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 30, 2000
Commission file number 1-8048
TII INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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State of incorporation: DELAWARE I.R.S. Employer Identification No. 66-0328885
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1385 AKRON STREET, COPIAGUE, NEW YORK 11726
(631) 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 8, 2000 held by non-affiliates of the registrant was approximately
$24.7 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 8, 2000 was 11,680,484.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 2000 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 contain, forward-looking statements concerning, among other things,
the Company's future plans and objectives that are or may be deemed to be
"forward-looking statements." The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995 which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement. The
Company believes that it is in the best interests of its stockholders and
potential investors to take advantage of the "safe harbor" provisions of that
Act. Such forward-looking statements are subject to a number of known and
unknown risks and uncertainties that could cause the Company's actual results,
performance or achievements to differ materially from those described or implied
in the forward-looking statements. These factors include, but are not limited
to, general economic and business conditions, including the regulatory
environment applicable to the communications industry; weather and similar
conditions (including the effects of hurricanes in the Caribbean where the
Company's principal gas tube manufacturing facility is 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, loss or disruption of sales to major
customers as a result of, among other things, third party labor disputes,
shipping disruptions from countries that the Company's contract manufacturers
produce the Company's products as well as the Company's ability to market its
existing, recently developed and new products (see "Marketing and Sales"); the
risks inherent in new product introductions, such as start-up delays and
uncertainty of customer acceptance; dependence on third parties for certain of
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"); 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, produces and markets lightning and overvoltage surge protection
products and systems, network interface devices ("NIDs") and station electronic
products for use in the communications industry. The Company sells its products
to United States telephone operating companies ("Telcos"), including all four
Regional Bell Operating Companies ("RBOC"), as well as original equipment
manufacturers ("OEMs"), cable television ("CATV") providers and competitive
access providers ("CAPs") of communications services. The Company believes that
its products offer superior, cost-effective performance features and
characteristics, including high reliability, long life cycles, ease of
installation and optimum protection against adverse environmental conditions.
This has lead to TII becoming the leading supplier of overvoltage surge
protectors to the U.S. Telephone industry for use at their subscriber locations.
Overvoltage surge protectors are mandated in the United States by the National
Electrical 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. The NEC is published by the National Fire
Protection Agency and typically is adopted by states and local municipalities.
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's patented broadband coax protector product line was designed to
address the rapidly growing market for telephony over coaxial networks. The 1999
edition of the NEC requires lightning and surge protection to be included on
network powered coax lines, the preferred technology to bring telephony and
broadband services to homes and businesses.
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
this need, TII developed an innovative broadband NID product line specifically
designed to house the communication service provider's technology of choice,
whether traditional twisted pair lines, high-bandwidth coaxial cable or fiber
optic lines.
During fiscal 1999, the Company initiated a strategic operations re-alignment in
an effort to enhance operating efficiencies and reduce costs. This program
included 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"). This operations re-alignment was completed in June
2000.
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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
(631) 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 are 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
producer of quality, high-performance products; (iii) outsourcing certain
operations; (iv) establishing collaborative agreements with select partners for
product and market development; (v) introducing new and innovative products that
are complementary to its current products and (vi) continuing expansion into new
markets, including broadband communication networks which provide advanced
voice, video and data services, as well as in the commercial, industrial and
international surge protection markets.
The Company believes its strategies provide several distinct competitive
advantages, including reduced capital investment requirements, raw material and
work in process inventory levels and overhead expenditures, as well as 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.
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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 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 intends to enter into 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, Telcordia (formerly Bellcore), Underwriters Laboratory ("UL") and
other testing facilities.
PRODUCTS
LIGHTNING AND OVERVOLTAGE SURGE PROTECTION PRODUCTS. The Company designs,
manufactures and markets overvoltage surge protection products and 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
communications provider's loss of revenue due to subscriber outages; and (iv)
reduce the communications provider's costs to replace or repair damaged
equipment. Overvoltage surge protectors differ in power capacity, application,
configuration and price to meet varying needs.
In the United States, overvoltage surge protectors are mandated 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 communication 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 a
standard in 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
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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.
Broadband Coaxial Protectors: Recent revisions to the NEC, as it
continues to be adopted by local jurisdictions, require overvoltage surge
protection on all network powered subscriber coax lines, the preferred coaxial
cable technology to bring telephony and broadband services to homes and
businesses. As an integral part of the Company's broadband product line, the
Company recently developed its high-performance, 75-ohm, patented Broadband Coax
Protector product line to safeguard coaxial cable lines. While providing
overvoltage surge protection, the Company's in-line Broadband Coax Protectors
are virtually transparent to the network, permitting high-bandwidth signals to
be transmitted without adversely affecting the signal. The Company's Broadband
Coax Protectors have begun to be installed in active network interface units
distributed as part of hybrid-fiber coax (known as HFC) broadband network
build-outs. These build-outs, employing HFC architecture, connect residential
and business customers to an enhanced range of video, voice and high-speed data
communication possibilities, as well as improved signal reliability, better
pictures and superior two-way transmission capability over existing and new HFC
systems.
Capitalizing on the Company's patent for in line Coaxial Cable Surge Protectors,
the Company has also developed a 50-ohm Base Station Protector product line
which protects wireless service providers' cell sites from the damaging effects
of lightning and other surges. The Company has have also developed its 10 Base T
Surge Protector, which is presently utilized by an RBOC customer to deliver
broadband signals over "category five" cables, a competing network technology.
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 and higher capacitance than gas
tubes. When an overvoltage surge exceeds the energy handling capacity of the
solid state protector, it fails causing the telephone to cease operating. High
capacitance on a communication line adversely affects high bandwidth
transmission, distorting the signal. As a result, most Telcos use high energy
handling, low capacitance gas tube protectors at the subscriber location. In the
Telco's switching center, where lower energy handling and higher capacitance is
not a major concern, solid state protectors are used more frequently. 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 has also combined 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 protector with the energy
handling capability of a gas tube. See "Business - Competition."
AC Powerline Protectors: TII's powerline surge protectors utilize the
Company's 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 59%, 49% and 55% of the Company's net sales during the Company's
fiscal years 2000, 1999 and 1998, respectively.
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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 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 accommodate from one to
twenty-five access lines. Designed with future technologies in mind, the
Company's broadband NIDs also accommodate TII's patented coaxial overvoltage
surge protector, as well as fiber optic lines.
NID sales represented approximately 32%, 39% and 30% of the Company's net sales
during fiscal 2000, 1999 and 1998, 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 9%, 6% and 7% of the Company's net sales in fiscal 2000, 1999 and
1998, respectively.
