As of December 31, 2008, we had available Federal net operating loss carryforwards of approximately $25 million and tax credits of approximately $264,000 to offset taxable income in the future. We also have $144,000 in tax credits for which we have provided a full valuation allowance as we believe these credits will expire unutilized.
Net income in 2008 was $578,000 or $0.04 per diluted share, compared to net income of $6.4 million or $0.48 per diluted share in 2007. Net income amounts include income tax expense of $810,000 ($0.06 per diluted share) in 2008 and income tax benefit of $4.8 million ($0.36 per diluted share) in 2007.
Net sales in 2007 were $46.8 million compared to $39.1 million in 2006, an increase of $7.7 million or 19.8% due to increased sales of home networking products and connectivity products, offset, in part, by a decline in sales of our NIDs.
Gross profit in 2007 was $14.6 million compared to $13.4 million in 2006, an increase of approximately $1.3 million or 9.5%, while the gross profit margin for those years were 31.3% and 34.2%, respectively. The decrease in gross profit margin is primarily attributable to (i) charges of $1.1 million related to the closing of our Puerto Rico facility (consisting of severance charges of $489,000, accelerated depreciation of $245,000 and other closing expenses of $342,000 recorded during the year ended December 31, 2007), which is included in cost of sales, and (ii) sales of certain lower margin home networking products.
Selling, general and administrative expenses for the year ended December 31, 2007 increased $1.2 million or 12.4% to $10.9 million from $9.7 million in the similar prior year period. The increase over the prior year was primarily due to:
The balance of the increase is related to miscellaneous items, no one of which is individually material.
Research and development expense was $2.2 million in 2007 compared to $1.9 million in 2006, an increase of $315,000 or 16.6%. This increase is attributable to an increase in personnel and related employee benefits of $212,000, consulting expenses of $75,000 and share-based compensation expense of $52,000, partially offset by a decrease of $73,000 in amounts incurred in the development of certain products completed during 2007. The largest portion of our development efforts is focused on new products for the growth segments of the Telco and MSO markets, primarily broadband deployment.
Interest expense was $12,000 in 2007 compared to $7,000 in 2006, an increase of approximately $5,000 or 71.4%.
Interest income was $172,000 in 2007 compared to $226,000 in 2006, a decrease of approximately $54,000, or 23.9%, which was primarily attributable to lower average cash and cash equivalent balances on hand throughout 2007 than in 2006 due to capital expenditures during the course of 2006 and 2007 for our new facility in Edgewood, New York.
We recorded a benefit from income taxes for the years ended December 31, 2007 and 2006 of $4,769,000 and $710,000, respectively. These benefits primarily resulted from a $5.7 million and a $1.6 million reduction in our deferred tax asset valuation allowance during 2007 and 2006, respectively, net of Federal and state taxes provided on pretax income. These reductions in the valuation allowance were based on our current projections for taxable income, considering, among other things, historical results of operations, a trending decline in our dependence on one customer for a significant portion of our total sales and our experience in projecting the timing and extent of taxable income in the future.
As of December 31, 2007, we had available Federal net operating loss carryforwards of approximately $27.0 million and tax credits of approximately $222,000 to offset taxable income in the future. We also have $144,000 in tax credits for which we have provided a full valuation allowance as we believe these credits will expire unutilized.
Net income in 2007 was $6.4 million or $0.48 per diluted share compared to net income of $2.7 million or $0.20 per diluted share in 2006, including the income tax benefit of $4.8 million ($0.36 per diluted share) and $710,000 ($0.05 per diluted share) for 2007 and 2006, respectively.
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 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 December 31, 2008, we had $19.3 million of working capital, which included $8.3 million of cash and cash equivalents, and our current ratio was 8.1 to 1. Our cash and cash equivalents increased during 2008 by $5.0 million to $8.3 million at December 31, 2008, from $3.3 million at December 31, 2007, primarily from net income of $578,000 plus non-cash expenses for (i) depreciation and amortization expense of $1.6 million, (ii) net loss on disposal of capital assets of $32,000, (iii) non-cash share based compensation of $807,000, and (iv) deferred income taxes of $736,000 and a decrease in accounts receivable $3.1 million. The generation of cash was offset, in part, by a decrease in accounts payable and accrued liabilities of $1.4 million.
Investing activities in 2008 used cash of $780,000 for capital expenditures, primarily for machinery and equipment used to manufacture products. Investing activities in 2007 used cash of $4.3 million for capital expenditures, primarily for building improvements ($2.7 million) and furniture and fixtures ($632,000) for our then new facility in Edgewood, New York and machinery and equipment used to manufacture products ($1.3 million). Financing activities provided $100,000 of cash in 2008 compared to $1.2 million in 2007 as a result of the exercise of stock options.
We believe that existing cash, coupled with internally generated funds and our available line of credit, will be sufficient for our working capital requirements and capital expenditure needs for at least the next twelve months.
In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. which replaced a $5.0 million credit facility that was expiring. Under the amended credit agreement, we are entitled to borrow from the bank up to $5.0 million 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 $1.5 million. At December 31, 2008, our borrowing base was $4.6 million. Loans under the credit agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement during 2008.
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Outstanding loans under the credit agreement bear interest, at our option, at either (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 LIBOR rate (as defined in the amended credit 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 credit agreement are collateralized by all of our accounts receivable and inventory, and are guaranteed by one of our subsidiaries.
The credit 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 the payment of dividends and limit our ability to repurchase our 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 credit agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $35.3 million, a ratio of net income before interest expense and taxes for the 12-month period ending with that 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 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 that fiscal quarter of not greater than 2.5 to 1.0. As of December 31, 2008, we were in compliance with all covenants in the credit agreement.
Off-Balance Sheet Arrangements
We have no off-balance sheet contractual arrangements, as 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. We believe that the determination of the carrying value of our inventories and long-lived assets, the valuation of accounts receivable, the valuation of deferred tax assets and the 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 are presented net of allowances for doubtful accounts and sales returns based upon facts and circumstances and our estimate of expected trends.
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Consistent with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 109 (“SFAS No. 109”) and Financial Accounting Standards Board (“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 2008, we recorded a valuation allowance of $31,000 for deferred tax assets that will not be recoverable based on our estimate of state net operating losses that will expire unused after December 31, 2009. In 2007 and 2006, in response to favorable developments in our projections for taxable income in the future, and based primarily upon positive evidence derived from our sustained levels of historical profitability and our projections for taxable income in the future, we reduced our valuation allowance against deferred tax assets to reflect the amount of deferred tax assets determined to be more-likely than not recoverable. 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 the requirements of SFAS 123(R), we 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, we use historical share option exercise experience, along with the vesting term and original contractual term of options granted.
Recently Adopted Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 became effective for us as of November 15, 2008. The adoption of SFAS 162 did not impact our financial position or results of operations.
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 123(R) 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. The adoption of SAB 110 did not have a material impact on 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 are 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.
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On January 1, 2007, we adopted FIN 48 which is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”, and addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements from that position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and also requires increased disclosures. When the tax law requires interest to be paid on an underpayment of income taxes, we recognize interest, which is classified as tax expense in the consolidated statements of income, in the first period that interest begins to accrue according to relevant provisions of the tax law. The amount of interest to be recognized is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with this interpretation and the amount previously taken or expected to be taken on a tax return. The adoption of FIN 48 did not result in any adjustment to the recognized benefits from our uncertain tax positions.
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 2006, we adopted the provisions of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current year Financial Statements” (“SAB 108”). SAB 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. In 2006, we changed our method of quantifying errors in accordance with SAB No. 108 and, as a result, recorded a reduction in our accumulated deficit as of January 1, 2006, of $162,000, net of tax.
Recently Issued Accounting Pronouncements – 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.
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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS 160”) 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 year ended December 31, 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders of
TII Network Technologies, Inc.
We have audited the accompanying consolidated balance sheet of TII Network Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TII Network Technologies, Inc. and Subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year then ended, in conformity with United States generally accepted accounting principles.
/s/ Marcum & Kliegman LLP
Marcum & Kliegman LLP
Melville, New York
March 27, 2009
26
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TII Network Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of TII Network Technologies, Inc. and subsidiaries as of December 31, 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TII Network Technologies, Inc. and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in the notes to the accompanying consolidated financial statements, the Company changed its method of quantifying errors in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements, effective December 31, 2006.
