UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
Or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 001-08048
TII NETWORK TECHNOLOGIES, INC. |
(Exact name of registrant as specified in its charter) |
State of incorporation: | Delaware | IRS Employer Identification No: | 66-0328885 |
141 Rodeo Drive, Edgewood, New York 11717 |
(Address and zip code of principal executive office) |
(631) 789-5000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No x
The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of August 1, 2008 was 13,769,792.
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | June 30, | | December 31, | |
| | 2008 | | 2007 | |
| | (unaudited) | | | |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 2,573 | | $ | 3,261 | |
Accounts receivable, net of allowance of $100 and $90 at June 30, 2008 and December 31, 2007, respectively | | | 6,059 | | | 6,994 | |
Inventories, net | | | 12,701 | | | 9,219 | |
Deferred tax assets, net | | | 647 | | | 674 | |
Other current assets | | | 227 | | | 372 | |
Total current assets | | | 22,207 | | | 20,520 | |
| | | | | | | |
Property, plant and equipment, net | | | 9,299 | | | 9,680 | |
Deferred tax assets, net | | | 9,048 | | | 9,358 | |
Other assets, net | | | 67 | | | 93 | |
Total assets | | $ | 40,621 | | $ | 39,651 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 2,772 | | $ | 2,301 | |
Accrued liabilities | | | 1,382 | | | 1,856 | |
Total current liabilities and total liabilities | | | 4,154 | | | 4,157 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized including 30,000 shares of series D junior participating; no shares outstanding | | | — | | | — | |
Common stock, par value $.01 per share; 30,000,000 shares authorized; 13,787,429 shares issued and 13,769,792 shares outstanding as of June 30, 2008, and 13,499,541 shares issued and 13,481,904 shares outstanding as of December 31, 2007 | | | 138 | | | 135 | |
Additional paid-in capital | | | 41,809 | | | 41,358 | |
Accumulated deficit | | | (5,199 | ) | | (5,718 | ) |
| | | 36,748 | | | 35,775 | |
Less: Treasury shares, at cost, 17,637 common shares at
June 30, 2008 and December 31, 2007 | | | (281 | ) | | (281 | ) |
Total stockholders’ equity | | | 36,467 | | | 35,494 | |
| | | | | | | |
Total liabilities and stockholders’ equity | | $ | 40,621 | | $ | 39,651 | |
See notes to unaudited condensed consolidated financial statements
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| | Three months ended
June 30, | | Six months ended
June 30, | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Net sales | | $ | 9,876 | | $ | 13,731 | | $ | 18,727 | | $ | 22,158 | |
Cost of sales | | | 6,349 | | | 10,184 | | | 11,948 | | | 15,819 | |
Gross profit | | | 3,527 | | | 3,547 | | | 6,779 | | | 6,339 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Selling, general and administrative | | | 2,353 | | | 2,647 | | | 4,760 | | | 5,215 | |
Research and development | | | 501 | | | 498 | | | 1,123 | | | 1,011 | |
Total operating expenses | | | 2,854 | | | 3,145 | | | 5,883 | | | 6,226 | |
| | | | | | | | | | | | | |
Operating income | | | 673 | | | 402 | | | 896 | | | 113 | |
| | | | | | | | | | | | | |
Interest expense | | | (4 | ) | | (6 | ) | | (4 | ) | | (6 | ) |
Interest income | | | 9 | | | 38 | | | 26 | | | 85 | |
Other income | | | — | | | 2 | | | — | | | 1 | |
| | | | | | | | | | | | | |
Income before income taxes | | | 678 | | | 436 | | | 918 | | | 193 | |
| | | | | | | | | | | | | |
Income tax provision | | | 309 | | | 267 | | | 399 | | | 181 | |
| | | | | | | | | | | | | |
Net income | | $ | 369 | | $ | 169 | | $ | 519 | | $ | 12 | |
| | | | | | | | | | | | | |
Net income per common share: | | | | | | | | | | | | | |
Basic and Diluted | | $ | 0.03 | | $ | 0.01 | | $ | 0.04 | | $ | 0.00 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | |
Basic | | | 13,546 | | | 12,726 | | | 13,520 | | | 12,669 | |
Diluted | | | 14,063 | | | 14,616 | | | 14,011 | | | 14,606 | |
| | | | | | | | | | | | | |
See notes to unaudited condensed consolidated financial statements
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(Unaudited)
| | Common
Stock
Shares | | Common
Stock
Amount | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Treasury
Stock | | Total
Stockholders’
Equity | | |
Balance December 31, 2007 | | 13,481,904 | | $ | 135 | | $ | 41,358 | | $ | (5,718 | ) | $ | (281 | ) | $ | 35,494 | |
Exercises of stock options | | 78,500 | | | 1 | | | 99 | | | — | | | — | | | 100 | |
Share-based compensation | | — | | | — | | | 340 | | | — | | | — | | | 340 | |
Restricted shares issued | | 209,388 | | | 2 | | | 12 | | | — | | | — | | | 14 | |
Net income for the six months ended June 30, 2008 | | — | | | — | | | — | | | 519 | | | — | | | 519 | |
Balance June 30, 2008 | | 13,769,792 | | $ | 138 | | $ | 41,809 | | $ | (5,199 | ) | $ | (281 | ) | $ | 36,467 | |
See notes to unaudited condensed consolidated financial statements
5
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | Six months ended | |
| | June 30, 2008 | | June 30, 2007 | |
| | | | | | | |
Cash Flows from Operating Activities | | | | | | | |
Net income | | $ | 519 | | $ | 12 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | |
Depreciation and amortization | | | 821 | | | 733 | |
Share-based compensation | | | 354 | | | 522 | |
Deferred income taxes | | | 337 | | | 150 | |
Loss on write-offs and disposals of capital assets | | | 8 | | | 22 | |
Excess tax benefits from stock option exercises | | | — | | | (5 | ) |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | | 935 | | | (6,008 | ) |
Inventories | | | (3,482 | ) | | 1,262 | |
Other assets | | | 153 | | | (168 | ) |
