGS PER SHARE
Shares used in computing earnings per share:
Weighted average number of shares of
common stock outstanding 7,475,738 7,429,000
Incremental shares attributed to common
stock equivalents - options and warrants -- 379,000
----------- -----------
7,475,738 7,808,000
=========== ===========
Earnings:
Net (loss) income ($ 160,000) $ 752,000
Add: Interest expense reduction -- 10,000
----------- -----------
($ 160,000) $ 762,000
=========== ===========
Earnings per common and common equivalent
share ($ 0.02) $ 0.10
=========== ===========
FULLY DILUTED EARNINGS PER SHARE
Shares used in computing earnings per share:
Weighted average number of shares
outstanding 7,475,738 7,429,000
Incremental shares attributed to common
stock equivalents - options and warrants -- 379,000
OPIC loan -- 300,000
----------- -----------
7,475,738 8,108,000
=========== ===========
Earnings:
Net (loss) income ($ 160,000) $ 752,000
Add: Interest expense reduction -- 29,000
----------- -----------
($ 160,000) $ 781,000
=========== ===========
Earnings per common and common equivalent
share ($ 0.02) $ 0.10
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000277928
<NAME> TII INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> SEP-26-1997
<CASH> 856
<SECURITIES> 2,692
<RECEIVABLES> 7,731
<ALLOWANCES> 53
<INVENTORY> 14,649
<CURRENT-ASSETS> 26,286
<PP&E> 39,130
<DEPRECIATION> 24,077
<TOTAL-ASSETS> 42,871
<CURRENT-LIABILITIES> 7,168
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 33,463
<TOTAL-LIABILITY-AND-EQUITY> 42,871
<SALES> 13,503
<TOTAL-REVENUES> 13,503
<CGS> 11,053
<TOTAL-COSTS> 2,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (160)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
