SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 24, 2005
COMMISSION FILE NUMBER 1-8048
TII NETWORK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0328885
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1385 Akron Street, Copiague, New York 11726
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(Address of principal executive offices) (Zip Code)
(631) 789-5000
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock. $.01 par value
Series D Junior Participating Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [ ] No [X]
The aggregate market value of the voting stock of the registrant
outstanding as of December 31, 2004 the last business day of the registrant's
most recently completed second quarter held by non-affiliates of the registrant
was approximately $16.1 million. While such market value excludes the market
value of shares that may be deemed beneficially owned by executive officers and
directors, this should not be construed as indicating that all such persons are
affiliates.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Common Stock of the registrant outstanding
as of September 19, 2005 was 12,246,096.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 2005 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Report.
Forward-Looking Statements
Certain statements in this Report are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
this Report, words such as "may," "should," "seek," "believe," "expect,"
"anticipate," "estimate," "project," "intend," "strategy" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans, operations, business strategies, operating results and financial
position. Forward-looking statements are subject to a number of known and
unknown risks and uncertainties that could cause the Company's actual results,
performance or achievements to differ materially from those described or implied
in the forward-looking statements. These factors include, but are not limited
to:
o exposure to increases in the cost of the Company's products, including
increases in the cost of the Company's petroleum-based plastic products
(see "Business - Raw Materials" and "Business Manufacturing");
o the Company's dependence for products and product components on Pacific
Rim contract manufacturers, including on-time delivery, quality and
exposure to changes in cost and changes in the valuation of the Chinese
Yuan (see "Business - Manufacturing");
o dependence on, and ability to retain, its "as-ordered" general supply
agreements with its largest three customers and win new contracts ( see
"Business - Marketing and Sales");
o continued dependence on the traditional copper-based Telco market which
has been declining over the last several years due principally to the
impact of alternate technologies and competition from multi-system
operators (see "Business - Competition");
o the ability of the Company to market and sell products to new markets
beyond its principal market - the copper-based Telco market ( see
"Business - Marketing and Sales");
o the Company's ability to timely develop products and adapt its existing
products to address technological changes, including changes in its
principal market (see "Business - Products" and "Business - Research
and Development");
o the potential for the disruption of shipments as a result of, among
other things, third party labor disputes and political unrest in or
shipping disruptions from countries in which the Company's contract
manufacturers produce the Company's products (see "Business -
Manufacturing");
o weather and similar conditions, particularly the effect of
hurricanes/typhoons on the Company's manufacturing, assembly and
warehouse facilities in Puerto Rico or the Pacific Rim (see "Business -
Manufacturing");
o competition in the Company's traditional Telco market and new markets
the Company is seeking to penetrate (see "Business - Competition");
o potential changes in customers' spending and purchasing policies and
practices (see "Business - Marketing and Sales");
o general economic and business conditions, especially as they pertain to
the Telco industry;
o dependence on third parties for product development (see "Business -
Research and Development");
o risks inherent in new product development and sales, such as start-up
delays and uncertainty of customer acceptance;
o the Company's ability to attract and retain technologically qualified
personnel (see "Business Research and Development");
o the Company's ability to fulfill its growth strategies;
o the level of inventories maintained by the Company's customers;
o the Company's ability to maintain listing of its Common Stock on the
Nasdaq SmallCap market;
o the availability of financing on satisfactory terms (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations").
2
PART I
ITEM 1. Business
General
TII Network Technologies, Inc. and subsidiary (together, the "Company"
or "TII"), designs, produces and markets lightning and surge protection
products, network interface devices ("NIDs"), station electronics and other
products. The Company sells these products principally to United States
telephone operating companies ("Telcos"), including the Regional Bell Operating
Companies ("RBOCs") and Independent Operating Companies (together, incumbent
local exchange carriers or "ILECs") and competitive local exchange carriers
("CLECs"). The Company also sells its products to original equipment
manufacturers ("OEMs") and multi-system operators ("MSOs") of communications
services. The Company believes that its products offer superior, cost-effective
performance, features and characteristics, including high reliability, long life
cycles, ease of installation and optimum protection against adverse
environmental conditions. This has resulted in TII becoming a leading supplier
of overvoltage surge protectors to the ILECs for use at their subscriber
locations.
Overvoltage surge protection is mandated in the United States by the
National Electrical Code ("NEC") to be installed on subscriber telephone lines
to prevent injury to users and damage to their equipment due to surges caused by
lightning and other hazardous overvoltages. The NEC is published by the National
Fire Protection Agency and typically is adopted by states and local
municipalities. The 1999 edition of the NEC requires overvoltage surge
protection to be included on network powered coax lines, a technology that
brings telephony and broadband services to homes and businesses. The Company's
patented broadband In-Line(R) coax protector product line has been designed to
address this market.
The Company also markets a line of NIDs tailored to various customer
specifications. NIDs house the FCC mandated demarcation point between
Telco-owned and subscriber-owned property. NIDs typically also enclose
overvoltage surge protectors and various station electronic products that, among
other things, allow a Telco to remotely test the integrity of its lines, thereby
minimizing costly maintenance dispatches.
In fiscal 2003, three RBOCs (Verizon, SBC and BellSouth) jointly
announced a ten to fifteen year multi-billion dollar capital improvement program
to deploy fiber optic lines to virtually all homes and businesses within their
regions (referred to as Fiber to the Premise, or "FTTP"). FTTP transmission is
significantly faster than traditional copper networks currently deployed by most
Telcos and MSOs. While the FTTP program is still in the early stage of
deployment by the RBOCs, its deployment will impact the Company's traditional
protection based products since FTTP networks require less traditional
protection than traditional copper networks.
The Company files Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q, files or furnishes Current Reports on Form 8-K, files or furnishes
amendments to those reports, and files proxy and information statements with the
Securities and Exchange Commission (the "SEC"). These reports and statements may
be read and copied at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. These reports and
statements, as well as beneficial ownership reports filed by the Company's
officers, directors and beneficial owners of more than 10% of the Company's
common stock, may be obtained without charge through the Company's Internet site
http://www.tiinettech.com as soon as reasonably practicable after such materials
are filed with, or furnished to, the SEC.
3
Products
Lightning and Overvoltage Surge Protection Products. The Company designs,
produces and markets overvoltage surge protection products primarily for use on
the subscribers' home or business telephone lines. Surge protectors: (i) protect
the subscribers and their equipment; (ii) reduce the subscribers' loss of
service; (iii) reduce the communications providers' loss of revenue due to
subscriber outages; and (iv) reduce the communications providers' costs to
replace or repair damaged equipment. Overvoltage surge protectors differ in
power capacity, application, configuration and price to meet varying needs.
In the United States, the NEC mandates overvoltage surge protectors to
be installed on all subscribers' telephone lines that are exposed to lightning
and accidental contact with electric light or power conductors.
Gas Tubes: The Company's gas tubes represent the foundation upon which
most of the Company's overvoltage surge protector products are based. The
principal component of the Company's overvoltage surge protector is a
proprietary two or three electrode gas tube. Overvoltage surge protection is
provided when the voltage on a communication line elevates to a level preset in
the gas tube, at which time the gases in the tube instantly ionize, momentarily
disconnecting the phone or other equipment from the circuit while safely
conducting the hazardous surge to ground. When the voltage on the line drops to
a safe level, the gases in the tube return to their normal state, returning the
phone and other connected equipment to service. The Company's gas tubes are a
standard in the industry and have been designed to withstand multiple
high-energy overvoltage surges while continuing to operate over a long service
life.
Modular Station Protectors: One of the Company's most advanced
overvoltage surge protectors, marketed under the trademark Totel Failsafe(R)
("TFS"), combines the Company's three electrode gas tube with a thermally
operated failsafe mechanism. The three-electrode gas tube is designed to protect
equipment from hazardous overvoltage surges and the failsafe mechanism is
designed to insure that, under sustained overvoltage conditions, the protector
will become permanently grounded. In certain of its modular protectors, the
Company combines the TFS protection element with a sealing gel making this
protector impervious to severe moisture or environmental contamination while
providing advanced overvoltage surge protection. The Company has developed
several overvoltage protectors for high-speed broadband applications.
Broadband Coaxial Protectors: The 1999 revision to the NEC requires
overvoltage surge protection on all network powered subscriber coax lines, a
cable technology that brings telephony and broadband services to homes and
businesses. As an integral part of the Company's broadband product line, the
Company has developed and patented a high-performance, 75-ohm broadband coax
protector to safeguard coaxial cable lines. While providing overvoltage surge
protection, the Company's In-Line(R) broadband coax protectors are virtually
transparent to the network, permitting high-bandwidth signals to be transmitted
without adversely affecting the signal.
Utilizing the Company's patent on In-Line(R) coaxial cable surge
protectors, the Company also offers for sale a 50-ohm base station protector
product line which is designed to protect wireless service providers' cell sites
from the damaging effects of lightning and other surges.
Solid State and Hybrid Modular Station Protectors: Incorporating
solid-state components, the Company's products include solid-state overvoltage
surge protectors. While solid-state overvoltage surge protectors are faster than
gas tube overvoltage surge protectors at reacting to surges, a feature that some
customers believe important in protecting certain of their sensitive equipment,
they have lower energy handling capability and higher capacitance than gas
tubes. When an overvoltage surge exceeds the energy handling capacity of the
solid-state protector, it fails, causing the telephone or other connected
equipment to cease operating. High capacitance on a communication line adversely
affects high-bandwidth transmission, distorting the signal. As a result, most
Telcos use high-energy handling, low capacitance gas tube protectors at the
subscriber location. In the Telco's switching center, where lower energy
handling and higher capacitance is not a major concern, solid-state protectors
are used more frequently. As communications equipment becomes more complex, a
protector's reaction speed to a surge may be perceived to be more critical than
its energy handling capabilities. In response, the Company has combined
solid-state protectors with the Company's gas tubes in hybrid overvoltage surge
protectors. While generally more expensive and complex than gas tube surge
protectors, the hybrid surge
4
protector can provide the speed of a solid-state protector with the energy
handling capability of a gas tube. (See "Business - Competition.")
AC Powerline Protectors: TII's powerline surge protectors utilize its
surge protection technology and are principally used by Telcos at their central
office locations. These devices protect the connected communication equipment
against damage or destruction caused when overvoltage surges enter equipment
through the powerline. These products have superior surge handling
characteristics compared to the standard strip surge protectors that plug into a
homeowner's AC outlet.
AC Powerline/Dataline Protectors: The Company has developed
powerline/dataline protectors for personal computers and home entertainment
systems. These protectors combine the Company's powerline protection technology
with the Company's proprietary protection for the telephone, DSL, Ethernet,
universal serial bus ("USB") and coax lines. The powerline/dataline protector
has unique protection and low capacitance qualities that are ideal for certain
applications, especially where protection and low capacitance are necessary,
particularly for residential powerline networking applications.
Lightning and overvoltage surge protection products, sold separately
from NIDs, accounted for approximately 24%, 31% and 27% of the Company's net
sales during the Company's fiscal years 2005, 2004 and 2003, respectively.
Network Interface Devices. The Company designs, produces and markets various
NIDs, which house the FCC mandated demarcation point between Telco-owned and
subscriber-owned property. The Company's NIDs typically also enclose its
overvoltage surge protectors and various station electronic products that, among
other things, allow Telcos to remotely test the integrity of their lines
minimizing costly maintenance dispatches.
