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 25, 1999
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 10, 1999 held by non-affiliates of the registrant was approximately
$11.7 million. 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 10, 1999 was 8,832,898.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 1999 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
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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 (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 products and product components (see "Raw Materials" and "Manufacturing");
the Company's ability to attract and retain technologically qualified personnel
(see "Employees"); the retention of the tax benefits provided by its Puerto Rico
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"); 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.
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PART I
ITEM 1. BUSINESS
GENERAL
TII designs, manufactures and markets lightning and surge protection systems,
network interface devices ("NIDs") and station electronics products for use in
the communications industry. The Company sells its premier overvoltage surge
protectors to United States telephone operating companies ("Telcos"), original
equipment manufacturers ("OEMs"), cable TV ("CATV") providers and competitive
access providers ("CAPs") of communications services. The Company believes that
the superior performance of its products, coupled with responsive customer
support, has fostered strong customer loyalty. This has lead to four of the five
regional bell operating companies ("RBOCs") and many of the 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 overvoltage surge protectors to 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, ease of
installation and optimum 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
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. Recent revisions to
the NEC, that took effect in 1999, require overvoltage surge protection on all
powered coaxial networks, which the Company believes will be the favored
technology to deliver telephony over coaxial lines.
In order to focus on its core business, the Company sold its fiber optic product
line ("TII-Ditel") in March 1999 for $5.3 million. Through TII-Ditel, Inc., the
Company produced and sold a line of fiber optic products, including interconnect
hardware components, cable assemblies, and a line of enclosures,
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primarily to the RBOCs, OEMs and long distance companies. Sales of fiber optic
products represented approximately 6%, 8% and 6% of the Company's net sales
during fiscal 1999, 1998 and 1997, respectively.
During fiscal 1999, the Company initiated a strategic operations re-alignment in
an effort to enhance operating efficiencies and reduce costs. These objectives
are expected to be achieved through outsourcing a significant portion of the
Company's production, closing its Dominican Republic facility, workforce
reductions and other cost-saving measures throughout the Company. As a result,
during fiscal 1999, the Company recorded a charge of $6.0 million (see "Business
- - Manufacturing", "Business - Employees" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
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).
BUSINESS STRATEGY
The Company's strategies for increasing its participation in the rapidly growing
worldwide communications industry is based upon focusing on: (i) comprehensive
customer relationships tailored to customer specifications, needs, service and
support; (ii) growing its core business by capitalizing on its reputation as a
manufacturer of quality, high-performance products; (iii) outsourcing certain
operations; (iv) establishing collaborative agreements with very select partners
for product development; (v) introducing new and innovative products that are
complementary to its current products and (vi) continuing its expansion into new
markets, including coaxial cable surge protection, international and wireless
markets, as well as AC power protection markets.
The Company believes its strategies provide it with several distinct competitive
advantages, including significantly reduced capital investment requirements,
inventory levels and overhead, enhanced market information and accelerated
time-to-market of advanced technology protection products. In addition, close
and constant customer contact allows the Company to maintain an updated customer
database that, in a rapidly changing technological market, can be used to shape
future product offerings and market applications. This approach, combined with
the Company's history of constantly improving 'protection expertise', improved
operations and effective collaboration allows the Company to bring protection
solutions to its customers faster, more effectively and more competitively
priced than its competitors.
CORE COMPETENCIES FOCUS: During fiscal 1999, the Company conducted a
strategic review of all operations and evaluated the advantages of utilizing
in-house resources versus outsourcing. This evaluation has resulted in the
outsourcing of a major portion of its assembly operations, plastic molding and
metal fabrication, thereby eliminating the need for the Company's Dominican
Republic facility and reducing its support requirements in Puerto Rico. In
addition, the Company entered into an agreement with a public warehouse thereby
eliminating the need for three separate Company warehouse locations.
COLLABORATIONS: The Company has successfully developed cooperative
working relationships with several of the world's most advanced communications,
technology and manufacturing companies. Working with these companies, joint
teams are formed to integrate their combined talents and
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technologies to foster and accelerate new product development, manufacturing and
effective sales, marketing and distribution.
COMPREHENSIVE CUSTOMER RELATIONSHIPS: The Company works closely with
its customer base, including major Telcos and select distributors to the
independent Telcos. The Company is presently negotiating agreements with partner
companies to expand its protection solution systems into the consumer,
commercial and industrial markets where the partners have significant and
extensive customer relationships.
CUSTOM TAILORED SURGE PROTECTION SOLUTIONS: The Company's reputation
with customers is one of providing swift responses to needs with creative and
effective protection solutions with products fully compliant with, and in most
cases superior in performance to, the demanding specifications of Telco
customers, Bellcore, Underwriters Laboratory and other testing facilities.
PRODUCTS
LIGHTNING AND SURGE PROTECTION PRODUCTS. The Company designs, manufactures and
markets overvoltage surge protection systems for the worldwide communications
industry for use 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's 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 TUBES: The Company's gas tubes represent the foundation upon which
most of the Company's 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 to ground. When the voltage on the 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 are the
standard of the industry and have been designed to withstand multiple
high-energy overvoltage surges while continuing to operate over a long service
life.
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 Company combines this TFS protection
element with a sealing gel making this modular surge protector virtually
impervious to severe moisture or environmental contamination while providing
advanced overvoltage surge protection.
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COAXIAL PROTECTORS: TII sells a patented coaxial cable transmission
line surge protector, that is the first Bellcore approved in-line coaxial
protection system. This 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 marketed to Telcos, 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 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 49%, 55% and 65% of the Company's net sales during the Company's
fiscal years 1999, 1998 and 1997, respectively.
NETWORK INTERFACE DEVICES. The Company designs, molds, assembles and markets
various NIDs, which 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 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, 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 the future. For use in various markets,
the NID product line currently consists of enclosures, which will accommodate
from one 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 fiber optic lines.
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NID sales represented approximately 39%, 30% and 23% of the Company's net sales
during fiscal 1999, 1998 and 1997, respectively.
STATION ELECTRONICS AND OTHER PRODUCTS. The Company also designs, manufactures
and markets station electronic products that are designed to be installed with
an overvoltage surge protector, typically within 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. The
Company also designs, manufactures and markets other products, including plastic
housings, wire terminals, enclosures, cabinets and various hardware products
principally for use by Telcos.
Station electronics and other products sold separately from NIDs accounted for
approximately 6%, 7% and 6% of the Company's net sales in fiscal 1999, 1998 and
1997, respectively.
RESEARCH AND DEVELOPMENT
As the communications and electronics industries continue their dramatic growth,
coupled with TII's surge protection solution expertise, new product
opportunities arise in the Company's core communication market and in the
consumer, commercial, industrial, international and AC power-line surge
protection markets. Currently, the Company's research and development ("R&D")
and related marketing efforts are focused on several major projects including:
[ ] Expanding and enhancing the broadband NID product line to
address anticipated future requirements of Telcos and other
communication service providers.
[ ] Further developing coaxial cable overvoltage surge protectors
for Telcos, CATV providers and wireless broadband
communications markets, including digital satellite television
market, wireless, paging, cellular and PCS networks.
[ ] 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 and circuits for the varying specifications of the
worldwide communications and power-line markets.