Accounts payable and accrued liabilities | | | (5 | ) | | 1,416 | |
Net cash used in operating activities | | | (360 | ) | | (2,064 | ) |
| | | | | | | |
Cash Flows from Investing Activities | | | | | | | |
Capital expenditures | | | (428 | ) | | (2,938 | ) |
Net cash used in investing activities | | | (428 | ) | | (2,938 | ) |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Proceeds from exercise of stock options | | | 100 | | | 474 | |
Excess tax benefits from stock option exercises | | | — | | | 5 | |
Net cash provided by financing activities | | | 100 | | | 479 | |
| | | | | | | |
Net decrease in cash and cash equivalents | | | (688 | ) | | (4,523 | ) |
| | | | | | | |
Cash and cash equivalents, at beginning of period | | | 3,261 | | | 5,362 | |
| | | | | | | |
Cash and cash equivalents, at end of period | | $ | 2,573 | | $ | 839 | |
| | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | |
Capital additions included in accounts payable | | $ | 2 | | $ | — | |
| | | | | | | |
Cash paid during the period for interest | | $ | 4 | | $ | 6 | |
| | | | | | | |
Cash paid during the period for income taxes | | $ | 122 | | $ | 73 | |
See notes to unaudited condensed consolidated financial statements
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim condensed consolidated financial statements presented herein have been prepared by TII Network Technologies, Inc. and subsidiaries (together “TII,” the “company,” “we,” “us,” or “our”) in accordance with U.S. generally accepted accounting principles for interim financial statements and in accordance with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all information and notes required by U.S. generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are considered necessary for a fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Results of operations for interim periods presented are not necessarily indicative of results of operations that might be expected for future interim periods or for the full fiscal year ending December 31, 2008.
Reclassifications
Certain reclassifications have been made to the prior period financial statements presented herein to conform to the 2008 presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us 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. Our more significant estimates include the valuation of accounts receivable, inventory, and deferred income taxes and the fair value of share-based payments. Actual results could differ from such estimates.
Recently Adopted Accounting Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement on Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. In February 2008, the FASB issued FASB Staff Positions (FSP) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to the fiscal year beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. It does not defer recognition and disclosure requirements for financial assets and financial liabilities, or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. Effective January 1, 2008, we adopted SFAS 157, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not have any impact on our condensed consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity is to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected is to be recognized in earnings as incurred and not deferred. SFAS 159 became effective for us as of January 1, 2008. We have not elected the fair value option to any of our arrangements. Accordingly, the adoption of SFAS 159 did not have any impact on our condensed consolidated financial statements.
In December 2007, the Securities Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”) No. 110, which amends SAB No. 107, to allow for the continued use, under certain circumstances, of the “simplified” method in developing an estimate of the expected term of so-called “plain vanilla” stock options accounted for under SFAS 123R beyond December 31, 2007. Companies can use the simplified method if they conclude that their stock option exercise experience does not provide a reasonable basis upon which to estimate expected term. We have concluded that our stock option exercise experience provides a reasonable basis upon which to estimate expected term, therefore we have refined our method to calculate estimates of the expected term of stock options.
Recently Issued Accounting Standards Not Yet Adopted
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will assess the impact of SFAS 141(R) if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which will require noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for periods beginning on or after December 15, 2008. We will assess the impact of SFAS 160 if and when any noncontrolling interests should arise.
Note 2 – Comprehensive income
We do not have any items of comprehensive income. Accordingly, for all periods presented, comprehensive income equaled net income.
Note 3 – Puerto Rico Facility Closing
In June 2007, our Board of Directors approved a plan to consolidate the operations of our Puerto Rico leased facility into our new headquarters in Edgewood, New York, resulting in the closure of the Puerto Rico facility. Cumulative costs incurred as of December 31, 2007 were $1,076 related to this plan. During the six months ended June 30, 2008 and 2007, we incurred $70 and $546, respectively, of costs related to this plan for a cumulative cost of $1,146 and $546 at June 30, 2008 and 2007, respectively. During the three months ended June 30, 2008 and 2007, we incurred $0 and $546, respectively, of costs related to this plan. All of these costs were included in cost of sales for the respective period incurred.