/s/ KPMG LLP
Melville, New York
March 31, 2008
27
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
| | | | | | | | |
| | December 31, | |
| | | |
| | 2008 | | | 2007 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 8,282 | | | $ | 3,261 | |
Accounts receivable, net of allowance of $88 and $90 at December 31, 2008 and 2007, respectively | | | 3,906 | | | | 6,994 | |
Inventories, net | | | 9,031 | | | | 9,219 | |
Deferred tax assets, net | | | 697 | | | | 674 | |
Other current assets | | | 175 | | | | 372 | |
| | | | | | | | |
Total current assets | | | 22,091 | | | | 20,520 | |
| | | | | | | | |
Property, plant and equipment, net | | | 8,877 | | | | 9,680 | |
Deferred tax assets, net | | | 8,599 | | | | 9,358 | |
Other assets, net | | | 154 | | | | 93 | |
| | | | | | | | |
Total assets | | $ | 39,721 | | | $ | 39,651 | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 2,090 | | | $ | 2,301 | |
Accrued liabilities | | | 652 | | | | 1,856 | |
| | | | | | | | |
Total current liabilities and total liabilities | | | 2,742 | | | | 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 preferred stock; 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 December 31, 2008, and 13,499,541 shares issued and 13,481,904 shares outstanding as of December 31, 2007 | | | 138 | | | | 135 | |
Additional paid-in capital | | | 42,262 | | | | 41,358 | |
Accumulated deficit | | | (5,140 | ) | | | (5,718 | ) |
| | | | | | | | |
| | | 37,260 | | | | 35,775 | |
Less: Treasury shares, at cost, 17,637 common shares at December 31, 2008 and December 31, 2007 | | | (281 | ) | | | (281 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 36,979 | | | | 35,494 | |
| | | | | | | | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 39,721 | | | $ | 39,651 | |
| | | | | | | | |
See notes to consolidated financial statements
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TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | | | | | | | | | | | |
| | Years ended December 31, | |
| | | |
| | 2008 | | 2007 | | 2006 | |
| | | | | | | | | |
Net sales | | $ | 35,190 | | | $ | 46,846 | | | $ | 39,104 | |
Cost of sales (includes restructuring charges of $70 in 2008 and $1,076 in 2007) | | | 23,178 | | | | 32,204 | | | | 25,730 | |
| | | | | | | | | | | | |
Gross profit | | | 12,012 | | | | 14,642 | | | | 13,374 | |
| | | | | | | | | | | | |
| | | 34.1 | % | | | 31.3 | % | | | 34.2 | % |
Operating expenses: | | | | | | | | | | | | |
Selling, general and administrative | | | 8,610 | | | | 10,926 | | | | 9,721 | |
Research and development | | | 2,040 | | | | 2,214 | | | | 1,899 | |
| | | | | | | | | | | | |
Total operating expenses | | | 10,650 | | | | 13,140 | | | | 11,620 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Operating income | | | 1,362 | | | | 1,502 | | | | 1,754 | |
| | | | | | | | | | | | |
Interest expense | | | (8 | ) | | | (12 | ) | | | (7 | ) |
Interest income | | | 39 | | | | 172 | | | | 226 | |
Other income (expense) | | | (5 | ) | | | 9 | | | | (2 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Income before income taxes | | | 1,388 | | | | 1,671 | | | | 1,971 | |
| | | | | | | | | | | | |
Income tax provision (benefit) | | | 810 | | | | (4,769 | ) | | | (710 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income | | $ | 578 | | | $ | 6,440 | | | $ | 2,681 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income per common share: | | | | | | | | | | | | |
Basic | | $ | 0.04 | | | $ | 0.50 | | | $ | 0.22 | |
| | | | | | | | | | | | |
Diluted | | $ | 0.04 | | | $ | 0.48 | | | $ | 0.20 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | |
Basic | | | 13,540 | | | | 12,821 | | | | 12,397 | |
Diluted | | | 13,745 | | | | 13,502 | | | | 13,474 | |
See notes to consolidated financial statements
29
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | |
| | Common
Shares
Outstanding | | Common
Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Treasury
Stock | | Total
Stockholders’
Equity | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance January 1, 2006 | | 12,344,319 | | $ | 124 | | $ | 38,277 | | $ | (15,001 | ) | $ | (281 | ) | $ | 23,119 | |
| | | | | | | | | | | | | | | | | | |
Cumulative effect of adjustments resulting from the adoption of SAB No. 108, net of taxes | | — | | | — | | | — | | | 162 | | | — | | | 162 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Adjusted balance at January 1, 2006 | | 12,344,319 | | | 124 | | | 38,277 | | | (14,839 | ) | | (281 | ) | | 23,281 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Exercise of stock options | | 153,350 | | | 2 | | | 118 | | | — | | | — | | | 120 | |
Share-based compensation | | — | | | — | | | 743 | | | — | | | — | | | 743 | |
Restricted stock awards | | 35,000 | | | — | | | — | | | — | | | — | | | — | |
Stock option excess tax benefit | | — | | | — | | | 8 | | | — | | | — | | | 8 | |
Net income for the year | | — | | | — | | | — | | | 2,681 | | | — | | | 2,681 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance December 31, 2006 | | 12,532,669 | | | 126 | | | 39,146 | | | (12,158 | ) | | (281 | ) | | 26,833 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Exercise of stock options | | 893,450 | | | 9 | | | 1,131 | | | — | | | — | | | 1,140 | |
Share-based compensation | | — | | | — | | | 1,000 | | | — | | | — | | | 1,000 | |
Restricted stock awards | | 55,785 | | | — | | | 68 | | | — | | | — | | | 68 | |
Stock option excess tax benefit | | — | | | — | | | 13 | | | — | | | — | | | 13 | |
Net income for the year | | — | | | — | | | — | | | 6,440 | | | — | | | 6,440 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance December 31, 2007 | | 13,481,904 | | | 135 | | | 41,358 | | | (5,718 | ) | | (281 | ) | | 35,494 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Exercise of stock options | | 78,500 | | | 1 | | | 99 | | | — | | | — | | | 100 | |
Share-based compensation | | — | | | — | | | 807 | | | — | | | — | | | 807 | |
Restricted stock awards | | 209,388 | | | 2 | | | (2 | ) | | — | | | — | | | — | |
Net income for the year | | — | | | — | | | — | | | 578 | | | — | | | 578 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Balance December 31, 2008 | | 13,769,792 | | $ | 138 | | $ | 42,262 | | $ | (5,140 | ) | $ | (281 | ) | $ | 36,979 | |
| | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements
30
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | |
| | Years ended December 31, | |
| | |
| | 2008 | | 2007 | | 2006 | |
| | | | | | |
Cash Flows Provided by Operating Activities | | | | | | | | | | | | |
Net income | | $ | 578 | | | $ | 6,440 | | | $ | 2,681 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,592 | | | | 1,429 | | | | 1,284 | |
Share-based compensation | | | 807 | | | | 1,068 | | | | 743 | |
Deferred income taxes | | | 736 | | | | (4,873 | ) | | | (797 | ) |
Loss on write-offs and disposals of capital assets | | | 32 | | | | 386 | | | | 158 | |
Excess tax benefits from stock option exercises | | | — | | | | (13 | ) | | | (8 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 3,088 | | | | (3,926 | ) | | | 497 | |
Inventories | | | 188 | | | | (855 | ) | | | 118 | |
Other assets | | | 95 | | | | (96 | ) | | | (19 | ) |
Accounts payable and accrued liabilities | | | (1,415 | ) | | | 1,479 | | | | (255 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 5,701 | | | | 1,039 | | | | 4,402 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash Flows Used in Investing Activities | | | | | | | | | | | | |
Capital expenditures | | | (780 | ) | | | (4,326 | ) | | | (4,494 | ) |
Proceeds from sale of capital assets | | | — | | | | 33 | | | | — | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (780 | ) | | | (4,293 | ) | | | (4,494 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash Flows Provided by Financing Activities | | | | | | | | | | | | |
Proceeds from exercise of stock options | | | 100 | | | | 1,140 | | | | 120 | |
Excess tax benefits from stock option exercises | | | — | | | | 13 | | | | 8 | |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 100 | | | | 1,153 | | | | 128 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 5,021 | | | | (2,101 | ) | | | 36 | |
| | | | | | | | | | | | |
Cash and cash equivalents, at beginning of year | | | 3,261 | | | | 5,362 | | | | 5,326 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash and cash equivalents, at end of year | | $ | 8,282 | | | $ | 3,261 | | | $ | 5,362 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | | | | | | |
Capital additions included in accounts payable | | $ | — | | | $ | 46 | | | $ | — | |
| | | | | | | | | | | | |
Cash paid during the year for interest | | $ | 7 | | | $ | 12 | | | $ | 7 | |
| | | | | | | | | | | | |
Cash paid during the year for income taxes | | $ | 152 | | | $ | 114 | | | $ | 76 | |
| | | | | | | | | | | | |
See notes to consolidated financial statements
31
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – Description of Business and Summary of Significant Accounting Policies
Business
TII Network Technologies, Inc. and subsidiaries (together, “Tii,” the “company,” “we,” “us” or “our”) design, manufacture and sell products to the service providers in the communications industry for use in their networks. Our products are typically found outdoor in the service provider’s distribution network, at the interface where the service provider’s network connects to the user’s network, and inside the user’s home or apartment, and are critical to the successful delivery of voice and broadband communication services.
