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 25, 1998
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 30, 1998 was 8,026,933.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 25, June 26,
1998 1998
---------------- ----------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 390 $ 377
Receivables 6,791 8,110
Inventories 19,656 18,619
Prepaid expenses 395 375
---------------- ----------------
Total current assets 27,232 27,481
---------------- ----------------
Fixed Assets
Property, plant and equipment 43,904 43,430
Less: Accumulated depreciation and amortization (25,948) (25,398)
---------------- ----------------
Net fixed assets 17,956 18,032
---------------- ----------------
Other Assets 1,988 2,051
---------------- ----------------
TOTAL ASSETS $ 47,176 $ 47,564
================ ================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and obligation under capital leases $ 3,673 $ 3,363
Accounts payable 6,394 6,528
Accrued liabilities 1,756 1,596
---------------- ----------------
Total current liabilities 11,823 11,487
---------------- ----------------
Long-Term Debt 1,840 1,855
Long-Term Obligation Under Capital Leases 306 511
---------------- ----------------
2,146 2,366
---------------- ----------------
Series C Convertible Redeemable Preferred Stock, 5,000 shares authorized; 4,900 shares
issued at September 25, 1998 and 5,000 shares issued at June 26, 1998, respectively;
liquidation preference of $1,150 per share 4,900 4,738
---------------- ----------------
Stockholders' Investment
Preferred Stock, par value $1.00 per share; 1,000,000 authorized, issuable in series;
Series C Convertible Redeemable, 5,000 shares authorized; 4,900 shares issued at
September 25, 1998 and 5,000 shares issued at June 26, 1998 - -
Series D Junior Participating, 30,000 shares authorized; no shares issued - -
Common Stock, par value $.01 per share; 30,000,000 shares authorized; 7,684,906
and 7,631,801 shares issued at September 25, 1998 and June 26, 1998, respectively. 77 76
Warrants outstanding 20 159
Capital in excess of par value 30,572 30,162
Accumulated deficit (2,081) (1,143)
---------------- ----------------
28,588 29,254
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
---------------- ----------------
Total stockholders' investment 28,307 28,973
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 47,176 $ 47,564
================ ================
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
(unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Net sales $ 14,646 $ 13,503
Cost of sales 12,145 11,053
------------- --------------
Gross profit 2,501 2,450
------------- --------------
Operating expenses
Selling, general and administrative 2,188 1,854
Research and development 889 776
------------- --------------
Total operating expenses 3,077 2,630
------------- --------------
Operating loss (576) (180)
Interest expense (113) (54)
Interest income 1 59
Other income 12 15
------------- --------------
Net loss (676) (160)
Preferred stock embedded dividend (262) -
------------- --------------
Net loss applicable to common stockholders ($938) ($160)
============= ==============
Net loss per share - basic and diluted $(.12) $(.02)
============= ==============
Weighted average shares outstanding - basic and diluted 7,648 7,476
============= ==============
</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 25, 1998 (unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Capital
in excess
Common Warrants of par Accumulated Treasury
Stock Outstanding value Deficit Stock
----------- --------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, June 26, 1998 $ 76 $ 159 $ 30,162 $ (1,143) $ (281)
Exercise of stock options 1 - 109 - -
Exercise of warrants - (19) 81 - -
Conversion of Series C
Preferred Stock - - 100 - -
Expiration of warrants - (120) 120 - -
Embedded dividend on Series
C Preferred Stock - - - (262) -
Net loss for the three months
ended September 25, 1998 - - - (676) -
----------- --------------- ----------- ---------------- -----------
BALANCE, September 25, 1998 $ 77 $ 20 $ 30,572 $ (2,081) $ (281)
=========== =============== =========== ================ ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
(unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (676) $ (160)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 550 309
Provision for inventory allowance, net 99 99
Amortization of other assets, net 49 59
Changes in assets and liabilities
Decrease (increase) in receivables 1,319 (343)
(Increase) decrease in inventories (1,136) 826
(Increase) decrease in prepaid expenses and other assets (6) 69
Increase (decrease) in accounts payable and accrued liabilities 26 (357)
----------------- ------------------
Net cash provided by operating activities 225 502
----------------- ------------------
Cash Flows from Investing Activities:
Capital expenditures (474) (1,318)
Purchases of marketable securities available for sale - (2,108)
Proceeds from sales and maturities of marketable securities
available for sale - 2,974
----------------- ------------------
Net cash used in investing activities (474) (452)
----------------- ------------------
Cash Flows from Financing Activities:
Proceeds from exercise of options and warrants 172 682
Net proceeds from short-term borrowings 310 -
Payment of long-term debt and obligations under capital leases (220) (123)
----------------- ------------------
Net cash provided by financing activities 262 559
----------------- ------------------
Net increase in cash and cash equivalents 13 609
Cash and Cash Equivalents, at beginning of period 377 247
----------------- ------------------
Cash and Cash Equivalents, at end of period $ 390 $ 856
================= ==================
Supplemantal disclosure of non-cash transactions:
Embedded dividend on Series C Preferred Stock $ 262 $ -
================= ==================
Valuation adjustment to record marketable
securities available for sale at fair value $ - $ 6
================= ==================
Supplemantal disclosure of cash transactions:
Cash paid during the period for income taxes $ - $ 112
================= ==================
Cash paid during the period for interest $ 113 $ 53
================= ==================
</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 25, 1998 and results of operations and cash
flows for the three months ended September 25, 1998 and September 26, 1997. 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 26,
1998. The results of operations for the three months ended September 25, 1998
are not necessarily indicative of the results that may be expected for the full
year ending June 25, 1999.
