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 24, 1999
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 22, 1999 was 8,832,898.
<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 24, June 25,
1999 1999
------------- --------
ASSETS (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 4,594 $ 8,650
Accounts receivable, net 5,077 5,589
Inventories 14,467 13,151
Other 253 182
------ ------
Total current assets 24,391 27,572
------ ------
Property, plant and equipment, net 12,039 12,030
Other 1,546 1,628
------ ------
TOTAL ASSETS $37,976 $41,230
====== ======
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and
obligation under capital leases $ 634 $ 674
Accounts payable 4,088 6,628
Accrued liabilities 2,233 2,073
Accrued restructuring expenses 1,586 1,709
----- ------
Total current liabilities 8,541 11,084
----- ------
Long-term debt and obligations under capital leases 2,279 2,403
----- ------
Series C Convertible Redeemable Preferred Stock,
2,850 shares issued at
September 24, 1999 and June 25, 1999;
liquidation preference of $1,150 per share 2,850 2,850
----- ------
Stockholders' Investment
Preferred Stock, par value $1.00 per share; 1,000,000 authorized;
Series C Convertible Redeemable Preferred Stock, 5,000 shares
authorized; 2,850 shares
outstanding at September 24, 1999 and June 25, 1999 - -
Series D Junior Participating, no shares issued - -
Common Stock, par value $.01 per share; 30,000,000 shares
authorized; 8,850,535
shares issued at September 24, 1999 and June 25, 1999 89 89
Warrants outstanding 20 20
Capital in excess of par value 32,610 32,610
Accumulated deficit (8,132) (7,545)
------ ------
24,587 25,174
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
------ ------
Total stockholders' investment 24,306 24,893
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $37,976 $ 41,230
====== =======
</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 24, 1999
AND SEPTEMBER 25, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998
-------- -----
Net sales $ 12,973 $ 14,646
Cost of sales 10,900 12,145
-------- -------
Gross profit 2,073 2,501
-------- -------
Operating expenses
Selling, general and administrative 1,897 2,188
Research and development 813 889
-------- -------
Total operating expenses 2,710 3,077
-------- -------
Operating loss (637) (576)
Interest expense (53) (113)
Interest income 106 1
Other (expense) income (3) 12
-------- -------
Net loss (587) (676)
Preferred stock embedded dividend - (262)
-------- -------
Net loss applicable to common stockholders ($587) ($938)
======== =======
Basic and diluted net loss per share $(.07) $(.12)
======== =======
Basic and diluted weighted average shares
outstanding 8,833 7,648
======== =======
See notes to consolidated financial statements
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<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 24, 1999
(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 25, 1999 $ 89 $ 20 $ 32,610 $ (7,545) $ (281)
Net loss for the three months
ended September 24, 1999 - - - (587) -
------ ------ -------- -------- ------
BALANCE, September 24, 1999 $ 89 $ 20 $ 32,610 $ (8,132) $ (281)
====== ====== ======== ======== ======
</TABLE>
See notes to consolidated financial statwements
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<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 24, 1999
AND SEPTEMBER 25, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (587) $ (676)
Adjustments to reconcile net loss to net cash
(used in) provided by
operating activities:
Depreciation and amortization 337 550
Provision for inventory 99 99
Amortization of other assets 60 49
Changes in assets and liabilities
Decrease in receivables 512 1,319
(Increase) in inventories (1,415) (1,136)
Increase in prepaid expenses and other assets (49) (6)
(Decrease) increase in accounts payable and
accrued liabilities (2,503) 26
-------- -------
Net cash (used in) provided by operating activities (3,546) 225
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (346) (474)
-------- -------
Net cash used in investing activities (346) (474)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants - 172
Net proceeds from short-term borrowings - 310
Payment of long-term debt and obligations under capital leases (164) (220)
-------- -------
Net cash (used in) provided by financing activities (164) 262
-------- -------
Net (decrease) increase in cash and cash equivalents (4,056) 13
Cash and Cash Equivalents, at beginning of period 8,650 377
------- ------
Cash and Cash Equivalents, at end of period $ 4,594 $ 390
======= ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Embedded dividend on Series C Preferred Stock $ - $ 262
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH TRANSACTIONS:
Cash paid during the period for interest $ 53 $ 113
======= ======
See notes to consolidated financial statements
</TABLE>
-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
the Company's financial position at September 24, 1999 and results of operations
and cash flows for the three months ended September 24, 1999 and September 25,
1998. 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 25,
1999. Results of operations for interim periods are not necessarily indicative
of the results that may be expected for the full fiscal year.