In order to focus on its core business, the Company sold its fiber optic
enclosure product line in March 1999 for $5.3 million. This product line
included interconnect hardware components, cable assemblies, and other products,
sold primarily to RBOCs, OEMs and long distance telephone companies. Sales of
fiber optic enclosure products represented approximately 6% and 8% of the
Company's net sales during fiscal 1999 and 1998, 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 markets and in the
rapidly growing CAP markets that are providing users with advanced voice, video
and data services, as well as in the commercial, industrial and international
surge protection markets. Currently, the Company's research and development
("R&D") and related marketing efforts are focused on several major projects
including:
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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 protection systems for OEMs for use
throughout Telco and other communications networks, as well as the
commercial and industrial markets.
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 29 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 $3.1 million in fiscal 2000 and $3.3 million
during both fiscal 1999 and 1998. The reduction in expense occurred as the
Company is benefiting from collaborative engineering efforts with its contract
manufacturers.
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
being a leading supplier of overvoltage surge protectors for over 25 years, its
current designation as a supplier to all four of the RBOCs 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 CATV providers, CAPs 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. The loss
of, or the disruption of shipments to, a customer that accounts for greater than
10% of the Company's revenues could have a material adverse affect on the
Company's financial condition or results of operations.
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Year Ended
------------------------------------
June 30, June 25, June 26,
2000 1999 1998
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Bell Atlantic Corporation (1) 25% 31% 24%
Tyco Electronics Corporation (2) 19% 15% 9
Corning Cable Systems LLC (3) 12% 9% 14%
Telco Sales, Inc. 12% 2% 0%
GTE Communication Systems Corporation (1) 0% 5% 12%
(1) On June 30, 2000, a wholly-owned subsidiary of Bell Atlantic Corporation
was merged with and into GTE Corporation, as a result of which GTE
Corporation became a wholly-owned subsidiary of Bell Atlantic. The
combined company is doing business as Verizon Communications. GTE
Communications Systems Corporation is a subsidiary of GTE Corporation.
(2) Tyco Electronics Corporation (a successor to Raychem Corporation) is an
OEM that purchases certain overvoltage protection products from the
Company for inclusion within their products.
(3) Corning Cable Systems LLC (formerly Siecor Corporation) is an OEM that
supplies NIDs to Telcos and is required by certain Telcos to purchase
TII's 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 $1.2 million in fiscal
2000 (2% of sales), $967,000 in fiscal 1999 (2% of net sales) and $2.6 million
in fiscal 1998 (5% 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 produces its gas tubes and certain of its overvoltage surge
protectors, NIDs and station electronics at its facility in Puerto Rico.
However, the majority of the production of overvoltage surge protectors (which
incorporate gas tubes manufactured at the Company's Puerto Rico facility), NIDs
and station electronics are produced by a network of contract manufacturers, the
principal one being a U.S. company with a facility in China.
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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, the
Company believes that the raw materials used will continue to be available in
sufficient supply at competitive prices. The Company depends on its network
contract manufacturers, to produce the majority of its products for sale to
customers. These manufacturers are responsible for the purchase of raw materials
used by them, except for the gas tubes which are supplied by the Company.
COMPETITION
The Company faces significant competition across all of its product lines. Its
principal competitors are Corning Cable Systems LLC, Tyco Electronics
Corporation and Keptel, Inc. (see "Business - 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. Further, solid state protectors have significantly higher
capacitance than gas tube protectors. Higher capacitance adversely affects
transmission on a high bandwidth communication line by distorting the signal.
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. 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 and gas tube
protectors are produced from different raw materials, manufacturing processes
and equipment.
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 in
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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 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 under certain conditions. 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 2000 levels of
qualified wages, fringe benefits, depreciation and taxes in Puerto Rico, the
Company's economic activity based credit limitation is approximately $2.4
million per annum. This amount will decrease in the future since the Company
completed its operations re-alignment and reduced 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 $4.5 million 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, the Company has not been required to pay
United States federal or Puerto Rico taxes on most of its income during fiscal
years 2000, 1999 and 1998. See Note 4 to Notes to Consolidated Financial
Statements.
EMPLOYEES
On September 8, 2000, the Company had approximately 220 full-time employees, of
whom 172 were employed at the Company's Puerto Rico facility.
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 leases a 20,000 square foot facility in Toa Alta, Puerto Rico, which
is approximately 20 miles southwest of San Juan, under an agreement which
expires in April 2006. This facility contains certain of the Company's
manufacturing, warehousing, administrative, research and development, and
quality assurance resources.
The Company also 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 2001. 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.
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 2000.
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 2000 and
1999, the high and low sales prices of the Company's Common Stock.
Fiscal 2000 High Low
---- ---
First Quarter Ended September 24, 1999 $2 $1 1/2
Second Quarter Ended December 31, 1999 1 5/8 1
Third Quarter Ended March 31, 2000 3 3/8 1 1/8
Fourth Quarter Ended June 30, 2000 4 3/16 1 5/8
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
As of September 8, 2000, the Company had approximately 598 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
30, 2000 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 30, June 25, June 26, June 27, June 28,
2000 1999(a) 1998(a) 1997 1996
-------------- ------------- ------------- -------------- -------------
STATEMENTS OF OPERATIONS DATA
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $49,635 $49,284 $50,548 $50,675 $44,513
Operating (loss) income ($743) ($9,211) ($4,542) ($892) $3,856
Net (loss) income applicable
to common stockholders ($1,018) ($6,402) ($5,142) ($856) $3,737
Net (loss) income per share - diluted ($0.11) ($0.79) ($0.68) ($0.12) $0.47
BALANCE SHEET DATA
----------------------------------------------
Working capital $19,123 $16,488 $15,994 $19,655 $23,801
Total assets $37,316 $41,230 $47,564 $42,823 $42,823
Long-term debt and capital
leases (including current portion) $1,567 $3,077 $5,729 $2,841 $2,739
Redeemable preferred stock $1,626 $2,850 $4,738 - -
Stockholders' investment $28,761 $24,893 $28,973 $33,011 $33,862
</TABLE>
(a) See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of several factors that affected
the Company's results of operations in fiscal 1999 and 1998.
(b) No cash dividends were declared in any of the reported periods.
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, produces and markets lightning and overvoltage surge protection
products and systems, network interface devices ("NIDs") and station electronic
products for use in the communications industry. The Company has been a leading
supplier of overvoltage surge protectors to U.S. telephone operating companies
("Telcos"), including Regional Bell Operating Companies ("RBOCs") for over 25
years. The Company reports on a 52-53 week fiscal year ending on the last Friday
in June. Fiscal 2000 contained 53 weeks, while fiscal 1999 and 1998 contained 52
weeks.