We sell our products through a network of sales channels, principally to telephone companies (“Telcos”), multi-system operators (“MSOs”) of communications services, including cable and satellite service providers, and original equipment manufacturers (“OEMs”).
Principles of Consolidation
The consolidated financial statements include the accounts of Tii Network Technologies, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our more significant estimates include the valuation of accounts receivable, inventory, deferred income taxes and the fair value of share-based payments. Actual results could differ from such estimates.
Cash Equivalents
All highly liquid investments with an original maturity at the time of purchase of three months or less are considered cash equivalents. Cash equivalents of $8,282,000 and $3,261,000 at December 31, 2008 and December 31, 2007, respectively, consisted of overnight investments in commercial paper.
Concentration of Credit Risk
We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At December 31, 2008, all of our cash is held at one financial institution.
Inventories
Inventories (materials and applicable overhead) are stated at the lower of cost or market, on the first-in, first-out basis.
32
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 estimated useful lives for each category of property, plant and equipment are as follows:
| | | |
| | Estimated useful life
(in years) | |
| | | |
Building and building improvemnts | | 30 | |
Machinery and equipment | | 5 - 10 | |
Computer hardware and software | | 3 - 5 | |
Office furniture, fixtures, equipment and other | | 3 - 5 | |
Leasehold improvements are amortized on a straight-line basis over the term of the respective leases or over their estimated useful lives, whichever is shorter.
Revenue Recognition
Our sales are derived from the sale of our products. We do not provide any services to our customers. Product sales are recorded when there is persuasive evidence of the arrangement, usually a customer purchase order, the products are shipped, title passes to the customer, and the price is fixed and determinable and probable of collection. Once a product is shipped, we have no acceptance or other post-shipment obligations precluding revenue recognition. Accounts receivable as of December 31, 2008 and 2007 are presented net of allowances for doubtful accounts and sales returns of $88,000 and $90,000, respectively, based upon known facts and circumstances and management’s estimate of expected trends.
In the normal course of business, we collect non-income related taxes, including sales and use tax, from our customers and we remit those taxes to governmental authorities. We present revenues net of these taxes.
Other Assets
Included in other assets at December 31, 2008 and 2007 are $146,000 and $81,000, respectively, of patent costs, net of accumulated amortization, which are amortized on a straight-line basis over the lesser of the life of the related products or the patents. Amortization of patent costs was $41,000 for the year ended December 31, 2008 and $36,000 for each of the years ended December 31, 2007 and 2006.
Long-Lived Assets
We review long-lived assets 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 would be recognized in the amount by which the carrying amount of the asset exceeds its fair value. There were no such events or changes in circumstances to require an analysis for 2008.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”) we use the with-and-without approach described in Emerging Issues Task Force (“EITF”) Topic No. D-32, “Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations,” to determine the recognition and measurement of excess tax benefits resulting from tax deductions in excess of the cumulative compensation cost recognized from stock options exercised. For financial statement purposes, certain of our net operating loss carryforwards contain deductions for share-based payments in excess of the related compensation expense recognized. In determining the period in which related tax benefits are realized for book purposes, such excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted.
33
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if, based on the technical merits of the position, it meets a “more likely than not” threshold that the position will be sustained on examination by the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes and accounting in interim periods and also requires increased disclosures. When the tax law requires interest to be paid on an underpayment of income taxes, we recognize interest, which is classified as tax expense in the consolidated statements of income, in the first period that interest begins to accrue according to relevant provisions of the tax law. The amount of interest to be recognized is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with this interpretation and the amount previously taken or expected to be taken on a tax return. The adoption of FIN 48 did not result in any adjustment to the recognized benefits from our uncertain tax positions.
Net Income Per Common Share
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders (which for us equals our net income) by the weighted average number of common shares outstanding, with the calculation of diluted EPS adding the dilutive effect of stock options and other common stock equivalents to the denominator. Antidilutive shares aggregating 2,431,000, 1,650,000 and 970,000 have been omitted from the calculation of dilutive EPS for the years ended December 31, 2008, 2007 and 2006, respectively. The calculation of the numerators and denominators of the basic and diluted income per share is as follows:
| | | | | | | | | | | | |
| | Years ended December 31, | |
| | | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | |
Numerator for diluted EPS calculation: | | | | | | | | | | | | |
Net income | | $ | 578,000 | | | $ | 6,440,000 | | | $ | 2,681,000 | |
| | | | | | | | | | | | |
Denominator for diluted EPS calculation: | | | | | | | | | | | | |
Weighted average shares outstanding - Basic | | | 13,540,000 | | | | 12,821,000 | | | | 12,397,000 | |
Effect of dilutive stock options | | | 205,000 | | | | 681,000 | | | | 1,003,000 | |
Effect of stock awards | | | — | | | | — | | | | 74,000 | |
| | | | | | | | | | | | |
| | | 13,745,000 | | | | 13,502,000 | | | | 13,474,000 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic EPS | | $ | 0.04 | | | $ | 0.50 | | | $ | 0.22 | |
| | | | | | | | | | | | |
Diluted EPS | | $ | 0.04 | | | $ | 0.48 | | | $ | 0.20 | |
| | | | | | | | | | | | |
Advertising Costs
We incur advertising costs for sales and marketing initiatives, including advertisements in magazines, brochures and mailings, promotions, public relations and tradeshows. Advertising costs were $92,000, $239,000 and $203,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
34
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, other current assets, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments.
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 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 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. The adoption of FSP SFAS 157-2 is not expected to have an impact on 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 are 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 consolidated financial statements.
Share-Based Payment
We follow the provisions of SFAS 123(R), which requires that all share based compensation be recognized as an expense in the financial statements and that this cost be measured at the fair value of the award. SFAS 123(R) also requires that excess tax benefits related to stock option exercises be reflected in the consolidated statements of cash flows as financing cash inflows and operating cash outflows. See Note 8 for additional information on shared-based compensation.
Comprehensive Income
Comprehensive income equaled net income for all periods presented.
Segment Information
We have evaluated the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and have determined that we have one reportable segment. We have provided the required geographic, major supplier and major customer information in Note 10.
35
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS 162 makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 became effective for us as of November 15, 2008. The adoption of SFAS 162 did not impact our financial position or results of operations.
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 123(R) 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. The adoption of SAB 110 did not have a material impact on our financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current year Financial Statements” (“SAB 108”). Prior to 2006, we quantitatively evaluated misstatements using the “roll-over” (income statement) method. As a result of the adoption of SAB 108, we changed our method of quantifying and evaluating errors to a “dual” (income statement and balance sheet) method. The transition provisions of SAB 108 permitted us to adjust for the cumulative effect on accumulated deficit of previously immaterial adjustments relating to prior years. Such adjustments do not require previously filed reports with the SEC to be amended.
Upon adoption of SAB 108 on January 1, 2006, we corrected our consolidated financial statements to reduce the allowance for doubtful accounts receivable by $59,000 and reduce accrued expenses by $158,000 for excess amounts established prior to January 1, 2006. The accrued expense adjustments related to an unreconciled amount of $50,000 and other excess accruals for income taxes payable of $63,000, real estate taxes payable of $29,000 and professional services of $16,000. These adjustments were not considered material to any prior period when evaluated using the roll-over method. As these adjustments were considered to be material under the dual method as of January 1, 2006, we recorded a cumulative effect adjustment to decrease our accumulated deficit as of January 1, 2006 by $162,000, net of tax of $55,000.