The Company's R&D department currently consists of 33 persons skilled and
experienced in various technical disciplines, including physics, electrical and
mechanical engineering, with specialization in such fields as electronics,
metallurgy and plastics. The Company utilizes advanced computer aided design
equipment networked with collaborative partners and directly linked to stereo
lithographic modeling capability to accelerate time-to-market.
The Company's R&D expense was $3.3 million during both fiscal 1999 and 1998 and
$3.1 million during 1997. All of such R&D was Company sponsored.
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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 and 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:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
June 25, June 26, June 27,
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Bell Atlantic Corporation 31% 24% 18%
Raychem Corporation 15% 9% 5%
Siecor Corporation(1) 9% 14% 20%
Keptel, Inc.(1) 6% 6% 11%
GTE Communication Systems Corporation 5% 12% 5%
</TABLE>
(1) Siecor Corporation and Keptel, Inc. are OEMs that supply NIDs to RBOCs
and are required by certain RBOCs to purchase TII overvoltage surge
protectors for inclusion within 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 $967,000 in fiscal 1999
(2% of net sales), $2.6 million in fiscal 1998 (5% of net sales), and $1.3
million in fiscal 1997 (3% of net sales). International sales have been made
primarily to countries in the Caribbean, South and Central America, Canada and
Western Europe. The Company requires foreign sales to be paid for in U.S.
currency, 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 has been producing its overvoltage surge protectors, NIDs and
station electronics at its facilities in Puerto Rico and the Dominican Republic.
As a result of the Company's strategic operations review, in an effort to
enhance operating efficiencies and reduce costs, the Company determined to
outsource the manufacture of a significant portion of its production. The
Company has retained a United States company operating in China to manufacture
TII products, other than the gas tubes which are being manufactured in Puerto
Rico. This decision to outsource some production to the Far East will enable the
Company to consolidate its Dominican Republic operations into its Puerto Rico
facilities and is expected to accelerate the improvement of the Company's
margins, while maintaining TII's superior product quality.
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RAW MATERIALS
The primary components of the Company's gas tubes, overvoltage surge protectors,
NIDs and other products are stamped, drawn and formed parts made out of a
variety of commonly available metals, ceramics and plastics. The manufacture of
the Company's overvoltage surge protectors and station electronic products use
commonly available solid state components, printed circuit boards and standard
electrical components, such as resistors, diodes and capacitors. While the
Company has no orders with suppliers of the components utilized in the
manufacture of its products with delivery scheduled later than a year from now,
the Company believes that the raw materials used will continue to be available
in sufficient supply at competitive prices. As the outsourcing of production
increases in the future under the Company's operations re-alignment, the
Company's dependency on its contract manufacturer will increase.
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, a subsidiary of Tyco
International, Inc. 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 processes
and equipment. The Company has begun developing and marketing overvoltage surge
protectors incorporating purchased solid state protectors on a limited basis.
Principal competitive factors include price, technology, delivery, quality and
reliability. Most of the Company's competitors have substantially greater
financial, sales, manufacturing and product development resources than the
Company. The Company believes that its sales, marketing and R&D departments, its
high quality, cost effective products 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
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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 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.
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") for its
Puerto Rico operations, and presently intends to continue to operate in a
fashion that will enable it to qualify for the Section 936 election. The
calculation of 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 1999 levels of
qualified wages, fringe benefits, depreciation and taxes in Puerto Rico, the
Company's economic activity based credit limitation is approximately $2,956,000
per annum. This amount is likely to decrease in the future as the Company
completes its operations re-alignment and reduces expenditures for wages, fringe
benefits, depreciation and taxes in Puerto Rico. Although the Section 936 credit
has 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. Puerto
Rico 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 Puerto Rico income and business plans,
the Company believes that it will be eligible to claim a Section 936 credit
under the grandfather rule discussed above.
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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 United States federal, Puerto Rico or Dominican
Republic taxes on most of its income during fiscal years 1999, 1998 and 1997.
See Note 4 to Notes to Consolidated Financial Statements.
EMPLOYEES
On September 10, 1999, the Company had approximately 967 full-time employees, of
whom 876 were engaged in manufacturing, 42 in engineering and new product
development and 49 in executive, sales and administrative positions. Of these
employees, approximately 222 are employed at the Company's Puerto Rico
facilities and approximately 691 are employed at its Dominican Republic
facilities. In connection with the Company's operations re-alignment begun
during fiscal 1999, the Company intends to close its Dominican Republic facility
and outsource manufacturing to a United States company operating in China. This
is expected to result in the elimination of the Company's work force in the
Dominican Republic. The Company expects that its workforce will be approximately
250 at the end of fiscal 2000.
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 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 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 will be closed at the end of this current 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 leases, which expire in July 2000. These facilities
house the Company's principal research and development activities and certain of
its marketing, administrative and executive offices.
The Company believes that its facilities and equipment are well maintained and
adequate to meet its current requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
11
<PAGE>
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 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the symbol
"TIII". The following table sets forth, for each quarter during fiscal 1999 and
fiscal 1998, the high and low sales prices of the Company's Common Stock.
Fiscal 1999 High Low
---- ---
First Quarter Ended September 25, 1998 8 1/4 1 15/16
Second Quarter Ended December 25, 1998 2 5/8 1 3/8
Third Quarter Ended March 26, 1999 2 23/32 1 9/16
Fourth Quarter Ended June 25, 1999 2 7/16 1 1/2
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
As of September 10, 1999, the Company had approximately 550 holders of record of
its Common Stock.
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
<PAGE>
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
25, 1999 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, included elsewhere in this
Report:
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 25, June 26, June 27, June 28, June 30,
1999(a) 1998(a) 1997 1996 1995
--------------- --------------- -------------- ------------- -------------
STATEMENTS OF OPERATIONS DATA
- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $49,284 $50,548 $50,675 $44,513 $43,830
Operating (loss) income ($9,211) ($4,542) ($892) $3,856 $3,602
Net (loss) income applicable
to common stockholders ($6,402) ($5,142) ($856) $3,737 $2,942
Net (loss) income per share - diluted ($0.79) ($0.68) ($0.12) $0.47 $0.52
BALANCE SHEET DATA
- -------------------------------------------
Working capital $16,488 $15,994 $19,655 $23,801 $15,947
Total assets $41,230 $47,564 $42,823 $42,823 $34,414
Debt and capital leases $3,077 $5,729 $2,841 $2,739 $2,767
Redeemable preferred stock $2,850 $4,738 - - -
Stockholders' investment $24,893 $28,973 $33,011 $33,862 $25,183
</TABLE>
(a) See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of several non-recurring
factors that affected the Company's results of operations in fiscal
1999 and 1998.
14
<PAGE>
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") and station electronics 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 non-recurring
factors in fiscal 1999 and 1998.
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 that 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 temporary 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 facility in the Dominican Republic. The disruptions were primarily
caused by the failure of certain vendors to 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 the
hiring of temporary manufacturing employees at its Puerto Rico facilities to
meet the accelerated production schedule. 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.
