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 September 30, 2009
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o 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 November 6, 2009 was 13,998,216.
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)
| | September 30, | | December 31, | |
| | 2009 | | 2008 | |
| | (unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 12,279 | | $ | 8,282 | |
Accounts receivable, net of allowance of $69 and $88 at | | | | | | |
| September 30, 2009 and December 31, 2008, respectively | | 2,125 | | | 3,906 | |
Inventories, net | | 7,447 | | | 9,031 | |
Deferred tax assets, net | | 611 | | | 697 | |
Other current assets | | 439 | | | 175 | |
Total current assets | | 22,901 | | | 22,091 | |
| | | | | | | |
Property, plant and equipment, net | | 8,248 | | | 8,877 | |
Deferred tax assets, net | | 8,638 | | | 8,599 | |
Other assets, net | | 184 | | | 154 | |
Total assets | $ | 39,971 | | $ | 39,721 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 1,897 | | $ | 2,090 | |
Accrued liabilities | | 599 | | | 652 | |
Total current liabilities and total liabilities | | 2,496 | | | 2,742 | |
| | | | | | | |
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 at December 31, 2008; | | | | | | |
| no shares outstanding | | - | | | - | |
| Common stock, par value $.01 per share; 30,000,000 shares authorized; | | | | | | |
| 14,015,853 shares issued and 13,998,216 shares outstanding as of | | | | | | |
| September 30, 2009, and 13,787,429 shares issued and 13,769,792 shares | | | | | | |
outstanding as of December 31, 2008 | | 140 | | | 138 | |
Additional paid-in capital | | 42,837 | | | 42,262 | |
Accumulated deficit | | (5,221 | ) | | (5,140 | ) |
| | | 37,756 | | | 37,260 | |
| Less: Treasury shares, at cost, 17,637 common shares | | | | | | |
at September 30, 2009 and December 31, 2008 | | (281 | ) | | (281 | ) |
Total stockholders' equity | | 37,475 | | | 36,979 | |
| | | | | | | |
Total liabilities and stockholders' equity | $ | 39,971 | | $ | 39,721 | |
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
September 30, | | Nine months ended
September 30, | |
| | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Net sales | | $ | 7,460 | | $ | 8,521 | | $ | 19,703 | | $ | 27,248 | |
Cost of sales | | | 5,237 | | | 5,648 | | | 13,110 | | | 17,569 | |
Gross profit | | | 2,223 | | | 2,873 | | | 6,593 | | | 9,679 | |
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Selling, general and administrative | | | 1,767 | | | 2,067 | | | 5,417 | | | 6,854 | |
Research and development | | | 366 | | | 495 | | | 1,200 | | | 1,618 | |
Total operating expenses | | | 2,133 | | | 2,562 | | | 6,617 | | | 8,472 | |
| | | | | | | | | | | | | | |
Operating income (loss) | | | 90 | | | 311 | | | (24 | ) | | 1,207 | |
| | | | | | | | | | | | | | |
Interest expense | | | (3 | ) | | (2 | ) | | (5 | ) | | (6 | ) |
Interest income | | | 4 | | | 9 | | | 10 | | | 36 | |
| | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 91 | | | 318 | | | (19 | ) | | 1,237 | |
| | | | | | | | | | | | | | |
Income tax (benefit) provision | | | (13 | ) | | 192 | | | 62 | | | 591 | |
| | | | | | | | | | | | | | |
Net income (loss) | | $ | 104 | | $ | 126 | | $ | (81 | ) | $ | 646 | |
| | | | | | | | | | | | | | |
Net income (loss) per common share: | | | | | | | | | | | | | |
Basic and Diluted | | $ | 0.01 | | $ | 0.01 | | $ | (0.01 | ) | $ | 0.05 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | |
Basic | | | 13,595 | | | 13,560 | | | 13,577 | | | 13,533 | |
Diluted | | | 13,846 | | | 13,723 | | | 13,577 | | | 13,985 | |
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 January 1, 2009 | | | 13,769,792 | | $ | 138 | | $ | 42,262 | | $ | (5,140 | ) | $ | (281 | ) | $ | 36,979 | |
Share-based compensation | | | - | | | - | | | 577 | | | - | | | - | | | 577 | |
Restricted shares issued | | | 228,424 | | | 2 | | | (2 | ) | | - | | | - | | | - | |
| Net loss for the nine months | | | | | | | | | | | | | | | | | | | |
ended September 30, 2009 | | | - | | | - | | | - | | | (81 | ) | | - | | | (81 | ) |
Balance September 30, 2009 | | | 13,998,216 | | $ | 140 | | $ | 42,837 | | $ | (5,221 | ) | $ | (281 | ) | $ | 37,475 | |
See notes to unaudited condensed consolidated financial statements
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | Nine months ended | |
| | September 30,
2009 | | September 30,
2008 | |
Cash Flows from Operating Activities | | | | | | | |
Net (loss) income | | $ | (81 | ) | $ | 646 | |
Adjustments to reconcile net (loss) income to net cash | | | | | | | |
provided by operating activities: | | | | | | | |
Depreciation and amortization | | | 1,212 | | | 1,223 | |
Share-based compensation | | | 577 | | | 580 | |
Deferred income taxes | | | 47 | | | 521 | |
Loss on write-offs and disposals of capital assets | | | 19 | | | 1 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | | 1,781 | | | 2,215 | |
Inventories | | | 1,584 | | | (2,010 | ) |
Other assets | | | (89 | ) | | 39 | |