Upon adoption of the provisions of FASB Interpretation No. 47, “Accounting for Asset Retirement Obligations,” in 2005, we recorded an asset retirement obligation of $109 for the estimated cost to restore the leased facility in Puerto Rico to its original condition at the end of the lease. Restoration was completed April 30, 2008. The following presents activity related to this obligation for the six months ended June 30, 2008:
Balance, December 31, 2007 | | $ | 39 | |
Additional charges | | | 70 | |
Liabilities settled | | | (109 | ) |
Balance, June 30, 2008 | | $ | — | |
Note 4 – Share–Based Payment Compensation
Share-based payment compensation is attributable to the granting of stock options and shares of restricted stock, and vesting of these options and shares of restricted stock over the remaining requisite service period. Compensation expense attributable to share-based compensation in the three and six months ended June 30, 2008 was $182 and $354, respectively. Compensation expense attributable to share-based compensation in the three and six months ended June 30, 2007 was $260 and $522, respectively.
On April 3, 2008, our Board of Directors adopted our 2008 Equity Compensation Plan (the “2008 Plan”), subject to stockholder approval, which was obtained May 22, 2008. The 2008 Plan replaces our 1998 Stock Option Plan which was scheduled to expire on October 7, 2008 as to our ability to grant options thereunder. The 1998 Plan permitted us to grant stock options while the 2008 Plan permits us to grant stock appreciation rights, restricted stock and restricted stock units, as well as stock options, under both plans to our employees, directors and consultants. The 2008 Plan authorizes the grant of awards not to exceed 1,000,000 shares of the Company’s Common Stock in the aggregate and expires on May 21, 2018. The Board of Directors of the Compensation Committee determines, among other things, optionees, type of award, the number of shares to be subject to each share grant or award, exercise prices for options, vesting periods and term of the award, which may not exceed 10 years.
On April 3, 2008, we entered into an Employment Agreement with Kenneth A. Paladino, our President and Chief Executive Officer (the “Agreement”). Pursuant to this Agreement, Mr. Paladino was granted a restricted stock award (the “Award”) covering 175,000 shares of the Company’s Common Stock under the 2008 Plan. The 2008 Plan and the Award to Mr. Paladino were subject to stockholder approval, which was obtained on May 22, 2008. The Award vests on April 2, 2013 if Mr. Paladino remains employed by the Company on that date, subject to earlier vesting on a pro rata basis upon certain events as provided in the Agreement. The total fair value on the date of grant of this Award was $329. We recorded expense of $7 during the three and six months ended June 30, 2008 for this Award.
During the three months ended June 30, 2008, we granted 100,000 options to purchase common stock with a fair value of $159 to two employees, and 154,000 options to purchase common stock with a fair value of $238 to six non-employee directors. In addition, following the Company’s 2008 annual meeting of stockholders of the Company, pursuant to a stockholder approved arrangement with respect to the payment of annual non-employee director fees, three non-employee directors elected to receive 6,250 shares of our common stock having a then fair market value of $12, and a non-employee director and the non-executive Chairman of the Board, elected to receive 15,638 shares of our common stock having a then fair market value of $29, in lieu of their annual non-employee director fees. We recorded total expense of $46 during the three and six months ended June 30, 2008 for these awards.
Note 5 - Net income per common share
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders (which equals our net income) by the weighted average number of common shares outstanding, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. During the three and six months ended June 30, 2008, outstanding options to purchase an aggregate of approximately 2,013,000 and 2,205,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. During both the three and six months ended June 30, 2007, outstanding options to purchase an aggregate of approximately 1,214,000 shares of common stock were excluded from the computation of diluted earnings per share for the applicable periods because their inclusion would have been anti-dilutive.
The following table sets forth the amounts used in the computation of basic and diluted net earnings per share:
| | Three months ended June 30, | | | Six months ended June 30, | |
| | 2008 | | 2007 | | | 2008 | | 2007 | |
Numerator for diluted EPS calculation: | | | | | | | | | | | | | | |
Net income | | $ | 369 | | $ | 169 | | | $ | 519 | | $ | 12 | |
| | | | | | | | | | | | | | |
Denominator for diluted EPS calculation (shares in thousands): | | | | | | | | | | | | | | |
Weighted average shares outstanding - Basic | | | 13,546 | | | 12,726 | | | | 13,520 | | | 12,669 | |
Effect of dilutive stock options | | | 308 | | | 1,890 | | | | 282 | | | 1,937 | |
Effect of restricted stock awards | | | 209 | | | — | | | | 209 | | | — | |
| | | 14,063 | | | 14,616 | | | | 14,011 | | | 14,606 | |
| | | | | | | | | | | | | | |
Basic EPS | | $ | 0.03 | | $ | 0.01 | | | $ | 0.04 | | $ | 0.00 | |
| | | | | | | | | | | | | | |
Diluted EPS | | $ | 0.03 | | $ | 0.01 | | | $ | 0.04 | | $ | 0.00 | |
Note 6 – Inventories
The following table sets forth the cost basis of each major class of inventory as of June 30, 2008 and December 31, 2007:
| June 30,
2008 | | December 31,
2007 | |
Raw material and subassemblies | $ | 1,366 | | $ | 1,048 | |
Work in progress | | 144 | | | 166 | |
Finished goods | | 11,191 | | | 8,005 | |
| $ | 12,701 | | $ | 9,219 | |
Inventories are net of a reserve of $809 and $503 at June 30, 2008 and December 31, 2007, respectively.