14
<PAGE>
The Company's results of operations in fiscal 1999 and 1998 were affected by the
following factors:
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 (fiscal 1998) 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 (fiscal 1999), the Company's principal operating
facilities in Toa Alta, Puerto Rico and San Pedro De Macoris, Dominican Republic
sustained significant inventory, equipment and facility damages as a result of
Hurricane Georges. In addition, 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 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 enclosure 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% and
8% of the Company's consolidated sales for fiscal years 1999 and 1998,
respectively.
During fiscal 1999, the Company initiated a strategic operations re-alignment in
an effort to enhance operating efficiencies and reduce costs. This program
included outsourcing a significant portion of the Company's production, closing
the Company's Dominican Republic facility, workforce reductions and
15
<PAGE>
other cost-saving measures throughout the Company. Under this plan, the Company
reduced its workforce from approximately 1,165 employees as of April 1999 to
approximately 255 by June 30, 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. This operations re-alignment was completed in June 2000. See Note 2 to
Notes to Consolidated Financial Statements.
FISCAL YEARS ENDED JUNE 30, 2000, JUNE 25, 1999 AND JUNE 26, 1998
Net sales for fiscal 2000 increased $351,000 or 0.7% to $49.6 million from $49.3
million in fiscal 1999. The nominal increse in sales reflect a net increase in
sales of newly developed products over the products they are replacing. 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 as well as less sales of fiber optic products 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.
Gross profit in fiscal 2000 was $9.5 million, or 19.1% of sales, versus $8.5
million, or 17.3% of sales, in fiscal 1999. Gross profit margins improved as a
result of the Company's operations re-alignment and the resulting efficiencies
and related cost reductions achieved, as well as a better mix of higher margin
products as compared to the prior year. 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.
Selling, general and administrative expenses for fiscal 2000 decreased $1.3
million or 15.9% to $7.1 million from $8.4 million in fiscal 1999. Lower
personnel expenses, due to the Company's operations re-alignment, and lower
legal expenses produced a majority of the decline. 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.
Research and development expenses for fiscal 2000 decreased by $219,000 or 6.5%
to $3.1 million from $3.3 million in fiscal 1999. Although overall expenses are
down, the Company continues to increase its product development activities. The
reduction in expense occurred as the Company is benefiting from collaborative
engineering efforts with its contract manufacturers. Research and development
expenses for fiscal 1999 increased by $48,000 or 1.5% to $3.3 million. The
increase 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 2000 decreased $173,000 to $214,000 due to decreased
borrowings under the Company's credit facilities, offset in part, by higher
average interest rates. Interest expense in fiscal 1999 increased $147,000 to
$387,000 due to increased borrowings under the Company's credit
16
<PAGE>
facilities while the Company was awaiting receipt of insurance proceeds from
claims resulting from Hurricane Georges.
Interest income in fiscal 2000 increased $146,000 to $204,000 from $58,000 in
fiscal 1999. The increase was due to increased averaged cash balances held by
the Company during fiscal 2000. Interest income in fiscal 1999 decreased $64,000
to $58,000 from $122,000 in fiscal 1998. The decline was due to decreased
average cash and marketable securities balances held by the Company during
fiscal 1999.
In the fourth quarter of fiscal 2000, the holder of the Company's $750,000
unsecured subordinated note converted that note into 428,571 shares of Common
Stock at a reduced conversion price. This transaction resulted in charges of
approximately $332,000 to other income (expense). Other income (expense) for
fiscal 1999 includes a $2.2 million gain on the sale of the Company's fiber
optic product line.
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 2000 levels of
qualified wages, fringe benefits, depreciation and taxes in Puerto Rico, the
Company's economic activity based credit limitation is approximately $2.4
million per annum. This amount will decrease in the future since the Company
completed its operations re-alignment and reduced 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 $4.5 million 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.
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, the Company has not been required to pay
United States federal or Puerto Rico taxes on most of its income during fiscal
years 2000, 1999 and 1998. See Note 4 to Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance decreased to $4.4 million at the
end of fiscal 2000 from $8.7 million at the end of fiscal 1999. The decrease
resulted from net cash outflows from operations of $5.4 million and investing
activities of $591,000, partially offset by net cash inflows from financing
activities of $1.8 million. Working capital increased to $19.1 million at the
end of fiscal 2000 from $16.5 million at the end of fiscal 1999.
17
<PAGE>
During fiscal 2000, $5.4 million of cash was used in operations, $5.0 million to
pay down accounts payable and accrued liabilities and $1.7 million to support an
increase in accounts receivable. While the Company incurred a net loss of $1.0
million, this was more than offset by non-cash charges of $1.6 million for
depreciation and amortization and $332,000 for induced conversion costs.
During fiscal 2000, cash of $591,000 was used by investing activities, which
consisted of $1.1 million of capital expenditures, net of $547,000 of proceeds
from the sale of a subsidiary's assets.
Financing activities provided $1.8 million of cash as $2.5 million in net
proceeds from a private placement of the Company's Common Stock was partially
offset by the use of $782,000 to repay debt and obligations under capital
leases.
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.
The Company has a credit facility in an aggregate amount of $7.5 million
consisting of a $6.0 million revolving credit facility and a $1.5 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. As of June 30, 2000, $1.5 million was outstanding under the term
loan and no balance was outstanding on the revolving credit facility. The
Company is in compliance with the covenants and terms of this credit facility.
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.
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.
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.
18
<PAGE>
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.