Accounts payable and accrued liabilities | | | (246 | ) | | (379 | ) |
Net cash provided by operating activities | | | 4,804 | | | 2,836 | |
| | | | | | | |
Cash Flows Used in Investing Activities | | | | | | | |
Capital expenditures | | | (565 | ) | | (674 | ) |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Proceeds from exercise of stock options | | | - | | | 100 | |
Repayment of short term debt | | | (242 | ) | | - | |
Net cash (used in) provided by financing activities | | | (242 | ) | | 100 | |
| | | | | | | |
Net increase in cash and cash equivalents | | | 3,997 | | | 2,262 | |
| | | | | | | |
Cash and cash equivalents, at beginning of period | | | 8,282 | | | 3,261 | |
| | | | | | | |
Cash and cash equivalents, at end of period | | $ | 12,279 | | $ | 5,523 | |
| | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | |
Capital expenditures included in accounts payable | | $ | - | | $ | 13 | |
Issuance of common stock | | | 2 | | | 2 | |
Insurance premiums financed with short term debt | | | 242 | | | - | |
| | | | | | | |
Supplemental Cash Flow Information | | | | | | | |
Cash paid during the period for interest | | $ | 5 | | $ | 6 | |
| | | | | | | |
Cash paid during the period for income taxes | | $ | 9 | | $ | 139 | |
See notes to unaudited condensed consolidated financial statements
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, 2008.
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, 2009.
Reclassifications
Certain reclassifications have been made to the prior period financial statements presented herein to conform to the 2009 presentation.
Subsequent Events
Effective this quarter, the Company adopted Accounting Standards Codification (“ASC”) 855, “Subsequent Events” (formerly SFAS No. 165, “Subsequent Events”). This standard establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of this standard did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after September 30, 2009 up through November 9, 2009, the date the Company issued these financial statements. No recognized or non-recognized subsequent events were noted.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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, inventories and deferred income taxes and the fair value of share-based payments. Actual results could differ from such estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments.
Recently Adopted Accounting Pronouncements
In July 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting
Standards Codification (“ASC”) or (“the Codification”) to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification supercedes all then-existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The adoption of SFAS 168 did not materially impact our financial statements or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”), as codified in ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. ASC 820 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. ASC 820 defines fair value based upon an exit price model. In February 2008, the FASB removed leasing transactions from the scope of ASC 820 and deferred the effective date of ASC 820 to fiscal years 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 did 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 ASC 820, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities, which we adopted effective January 1, 2009. The adoption of ASC 820 did not impact our financial position or results of operations.
In November 2007, the FASB Emerging Issues Task Force (“EITF”) issued EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), as codified in ASC 815, “Derivatives and Hedging” (“ASC 815”). As a result of ASC 815, freestanding warrants containing protective features, which provide for adjustments to the exercise or conversion price if the entity subsequently issues shares or other equity-related contracts to a new investor with more favorable pricing, will no longer be eligible to be recorded in equity. ASC 815 became effective for us on January 1, 2009. ASC 815 has not impacted us to date as we have no outstanding instruments that contain these protective features. We will assess the impact of ASC 815 if and when we issue instruments that contain these protective features.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”), as codified in ASC 805 “Business Combinations” (“ASC 805”). ASC 805 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. ASC 805 also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. ASC 805 became effective for us on January 1, 2009. ASC 805 has not impacted us to date. We will assess the impact of ASC 805 if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”), as codified in ASC 810 “Consolidation” (“ASC 810”), 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. ASC 810 became effective for us on January 1, 2009. ASC 810 has not impacted us to date as there are no such controlling interests. We will assess the impact of ASC 810 if and when any noncontrolling interests should arise.