Note 7 – Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the related asset. The following table sets forth the amounts of each major class of property, plant and equipment as of June 30, 2008 and December 31, 2007:
| | June 30,
2008 | | December 31,
2007 | |
Land | | $ | 1,244 | | $ | 1,244 | |
Building and building improvements | | | 4,298 | | | 4,288 | |
Construction in progress | | | 63 | | | 107 | |
Machinery and equipment | | | 7,672 | | | 7,343 | |
Computer hardware and software | | | 831 | | | 753 | |
Office furniture, fixtures, equipment and other | | | 764 | | | 721 | |
| | $ | 14,872 | | $ | 14,456 | |
Less: accumulated depreciation and amortization | | | (5,573 | ) | | (4,776 | ) |
| | $ | 9,299 | | $ | 9,680 | |
Depreciation and amortization of plant and equipment was $399 and $803 for the three and six months ended June 30, 2008, respectively, and $432 and $736 for the three and six months ended June 30, 2007, respectively.
We recorded a loss on disposal of capital assets of approximately $8 for the six months ended June 30, 2008 related to write-offs of obsolete equipment. For the three and six months ended June 30, 2007, we recorded a loss of $22 for assets disposed in connection with the move to our new facility in Edgewood, New York. In addition, during the three and six months ended June 30, 2007, we recorded accelerated depreciation of $85 related to assets in use at our Puerto Rico facility that were disposed of with the close of this facility.
Note 8 – Credit Facility
We have a credit facility that enables us to have up to $5,000 in the aggregate at any time outstanding, limited to a borrowing base equal to the aggregate of 80% of eligible accounts receivable (as defined in the agreement) plus 30% of eligible inventory (as defined in the agreement), subject to certain reserves. As of June 30, 2008, our borrowing base was calculated to be approximately $6,300. Outstanding borrowings under the credit facility mature on December 31, 2008. As of June 30, 2008, the Company had no borrowings outstanding under the credit facility.
Outstanding loans under the credit facility bear interest at our option at either (a) the greater of (i) the bank’s prime rate less 1.25% per annum or (ii) 1.00% per annum, or (b) under a formula based on LIBOR. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the credit facility.
Our obligations under the credit facility are collateralized by all of our accounts receivable and inventory, and are guaranteed by one of our subsidiaries.
The credit facility contains various covenants, including financial covenants and covenants that prohibit or limit a variety of actions without the bank’s consent. These include, among other things, covenants that prohibit the payment of dividends and limit our ability to (a) repurchase stock, (b) incur or guaranteeindebtedness, (c) create liens, (d) purchase all or a substantial part of the assets or stock of another entity, other than certain permitted acquisitions, (e) create or acquire any subsidiary, or (f) substantially change our business. The credit facility requires us to maintain, as of the end of each fiscal quarter, (a) tangible net worth and subordinated debt of at least $22,000, (b) a ratio of net income before interest expense and taxes for the 12-month period ending with such fiscal quarter to interest expense for the same period of at least 2.25 to 1.00, and (c) a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued expenses or losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization for the 12-month period ending with such fiscal quarter of not greater than 2.5 to 1.0. As of June 30, 2008, we were in compliance with all financial covenants in the credit facility.
11
Note 9 – Income Taxes
For the three and six months ended June 30, 2008 and 2007, our income tax provision consisted of amounts necessary to align our year-to-date tax provision with the effective tax rate we expect for the full year. That rate differs from the U.S. statutory rate primarily as a result of the non-deductibility of certain share-based compensation expense for income tax purposes that has been expensed for financial statement purposes and state taxes.
We do not expect that our unrecognized tax benefits will significantly change within the next twelve months. We file a consolidated U.S. income tax return and tax returns in certain state and local jurisdictions. There have not been any past tax examinations nor are there any current tax examinations in progress. Accordingly, as of June 30, 2008, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes.
Note 10- Significant Customers
The following customers accounted for 10% or more of our consolidated net sales during at least one of the periods presented below:
| Three months ended June 30, | | Six months ended June 30, |
| 2008 | | 2007 | | 2008 | | 2007 |
Customer A | 27% | | 32% | | 31% | | 34% |
Customer B | 14% | | * | | 16% | | 12% |
Customer C | 12% | | 34% | | * | | 21% |
Customer D | 11% | | * | | * | | * |
| | | | | | | |
___________________
* Amounts are less than 10%
As of June 30, 2008, five customers accounted for approximately 22%, 19%, 13%, 11% and 11% of accounts receivable, and as of December 31, 2007, two customers accounted for approximately 26% and 22% of accounts receivable.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)
The following discussion and analysis should be read in conjunction with the foregoing unaudited Condensed Consolidated Financial Statements and related notes thereto appearing elsewhere in this Report.
Overview
Business
We design, manufacture and market network interface devices (“NIDs”), intelligent NIDs (iNIDs), gateways and home networking products, overvoltage surge protection and connectivity solutions for the communications industry.