On September 21 and 22, 1998, the Company's principal operating facilities in
Toa Alta, Puerto Rico and San Pedro De Macoris, Dominican Republic,
respectively, sustained significant inventory, equipment and facility damages as
a result of Hurricane Georges. In addition, as a result of the storm, the
Company experienced production stoppages during the beginning of the second
quarter of fiscal 1999 and periods of less than full production continuing into
the fiscal 1999 third quarter. Both
15
<PAGE>
facilities became fully operational during the third fiscal quarter. Damaged
inventory, business interruption losses, fees payable to the Company's insurance
advisors, losses to plant and equipment and other expenses incurred totaled
$17.9 million. The Company received insurance payments of $19.3 million with
respect to the losses sustained, including lost profits. Accordingly, insurance
proceeds net of hurricane losses and expenses resulted in a gain of $1.4 million
in fiscal 1999.
In order to focus on its core business, the Company sold substantially all of
the assets of its fiber optic subsidiary, TII-Ditel, Inc., in March 1999 for
$5.3 million. The resulting gain of $2.2 million is included in other income in
fiscal 1999. Sales of TII-Ditel, Inc. represented approximately 6%, 8% and 6% of
the Company's consolidated sales for fiscal years 1999, 1998 and 1997,
respectively.
During fiscal 1999, the Company initiated a strategic operations re-alignment in
an effort to enhance operating efficiencies and reduce costs. These results are
expected to be achieved through outsourcing a significant portion of the
Company's production, closing the Company's Dominican Republic facility,
workforce reductions and other cost-saving measures throughout the Company.
Under this plan, the Company expects to reduce its workforce from approximately
1,165 employees as of April 1999 to approximately 250 by the end of fiscal 2000,
including reductions resulting from the completion of the sale of non-core
businesses. As a result, the Company recorded a charge to earnings of $6.0
million in fiscal 1999 comprised of $1.0 million for severance and employee
termination benefits, $700,000 for plant closure costs and $4.3 million to
reduce the carrying value of leasehold improvements, plant and equipment to be
abandoned or sold to their estimated net realizable value.
FISCAL YEARS ENDED JUNE 25, 1999, JUNE 26, 1998 AND JUNE 27, 1997
Net sales for fiscal 1999 decreased by $1.3 million or 2.5% to $49.3 million
from $50.5 million in fiscal 1998. The decline resulted primarily from a
decrease in product shipped due to the Company's production disruptions caused
by Hurricane Georges. Sales of the Company's fiber optic product line decreased
by $739,000 as the Company sold this product line on March 1, 1999. These
declines were partially offset by an increase in sales of the Company's NID
product line. Net sales for fiscal 1998 decreased by $127,000 or .3% to $50.5
million from $50.7 million in fiscal 1997. The decline resulted primarily from a
decrease in product shipped due to the Company's production disruptions in
gearing up toward the accelerated production of broadband NIDs, partially offset
by an increase in sales of its fiber optic product line.
Gross profit in fiscal 1999 was $8.5 million, or 17.3% of sales, versus $7.0
million, or 13.9% of sales, in fiscal 1998. Gross profit margins improved as a
result of the Company's effort to reduce production costs and because
comparability was effected by the abnormally low gross profit margins in the
second quarter of fiscal 1998 due to production disruptions experienced in that
year. Gross profit in fiscal 1998 was $7.0 million, or 13.9% of sales, versus
$9.3 million, or 18.3% of sales, in fiscal 1997. This decline related to the
increased production costs incurred by the Company while producing new NID
products under sales contracts won in fiscal 1997.
Selling, general and administrative expenses for fiscal 1999 increased $134,000
or 1.6% to $8.4 million from $8.3 million in fiscal 1998 due to increased
personnel, promotion and other expenses associated with the Company's efforts to
promote new products, including its coaxial cable surge protector
product line. In fiscal 1998 selling, general and administrative expenses
increased $1.2 million or 17.4% to $8.3 million from $7.1 million in fiscal
1997. The increase resulted primarily from legal, accounting and other expenses
incurred in connection with a withdrawn public offering of the Company's Common
16
<PAGE>
Stock in the second quarter of fiscal 1998 and additional personnel and
promotion costs associated with the Company's efforts to obtain and fulfill new
sales contracts.
Research and development expenses for fiscal 1999 increased by $48,000 or 1.5%
to $3.3 million. Research and development expenses for fiscal 1998 increased by
$211,000 or 6.8% to $3.3 million from $3.1 million in fiscal 1997. The increases
related primarily to a greater number of personnel, and to higher prototype and
testing costs associated with product development for expansion of the Company's
product lines, including its broadband surge protectors.
Interest expense in fiscal 1999 increased $147,000 to $387,000 due to increased
borrowings under the Company's credit facilities while the Company was awaiting
receipt of insurance proceeds from claims resulting from Hurricane Georges. With
the receipt of these insurance proceeds, interest expense is expected to be
lower in fiscal 2000. In fiscal 1998, interest expense declined $47,000 to
$240,000 from $287,000 in fiscal 1997 as a result of lower average loan
balances.
Interest income in fiscal 1999 decreased $64,000 to $58,000 from $122,000 in
fiscal 1998 and by $192,000 from $314,000 in fiscal 1997. The decline in both
years was due to decreased averaged cash and marketable securities balances held
by the Company during those respective years. Interest income is expected to
increase in the future as the Company has higher cash balances after the receipt
of the insurance proceeds received due to Hurricane Georges.
Other income (expenses) for fiscal 1999 includes a $2.2 million gain on the sale
of the Company's fiber optic product line.
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
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") for its
Puerto Rico operations, and presently intends to continue to operate in a
fashion that will enable it to qualify for the Section 936 election. The
calculation of 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 1999 levels of
qualified wages, fringe benefits, depreciation and taxes in Puerto Rico, the
Company's economic activity based credit limitation is approximately $2,956,000
per annum. This amount is likely to decrease in the future as the Company
completes its operations re-alignment and reduces expenditures for wages, fringe
benefits, depreciation and taxes in Puerto Rico. Although the Section 936 credit
has 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. Puerto
Rico 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 Puerto Rico income and business plans,
the Company believes that it will be eligible to claim a Section 936 credit
under the grandfather rule discussed above.
17
<PAGE>
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 United States federal, Puerto Rico or Dominican
Republic taxes on most of its income during fiscal years 1999, 1998 and 1997.
See Note 4 to Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance increased to $8.7 million at the
end of fiscal 1999 from $377,000 at the end of fiscal 1998. Working capital
increased to $16.5 million at the end of fiscal 1999 from $16.0 million at the
end of fiscal 1998. During fiscal 1999, $3.1 million of cash was used in
operations. The Company's net loss of $6.1 million included non-cash charges of
$6.0 million for restructuring reserves, and $2.4 million for depreciation and
amortization. This was offset by a $2.2 million gain from the sale of subsidiary
assets and a $1.4 million gain from insurance proceeds net of hurricane loss.
Additionally, inventory used $5.1 million, slightly offset by a decrease in
accounts receivable which provided $1.7 million.
During fiscal 1999, cash of $13.9 million was provided by investing activities,
which consisted of $11.2 million of net insurance proceeds for losses from
hurricane Georges and $4.5 million from the sale of subsidiary assets, partially
offset by capital expenditures of $1.8 million. Financing activities used $2.5
million, including a net repayment of debt and obligations under capital leases
of $2.7 million.
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.
Additionally, the Company expects to increase its inventory oods during its
operations re-alignment which will use approximately $2 - $4 million of cash
during the next fiscal year.
The Company has a credit facility with BNY Financial Corporation, an affiliate
of The Bank of New York, 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. The revolving 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. 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.