19
<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 30, 2000 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 30, 2000. 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 auditing standards generally accepted
in the United States. 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 30, 2000 and June 25, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
San Juan, Puerto Rico
September 28, 2000
Stamp No. 1682783 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
20
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, June 25,
2000 1999
--------------- ---------------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 4,446 $ 8,650
Accounts receivable, net 7,246 5,589
Inventories 12,825 13,151
Other 268 182
--------------- ---------------
Total current assets 24,785 27,572
--------------- ---------------
Property, plant and equipment, net 11,223 12,030
Other 1,308 1,628
--------------- ---------------
TOTAL ASSETS $ 37,316 $ 41,230
=============== ===============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities
Current portion of long-term debt and obligations under capital leases $ 300 $ 674
Accounts payable 3,685 6,628
Accrued liabilities 1,475 2,073
Accrued restructuring expenses 202 1,709
--------------- ---------------
Total current liabilities 5,662 11,084
--------------- ---------------
Long-Term Debt and Obligations Under Capital Leases 1,267 2,403
--------------- ---------------
Series C Convertible Redeemable Preferred Stock, 1,626 and 2,850 shares
outstanding at June 30, 2000 and June 25, 1999, respectively;
liquidation preference of $1,150 per share 1,626 2,850
--------------- ---------------
Commitments and Contingencies (Note 8)
Stockholders' Investment
Preferred Stock, par value $1.00 per share; 1,000,000 shares authorized;
Series C Convertible Redeemable, 1,626 and 2,850 shares
outstanding at June 30, 2000 and June 25, 1999, respectively; - -
Series D Junior Participating, no shares outstanding (Note 6) - -
Common Stock, par value $.01 per share; 30,000,000 shares authorized;
11,698,121 and 8,850,535 shares issued; 11,680,484 and
8,832,898 shares outstanding at June 30, 2000 and
June 25, 1999, respectively (Note 5) 117 89
Warrants and options outstanding 369 20
Capital in excess of par value 37,119 32,610
Accumulated deficit (8,563) (7,545)
--------------- ---------------
29,042 25,174
Less - Treasury stock, at cost; 17,637 common shares (281) (281)
--------------- ---------------
Total stockholders' investment 28,761 24,893
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 37,316 $ 41,230
=============== ===============
</TABLE>
See notes to consolidated financial statements
21
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------
June June June
30, 2000 25, 1999 26, 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $ 49,635 $ 49,284 $ 50,548
Cost of sales 40,166 40,737 43,504
---------------- --------------- ---------------
Gross profit 9,469 8,547 7,044
---------------- --------------- ---------------
Operating expenses
Selling, general and administrative 7,090 8,424 8,290
Research and development 3,125 3,344 3,296
Costs to close facility, net of reversals (3) 5,990 -
---------------- --------------- ---------------
Total operating expenses 10,212 17,758 11,586
---------------- --------------- ---------------
Operating loss (743) (9,211) (4,542)
Insurance proceeds, net of hurricane loss - 1,408 -
Interest expense (214) (387) (240)
Interest income 204 58 122
Other (expense) income (265) 1,992 (44)
---------------- --------------- ---------------
Net loss (1,018) (6,140) (4,704)
Preferred stock embedded dividend - (262) (438)
---------------- --------------- ---------------
Net loss applicable to common stockholders $ (1,018) $ (6,402) $ (5,142)
================ =============== ===============
Basic and diluted net loss per share ($0.11) ($0.79) ($0.68)
================ =============== ===============
Basic and diluted weighted average shares outstanding 9,198 8,100 7,572
================ =============== ===============
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(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 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)
Exercise of stock options - - 53 - - -
Conversion of Series C
Preferred Stock 6 - 1,218 - - -
Sale of Common Stock 18 349 2,160 - - -
Conversion of debt 4 - 1,078 - - -
Net loss for the year - - - (1,018) - -
------------ --------------- --------------- ----------------- --------------- -----------
BALANCE, June 30, 2000 $ 117 $ 369 $ 37,119 $ (8,563) $ - $ (281)
============ =============== =============== ================= =============== ===========
</TABLE>
See notes to consolidated financial statements
23
<PAGE>
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
June 30, June 25, June 26,
2000 1999 1998
----------- ------------ ------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net loss ($1,018) ($6,140) ($4,704)
----------- ------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,420 2,193 1,631
Provision for inventory 396 396 206
Amortization of other assets 239 239 194
Induced debt conversion cost 332
Cost to close facility, net of reversals (3) 5,990 -
Gain from sale of subsidiary assets - (2,168)
Gain from insurance proceeds, net of hurricane loss - (1,408)
Changes in operating assets and liabilities
(Increase) decrease in receivables (1,657) 1,706 (722)
Increase in inventories (70) (5,121) (3,251)
(Increase) decrease in other assets (5) 377 (602)
(Decrease) increase in accounts payable and accrued liabilities (5,045) 790 1,153
----------- ------------ ------------
Net cash used in operating activities (5,411) (3,146) (6,095)
----------- ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures, net of dispositions (1,138) (1,809) (4,890)
Purchases of marketable securities available for sale - - (3,572)
Proceeds from sales and maturities of marketable securities
available for sale - - 7,124
Net insurance proceeds for hurricane damages - 11,190 -
Net proceeds from sale of subsidiary's assets 547 4,518 -
----------- ------------ ------------
Net cash (used in) provided by investing activities (591) 13,899 (1,338)
----------- ------------ ------------
Cash Flows from Financing Activities:
Proceeds from exercise of options and warrants 53 172 861
Borrowings of debt and obligations under capital leases - 965 3,912
Payments of debt and obligations under capital leases (782) (3,617) (1,760)
Net proceeds from sale of Common Stock 2,527 - -
Net proceeds from issuance of Preferred Stock - - 4,550
----------- ------------ ------------
Net cash provided by (used in) financing activities 1,798 (2,480) 7,563
----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (4,204) 8,273 130
Cash and cash equivalents, at beginning of year 8,650 377 247
----------- ------------ ------------
Cash and cash equivalents, at end of year $4,446 $8,650 $377
=========== ============ ============
</TABLE>
See notes to consolidated financial statements
24
<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") design, produce
and market lightning and surge protection products and systems, network
interface devices and station electronics for use in the communications
industry. Sales of overvoltage surge protection products to United States
customers constitute the majority of the Company's consolidated sales for each
of the three years ended June 30, 2000.
FISCAL YEAR: The Company reports on a 52-53 week year ending on the last Friday
in June. Fiscal 2000 contained 53 weeks, while fiscal 1999 and 1998 contained 52
weeks.
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
accounting principles generally accepted in the United States 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 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 $175,000 relating to key-man life insurance policies with a
face amount in excess of $1.1 million.
NET LOSS PER COMMON SHARE: The Company utilizes Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," 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
25
<PAGE>
Company's Common Stock were anti-dilutive and excluded from the computation.
Therefore, diluted loss per share equals basic loss per share. The following
table summarizes outstanding securities that are convertible into the Company's
Common Stock:
<TABLE>
<CAPTION>
June 30, 2000 June 25, 1999 June 26, 1998
------------------------- ------------------------------ -----------------------
Exercise Exercise Exercise
Quantity Price Quantity Price Quantity Price
<S> <C> <C> <C> <C> <C> <C>
Stock Option Plans (a) 2,757,941 $ 2.08 2,474,501 $ 2.18 2,306,376 $ 4.89
Investor Option 100,000 2.50 100,000 2.50 100,000 2.50
Warrants 200,000 7.03 200,000 7.03 200,000 7.03
Warrants - - - - 60,000 6.56
Warrants 10,000 6.15 20,000 6.15 20,000 6.15
Convertible Debt - - 300,000 2.50 300,000 2.50
Warrants(b) 2,214,000 2.79 - -
Unit Purchase Options(b) 414,000 2.69 - - - -
Convertible Preferred Stock (c) 850,474 1,781,250 1,196,172
--------- ---------- ----------
6,546,415 4,875,751 4,182,548
========== ========== ==========
</TABLE>
(a) Weighted average exercise price of outstanding stock options at year-end.