NOTE 2 - NET LOSS PER COMMON SHARE
Basic and diluted loss per share is based only on the weighted average number of
shares outstanding during the period due to the net losses for the periods
reported. Incremental common stock equivalent shares of 1.9 million and 1.6
million were not used in the calculation of diluted loss per common share in the
quarters ended September 24, 1999 and September 25, 1998, respectively, since
their inclusion would have been antidilutive. In addition, stock options to
purchase 1.8 million and 2.3 million shares of common stock for the quarters
ended September 24, 1999 and September 25, 1998, respectively, were outstanding
but not included in the computation of diluted loss per common share because the
option exercise prices were greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
NOTE 3 - INVENTORIES
Inventories, net of allowances, consisted of the following components:
September 24, June 25,
1999 1999
------------- -----------
Raw material $3,331,000 $4,879,000
Work in process 3,442,000 3,191,000
Finished goods 7,694,000 5,081,000
------------ -----------
$14,467,000 $13,151,000
============ ===========
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<PAGE>
NOTE 4 - ACCRUED RESTRUCTURING EXPENSES
The Company initiated an operations re-alignment during the fourth quarter of
fiscal 1999. This includes outsourcing a significant amount of production to a
contract manufacturer in China, closing the Company's Dominican Republic
manufacturing facility and the sale of its metal stamping and plastic molding
production operations. The Company anticipates completing this operations
re-alignment before the end of fiscal 2000.
The components of restructuring costs, spending and other activity, as well as
the remaining reserve balances at September 24, 1999, which are included in
"Accrued restructuring expenses" in the accompanying consolidated balance
sheets, are as follows:
Employee Plant
Termination Closure
Benefits Costs Total
----------- --------- ----------
Balance at June 25, 1999 $1,010,000 $ 699,000 $ 1,709,000
Cash payments (123,000) - (123,000)
----------- --------- ----------
Balance at September 24, 1999 $ 887,000 $ 699,000 $ 1,586,000
=========== ========= ===========
NOTE 5 - GEOGRAPHIC INFORMATION
The following table presents the Company's assets and liabilities by geographic
area:
U.S. and Dominican
Puerto Rico Republic Consolidated
------------- ----------- ------------
As of September 24, 1999
Current Assets $ 19,176,000 $ 5,215,000 $ 24,391,000
Property, Plant & Equipment 11,563,000 476,000 12,039,000
Other assets 1,483,000 63,000 1,546,000
------------ ----------- ------------
Total assets $ 32,222,000 $ 5,754,000 $ 37,976,000
============ =========== ============
------------ ----------- ------------
Total liabilities $ 10,576,000 $ 244,000 $ 10,820,000
============ =========== ============
-7-
<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.
RESULTS OF OPERATIONS
Net sales for the fiscal 2000 first quarter decreased $1.6 million or 11.4% to
$13.0 million from $14.6 million for the first quarter of fiscal 1999. The
decrease in sales was due primarily to the absence of sales of fiber optic
products following the Company's sale of this product line in March 1999.
Gross profit for the fiscal 2000 first quarter decreased by $428,000 or 17.1% to
$2.1 million. Gross profit as a percentage of sales decreased for the first
fiscal 2000 quarter to 16.0% from 17.1% for the first quarter of fiscal 1999.
This decrease was caused primarily by the absence of sales of the Company's
fiber optic product line, which had a higher gross profit margin. To help
increase its gross margins, the Company initiated an operations re-alignment
during the fourth quarter of fiscal 1999. This includes outsourcing a
significant amount of production to a contract manufacturer in China, closing
the Company's Dominican Republic manufacturing facility and the sale of its
metal stamping and plastic molding production operations. During this
transition, the Company continues to incur manufacturing overhead expenses which
are included in cost of sales. Upon the closure of the Dominican Republic
facility and the reduction of in-house manufacturing expenditures, the lower
cost of product from the contract manufacturer is expected to increase gross
profit margins in future quarters. The Company anticipates completing this
operations re-alignment before the end of fiscal 2000.