Due to the non-recurring charge associated with the operations re-alignment, the
Company would not have been in compliance with the tangible net worth convenant
contained within the credit facility with BNY Financial Corporation. However,
the Company amended this facility on July 22, 1999 to adjust the tangible net
worth convenant to $21.0 million. The Company is in compliance with the amended
terms of the credit facility with BNY Financial Corporation.
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.
18
<PAGE>
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.
YEAR 2000
TII 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 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. TII 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 TII
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 (6)
contingency planning. Steps 1, 2 and 3 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 remediation
programs are in progress and are expected to be completed by the end of October
1999. Further testing will continue throughout the remaining 3 months of 1999.
In Step 5, all current suppliers of goods and services have been approached and
replies have been received from most suppliers. Key suppliers are the subject of
more detailed scrutiny to monitor the progress of their program. Liaison with
key customers is virtually 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. This program is progressing. TII
expects to be in full Year 2000 readiness for critical systems by the end of the
October 1999 and 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 $925,000 has been spent to date.
RISKS: The most reasonably 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
19
<PAGE>
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.
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 under 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 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.
20
<PAGE>
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 25, 1999 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 25, 1999. 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 25, 1999 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 25, 1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Juan, Puerto Rico
September 15, 1999.
Stamp No. 1596954 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
21
<PAGE>
<TABLE>
<CAPTION>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 25, 1999 AND JUNE 26, 1998
(Dollars in thousands)
June 25, June 26,
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 8,650 $ 377
Accounts receivable, net 5,589 8,110
Inventories 13,151 18,619
Other 182 375
--------------- ---------------
Total current assets 27,572 27,481
--------------- ---------------
Property, plant and equipment, net 12,030 18,032
Other 1,628 2,051
--------------- ---------------
TOTAL ASSETS $ 41,230 $ 47,564
=============== ===============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and obligations under capital leases $ 674 $ 3,363
Accounts payable 6,628 6,528
Accrued liabilities 2,073 1,596
Accrued restructuring expenses 1,709 -
--------------- ---------------
Total current liabilities 11,084 11,487
--------------- ---------------
Long-Term Debt and Obligations Under Capital Leases 2,403 2,366
--------------- ---------------
Series C Convertible Redeemable Preferred Stock, 2,850 shares issued at
June 25, 1999 and 5,000 shares issued at June 26, 1998, respectively;
liquidation preference of $1,150 per share 2,850 4,738
--------------- ---------------
Commitments and Contingencies (Note 8)
Stockholders' Investment
Preferred Stock, par value $1.00 per share; 1,000,000 authorized;
Series C Convertible Redeemable, 2,850 shares issued at June 25, 1999
and 5,000 shares issued at June 26, 1998 - -
Series D Junior Participating, no shares issued (Note 6) - -
Common Stock, par value $.01 per share; 30,000,000 shares authorized;
8,850,535 and 7,631,801 shares issued at June 25, 1999 and
June 26, 1998, respectively (Note 5) 89 76
Warrants outstanding 20 159
Capital in excess of par value 32,610 30,162
Accumulated deficit (7,545) (1,143)
--------------- ---------------
25,174 29,254
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
--------------- ---------------
Total stockholders' investment 24,893 28,973
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 41,230 $ 47,564
=============== ===============
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
<TABLE>
<CAPTION>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 25, 1999
(Dollars in thousands, except per share data)
Fiscal Year Ended
------------------------------------------------------
June June June
25, 1999 26, 1998 27, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 49,284 $ 50,548 $ 50,675
Cost of sales 40,737 43,504 41,421
---------------- ---------------- ----------------
Gross profit 8,547 7,044 9,254
---------------- ---------------- ----------------
Operating expenses
Selling, general and administrative 8,424 8,290 7,061
Research and development 3,344 3,296 3,085
Costs to close facility 5,990 - -
---------------- ---------------- ----------------
Total operating expenses 17,758 11,586 10,146
---------------- ---------------- ----------------
Operating loss (9,211) (4,542) (892)
Insurance proceeds, net of hurricane loss 1,408 - -
Interest expense (387) (240) (287)
Interest income 58 122 314
Other income (expense) 1,992 (44) 72
---------------- ---------------- ----------------
Loss before provision for income taxes (6,140) (4,704) (793)
Provision for income taxes - - 63
---------------- ---------------- ----------------
Net loss (6,140) (4,704) (856)
Preferred stock embedded dividend (262) (438) -
---------------- ---------------- ----------------
Net loss applicable to common stockholders $ (6,402) $ (5,142) $ (856)
================ ================ ================
Basic and diluted net loss per share ($0.79) ($0.68) ($0.12)
================ ================ ================
Basic and diluted weighted average shares outstanding 8,100 7,572 7,430
================ ================ ================
</TABLE>
See notes to consolidated financial statements
23
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 25, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Valuation
Adjustment
to record
Marketable
Capital Securities
in excess available for
Common Warrants of par Accumulated sale at Treasury
Stock Outstanding value Deficit fair value Stock
------------ ---------------- -------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 28, 1996 $ 75 $7120 $ 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 6) - - 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)
Exercise of stock options 1 - 109 - - -
Exercise of warrants - (19) 81 - - -
Conversion of Series C
Preferred Stock 12 - 2,138 - - -
Expiration of warrants - (120) 120 - - -
Embedded dividend on Series
C Preferred Stock - - - (262) - -
Net loss for the year - - - (6,140) - -
------------ ---------------- -------------- ---------------- --------------- -----------
BALANCE, June 25, 1999 $89 $20 $ 32,610 ($7,545) - ($281)
============ ================ ============== ================ =============== ===========
</TABLE>
See notes to consolidated financial statements
24
<PAGE>
<TABLE>
<CAPTION>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 25, 1999
(Dollars in thousands)
Fiscal Year Ended
--------------------------------------
June 25, June 26, June 27,
1999 1998 1997
----------- ------------ ------------
<S>
Cash Flows from Operating Activities: <C> <C> <C>
Net loss ($6,140) ($4,704) ($856)
----------- ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,193 1,631 1,745
Provision for inventory 396 206 2,896
Amortization of other assets 239 194 180
Costs to close facility 5,990 - -
Gain from sale of subsidiary assets (2,168)
Gain from insurance proceeds, net of hurricane loss (1,408)
Changes in assets and liabilities
Decrease (increase) in receivables 1,706 (722) (304)
Increase in inventories (5,121) (3,251) (4,438)
Decrease (increase) in other assets 377 (602) (362)
Increase in accounts payable and accrued liabilities 790 1,153 787
----------- ------------ ------------
Net cash used in operating activities (3,146) (6,095) (352)
----------- ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (1,809) (4,890) (4,267)
Purchases of marketable securities available for sale - (3,572) (24,488)
Proceeds from sales and maturities of marketable securities
available for sale - 7,124 26,895
Net insurance proceeds for hurricane 11,190 - -
Net Proceeds from sale of subsidiary's assets 4,518 - -
----------- ------------ ------------
Net cash provided by (used in) investing activities 13,899 (1,338) (1,860)
----------- ------------ ------------
Cash Flows from Financing Activities:
Proceeds from exercise of options and warrants 172 861 6
Borrowings of debt 965 3,912 -
Payments of debt and obligations under capital leases (3,617) (1,760) (430)
Net proceeds from issuance of preferred stock - 4,550 -
----------- ------------ ------------
Net cash (used in) provided by financing activities (2,480) 7,563 (424)
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 8,273 130 (2,636)
Cash and cash equivalents, at beginning of year 377 247 2,883
----------- ------------ ------------
Cash and cash equivalents, at end of year $8,650 $377 $247
=========== ============ ============
</TABLE>
See notes to consolidated financial statements
25
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND 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 and station electronics. Sales of overvoltage surge protection
products, which are manufactured primarily in the Company's plants in Puerto
Rico and the Dominican Republic, to United States customers constitute the
majority of the Company's consolidated sales for each of the three years ended
June 25, 1999.