Recently Issued Accounting Standards Not Yet Adopted
In October 2009, the FASB published “FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements” (“Update 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. The amended guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements or results of operations.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 eliminates exceptions in FASB Interpretation No. 46(R) to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FASB Interpretation No. 46(R). The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS 167 will be effective January 1, 2010. We do not expect the adoption of SFAS 167 to have any impact on our financial statements or results of operations.
Note 2 – Comprehensive income (loss)
We do not have any items of comprehensive income or loss. Accordingly, for all periods presented, comprehensive income (loss) equaled net income (loss).
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. We did not incur any costs related to this plan during the nine months ended September 30, 2009. During the three and nine months ended September 30, 2008, we incurred no costs and $70,000 of costs, respectively, related to this plan. Cumulative costs incurred through December 31, 2008 to close the Puerto Rico facility were $1,146,000. All of these costs were included in cost of sales for the respective periods incurred.
Upon adoption of the provisions of ASC 410-20, “Accounting for Asset Retirement Obligations,” in 2005, we recorded an asset retirement obligation of $109,000 for the estimated cost to restore the then leased facility in Puerto Rico to its original condition at the end of the lease. Based upon an updated assessment of the final restoration costs, we recorded additional charges of $70,000 and settled liabilities of $109,000 during the nine months ended September 30, 2008. Restoration was completed in April 2008 and there were no liabilities related to this plan thereafter.
Note 4 – Share–Based Compensation
Share-based 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. Expense
attributable to share-based compensation during the three and nine months ended September 30, 2009 was $192,000 and $577,000, respectively. Expense attributable to share-based compensation during the three and nine months ended September 30, 2008 was $227,000 and $580,000, respectively.
During the nine months ended September 30, 2009, we granted options to purchase 130,000 shares of our common stock with a grant date fair value of $106,000 to six non-employee directors pursuant to our 2003 Non-Employee Director Stock Option Plan and we granted restricted stock awards covering 148,000 shares of our common stock with a grant date fair value of $87,000 to seven employees and one consultant pursuant to our 2008 Equity Compensation Plan. In addition, following our 2009 annual meeting of stockholders, pursuant to a stockholder approved arrangement with respect to the payment of annual non-employee director fees, four non-employee directors each elected to receive 12,369 shares of our common stock having a fair market value of $11,750 on date of issuance, and the non-executive Chairman of our Board elected to receive 30,948 shares of our common stock having a fair market value of $29,400 on date of issuance, in lieu of their annual non-employee director fees which would otherwise have been paid in cash. These non-employee director shares are subject to forfeiture for a period of up to one year in certain instances. We recorded total expense of $53,000 and $97,000 during the three and nine months ended September 30, 2009, respectively, for these awards.
Note 5 - Net income per common share
Basic earnings (loss) per share (“EPS”) is computed by dividing income (loss) available to common stockholders (which equals our net income (loss)) by the weighted average number of common shares outstanding during the applicable period, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. During the three months ended September 30, 2009, 175,000 restricted stock awards and outstanding options to purchase an aggregate of 2,138,550 shares of common stock were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. Due to the net loss for the nine months ended September 30, 2009, all potentially dilutive common stock equivalents for the period, consisting of 403,424 restricted stock awards and outstanding options to purchase an aggregate of 2,484,550 shares of common stock were excluded because their inclusion would have been anti-dilutive. During the three and nine months ended September 30, 2008, outstanding options to purchase an aggregate of approximately 2,581,250 and 2,330,167 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
The following table sets forth the amounts used in the computation of basic and diluted EPS:
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2009 | | 2008 | | 2009 | | 2008 |
Numerator for basic and diluted EPS calculation: | | | | | | | | | | | | |
Net income (loss) | | $ | 104,000 | | $ | 126,000 | | $ | (81,000 | ) | $ | 646,000 |