Selling, general and administrative expenses for the first fiscal 2000 quarter
decreased by $291,000 (13.3%) to $1.9 million from $2.2 million for the first
quarter of fiscal 1999. As a percentage of sales, selling, general and
administrative expenses decreased for the first quarter of fiscal 2000 to 14.6%
from 14.9% for the first quarter of fiscal 1999. The decrease resulted primarily
from reduced selling, general and administrative expenses associated with the
Company's fiber optic product line, which was sold in March 1999, slightly
offset by higher personnel and consulting expenses.
Research and development expenses for the first fiscal 2000 quarter decreased
$76,000 (8.6%) to $813,000 from $889,000 for the first quarter of fiscal 1999.
As a percentage of sales, research and development expenses for the first
quarter of fiscal 2000 increased to 6.3% from 6.1% for the first quarter of
fiscal 1999. The decrease in the dollar amount of expenses relates primarily to
lower personnel and other costs associated with the sale of the Company's fiber
optic product line; however the Company increased its research and development
expenses as a percentage of sales for the continuing expansion of its Broadband
Surge Protector product lines, as well as its Network Interface Devices and
other proprietary products.
Interest expense for the first quarter of fiscal 2000 decreased by $60,000 to
$53,000 from $113,000 in the first quarter of fiscal 1999 due to decreased
borrowings under the Company's credit facility.
Interest income for the first quarter of fiscal 2000 increased by $105,000 to
$106,000 from $1,000 in the first quarter of fiscal 1999 due to increased cash
and cash equivalents balances.
-8-
<PAGE>
Net loss applicable to common stockholders for the first quarter of fiscal 2000
was $587,000 versus $938,000 in fiscal 1999. Of this reduction, $262,000 relates
to the absence of the Preferred Stock embedded dividend, which was the
amortization of the issuance costs and beneficial conversion feature over the
period to earliest conversion of the Series C Convertible Preferred Stock sold
in a January 1998 private placement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $638,000 to $15.9 million at the end of
the first quarter of fiscal 2000.
During the first fiscal 2000 quarter, $3.5 million of cash was used by
operations. While the Company had a net loss of $587,000 for the quarter, such
loss included $397,000 for depreciation and amortization. The Company used $2.5
million of cash to reduce accounts payable, accrued liabilities and accrued
restructuring expenses and $1.4 million to increase inventories, slightly offset
by a decrease in accounts receivable which provided $512,000 of cash. During the
remaining quarters of fiscal 2000, while the Company completes its operations
re-alignment, it will continue to use cash to increase inventory to allow for a
smooth transition to contract manufacturers and to mitigate the risks associated
with the year 2000 issue.
During the first fiscal 2000 quarter, the Company used $346,000 of cash for
capital expenditures and $164,000 for the payment of long-term debt and
obligations under capital leases.
The Company has a credit facility with GMAC Commercial Credit LLC, formerly BNY
Financial Corporation, in an aggregate principal amount of $7.7 million,
consisting of a $6.0 million revolving credit facility and a $1.7 million term
loan. At September 24, 1999, the Company had no outstanding borrowings under the
revolving credit facility. The revolving credit facility is limited by a
borrowing base equal to 85% of eligible accounts receivable and 50% of eligible
inventory, subject to certain reserves. Subject to extension in certain
instances, the scheduled maturity date of revolving credit loans is April 30,
2003, while the term loan is to be repaid through March 31, 2003, subject to
mandatory repayments from disposition proceeds and insurance proceeds in certain
circumstances.
Funds anticipated to be generated from operations, together with available cash
and borrowings under the credit facility, are considered to be adequate to
finance the Company's operational and capital needs for the foreseeable future.
