SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-8048
TII INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0328885
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1385 Akron Street, Copiague, New York 11726
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-789-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____
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.[ ]
The aggregate market value of the voting stock of the registrant
outstanding as of September 27, 1995 held by non-affiliates of the registrant
was approximately $45,000,000. While such market value excludes shares which
may be deemed beneficially owned by executive officers and directors and their
associates, this should not be construed as indicating that all such persons
are affiliates.
The number of shares of the Common Stock of the registrant outstanding as
of September 27, 1995 was 7,016,758. The foregoing gives effect to the
conversion of all Class B Stock into Common Stock on September 27, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Portions ofthe registrant's Proxy Statement relating to its 1995 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
PART I
Item 1. Business
General
TII is a leading supplier to United States telephone operating companies
("Telcos") of overvoltage surge protectors. Overvoltage protectors are
required by the National Electric Code to be installed on the subscriber's
(user's) home or office telephone lines to prevent injury to telecommunication
users and damage to telecommunication equipment due to overvoltage surges
caused by lightning and other hazardous electrical occurrences. The Company's
other products include network interface devices ("NIDs") and station
electronics, which may be incorporated in NIDs together with the Company's
overvoltage protectors. Further, during the second quarter of fiscal 1994, the
Company introduced a line of fiber optic products in order to participate in
the growing fiber optic market. The Company markets its products, directly or
indirectly, to the seven Regional Bell Operating Companies ("RBOCs") and GTE
Corporation ("GTE"), as well as original equipment suppliers who sell to the
global telcom marketplace, which collectively service over 85% of the 140
million subscriber lines in the United States, as well as to most of the 1,300
smaller Telcos.
The Company's strategy is to develop new products which are complementary
to its current products, expand into new markets and capitalize on its
reputation as a quality manufacturer among the Telcos.
As a result of an election to apply Section 936 of the United States
Internal Revenue Code of 1986, as amended (the "Code"), a tax exemption under
Puerto Rico's Industrial Incentive Act of 1963, and the availability of net
operating loss and tax credit carryovers, most of the Company's income is
presently not taxed. (See "Tax Attributes".)
The Company is a Delaware corporation organized in 1971 and is the
successor to a corporation founded in 1964 by Alfred J. Roach, Chairman of the
Board of Directors of the Company. Unless the context otherwise requires, the
term "Company" as used herein refers to TII Industries, Inc. and its
subsidiaries.
The Company's principal executive office is located at 1385 Akron Street,
Copiague, New York 11726 (telephone number (516) 789-5000) and its principal
operations office is located at Rd. 165, Kilometer 1.6, Toa Alta, Puerto Rico
00953 (telephone number (809) 870-2700).
Products
TII has been a manufacturer of overvoltage protection devices based on
gas tube technology for over 20 years. This core gas tube technology
represents the foundation upon which certain new products and technological
enhancements of the Company's traditional products are to be based.
In addition, the Company has expanded its research and development efforts
to accelerate the development of additional products for both its established
telecommunications and its new fiber optic product lines.
2
Overvoltage Surge Protectors. The Company designs, manufactures and
markets overvoltage protectors primarily for use by the Telco industry on the
subscriber's home or office telephone lines. These overvoltage protectors
differ in power capacity, application, configuration and price to meet the
Telco's varying needs.
The heart of the TII overvoltage protector is its proprietary two and
three electrode gas tube. Overvoltage protection is provided when the voltage
on a telephone 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
into the ground. When the voltage on the Telco's 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 have been
designed to withstand multiple high energy overvoltage surges while continuing
to operate over a long service life with minimal failure rates.
One of the Company's most advanced overvoltage protectors is embodied in
its Totel Failsafe series, combine the Company's three electrode gas tube with
a patented, thermally operated, failsafe mechanism, encapsulated in an
environmentally sealed module. The three electrode gas tube protects the
equipment from hazardous overvoltage surges and the failsafe mechanism is
designed to insure that, under sustained overvoltage conditions, the protector
will become permanently grounded. The sealed module is designed to prevent
damage to the protector from moisture and industrial pollution.
In August 1995, the Company entered into a long-term strategic agreement
with a joint venture to develop and manufacture advanced technology protectors
for sale into global telecommunications markets. (See "Strategic Agreement",
below.)