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 the 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 categorized its marketable security
investments during fiscal 1997 and 1998 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.
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 $1.4 million.
NET LOSS PER COMMON SHARE: The Company utilizes Statement of Financial
Accounting Standards No. 128 "Earnings Per Share ("SFAS 128")" which requires
the reporting of basic and diluted earnings per share. Since the Company
incurred losses in all reported periods, all securities convertible into the
Company's Common Stock were anti-dilutive and excluded from the computation.
Diluted loss per share equals basic loss per share. The following table
summarizes the outstanding securities convertible into the Company's Common
Stock:
26
<PAGE>
<TABLE>
<CAPTION>
June 25, June 26, June 27,
1999 1998 1997
------------------------- --------------------------- ----------------------------
Exercise Exercise Exercise
Quantity Price Quantity Price Quantity Price
<S> <C> <C> <C> <C> <C> <C>
Stock Option Plans (a) 2,474,501 $ 2.18 2,306,376 $ 4.89 1,661,207 $ 4.98
Option - - - - 150,000 $ 7.50
Option 100,000 $ 2.50 100,000 $ 2.50 100,000 $ 2.50
Warrant 200,000 7.03 200,000 $ 7.03 - -
Warrants - - 60,000 $ 6.56 60,000 $ 6.56
Warrants 20,000 $ 6.15 20,000 $ 6.15 20,000 $ 6.15
Unsecured Convertible Debt 300,000 $ 2.50 300,000 $ 2.50 300,000 $ 2.50
Convertible Preferred Stock (b) 1,781,250 1,196,172 -
------------- --------------- ---------------
4,875,751 4,182,548 2,291,207
============= =============== ===============
</TABLE>
(a) Weighted average exercise price of outstanding stock options at year-end.
(b) Assuming conversion of the Series C Preferred Shares at 95% of the average
of the closing bid prices of the Company's Common Stock during the ten
consecutive trading days immediately preceding the applicable fiscal year end.
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 $271,000 and $84,000 at June 25, 1999 and
June 26, 1998.
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.
STOCK BASED COMPENSATION: The Company applies the intrinsic value method in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for options granted with an exercise price equal to market value
at the date of grant.
COMPREHENSIVE INCOME: The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the fiscal year
ended June 25, 1999. The adoption had no impact on net income or total
stockholders investment. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income is immaterial for the three
years ended June 25, 1999 and therefore, the Company has elected to omit the
additional disclosures required by SFAS No. 130.
SEGMENT INFORMATION: The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the fiscal year ended
June 25, 1999. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing
27
<PAGE>
performance as the source of the Company's reportable segments. SFAS No. 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations, financial position, or disclosure to the financial
statements. The Company has evaluated the provisions of SFAS No. 131 and, based
on the management approach required by this statement, has determined that its
operating decisions and performance measures are geared towards one segment. The
Company however, complied with the geographic and major customers' requirements
of SFAS No. 131. See Note 7.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company is not
involved in hedging activities and has no derivative instruments.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the fiscal year 1999 presentation.
NOTE 2 - OPERATIONS RE-ALIGNMENT: During fiscal 1999, the Company initiated a
strategic operations re-alignment in an effort to enhance operating efficiencies
and reduce costs. These objectives are expected to be achieved through
outsourcing a significant portion of the Company's production, closing its
Dominican Republic facility, divesting its injection molding and metal stamping
operations, workforce reductions and other cost-saving measures throughout the
Company. Under this plan, the Company expects to reduce its workforce from
approximately 1,165 employees as of April 1999 to 250 by the end of fiscal 2000,
including reductions resulting from the anticipated sale of non-core businesses.
No severance was paid under this operations re-alignment prior to the end of
fiscal year 1999.
In connection with this program, the Company assessed the future use and
recoverability of certain machinery, equipment and leasehold improvements in the
Dominican Republic, injection molding and metal stamping facilities
("Equipment"). The Company estimated the net realizable value of the Equipment
utilizing a recently completed fair market value appraisal, adjusted for the
estimated costs to sell the Equipment. An allowance was created equal to the
difference between the Equipment's book value and its estimated net realizable
value. The Company will continue to utilize this Equipment until it is sold or
abandoned. The depreciation expense for this Equipment has been suspended but,
since the Equipment was written down near the end of fiscal 1999, the effect of
the suspension of depreciation for fiscal 1999 is not material to the
accompanying consolidated financial statements.
As a result, during fiscal 1999 the Company recorded a charge of $6.0 million
included within the Costs to close facility on the Consolidated Statement of
Operations. This amount is comprised of $4.3 million to reduce the carrying
value of leasehold improvements, plant and equipment to be abandoned or sold to
their estimated net realizable value, $1.0 million for severance and employee
termination benefits and $700,000 for plant closure costs.
NOTE 3 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES: The composition of
long-term debt and obligations under capital leases is as follows:
28
<PAGE>
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
---------------------------------
<S> <C> <C>
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 (8.25% and 9%
at June 25, 1999 and June 26, 1998, respectively) 1,731,000 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
Capitalized leases payable through 2002, bearing interest ranging from
1.9% to 14.9%, secured by assets with a book value of approximately $1,278,000. 521,000 978,000
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. 75,000 89,000
---------------------------------
3,077,000 5,729,000
Current portion (674,000) (3,363,000)
---------------------------------
$ 2,403,000 $ 2,366,000
=================================
</TABLE>
The Company has a credit facility with BNY Financial Corporation in an aggregate
principal amount of $7.7 million ("Credit Facility"), consisting of a $6.0
million revolving credit facility and a $1.7 million term loan. The revolving
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. 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.
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
or 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 term 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.
Due to the non-recurring charge associated with the operations re-alignment, the
Company would not have been in compliance with the tangible net worth convenant
contained within the Credit Facility. However, the company amended the Credit
Facility on July 22, 1999 to adjust the tangible net worth convenant to $21.0
million and is presently in compliance with the amended terms of the Credit
Facility.
The loan agreements, as amended on, require, among other things, that: (a) the
Company maintain a consolidated tangible net worth, which includes the value of
outstanding Series C Redeemable Preferred Stock, of at least $21.0 million (with
such minimum amount to be increased each fiscal quarter, commencing June 26,
1999, by an amount equal to 50% of the Company's consolidated net income for
such quarter); (b) capital expenditures of the Company and its subsidiaries not
to exceed in the aggregate, $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 and each of its subsidiaries have collateralized their respective
obligations under the Credit Facility by a grant of a lien and security interest
against substantially all of their respective assets
29
<PAGE>
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 and obligations under capital leases are as
follows:
Fiscal year Amount
- ----------------------- ----------------
2000 $ 674,000
2001 1,122,000
2002 335,000
2003 946,000
----------------
Total payments 3,077,000
Less: current portion (674,000)
----------------
$ 2,403,000
================
NOTE 4 - 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 1999 levels of qualified wages, fringe benefits, depreciation and
taxes in Puerto Rico, the Company's economic activity based credit limitation is
approximately $2,956,000 per annum.