Note 2 - Net loss per common share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128") requires the replacement of previously reported primary and fully diluted
earnings per share required by Accounting Principles Board Opinion No. 15 with
basic earnings per share and diluted earnings per share commencing with periods
ending after December 15, 1997. Per share amounts for the quarter ended
September 26, 1997 have been restated to conform to the requirements of SFAS
128. Because the Company experienced a loss in all reported periods, shares
issuable upon the exercise of stock options and warrants and upon conversion of
the Company's Series C Preferred Stock were not included in the calculation of
diluted earnings per share as their effect would have been anti-dilutive.
However, the embedded dividend related to such Preferred Shares increased the
net loss applicable to common shareholders.
Note 3 - Inventories
Inventories, net of allowances, consisted of the following components:
September 25, June 26,
1998 1998
-------------------- -------------------
Raw material $9,667,000 $9,244,000
Work in process 5,783,000 5,586,000
Finished goods 4,206,000 3,789,000
-------------------- -------------------
$19,656,000 $18,619,000
==================== ===================
6
<PAGE>
Note 4 - Hurricane Georges
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
significant inventory, equipment and facility damages as a result of Hurricane
Georges. In addition, the Company experienced production stoppage through mid
October 1998 as a result of the storm. The accompanying consolidated financial
statements do not reflect any inventory, equipment, facilities or business
interruption related write-downs or reserves as management and the Company's
insurance advisors are assessing the full extent of the damages. Management and
the Company's insurance advisors believe the losses will be fully covered by
insurance.
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.
General
As discussed in Note 4 to the consolidated financial statements, the Company
experienced production stoppages during the last week of the September 1998
fiscal quarter at both its Puerto Rico and Dominican Republic facilities due to
Hurricane Georges. This production stoppage continued through mid October 1998,
when both facilities began to ramp up production. Management believes this will
reduce sales for the quarter ended December 1998, but any shortfall in gross
profit will be recovered from proceeds expected to be received under the
Company's business interuption insurance policies.
Results of Operations
Net sales for the first quarter of fiscal 1999 increased $1.1 million or 8.5% to
$14.6 million from $13.5 million for the first quarter of fiscal 1998. Sales
gains in the Network Interface Device and fiber optic product lines provided the
majority of the increase.
Gross profit for the first quarter of fiscal 1999 increased by $51,000 or 2.1%
to $2.5 million. Gross profit as a percentage of sales decreased for the first
quarter of fiscal 1999 to 17.1% from 18.1% for the first quarter of fiscal 1998.
The Company's gross profit margin for the first quarter of fiscal 1999 continued
to be impacted by additional material, labor and overhead costs associated with
its broadband NID product line.
Selling, general and administrative expenses for the first quarter of fiscal
1999 increased by $334,000 (18.0%) to $2.2 million from $1.9 million for the
first quarter of fiscal 1998. As a percentage of sales, selling, general and
administrative expenses increased for the first quarter of fiscal 1999 to 14.9%
from 13.7% for the first quarter of fiscal 1998. The increase resulted primarily
from increased personnel, promotion and other costs associated the Company's
efforts to promote its new Coaxial Cable Surge Protector product line and from
higher legal and financial advisory fees.
Research and development expenses for the first quarter of fiscal 1999 increased
$113,000 (14.6%) to $889,000 from $776,000 for the first quarter of fiscal 1998.
As a percentage of sales, research and development expenses for the first
quarter of fiscal 1999 increased to 6.1% from 5.7% for the first
7
<PAGE>
quarter of fiscal 1998. The increase relates primarily to higher personnel and
other costs associated with product development for expansion of the Company's
Broadband Surge Protector product lines.
Interest expense for the first quarter of fiscal 1999 increased by $59,000 to
$113,000 from $54,000 in the first quarter of fiscal 1998 due to increased
borrowings under the Company's credit facility. Interest income for the first
quarter of fiscal 1999 decreased by $58,000 to $1,000 from $59,000 in the first
quarter of fiscal 1998 due to a reduced marketable securities balance.
Liquidity and Capital Resources
The Company's working capital balance decreased $585,000 to $15.4 million at the
end of the first quarter of fiscal 1999.