| | | | | | | | | | | | |
Denominator for basic EPS calculation: | | | | | | | | | | | | |
Weighted average shares outstanding - Basic | | | 13,595,000 | | | 13,560,000 | | | 13,577,000 | | | 13,533,000 |
| | | | | | | | | | | | |
Denominator for diluted EPS calculation: | | | | | | | | | | | | |
Weighted average shares outstanding - Basic | | | 13,595,000 | | | 13,560,000 | | | 13,577,000 | | | 13,533,000 |
Effect of dilutive stock options | | | 142,000 | | | 163,000 | | | - | | | 243,000 |
Effect of unvested restricted stock awards | | | 109,000 | | | - | | | - | | | 209,000 |
| | | 13,846,000 | | | 13,723,000 | | | 13,577,000 | | | 13,985,000 |
| | | | | | | | | | | | |
Basic EPS | | $ | 0.01 | | $ | 0.01 | | $ | (0.01 | ) | $ | 0.05 |
| | | | | | | | | | | | |
Diluted EPS | | $ | 0.01 | | $ | 0.01 | | $ | (0.01 | ) | $ | 0.05 |
10
Note 6 – Inventories
The following table sets forth the cost basis of each major class of inventory as of September 30, 2009 and December 31, 2008:
| | September 30, | | December 31, | |
| | 2009 | | 2008 | |
Raw material and subassemblies | | $ | 1,196,000 | | $ | 1,459,000 | |
Work in progress | | | 209,000 | | | - | |
Finished goods | | | 6,042,000 | | | 7,572,000 | |
| | $ | 7,447,000 | | $ | 9,031,000 | |
Inventories are net of a reserve of $737,000 and $977,000 at September 30, 2009 and December 31, 2008, 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 September 30, 2009 and December 31, 2008:
| | September 30, | | | December 31, | |
| | 2009 | | | 2008 | |
Land | | $ | 1,244,000 | | | $ | 1,244,000 | |
Building and building improvements | | | 4,307,000 | | | | 4,303,000 | |
Construction in progress | | | 147,000 | | | | 118,000 | |
Machinery and equipment | | | 7,775,000 | | | | 7,865,000 | |
Computer hardware and software | | | 841,000 | | | | 802,000 | |
Office furniture, fixtures, equipment and other | | | 730,000 | | | | 764,000 | |
| | $ | 15,044,000 | | | $ | 15,096,000 | |
Less: accumulated depreciation and amortization | | | (6,796,000 | ) | | | (6,219,000 | ) |
| | $ | 8,248,000 | | | $ | 8,877,000 | |
Depreciation and amortization of plant and equipment was $371,000 and $1,175,000 for the three and nine months ended September 30, 2009, respectively, and $383,000 and $1,193,000 for the three and nine months ended September 30, 2008, respectively. These amounts included accelerated depreciation of $8,000 (in cost of sales) and $83,000 ($77,000 in cost of sales and $6,000 in research and development expenses) for the three and nine months ended September 30, 2009, respectively, and $9,000 (in cost of sales) and $16,000 (in cost of sales) for the three and nine months ended September 30, 2008, respectively, resulting from revisions to the estimate of the useful lives of certain machinery and equipment.
We recorded a loss on disposal of capital assets of $19,000 and $1,000 for the nine months ended September 30, 2009 and 2008, respectively, related to disposals of obsolete equipment. These charges are included in selling, general and administrative expenses.
As of December 31, 2008, we capitalized $102,000 of costs incurred for the development of machinery and equipment and $16,000 of costs incurred for license fees for computer software. These costs were classified as construction in progress at December 31, 2008, as neither the machinery and equipment nor the software were in service at that date. During the nine months ended September 30, 2009, we had additions to construction in progress of $45,000 for the development of machinery and equipment. As of September 30, 2009, the computer software was placed into service, it is included in computer hardware and software and is being depreciated over its estimated useful life.
Note 8 – Short Term Debt
In April 2009, we renewed our general insurance policies for the period April 2009 through March 2010 and financed 90% of these premiums through a third party. Accordingly, we recorded short term debt of $242,000, accrued interest of $7,000, and a prepaid asset of $249,000. As of September 30, 2009, the loan and all accrued interest was paid in full. Total interest paid on this loan was $1,000 and $5,000 for the three and nine months ended September 30, 2009, respectively.
Note 9 – Credit Facility
In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. (the “amended agreement”) which replaced a $5,000,000 credit facility that was expiring. Under the amended agreement, we are entitled to borrow from the bank up to $5,000,000 in the aggregate at any one time outstanding, but limited to a borrowing base, in general, equal to 80% of eligible accounts receivable (as defined), plus the lesser of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company’s continental United States warehouse), after certain reserves, or $1,500,000. As of September 30, 2009, our borrowing base was $3,120,000. Loans under the amended agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement as of September 30, 2009 or December 31, 2008.