Recently Issued Accounting Pronouncements 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 on or after December 15, 2008. We will comply with SFAS 141(R) if and when a future acquisition occurs.
36
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which requires 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 comply with SFAS 160 if and when any noncontrolling interests should arise.
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. During the year ended December 31, 2008 and 2007, we incurred $70,000 and $1,076,000, respectively, of costs related to this plan. Cumulative costs incurred as of December 31, 2008 were $1,146,000 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 FIN No. 47, “Accounting for Asset Retirement Obligations,” in 2005, we recorded an asset retirement obligation of $109,000 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 year ended December 31, 2008:
| | | | |
Balance, December 31, 2007 | | $ | 39,000 | |
Additional charges | | | 70,000 | |
Liabilities settled | | | (109,000 | ) |
| | | | |
Balance, December 31, 2008 | | $ | — | |
| | | | |
NOTE 4 – Inventories
The following table represents the cost basis of each major class of inventory as of December 31, 2008 and 2007:
| | | | | | | | |
| | December 31, | |
| | | |
| | 2008 | | | 2007 | |
| | | | | | |
Raw material and subassemblies | | $ | 1,459,000 | | | $ | 1,048,000 | |
Work in progress | | | — | | | | 166,000 | |
Finished goods | | | 7,572,000 | | | | 8,005,000 | |
| | | | | | | | |
| | $ | 9,031,000 | | | $ | 9,219,000 | |
| | | | | | | | |
Inventories are net of a reserve of $980,000 and $503,000 at December 31, 2008 and 2007, respectively.
37
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – 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 presents the amounts of each major class of property, plant and equipment as of December 31, 2008 and 2007:
| | | | | | | | |
| | December 31, | |
| | | |
| | 2008 | | | 2007 | |
| | | | | | |
Land | | $ | 1,244,000 | | | $ | 1,244,000 | |
Building and building improvements | | | 4,303,000 | | | | 4,288,000 | |
Construction in progress | | | 118,000 | | | | 107,000 | |
Machinery and equipment | | | 7,865,000 | | | | 7,343,000 | |
Computer hardware and software | | | 802,000 | | | | 753,000 | |
Office furniture, fixtures, equipment and other | | | 764,000 | | | | 721,000 | |
| | | | | | | | |
| | $ | 15,096,000 | | | $ | 14,456,000 | |
Less: accumulated depreciation and amortization | | | (6,219,000 | ) | | | (4,776,000 | ) |
| | | | | | | | |
| | $ | 8,877,000 | | | $ | 9,680,000 | |
| | | | | | | | |
Depreciation and amortization of plant and equipment was $1,551,000, $1,393,000 and $1,248,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
We recorded a loss on the disposal of capital assets of approximately $32,000 for the year ended December 31, 2008 related to the disposal of obsolete equipment. We recorded a loss on the disposal of capital assets of $174,000 for the year ended December 31, 2007 in connection with the move to our new corporate headquarters facility and write-offs of obsolete equipment. Such charges are included in depreciation and amortization within selling, general and administrative expenses. In addition, we recorded accelerated depreciation of $245,000 related to assets that were in use at our Puerto Rico facility and disposed of subsequent to the close of this facility, which is included in cost of sales for the year ended December 31, 2007.
We sold assets from our Puerto Rico facility, which was closed in September 2007 (see Note 3) for a gain of $33,000, which is included in cost of sales for the year ended December 31, 2007.
During 2007, we capitalized $217,000 of costs related to the implementation of a new enterprise resource planning computer software application in accordance with FASB Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.
During 2008, we capitalized $118,000 of costs incurred for the development of machinery and equipment. These costs are classified as construction in progress at December 31, 2008 as the machinery and equipment was not in service at this date. During 2007, we capitalized $61,000 of costs incurred for the development of our new external website in accordance with EITF 00-2, “Accounting for Web Site Development Costs”. These costs were classified as construction in progress and were not being depreciated as of December 31, 2007. During 2008, we capitalized additional costs of $6,000 for the development of our external website which was placed into service and is included in computer hardware and software at December 31, 2008.
NOTE 6 - Revolving Credit Facility
In December 2008, we entered into an amended credit agreement with JP Morgan Chase Bank, N.A. which replaced a $5.0 million credit facility that was expiring. Under the amended credit agreement, we are entitled to borrow from the bank up to $5.0 million 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 $1.5 million. As of December 31, 2008, our borrowing base was $4.6 million. Loans under the credit agreement mature on December 31, 2010. We had no borrowings outstanding under the credit agreement during 2008.
38
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding loans under the credit agreement bear interest, at our option, either (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 credit 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 credit 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 credit 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 credit agreement requires us to maintain, as of the end of each fiscal quarter, tangible net worth and subordinated debt of at least $35.3 million, 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 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 the fiscal quarter for which compliance is being determined of not greater than 2.5 to 1.0. As of December 31, 2008, we were in compliance with all financial covenants in the credit agreement.
NOTE 7 - Income Taxes
The components of the income tax expense / (benefit) for the years ended December 31, 2008, 2007 and 2006 are as follows:
| | | | | | | | | | | | |
| | Years ended December 31, | |
| | | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | |
Current | | | | | | | | | | | | |
Federal | | $ | 43,000 | | | $ | 56,000 | | | $ | 67,000 | |
State | | | 31,000 | | | | 47,000 | | | | 20,000 | |
| | | | | | | | | | | | |
Total current | | | 74,000 | | | | 103,000 | | | | 87,000 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Deferred | | | | | | | | | | | | |
Federal | | | 592,000 | | | | (4,652,000 | ) | | | (745,000 | ) |
State | | | 144,000 | | | | (220,000 | ) | | | (52,000 | ) |
| | | | | | | | | | | | |
Total deferred | | | 736,000 | | | | (4,872,000 | ) | | | (797,000 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total income tax expense (benefit) | | $ | 810,000 | | | $ | (4,769,000 | ) | | $ | (710,000 | ) |
| | | | | | | | | | | | |
39
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a reconciliation from our income tax provision / (benefit) based on the U.S. Federal statutory income tax rate to the income tax expense / (benefit) reported for financial reporting purposes:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | |
| | | |
| | 2008 | | 2007 | | 2006 | |
| | | | | | | |
| | Amount | | % | | Amount | | % | | Amount | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tax at statutory rate | | $ | 472,000 | | | | 34.0 | % | | $ | 568,000 | | | | 34.0 | % | | $ | 670,000 | | | | 34.0 | % | |
Increase (reduction) in income taxes from: | | | | | | | | | | | | | | | | | | | | | | | | | |
State and local income taxes, net of federal income tax effect | | | 71,000 | | | | 5.1 | % | | | 41,000 | | | | 2.5 | % | | | (27,000 | ) | | | -1.4 | % | |
Change in state tax rate | | | 60,000 | | | | 4.3 | % | | | 144,000 | | | | 8.6 | % | | | 59,000 | | | | 3.0 | % | |
Share-based compensation | | | 151,000 | | | | 10.9 | % | | | 155,000 | | | | 9.3 | % | | | 52,000 | | | | 2.6 | % | |
Meals and entertainment | | | 24,000 | | | | 1.7 | % | | | 28,000 | | | | 1.7 | % | | | 23,000 | | | | 1.2 | % | |
Change in valuation allowance | | | 30,000 | | | | 2.2 | % | | | (5,748,000 | ) | | | -344.0 | % | | | (1,546,000 | ) | | | -78.4 | % | |
Other, net | | | 2,000 | | | | 0.1 | % | | | 43,000 | | | | 2.6 | % | | | 59,000 | | | | 3.0 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 810,000 | | | | 58.4 | % | | $ | (4,769,000 | ) | | | -285.4 | % | | $ | (710,000 | ) | | | -36.0 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The tax effects of temporary differences and net operating loss and tax credit carryforwards that give rise to deferred tax assets and liabilities are as follows:
| | | | | | | | | |
| | December 31, | |
| | | |
| | 2008 | | 2007 | |
| | | | | |
Inventory | | $ | 409,000 | | | $ | 223,000 | | |
Accounts receivable | | | 32,000 | | | | 32,000 | | |
Share-based compensation | | | 612,000 | | | | 462,000 | | |
Other liabilities | | | — | | | | 14,000 | | |
Accrued expenses | | | 57,000 | | | | 330,000 | | |
Net operating loss carryforwards | | | 8,230,000 | | | | 9,121,000 | | |
Business and AMT credit carryforwards | | | 422,000 | | | | 379,000 | | |
| | | | | | | | | |
| | $ | 9,762,000 | | | $ | 10,561,000 | | |
Less: valuation allowance | | | (175,000 | ) | | | (144,000 | ) | |
| | | | | | | | | |
Net deferred tax assets | | $ | 9,587,000 | | | $ | 10,417,000 | | |
Property, plant and equipment | | | (291,000 | ) | | | (385,000 | ) | |
| | | | | | | | | |
Net deferred income tax assets | | $ | 9,296,000 | | | $ | 10,032,000 | | |
| | | | | | | | | |
Consistent with the provisions of SFAS No. 109, “Accounting for Income Taxes,” we regularly estimate our ability to recover deferred tax assets, and establish a valuation allowance against deferred tax assets that are determined to be “more-likely-than-not” unrecoverable. 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. During the year ended December 31, 2008, our deferred tax asset valuation allowance was increased by $31,000 related to our estimate of state net operating losses that we expect to expire unutilized. During the years ended December 31, 2007 and 2006, based primarily upon positive evidence derived from our sustained levels of historical profitability and our projections for taxable income in the future, we revised our estimate of the amount of deferred tax assets that would more-likely-than-not be unrecoverable and, accordingly, reduced the deferred tax asset valuation allowance, which resulted in income tax benefits of $5.7 million and $1.6 million for the years ended December 31, 2007 and 2006, respectively. As of December 31, 2008, management believes that it is more-likely-than-not that the results of future operations will generate sufficient taxable income to realize the net amount of our deferred tax assets over the periods during which temporary differences reverse and net operating loss carryforwards expire.