Results of Operations
The following table sets forth certain statement of operations information as a percentage of net sales for the periods indicated (except “Income tax provision,” which is stated as a percentage of “Income before income taxes”):
| | Three months ended June 30, | | | | | | |
(dollars in thousands) | | 2008 | | 2007 | | | | | | |
| | | Amount | | % of
Net sales | | | Amount | | % of
Net sales | | | | Dollar
increase
(decrease) | | Percent
increase
(decrease) | |
Net sales | | $ | 9,876 | | 100.0 | % | $ | 13,731 | | 100.0 | % | | $ | (3,855 | ) | -28.1 | % |
Cost of sales | | | 6,349 | | 64.3 | % | | 10,184 | | 74.2 | % | | | (3,835 | ) | -37.7 | % |
Gross profit | | | 3,527 | | 35.7 | % | | 3,547 | | 25.8 | % | | | (20 | ) | -0.6 | % |
| | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 2,353 | | 23.8 | % | | 2,647 | | 19.3 | % | | | (294 | ) | -11.1 | % |
Research and development | | | 501 | | 5.1 | % | | 498 | | 3.6 | % | | | 3 | | 0.6 | % |
Total operating expenses | | | 2,854 | | 28.9 | % | | 3,145 | | 22.9 | % | | | (291 | ) | -9.3 | % |
| | | | | | | | | | | | | | | | | |
Operating income | | | 673 | | 6.8 | % | | 402 | | 2.9 | % | | | 271 | | 67.4 | % |
| | | | | | | | | | | | | | | | | |
Interest expense | | | (4 | ) | 0.0 | % | | (6 | ) | 0.0 | % | | | 2 | | -33.3 | % |
Interest income | | | 9 | | 0.1 | % | | 38 | | 0.3 | % | | | (29 | ) | -76.3 | % |
Other income | | | — | | 0.0 | % | | 2 | | 0.0 | % | | | (2 | ) | -100.0 | % |
| | | | | | | | | | | | | | | | | |
Income before income taxes | | | 678 | | 6.9 | % | | 436 | | 3.2 | % | | | 242 | | 55.5 | % |
Income tax provision | | | 309 | | 45.6 | % | | 267 | | 61.2 | % | | | 42 | | 15.7 | % |
Net income | | $ | 369 | | 3.7 | % | $ | 169 | | 1.2 | % | | $ | 200 | | 118.3 | % |
| | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | | | |
(dollars in thousands) | 2008 | | 2007 | | | | | | |
| Amount | | % of
Net sales | | Amount | | % of
Net sales | | Dollar
increase
(decrease) | | Percent
increase
(decrease |
Net sales | | $ | 18,727 | | 100.0 | % | $ | 22,158 | | 100.0 | % | $ | (3,431 | ) | -15.5 | % |
Cost of sales | | | 11,948 | | 63.8 | % | | 15,819 | | 71.4 | % | | (3,871 | ) | -24.5 | % |
Gross profit | | | 6,779 | | 36.2 | % | | 6,339 | | 28.6 | % | | 440 | | 6.9 | % |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 4,760 | | 25.4 | % | | 5,215 | | 23.5 | % | | (455 | ) | -8.7 | % |
Research and development | | | 1,123 | | 6.0 | % | | 1,011 | | 4.6 | % | | 112 | | 11.1 | % |
Total operating expenses | | | 5,883 | | 31.4 | % | | 6,226 | | 28.1 | % | | (343 | ) | -5.5 | % |
| | | | | | | | | | | | | | | | |
Operating income | | | 896 | | 4.8 | % | | 113 | | 0.5 | % | | 783 | | 692.9 | % |
| | | | | | | | | | | | | | | | |
Interest expense | | | (4 | ) | 0.0 | % | | (6 | ) | 0.0 | % | | 2 | | -33.3 | % |
Interest income | | | 26 | | 0.1 | % | | 85 | | 0.4 | % | | (59 | ) | -69.4 | % |
Other income | | | — | | 0.0 | % | | 1 | | 0.0 | % | | (1 | ) | -100.0 | % |
| | | | | | | | | | | | | | | | |
Income before income taxes | | | 918 | | 4.9 | % | | 193 | | 0.9 | % | | 725 | | 375.6 | % |
Income tax provision | | | 399 | | 43.5 | % | | 181 | | 93.8 | % | | 218 | | 120.4 | % |
Net income | | $ | 519 | | 2.8 | % | $ | 12 | | 0.1 | % | $ | 507 | | 4225.0 | % |
Net sales for the three months ended June 30, 2008 were $9,900 compared to $13,700 in the comparable prior year period, a decrease of $3,800 or 28.1%. Net sales for the six months ended June 30, 2008 were $18,700 compared to $22,200 in the comparable prior year period, a decrease of $3,500 or 15.5%. The decrease was primarily due to a lower level of sales of the Company’s HomePlug® products in the second quarter of 2008 than in the same period in 2007, when the Company began initial shipments of those products under a contract won in 2007.
Gross profit for each of the three months ended June 30, 2008 and 2007 was $3,500, while gross profit margin improved to 35.7% from 25.8%. Gross profit for the six months ended June 30, 2008 was $6,800 compared to $6,300 in the prior year period, an increase of $440 or 6.9%, while gross profit margin improved to 36.2% from 28.6%. The improvement in gross profit was primarily due to (a) cost savings as a result of the consolidation of our Puerto Rico operations, (b) related severance charges recorded in the prior year periods, there were no such severance charges recorded in the current year periods and (c) a change in product mix.