TII also designs, manufactures and markets special purpose models of
powerline protectors, utilizing the Company's gas tubes and solid state
protection technology, principally for use by the Company's Telco customers.
TII's powerline protectors protect the connected Telco equipment against damage
or destruction caused when overvoltage surges enter equipment through the
powerline.
Overvoltage protectors sold separately accounted for approximately 68%,
76% and 73% of the Company's net sales during the Company's fiscal years 1995,
1994 and 1993, respectively.
Network Interface Devices ("NIDs"). The Company designs, molds,
assembles and markets various NIDs which typically contain wire terminals to
connect a subscriber's telephone, one or more overvoltage protectors and a
demarcation point to clearly separate the Telco's wires from the subscriber's
wires. NIDs were developed to establish a separation point between Telco
property and subscriber property in response to Federal Communication
Commission and state public service commission requirements. Certain Telcos
have also begun installing various station electronic products in NIDs,
including remote testing devices, through which the Telcos are able to
automatically test the integrity of their lines.
The Company's NIDs principally incorporate station protectors and
electronics. The Company also offers a line of retrofit NIDs for existing
subscriber installations. These units are designed to meet industry
requirements by simply removing the cover of existing station protectors and
replacing that cover with an easy-to-install retrofit NID. Utilizing the
existing station protector
3
benefits the Telco by reducing installation time and material costs. These
NIDs, together with NIDs sold without protection or electronics, represented
approximately 20%, 14% and 17% of the Company's net sales during fiscal 1995,
1994 and 1993, respectively.
Station Electronics and Other Products. The Company designs,
manufactures and markets special purpose station electronic products that are
included in NIDs or sold separately. Most subscriber electronic devices are
designed to be installed with an overvoltage protector, typically in a NID.
The Company's station electronics products include maintenance termination
units designed to interface with the Telco's central office test equipment,
offering the Telco remote testing capabilities. With this product installed at
the subscriber's home or business, a Telco can determine whether a defect or
fault is in Telco or subscriber-owned equipment before dispatching a
maintenance vehicle. Another product automatically identifies the calling
party on a party line (located primarily in rural areas of the United States
and Canada) without operator assistance. The Company also designs,
manufactures and markets other products, including plastic housings, wire
terminals, enclosures, cabinets and various hardware products principally for
use by the Telco industry. Station electronics and other products sold
separately, and payments from AT&T Corporation ("AT&T") under an agreement with
the Company which expires on December 31, 1995 (with a final payment scheduled
to be received in March 1996), accounted for approximately 9%, 8% and 10% of
the Company's net sales in fiscal 1995, 1994 and 1993, respectively. (See
"AT&T Agreement" in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of this Report).
Fiber Optic Products. In order to participate in the growing fiber optic
market and help expand TII into new markets including the long distance service
providers, TII began to design and develop various fiber optic products in
fiscal 1994. To accelerate its entry into this market, in September 1993, the
Company acquired 98.5% (and subsequently acquired an additional 1.1%) of Ditel,
Inc. ("Ditel") for a purchase price which was not material to the Company.
Ditel, a North Carolina-based company, designs, manufactures and supplies fiber
optic products for markets similar to those in which the Company sells its
current products.
The Company's fiber optic products include enclosures, cabinets, splice
trays and a fiber optic cable management system. The Company integrates these
products with purchased fiber optic components to design and produce customized
fiber optic cable assemblies for the various interconnection points which join
and extend fiber optic cables from the Telcos long distance networks to central
offices and subscriber locations. Sales of fiber optic products, which
commenced in the beginning of the second quarter of fiscal 1994, were 3.0% and
2.0% of the Company's net sales during fiscal 1995 and 1994, respectively.
Marketing and Customers
The Company sells overvoltage protectors, NIDs, station electronics and
other products to Telcos both directly and through distributors who are both
affiliated and unaffiliated with Telcos in the United States. TII also sells
its protectors to telecommunications equipment manufacturers, including other
NID suppliers, which incorporate the Company's protectors into their products
for resale to the Telcos. With the entry of the Company into the fiber optic
market, the Company also is broadening its customer base to traditional users
of fiber optic products, including long distance carriers and cable television
providers.