40
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2008, our deferred tax valuation allowance of $175,000 related to (i) general business tax credit carryforwards expected to expire unutilized of $144,000 and (ii) state NOLs expected to expire unutilized of $31,000. As of December 31, 2007, our deferred tax asset valuation allowance of $144,000 related to general business tax credit carryforwards expected to expire unutilized.
At December 31, 2008, for U.S. Federal income tax purposes, we had net operating loss carryforwards of approximately $25.0 million which expire from 2019 to 2022. We estimate that it is more likely than not that these net operating loss carryforwards will be utilized prior to their respective expiration periods and, as such, have not provided a valuation allowance against them. It is at least reasonably possible that the actual period that the net operating loss carryforwards are utilized may differ from this estimate. Our net operating loss carryforwards include $1.0 million of excess stock compensation net operating losses that have not been recorded as deferred tax assets, in accordance with SFAS 123(R). If all of our net operating losses are realized in the future, approximately $334,000 of the benefit (related to excess stock compensation net operating losses) would increase our additional paid-in capital, after regular net operating losses are exhausted. As of December 31, 2008, we have Alternative Minimum Tax credit carryforwards of $264,000, which have no expiration date.
During the years ended December 31, 2008 and 2007, a tax benefit of $255 and $13,000, respectively, was allocated to additional paid-in-capital, resulting from the current reduction in income taxes payable relating to excess stock compensation deductions. During 2008, our deferred tax asset valuation allowance was increased by $31,000 related to our estimate of state net operating losses that we expect to expire unutilized. During the year ended December 31, 2007, our deferred tax asset valuation allowance was reduced by $6.1 million, primarily related to (i) the release of a valuation allowance against certain of our deferred tax assets of $5.7 million (ii) a valuation allowance adjustment recorded upon the adoption of FIN 48 of $255,000 and (iii) the impact of a change in our state tax rate to our deferred taxes of $75,000.
NOTE 8 - Common Stock and Stock Awards
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, under which our ability to grant options expired on October 7, 2008. 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, to our employees, directors and consultants. The 2008 Plan authorizes the grant of awards not to exceed 1.0 million shares of the Company’s Common Stock in the aggregate until May 21, 2018. The Compensation Committee of the Board of Directors determines, among other things, award recipients, the type of award, the number of shares to be subject to each share grant or award, exercise prices for options and the base value for stock appreciation rights, vesting periods and conditions to vesting, and the 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. Pursuant to this agreement, Mr. Paladino was granted a restricted stock 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 award permits Mr. Paladino full voting rights and dividend participation on these shares prior to vesting. As such, we have reflected these shares as outstanding at December 31, 2008. The total fair value on the date of grant of this award was $329,000. We recorded expense of $40,000 during the year ended December 31, 2008 for this award.
41
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our 1998 Stock Option Plan expired as to the grant of future options in October 2008. As of December 31, 2008, options to purchase 1,589,500 shares were outstanding under the 1998 Plan. Our 1995 Employee Stock Option Plan expired as to the grant of future options in September 2005. As of December 31, 2008, options to purchase 167,550 shares were outstanding under the 1995 Plan.
Our 2003 Non-Employee Director Stock Option Plan, as amended, permits our Board of Directors or the Compensation Committee of the Board of Directors to grant, until September 2013, options to purchase up to 1,000,000 shares of common stock to non-employee directors of the company. On the date a person initially becomes an outside director, that individual is granted an option to purchase 24,000 shares under the 2003 Plan. At each annual stockholders meeting at which directors are elected, each outside director in office after the meeting is automatically granted an option to purchase, under the 2003 Plan, amended by stockholders on December 1, 2005 and June 7, 2007, 10,000 shares plus additional specified shares for serving on Board committees or as chairperson of a committee. Options granted under the 2003 Plan must have an exercise price equal to the market value of the common stock on the date of grant. All options granted under the 2003 Plan have a term of ten years and are exercisable quarterly, beginning immediately on the grant date, except that initial option grants to new outside directors vest quarterly over three years starting one year after the grant date. As of December 31, 2008, options to purchase 490,000 shares of common stock were outstanding under the 2003 Plan, and options to purchase 461,000 shares were available for grant. Our 1994 Non-Employee Director Stock Option Plan expired as to the grant of future options in September 2004. As of December 31, 2008, options to purchase 177,000 shares were outstanding under the 1994 Plan.
Our non-employee directors may elect to receive, in lieu of their $10,000 annual cash retainer ($25,000 in the case of the non-executive Chairman of the Board of Directors), shares of our common stock equal in market value to $11,750 ($29,400 in the case of the non-executive Chairman of the Board of Directors). Market value is determined at the date of the annual meeting of stockholders at which directors are elected for the year to which the retainer pertains. In 2008, three directors elected to receive an aggregate of 18,750 shares having a market value of $35,250, and the non-executive Chairman of the Board of Directors elected to receive 15,638 shares having a market value of $29,400. In 2007, four directors elected to receive an aggregate of 18,216 shares having a market value of $47,000, and the non-executive Chairman of the Board of Directors elected to receive 11,395 shares having a market value of $29,400. The shares are subject to forfeiture in the event that the non-employee director resigns or is removed for cause preceding the next annual meeting following the directors’ election to receive the shares. We recognized expense of $73,000 and $68,000 for these awards for the years ended December 31, 2008 and December 31, 2007, respectively.
Total share-based compensation is attributable to the granting of, and the remaining requisite service period of, stock options and restricted stock awards. Compensation expense attributable to share-based compensation for the years ended December 31, 2008, 2007 and 2006 was $807,000, $1,068,000 and $743,000, respectively. The tax benefit related to such compensation cost was $133,000, $215,000 and $210,000 for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, the total unrecognized compensation cost related to non-vested stock awards was $1.6 million and the related weighted average period over which this remaining expense is expected to be recognized is approximately 2.8 years. It is our policy to issue previously authorized shares to satisfy stock option exercises in the period of exercise.