During the first quarter of fiscal 1999, $225,000 of cash was provided by
operations. While the Company had a net loss of $676,000 for the first quarter
of fiscal 1999, such loss included non-cash charges of $698,000, including
$550,000 for depreciation and amortization. The remaining cash flow from
operations resulted primarily from a $1.3 million decrease in receivables, which
was largely offset by an increase in inventory of $1.1 million.
During the first quarter of fiscal 1999, cash of $474,000 was used in investing
activities for capital expenditures. Financing activities provided $262,000,
with $310,000 of proceeds from short term borrowings and $172,000 realized from
the exercise of stock options and warrants being partially offset by the payment
of $220,000 of long-term debt and obligations under capital leases.
The Company has 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 Facilities"). The Credit Facilities enable 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. At September 25, 1998 $3.0 million was
outstanding under this faciity. 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.
At September 25, 1998 $1.1 million was outstanding under this faciity. 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 Facilities require that the Company maintain tangible net worth (as
defined) of $30.0 million. As of September 25, 1998, the Company's tangible net
worth (as defined) was approximately $32.2 million. The Company believes it will
reduce the operating loss during the quarter ended December 25, 1998 compared to
the September 1998 quarter. However, if the operating losses were to continue or
increase, or events occurred causing additional losses, the Company may cease to
be in compliance with this covenant. 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
Facilities. In connection with the damages suffered as a result of Hurricane
Georges, the Company has asserted claims under its insurance policies to cover
losses sustained from the hurricane, including business interruption, and has
already received the first of several expected advance payments from its
insurance carriers. To the extent additional expected advance payments are
delayed, the Company may find it necessary to further borrow under the Credit
Facilities, subject to the borrowing limits thereof. There can be no assurance
that such credit limits will be sufficient and, if the lender does not permit
borrowings in excess thereof, the Company may require temporary financing from
other sources. Management believes that should the Company require additional or
replacement financing, 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 and business
prospects.
8
<PAGE>
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.
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 has assessed 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 to 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), or 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.
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. 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;
potential technological changes, including the Company's ability to timely
develop new products and adapt its existing products to technological changes;
potential changes in customer spending and purchasing policies and practices, as
well as the Company's ability to market its existing, recently developed and new
products; the risks inherent in new product introductions, such as startup
delays and uncertainty of customer acceptance; the Company's dependence on third
parties for product components; the Company's ability to attract and retain
technologically qualified personnel; the retention of the tax benefits provided
by its Puerto Rico and Dominican Republic operations; the Company's ability to
fulfill its growth strategies; the availability of financing on satisfactory
terms to support the Company's growth; and other factors discussed elsewhere in
this Report and in other Company reports hereafter filed with the Securities and
Exchange Commission.
9
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 25, 1998, holders of 100 shares of the
Company's Series C Convertible Redeemable Preferred Stock converted such
Preferred Stock into 22,030 shares of the Company's Common Stock. The Company
believes that the exemption from registration afforded by Section 3(a)(9) of the
Securities Act of 1933, as amended (the " Securities Act"), is applicable to the
issuance of such shares, as such issuance involved a security exchanged by the
Company with existing securityholders exclusively, where no commission or other
remuneration was paid or given directly or indirectly for soliciting such
exchanges.
On July 13, 1998, the Company issued 10,000 shares of its Common Stock, pursuant
to the partial exercise of a warrant which entitles the holder thereof to
purchase up to 20,000 shares of Common Stock on or before July 15, 2001. The
exercise price was $6.15 per share (an aggregate of $61,500). No underwriting
discounts or commissions were paid in connection with the issuance of the
shares. In connection with the issuance, the holder acknowledged that the shares
issued were being acquired for investment and without a view to the distribution
thereof and could not be sold or transferred in the absence of registration
under the Securities Act or an opinion of counsel that such registration is 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
27. EDGAR financial data schedule.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter for which this Report
is filed.
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 9, 1998 /s/ Paul G. Sebetic
---------------------------------
Paul G. Sebetic
Vice President-Finance and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- ----------
27. Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000277928
<NAME> TII INDUSTRIES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> SEP-25-1998
<CASH> 390
<SECURITIES> 0
<RECEIVABLES> 6,791
<ALLOWANCES> 53
<INVENTORY> 19,656
<CURRENT-ASSETS> 27,232
<PP&E> 43,904
<DEPRECIATION> 25,948
<TOTAL-ASSETS> 47,176
<CURRENT-LIABILITIES> 11,823
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 28,230
<TOTAL-LIABILITY-AND-EQUITY> 47,176
<SALES> 14,646
<TOTAL-REVENUES> 14,646
<CGS> 12,145
<TOTAL-COSTS> 3,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> (676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (676)
<DISCONTINUED> 0
<EXTRAORDINARY> (262)
<CHANGES> 0
<NET-INCOME> (938)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