Outstanding loans under the amended agreement bear interest, at our option, either at (a) the bank’s prime rate plus 2.75% per annum, provided that the prime rate shall not be less than an adjusted one-month London Interbank Offered Rate (“LIBOR”) (as defined in the amended agreement), or (b) under a formula based on LIBOR plus 4.5% per annum. 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 amended agreement are collateralized, pursuant to a Continuing Security Agreement, by all of our accounts receivable and inventory, and are also guaranteed by one of our subsidiaries.
The amended agreement 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 our payment of dividends and limit our ability to repurchase stock, incur or guarantee indebtedness, create liens, purchase all or a substantial part of the assets or stock of another entity, other than certain permitted acquisitions, create or acquire any subsidiary, or substantially change our business. The amended agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $35,300,000, 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 a ratio of total liabilities, excluding accounts payable in the ordinary course of business, accrued expenses and losses and deferred revenues or gains, to net income before interest expense, income taxes, depreciation and amortization for the 12-month period ending with the fiscal quarter for which compliance is being determined of not greater than 2.5 to 1.0. As of September 30, 2009, we were in compliance with all financial covenants in this agreement.
Note 10 – Income Taxes
For the three and nine months ended September 30, 2009 and 2008, 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, state taxes and additionally, in 2009, an increase in the valuation allowance against deferred tax assets for our estimate of state net operating losses that will likely expire unutilized.
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 are no current tax examinations in progress. Accordingly, as of September 30, 2009, we remain subject to examination in all tax jurisdictions for all relevant jurisdictional statutes.
Note 11- 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
September 30, | | Nine months ended
September 30, |
| 2009 | | 2008 | | 2009 | | 2008 |
Customer A | 38% | | 40% | | 37% | | 34% |
Customer B | 12% | | 16% | | 11% | | 16% |
Customer D | 10% | | 10% | | 15% | | * |
Customer E | * | | 11% | | * | | * |
___________________
* Amounts are less than 10%
As of September 30, 2009, three customers accounted for approximately 23%, 15% and 13% of accounts receivable, and as of December 31, 2008, three customers accounted for approximately 32%, 16% and 14% of accounts receivable.
Note 12 – Litigation
In February 2009, a lawsuit was filed in Puerto Rico by a former sales representative against Tii. The complaint alleges that we terminated our relationship with the former sales representative without just cause and is seeking $1,400,000 in damages, plus attorney’s fees and costs. We believe this case is without merit and we intend to defend this case vigorously.
In May 2009 and June 2009, two purported stockholders instituted separate lawsuits against Tii and each member of our Board of Directors in Suffolk County, New York and the State of Delaware arising from an unsolicited expression of interest to acquire all our outstanding shares of common stock for $1.00 per share. We rejected this expression of interest as inadequate and not in the best interest of Tii or our stockholders on July 20, 2009. Both actions seek class action status, are similar and, in general, allege that our Board of Directors violated the fiduciary duties owed by them to us and our public shareholders in connection with the transaction contemplated in the expression of interest. These actions seek, in general, equitable relief compelling our Board to properly exercise its fiduciary duties to consider whether the transaction contemplated in the expression of interest or an alternate transaction maximizes shareholder value, plus attorneys’ fees, costs and expenses. No filings have been made in either action since July 6, 2009. We believe both of these actions are without merit and intend to defend these cases vigorously.