42
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the year ended December 31, 2008:
| | | | | | | | | | | | | | | | | |
| | Common
Shares
Subject to
Options | | Weighted Average
Exercise Price | | Aggregate
Intrinsic
Value | | Weighted Average
Contractual Life
Remaining in
Years | |
| | | | | | | | | |
Outstanding at beginning of year | | | 3,483,375 | | | $ | 2.15 | | | | | | | | | | |
Granted | | | 254,000 | | | | 1.85 | | | | | | | | | | |
Exercised | | | (78,500 | ) | | | 1.27 | | | | | | | | | | |
Forfeited | | | (252,100 | ) | | | 2.16 | | | | | | | | | | |
Expired | | | (857,725 | ) | | | 2.31 | | | | | | | | | | |
Cancelled | | | (125,000 | ) | | | 2.60 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 2,424,050 | | | $ | 2.06 | | | $ | 52,000 | | | | 6.2 | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Options expected to vest | | | 737,234 | | | $ | 2.34 | | | $ | — | | | | 8.1 | | |
Options exercisable at end of year | | | 1,664,950 | | | $ | 1.94 | | | $ | 52,000 | | | | 5.3 | | |
Shares available for future grant at end of year | | | 1,286,000 | | | | | | | | | | | | | | |
The exercise period for all stock options may not exceed ten years from the date of grant. Stock option grants to individuals generally become exercisable in substantively equal tranches over a service period of up to five years.
The total fair value of stock options vested during the years ended December 31, 2008, 2007 and 2006 was $677,000, $978,000 and $708,000, respectively.
The intrinsic value of stock options exercised during the years ended December 31, 2008, 2007 and 2006 was $51,000, $936,000 and $275,000, respectively.
We account for stock-based compensation in accordance with SFAS No. 123(R). The fair value of restricted stock awards is based on the closing market price of our common stock on the measurement date of the award. In order to determine the fair value of stock options on the date of grant, we applied the Black-Scholes-Merton 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 the estimate of 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.
Fair values of options granted were determined based on the following assumptions:
| | | | | | | | | | | | | |
| | Years ended December 31, | |
| | | | | | | |
| | 2008 | | 2007 | | 2006 | |
| | | | | | | |
Expected term | | | 5.8 - 7.0 years | | | 5.2 - 6.5 years | | | 6.4 years | |
Interest rate | | | 2.81% - 3.38 | % | | | 3.9% - 5.2 | % | | | 4.8 | % | |
Volatility | | | 109.8 | % | | | 127.3 | % | | | 132.9 | % | |
Dividends | | | — | | | | — | | | | — | | |
Weighted average fair value of options granted | | $ | 1.56 | | | $ | 2.13 | | | $ | 2.51 | | |
43
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity of our non-vested restricted stock awards during the year ended December 31, 2008:
| | | | | | | | | | |
| | Shares | | Weighted-average
Grant Date Fair
Value | |
| | | | | |
Non-vested awards at beginning of year | | | 29,611 | | | | $ | 2.58 | | |
Granted | | | 209,388 | | | | $ | 1.88 | | |
Vested | | | (29,611 | ) | | | $ | 2.58 | | |
| | | | | | | | | | |
Non-vested awards at end of year | | | 209,388 | | | | $ | 1.88 | | |
| | | | | | | | | | |
The future expected expense for non-vested restricted stock awards is $315,000.
NOTE 9 - Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock in series, with each series having such powers, rights, preferences, qualifications and restrictions as determined by our Board of Directors. No shares of preferred stock were outstanding at December 31, 2008 and December 31, 2007.
In May 2008, our Stockholder Rights Plan under which we could have issued Series D junior participating preferred stock expired. In March 2009, we returned the previously authorized Series D junior participating preferred stock to authorized but unissued preferred stock.
NOTE 10 - Significant Customers, Export Sales and Geographical Segments
Significant Customers
The following customers accounted for 10% or more of our consolidated net sales during one or more of the periods presented below:
| | | | | | | | | | |
| | Years ended December 31, | |
| | | | | | | |
| | 2008 | | 2007 | | 2006 | |
| | | | | | | |
Customer A | | 33 | % | | 29 | % | | 46 | % | |
Customer B | | 14 | % | | 13 | % | | 13 | % | |
Customer C | | | * | | 15 | % | | | * | |
Customer D | | 12 | % | | | * | | | * | |
* Less than 10%
As of December 31, 2008, three customers accounted for approximately 32%, 16% and 14% of accounts receivable, respectively. As of December 31, 2007, two customers accounted for approximately 26% and 22% of accounts receivable, respectively.
44
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Export Sales
For each of the years ended December 31, 2008, 2007 and 2006, export sales were less than 10% of consolidated net sales.
Geographical Segments
We do not have any operating facilities outside the United States; however, certain equipment owned by us is utilized by our contract manufacturers in Asia. The net book value of our equipment held by our contract manufacturers at December 31, 2008 and 2007 was approximately $2.1 million and $2.2 million, respectively. As described in Note 3, we closed our facility in Puerto Rico in September 2007. Prior to this, our operations located in Puerto Rico and New York were managed as one geographic segment.
Significant Contract Manufacturers
On May 3, 2000, we entered into an agreement with a contract manufacturer in Malaysia to outsource the manufacturing of certain of our gas tubes used in our products. The agreement is for ten years, but may be terminated by either party with one year’s advance notice. On December 18, 2003, we entered into an agreement that expires in June 2009 with a contract manufacturer in China, which is a subsidiary of a U.S. based corporation, to manufacture and supply products to us. These two contract manufacturers produce a majority of the products that we sell.
NOTE 11 - Commitments, Contingencies and Related Party Transactions
We lease real property and equipment under operating leases with terms expiring through March 2013. Minimum lease rentals, exclusive of real property taxes, during the next five years are approximately:
| | | | |
2009 | | $ | 29,000 | |
2010 | | $ | 14,000 | |
2011 | | $ | 11,500 | |
2012 | | $ | 11,500 | |
2013 | | $ | 3,000 | |
Rent expense under operating leases was $20,000, $124,000 and $194,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
In September 2007, we closed our operations in Puerto Rico (see Note 3) where we leased a facility under an operating lease that contained a provision that required us to restore the facility to its original condition upon exiting the facility, which primarily involved the removal of leasehold improvements and which was completed in April 2008. We initially recorded an asset retirement obligation of $109,000 in 2005 for this liability and no liability remains as of December 31, 2008.
We are a party to agreements with four executive officers providing that, in the event we should terminate the officer’s employment (other than for cause) or if the officer voluntarily terminates his or her employment for good reason (as defined), the officer will be entitled to at least six months severance pay, the continuation of benefits during the six month period and the acceleration of vesting of stock options. We do not provide our other employees any post-retirement or post-employment benefits, except discretionary severance payments upon termination of employment and their COBRA entitlement.
45
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2006, the Board of Directors elected Kenneth A. Paladino as our President and Chief Executive Officer and a director to replace Timothy J. Roach, who retired and resigned as President, Chief Executive Officer, director and employee of the company. In connection therewith, we entered into a Consulting Agreement with Mr. Roach which replaced the Third Amended and Restated Employment Agreement between Mr. Roach and the company. Under the Consulting Agreement, among other things, Mr. Roach received compensation for a one-year period at the rate of $300,000 per annum. We expensed this amount during the year ended December 31, 2006. In connection with the departure of another executive of the company, effective August 31, 2006, we provided severance-related benefits, including certain salary, benefit continuation and a one year consulting compensation. We expensed approximately $110,000 in connection with this agreement during the year ended December 31, 2006. These severance obligations were paid during 2007.
In connection with the departure of an executive of the company in January 2008, we provided severance benefits including salary continuation and health benefits for a period of one year. We recorded a charge of $291,000 during the year ended December 31, 2007 for these benefits, exclusive of a bonus of $80,000 that was earned and recorded in 2007. A liability of $11,000 remains in accrued liabilities at December 31, 2008.
In September 2005, we entered into a consulting agreement with Alfred J. Roach, who, at the time ceased being Chairman of the Board of Directors but remains a beneficial owner of more than 5% of our common stock. The consulting agreement provides for Mr. Roach to consult with our executive officers and directors regarding our business and operations, focusing on the sale and marketing of our products. The four year agreement commenced on November 1, 2005 (when he ceased being an employee) and provides for an annual fee of $160,000 per year and 5% commissions on the net sales generated as a result of his efforts related to products sold in specified foreign countries where we are currently not doing any business. We have not recorded any expense for commissions under this agreement through December 31, 2008.