Although the Section 936 credit was 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, in the
case of 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.
30
<PAGE>
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 January 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 2006 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.
At June 25, 1999, for U.S. federal income tax purposes, the Company had net
operating loss carryforwards aggregating approximately $18,174,000 which expire
periodically through 2013, and along with its subsidiaries had consolidated net
operating loss carryforwards aggregating approximately $25,677,000 which expire
periodically through 2013 and general business tax credit carryforwards 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. Accordingly, 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 25, 1999, the Company and the Company's
United States subsidiaries have approximately $3,560,000 and $2,419,000,
respectively of net operating losses that were generated subsequent to the
ownership change and remain available for use through 2013. In addition, the
Company and the Company's United States subsidiaries have available
approximately $157,000 and $758,000, respectively in unused Section 382 annual
net operating loss limitation carryforwards.
Temporary differences between income tax and financial reporting assets and
liabilities (primarily inventory valuation allowances, property and equipment
and accrued employee benefits) and net operating loss carryforwards give rise to
deferred tax assets in the amount of approximately $6,339,000 for which a full
(100%) offsetting valuation allowance has been provided due to the uncertainty
of realizing any benefit in the future.
NOTE 5 - COMMON STOCK: The Company is authorized to issue 30,000,000 shares of
Common Stock.
STOCK OPTION PLANS: The Company's 1998 Stock Option Plan (the "1998 Plan")
permits each of the Board of Directors and the Compensation Committee of the
Board of Directors to grant, until October 2008, options to employees (including
officers and directors who are employees) and consultants covering 1,500,000
shares of Common Stock. Option terms (not to exceed 10 years), exercise prices
and exercise dates are determined by the Board of Directors or the Compensation
Committee of the
31
<PAGE>
Board. Options are also outstanding under the Company's 1986 Stock Option Plan
and 1995 Stock Option Plan, although no further options may be granted under the
1986 Stock Option Plan and only 2,500 options may be granted under the 1995
Stock Option Plan.
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 following each annual meeting of Stockholders; (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 is 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 25, 1999, June
26, 1998 and June 27, 1997 follows:
<TABLE>
<CAPTION>
June 25, 1999 June 26, 1998 June 27, 1997
----------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
-------------- ------------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 2,306,376 $4.89 1,661,207 $4.98 1,313,207 $5.06
Granted 1,115,141 2.27 855,500 4.61 433,000 4.81
Exercised (21,075) 5.23 (168,828) 4.31 (1,500) 3.92
Canceled or expired (925,941) 5.12 (41,503) 4.87 (83,500) 5.44
-------------- ------------- -------------- ------------ -------------- -------------
Outstanding at end of period 2,474,501 $2.18 2,306,376 $4.89 1,661,207 $4.98
============== ============= ============== ============ ============== =============
Options exercisable at end of period 491,110 949,356 773,344
Shares available for future grant
at end of period 555,859 103,500 187,500
Exercise price per share for options
exercised during period $3.13-5.75 $2.50-6.75 $2.50-4.63
Exercise price per share for options
Outstanding at end of period $1.56-8.25 $2.50-9.38 $2.50-9.38
</TABLE>
The following is additional information relating to options outstanding as of
June 25, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Exercise Of Exercise Contractual Of Exercise
Price Range Shares Price Life (Years) Shares Price
- -------------------------- ------------ ------------ --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$1.56 - $2.00 1,279,800 $ 1.58 9.3 57,500 $ 1.57
2.01 - 2.50 1,019,301 2.32 8.9 280,810 2.34
2.51 - 5.00 56,400 4.30 5.3 36,800 4.14
5.01 - 8.25 119,000 6.45 7.1 116,000 6.49
------------ ------------ ----------- ------------- -----------
2,474,501 $ 2.18 8.9 491,110 $ 3.36
============ ============ =========== ============= ===========
</TABLE>
32
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option plans
as Accounting Principles Board (APB) Opinion 25 and related interpretations in
accounting for stock options plans is followed. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date, as prescribed by SFAS No. 123, net loss would have been increased to
the pro forma amounts indicated in the table below.
<TABLE>
<CAPTION>
Fiscal Year Ended June
--------------------------------------------------------
25, 1999 26, 1998 27, 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported ($6,402,000) ($5,142,000) ($856,000)
Pro forma ($7,430,000) ($5,817,000) ($1,161,000)
Net loss per share:
As reported ($0.79) ($0.68) ($0.12)
Pro forma ($0.92) ($0.77) ($0.16)
</TABLE>
The weighted average fair value of options granted were determined based on the
Black-Scholes model, utilizing the following assumptions:
June 25, June 26, June 27,
1999 1998 1997
----------- --------- ----------
Expected term 6 Years 7 Years 7 Years
Interest rate 6.1% 5.6% 5.6%
Volatility 54.2% 35.2% 35.2%
Dividends 0% 0% 0%
Weighted Average fair value of options granted $1.32 $2.24 $2.24
OTHER OPTIONS AND WARRANTS OUTSTANDING: The holder of the Company's unsecured
subordinated note (see Note 3) 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 6, warrants outstanding which
allow the holders to purchase 20,000 shares of Common Stock at an exercise price
of $6.15 per share, which expire in July 2001.
NOTE 6 - 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. After giving effect to a commission and
other issuance costs aggregating approximately $450,000, net proceeds were
approximately $4,550,000. The Preferred Shares were issued with a beneficial
conversion feature which has been valued at $250,000 and recognized as
33
<PAGE>
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 date (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 Shares balance. The
Preferred Shares bear no dividends, are convertible into shares of the Company's
Common Stock 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 Shares and the 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 Shares.
Because the Preferred Shares have 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. During
fiscal 1999, 2,150 Preferred Shares were converted into 1,187,659 shares of
common stock.
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.
34
<PAGE>
NOTE 7 - SIGNIFICANT CUSTOMERS, EXPORT SALES AND GEOGRAPHICAL 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:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------
June 25, June 26, June 27,
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Bell Atlantic Corporation 31% 24% 18%
Raychem Corporation 15% 9% 5%
Siecor Corporation(1) 9% 14% 20%
Keptel, Inc.(1) 6% 6% 11%
GTE Communication Systems Corporation 5% 12% 5%
</TABLE>
(1) Siecor Corporation and Keptel, Inc. are Original Equipment Manufactures
that supply Network Interface Devices to Regional Bell Operating
Companies and are required by certain Regional Bell Operating Companies
to purchase TII overvoltage surge protectors for inclusion within their
Network Interface Devices.
EXPORT SALES: For each of the three years ended June 25, 1999 export sales were
less than 10% of consolidated net sales.
GEOGRAPHICAL SEGMENTS: The company's manufacturing operations are divided 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 facility 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 includes, in current assets, the inventory balances as it
relates to its physical location.