4
Beginning primarily in fiscal 1994, the Company changed its sales force
from one based primarily on manufacturers representatives to one based
primarily on direct sales personnel employed by the Company. The Company
believes this direct sales force affords the Company better coverage of its
telecommunications customers. The Company is using the same direct sales force
and distribution network to sell both its new fiber optic products and non-
fiber optic products.
The following customers are the only customers who accounted for
more than 10% of the Company's consolidated revenues during any of the
periods listed below:
Percentage of Net Sales
for Year Ended
June 30, June 24, June 25,
1995 1994 1993
BellSouth Corporation (2) 8% 11% 22%
Telesector Resources Group
(a subsidiary of NYNEX) 13% 14% 17%
GTE Control Devices (3) * * 12%
Siecor Corporation (2) (3) 30% 34% 11%
____________________
(1) Asterisk denotes less than 10% for the period presented.
(2) Many Telcos have made a determination to have overvoltage protectors
inserted into NIDs by NID manufacturers. As a result, certain purchases
of the Company's overvoltage protectors previously made directly by these
Telcos were shifted to NID manufacturers. Due to a determination made by
BellSouth Corporation ("BellSouth") to have the Company's overvoltage
protectors inserted into NIDs produced for BellSouth by Siecor
Corporation, a telecommunications equipment manufacturer ("Siecor"),
certain purchases previously made directly by BellSouth were shifted to
Siecor during fiscal 1995 and 1994. The Company believes that, with
sales through Siecor and BellSouth's direct purchases, BellSouth's use of
the Company's overvoltage protectors has not diminished since fiscal
1993.
(3) GTE Control Devices, which sold NIDs principally to the Telcos of its
parent, GTE, was acquired in September 1993 by Siecor Corporation. As a
result, sales to GTE Control Devices, which incorporated TII overvoltage
protectors into its products, were shifted to Siecor.
Purchases of the Company's products are generally based on individual
customer purchase orders for delivery within thirty days under general supply
contracts. The Company, therefore, has no material firm backlog of orders.
Strategic Agreement
In August 1995, the Company entered into a long-term strategic
agreement ("ANT Agreement") with Access Network Technologies ("ANT")
to develop and manufacture advanced technology products for sale
into the global telecommunications markets. ANT is a joint venture
5
between AT&T Network Cable Systems and Raychem Corporation. The first
products to be jointly developed under the ANT Agreement are proprietary
gel-filled overvoltage protector terminal blocks and station protectors.
Customers for the products developed under the ANT Agreement are expected to
be Telcos throughout the United States as well as the local exchange carriers
and network operators around the world, including telecommunications companies,
military, law enforcement, customs, finance, transportation and utility
networks.
Export Sales
The Company's sales of its products in foreign countries aggregated
approximately $969,000 in fiscal 1995 (2% of net sales), $744,000 in fiscal
1994 (2% of net sales) and $450,000 in fiscal 1993 (1% of net sales). Foreign
sales have been made primarily within countries in the Caribbean, South and
Central America, Canada and Western Europe. The Company requires foreign sales
to be paid for in U.S. currency. Foreign sales are affected by such factors as
exchange rates, changes in protective tariffs and foreign government import
controls.
Manufacturing
The Company produces its overvoltage protectors, NIDs and station
electronics at its facilities in Puerto Rico and the Dominican Republic, and
its fiber optic products at its facility in North Carolina.
The manufacture of the Company's gas tubes requires vacuum ovens,
specialized test equipment and various processes developed by the Company. The
assembly and the test equipment used in the manufacture of the gas tube
overvoltage protectors and other Company products was developed and built by
the Company or by various equipment manufacturers to the Company's
specifications. TII produces a substantial portion of its NIDs and other
plastic enclosures in its thermoplastic molding facility. All of the Company's
products contain numerous metal components produced with the Company's metal
stamping and forming equipment. The Company believes that this vertical
integration of its manufacturing processes gives the Company both cost and
delivery advantages.
The Company's fiber optic products are assembled principally from outside
purchased components.
TII uses a statistical process control method within its manufacturing
and engineering operations to establish quality standards, qualify vendors,
inspect incoming components, maintain in-process inspection and lot control and
perform final testing of finished goods.