To address the demand for voice, high-speed data and interactive video
services, Telcos and MSOs are expanding and upgrading their networks to
accommodate the higher bandwidth necessary to transmit these services. In
response, and with future technology in mind, TII has developed a line of
broadband NIDs designed to enclose the technology of choice needed to
accommodate higher bandwidth signals, whether traditional twisted pair lines,
high-bandwidth coaxial cable or fiber optic lines. The Company's broadband NID
product line is modular in design and thus facilitates expansion to accommodate
additional subscriber access lines. For use in various markets, the NID product
line currently consists of enclosures that accommodate from one to twenty-five
access lines. The Company's broadband NIDs can also accommodate TII's DSL
electronic products in addition to the Company's patented coaxial overvoltage
surge protector.
NID sales (including overvoltage surge protectors and station
electronic products installed therein) represented approximately 54%, 54% and
62% of the Company's net sales during fiscal 2005, 2004 and 2003, respectively.
Station Electronic, VOIP Enclosures and Other Products. The Company designs,
produces and markets station electronic products that are typically installed
within a NID. One of the Company's station electronic products allows a Telco to
remotely test the integrity of its lines, minimizing costly maintenance
dispatches. Additionally, since Telcos have been expanding and upgrading their
networks with new technologies to provide users with the expanded bandwidth
necessary for high-speed transmission of data over traditional Telco lines, TII
has developed several DSL station electronic products for this market. This
product line also includes DSL POTS (Plain Old Telephone Service) Splitters that
isolate the voice and data signals on a Telco line to provide separate outputs
for phone and data services, enabling DSL service.
During fiscal 2005, the Company introduced several passive Voice Over
Internet Protocol ("VOIP") products which allow MSO's to consolidate multiple
phone lines in one location in order to provide Internet Protocol ("IP")
telephony to their cable subscribers. These are the first of several VOIP
related products that the Company is developing for this rapidly growing market.
Home Networking Systems. To address the growing demands and complexities of
communications networks in the home, the Company is in the process of bringing
to market a multi-service residential gateway product
5
through its traditional Telco distribution channels. This new system, referred
to as a SID (Service Interface Device), is being jointly developed and marketed
with a technology partner. Developmental problems that delayed the introduction
of the SID have essentially been resolved and the Company anticipates that field
trials of the SID will occur at several ILECs in the second half of fiscal 2006.
The Company has introduced HomePlug compatible and HomePlug embedded
surge protectors that incorporate the Company's proprietary AC protection and a
HomePlug powerline communications integrated circuit. This technology enables
networking of voice, data and audio devices through the consumers' AC
powerlines. This is one of several new products that the Company has introduced
to address the growing HomePlug market. These products are also designed to
protect sensitive equipment from the effects of lightning and other hazardous
surges, without affecting the high-speed signals that are transmitted over the
residential powerlines.
Research and Development
New product opportunities continue to arise in the Company's
traditional Telco markets, as well as in the OEM and MSO markets. The Company
also continues to evaluate the commercial, industrial and international markets
for its current products as well as variations of them. The Company's research
and development ("R&D") and related marketing efforts are focused on several
projects, currently including:
o Expanding powerline protection technology into targeted markets,
including residential powerline communications and broadband over
powerline,
o Developing fiber optic protection solutions, connectivity products and
enclosures to address the deployment of FTTP, as well as the expanding
use of fiber in homes and businesses,
o Further expanding the Company's passive and active VOIP products,
o Expanding and enhancing SID, a new multi-service residential gateway
system which the Company is in the process of bringing to market, and
o Further developing DSL and coaxial cable overvoltage surge protectors
and station electronics for the growing broadband communications
markets, including Telcos and MSOs.
The Company's R&D strategy includes developing products internally,
with technology partners and with contract manufacturers. The Company's R&D
engineers work closely with its contract manufacturers during the design and
development phase of all products, especially its gas tubes and enclosures. The
Company is jointly developing and marketing SID and HomePlug products with
technology partners.
The Company's R&D department is skilled and experienced in various
technical disciplines, including physics, electrical, mechanical and software
design, with specialization in such fields as plastics, electronics, metallurgy
and chemistry. The Company's contract manufacturing partners are similarly
skilled in these R&D fields, with engineering and manufacturing expertise to
bring a product of the highest quality and at a competitive price to market on
time. The Company's other technology partners are skilled in the design of
products for advanced communications networks.
The Company's R&D expense was $1.3 million, $1.4 million and $1.3
million during fiscal years 2005, 2004 and 2003, respectively. Though
essentially spending at the same level these past three fiscal years, the
Company has directed a higher portion of its R&D outlays in 2005 to new
technologies and products as opposed to its traditional copper-based protection
products. (See "Business - Manufacturing")
Marketing and Sales
The Company markets and sells its products to the Telcos and MSOs
through direct sales personnel, as well as manufacturers' representatives.
Products are distributed either directly or through national and regional
distributors. OEM customers are typically sold direct or through distributors.
Prior to selling its products to a Telco, MSO or associated OEM
customer, the Company must typically undergo a lengthy product qualification
process involving approval agencies designated by law, codes and/or customers.
Thereafter, the Company continually submits successive generations of products,
as well as new
6
products, to its customers for qualification. The Company's reputation as a
leading supplier of overvoltage surge protectors to Telco customers for over 30
years combined with its strategy to develop products by working closely with its
customers, provides a strong position from which it can market new products to
its current Telco customer base as well as to new emerging market customers.
The following customers accounted for 10% or more of the Company's
consolidated net sales during one or more of the years presented below. The loss
of, or the disruption of shipments to, one of these customers could have a
material adverse effect on the Company's results of operations and financial
condition.
Year Ended
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June 24, June 25, June 27,
2005 2004 2003
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Verizon 52% 53% 58%
Tyco Electronics Corporation 10% 13% 7%
Telco Sales, Inc. 10% 11% 10%
While the Company has begun to more aggressively market and sell into
new emerging markets, Telco customers, including those listed above, represented
approximately 94% of the Company's sales in fiscal 2005. Verizon and its
affiliates ("Verizon") is a Telco RBOC. Tyco Electronics Corporation purchases
overvoltage protection products from the Company for inclusion within their
products for resale to Telcos. Telco Sales, Inc. is a distributor that purchases
the Company's products for resale to Telcos.
On July 8, 2005, the Company received a Product Purchase Agreement (the
"Verizon Agreement"), which is a general supply agreement, from Verizon Services
Corp. setting forth the terms under which the Company is to continue to provide
product to Verizon, with additional approved products and an expanded territory,
until March 31, 2010. Prices, warranties, benefits, terms and conditions granted
to Verizon under the Verizon Agreement are fixed, but must be at least as
favorable as those granted by the Company to other commercial customers under
like or similar circumstances. The principal products that will be supplied
under the terms of the Verizon Agreement are NIDs for deployment by Verizon in
its traditional copper transmission network. The products incorporate the
Company's sealing technologies and other components, including DSL enabling
electronics.
Sales of the Company's products to Telcos, including Verizon, are
generally through "as-ordered" general supply agreements. General supply
agreements do not require Telcos to purchase specific quantities of products and
can be terminated for various reasons, including without cause by either party,
or extended by mutual written agreement. Purchases of the Company's products are
generally based on individual customer purchase orders for delivery from
inventory or within up to thirty days. The Company, therefore, has no material
firm backlog of orders.
The Company believes that its products offer superior, cost-effective
performance, features and characteristics, including high reliability, long life
cycles, ease of installation and optimum protection against adverse
environmental conditions. The Company believes that this, together with
responsive customer service, reduces the risks inherent in "as-ordered"
contracts. The Company further believes that its superior products and customer
care,attributes which have attracted and maintained its Telco business, will
enhance the Company's ability to expand into emerging markets.
The Company's international sales were approximately $1.2 million in
fiscal 2005 (4% of sales), $1.8 million in fiscal 2004 (6% of sales) and
$768,000 in fiscal 2003 (3% of net sales). International sales have been made
primarily to countries in the Caribbean, South and Central America, Canada, the
Pacific Rim and Europe. The Company requires foreign sales to be paid for in
U.S. currency. International sales are affected by such factors as the North
American Free Trade Agreement ("NAFTA") and future Central American Free Trade
Agreement ("CAFTA") requirements, exchange rates, changes in protective tariffs
and foreign government import controls. The Company believes international
markets continue to offer additional opportunities for its products and
continues to seek methods to increase these sales.
7
Manufacturing
While the Company maintains a quick-response, low-cost assembly and
specialty gas tube manufacturing operation at its facility in Puerto Rico,
substantially all high volume production has been outsourced and is now being
produced by contract manufacturers within the Pacific Rim, principally Malaysia
and China, utilizing, in most cases, the Company's equipment and processes. The
Company's primary contract manufacturer is an independent U.S. based corporation
with a wholly owned subsidiary located within China. A second contract
manufacturer in Malaysia produces most of the Company's proprietary gas tubes.
That company also sells its own gas tubes to competitors of the Company. There
are strict non-disclosure agreements with each of these contract manufacturers.
The Company depends on its contract manufacturers to produce the majority of its
products for sale to customers.
The Company maintains all final quality assurance approval for all
products prior to shipment. The Company's contract manufacturers' facilities are
listed by Underwriters Laboratories ("UL") and are ISO 9000 registered. The
Company continually evaluates its current and potential contract manufacturers
to assure the highest quality product, best delivery and most competitive
pricing.
Raw Materials
The primary components of the Company's products are stamped, drawn and
formed parts made out of a variety of commonly available metals, ceramics and
plastics. The manufacture of the Company's overvoltage surge protectors and
station electronic products use commonly available components, printed circuit
boards and standard electrical components, such as resistors, diodes and
capacitors. All orders with suppliers of the components utilized in the
manufacture of the Company's products are scheduled for delivery within a year.
The Company's products contain a significant amount of plastic that is
manufactured out of petroleum and the Company imports most of its products from
its contract manufacturers, principally in Malaysia and China. A continuation of
the trend of increased petroleum prices could have an adverse effect on the cost
of the Company's products and profit the Company realizes.
Competition
The Company faces significant competition across all of its markets and
product lines. Its principal competitors within the Telco market are Corning
Cable Systems LLC, Tyco Electronics Corporation, which is also a customer of the
Company (see "Business - Marketing and Sales") and Bourns Inc. Its principal
competition within the MSO market is Panamax, Inc, Belkin Corporation and
American Power Conversion Corp.
The Company's gas tube overvoltage surge protectors not only compete
with other companies' gas tube overvoltage surge protectors, but also with
solid-state overvoltage surge protectors. While solid-state surge protectors
react faster to surges, gas tube overvoltage surge protectors have generally
remained the overvoltage surge protection technology of choice at the
subscribers' location by virtually all Telcos because of the gas tube's ability
to repeatedly withstand significantly higher energy surges than solid-state
surge protectors. This enables gas tubes to survive longer in the field than
solid-state surge protectors, reducing loss of service and costs in dispatching
a maintenance vehicle to replace the failed surge protector. Further, solid
state protectors have significantly higher capacitance than gas tube protectors.