(b) In June 2000, the Company completed a private placement of 1,800,000 units,
each unit consisting of one share of Common Stock and one warrant to purchase
one share of Common Stock at $2.79. In connection with this private placement,
the Company issued to certain employees of the placement agent 414,000 Unit
Purchase Options ("UPO"), at an exercise price of $2.69 per UPO. Each UPO
consisting of one share of Common Stock and one warrant to purchase one share of
Common Stock at $2.79.
(c) 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 $1.9 million and $271,000 at June 30, 2000
and June 25, 1999.
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 to employees or directors with an exercise
price equal to market value at the date of grant.
COMPREHENSIVE INCOME: The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," in the fiscal year ended June 25, 1999. Comprehensive income consists
of net income and other comprehensive income. The adoption had no impact on net
income or total stockholders' investment. Other comprehensive income is
immaterial for the three years ended June 30, 2000 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
26
<PAGE>
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 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, has
applied the geographic and major customers' requirements of SFAS No. 131. See
Note 7.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: During 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. In addition, during 1999 the
Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133," which delays
the effective date of SFAS No. 133 for one year. The Company is not involved in
hedging activities and has no derivative instruments. Therefore, the
implementation of SFAS No. 133 is not expected to have a material impact on the
Company's consolidated statement of operations or consolidated balance sheet.
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. This program included 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 reduced its workforce from approximately 1,165
employees as of April 1999 to 255 at June 30, 2000, including reductions
resulting from the sale of non-core businesses. Additionally, the Company
assessed the future use and recoverability of certain machinery, equipment and
leasehold improvements in the Dominican Republic and its injection molding and
metal stamping facilities in Puerto Rico ("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.
As a result, during fiscal 1999, the Company recorded a charge of $6.0 million,
included within "Costs to close facility" on the Consolidated Statements of
Operations. The Company completed the operations re-alignment during June 2000.
During fiscal 2000, the Company analyzed the adequacy of the reserves remaining
related to asset impairment, severance and employee termination benefits. The
Company reversed approximately $151,000 and $300,000 of severance and employee
benefits and plant closures reserves, respectively. This was partially offset by
an additional charge of approximately $448,000 related to the property plant and
equipment impairment reserve as a result of a reduction in the estimated net
realizable value of certain assets. The components of this charge, the
corresponding fiscal 2000 activity and the remaining reserve balances at June
30, 2000, which are included in "Property, plant and equipment, net" and in
"Accrued restructuring expenses" in the accompanying consolidated balance
sheets, are as follows:
27
<PAGE>
<TABLE>
<CAPTION>
Employee Plant
Asset Termination Closure
Write-downs Benefits Costs Total
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Fiscal 1999 restructuring costs
and asset write-downs $ 4,281,000 $ 1,010,000 $ 699,000 $ 5,990,000
Cash payments during fiscal 2000 - (682,000) (374,000) (1,056,000)
Non-cash activity (4,294,000) (151,000) (300,000) (4,745,000)
Additions to asset write-downs 448,000 - - 448,000
--------- --------- -------- ---------
Balance June 30, 2000 $ 435,000 $ 177,000 $ 25,000 $ 637,000
========= ========= ======== =========
</TABLE>
NOTE 3 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES: The composition of
long-term debt and obligations under capital leases is as follows:
<TABLE>
<CAPTION>
June 30, June 25,
2000 1999
----------- -----------
<S> <C> <C>
Term loan, bearing interest at a rate described below (10% and 8.25%
at June 30, 2000 and June 25, 1999, respectively) $ 1,469,000 $ 1,731,000
Unsecured subordinated note payable due July 19, 2001, bearing interest at 10%,
convertible into common stock - $ 750,000
Capitalized leases payable through 2004, bearing interest ranging from
11.0% to 12.0%, secured by assets with a book value of approximately $87,000 $ 41,000 $ 521,000
Installment notes payable through 2004, bearing interst ranging from 8.0% to 9.5%,
secured by assets with a net book value of approximately $234,000 $ 57,000 $ 75,000
----------- -----------
1,567,000 $ 3,077,000
Current Portion (300,000) (674,000)
----------- -----------
1,267,000 $ 2,403,000
=========== ===========
</TABLE>
The Company has a credit facility in an aggregate amount of $7.5 million
("Credit Facility"), consisting of a $6.0 million revolving credit facility and
a $1.5 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. As of June 30, 2000, $1.5 million was outstanding
under the term loan and no balance was outstanding on the revolving credit
facility.
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. The Credit
Facility is
28
<PAGE>
secured by a lien and security interest against substantially all of the assets
and properties of the Company and its subsidiaries, regardless of whether
comprising a part of the borrowing base, and a pledge of all (or in one case
65%) of each subsidiaries' capital stock.
The loan agreements, as amended, 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 at
June 30, 2000 (with such minimum amount to be increased each fiscal quarter
thereafter, 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 $5.8 million for any fiscal year; 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 is in compliance with the
covenants and terms of this credit facility.
Future payments for long term debt and obligations under capital leases are as
follows:
Fiscal Year Amount
----------- -------------
2001 $ 300,000
2002 307,000
2003 950,000
2004 10,000
-------------
Total Payments 1,567,000
Less: current portion (300,000)
-------------
$ 1,267,000
=============
In the fourth quarter of fiscal 2000, the holder of the Company's $750,000
unsecured subordinated note converted that note into 428,571 shares of Common
Stock at a reduced conversion price. This transaction resulted in charges of
approximately $332,000 to other income (expense).
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.
29
<PAGE>
The economic activity limitation on the amount of allowable credits under
Section 936 is based upon qualified wages, fringe benefits, depreciation
deductions and taxes in Puerto Rico. Based on fiscal 2000 levels of qualified
wages, fringe benefits, depreciation and taxes in Puerto Rico, the Company's
economic activity based credit limitation is approximately $2.4 million. This
amount will decrease in the future as a result of the Company's operations
re-alignment and reduced expenditures for wages, fringe benefits, depreciation
and taxes in Puerto Rico.
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 $4.5 million of taxable income. The Company's Section
936 credit for each year during the grandfather period would continue to be
subject to the economic activity limitation (as discussed above). Based on the
Company's current level of possession income and business plans, the Company
believes that it will be eligible to claim a Section 936 credit under the
grandfather rule discussed above.
As long as the Company's election under Section 936 is in effect, the Company
may not file a consolidated tax return with any of its subsidiaries for United
States income tax purposes, and the filing of consolidated returns is not
permitted under Puerto Rico income tax laws. Consequently, should the Company
itself sustain losses, those losses could not be used to offset the federal
taxable income of its subsidiaries; and, conversely, should the Company's
subsidiaries sustain losses, those losses could not be used to offset the
federal taxable income of the Company.
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.