From time to time, we are subject to legal proceedings or claims which arise in the ordinary course of business. While the outcome of such matters can not be predicted with certainty, we believe that such matters will not have a material adverse effect on our financial condition or liquidity.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the foregoing 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 (benefit) provision,” which is stated as a percentage of “Income (loss) before income taxes”):
| | Three months ended September 30, | | | | | |
(dollars in thousands) | | 2009 | | 2008 | | | | | |
| | | Amount | | | % of
Net sales | | | Amount | | | % of
Net sales | | | Dollar
increase
(decrease) | | | Percent
increase
(decrease) | |
Net sales | | $ | 7,460 | | | 100.0 | % | $ | 8,521 | | | 100.0 | % | $ | (1,061 | ) | | -12.5 | % |
Cost of sales | | | 5,237 | | | 70.2 | % | | 5,648 | | | 66.3 | % | | (411 | ) | | -7.3 | % |
Gross profit | | | 2,223 | | | 29.8 | % | | 2,873 | | | 33.7 | % | | (650 | ) | | -22.6 | % |
| | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 1,767 | | | 23.7 | % | | 2,067 | | | 24.3 | % | | (300 | ) | | -14.5 | % |
Research and development | | | 366 | | | 4.9 | % | | 495 | | | 5.8 | % | | (129 | ) | | -26.1 | % |
Total operating expenses | | | 2,133 | | | 28.6 | % | | 2,562 | | | 30.1 | % | | (429 | ) | | -16.7 | % |
| | | | | | | | | | | | | | | | | | | |
Operating income | | | 90 | | | 1.2 | % | | 311 | | | 3.6 | % | | (221 | ) | | -71.1 | % |
| | | | | | | | | | | | | | | | | | | |
Interest expense | | | (3 | ) | | 0.0 | % | | (2 | ) | | 0.0 | % | | 1 | | | 50.0 | % |
Interest income | | | 4 | | | 0.1 | % | | 9 | | | 0.1 | % | | (5 | ) | | -55.6 | % |
| | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 91 | | | 1.2 | % | | 318 | | | 3.7 | % | | (227 | ) | | -71.4 | % |
Income tax (benefit) provision | | | (13 | ) | | -14.3 | % | | 192 | | | 60.4 | % | | (205 | ) | | -106.8 | % |
Net income | | $ | 104 | | | 1.4 | % | $ | 126 | | | 1.5 | % | $ | (22) | | | -17.5 | % |
14
| | Nine months ended September 30, | | | | | |
(dollars in thousands) | | 2009 | | 2008 | | | | | |
| | Amount | | % of
Net sales | | Amount | | % of
Net sales | | Dollar
increase
(decrease) | | Percent
increase
(decrease) | |
Net sales | | $ | 19,703 | | | 100.0 | % | $ | 27,248 | | | 100.0 | % | $ | (7,545 | ) | | -27.7 | % |
Cost of sales | | | 13,110 | | | 66.5 | % | | 17,569 | | | 64.5 | % | | (4,459 | ) | | -25.4 | % |
Gross profit | | | 6,593 | | | 33.5 | % | | 9,679 | | | 35.5 | % | | (3,086 | ) | | -31.9 | % |
| | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 5,417 | | | 27.5 | % | | 6,854 | | | 25.2 | % | | (1,437 | ) | | -21.0 | % |
Research and development | | | 1,200 | | | 6.1 | % | | 1,618 | | | 5.9 | % | | (418 | ) | | -25.8 | % |
Total operating expenses | | | 6,617 | | | 33.6 | % | | 8,472 | | | 31.1 | % | | (1,855 | ) | | -21.9 | % |
| | | | | | | | | | | | | | | | | | | |
Operating (loss) income | | | (24 | ) | | -0.1 | % | | 1,207 | | | 4.4 | % | | (1,231 | ) | | -102.0 | % |
| | | | | | | | | | | | | | | | | | | |
Interest expense | | | (5 | ) | | 0.0 | % | | (6 | ) | | 0.0 | % | | 1 | | | -16.7 | % |
Interest income | | | 10 | | | 0.1 | % | | 36 | | | 0.1 | % | | (26 | ) | | -72.2 | % |
| | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (19 | ) | | -0.1 | % | | 1,237 | | | 4.5 | % | | (1,256 | ) | | -101.5 | % |
Income tax provision | | | 62 | | | -326.3 | % | | 591 | | | 47.8 | % | | (529 | ) | | -89.5 | % |
Net (loss) income | | $ | (81 | ) | | -0.4 | % | $ | 646 | | | 2.4 | % | $ | (727 | ) | | -112.5 | % |
Net sales for the three months ended September 30, 2009 were $7,460,000 compared to $8,521,000 in the comparable prior year period, a decrease of $1,061,000 or 12.5%. Net sales for the nine months ended September 30, 2009 were $19,703,000 compared to $27,248,000 in the comparable prior year period, a decrease of $7,545,000 or 27.7%. The decrease in the 2009 periods was primarily due to the economic downturn, which has negatively impacted sales of our connectivity and network interface device products, and the loss of landlines by the service providers which has negatively impacted sales of our network interface device products. Additionally, in the three months ended September 30, 2009, the decrease in sales was partially offset by an increase in sales of our broadband products into the growing broadband market and to new customers.