Higher capacitance adversely affects transmission on a high bandwidth
communication line by distorting the signal. Solid state overvoltage surge
protectors are used principally in Telcos' central office switching centers
where speed is perceived to be more critical than energy handling capabilities
and in regions where there is a low incidence of lightning. The Company believes
that, for the foreseeable future, both gas tube and solid state protectors will
continue to be used as overvoltage surge protectors within the Telco market. The
Company also believes that the deployment of FTTP networks by the Telcos could
include less traditional protection requirements.
The Company's reputation among its customers is one of providing swift
responses to their needs with creative and effective solutions using products
compliant with, and in most cases superior in performance to, the demanding
specifications of customers. This approach, combined with the Company's history
of continually
8
improving technology, improved operations and effective collaborations, allows
the Company to bring product solutions to its customers quickly and
competitively priced.
Principal competitive factors within the Company's markets include
price, technology, product features, service, quality, reliability and bringing
new products to market on time. Most of the Company's competitors have
substantially greater financial, sales, manufacturing and product development
resources than the Company. The Company believes that its sales, marketing and
research and development departments, its high quality products and service, its
contract manufacturers' low cost production capabilities and their engineering
resources combined with the Company's overvoltage surge protection technology,
enable it to maintain its competitive position.
Patents and Trademarks
The Company owns or has applied for a number of patents relating to
certain of its products or product components and owns a number of registered
trademarks that are considered to be of value principally in identifying the
Company and its products. TII(R), In-Line(R), Totel Failsafe(R) and Angle
Driver(R) are among the registered trademarks of the Company. While the Company
considers its patents and trademarks to be important, especially in the early
stages of product marketing, it believes that, because of technological advances
in its industry, its success depends primarily upon its sales, engineering and
manufacturing skills and effective development collaborations which have
accelerated time-to-market of improved and new products. To maintain its
industry position, the Company relies primarily on technical leadership, trade
secrets, its proprietary technology and its contract manufacturers' low cost
production capabilities and their engineering resources.
Government Regulation
The Telco industry is subject to regulation in the United States and in
other countries. In the United States, the FCC and various state public service
or utility commissions regulate most of the Telcos and other communications
access providers who use the Company's products. While such regulations do not
typically apply directly to the Company, the effects of such regulations, which
are under continuous review and subject to change, could adversely affect the
Company's customers and, ultimately, the Company.
The NEC requires that an overvoltage surge protector listed by UL or
another qualified electrical testing laboratory be installed on all subscriber
telephone lines that are exposed to lightning and accidental contact with
electric light or power conductors. Listing by UL has been obtained by the
Company where required.
Compliance with applicable federal, state and local environmental
regulations has not had, and the Company does not believe that compliance in the
future will have, a material adverse effect on its earnings, capital
expenditures or competitive position.
Employees
On September 1, 2005, the Company had approximately 85 full-time
employees, of whom 47 were employed at the Company's Puerto Rico facility. The
Company has not experienced any work stoppage as a result of labor difficulties
and believes it has satisfactory employee relations. The Company is not a party
to any collective bargaining agreements.
Seasonality
The Company's principal product, NIDs, are typically installed on the
side of homes. The Company's sales levels have historically been adversely
affected during winter months when severe weather hinders or delays the Telco's
installation and maintenance of their outside plant network. As a result, the
Company typically experiences lower sales in the Company's fiscal third quarter.
Conversely, during the hurricane season, sales may increase based on the
severity and location of hurricanes and the number of NIDs that are damaged and
need replacement.
9
ITEM 2. Properties
The Company occupies a single story building and a portion of another
building, consisting of an aggregate of approximately 13,000 square feet, in
Copiague, New York under leases that expire in July 2006. These facilities house
the Company's principal research and development activities, marketing,
administrative and executive offices.
The Company also leases a 20,000 square foot facility in Toa Alta,
Puerto Rico, which is approximately 20 miles southwest of San Juan, under an
agreement that expires in April 2006. This facility contains certain of the
Company's assembly and manufacturing, warehousing and quality assurance
functions.
The Company believes that its facilities and equipment are well
maintained and adequate to meet its current requirements.
ITEM 3. Legal Proceedings
The Company is not a party to any pending legal proceedings. However,
from time to time the Company is 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, the Company believes that such matters will not
have a material adverse effect on its financial condition or liquidity.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2005.
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Company's common stock trades on the Nasdaq SmallCap Market under
the symbol "TIII". The following table sets forth, for each quarter during
fiscal 2005 and 2004, the high and low sales prices of the Company's common
stock on that market:
Fiscal 2005 High Low
----------- -----------
First Quarter Ended September 24, 2004 $ 1.62 $ 0.97
Second Quarter Ended December 31, 2004 1.74 1.06
Third Quarter Ended March 25, 2005 2.09 1.37
Fourth Quarter Ended June 24, 2005 2.19 1.16
Fiscal 2004 High Low
------------ ------------
First Quarter Ended September 26, 2003 $ 1.36 $ 0.39
Second Quarter Ended December 26, 2003 2.98 1.01
Third Quarter Ended March 26, 2004 2.67 1.57
Fourth Quarter Ended June 25, 2004 2.05 1.11
As of September 19, 2005, the Company had approximately 334 holders of
record of its common stock.
To date, the Company has paid no cash dividends. For the foreseeable
future, the Company intends to retain all earnings generated from operations for
use in the Company's business. Additionally, the Company's borrowing arrangement
entered into September 2003 prohibits the payment of cash dividends.
10
Except as previously reported in the Company's Current Report on Form
8-K dated June 24, 2005, the Company did not sell any equity securities during
the year ended June 24, 2005 that were not registered under the Securities Act
of 1933, as amended.
ITEM 6. Selected Financial Data
The following Selected Financial Data has been derived from the
Company's consolidated financial statements for the five years ended June 24,
2005 and should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations, and the Consolidated Financial
Statements and the related notes thereto, included elsewhere in this Report:
Selected Financial Data
(Dollars in thousands, except per share data)
June 24, June 25, June 27, June 28, June 29,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Statements of Operations Data(a):
Net sales $ 26,796 $ 28,485 $ 24,073 $ 29,801 $ 39,323
Operating earnings (loss) $ 1,097 $ 1,582 $ (997) $ (6,865) $ (7,589)
Net earnings (loss) attributable
to common stockholders $ 1,392 $ 1,563 $ (1,008) $ (6,541) $ (7,540)
Diluted net earnings (loss)
attributable to common
stockholders, per share $ 0.11 $ 0.12 $ (0.09) $ (0.56) $ (0.65)
Balance Sheet Data:
Working capital $ 12,442 $ 11,037 $ 8,235 $ 8,224 $ 13,910
Total assets $ 22,149 $ 17,802 $ 15,101 $ 18,528 $ 30,762
Debt $ - $ - $ 39 $ 489 $ 1,463
Redeemable preferred stock $ - $ - $ - $ - $ 1,626
Stockholders' equity $ 16,853 $ 15,461 $ 13,771 $ 14,779 $ 21,224
- ------------------------
(a) No cash dividends were declared in any of the reported periods.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Selected Financial Data and the Consolidated Financial Statements and
related notes thereto appearing elsewhere in this Report.
Overview
Business
TII Network Technologies, Inc., and subsidiary (together, the "Company"
or "TII"), designs, produces and markets lightning and surge protection
products, network interface devices ("NIDs"), station electronic and other
products. The Company has been a leading supplier of overvoltage surge
protectors to U.S. telephone operating companies ("Telcos") for over 30 years.
General
The Company's primary market, the traditional Telco copper-based
transmission network, has been declining over the last several years. This is
due principally to the competitive impact of alternative technologies
11
that compete with the Telco's traditional copper-based transmission network
(examples include cellular service and Fiber to the Premise ("FTTP")) and
competition from multi-system operators ("MSOs"). This trend, which has resulted
in cutbacks in copper-based construction and maintenance budgets by the Telcos
and a reduction in the number of their access lines, has adversely affected the
Company's principal copper-based business. In response to this trend, the
Company has been pursuing new markets with new products that take advantage of
the Company's proprietary protection and enclosure technologies.
The Company's major customer, Verizon, has begun its strategy to deploy
FTTP. This multi-year program has resulted in a reduction of capital outlays on
its traditional copper network and has therefore impacted the Company's
traditional protection based products since FTTP networks require less
traditional protection than current copper networks. Though the full extent of
the impact on the Company of this program is not yet known, the Company believes
that the current embedded copper infrastructure will continue to play a
significant role as a transmission medium for years to come.
On July 8, 2005, the Company received a Product Purchase Agreement (the
"Verizon Agreement"), which is a general supply agreement, executed by Verizon
Services Corp., setting forth the terms under which the Company is to continue
to provide product to Verizon, with additional approved products and an expanded
territory, until March 31, 2010. Prices, warranties, benefits, terms and
conditions granted to Verizon under the Verizon Agreement are fixed, but must be
at least as favorable as those granted by the Company to other commercial
customers under like or similar circumstances.
Results of Operations
Fiscal Years Ended June 24, 2005, June 25, 2004 and June 27, 2003
Net sales in fiscal 2005 decreased $1.7 million or 5.9% to $26.8
million from $28.5 million in fiscal 2004. The comparative decrease in sales for
fiscal 2005 compared to fiscal 2004 was the result of a sharp increase in the
need for the Company's products in the first quarter of fiscal 2004, primarily
due to the hurricanes that occurred during the summer of calendar 2003. Net
sales in fiscal 2004 increased $4.4 million or 18.3% to $28.5 million from $24.1
million in fiscal 2003. The increase in sales for fiscal 2004 compared to fiscal
2003 resulted from an increased need for the Company's products primarily due to
the hurricanes that occurred during the summer of calendar 2003, compounded by
the low inventory levels that the Company's customers were then carrying, and
the impact of the improvement in the telecommunications industry on some of the
Company's customers. These increases were partially offset by the reduction in
the number of telephone access lines being deployed.
Gross profit in fiscal 2005 was $7.9 million compared to $8.6 million
in fiscal 2004, a decrease of approximately $713,000, or 8.3%. Gross profit
margins for those periods were 29.5% and 30.2%, respectively. The lower gross
profit levels and margin was due to the effect of fixed overhead costs on lower
sales levels. Gross profit in fiscal 2004 was $8.6 million compared to $5.8
million in fiscal 2003, an increase of approximately $2.8 million or 48.4%.
Gross profit margins for those periods were 30.2% and 24.1%, respectively. The
improved gross profit level and margin were primarily due to the increased sales
levels and the actions that the Company had taken to reduce the cost of
producing its products.
Selling, general and administrative expenses in fiscal 2005 were $5.5
million compared to $5.7 million in fiscal 2004, a decrease of approximately
$189,000 or 3.3% resulting from gains of $222,000 from the sale of the Company's
two remaining condominiums in Puerto Rico. Excluding the gains from the
condominium sales, selling, general and administrative expenses for fiscal 2005
increased by $33,000. Selling, general and administrative expenses in fiscal
2004 were $5.7 million compared to $5.5 million in fiscal 2003, an increase of
approximately $215,000 or 3.9% due to $212,000 of gains from the sale of
condominiums in Puerto Rico in fiscal 2003.
Research and development expenses in fiscal 2005 were $1.3 million
compared to $1.4 million in fiscal 2004, a decrease of approximately $39,000 or
2.9%. Research and development expenses in fiscal 2004 were $1.4 million
compared to $1.3 million in fiscal 2003. Though essentially spending at the same
level over the last three fiscal years, the Company is spending a higher portion
of these expenses on products outside its traditional copper-based telecom
related protection products as it seeks to diversify its traditional customer
and product base.