Geographical Segments
-------------------------------------------------
U.S. and Dominican
Puerto Rico Republic Consolidated
---------------- --------------- -------------
As of June 25, 1999
Current assets $ 19,855,000 $ 7,717,000 $ 27,572,000
Property, plant & equipment 11,576,000 454,000 12,030,000
Other assets 1,562,000 66,000 1,628,000
---------------- -------------- --------------
Total assets $32,993,000 $8,237,000 $41,230,000
================ ============== ==============
Total liabilities $13,257,000 $230,000 $13,487,000
================ ============== ==============
35
<PAGE>
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
================ ============== =============
NOTE 8 - 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 $427,000, $145,000, $161,000,
$161,000, $161,000, and $295,000 fiscal years 2000, 2001, 2002, 2003 and 2004
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. Neither party
exercised its option. At June 25, 1999, accrued rent owed under this agreement
was $50,000.
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 25, 1999 was
approximately $2,803,000 and, although fully depreciated, has an appraised fair
market value of $2,205,000. All equipment under lease has been of good quality
and most, if not all, equipment is expected to remain usable by the Company for
the foreseeable future. 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 1999, 1998 and 1997 was
approximately $781,000, $634,000 and $682,000 respectively, including $200,000
each year relating to the equipment leases with PRC.
NOTE 9 - PROFIT SHARING PLAN: The Company has a defined contribution pension
plan through a 401(k) profit sharing plan. The plan covers substantially all
U.S. and Puerto Rico employees and requires the Company to match employees'
contributions up to specified limitations and subject to certain vesting
schedules.
36
<PAGE>
NOTE 10 - SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
------------------- ----------------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
<S> <C> <C>
Accounts receivable:
Trade accounts receivable $5,201,000 $7,923,000
Other receivables 504,000 249,000
Allowance for doubtful accounts (116,000) (62,000)
------------------- ----------------------
$5,589,000 $8,110,000
=================== ======================
Inventories:
Raw materials $9,346,000 $ 11,880,000
Work in process 3,191,000 5,586,000
Finished goods 5,081,000 3,789,000
------------------- ----------------------
17,618,000 21,255,000
Allowance for inventory (4,467,000) (2,636,000)
------------------- ----------------------
$13,151,000 $18,619,000
=================== ======================
Property, plant and equipment:
Machinery and equipment $ 19,542,000 $ 23,983,000
Tools, dies and molds 9,998,000 9,919,000
Leasehold improvements 7,188,000 6,241,000
Office fixtures, equipment and other 2,685,000 3,287,000
------------------- ----------------------
Total Property, plant and equipment 39,413,000 43,430,000
Less: Accumulated depreciation (27,383,000) (25,398,000)
------------------- ----------------------
$ 12,030,000 $ 18,032,000
=================== ======================
Accrued liabilities:
Payroll, incentive and vacation $906,000 $924,000
Accrued payroll taxes 330,000 129,000
Legal and professional fees 685,000 457,000
Rent 50,000 -
Other 102,000 86,000
------------------- ----------------------
$2,073,000 $1,596,000
=================== ======================
</TABLE>
Fiscal Year Ended
------------------------------
June 25, June 26, June 27,
1999 1998 1997
--------- --------- -------
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH
FLOWS INFORMATION
Capital leases entered into - $729 $533
====== ========= ========
Embedded dividend on Series C Preferred Stock $262 $438 -
====== ========= ========
Valuation adjustment to record marketable securities
available for sale at fair value - ($7) ($40)
====== ========= ========
Supplemental cash flow information:
Cash paid for income taxes - $112 $42
====== ========= ========
Cash paid for interest $404 $212 $241
====== ========= ========
37
<PAGE>
NOTE 11 - DISPOSITIONS: The Company sold substantially all of the assets of its
fiber optic products subsidiary, TII-Ditel, Inc., in March 1999 for $5.3
million. The resulting gain of $2.2 million is included in other income in
fiscal year 1999.
NOTE 12 - QUARTERLY RESULTS (UNAUDITED): The following table reflects the
unaudited quarterly results of the Company for the fiscal years ended June 26,
1998 and June 25, 1999:
<TABLE>
<CAPTION>
Net Income
(Loss) Diluted
Operating Applicable Net Income
Gross Income to Common (Loss)
Quarter Ended Net Sales Profit (Loss) Shareholders Per Share
- ---------------------------------------- ------------------- ------------------- -------------------------------------
1999 FISCAL YEAR
<S> <C> <C> <C> <C> <C>
September 25, 1998 $14,646,000 $2,501,000 ($576,000) ($676,000) ($0.12)
December 25, 1998 8,600,000 1,545,000 (1,548,000) (648,000) (0.08)
March 26, 1999 12,589,000 2,234,000 (700,000) 1,604,000 0.15
June 25, 1999 13,449,000 2,267,000 (355,000) (6,378,000) (0.75)
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)
</TABLE>
38
<PAGE>
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 1999 Annual
Meeting of Stockholders.
39
<PAGE>
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 25, 1999 and June 26, 1998........21
Consolidated Statements of Operations for each of the three years in
the period ended June 25, 1999......................................22
Consolidated Statements of Stockholders' Investment for each of the
three years in the period ended June 25, 1999.......................23
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 25, 1999......................................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
- ------- ----------------
2 Asset Purchase Agreement, dated February 26, 1999, by and
between TII-Ditel, Inc. and Ditel, Inc.
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)(A) 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)(1)(B)* Letter Agreement dated as of July 22, 1999 between the
Company, TII Corporation and the Lender.
40
<PAGE>
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).
41
<PAGE>
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)(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).
42
<PAGE>
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).
99.1 Stipulation of Settlement dated May 25, 1999 between counsel
to the plaintiffs and counsel to the defendants in the action
entitled David H. Addis and Hemda Z. Addis v. TII Industries,
Inc., Alfred J. Roach, Timothy J. Roach, Dorothy Roach, George
S. Katsarakes, James R. Grover, Jr., William G. Sharwell, Dr.
Joseph C. Hogan and C. Bruce Barksdale. Incorporated by
reference to 99.1 to the Company's Report on Form 8-K dated
(date of earliest event reported) May 25, 1999. (File No.
1-8048).
- -----------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated May 25, 1999 (date of
earliest event reported) reporting under Item 5 - Other Events and Item 7
- Financial Statements, Pro Forma Financial Information and Exhibits. No
financial statements were filed with that Report. Subsequent to the end of
the fourth fiscal 1999 quarter, the Company filed a Current Report on Form
8-K dated August 23, 1999 (date of earliest event reported) reporting
under Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma
Financial Information in Exhibits. No financial statements were filed with
that Report.
43
<PAGE>
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.
September 15, 1999 By /s/ Timothy J. Roach
----------------------------------------
Timothy J. Roach, President,
Chief Executive Officer and Director
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 15, 1999 /s/ Alfred J. Roach
----------------------------------------------
Alfred J. Roach, Chairman
of the Board and Director
September 15, 1999 /s/ Timothy J. Roach
----------------------------------------------
Timothy J. Roach, President,
Chief Executive Officer (principal
executive officer) and Director
September 15, 1999 /s/ C. Bruce Barksdale
----------------------------------------------
C. Bruce Barksdale, Director
September 15, 1999 /s/ James R. Grover, Jr.