Selling, general and administrative expenses for the three months ended June 30, 2008 were $2,400 compared to $2,600 in the comparable prior year period, a decrease of $294 or 11.1%. The decrease in the three month 2008 period was primarily attributable to a decrease of $180 in salary and benefits expense resulting from a decrease in headcount, a decrease in share based compensation expense of $80 due to options becoming fully vested and a decrease in moving expenses of $82 as we completed our move into our new Edgewood, New York facility in 2007, offset, in part, by various other immaterial items. Selling, general and administrative expenses for the six months ended June 30, 2008 were $4,800 compared to $5,200 in the comparable prior year period, a decrease of $455 or 8.7%. The decrease in the six month 2008 period is primarily attributable to a decrease of $267 in salary and benefits expense resulting from a decrease in headcount and a decrease in share based compensation expense of $179 due to options becoming fully vested.
Research and development expenses for the three months ended June 30, 2008 were $501 compared to $498 for the comparable prior year period, an increase of $3 or 0.6%. Research and development expenses for the six months ended June 30, 2008 were $1,100 compared to $1,000 in the comparable prior year period, an increase of $112 or 11.1%. Although this expense for the 2008 periods is consistent with the 2007 periods, there was an increase in product development expenses, offset, in part, by decreases in employee-related and consulting expenses.
Interest income for the three months ended June 30, 2008 was $9 compared to $38 in the comparable prior year period, a decrease of $29 or 76.3%. Interest income for the six months ended June 30, 2008 was $26 compared to $85 in the comparable prior year period, a decrease of $59 or 69.4%. The decreases resulted from lower average cash and cash equivalent balances on hand in the 2008 periods compared to the 2007 periods.
During the three months ended June 30, 2008 and 2007, we recorded a provision for income taxes of $309 and $267, respectively. During the six months ended June 30, 2008 and 2007, we recorded a provision for income taxes of $399 and $181, respectively. Our income tax provision for each period consists of amounts necessary to align our year-to-date tax provision with the effective tax rate we expect to achieve for the full year. That rate differs from the U.S. statutory rate primarily as a result of the non-deductibility of certain share-based compensation expense for income tax purposes that has been recognized for financial statement purposes and state taxes.
Impact of Inflation
We do not believe our business is affected by inflation to a greater extent than the general economy. Our products contain a significant amount of plastic that is petroleum based. We import most of our products from contract manufacturers, principally in Malaysia and China, and fuel costs are, therefore, a significant component of transportation costs to obtain delivery of products. Accordingly, increased petroleum prices have negatively impacted the cost of our products and we continue to take steps to mitigate the affect on the profit we realize. Increased labor costs in the countries in which our contract manufacturers produce products for us and a continuing increase in the cost of precious metals could also increase the cost of our products. We monitor the impact of inflation and attempt to adjust prices where market conditions permit, except that we may not increase prices under our general supply agreement with Verizon Services Corp. Inflation has not had a significant effect on our operations during any of the reported periods.
Liquidity and Capital Resources
As of June 30, 2008, we had $18,100 of working capital, which included $2,600 of cash and cash equivalents, and our current ratio was 5.3 to 1. During the six months ended June 30, 2008, our cash flows from operations used $360, primarily to support a $3,500 increase in inventory, offset, in part, by earnings before non-cash expenses of $2,000 and decreases in accounts receivable and other assets of $935 and $153, respectively. The increase in inventory is to fulfill anticipated sales, and we expect inventory levels to decrease over the remainder of the year. During the six months ended June 30, 2007, our cash flows from operations used $2,100, primarily due to a $6,000 increase in accounts receivable (principally from shipments of the Company’s HomePlug® products made late in the second quarter of 2007), offset, in part, by an increase of $1,400 in accounts payable and accrued liabilities, a decrease in inventory of $1,300 and earnings before non-cash expenses of $1,300.
Investing activities in the 2008 six month period used cash of $428 for capital expenditures, primarily for machinery and equipment used in the development of new products, while investing activities in the first six months of 2007 used cash of $2,900 for capital expenditures, primarily for building improvements and furniture and fixtures for our new facility in Edgewood, New York. Financing activities provided $100 of cash in the first six months of 2008 compared to $479 in the first six months of 2007 as a result of the exercise of stock options.
We have a credit facility that enables us to have up to $5,000 in the aggregate at any time outstanding, limited to a borrowing base equal to the aggregate of 80% of eligible accounts receivable (as defined in the agreement) plus 30% of eligible inventory (as defined in the agreement), subject to certain reserves. As of June 30, 2008, our borrowing base was calculated to be approximately $6,300. Outstanding borrowings under the credit facility mature on December 31, 2008. As of June 30, 2008, we had no borrowings outstanding under the credit facility.
Outstanding loans under the credit facility bear interest at our option at either (a) the greater of (i) the bank’s prime rate less 1.25% per annum or (ii) 1.00% per annum, or (b) under a formula based on LIBOR. We also pay a commitment fee equal to 0.25% per annum on the average daily unused portion of the credit facility. Our obligations under the credit facility are collateralized by all of our accounts receivable and inventory. Our obligations under the credit facility are also guaranteed by one of our subsidiaries.