12
Interest expense was $7,000 in fiscal 2005 compared to $14,000 in
fiscal 2004, a decrease of approximately $7,000 or 50%. Interest expense was
$14,000 in fiscal 2004 compared to $41,000 in fiscal 2003, a decrease of
approximately $27,000 or 65.9%. The declines were due to lower levels of lease
financing obligations which were fully repaid in fiscal 2004.
Interest income for fiscal 2005 was $86,000 compared to $32,000 in
fiscal 2004, an increase of approximately $54,000. Interest income for fiscal
2004 was $32,000 compared to $17,000 in fiscal 2003, an increase of
approximately $15,000 or 88.2%. The increases were due to higher average cash
and cash equivalent balances held by the Company.
Other income in fiscal 2005 includes a gain of $265,000 resulting from
the net settlement received from the surrender of whole-life insurance policies
that the Company had held on the life of the Company's Chief Executive Officer.
In fiscal 2005 and 2004, the Company recorded a provision for income
taxes of $43,000 and $60,000, respectively, primarily due to the limitations on
the use of net operating loss carryforwards under alternative minimum tax
regulations. (See Note 3 of Notes to Consolidated Financial Statements for
information relating to the Company's net operating loss carryforwards.) Due to
the Company's pre-tax losses, there was no tax provision during the year ended
June 27, 2003.
Net earnings for fiscal 2005 were $1.4 million or $0.11 per diluted
share, compared to net earnings of $1.6 million or $0.12 per diluted share in
fiscal 2004 and a net loss of $1.0 million or $0.09 per diluted share in fiscal
2003.
Impact of Inflation
The Company does not believe its business is affected by inflation to a
greater extent than the general economy. The Company's products contain a
significant amount of plastic that is manufactured out of petroleum and the
Company imports most of its products from contract manufacturers, principally in
Malaysia and China. A continuation of the trend of increased petroleum prices
could have an adverse effect on the cost of the Company's products and profit
the Company realizes. The Company monitors the impact of inflation and attempts
to adjust prices where market conditions permit, except that the Company may not
increase prices under the Verizon Agreement. Inflation has not had a significant
effect on the Company's operations during any of the reported periods.
Liquidity and Capital Resources
Fiscal 2005 Liquidity compared to Fiscal 2004
The Company's cash and cash equivalents were $4.5 million at the end of
fiscal 2005 compared to $4.2 million at the end of fiscal 2004, an increase of
approximately $365,000. Working capital increased to $12.4 million at the end of
fiscal 2005 from $11.0 million at the end of fiscal 2004.
During fiscal 2005 and fiscal 2004, the Company generated $1.4 million
and $3.7 million, respectively, of net cash from operating activities. The cash
generated from operating activities in fiscal 2005 was due to net cash generated
from operating earnings of $2.3 million (net earnings of $1.4 million plus
depreciation and amortization expense of $1.1 million less a net gain on
disposal of capital assets of $198,000), and an increase in accounts payable and
accrued liabilities of $3.0 million due to increased payables for product
associated with a higher level of inventories. These increases were offset, in
part, by an increase in accounts receivable of $471,000 due to higher sales in
the fourth quarter of fiscal 2005 and an increase in inventories of $3.5
million. The increase in inventories was primarily due to the ordering of
product in anticipation of the Verizon Agreement and the higher required
inventory levels for an expanded product base.
13
Net cash used in investing activities was $1.1 million in fiscal 2005
compared to $444,000 in fiscal 2004. The increase was due to $1.4 million of
purchases of capital assets in fiscal 2005. Most of these purchases were for
equipment utilized in establishing production lines at the Company's new
contract manufacturer in China. During the period, the Company successfully
completed the transition of substantially all production performed in China to
this new manufacturer. The increase in investing activities was partially offset
by net proceeds of $362,000 from the sale of various Company fixed assets.
The Company had no financing activities in fiscal 2005 compared to net
cash provided by financing activities of $88,000 in fiscal 2004. The net cash
provided by financing activities in fiscal 2004 was due to proceeds received
from the exercise of stock options of $127,000, partially offset by $39,000 of
payments of debt and obligations under capital leases.
Fiscal 2004 Liquidity compared to Fiscal 2003
The Company's cash and cash equivalents were $4.2 million at the end of
fiscal 2004 compared to $772,000 at the end of fiscal 2003, an increase of
approximately $3.4 million. Working capital increased to $11.0 million at the
end of fiscal 2004 from $8.2 million at the end of fiscal 2003.
During fiscal 2004 and fiscal 2003, the Company generated $3.7 million
and $293,000, respectively, of net cash from operating activities. The cash
generated from operating activities in fiscal 2004 was produced from cash
provided by changes in operating assets and liabilities of $617,000 and net cash
earnings (net earnings of $1.6 million plus depreciation and amortization
expense of $1.0 million and a non-cash loss on disposal of capital assets of
$512,000) of $3.1 million. The cash produced by changes in operating assets and
liabilities resulted from an increase of $1.0 million in accounts payable and
accrued liabilities due to timing of payments to vendors and a reduction in
inventory of $500,000 due to the fulfillment of sales orders with existing
inventory, partially offset by an increase in accounts receivable of $914,000
due to higher sales.
Net cash used in investing activities was $444,000 in fiscal 2004
compared to $85,000 of net cash provided in fiscal 2003. The net cash used in
investing activities during fiscal 2004 was for purchases of capital assets.
Net cash provided by financing activities was $88,000 in fiscal 2004
compared to $474,000 of net cash used in fiscal 2003. The net cash provided by
financing activities in fiscal 2004 was due to proceeds received from the
exercise of stock options of $127,000, partially offset by $39,000 of payments
of debt and obligations under capital leases. In fiscal 2003, $455,000 was used
to repay a term loan under a revolving credit facility.
Capital Resources
The Company has a credit facility that enables it to have up to $3.0
million of borrowings outstanding at any one time, limited by a borrowing base
equal to 85% of eligible accounts receivable, subject to certain reserves.
Outstanding borrowings under the credit facility will bear interest at a
specified bank's prime rate (6.25% at June 24, 2005) plus 1%, but never less
than 5% per annum, and the Company is also required to pay an annual facility
fee of 3/4 of 1% of the maximum amount of the credit facility. At June 24, 2005,
the borrowing base was $3.3 million and there were no borrowings outstanding.
The credit facility expires in September 2006 and is automatically renewed for
successive two year periods unless terminated by the lender at any time on 60
days notice, or the Company on 60 days notice prior to the end of the current
term or any renewal term. The credit facility is guaranteed by the Company's
subsidiary and is secured by a lien and security interest against substantially
all of the assets of the Company. The credit facility requires, among other
things, that the Company maintain a consolidated tangible net worth of at least
$12.0 million and working capital of at least $6.0 million. The credit facility
also prohibits, without the lender's consent, the payment of cash dividends,
significant changes in management or ownership of the Company, business
acquisitions, the incurrence of additional indebtedness, other than lease
obligations for the purchase of equipment, and the guarantee of the obligations
of others.
Funds anticipated to be generated from operations, together with
available cash, cash equivalents and the Company's credit facility, are
considered to be adequate to finance the Company's operational and capital needs
for the next twelve months.
14
Contractual Obligations and Commercial Commitments
The following table sets forth a schedule of payments required under
the Company's contractual obligations and includes the maximum potential
payments that may be required under the Company's other commercial commitments:
Due by Period
--------------------------------------------------------------
Contractual Obligations: Less
Than After
Total 1 Year 1 - 3 years 4 - 5 years 5 years
--------------- --------------- ---------------- -------------- --------------
Operating lease obligations $ 182,000 $ 175,000 $ 7,000 $ - $ -
Other obligations 213,000 213,000 - - -
--------------- --------------- ---------------- -------------- --------------
Total contractual cash obligations $ 395,000 $ 388,000 $ 7,000 $ - $ -
=============== =============== ================ ============== ==============
The Company has no commitments for capital expenditures, but expects to
purchase new equipment and incur leasehold improvements in the normal course of
business.
Off-Balance Sheet Financing
The Company has no off-balance sheet contractual arrangements, as that
term is defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies, Estimates and Judgments
TII's 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. The Company believes that the determination of the carrying value of
the Company's inventories and long-lived assets and establishment of a valuation
allowance for deferred tax assets are the most critical areas where management's
judgments and estimates most affect the Company's reported results. While the
Company believes its 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 the Company's
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 the
Company's 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.
The Company reviews 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.
At June 24, 2005, the Company has provided a valuation allowance
against all its net deferred tax assets due to the uncertainty of realizing any
future benefits therefrom. If and when the Company's historical and projected
pre-tax earnings indicate it will more likely than not realize, all or a portion
of its deferred tax assets, the Company would reduce its valuation allowance,
accordingly.
Recently Issued Accounting Pronouncements
In June 2005, the Financial Accounting Standard Board ("FASB") issued
SFAS No.154, "Accounting Changes and Error Corrections", a replacement of APB
Opinion No. 20, Accounting Changes, and FASB SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS No. 154 applies to all voluntary
15
changes in accounting principles, and changes the requirements for accounting
for and reporting of, a change in accounting principle. SFAS No.154 requires
retrospective application to prior periods' financial statements of a voluntary
change in an accounting principle unless it is impracticable. SFAS No. 154 also
requires that a change in method of depreciation, amortization or depletion for
long-lived, non-financial assets be accounted for as a change in an accounting
estimate that is affected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Earlier application is permitted for
accounting changes and corrections of errors occurring in fiscal years beginning
after June 1, 2005. SFAS No. 154 does not change the transition provisions of
any existing accounting pronouncements, including those that are in transition
phase as of the date of SFAS No. 154. The Company does not believe that adoption
of SFAS No. 154 will have a material impact on its financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-based Payment,"
which addresses accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using Accounting Principle Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and instead requires
that such transactions be accounted for using a fair-value-based method. This
statement is effective for annual periods beginning after June 15, 2005 (the
Company's 2006 fiscal year), as if all share-based compensation awards granted,
modified or settled after December 15, 1994 had been accounted for using the
fair-value-based method of accounting. The Company will use the modified
prospective approach in adopting the provisions of SFAS 123R. The Company has
unrecognized stock compensation expense of approximately $69,000 related to
unvested options outstanding at June 24, 2005. Future grants of stock options
will result in additional compensation expense.
In March 2005, the SEC staff issued guidance on Statement No. 123R,
Share-Based Payments. Staff Accounting Bulletin No. 107 ("SAB No. 107") was
issued to assist preparers by simplifying some of the implementation challenges
of Statement No. 123R while enhancing the information that investors receive.
SAB No. 107 creates a framework that is premised on (a) considerable judgment
will be required by preparers to successfully implement Statement No. 123R,
specifically when valuing employee stock options; and (b) reasonable
individuals, acting in good faith, may conclude differently on the fair value of
employee stock options. Key topics covered by SAB No. 107 include (a) valuation
models (SAB No. 107 reinforces the flexibility allowed by Statement No. 123R to
choose an option-pricing model that meets the standard's fair value measurement
objective), (b) expected volatility (the SAB provides guidance on when it would
be appropriate to rely exclusively on either historical or implied volatility in
estimating expected volatility) and (c) expected term (the new guidance includes
examples and some simplified approaches to determining the expected term under
certain circumstances). The Company will apply the principles of SAB No. 107 in
conjunction with its adoption of Statement No. 123R.