Raw Materials
The Company uses stamped, drawn and formed parts made out of a variety of
commonly available metals, ceramics and plastics as the primary components of
its gas tubes, overvoltage protectors, NIDs, other molded plastic housings and
fiber optic products. In manufacturing certain protectors and station
electronic products, the Company purchases commonly available solid state
components, printed circuit boards and standard electrical components such as
resistors, diodes and capacitors. The Company has no contracts with
suppliers of the components utilized in the manufacture of its products
which extend for more than one year. The Company believes that all raw
6
materials used by it will continue to be readily available in sufficient
supply from a number of sources at competitive prices.
Patents and Trademarks
The Company owns or has applied for a number of patents relating to its
products, and owns a number of registered trademarks which are considered to be
of value principally in identifying the Company and its products. While the
Company considers these important, it believes that, because of technological
advances in its industry, its success depends primarily upon its sales,
engineering and manufacturing skills.
Research and Development
As the Telcos upgrade and expand their networks to provide the
telecommunications services of the future, new product opportunities continue
to arise for the Company. During fiscal 1995, the Company continued to develop
new fiber optic products as well as its other products. Currently, the
Company's research and development and related marketing efforts are focused on
several major projects including:
-- Designing custom overvoltage protectors pursuant to the ANT
Agreement as well as for other original equipment manufacturers for
installation throughout the Telco and other communications
networks.
-- Developing overvoltage protectors for the cable TV and broadband
communications markets.
-- Expanding the Company's fiber optic product line of enclosures and
fiber optic cable management systems to meet the growing needs of
existing and potential customers.
-- Developing enhanced station protectors and network interface
devices to address anticipated future requirements of the Telcos.
-- Developing products related to the protection of telecommunications
equipment connected to commercial power.
The Company's research and development ("R&D") department, was
strengthened by the addition of a Vice President of Research and Development
during fiscal 1994 and several new development engineers during fiscal 1994 and
fiscal 1995. The department currently consists of 27 persons skilled and
experienced in various technical disciplines, including physics, electrical and
mechanical engineering, with specialization in such fields as electronics,
metallurgy, plastics and fiber optics. The Company maintains computer aided
design equipment and laboratory facilities, which contain sophisticated
equipment, in order to develop and test its existing and new products.
The Company's R&D expense was $2,619,000, $2,100,000 and $1,370,000
during fiscal 1995, 1994 and 1993, respectively. The increases were primarily
due to staff increases, increased costs of development projects and an increase
in research projects. The Company sponsors all of its R&D.
7
Competition
Although TII is a leading supplier to Telcos of overvoltage protectors
for use at subscriber premises, in NIDs and station protectors, overvoltage
protectors are subject to significant competition, including competition from
NID manufacturers (including Siecor, a major customer of the Company) which
have introduced their own line of overvoltage protectors. The Company expects
this significant competition to continue in the Company's overvoltage
protectors as well as the Company's other products. Principal competitive
factors include technology, delivery, price, quality and reliability. Most of
the Company's competitors have substantially greater assets and financial
resources, and have larger sales forces, manufacturing facilities and R&D
staffs than those of the Company. The Company believes that its present sales,
marketing and R&D departments, its low-cost high quality production facilities
and strategic agreement with ANT, as well as its present protection technology,
enable it to meet competition.
The Company's gas tube overvoltage protectors not only compete with other
companies' gas tube overvoltage protectors, but also with solid state
overvoltage protection devices. While solid state protectors are faster at
reacting to surges, gas tube overvoltage protectors have generally remained the
subscriber overvoltage protection technology of choice by virtually all Telcos
because of the gas tube's ability to repeatedly withstand significantly higher
energy surges while adding virtually no capacitance onto the communication
line. Solid state overvoltage protectors are used principally in Telco's
central office switching centers where speed is perceived to be more critical
than energy handling capabilities. While the Company believes that, for the
foreseeable future, both gas tube and solid state devices will continue to be
used as overvoltage protectors within the telecommunications market, solid
state protectors may gain market share from gas tube protectors, especially
where high speed response is critical. Solid state and gas tube devices are
produced from different raw materials, manufacturing processes and equipment.
On a limited basis, the Company has begun developing and marketing overvoltage
protectors incorporating purchased solid state devices.