The credit facility contains various covenants, including financial covenants and covenants that prohibit or limit a variety of actions without the bank’s consent. These include, among other things, covenants that prohibit the payment of dividends and limit our ability to (a) repurchase stock, (b) incur or guarantee indebtedness, (c) create liens, (d) purchase all or a substantial part of the assets or stock of another entity, other than certain permitted acquisitions, (e) create or acquire any subsidiary, or (f) substantially change its business. The credit facility requires us to maintain, as of the end of each fiscal quarter, (a) tangible net worth and subordinated debt of at least $22,000, (b) a ratio of net income before interest expense and taxes for the 12-month period ending with such fiscal quarter to interest expense for the same period of at least 2.25 to 1.00, and (c) a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued expenses or losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization for the 12-month period ending with such fiscal quarter of not greater than 2.5 to 1.0. As of June 30, 2008, we were in compliance with all covenants in the credit facility.
We believe that existing cash, together with internally generated funds, the anticipated collection of the receivables generated from sales, and the available line of credit, will be sufficient for our working capital requirements and capital expenditure needs for the foreseeable future.
Seasonality
Our operations are subject to seasonal variations primarily due to the fact that our principal products, NIDs, are typically installed on the side of homes. During the hurricane season, sales may increase depending upon the severity and location of hurricanes and the number of NIDs that are damaged and need replacement. Conversely, during winter months when severe weather hinders or delays the Telco’s installation and maintenance of their outside plant network, sales have been adversely affected until replacements can be installed (at which time sales increase).
Off Balance Sheet Financing
We have no off-balance sheet contractual arrangements, as that term is defined in Item 304 (a) (4) of Regulation S-K.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. We believe that the determination of the carrying value of our inventories and long-lived assets, the valuation allowance of deferred tax assets and valuation of share-based payment compensation are the most critical areas where management’s judgments and estimates most affect our reported results. While we believe our estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on our estimates, assumptions and judgments as of the balance sheet date.
Inventories are required to be stated at net realizable value at the lower of cost or market. In establishing the appropriate inventory write-downs, management assesses the ultimate recoverability of the inventory, considering such factors as technological advancements in products as required by our customers, average selling prices for finished goods inventory, changes within the marketplace, quantities of inventory items on hand, historical usage or sales of each inventory item, forecasted usage or sales of inventory and general economic conditions.
We review long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value.
Accounts receivable is presented on our balance sheets net of allowances for doubtful accounts and sales returns based upon our estimate of known issues and expected trends.
Consistent with the provisions of Statement of Financial Accounting Standard No. 109 (“SFAS No. 109”) and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), we regularly estimate our ability to recover deferred tax assets, and report these assets at the amount that is determined to be “more-likely-than-not” recoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. In the event that evidence becomes available in the future to indicate that the valuation of our deferred tax assets should be adjusted (for example, significant changes in our projections for future taxable income), our estimate of the recoverability of deferred taxes may change, resulting in an associated adjustment to earnings in that period.
In accordance with SFAS No. 123(R), we are required to record the fair value of share-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, we apply the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected term assumptions require a greater level of judgment. We estimate expected stock-price volatility based primarily on historical volatility of the underlying stock using daily price observations over a period equal to the expected term of the option, but also consider whether other factors are present that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected volatility. With regard to our estimate of expected term, as adequate information with respect to historical share option exercise experience is not available, we primarily consider the vesting term and original contractual term of options granted.
Recently Adopted Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. In February 2008, the FASB issued FASB Staff Positions (FSP) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to the fiscal year beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. It does not defer recognition and disclosure requirements for financial assets and financial liabilities, or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. Effective January 1, 2008, we adopted SFAS 157, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not impact our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity is to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected is to be recognized in earnings as incurred and not deferred. SFAS 159 became effective for us as of January 1, 2008. We have not elected the fair value option to any of our arrangements. Accordingly, the adoption of SFAS 159 did not have any impact on our condensed consolidated financial statements.
In December 2007, the Securities Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”) No. 110, which amends SAB No. 107 to allow for the continued use, under certain circumstances, of the “simplified” method in developing an estimate of the expected term of so-called “plain vanilla” stock options accounted for under SFAS 123R beyond December 31, 2007. Companies can use the simplified method if they conclude that their stock option exercise experience does not provide a reasonable basis upon which to estimate expected term. We have concluded that our stock option exercise experience provides a reasonable basis upon which to estimate expected term, therefore we have refined our method to calculate estimates of the expected term of stock options.
Recently Issued Accounting Standards Not Yet Adopted
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will assess the impact of SFAS 141(R) if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which will require noncontrolling interests, previously referred to as minority interests, to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for periods beginning on or after December 15, 2008. We will assess the impact of SFAS 160 if and when any noncontrolling interests should arise.