In March 2005, the FASB issued FASB Interpretation ("FIN") N0. 47,
Accounting for Conditional Asset Retirement Obligations - An Interpretaion of
FASB Statement No. 143. The FASB issued FIN 47 to address diverse accounting
practices that developed with respect to the timing of liability recognition for
legal obligations associated with the retirement of a tangible long-lived asset
when the timing and (or) method of settlement of the obligation are conditional
on a future event. FIN 47 concludes that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the liability's fair value can be reasonably estimated. FIN 47 is
effective for the Company no later than June 30, 2006. The Company has not yet
determined the effect that the adoption will have on its financial position or
results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all
companies to recognize a current-period charge for abnormal amounts of idle
facility expense, frieght, handling costs and wasted materials. This statement
also requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for fiscal years beginning after June 15, 2005 (the
Company's 2006 fiscal year). The Company is currently evaluating the effect that
this statement will have on its consolidated financial statements.
16
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks
The Company is exposed to market risks, including changes in interest
rates. The interest payable under the Company's credit facility, under which
there were no borrowings outstanding at June 24, 2005, is based on a specified
bank's prime interest rate plus 1% and, therefore, is affected by changes in
market interest rates. Historically, the effects of movements in the market
interest rates have been immaterial to the consolidated operating results of the
Company.
The Company's products contain a significant amount of plastic that is
manufactured out of petroleum and the Company imports most of its products from
contract manufacturers, principally in Malaysia and China. A continuation of the
trend of increased petroleum prices could have an adverse effect on the cost of
the Company's products and profit the Company realizes.
The Company requires foreign sales to be paid in U.S. currency and is
billed by its contract manufacturers in U.S. currency. Since one of the
Company's Pacific Rim suppliers are based in China, the cost of the Company's
products could be affected by changes in the valuation of the Chinese Yuan.
Historically, the Company has 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 it purchases or the
value of foreign currencies.
17
ITEM 8. Financial Statements and Supplemental Data
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 subsidiary as of June 24, 2005 and June 25, 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended June 24, 2005. In
connection with our audits of the consolidated financial statements, we also
audited the financial statement schedule listed in Item 15(a)(2) for each of the
years in the three-year period ended June 24, 2005. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TII Network
Technologies, Inc. and Subsidiary as of June 24, 2005 and June 25, 2004, and the
results of their operations and their cash flows for each of the years in the
three year period ended June 24, 2005 in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Melville, New York
September 14, 2005
18
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 24, June 25,
2005 2004
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,529 $ 4,164
Accounts receivable, net 3,906 3,435
Inventories 8,899 5,405
Other current assets 404 374
-------- --------
Total current assets 17,738 13,378
-------- --------
Property, plant and equipment, net 4,229 3,947
Other assets 182 477
-------- --------
Total Assets $ 22,149 $ 17,802
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,733 $ 643
Accrued liabilities 1,563 1,698
-------- --------
Total current liabilities 5,296 2,341
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $1.00 per share; 1,000,000 shares authorized;
Series D Junior Participating; no shares outstanding - -
Common stock, par value $.01 per share; 30,000,000 shares authorized;
12,178,733 shares issued and 12,161,096 shares outstanding as of June
24, 2005 and 11,925,421 shares issued and 11,907,784 shares
outstanding as of June 25, 2004 122 119
Additional paid-in capital 37,989 37,992
Accumulated deficit (20,977) (22,369)
-------- --------
17,134 15,742
Less: Treasury shares, at cost, 17,637 common shares at June 24, 2005
and June 25, 2004; (281) (281)
-------- --------
Total stockholders' equity 16,853 15,461
-------- --------
Total Liabilities and Stockholders' Equity $ 22,149 $ 17,802
======== ========
See notes to consolidated financial statements
19
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended
----------------------------------
June 24, June 25, June 27,
2005 2004 2003
-------- -------- --------
Net sales $ 26,796 $ 28,485 $ 24,073
Cost of sales 18,901 19,877 18,274
-------- -------- --------
Gross profit 7,895 8,608 5,799
-------- -------- --------
Operating expenses:
Selling, general and administrative 5,480 5,669 5,454
Research and development 1,318 1,357 1,342
-------- -------- --------
Total operating expenses 6,798 7,026 6,796
-------- -------- --------
Operating earnings (loss) 1,097 1,582 (997)
Interest expense (7) (14) (41)
Interest income 86 32 17
Other income 259 23 13
-------- -------- --------
Earnings (loss) before income taxes 1,435 1,623 (1,008)
Provision for income taxes 43 60 -
-------- -------- --------
Net earnings (loss) $ 1,392 $ 1,563 $ (1,008)
======== ======== ========
Net earnings (loss) per common share:
Basic $ 0.12 $ 0.13 $ (0.09)
======== ======== ========
Diluted $ 0.11 $ 0.12 $ (0.09)
======== ======== ========
Weighted average common shares outstanding:
Basic 11,971 11,820 11,682
Diluted 12,687 12,715 11,682
See notes to consolidated financial statements
20
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Additional Total
Stock Common Stock Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity
---------- ---------- ---------- ---------- ---------- ----------
Balance June 28, 2002 11,682,284 $ 117 $ 37,867 $ (22,924) $ (281) $ 14,779
Net loss for the year - - - (1,008) - (1,008)
---------- ---------- ---------- ---------- ---------- ----------
Balance June 27, 2003 11,682,284 117 37,867 (23,932) (281) 13,771
Exercise of stock options 225,500 2 125 - - 127
Net earnings for the year - - 1,563 - 1,563
---------- ---------- ---------- ---------- ---------- ----------
Balance June 25, 2004 11,907,784 119 37,992 (22,369) (281) 15,461
Exercise of warrants 253,312 3 (3) - - -
Net earnings for the year - - - 1,392 - 1,392
---------- ---------- ---------- ---------- ---------- ----------
Balance June 24, 2005 12,161,096 $ 122 $ 37,989 $ (20,977) $ (281) $ 16,853
========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements
21
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended
---------------------------------
June 24, June 25, June 27,
2005 2004 2003
------- ------- -------
Cash Flows from Operating Activities:
Net earnings (loss) $ 1,392 $ 1,563 $(1,008)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,136 1,056 1,115
(Gain) loss on disposal of capital assets (198) 512 (212)
Changes in operating assets and liabilities:
Accounts receivable (471) (914) 997
Inventories (3,494) 500 1,457
Other assets 113 (19) (87)
Accounts payable and accrued liabilities 2,955 1,050 (1,969)
------- ------- -------
Net cash provided by operating activities 1,433 3,748 293
------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures (1,430) (444) (244)
Net proceeds from sale of fixed assets 362 - 329
------- ------- -------
Net cash (used in) provided by investing activities (1,068) (444) 85
------- ------- -------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options - 127 -
Net repayments of borrowings under revolving credit facility - - (455)
Repayment of debt and obligations under capital leases - (39) (19)
------- ------- -------
Net cash provided by (used in) financing activities - 88 (474)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 365 3,392 (96)
Cash and cash equivalents, at beginning of year 4,164 772 868
------- ------- -------
Cash and cash equivalents, at end of year $ 4,529 $ 4,164 $ 772
======= ======= =======
Non-cash investing and financing activities:
Acquisition of equipment under capital leases $ - $ - $ 24
======= ======= =======
Cash paid during the year for interest $ 7 $ 14 $ 41
======= ======= =======
Cash paid during the year for income taxes 18 60 -
======= ======= =======
See notes to consolidated financial statements
22
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Description of Business and Summary of Significant Accounting Policies
Business: TII Network Technologies, Inc. and subsidiary (together, the
"Company") design, produce and market lightning and surge protection products,
network interface devices ("NIDs"), station electronics and other products
principally to the Telco industry.
Fiscal Year: The Company reports on a 52-53 week fiscal year ending on the last
Friday in June. Fiscal 2005, 2004 and 2003 each contained 52 weeks.
Principles of Consolidation: The consolidated financial statements include the
accounts of TII Network Technologies, Inc. and its wholly owned subsidiary. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from such estimates.
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 $3,037,000 and $3,005,000 at June 24, 2005 and June 25, 2004,
respectively, consisted of money market accounts.
Inventories: Inventories (materials, direct labor and applicable overhead
expenses) are stated at the lower of cost or market, on the first-in, first-out
basis.
Property, Plant and Equipment: Property, plant and equipment is recorded at cost
and depreciated on the straight-line method over the estimated useful life of
the related asset. The estimated useful life of machinery and equipment is
generally between 5 and 10 years. Leasehold improvements are amortized on a
straight-line basis over the term of the respective leases or over their
estimated useful lives, whichever is shorter. Depreciation and amortization of
plant and equipment was $1,100,000, $1,020,000 and $1,079,000 for the years
ended June 24, 2005, June 25, 2004 and June 27, 2003, respectively.
Revenue Recognition: The Company's net sales are derived from the sale of its
products. The Company does not provide any services to its customers. Product
sales are recorded when there is persuasive evidence of the arrangement, usually
a customer purchase order, the products are shipped and title passes to the
customer and the fee is fixed and determinable and probable of collection. Once
a product is shipped, the Company has no acceptance or other post-shipment
obligations and product returns and warranty costs have historically been
insignificant.
Other Assets: Included in other assets at June 24, 2005 and June 25, 2004 are
$171,000 and $207,000, respectively, of patent costs, net of accumulated
amortization, deemed recoverable by the Company, which are amortized on a
straight-line basis over the lesser of the life of the related product or the
patent. Amortization of patent costs was $36,000 for each of the three fiscal
years ending June 24, 2005. Also included is the cash surrender value of key-man
life insurance of approximately $145,000 at June 25, 2004. In March 2005, the
Company surrendered the associated whole-life insurance policies for a net
settlement of $410,000 which resulted in a gain of $265,000 that is included in
the accompanying consolidated statements of operations in other income for the
year ended June 24, 2005. In fiscal 2005, the Company sold its remaining two
condominiums in Puerto Rico, which had been included in other assets on the June
25, 2004 balance sheet, for an aggregate selling price of $337,000, which
resulted in an aggregate gain of $222,000 included in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended June 24, 2005. In fiscal 2003, the Company sold two
condominiums in Puerto Rico for an aggregate selling price of $329,000, which
23
resulted in an aggregate gain of $212,000 included in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the year ended June 27, 2003.
Long-Lived Assets: The Company reviews 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 as the amount by which the carrying amount of the asset exceeds its
fair value.
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. 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 realized or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date.
Net Earnings (Loss) Per Common Share: Basic net earnings (loss) per share is
computed based on the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed based on the weighted average
number of common shares outstanding increased by dilutive common stock options
and warrants. Included in the diluted earnings per share calculation for fiscal
2005 and 2004 were 716,000 and 895,000, respectively, incremental shares for
options and warrants under the treasury stock method. In fiscal 2005 and 2004,
2,172,850 and 4,022,250 options and warrants outstanding as of June 24, 2005 and
June 25, 2004, respectively, were excluded from the calculation of diluted
earnings per share since their effect was anti-dilutive as their exercise prices
were greater than the average market price of the Company's common stock. Since
the Company incurred a loss in fiscal 2003 all securities exercisable for the
Company's common stock were anti-dilutive. The following table summarizes all
outstanding securities that were exercisable for the Company's common stock.