YEAR 2000
The Company has been implementing a program, the objective of which is to ensure
that the Company is not adversely affected by "Date Discontinuity" problems in
computers, software and embedded processors during the transition from 1999 to
2000 and as a result of 2000 being a leap year. Date discontinuity occurs when
time as expressed by a system or its software does not move forward successfully
in line with true time. The most commonly known manifestation of this occurs in
systems
-9-
<PAGE>
that recognize years as two digits and, when moving from `99' to `00', recognize
`00' as 1900 or fail altogether.
PROJECT SCOPE: The project covers Information Technology (IT) systems,
embedded processors, supply chain and business continuity. IT systems include
central and network hardware, business systems and desktop hardware and
software. The Company has minimal firm created software, the majority being
industry standard packages, customized only where necessary. Embedded processors
include, for example, plant instruments, laboratory equipment, control systems,
data acquisition systems, vehicles and telecommunications. Supply chain
considerations include liaison with suppliers and customers about our respective
states of readiness for the Year 2000. Business continuity will consider all
areas of the business and put in place contingency plans to mitigate the
consequences arising from key risks identified. The project covers all the
Company's sites.
PROGRAM: Work was divided into the following key stages: (1) inventory
of hardware, software and embedded systems, (2) analysis of compliance, (3)
defining and planning of solutions, (4) implementation and testing of solutions,
(5) confirmation of major suppliers' and customers' state of readiness, and (6)
contingency planning. Steps 1, 2, 3, 5 and 6 are complete. Step 4 is
substantially complete, with the Company's enterprise wide manufacturing and
accounting system, operating systems, servers and the majority of personal
computers brought into year 2000 compliance. Some testing and additional minor
remediation programs are in progress and are expected to be completed by the end
of November 1999. Further testing will continue throughout the remaining 2
months of 1999. In Step 5, all current suppliers of goods and services have been
approached and replies have been received from all critical suppliers and most
other suppliers. Key suppliers are the subject of more detailed scrutiny to
monitor the progress of their programs. Liaison with key customers is completed.
The risk analysis relevant to the business which feeds into the contingency plan
(Step 6) covers internal processes, resource requirements and supply chain
issues. A contingency plan has been developed and is continually reviewed to
ensure all relevant issues are considered. The Company believes it is in full
Year 2000 readiness for its critical systems, and that by the end of the
November 1999 it will be for all its systems. The Company will continue to
monitor all areas through January 2000 and beyond.
COSTS: The estimated total cost of achieving Year 2000 compliance is
approximately $1,050,000. This figure is subject to ongoing review and,
throughout the project life cycle, the business benefit of each remediation is
reviewed, which may vary the amount the Company is required to spend.
Approximately $950,000 has been spent to date.
RISKS: The most likely worst case scenario is an event that would
disrupt the Company's procurement process and impact production and product
delivery to customers. The Company plans to build up inventory levels and
request key suppliers to do the same. In addition the Company is working with
its suppliers to minimize the possibility of such an event occurring and,
through its contingency planning, to mitigate the consequences. However, 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 the
Company's results of operations, liquidity and financial condition.
-10-
<PAGE>
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) 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 communications 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 start-up
delays and uncertainty of customer acceptance; dependence on third parties for
its products and product components; the Company's ability to attract and retain
technologically qualified personnel; the retention of the tax benefits provided
by its Puerto Rico operations; the Company's ability to fulfill its growth
strategies; the availability of financing on satisfactory terms to support the
Company's growth; the Company's ability to timely and successfully complete its
year 2000 compliance program and its suppliers and customers to timely and
successfully complete their year 2000 compliance programs in a manner compatible
to the Company's systems; and other factors discussed elsewhere in this Report
and in other Company reports hereafter filed with the Securities and Exchange
Commission.
PART II. OTHER INFORMATION
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.
<PAGE>
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: October 29, 1999 /s/ Paul G. Sebetic
-----------------------------------
Paul G. Sebetic
Vice President-Finance and Chief
Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> TII INDUSTRIES, INC.
<S> <C>
<PERIOD-TYPE> 3 MOS
<FISCAL-YEAR-END> 6-30-2000
<PERIOD-START> 6-26-1999
<PERIOD-END> 9-24-1999
<CASH> 4,594
<SECURITIES> 0
<RECEIVABLES> 5,077
<ALLOWANCES> 101
<INVENTORY> 14,467
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<PP&E> 12,039
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