As a recent entrant into the fiber optic market, the Company expects to
meet significant competition from companies with greater financial and R&D
resources. The market in this area is characterized by innovation, rapidly
changing technology and new product development. The Company's success in this
area will depend, in large measure, upon its ability to identify customer needs
and develop new products to keep pace with continuing changes in technology and
customer preferences.
Regulation
The National Electrical Code requires that an overvoltage protector
listed by Underwriters Laboratories or another qualified electrical testing
laboratory be installed on virtually all subscriber telephone lines. Listing
by Underwriters Laboratories has been obtained by the Company where required.
Compliance with applicable federal, state and local environmental
regulations has not had, and the Company does not believe that compliance in
the future will have, a material effect on its earnings, capital expenditures
or competitive position.
8
Certain Tax Attributes
Because the Company is incorporated in the United States and operates
primarily in the Commonwealth of Puerto Rico, its income would normally be
subject to income tax by both the United States and Puerto Rico. At the
present time, however, as explained more fully below, the Company does not pay
United States federal or Puerto Rico income tax on most of its income. The
Company is, however, subject to United States federal and applicable state
income taxes with respect to its non-Puerto Rico operations, including those of
Ditel.
The Company has elected the application of Section 936 of the Code and
presently intends to continue to operate in a fashion that will enable it to
qualify for the Section 936 election. Under that section, as long as the
Company (on a non-consolidated basis) has cumulatively derived, in its current
and two preceding tax years, at least 80% of its gross income from sources
within Puerto Rico and at least 75% of its gross income from the active conduct
of a trade or business within Puerto Rico, as defined in the Code, the Company
is entitled to a federal tax credit in an amount equal to the lesser of the
United States federal tax attributable to its taxable income arising from the
active conduct of its business within Puerto Rico or the economic activity
based credit limitation, as further discussed below (since the Company did not
elect the alternative percentage limitation). To the extent the Company has
taxable income arising from United States sources (e.g., income from investment
activity in the U.S.), the Company would not be entitled to offset the related
tax on such income with the Section 936 tax credit.
The economic activity limitation on the amount of allowable credits under
Section 936, as added by the Revenue Reconciliation Act of 1993, is based upon
qualified wages paid for services performed in Puerto Rico, depreciation
deductions and taxes in Puerto Rico and, in the case of the Company, is
effective beginning with its 1995 fiscal year. Based on fiscal 1995 levels of
qualified wages, fringe benefits and depreciation in Puerto Rico, the Company's
economic activity based credit limitation is approximately $3,000,000 per
annum. The amount of the economic activity based Section 936 credit limitation
available for fiscal 1995 will be sufficient to offset the United States
federal income tax on Puerto Rico source income for the Company's 1995 fiscal
year, as computed after utilization of the Company's available net operating
loss carry forwards of approximately $334,000.
Proposed legislation included in the Revenue Reconciliation Bill of 1995
generally would repeal the Section 936 credit for taxable years beginning after
December 31, 1995. However, since the Company had elected the Section 936
credit for prior years, it would be eligible to continue to claim a Section 936
credit for an additional 10 years under a special grandfather rule. If the
Company adds a substantial new line of business in the Company after September
13, 1995, the Company would cease to be eligible to claim the Section 936
credit beginning with the taxable year in which such new line of business is
added. Possession income that would be eligible for the Section 936 credit in
each of the years during the grandfather period would be subject to a cap equal
to the Company's average inflation-adjusted possession income for the three of
the five most recent years ending before September 13, 1995 determined by
excluding the years in which the Company's adjusted possession income was the
highest and the lowest. The Company's Section 936 credit for each year during
the grandfather period would continue to be subject to the economic activity
limitation (as discussed above). If enacted, this proposed legislation
would be effective for the Company's 1997 fiscal year. Based on
the Company's current level of possession income and
9
business plans, the Company believes that it will be eligible to claim a
Section 936 credit under the grandfather rule discussed above if this
legislation is enacted.
As long as the Company's election under Section 936 is in effect, the
Company cannot file a consolidated tax return with any of its subsidiaries for
United States income tax purposes, and the filing of consolidated returns is
not permitted under Puerto Rico income tax laws. Consequently, should the
Company itself sustain losses, those losses could not be used to offset the
federal taxable income of its subsidiaries; and, conversely, should the
Company's subsidiaries sustain losses, those losses could not be used to offset
the federal taxable income of the Company.