----------------------------------------------
James R. Grover, Jr., Director
September 15, 1999 /s/ Joseph C. Hogan
----------------------------------------------
Joseph C. Hogan, Director
September 15, 1999 /s/ George S. Katsarakes
----------------------------------------------
George S. Katsarakes, Director
September 15, 1999 /s/ Dorothy Roach
----------------------------------------------
Dorothy Roach, Director
September 15, 1999 /s/ William G. Sharwell
----------------------------------------------
William G. Sharwell, Director
September 15, 1999 /s/ Paul G. Sebetic
----------------------------------------------
Paul G. Sebetic, Vice President-Finance
and Chief Financial Officer
(principal financial officer)
<PAGE>
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 25, 1999, and the related consolidated statements of
operations, stockholders' investment and cash flows for each of the three years
in the period ended June 25, 1999, included in this Form 10-K and have issued
our report thereon dated September 25, 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 27, 1997, June 26, 1998 and June
25, 1999 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 15, 1999.
Stamp No. 1596955 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
45
<PAGE>
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 25, 1999 $2,636,000 9,428,000 (7,597,000) $4,467,000
June 26, 1998 $2,430,000 206,000 - $2,636,000
June 27, 1997 $2,034,000 2,896,000 (2,500,000) $2,430,000
RESTRUCTURING RESERVE
Balance at Balance
Beginning of at End of
Fiscal Year Ended Year Additions Dispositions Year
- ----------------------------- --------- -------------- ------------- ---------
June 25, 1999
Property, plant and equipment $0 $4,281,000 $0 $4,281,000
Employee severance - 1,010,000 - $1,010,000
Plant closure costs - 699,000 - $699,000
--------- -------------- ----------- -----------
$0 $5,990,000 $0 $5,990,000
========= ============== =========== ===========
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Balance
Beginning of at End of
Fiscal Year Ended Year Additions Dispositions Year
- ----------------------- ---------------- ------------ ------------- ---------
June 25, 1999 $62,000 54,000 - $116,000
June 26, 1998 $53,000 13,000 (4,000) $62,000
June 27, 1997 $122,000 10,000 (79,000) $53,000
BNY FACTORING LLC
1290 Avenue of the Americas
New York, New York 10104
as of July 22, 1999
TII INDUSTRIES, INC.
TII CORPORATION
1385 Akron Street
Copiague, New York 11726
Re: Consent and Amendment
Gentlemen:
Reference is made to the Revolving Credit, Term Loan and Security
Agreement dated April 30, 1998 (the "Industries Loan Agreement") among and BNY
Factoring LLC, as successor to BNY Financial Corporation ("BNYF"), TII
Industries, Inc. ("Industries") and TII Corporation ("Corporation") and each of
the notes, instruments, mortgages, agreements and other documents executed
and/or delivered in connection therewith (all of the foregoing, together with
the Industries Loan Agreement, collectively, the "Loan Agreements"), as the same
now exists or hereafter be amended, restated, renewed, extended, supplemented or
otherwise modified, (collectively, the "Loan Documents"). All capitalized terms
not otherwise defined herein shall have the meanings ascribed to such terms as
set forth in the Loan Agreements.
Industries and Corporation have requested certain amendments to the
Loan Agreements, and Industries has requested that BNYF consent to the
repurchase by Industries of all of Industries Series C Convertible Preferred
Stock with the proceeds of certain matured funds in the possession of BNYF for
an aggregate amount not to exceed $3,600,000 (the "Stock Repurchase"), and BNYF
is willing to do so subject to the terms and provisions of this Letter Re:
Consent and Amendment (the "Agreement").
In consideration of the foregoing, the parties hereby agree as follows:
1. Subject to the terms and conditions set forth herein, BNYF hereby
consents to the Stock Repurchase and agrees to make available to Industries an
amount not to exceed $3,600,000; provided that (i) such funds shall be used
solely for the purpose of paying for the Stock Repurchase and reasonable and
customary costs incidental thereto, and (ii) after giving effect to the Stock
Repurchase, there shall be no Revolving Advances outstanding under the Loan
Agreements.
<PAGE>
2. Paragraph 6.5 of the Industries Loan Agreement is hereby amended
and restated in its entirety to read as follows:
"6.5 Net Worth. Cause to be maintained at all times a consolidated Net
Worth in an amount not less than $21,000,000 ("Minimum Net Worth"). For
each of Borrowers' fiscal quarters during the Term commencing with the
fiscal quarter beginning on June 30, 1999, Minimum Net Worth shall be
increased by an amount equal to fifty percent (50%) of Net Income for
each such quarter."
3. Except as specifically set forth herein, no other changes or
modifications to the Loan Documents are intended or implied, and in all other
respects, the Loan Documents shall continue to remain in full force and effect
in accordance with their respective terms as of the date hereof. Except as
specifically set forth herein, nothing contained herein shall evidence a waiver
or amendment by BNYF of any other provision of the Loan Documents nor shall
anything contained herein be construed as a consent by BNYF to any transaction
other than that specifically consented to herein.
4. The terms and provisions of this Agreement shall be for the benefit
of the parties hereto and their respective successors and assigns; no other
person, firm, entity or corporation shall have any right benefit or interest
under this Agreement. This Agreement may be signed in counterparts, each of
which shall be an original and all of which when taken together shall constitute
one agreement. In making proof of this Agreement, it shall not be necessary to
produce or account for more than one counterpart signed by the party to be
charged.
5. This Agreement sets forth the entire agreement and understanding of
the parties with respect to the matter set forth herein. This Agreement cannot
be changed, modified, amended or terminated except in writing executed by the
party to be charged.
Very truly yours,
BNY FACTORING LLC
By:
Title:
ACKNOWLEDGED AND AGREED:
TII INDUSTRIES, INC.
TII CORPORATION
By:
Title: Of Each
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
The terms and provisions of the foregoing are hereby acknowledged and consented
to:
CROWN TOOL & DIE COMPANY, INC.
By:
Title:
TII-DITEL, INC.
By:
Title:
TII-DOMINICANA, INC.
By:
Title:
TII INTERNATIONAL, INC.
By:
Title:
TELECOMMUNICATIONS INDUSTRIES, INC.
By:
Title:
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated September 15, 1999, including in this Annual Report on Form 10-K,
into the Company's previously filed Registration Statements on Form S-8 (Nos.
2-71781, 2-90852, 33-2555, 33-11449, 33-26930, 33- 37310, 33-53180, 33-59096,
33-64965, 33-64961, 33-64967, 333-47151, 333-68579) and previously filed
Registration Statements on Form S-3 (File Nos. 33-64980, 333-47105, 333-47109,
333-47111).
ARTHUR ANDERSEN LLP
SAN JUAN, PUERTO RICO
SEPTEMBER 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000277928
<NAME> TII INDUSTRIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> JUN-25-1999
<CASH> 377
<SECURITIES> 0
<RECEIVABLES> 8,110
<ALLOWANCES> 0
<INVENTORY> 18,619
<CURRENT-ASSETS> 27,481
<PP&E> 18,032
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,564
<CURRENT-LIABILITIES> 11,487
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 47,564
<TOTAL-LIABILITY-AND-EQUITY> 47,564
<SALES> 50,548
<TOTAL-REVENUES> 50,548
<CGS> 43,504
<TOTAL-COSTS> 11,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> (4,704)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,704)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,704)
<EPS-BASIC> (0.68)
<EPS-DILUTED> 0
</TABLE>