June 24, 2005 June 25, 2004 June 27, 2003
---------------------------- ---------------------------- -------------------------
Quantity Exercise Quantity Exercise Quantity Exercise
Price Price Price
------------- ------------ ------------- ------------- ------------ -----------
Stock option plans (a) 3,316,850 $1.62 2,998,650 $1.68 3,363,350 $1.53
Investor Option - - - - 100,000 2.50
Warrants (b) - - 2,214,000 2.79 2,214,000 2.79
Unit Purchase Options (b) - - 414,000 2.69 414,000 2.69
Warrant (c) - - 750,000 1.00 750,000 1.00
------------- ------------- ------------
3,316,850 6,376,650 6,841,350
============= ============= ============
- ----------
(a) Exercise price in table is the weighted average exercise price of
outstanding stock options at year-end.
(b) In June 2000, the Company completed a private placement of 1,800,000
units. Each unit consisted of one share of common stock and one warrant
to purchase one share of common stock, at $2.79 per share. In
connection with this private placement, the Company issued to certain
employees of the placement agent 414,000 Unit Purchase Options ("UPO")
with an exercise price of $2.69 per UPO. Each UPO consisted of one
share of common stock and one warrant to purchase one share of common
stock at $2.79 per share. On December 8, 2004, all of the options and
warrants associated with this private placement expired unexercised.
(c) This warrant was issued in June 2002 as partial consideration to
repurchase all of the then outstanding convertible preferred stock. On
June 23, 2005, the Company issued 253,312 common shares upon the net
common share exercise of the entire warrant.
Fair Value of Financial Instruments: The carrying amounts of cash and cash
equivalents, receivables and other current assets, accounts payable and accrued
liabilities approximate fair value because of the short-term nature of these
instruments.
24
Stock Based Compensation: The Company applies the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its stock
option plans. The exercise price of all options granted under all the plans has
equaled at least the market value of the common stock on the dates of grants.
Accordingly, no compensation expense has been recognized for options granted to
employees or directors.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If the Company had elected to
recognize stock-based compensation cost based on the fair value of the options
granted at grant date, as prescribed by SFAS No. 123, the Company's net earnings
(loss) and net earnings (loss) per share would have been the pro forma amounts
as indicated in the table below.
Fiscal Year Ended
-------------------------------------------
June 24, 2005 June 25, 2004 June 27, 2003
----------- ----------- -----------
Net earnings (loss):
As reported $ 1,392,000 $ 1,563,000 $(1,008,000)
Deduct: Total stock-based compensation
expense using fair value method, net of
income taxes 459,000 528,000 506,000
----------- ----------- -----------
Pro forma $ 933,000 $ 1,035,000 $(1,514,000)
Basic net earnings (loss) per share:
As reported $ 0.12 $ 0.13 $ (0.09)
Proforma $ 0.08 $ 0.09 $ (0.13)
Diluted net earnings (loss) per share:
As reported $ 0.11 $ 0.12 $ (0.09)
Pro forma $ 0.07 $ 0.08 $ (0.13)
The weighted average fair values of options granted were determined based on the
Black-Scholes option-pricing model, utilizing the following assumptions:
June 24, June 25, June 27,
2005 2004 2003
---------------- ------------------ -----------------
Expected term 5 Years 5 Years 5 Years
Interest rate 3.9% 3.8% 3.3 %
Volatility 142.9% 84.0% 60.5 %
Dividends 0% 0% 0 %
Weighted average fair value of options granted $ 1.64 $ 1.69 $0.17
Comprehensive Income (Loss): Comprehensive income (loss) equaled the net
earnings (loss) for each of the years in the three year period ended June 24,
2005.
Segment Information: The Company has evaluated the provisions of Statement of
Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," and has determined that it has one
reportable segment. The Company has disclosed the geographic, major suppliers
and major customers' requirements of SFAS No. 131. See Note 6.
NOTE 2 - Revolving Credit Facility:
The Company had no long-term debt or borrowings under its revolving credit
facility at June 24, 2005 or June 25, 2004.
The Company has a credit facility that enables it to have up to $3.0
million of borrowings outstanding at any one time, limited by a borrowing base
equal to 85% of eligible accounts receivable, subject to certain reserves.
Outstanding borrowings under the credit facility will bear interest at a
specified bank's prime rate (6.25% at June 24, 2005) plus 1%, but never less
than 5% per annum, and the Company is also required to pay an annual facility
fee of 3/4 of 1% of the maximum amount of the credit facility. At June 24, 2005,
the borrowing
25
base was $3.3 million and there were no borrowings outstanding. The credit
facility expires in September 2006 and is automatically renewed for successive
two year periods unless terminated by the lender at any time on 60 days notice
or the Company on 60 days notice prior to the end of the current term or any
renewal term. The credit facility is guaranteed by the Company's subsidiary and
is secured by a lien and security interest against substantially all of the
assets of the Company. The credit facility requires, among other things, that
the Company maintain a consolidated tangible net worth of at least $12.0 million
and working capital of at least $6.0 million. The credit facility also
prohibits, without the lender's consent, the payment of cash dividends,
significant changes in management or ownership of the Company, business
acquisitions, the incurrence of additional indebtedness, other than lease
obligations for the purchase of equipment, and the guarantee of the obligations
of others. At June 24, 2005, the Company was in compliance with all its debt
covenants.
NOTE 3 - Income Taxes
The provision for income taxes of $43,000 and $60,000 in fiscal 2005
and fiscal 2004, respectively, primarily consisted of Federal alternative
minimum taxes (AMT), due to the limitations on the use of net operating loss
carryforwards for the AMT. The tax effects of temporary differences and net
operating loss and credit carryforwards that give rise to the net deferred tax
assets (liabilities) are as follows:
June 24, June 25,
2005 2004
------------ ------------
Inventory $ 240,000 $ 147,000
Accounts receivable 36,000 34,000
Accrued expenses 178,000 181,000
Net operating loss carryforwards 12,610,000 12,342,000
Business credit carryforwards 540,000 531,000
------------ ------------
13,604,000 13,235,000
Less: valuation allowance (12,821,000) (13,163,000)
------------ ------------
Net deferred tax assets 783,000 72,000
Property, plant and equipment (783,000) (72,000)
------------ ------------
$ - $ -
============ ============
At June 24, 2005, for U.S. Federal income tax purposes, the Company had
net operating loss carryforwards of approximately $35,000,000, which expire from
2007 to 2023, a portion of which are subject to Internal Revenue Code Section
382 limitations. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not, that some portion or
all of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which net operating loss carryforwards are utilizable and
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. At June 24, 2005 and June 25,
2004, the Company has provided a valuation allowance against all its net
deferred tax assets due to the uncertainty of realizing any future benefits
therefrom. If all deferred tax assets are realized in the future, $122,000 of
the benefit would increase additional paid-in capital.
NOTE 4 - Common Stock, Stock Options and Warrants:
Stock Option Plans: The Company's 1995 Stock Option Plan and 1998 Stock
Option Plan permit the Board of Directors or the Compensation Committee of the
Board of Directors to grant, until September 2005 and October 2008,
respectively, options to employees (including officers and directors who are
employees), consultants and, in the case of the 1998 Stock Option Plan,
non-employee directors. The 1995 Stock Option Plan and 1998 Stock Option Plan
cover 1,250,000 and 2,500,000 shares, respectively, of common stock. The Board
of Directors or the Compensation Committee determines vesting periods, option
terms, which may not exceed 10 years, and exercise prices. At June 24, 2005,
options to purchase 1,060,900 and 1,607,950 shares were
26
outstanding under the 1995 Plan and 1998 Plan, respectively. At June 24, 2005,
51,900 and 878,550 options were available for grant under the 1995 Plan and 1998
Plan, respectively.
On December 3, 2003, the Company's shareholders approved the 2003
Non-Employee Director Stock Option Plan which expires on September 23, 2013 and
replaced the Company's 1994 Non-Employee Director Stock Option Plan on December
4, 2003. As of June 24, 2005, there were options to purchase 648,000 shares of
common stock outstanding under these plans. The 2003 Plan provides for the grant
of options to purchase up to 500,000 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 shareholders meeting at which directors are
elected, each outside director in office after the meeting is automatically
granted an option to purchase 5,000 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 the initial option grant to new outside directors vests
quarterly over three years starting one year from the grant date. At June 24,
2005, 394,000 options were available for grant under the 2003 plan.
The exercise price of all options granted under all the plans has
equaled at least the market value of the common stock on the dates of grants.
Certain information relating to the employee stock option plans and the
non-employee director plans for the years ended June 24, 2005, June 25, 2004,
and June 27, 2003 follows:
Fiscal Year Ended
-------------------------------------------------------------------------------------------
June 24, 2005 June 25, 2004 June 27, 2003
--------------------------- --------------------------- ----------------------------
Common Weighted Common Weighted Common Weighted
Shares Average Shares Average Shares Average
Subject to Exercise Subject to Exercise Subject to Exercise
Options Price Options Price Options Price
------------ ----------- ------------ ----------- ------------- ------------
Outstanding at beginning of year 2,998,650 $ 1.68 3,363,350 $ 1.53 3,420,341 $ 1.79
Granted 408,000 1.49 180,000 2.49 590,000 0.32
Exercised - - (225,500) 0.56 - -
Canceled or expired (89,800) 2.97 (319,200) 1.36 (646,991) 1.80
------------ ----------- ------------ ----------- ------------- ------------
Outstanding at end of year 3,316,850 $ 1.62 2,998,650 $ 1.68 3,363,350 $ 1.53
============ =========== ============ =========== ============= ============
Options exercisable at end of
year 3,129,550 2,554,150 2,193,390
Shares available for future grant
at end of year 1,324,450 1,690,650 1,053,450
The following additional information relates to options outstanding as
of June 24, 2005:
Weighted Weighted Weighted
Common Shares Average Average Number of Average
Exercise Subject to Exercise Remaining Options Exercise
Price Range Options Price Life (Years) Exercisable Price
- ----------------------------- --------------- -------------- --------------- ---------------- -------------
$0.29 - $1.50 1,361,000 $ 0.86 8.2 1,221,000 $ 8.50
1.51 - 2.00 923,400 1.62 7.3 891,100 1.62
2.01 - 2.50 822,450 2.31 7.2 807,450 2.31
2.51 - 8.25 210,000 3.85 6.7 210,000 3.85
--------------- -------------- --------------- ---------------- -------------
3,316,850 $ 1.62 7.6 3,129,550 $ 1.65
=============== ============== =============== ================ =============
27
Warrants:
On June 21, 2002, the Company issued a warrant to purchase 750,000
shares of common stock at $1.00 per share in connection with its repurchase of
all its then outstanding Series C Convertible Preferred Stock. On June 23, 2005,
in accordance with the warrant's original terms, the Company issued 253,312
common shares to the warrant holder upon the net common share exercise of the
entire warrant. Accordingly, the Company received no cash proceeds from the
exercise of the warrant.
NOTE 5 - Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock in series, with each series having such powers, rights, preferences,
qualifications and restrictions as determined by the Board of Directors.