At June 30, 2000, for U.S. federal income tax purposes, the Company had net
operating loss carryforwards aggregating approximately $19.7 million which
expire periodically through 2020, and along with its subsidiaries had
consolidated net operating loss carryforwards aggregating approximately $28.7
million which expire periodically through 2020 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 that 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), with respect to net operating losses which arose
prior to the private placement, is approximately $334,000 per year for the
possessions corporation and approximately $380,000 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
30
<PAGE>
exceeds the Company's Section 936 credit. Included in the above net operating
loss carryforwards are approximately $13.8 million and $16.9 million,
respectively of net operating losses that were generated prior to the ownership
change that are subject to the Section 382 limitation. Of these amounts it is
unlikely that $11.3 million and $12.9 million, respectively will be utilized
prior to expiration due to the Section 382 limitation discussed above. 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 30,
2000, the Company and the Company's United States subsidiaries have
approximately $5.9 million and $5.8 million, respectively, of net operating
losses that were generated subsequent to the ownership change and remain
available for use through 2020. In addition, the Company and the Company's
United States subsidiaries have available approximately $506,000 and $657,000,
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 $7.3 million 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 1995 Stock Option Plan (the "1995 Plan") and
1998 Stock Option Plan (the "1998 Plan") permit each of the Board of Directors
and the Compensation Committee of the Board of Directors to grant, until
September 2005 and October 2008, respectively, options to employees (including
officers and directors who are employees) and consultants covering 1,208,600
(after giving effect to exercises through June 30, 2000) and 1,500,000 shares,
respectively, 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 Board. At June 30, 2000, options to purchase
1,208,600 and 1,323,941 shares were outstanding under the 1995 Plan and 1998
Plan, respectively, and 60,400 options are outstanding under the Company's 1986
Stock Option Plan, although no further options may be granted under the
Company's 1986 Stock Option Plan.
The 1994 Non-Employee Director Stock Option Plan covers an aggregate of 200,000
shares of Common Stock (with 165,000 options outstanding as of June 30, 2000)
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 is 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 30, 2000, June
25, 1999 and June 26, 1998 follows:
31
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------------------
June 30, 2000 June 25, 1999 June 26, 1998
-------------------------- ------------------------- -------------------------
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 year 2,474,501 $2.18 2,306,376 $4.89 1,661,207 $4.98
Granted 534,000 1.60 1,115,141 2.27 855,500 4.61
Exercised (34,200) 1.56 (21,075) 5.23 (168,828) 4.31
Canceled or expired (216,360) 2.10 (925,941) 5.12 (41,503) 4.87
------------ ----------- ------------ ---------- ------------ -----------
Outstanding at end of year 2,757,941 $2.08 2,474,501 $2.18 2,306,376 $4.89
============ =========== ============ ========== ============ ===========
Options exercisable at end of period 773,369 491,110 949,356
Shares available for future grant
at end of period 196,059 555,859 103,500
Exercise price per share of options
exercised during period $1.56 $3.13-5.75 $2.50-6.75
Exercise price per share of options
outstanding at end of period $1.03-8.25 $1.56-8.25 $2.50-9.38
</TABLE>
The following is additional information relating to options outstanding as of
June 30, 2000:
<TABLE>
<CAPTION>
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>
$1.03 - $1.50 137,500 $ 1.30 9.5 58,750 $ 1.22
1.51 - 2.00 1,548,100 1.60 8.7 247,410 1.58
2.01 - 2.50 896,941 2.31 8.5 299,309 2.31
2.51 - 8.25 175,400 5.76 5.5 167,900 5.82
------------- ------------ --------------- ------------ -------------
2,757,941 $ 2.08 8.5 773,369 $ 2.76
============= ============ =============== ============ =============
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 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.
32
<PAGE>
Fiscal Year Ended June
------------------------------------
30, 2000 25, 1999 26, 1998
-------- -------- --------
Net loss applicable to common
stockholders:
As reported ($1,018,000) ($6,402,000) ($5,142,000)
Pro Forma ($2,105,000) ($7,430,000) ($5,817,000)
Net loss per share:
As reported ($0.11) ($0.79) ($0.68)
Pro Forma ($0.23) ($0.92) ($0.77)
The weighted average fair value of options granted were determined based on the
Black-Scholes model, utilizing the following assumptions:
<TABLE>
<CAPTION>
June 30, June 25, June 26,
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Expected term 5 Years 6 Years 7 Years
Interest rate 6.0% 6.1% 5.6%
Volatility 62.3% 54.2% 35.2%
Dividends 0% 0% 0%
Weighted average fair value of options granted $0.93 $1.32 $2.24
</TABLE>
OTHER OPTIONS AND WARRANTS OUTSTANDING: As of June 30, 2000, the Company had
outstanding an option exercisable into 100,000 shares of Common Stock at $2.50
per share that expires in July 2003 and warrants (in addition to the placed
warrants described in Note 6) exercisable into 10,000 shares of Common Stock at
$6.15 per share that expire in July 2001.
In June 2000, the Company completed a private placement of 1,800,000 units at
$1.75 per unit, each unit consisting of one share of Common Stock and one
warrant to purchase one share of Common Stock. Each warrant entitles its holder
to purchase, between December 9, 2000 and December 8, 2004, one share of Common
Stock at an exercise price of $2.79. In connection with this private placement,
the Company issued to certain employees of the placement agent 414,000 UPOs.
Each UPO can be exercised at an exercise price of $2.69 per UPO, between
December 9, 2000 and December 8, 2004. Each UPO consists of one share of Common
Stock and one Warrant to purchase one share of Common Stock at $2.79 Both the
warrants and UPOs are subject to possible adjustment of the number of shares
issuable upon their exercise, and their exercise prices, if certain events
occur.
See Note 6 for information concerning warrants to purchase 200,000 shares of
Common Stock at an exercise price of $7.03 per share until January 25, 2001
issued in connection with a private placement in January 1998.
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.
33
<PAGE>
SERIES C CONVERTIBLE PREFERRED STOCK AND WARRANTS EXPIRING JANUARY 2001: In
January 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 its Common Stock at an exercise price
of $7.03 per share, which expire on January 25, 2001 ("1998 Warrants") for an
aggregate purchase price of $5.0 million. After giving effect to commission and
other issuance costs aggregating approximately $450,000, net proceeds were
approximately $4.6 million. The Preferred Shares were issued with a beneficial
conversion feature which has been valued at $250,000 and recognized as
additional paid in capital. The amortization of both the issuance costs of
$450,000 and the beneficial conversion feature of $250,000 over the period to
the earliest conversion date (eight months) has been recognized as a non-cash
preferred stock embedded dividend, increased the net loss applicable to common
stockholders in fiscal 1998 and 1999 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 $5.58 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 1998 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 2000, 1,224 Preferred Shares were converted into 584,815 shares of Common
Stock and, during fiscal 1999, 2,150 Preferred Shares were converted into
1,187,659 shares of Common Stock.