On September 14, 2005, we entered into a one year consulting agreement with Charles H. House, a director and non-executive Chairman of our Board of Directors. Mr. House assisted us in, among other things, the analysis, development and implementation of a comprehensive go-to-market business plan for certain of our products in exchange for 35,000 shares of our common stock. As the award became fully-vested and non-forfeitable upon completion of his consulting services, we recognized expense for these awards based upon the fair value of the vested portion of the award at each reporting date. The expense recognized for these awards was $55,000 for the year ended December 31, 2006.
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.
In February 2009, a lawsuit was filed in Puerto Rico by a former sales representative against us. The complaint alleges that we terminated our relationship with the former sales representative without just cause and is seeking $1.4 million in damages, plus attorney’s fees and costs. We believe this case is without merit and we intend to defend this case vigorously.
NOTE 12 – Employee Benefits
In connection with the closing of our facility and operations in Puerto Rico in September 2007 (see Note 3), we terminated our separate defined contribution plan in which the employees in Puerto Rico participated. All participants were required to take distributions. We currently have one defined contribution plan, which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. This plan covers substantially all U.S. employees who meet eligibility requirements and requires us to match employees’ contributions up to specified limitations and subject to certain vesting schedules. In October 2005, our Board of Directors approved an increase in our voluntary 401(k) matching contribution from 10% to 20% of each participating employee’s deferred contribution commencing January 1, 2006, and in November 2007, approved a further increase from 20% to 40% of each participating employee’s deferred contribution commencing January 1, 2008. Our expense for employer matching contributions was $118,000, $63,000 and $66,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
46
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 2008 and 2007:
| | | | | | | | | |
| | December 31, | |
| | | |
| | 2008 | | 2007 | |
| | | | | |
Accrued payroll, bonus and vacation | | $ | 402,000 | | | $ | 1,229,000 | | |
Accrued legal and other professional fees | | | 151,000 | | | | 103,000 | | |
Other accrued expenses | | | 99,000 | | | | 524,000 | | |
| | | | | | | | | |
| | $ | 652,000 | | | $ | 1,856,000 | | |
| | | | | | | | | |
NOTE 14 - Quarterly Financial Data (Unaudited)
The following table summarizes our unaudited quarterly results for the years ended December 31, 2008, 2007 and 2006:
| | | | | | | | | | | | | | | | |
Quarter ended | | Net sales | | Gross
profit | | Operating
income
(loss) | | Net
income
(loss) | | Diluted net
income
per share
(a) | |
| | | | |
| | (in thousands, except per share data) | |
March 31, 2008 | | $ | 8,851 | | $ | 3,252 | | $ | 223 | | $ | 151 | | $ | 0.01 | |
June 30, 2008 | | | 9,876 | | | 3,527 | | | 673 | | | 369 | | $ | 0.03 | |
September 30, 2008 | | | 8,521 | | | 2,873 | | | 311 | | | 126 | | $ | 0.01 | |
December 31, 2008 | | | 7,942 | | | 2,360 | | | 154 | | | (68 | ) | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
March 31, 2007 | | $ | 8,427 | | $ | 2,792 | | $ | (289 | ) | $ | (157 | ) | $ | (0.01 | ) |
June 30, 2007 | | | 13,731 | | | 3,547 | | | 402 | | | 169 | | $ | 0.01 | |
September 30, 2007 | | | 12,704 | | | 3,989 | | | 700 | | | 372 | | $ | 0.03 | |
December 31, 2007 | | | 11,984 | | | 4,314 | | | 688 | | | 6,056 | | $ | 0.44 | |
| | | | | | | | | | | | | | | | |
March 31, 2006 | | $ | 9,428 | | $ | 3,187 | | $ | 528 | | $ | 343 | | $ | 0.03 | |
June 30, 2006 | | | 11,211 | | | 3,761 | | | 685 | | | 437 | | $ | 0.03 | |
September 30, 2006 | | | 10,495 | | | 3,964 | | | 579 | | | 399 | | $ | 0.03 | |
December 31, 2006 | | | 7,971 | | | 2,463 | | | (37 | ) | | 1,502 | | $ | 0.11 | |
| |
(a) | The sum of the unaudited quarterly diluted net income per share amounts do not always equal the annual amount reported because the per share amounts are computed independently for each quarter and the year. |
47
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
Not applicable.
|
| |
ITEM 9A(T). | CONTROLS AND PROCEDURES |
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 December 31, 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.
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes policies and procedures pertaining to our ability to record, process and report reliable information. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our published financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2008, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2008, there were no changes in the Company’s internal control over financial reporting that have materially and adversely affected, or are reasonably likely to materially and adversely affect, the Company’s internal control over financial reporting.
48
PART III
The information required by Part III (Items 10, 11, 12, 13 and 14) of Form 10-K is incorporated herein by reference to the information called for by those items which will be contained our Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to our 2009 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements
| | |
Reports of Independent Registered Public Accounting Firms | | 26 |
Consolidated Balance Sheets at December 31, 2008 and December 31, 2007 | | 28 |
Consolidated Statements of Income for the years ended December 31, 2008, December 31, 2007 and December 31, 2006 | | 29 |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, December 31, 2007 and December 31, 2006 | | 30 |
Consolidated Statements of Cash Flows for the years ended December 31, 2008, December 31, 2007 and December 31, 2006 | | 31 |
Notes to Consolidated Financial Statements | | 32 |
(2) Financial Statement Schedules
None
(3) Exhibits
| | | | | |
Exhibit
Number | | | | Description | |
| | | | | | |
| | |
2(a) | | Agreement, dated as of February 27, 2006, by and between The Community Programs Center of Long Island, Inc. and us. Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated (date of earliest event reported) February 27, 2006 (File No. 001-8048). |
| | |
3(a)(1) | | Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 001-8048). |
| | |
3(a)(2) | | Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 001-8048). |
| | |
3(a)(3) | | Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 001-8048). |
| | |
3(b) | | By-laws, as amended. Incorporated by reference to Exhibit 3 to our Current Report on Form 8-K dated (date of earliest event reported) November 13, 2007 (File No. 001-8048). |
| | |
4(a)(1) | | Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
49
| | |
4(a)(2) | | Line of Credit Note, dated December 15, 2006, from us to JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
|
4(a)(3) | | Amendment to Line of Credit Note and Credit Agreement, dated as of December 30, 2008, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
4(a)(4) | | Continuing Security Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(c) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
4(a)(5) | | Continuing Guaranty, dated as of December 15, 2006, by TII Systems, Inc. in favor of JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(d) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
10(a)(1)(A)+ | | 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to our Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 001- 8048). |
| | |
10(a)(1)(B)+ | | Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(1)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
10(a)(2)(A)+ | | 1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 001-8048). |
| | |
10(a)(2)(B)+ | | Form of Incentive Stock Option Contract, dated June 7, 2005, between us and separately with each of Kenneth A. Paladino and Nisar Chaudhry. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005. |
| | |
10(a)(2)(C)+ | | Forms of Option Contracts under our 1995 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(2)(E) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No 001-8048). |
| | |
10(a)(3)(A)+ | | 1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048). |
| | |
10(a)(3)(B)+ | | Incentive Stock Option Contract, dated September 13, 2005 between us and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005. |
| | |
10(a)(3)(C)+ | | Forms of Option Contracts under our 1998 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
10(a)(4)(A)+ | | 2003 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048). |
| | |
10(a)(4)(B)+ | | Forms of Option Contracts under our 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(4)(C) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
10(a)(5)(A)+ | | The Company’s 2008 Equity Compensation Plan. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048). |
50
| | |
10(a)(5)(B)+ | | Restricted Stock Contract dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048). |
| | |
10(a)(5)(C)+* | | Forms of Non-Qualified Stock Option, Incentive Stock Option, Stock Appreciation Rights, Restricted Stock and Restricted Stock Unit Contracts under our 2008 Equity Compensation Plan. |
| | |
10(b)(1)+ | | Employment Agreement dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048). |
| | |
10(b)(2)+ | | Amendment, effective January 1, 2009, to Employment Agreement dated as of April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(c)(1)+ | | Letter Agreement, dated October 18, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.02 to our Current Report on Form 8-K dated (date of earliest event reported) November 15, 2006 (File No. 001-8048). |
| | |
10(c)(2)+ | | Termination Severance Agreement, dated December 15, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