Gross profit for the three months ended September 30, 2009 was $2,223,000 compared to $2,873,000 in the prior year period, a decrease of $650,000 or 22.6%, while our gross profit margin decreased to 29.8% from 33.7%. Gross profit for the nine months ended September 30, 2009 was $6,593,000 compared to $9,679,000 in the prior year period, a decrease of $3,086,000 or 31.9%, while our gross profit margin decreased to 33.5% from 35.5%. The decrease in gross profit margin in the 2009 periods was primarily due to air freight and expediting costs incurred to satisfy an increase in demand for products with contracted delivery requirements. We had previously reduced the production of these products due to the sharp reduction in demand from our customers in the prior quarters as a result of the impact of the global recession.
Selling, general and administrative expenses for the three months ended September 30, 2009 were $1,767,000 compared to $2,067,000 in the comparable prior year period, a decrease of $300,000 or 14.5%. Selling, general and administrative expenses for the nine months ended September 30, 2009 were $5,417,000 compared to $6,854,000 in the comparable prior year period, a decrease of $1,437,000 or 21.0%. The decrease in the 2009 periods was primarily due to cost reduction measures implemented in 2008 and early 2009 (the largest being a decrease in salary and related benefits resulting from a decrease in headcount), a decrease in commission expense resulting from the decrease in sales and, in the 2009 nine month period, there was a decrease in professional and consulting fees.
Research and development expenses for the three months ended September 30, 2009 were $366,000 compared to $495,000 for the comparable prior year period, a decrease of $129,000 or 26.1%. Research and development expenses for the nine months ended September 30, 2009 were $1,200,000 compared to $1,618,000 in the comparable prior year period, a decrease of $418,000 or 25.8%. These decreases were primarily attributable to greater costs incurred in the 2008 periods for third-party testing fees not necessary in the 2009 periods. Additional savings resulted from lower salaries and related benefits from a reduction in headcount in 2008.
During the three months ended September 30, 2009, we recorded a benefit for income taxes of $13,000 as compared to a provision for income taxes of $192,000 in the comparable prior year period. During the nine months ended September 30, 2009 and 2008, we recorded a provision for income taxes of $62,000 and $591,000, 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, state taxes and, additionally, in 2009, an increase in the valuation allowance against deferred tax assets for our estimate of state net operating losses that will likely expire unutilized.
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, an increase in petroleum prices can potentially increase the cost of our products. 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, where possible, to adjust prices where market conditions permit, except that we may not increase prices under our general supply agreement with Verizon Services Corp. Inflation did not have a significant effect on our operations during any of the reported periods.
Liquidity and Capital Resources
As of September 30, 2009, we had $20,405,000 of working capital, which included $12,279,000 of cash and cash equivalents, and our current ratio was 9.2 to 1.
The primary reason for the $4,804,000 of cash provided by operating activities in the nine months of 2009 compared to the $2,836,000 cash provided by operating activities in the nine months of 2008 was a $1,584,000 reduction in inventories in the 2009 period compared to a $2,010,000 temporary build-up of inventories in the 2008 period to fulfill anticipated sales. This increase was partially offset by a net loss of $81,000 in the 2009 nine month period compared to net income of $646,000 in the same 2008 period; a $474,000 decrease in the change in deferred income taxes to $47,000 in the nine months of 2009 from $521,000 in the comparable prior year period due to the decrease in pretax income in the 2009 period from the 2008 period; and a $434,000 decrease in the change in accounts receivable to $1,781,000 in the nine months of 2009 from $2,215,000 in the comparable year period due to a lower accounts receivable balance at January 1, 2009 ($3,906,000) than at January 1, 2008 ($6,994,000) resulting from the decrease in sales volume.
Investing activities in the first nine months of 2009 used cash of $565,000 for capital expenditures, primarily for machinery and equipment used in the development of new products, compared to $674,000 used for this purpose in the similar 2008 period.
Financing activities in the first nine months of 2009 used cash of $242,000 for repayments of insurance premiums financed with short term debt, while the exercise of stock options provided $100,000 of cash in the similar period of 2008.
In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. (the “amended agreement”) which replaced a $5,000,000 credit facility that was expiring. Under the amended agreement, we are entitled to borrow from the bank up to $5,000,000 in the aggregate at any one time outstanding, but limited to a borrowing base, in general, equal to 80% of eligible accounts receivable (as defined), plus the lesser of 30% of eligible inventory (as defined, generally to include, with certain exceptions, inventories at the Company’s continental United States warehouse), after certain reserves, or $1,500,000. As of September 30, 2009, our borrowing base was $3,120,000. Loans under the amended agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement as of September 30, 2009.