SERIES D JUNIOR PARTICIPATING PREFERRED STOCK: In May 1998, the Company adopted
a Stockholder Rights Plan providing for the distribution to the Company's
stockholders of one Right ("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, 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
34
<PAGE>
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.
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:
Year Ended
------------------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Bell Atlantic Corporation (1) 25% 31% 24%
Tyco Electronics Corporation (2) 19% 15% 9
Corning Cable Systems LLC (3) 12% 9% 14%
Telco Sales, Inc. 12% 2% 0%
GTE Communication Systems Corporation (1) 0% 5% 12%
(1) On June 30, 2000, a wholly-owned subsidiary of Bell Atlantic
Corporation was merged with and into GTE Corporation, as a result of
which GTE Corporation became a wholly-owned subsidiary of Bell
Atlantic. The combined company is doing business as Verizon
Communications. GTE Communications Systems Corporation is a subsidiary
of GTE Corporation.
(2) Tyco Electronics Corporation (a successor to Raychem Corporation) is
an original equipment manufacturer that purchases certain overvoltage
protection products from the Company for inclusion within their
products.
(3) Corning Cable Systems LLC (formerly Siecor Corporation) is an original
equipment manufacturer that supplies network interface devices to
telephone companies and is required by certain telephone companies to
purchase TII's overvoltage surge protectors for inclusion within their
network interface devices.
EXPORT SALES: For each of the three years ended June 30, 2000 export sales were
less than 10% of consolidated net sales.
GEOGRAPHICAL SEGMENTS: Sales of overvoltage surge protection products to United
States customers constitute the majority of the Company's consolidated sales for
each of the three years ended June 30, 2000. As part of the operations
re-alignment (see Note 2), the Company closed its manufacturing facility in the
Dominican Republic, the only area considered by the Company's management as
foreign, and, as a result, there are no operating facilities nor producing
assets outside the United States and Puerto Rico. Consequently, the Company's
operations located in Puerto Rico and Copiague, New York are managed as one
geographic segment.
35
<PAGE>
NOTE 8 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS: The Company
leases real property and equipment under various leases with terms expiring
through April 2006. The leases require minimum annual rentals, exclusive of real
property taxes, of approximately $310,000, $83,000, $83,000, $83,000 and
$153,000 in fiscal years 2001, 2002, 2003, 2004 and 2005 and thereafter,
respectively. Substantially all of the real property leases contain escalation
clauses related to increases in property taxes.
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. This
lease was amended in June 2000, removing certain items from the lease agreement
and reducing the annual rent by the corresponding annual rent attributed to the
removed items. The present annual rental amount is $139,476, the lease expires
on July 17, 2001 and at June 30, 2000 no accrued rent was due under this
agreement. The equipment under lease from PRC was purchased by PRC at various
times since 1982. 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, that the original cost of assets under lease
to the Company at June 30, 2000 was approximately $2.0 million and, although
fully depreciated, those assets had an appraised fair market value of $1.6
million as of November 12, 1998. All equipment under lease has been of good
quality and most, if not all, equipment is expected to remain usable by the
Company through the end of the lease term. 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 to increase the rentals paid
by the Company.
Rental expense, including property taxes, for fiscal 2000, 1999 and 1998 was
approximately $681,000, $781,000 and $634,000 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 30, June 25,
2000 1999
--------------- ---------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
Accounts receivable
<S> <C> <C>
Trade accounts receivable $7,329,000 $5,201,000
Other receivables 61,000 504,000
Less: allowance for doubtful accounts (144,000) (116,000)
--------------- ---------------
$7,246,000 $5,589,000
============= ==============
Inventories:
Raw materials and subassemblies $8,342,000 $9,346,000
Work in progress $4,387,000 $3,191,000
Finished Goods $3,059,000 $5,081,000
--------------- ---------------
15,788,000 17,618,000
Less: allowance for inventory (2,963,000) (4,467,000)
-------------- ---------------
$12,825,000 $13,151,000
============== ===============
Property, plant and equipment:
Machinery and equipment $19,392,000 $19,542,000
Tools, dies and molds 9,655,000 9,998,000
Leasehold improvements 4,791,000 7,188,000
Office fixtures, equipment and other 2,190,000 2,685,000
-------------- ---------------
36,028,000 39,413,000
Less: accumulated depreciation (24,805,000) (27,383,000)
-------------- ---------------
$11,223,000 $ 12,030,000
============== ===============
Accrued liabilities:
Payroll, incentive and vacation $584,000 $906,000
Accrued payroll taxes 34,000 330,000
Legal and professional fees 299,000 685,000
Rent 0 50,000
Other 558,000 102,000
-------------- ---------------
$ 1,475,000 $ 2,073,000
============== ===============
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
June 30, June 25, June 26,
Supplemental Consolidated Statement of Cash Flows Information 2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Capital leases entered into $ - $ - $ 729
=========== ============ ============
Embedded dividend on Series C Preferred Stock $ - $ 262 $ 438
=========== ============ ============
Valuation adjustment to record marketable securities
available for sale at fair value $ - $ - $ (7)
=========== ============ ============
Cash paid for income taxes $ - $ - $ 112
=========== ============ ============
Cash paid for interest $ 215 $ 404 $ 212
=========== ============ ============
</TABLE>
37
<PAGE>
NOTE 11 - DISPOSITIONS: In March 1999, the Company sold substantially all of the
assets of its fiber optic products subsidiary, TII-Ditel, Inc. 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 30,
2000 and June 25, 1999:
<TABLE>
<CAPTION>
Net (Loss)
Income Diluted
Operating Applicable Net (Loss)
Gross (Loss) to Common Income
Quarter Ended Net Sales Profit Income Shareholders Per Share
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 FISCAL YEAR
September 24, 1999 $12,973,000 $2,073,000 $ (637,000) $(587,000) $ (0.07)
December 31, 1999 13,189,000 2,269,000 (293,000) (278,000) (0.03)
March 31, 2000 11,853,000 2,533,000 54,000 32,000 -
June 30, 2000 11,620,000 2,594,000 133,000 (185,000) (0.02)
1999 FISCAL YEAR
Sepbember 25, 1998 $14,646,000 $2,501,000 $ (576,000) $(938,000) $ (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(a) 13,449,000 2,267,000 (6,387,000) (6,420,000) (0.75)
</TABLE>
(a) Includes a charge of $6.0 million for costs to close facility. See Note
2 to Notes to Consolidated Financial Statements.