Forward-Looking Statements
Certain statements in this Report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as “may,” “should,” “seek,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “strategy” and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect our future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements as a result of several factors, including, but not limited to, those factors discussed under the caption “Risk Factors” and elsewhere in this document. We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report. These factors include, but are not limited to:
| • | the ability to market and sell products to new markets beyond our principal copper-based Telco market which has been declining over the last several years, due principally to the impact of alternate technologies; |
| • | exposure to increases in the cost of our products, including increases in the cost of our petroleum-based plastic products and precious metals; |
| • | general economic and business conditions, especially as they pertain to the Telco industry; |
| • | the ability to timely develop products and adapt our existing products to address technological changes, including changes in our principal market; |
| • | competition in our traditional Telco market and new markets we are seeking to penetrate; |
| • | dependence on, and ability to retain, our “as-ordered” general supply agreements with our largest customer and ability to win new contracts; |
| • | potential changes in customers’ spending and purchasing policies and practices; |
| • | dependence on third parties for certain product development; |
| • | dependence for products and product components from Pacific Rim contract manufacturers, including on-time delivery that could be interrupted as a result of third party labor disputes, political factors or shipping disruptions, quality control and exposure to changes in costs and changes in the valuation of the Chinese Yuan; |
| • | weather and similar conditions, particularly the effect of typhoons on our assembly and warehouse facilities in the Pacific Rim; |
| • | the ability to attract and retain technologically qualified personnel; and |
| • | the availability of financing on satisfactory terms. |
We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including changes in interest rates. The interest payable under our credit facility, under which there were no borrowings outstanding at during June 30, 2008, is based on a specified bank’s prime interest rate and, therefore, is affected by changes in market interest rates. Historically, the effects of movements in the market interest rates have been immaterial to our consolidated operating results, as we have not borrowed to any significant degree.
Our products contain a significant amount of plastic that is petroleum based. We import most of our products from contract manufacturers, principally in Malaysia and China. The increased cost of petroleum has negatively impacted the cost of our products, and we continue to take steps to mitigate the affect on the profit we realize.
We require foreign sales to be paid in U.S. currency, and we are billed by our contract manufacturers in U.S. currency. Since one of our Pacific Rim suppliers is based in China, the cost of our products could be affected by changes in the valuation of the Chinese Yuan.
Historically, we have not purchased or entered into interest rate swaps or future, forward, option or other instruments designed to hedge against changes in interest rates, the price of materials we purchase or the value of foreign currencies.
We do not believe that a 10% change in interest rates, petroleum prices, precious metals prices or foreign currency exchange rates would have a significant impact on our financial position or result of operations.
Item 4 | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, our management, with the participation of our President and Principal Executive Officer and our Vice President-Finance and Principal Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, these officers concluded that, as of June 30, 2008, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within us to disclose material information otherwise required to be set forth in our periodic reports.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal controls over financial reporting that occurred during the quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 22, 2008, following the Company’s 2008 annual meeting of stockholders of the Company at which directors were elected, pursuant to a stockholder approved arrangement with respect to the payment of annual non-employee director fees, each of Mark T. Bradshaw, Lawrence M. Fodrowski and James Grover, non-employee directors of the Company, elected to receive 6,250 shares of the Company’s common stock having a then fair market value of $11,750, and Charles H. House, a non-employee director and the non-executive Chairman of the Board, elected to receive 15,638 shares of the Company’s common stock having a then fair market value of $29,400, in lieu of their annual non-employee director fees. The shares are subject to forfeiture in the event such non-employee director resigns or is removed for cause before the 2009 annual meeting of stockholders of the Company. Each of such non-employee directors represented, among other things, that he or she was acquiring these shares for his or her own account, for investment only, and not with a view toward their resale or distribution, and acknowledged that the shares purchased may not be resold unless subsequently registered under the Securities Act of 1933, as amended (the “Securities Act”), or unless an exemption from registration is available. The certificates evidencing the shares contain a legend to that effect. The Company believes that the issuance of the shares was exempt from the registration provisions of the Securities Act by virtue of the exemption afforded under Section 4(2) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
At our 2008 annual meeting of stockholders held on May 22, 2008, our stockholders:
a. Elected the following to serve as Class III directors until our 2011 annual meeting of stockholders and until their respective successors are elected and qualified, by the following votes:
| | For | | Withheld |
Mark T. Bradshaw | | 10,924,208 | | 1,316,475 |
James R. Grover, Jr. | | 10,249,659 | | 1,991,024 |
Charles H. House | | 10,681,900 | | 1,558,783 |
| b. | Approved our Equity Compensation Plan, by the following vote: |
For | | Against | | Abstain | | Non-Broker Votes |
3,538,322 | | 2,320,627 | | 30,979 | | 6,350,755 | |
c. Ratified the selection by our Board of Directors of KPMG LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2008, by the following vote:
For | | Against | | Abstain |
11,625,605 | | 469,294 | | 145,784 |
As reported in our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2008, on June 3, 2008, as recommended by the Audit Committee of our Board of Directors, we dismissed KPMG LLP as our independent registered public accounting firm and, as reported in our Current Report on Form 8-K filed with the Securities Exchange Commission on July 15, 2008, we engaged Marcum & Kliegman LLP on that date as our new registered public accounting firm.
Item 6. Exhibits
31(a) | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31(b) | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32(a) | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32(b) | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | TII NETWORK TECHNOLOGIES, INC. |
Date: August 4, 2008 | By: | /s/ Jennifer E. Katsch Jennifer E. Katsch Vice President-Finance, Treasurer and Chief Financial Officer |
Exhibit Index