Series D Junior Participating Preferred Stock: In May 1998, the Company
adopted a Stockholder Rights Plan providing for the distribution to the
Company's stockholders of one Right ("Right") for each share of the Company's
common stock issued and outstanding at the opening of business on May 21, 1998
(the "Distribution Date") and each subsequent share of common stock issued. Each
Right entitles the registered holder of a share of common stock to purchase from
the Company 1/1000 of a share of Series D Junior Participating Preferred Stock
of the Company, at a price of $30 per Right (the "Purchase Price"), subject to
adjustment. The Rights have a term of ten years, have no voting power or rights
to dividends, are not detachable and not separately transferable from the
Company's common stock until they become exercisable. In general, the Rights
become exercisable following an announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") owns, or the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning, at least 20% of the Company's outstanding common
stock. If any person becomes an Acquiring Person by acquiring beneficial
ownership of at least 20% of the Company's common stock, each outstanding Right
(other than those owned by an Acquiring Person) will "flip in" and become a
right to buy, at the Purchase Price, that number of shares of common stock of
the Company that will have a market value of two times the Purchase Price. After
a person becomes an Acquiring Person (but before such Acquiring Person owns 50%
or more of the outstanding common stock), the Company may permit each Right
(other than those owned by an Acquiring Person) to be exchanged, without payment
of the Purchase Price, for one share of common stock. If (i) the Company is
acquired in a merger or other business combination transaction and the Company
does not survive or the Company merges, consolidates or engages in a share
exchange with another person and does survive but all or part of its stock is
changed or (ii) at least 50% of the Company's assets or earning power is sold or
transferred, then each outstanding Right will "flip over" and become a right to
buy, at the Purchase Price, that number of shares of common stock of the
acquiring company that will have a market value of two times the Purchase Price.
The Company may redeem the Rights in whole, but not in part, at a price of $.01
per Right at any time prior to the time a person acquires beneficial ownership
of at least 20% of the Company's common stock and, if certain conditions are
met, within ten days following the time a person has acquired 20% or more of the
common stock.
NOTE 6 - Significant Customers, Export Sales and Geographical Segments
Significant Customers: The following customers accounted for 10% or more of the
Company's consolidated net sales during one or more of the years presented
below:
Fiscal Year Ended
----------------------------------------------------
June 24, June 25, June 27,
2005 2004 2003
--------------- ------------- ----------------
Verizon 52% 53% 58%
Tyco Electronics Corporation 10% 13% 7%
Telco Sales, Inc. 10% 11% 10%
28
As of June 24, 2005, one customer accounted for 56% of accounts
receivable and as of June 25, 2004 two customers accounted for approximately 47%
and 19% of accounts receivable.
Export Sales: For each of the three years ended June 24, 2005, export sales were
less than 10% of consolidated net sales.
Geographical Segments: The Company does not have any operating facilities or
producing assets outside the United States and Puerto Rico; however, certain
equipment owned by the Company is utilized by the Company's contract
manufacturers in Asia. The net book value of such equipment held by the
Company's contract manufacturers was approximately $2.8 million and $1.8 million
at June 24, 2005 and June 25, 2004, respectively. The Company's operations
located in Puerto Rico and New York are managed as one geographic segment.
Significant Contract Manufacturers: On May 3, 2000, the Company entered into an
agreement with a contract manufacturer in Malaysia to outsource the manufacture
of certain of its gas tubes used in its products. The agreement is for ten
years, but may be terminated by either party with one year's advance notice. On
December 18, 2003, the Company 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 the Company. These two
suppliers produce a majority of the Company's products that it sells to its
customers.
NOTE 7 - Commitments, Contingencies and Related Party Transactions
The Company leases real property and equipment under various operating
leases with terms expiring through July 2006. The leases require minimum annual
rentals, exclusive of real property taxes, of approximately $182,000 in fiscal
2006. Rent expense under operating leases was $203,000, $213,000 and $219,000 in
fiscal 2005, 2004 and 2003, respectively.
The Company has financed its annual insurance premiums through its
broker. The balance outstanding as of June 24, 2005 was $213,000, which is to be
paid in equal installments from July 2005 to December 2005 plus interest at
5.25% per annum.
The Company had an agreement with David Garwood, a member of the Board
of Directors, to provide strategic planning consulting services from April 1,
2002 until its expiration on March 31, 2003 at $10,000 per quarter.
On March 7, 2005, the Company terminated its agreement with Timothy J.
Roach, President and Chief Executive Officer of the Company, to lease two houses
near the Company's Copiague, New York facility, at an aggregate annual rental of
$31,000 plus expenses. The houses were used by the Chairman of the Board and
other executives, directors and employees when visiting the Company's New York
facility.
On May 17, 2005, the Company and Timothy J. Roach, the Company's
President and Chief Executive Officer, amended and restated his employment
agreement that continues through June 30, 2006, with automatic one year
extensions subject to certain conditions, under which Mr. Roach is entitled to
an annual salary of $300,000, subject to increases and bonuses at the discretion
of the Board of Directors or Compensation Committee. Included in the agreement
are health and other benefits, including life insurance, and certain termination
rights, which may include severance pay of two times his annual compensation.
From 1982 until June 25, 2004, the Company had leased equipment from
PRC Leasing, Inc., a corporation owned by Alfred J. Roach, the then Chairman of
the Board of Directors of the Company. Rent expense under the lease was $50,000
in each of fiscal years 2004 and 2003. On September 14, 2005, the Company agreed
to store certain equipment previously leased by the Company from PRC Leasing,
Inc., until April 1, 2006, and received a release from Alfred J. Roach, a
director of the Company who, at the time, ceased being Chairman of the Company's
Board of Directors, for all claims, known or unknown, he might have against the
Company, including any regarding the previously leased equipment. Concurrent
with this agreement, the Company entered into a consulting agreement with Mr.
Roach. The consulting agreement provides for Mr. Roach to consult with the
Company's executive officers and directors regarding the Company's business and
operations, focusing on the sale and marketing of the Company's products. The
four year agreement commences on November 1, 2005
29
(when he will no longer be an employee) and provides for an annual fee of
$160,000 per year plus 5% commissions on the net sales, generated as a result of
his efforts, of products sold in specified foreign countries where the Company
is currently not doing any business.
On September 14, 2005, the Company entered into a one year consulting
agreement with Charles H. House, a director of the Company. Mr. House is to
assist the Company in, among other things, the analysis, development and
implementation of a comprehensive go-to-market business plan, for certain
products of the Company, in exchange for 35,000 shares of the Company's common
stock.
From time to time, the Company is 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, the Company believes that such
matters will not have a material adverse effect on its financial condition or
liquidity.
NOTE 8 - Employee Benefits
The Company has a defined contribution plan which qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
The plan covers substantially all U.S. and Puerto Rico employees who meet the
eligibility requirements and requires the Company to match employees'
contributions up to specified limitations and subject to certain vesting
schedules. The matching expense for the Company was $20,000, $20,000 and $21,000
in fiscal 2005, 2004 and 2003, respectively.
The Company does not provide its employees any other post-retirement or
post-employment benefits, except discretionary severance payments upon
termination of employment.
NOTE 9 - Supplemental Consolidated Balance Sheet Information
June 24, June 25,
2005 2004
----------- -----------
Accounts receivable:
Trade accounts receivable $ 3,994,000 $ 3,521,000
Other receivables 12,000 14,000
Less: allowance for doubtful accounts (100,000) (100,000)
----------- -----------
$ 3,906,000 $ 3,435,000
=========== ===========
Inventories, net:
Raw materials and subassemblies $ 2,192,000 $ 1,487,000
Work in progress 243,000 175,000
Finished goods 6,464,000 3,743,000
----------- -----------
$ 8,899,000 $ 5,405,000
=========== ===========
Property, plant and equipment:
Machinery and equipment $ 7,955,000 $ 7,090,000
Leasehold improvements 5,000 5,000
Office fixtures, equipment and other 608,000 215,000
----------- -----------
8,568,000 7,310,000
Less: accumulated depreciation (4,339,000) (3,363,000)
----------- -----------
$ 4,229,000 $ 3,947,000
=========== ===========
Accrued liabilities:
Accrued payroll, bonus and vacation $ 716,000 $ 945,000
Accrued legal and other professional fees 209,000 212,000
Other accrued expenses 638,000 541,000
----------- -----------
$ 1,563,000 $ 1,698,000
=========== ===========
30
NOTE 10 - Quarterly Financial Data (Unaudited)
The following table reflects the unaudited quarterly results of the
Company for the fiscal years ended June 24, 2005 and June 25, 2004,
respectively:
Operating Net Diluted net
Gross earnings earnings earnings
Quarter Ended Net sales profit (loss) (loss) per share(a)
- ----------------------------- --------------- ---------------- ---------------- --------------- -----------------
September 24, 2004 $6,952,000 $2,135,000 $600,000 $597,000 $0.05
December 31, 2004 7,053,000 2,074,000 255,000 254,000 0.02
March 25, 2005 5,231,000 1,388,000 (344,000) (53,000) -
June 24, 2005 7,560,000 2,298,000 586,000 594,000 0.05
- ----------------------------- --------------- ---------------- ---------------- --------------- -----------------
September 26, 2003 $9,211,000 $2,787,000 $915,000 $913,000 $0.08
December 26, 2003 7,001,000 2,069,000 309,000 320,000 0.02
March 26, 2004 6,038,000 1,935,000 218,000 217,000 0.02
June 25, 2004 6,235,000 1,817,000 140,000 113,000 0.01
- ----------------------------
(a) The sum of the unaudited quarterly income (loss) 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 based on the weighted average common and
common equivalent shares outstanding in each period.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this Report, management of the
Company, with the participation of the Company's President and principal
executive officer and the Company's Vice President-Finance and principal
financial officer, evaluated the effectiveness of the Company's "disclosure
controls and procedures," as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934. Based on that evaluation, these officers concluded that,
as of June 24, 2005, the Company's disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed in the Company's periodic filings under the Securities Exchange Act of
1934 is accumulated and communicated to the Company's 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 the Company to disclose material information otherwise
required to be set forth in the Company's periodic reports.
During the period covered by this Report, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
The information called for by Part III (Items 10, 11, 12, 13 and 14 of
Form 10-K) is incorporated herein by reference to such information which will be
contained in the Company's Proxy Statement to be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934 with respect to the Company's 2005
Annual Meeting of Stockholders.
31
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Report of Independent Registered Public Accounting Firm ...................................................18
Consolidated Balance Sheets at June 24, 2005 and June 25, 2004............................................19
Consolidated Statements of Operations for each of the years in the
three-year period ended June 24, 2005.................................................................20
Consolidated Statements of Stockholders' Equity for each of the years in the
three-year period ended June 24, 2005.................................................................21
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended June 24, 2005.................................................................22
Notes to Consolidated Financial Statements................................................................23
(a)(2) Schedule II - Valuation and Qualifying Accounts...........................................................S-1
(3) Exhibits
Exhibit
Number EXHIBIT INDEX
- ------
Description
3(a)(1) Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of the State of Delaware on
December 10, 1996. Incorporated by reference to Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 27, 1996 (File No. 1-8048).
3(a)(2) Certificate of Designation, as filed with the Secretary of
State of the State of Delaware on May 15, 1998. Incorporated
by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) May 7, 1998
(File No. 1-8048).
3(a)(3) Certificate of Amendment of the Company's 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 the Company's Current Report on
Form 8-K dated (date of earliest event reported) December 5,
2001 (File No. 1-8048).
3(b) By-laws of the Company, as amended. Incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K
dated (date of earliest event reported) September 13, 2005
(File No. 1-8048).