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 2000 Annual
Meeting of Stockholders.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a)(1) Report of Independent Public Accountants................................... 20
Consolidated Balance Sheets at June 30, 2000 and June 25, 1999............. 21
Consolidated Statements of Operations for each of the three years in the
period ended June 30, 2000............................................... 22
Consolidated Statements of Stockholders' Investment for each of the
three years in the period ended June 30, 2000............................ 23
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 2000........................................... 24
Notes to Consolidated Financial Statements................................. 25
(a)(2) Report of Independent Public Accountants................................... S-1
Schedule II - Valuation and Qualifying Accounts............................ S-2
</TABLE>
(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, 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 & Savings Bank (formerly 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 GMAC Commercial Credit LLC (successor of 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).
39
<PAGE>
4(b)(1)(B) Consent and Amendment dated as of July 22, 1999 between the Company,
TII Corporation and the Lender.
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).
40
<PAGE>
10(a)(1)+ 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)(2)+ 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)(3)+ 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(a)(4)+ 1998 Stock Option Plan. Incorporated by reference to Exhibit A to
the Company's Proxy Statement dated November 6, 1998 (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 (File No. 333-38467).
10(b)(6)+ Amended and Restated Employment Agreement dated as of March 9, 1998
between the Company and George S. Katsarakes. Incorporated by
reference to Exhibit 10(b)(6) to the company's Annual Report on Form
10K for the fiscal year ended June 26, 1998 (File No. 1-8048)
10(b)(7)+* Employment Agreement dated as of September 5, 2000 between the
Company and Kenneth A. Paladino.
10(b)(8)+* Employment Agreement dated as of June 30, 2000 between the Company
and Thomas J. Guzek.
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(c)(1)(E)*Fourth Amendment dated June 27, 2000 to Equipment Lease dated July
18, 1991 between the Company and PRC.
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).
41
<PAGE>
10(d)(2) Consolidated Contract of Lease Renewal and Construction dated
February 1, 1994 between TII Dominicana, Inc., a subsidiary of the
Company, and The Industrial Development Corporation of the Dominican
Republic. Incorporated by reference to Exhibit 10(g)(2) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1995 (File No. 1-8048).
10(e)(1) Form of Warrant issued to the investors in the Company's January 26,
1998 private placement. Incorporated by reference to Exhibit 99.1 to
the Company's Report on Form 8-K dated (date of earliest event
reported) January 26, 1998. (File No. 1-8048).
10(e)(2) Securities Purchase Agreement dated as of January 26, 1998 by and
among the Company and the investors in the Company's January 26,
1998 private placement. Incorporated by reference to Exhibit 99.2 to
the Company's Report on Form 8-K/A dated (date of earliest event
reported) January 26, 1998. (File No. 1-8048).
10(e)(3) Registration Rights Agreement dated as of January 26, 1998 by and
among the Company and the investors in the Company's January 26,
1998 private placement. Incorporated by reference to Exhibit 99.3 to
the Company's Report on Form 8-K/A dated (date of earliest event
reported) January 26, 1998. (File No. 1-8048).
10(f)(1)* Form of Warrant issued to the investors in the Company's June 8,
2000 private placement and underlying the Unit Purchase Option.
10(f)(2)* Subscription Agreement and Investor Information Statement, including
registration rights undertaking of the Company, by and among the
Company and the investors in the Company's June 8, 2000 private
placement.
10(f)(3)* Placement Agent Agreement dated as of May 15, 2000 by and among the
Company and M.H. Meyerson & Co., Inc., as placement agent, with
respect to the Company's June 8, 2000 private placement
10(f)(4)* Form of Unit Purchase Option issued to the placement agent for
Company's June 8, 2000 private placement.
21* Subsidiaries of the Company.
23* Consent of independent public accountants.
27* Financial data schedule (filed electronically only).
-----------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 8, 2000 (date of
earliest event reported) reporting under Item 5 - Other Events. Subsequent
to the end of the fourth fiscal 2000 quarter, the Company filed a Current
Report on Form 8-K dated July 31, 2000 (date of earliest event reported)
reporting under Item 5 - Other Events. No financial statements were filed
with either Report.
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.
42
<PAGE>
TII INDUSTRIES, INC.
-----------------------------------
September 28, 2000 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.
<TABLE>
<CAPTION>
<S> <C>
September 28, 2000 /s/ Alfred J. Roach
---------------------------------------
Alfred J. Roach, Chairman
of the Board and Director
September 28, 2000 /s/ Timothy J. Roach
---------------------------------------
Timothy J. Roach, President,
Chief Executive Officer (principal
executive officer) and Director
September 28, 2000 /s/ Kenneth A. Paladino
---------------------------------------
Kenneth A. Paladino, Vice
President-Finance
(principal financial officer)
September 28, 2000 /s/ C. Bruce Barksdale
--------------------------------------
C. Bruce Barksdale, Director
September 28, 2000 /s/ James R. Grover, Jr.
---------------------------------------
James R. Grover, Jr., Director
September 28, 2000 /s/ Joseph C. Hogan
---------------------------------------
Joseph C. Hogan, Director
September 28, 2000 /s/ George S. Katsarakes
---------------------------------------
George S. Katsarakes, Director
September 28, 2000 /s/ Dorothy Roach
---------------------------------------
Dorothy Roach, Director
September 28, 2000 /s/ R. D. Garwood
---------------------------------------
R. D. Garwood, Director
</TABLE>
43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TII Industries, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated balance sheets of TII Industries, Inc. and
subsidiaries as of June 30, 2000 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 30, 2000, included in this Form 10-K
and have issued our report thereon dated September 13, 2000. 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 30, 2000, June 25, 1999
and June 26, 1998 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. The 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 28, 2000.
Stamp No. 1682784 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
S-1
<PAGE>
SCHEDULE II
TII INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR INVENTORY
<TABLE>
<CAPTION>
Balance at Balance
Beginning of at End of
Fiscal Year Ended Year Additions Dispositions Year
-------------------------------------------- -------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
June 30, 2000 $4,467,000 396,000 (1,900,000) $2,963,000
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
</TABLE>
RESTRUCTURING RESERVE
<TABLE>
<CAPTION>
Balance at Additions / Balance at
Fiscal Year Ended June 25, 1999 (Adjustments) Dispositions June 30, 2000
-------------------------------------------- -------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Property, plant and equipment $4,281,000 $448,000 ($4,294,000) $435,000
Employee severance 1,010,000 (151,000) (682,000) 177,000
Plant closure costs 699,000 (300,000) (374,000) 25,000
-------------------- ------------------- ------------------ -------------------
$5,990,000 ($3,000) ($5,350,000) $637,000
==================== =================== ================== ===================
</TABLE>
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Balance
Beginning of at End of
Fiscal Year Ended Year Additions Dispositions Year
-------------------------------------------- -------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
June 30, 2000 $116,000 44,000 (16,000) $144,000
June 25, 1999 $62,000 54,000 - $116,000
June 26, 1998 $53,000 13,000 (4,000) $62,000
</TABLE>
S-2