10(c)(3)+ | | Amendment, effective January 1, 2009, to Termination Severance Agreement, dated December 15, 2006, between the Company and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(d)(1)+ | | Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(d)(2)+ | | Amendment, effective January 1, 2009, to Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(f)(1)(A)+ | | Resolution of the Board of Directors adopted on October 14, 2005 amending the cash compensation payable to non-employee directors. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) October 14, 2005 (File No 1-8048). |
| | |
10(f)(1)(B)+ | | Reimbursement Policy for Non-Employee Directors dated December 31, 2008. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(f)(2)+ | | Description of Arrangement to Permit Directors to Accept Shares of Common Stock of the company in Lieu of Annual Directors’ Fees. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No 001-8048). |
| | |
10(g)+ | | Consulting Agreement, dated September 14, 2005, between us and Alfred J. Roach. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 001-8048). |
51
| | |
10(h) | | Severance Agreement, dated January 11, 2008, between us and Martin Pucher. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001-8048). |
| | |
10(i) | | Product Purchase Agreement, effective as of April 1, 2005, between us and Verizon Services Corp. (confidential treatment has been granted with respect to certain portions of this agreement). Incorporated by reference to Exhibit 10(d) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
14 | | Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001- 8048). |
| | |
21 | | List of Subsidiaries. Incorporated by reference to Exhibit 21 to our Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (File No. 001-8048). |
| | |
23(a)* | | Consent of Marcum & Kliegman LLP. |
| | |
23(b)* | | Consent of KPMG LLP. |
| | |
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. |
| | |
| | |
* | Filed herewith. |
| |
+ | Management contract or compensatory plan or arrangement. |
52
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | TII NETWORK TECHNOLOGIES, INC. |
| | |
March 27, 2009 | By: | /s/ Kenneth A. Paladino | |
| | | |
| | Kenneth A. Paladino, President and |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | |
March 27, 2009 | | /s/ Kenneth A. Paladino | |
| | | |
| | Kenneth A. Paladino, President and |
| | Chief Executive Officer (Principal |
| | Executive Officer) and Director |
| | |
March 27, 2009 | | /s/ Jennifer E. Katsch | |
| | | |
| | Jennifer E. Katsch, Vice President-Finance (Principal |
| | Financial Officer), Treasurer and Chief Financial |
| | Officer |
| | |
March 27, 2009 | | /s/ Mark T. Bradshaw | |
| | | |
| | Mark T. Bradshaw, Director |
| | | |
March 27, 2009 | | /s/ Lawrence M. Fodrowski |
| | | |
| | Lawrence M. Fodrowski, Director |
| | |
March 27, 2009 | | /s/ James J. Grover, Jr. | |
| | | |
| | James R. Grover, Jr., Director |
| | |
| | | |
| | Susan Harman, Director |
| | |
March 27, 2009 | | /s/ Charles H. House | |
| | | |
| | Charles H. House, Director |
| | |
March 27, 2009 | | /s/ Brian Kelley | |
| | | |
| | Brian Kelley, Director |
53
Exhibit Index
| | | | | |
Exhibit
Number | | | | Description | |
| | | | | | |
| | |
2(a) | | Agreement, dated as of February 27, 2006, by and between The Community Programs Center of Long Island, Inc. and us. Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated (date of earliest event reported) February 27, 2006 (File No. 001-8048). |
| | |
3(a)(1) | | Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 001-8048). |
| | |
3(a)(2) | | Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 001-8048). |
| | |
3(a)(3) | | Certificate of Amendment to Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 001-8048). |
| | |
3(b) | | By-laws, as amended. Incorporated by reference to Exhibit 3 to our Current Report on Form 8-K dated (date of earliest event reported) November 13, 2007 (File No. 001-8048). |
| | |
4(a)(1) | | Credit Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
4(a)(2) | | Line of Credit Note, dated December 15, 2006, from us to JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
4(a)(3) | | Amendment to Line of Credit Note and Credit Agreement, dated as of December 30, 2008, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
4(a)(4) | | Continuing Security Agreement, dated as of December 15, 2006, between JPMorgan Chase Bank, N.A. and us. Incorporated by reference to Exhibit 4.1(c) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
4(a)(5) | | Continuing Guaranty, dated as of December 15, 2006, by TII Systems, Inc. in favor of JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.1(d) to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
| | |
10(a)(1)(A)+ | | 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to our Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 001- 8048). |
| | |
10(a)(1)(B)+ | | Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(1)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
10(a)(2)(A)+ | | 1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 001-8048). |
54
| | |
10(a)(2)(B)+ | | Form of Incentive Stock Option Contract, dated June 7, 2005, between us and separately with each of Kenneth A. Paladino and Nisar Chaudhry. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005. |
| | |
10(a)(2)(C)+ | | Forms of Option Contracts under our 1995 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(2)(E) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No 001-8048). |
| | |
10(a)(3)(A)+ | | 1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048). |
| | |
10(a)(3)(B)+ | | Incentive Stock Option Contract, dated September 13, 2005 between us and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005. |
| | |
10(a)(3)(C)+ | | Forms of Option Contracts under our 1998 Stock Option Plan. Incorporated by reference to Exhibit 10(a)(3)(B) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
10(a)(4)(A)+ | | 2003 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No. 001-8048). |
| | |
10(a)(4)(B)+ | | Forms of Option Contracts under our 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 10(a)(4)(C) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
10(a)(5)(A)+ | | The Company’s 2008 Equity Compensation Plan. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048). |
| | |
10(a)(5)(B)+ | | Restricted Stock Contract dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048). |
| | |
10(a)(5)(C)+* | | Forms of Non-Qualified Stock Option, Incentive Stock Option, Stock Appreciation Rights, Restricted Stock and Restricted Stock Unit Contracts under our 2008 Equity Compensation Plan. |
| | |
10(b)(1)+ | | Employment Agreement dated April 3, 2008 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K dated (date of earliest event reported) April 3, 2008 (File No. 1-8048). |
| | |
10(b)(2)+ | | Amendment, effective January 1, 2009, to Employment Agreement dated as of April 3, 2008, between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(c)(1)+ | | Letter Agreement, dated October 18, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.02 to our Current Report on Form 8-K dated (date of earliest event reported) November 15, 2006 (File No. 001-8048). |
| | |
10(c)(2)+ | | Termination Severance Agreement, dated December 15, 2006, between us and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 15, 2006 (File No. 001-8048). |
55
| | |
10(c)(3)+ | | Amendment, effective January 1, 2009, to Termination Severance Agreement, dated December 15, 2006, between the Company and Jennifer E. Katsch. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(d)(1)+ | | Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(a) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(d)(2)+ | | Amendment, effective January 1, 2009, to Termination Severance Agreement, dated February 7, 2007, between the Company and David E. Foley. Incorporated by reference to Exhibit 99.3(b) to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(f)(1)(A)+ | | Resolution of the Board of Directors adopted on October 14, 2005 amending the cash compensation payable to non-employee directors. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) October 14, 2005 (File No 1- 8048). |
| | |
10(f)(1)(B)+ | | Reimbursement Policy for Non-Employee Directors dated December 31, 2008. Incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K dated (date of earliest event reported) December 30, 2008 (File No. 001-8048). |
| | |
10(f)(2)+ | | Description of Arrangement to Permit Directors to Accept Shares of Common Stock of the company in Lieu of Annual Directors’ Fees. Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K dated (date of earliest event reported) December 1, 2005 (File No 001-8048). |
| | |
10(g)+ | | Consulting Agreement, dated September 14, 2005, between us and Alfred J. Roach. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 001-8048). |
| | |
10(h) | | Severance Agreement, dated January 11, 2008, between us and Martin Pucher. Incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001-8048). |
| | |
10(i) | | Product Purchase Agreement, effective as of April 1, 2005, between us and Verizon Services Corp. (confidential treatment has been granted with respect to certain portions of this agreement). Incorporated by reference to Exhibit 10(d) to our Annual Report on Form 10-K for the fiscal year ended June 24, 2005 (File No. 001-8048). |
| | |
14 | | Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14.1 to our Current Report on Form 8-K dated (date earliest event reported) January 11, 2008 (File No. 001- 8048). |
| | |
21 | | List of Subsidiaries. Incorporated by reference to Exhibit 21 to our Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (File No. 001-8048). |
| | |
23(a)* | | Consent of Marcum & Kliegman LLP |
| | |
23(b)* | | Consent of KPMG LLP. |
| | |
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. |
56
| | |
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. |
| | |
| | |
* | Filed herewith. |
| |
+ | Management contract or compensatory plan or arrangement. |
57