4(a) Rights Agreement dated as of May 15, 1998 between the Company
and Harris Trust & Savings Bank formerly Harris Trust of
Chicago). Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) May 7, 1998 (File No. 1-8048).
4(b)(1) Security Agreement dated as of September 17, 2003 between the
Company and Milberg Factors, Inc. ("Lender"). Incorporated by
reference to Exhibit 4(b)(1) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 2003 (File No.
1-8048).
4(b)(2) Guaranty Agreement dated as of September 17, 2003 between TII
Systems, Inc. and Lender. Incorporated by reference to
Exhibhit 4(b)(2) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 27, 2003 (File No. 1-8048).
4(b)(3) Security Interest In Inventory Under Uniform Commercial Code
Supplement to Security Agreement (Accounts Receivable
Financing) Contract dated as of September 17, 2003 between the
Company and Lender. Incorporated by reference to Exhibit
4(b)(3) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 27, 2003 (File No. 1-8048).
32
4(b)(4) Security Agreement - Goods and Chattels dated as of September
17, 2003 between the Company and Lender. Incorporated by
reference to Exhibit 4(b)(4) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 2003 (File No
1-8048).
10(a)(1)(A)+ 1994 Non-Employee Director Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 29,
2001 (File No. 1-8048).
10(a)(1)(B)*+ Form of Option Contract under 1994 Non-Employee Director Stock
Option Plan.
10(a)(2)(A)+ 1995 Stock Option Plan, as amended. Incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 26, 1997 (File No.
1-8048).
10(a)(2)(B)+ Non-Qualified Stock Option Contract, dated June 7, 2005,
between the Company and Timothy J. Roach. Incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) June 7, 2005.
10(a)(2)(C)+ Form of Incentive Stock Option Contract, dated June 7, 2005,
between the Company and separately with each of Kenneth A.
Paladino, Nisar Chaudry and Virginia M. Hall. Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) June 7, 2005.
10(a)(2)(D)+ Form of Incentive Stock Option Contract, dated September 13,
2005 between the Company and Kenneth A. Paladino. Incorporated
by reference to Exhibit 99.3 to the Company's Current Report
on Form 8-K dated (date of earliest event reported) September
13, 2005.
10(a)(2)(E)*+ Forms of Option Contracts under 1995 Stock Option Plan.
10(a)(3)(A)+ 1998 Stock Option Plan, as amended. Incorporated by reference
to Exhibit 10(a)(4) to the Company's Annual Report on Form
10-K for the fiscal year ended June 27, 2003 (File No.
1-8048).
10(a)(3)(B)*+ Forms of Option Contracts under 1998 Stock Option Plan.
10(a)(4)(A)+ 2003 Non-Employee Director Stock Option Plan. Incorporated by
reference to Appendix A to the Company's Proxy Statement dated
October 27, 2003 (File No. 1-8048).
10(a)(4)(B)+ 2003 Non-Employee Director Stock Option Plan as amended
effective September 25, 2004. Incorporated by reference to
Exhibit 99(a) to the Company's Form S-8 dated November 15,
2004 (File No. 1-8048).
10(a)(4)(C)*+ Forms of Option Contracts under 2003 Non-Employee Director
Stock Option Plan.
10(b)(1)+ Second Amended and Restated Employment Agreement, dated as of
May 17, 2005 between the Company and Timothy J. Roach.
Incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated (date of earliest event
reported) May 17, 2005 (File No. 1-8048).
10(b)(2)+ Consulting Agreement, dated September 14, 2005, between the
Company and Alfred J. Roach. Incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K (date
of earliest event reported) September 13, 2005 (File No.
1-8048).
10(b)(3)+ Consulting Agreement, dated September 14, 2005, between the
Company and Charles H. House. Incorporated by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K (date
of earliest event reported) September 13, 2005(File No.
1-8048).
10(c)(1) Lease Contract dated April 27, 1998 between the Company and
Puerto Rico Industrial Development Company. Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 27, 1998 (File
No. 1-8048).
33
10(d)* Product Purchase Agreement, effective as of April 1, 2005,
between the Company and Verizon Services Corp. (confidential
treatment has been requested with respect to certain portions
of this agreement).
14 Code of Ethics for Senior Financial Officers. Incorporated by
reference to Exhibit 14 to the Company's Annual Report on Form
10-K for the fiscal year ended June 25, 2004 (File No.
1-8048).
21 Subsidiaries of the Company. Incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 2002 (File No. 1-8048).
23* 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.
34
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.
September 22, 2005 By: /s/ Timothy J. Roach
--------------------------------------------
Timothy J. Roach, 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.
September 22, 2005 By: /s/ Timothy J. Roach
--------------------------------------------
Timothy J. Roach, President, and
Chief Executive Officer
(Principal Executive Officer)
September 22, 2005 /s/ Kenneth A. Paladino
--------------------------------------------
Kenneth A. Paladino, Vice President-Finance, Chief Operating
Officer and Treasurer (Principal Financial Officer)
September 22, 2005
/s/ Alfred J. Roach
--------------------------------------------
Alfred J. Roach, Director
September 22, 2005
/s/ C. Bruce Barksdale
--------------------------------------------
C. Bruce Barksdale, Director
September 22, 2005
/s/James R. Grover Jr.
--------------------------------------------
James R. Grover, Jr., Director
September 22, 2005
/s/ Joseph C. Hogan
--------------------------------------------
Joseph C. Hogan, Director
September 22, 2005
/s/ R.D. Garwood
--------------------------------------------
R. D. Garwood, Director
September 22, 2005
/s/ Lawrence M. Fodrowski
--------------------------------------------
Lawrence M. Fodrowski, Director
September 22, 2005
/s/ Mark T. Bradshaw
--------------------------------------------
Mark T. Bradshaw, Director
September 22, 2005 /s/ Charles H. House
--------------------------------------------
Charles H. House, Director
35
TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Accounts Balance
Beginning of Receivable at End of
Fiscal Year Ended Year Additions Write-offs Year
- -------------------------------------------- -------------------- ------------------- ------------------ ------------------
June 24, 2005 $ 100,000 - - $ 100,000
June 25, 2004 $ 100,000 - - $ 100,000
June 27, 2003 $ 100,000 - - $ 100,000
S-1
Exhibit
Number EXHIBIT INDEX
- ------
Description
3(a)(1) Restated Certificate of Incorporation of the Company, as filed
with the Secretary of State of the State of Delaware on
December 10, 1996. Incorporated by reference to Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 27, 1996 (File No. 1-8048).
3(a)(2) Certificate of Designation, as filed with the Secretary of
State of the State of Delaware on May 15, 1998. Incorporated
by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) May 7, 1998
(File No. 1-8048).
3(a)(3) Certificate of Amendment of the Company's 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 the Company's Current Report on
Form 8-K dated (date of earliest event reported) December 5,
2001 (File No. 1-8048).
3(b) By-laws of the Company, as amended. Incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K
dated (date of earliest event reported) September 13, 2005
(File No. 1-8048).
4(a) Rights Agreement dated as of May 15, 1998 between the Company
and Harris Trust & Savings Bank formerly Harris Trust of
Chicago). Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) May 7, 1998 (File No. 1-8048).
4(b)(1) Security Agreement dated as of September 17, 2003 between the
Company and Milberg Factors, Inc. ("Lender"). Incorporated by
reference to Exhibit 4(b)(1) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 2003 (File No.
1-8048).
4(b)(2) Guaranty Agreement dated as of September 17, 2003 between TII
Systems, Inc. and Lender. Incorporated by reference to
Exhibhit 4(b)(2) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 27, 2003 (File No. 1-8048).
4(b)(3) Security Interest In Inventory Under Uniform Commercial Code
Supplement to Security Agreement (Accounts Receivable
Financing) Contract dated as of September 17, 2003 between the
Company and Lender. Incorporated by reference to Exhibit
4(b)(3) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 27, 2003 (File No. 1-8048).
4(b)(4) Security Agreement - Goods and Chattels dated as of September
17, 2003 between the Company and Lender. Incorporated by
reference to Exhibit 4(b)(4) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 2003 (File No
1-8048).
10(a)(1)(A)+ 1994 Non-Employee Director Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 29,
2001 (File No. 1-8048).
10(a)(1)(B)*+ Form of Option Contract under 1994 Non-Employee Director Stock
Option Plan.
10(a)(2)(A)+ 1995 Stock Option Plan, as amended. Incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 26, 1997 (File No.
1-8048).
10(a)(2)(B)+ Non-Qualified Stock Option Contract, dated June 7, 2005,
between the Company and Timothy J. Roach. Incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) June 7, 2005.
10(a)(2)(C)+ Form of Incentive Stock Option Contract, dated June 7, 2005,
between the Company and separately with each of Kenneth A.
Paladino, Nisar Chaudry and Virginia M. Hall. Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) June 7, 2005.
10(a)(2)(D)+ Form of Incentive Stock Option Contract, dated September 13,
2005 between the Company and Kenneth A. Paladino. Incorporated
by reference to Exhibit 99.3 to the Company's Current Report
on Form 8-K dated (date of earliest event reported) September
13, 2005.
10(a)(2)(E)*+ Forms of Option Contracts under 1995 Stock Option Plan.
10(a)(3)(A)+ 1998 Stock Option Plan, as amended. Incorporated by reference
to Exhibit 10(a)(4) to the Company's Annual Report on Form
10-K for the fiscal year ended June 27, 2003 (File No.
1-8048).
10(a)(3)(B)*+ Forms of Option Contracts under 1998 Stock Option Plan.
10(a)(4)(A)+ 2003 Non-Employee Director Stock Option Plan. Incorporated by
reference to Appendix A to the Company's Proxy Statement dated
October 27, 2003 (File No. 1-8048).
10(a)(4)(B)+ 2003 Non-Employee Director Stock Option Plan as amended
effective September 25, 2004. Incorporated by reference to
Exhibit 99(a) to the Company's Form S-8 dated November 15,
2004 (File No. 1-8048).
10(a)(4)(C)*+ Forms of Option Contracts under 2003 Non-Employee Director
Stock Option Plan.
10(b)(1)+ Second Amended and Restated Employment Agreement, dated as of
May 17, 2005 between the Company and Timothy J. Roach.
Incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated (date of earliest event
reported) May 17, 2005 (File No. 1-8048).
10(b)(2)+ Consulting Agreement, dated September 14, 2005, between the
Company and Alfred J. Roach. Incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K (date
of earliest event reported) September 13, 2005 (File No.
1-8048).
10(b)(3)+ Consultating Agreement, dated September 14, 2005, between the
Company and Charles H. House. Incorporated by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K (date
of earliest event reported) September 13, 2005(File No.
1-8048).
10(c)(1) Lease Contract dated April 27, 1998 between the Company and
Puerto Rico Industrial Development Company. Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 27, 1998 (File
No. 1-8048).
10(d)* Product Purchase Agreement, effective as of April 1, 2005,
between the Company and Verizon Services Corp. (confidential
treatment has been requested with respect to certain portions
of this agreement).
14 Code of Ethics for Senior Financial Officers. Incorporated by
reference to Exhibit 14 to the Company's Annual Report on Form
10-K for the fiscal year ended June 25, 2004 (File No.
1-8048).
21 Subsidiaries of the Company. Incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 2002 (File No. 1-8048).
23* 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.