We believe that our existing cash, together with internally generated funds and the available line of credit, will be sufficient for our working capital requirements and capital expenditure needs for at least the next twelve months.
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, NID 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 303(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. A summary of our most critical accounting policies can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of our Annual Report on Form 10-K for year ended December 31, 2008. We regularly evaluate items which may impact our critical accounting estimates and judgments. During the nine months ended September 30, 2009, we did not update our critical accounting policies.
Recently Adopted Accounting Pronouncements
In July 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (“ASC”) or (“the Codification”) to become the source of authoritative U.S. Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification supercedes all then-existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative. SFAS 168, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The adoption of SFAS 168 did not materially impact our financial statements or results of operations.
Effective this quarter, the Company adopted ASC 855, “Subsequent Events” (formerly SFAS No. 165, “Subsequent Events”). This standard establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of this standard did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after September 30, 2009 up through November 9, 2009, the date the Company issued these financial statements. No recognized or non-recognized subsequent events were noted.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”), as codified in ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. ASC 820 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. ASC 820 defines fair value based upon an exit price model. In February 2008, the FASB removed leasing transactions from the scope of ASC 820 and deferred the effective date of ASC 820 to fiscal years 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 did 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 ASC 820, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities, which we adopted effective January 1, 2009. The adoption of ASC 820 did not impact our financial position or results of operations.
In November 2007, the FASB Emerging Issues Task Force (“EITF”) issued EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”), as codified in ASC 815, “Derivatives and Hedging” (“ASC 815”). As a result of ASC 815, freestanding warrants containing protective features, which provide for adjustments to the exercise or conversion price if the entity subsequently issues shares or other equity-related contracts to a new investor with more favorable pricing, will no longer be eligible to be recorded in equity. ASC 815 became effective for us on January 1, 2009. ASC 815 has not impacted us to date as we have no outstanding instruments that contain these protective features. We will assess the impact of ASC 815 if and when we issue instruments that contain these protective features.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”), as codified in ASC 805 “Business Combinations” (“ASC 805”). ASC 805 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. ASC 805 also established disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. ASC 805 became effective for us on January 1, 2009. ASC 805 has not impacted us to date. We will assess the impact of ASC 805 if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”), as codified in ASC 810 “Consolidation” (“ASC 810”), 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. ASC 810 became effective for us on January 1, 2009. ASC 810 has not impacted us to date as there are no such controlling interests. We will assess the impact of ASC 810 if and when any noncontrolling interests should arise.
Recently Issued Accounting Standards Not Yet Adopted
In October 2009 the FASB published “FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements” (“Update 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. The amended guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements or results of operations.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 eliminates exceptions in FASB Interpretation No. 46(R) to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FASB Interpretation No. 46(R). The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS 167 will be effective January 1, 2010. We do not expect the adoption of SFAS 167 to have any impact on our financial statements or results of operations.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q 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 below and elsewhere in this document. We undertake no obligation to update any forward-looking statement to reflect events after the date of this Report. Among those factors are:
| • | general economic and business conditions, especially as they pertain to the telecommunications industry; |
| • | potential changes in customers’ spending and purchasing policies and practices, which are effected by customers’ internal budgetary allotments that may be impacted by the current economic climate, particularly in the United States; |
| • | pressure from customers to reduce pricing without achieving a commensurate reduction in costs; |
| • | the ability to market and sell products to new markets beyond our principal copper-based telephone operating company (“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; |
| • | 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 into which we have been seeking to Ex; |
| • | dependence on, and ability to retain, our “as-ordered” general supply agreements with our largest customer and our ability to win new contracts; |
| • | 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, including the effect of typhoons on our assembly facilities in the Pacific Rim which can disrupt product production, the effect of hurricanes in the United States which can increase the demand for our products and harsh winter conditions which can temporarily disrupt the installation of certain of our products by Telcos; |
| • | the ability to attract and retain technologically qualified personnel; and |
| • | the availability of financing on satisfactory terms. |
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 during the nine months ended September 30, 2009, 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. An increase in the cost of petroleum can negatively impact the cost of our products.
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.
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 September 30, 2009, 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 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 control 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 control over financial reporting.
PART II. OTHER INFORMATION
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: November 9, 2009 | By: /s/ Jennifer E. Katsch Jennifer E. Katsch Vice President-Finance, Treasurer and Chief Financial Officer |
Exhibit Index