As a result of a private placement consummated in August 1992 (the
"Private Placement"), there has been an "ownership change" of TII and its
subsidiaries within the meaning of Section 382 of the Code, which significantly
limits the ability of the Company and its subsidiaries to utilize their
net operating losses and tax credit carryovers. Generally, following an
"ownership change" the amount of available net operating loss carryforwards and
credit equivalents from periods before the "ownership change" that may be used
by a company in any tax year following the change cannot exceed the "long-term
tax exempt-rate" at the time of such change (which rate was 6.35% as of the
time of the Private Placement) multiplied by the value of the Company at the
time of the "ownership change" (with certain adjustments). At June 30, 1995,
the Company had net operating loss carryforwards aggregating approximately
$15,800,000 which expire periodically through 2007, and along with its
subsidiaries had combined net operating loss carryforwards aggregating
approximately $25,045,000 which expire periodically through 2010 and general
business tax credit carryforwards of approximately $322,000 which expire
periodically through 2001. However, as a result of the "ownership change",
the maximum amount of net operating loss and tax credit equivalent
carryforwards which may be utilized in any year (and which is utilized to
offset income prior to the utilization of a credit available under Section
936 of the Code) is approximately $334,000 per year for the possessions
corporation and approximately $380,000 per year for the United States
subsidiaries. The effect of the "ownership change" is somewhat mitigated
with respect to the Company as a result of its Section 936
election since United States federal income tax is payable only to the extent
such tax exceeds the Company's Section 936 credit. In addition, net operating
losses generated subsequent to the "ownership change" are not subject to
limitation and may therefore be fully utilized. As of June 30, 1995, the
Company's United States subsidiaries have approximately $1,993,000 of net
operating losses that were generated subsequent to the "ownership change" and
remain available for use through 2010. In addition, the Company's United
States subsidiaries have available approximately $1,093,000 in unused Section
382 annual net operating loss limitation carryforwards.
The Company also has been granted exemptions under Puerto Rico's
Industrial Incentive Act of 1963 until June 2009 for income tax purposes and
for property tax purposes. In each case the level of exemption is 90%. The
Company also has substantial net operating loss carryforwards available through
fiscal 1998 to offset any remaining Puerto Rico taxable income. There are no
limitations on the Company's ability to utilize such net operating loss
carryforwards to reduce its Puerto Rico income tax. Furthermore, the Company's
subsidiary operating in the Dominican Republic is exempt from taxation in that
country.
10
Employees
On September 15, 1995, the Company had approximately 1,070 employees, of
whom 980 were engaged in manufacturing and 50 in engineering and new product
development, with the balance being employed in executive, sales and
administrative activities. Of these employees, approximately 310 are employed
at the Company's Puerto Rico facilities and 690 are employed at its Dominican
Republic facilities. The Company has not experienced any work stoppage as a
result of labor difficulties and believes it has satisfactory employee
relations.
Item 2. Properties
The Company manufactures its non-fiber optic products in Toa Alta, Puerto
Rico, approximately 20 miles southwest of San Juan, in a single story building
which, together with several smaller buildings, contain an aggregate of
approximately 30,000 square feet of space. These facilities also contain
certain of the Company's warehousing facilities and certain of its
administrative, quality control, sales and executive offices. These buildings
are leased under an agreement with the Puerto Rico Industrial Development
Company ("PRIDCO") which expired October 31, 1994 and requires the employment
of a minimum of 185 persons at this facility. In addition, the Company leases
from PRIDCO a single story building of approximately 8,800 square feet in
Caguas, Puerto Rico under a lease which expired in August 1995. This building
houses Crown Tool & Die Company, Inc., the Company's metal stamping subsidiary.
The Company has been negotiating an extension of its leases with PRIDCO and
believes it will be able to extend the leases in Toa Alta and Caguas on terms
substantially similar to those contained in the existing leases.
The Company also leases a building consisting of approximately 73,000
square feet, in San Pedro De Macoris, Dominican Republic under a lease which
expires on November 1, 1998. This facility houses certain of the Company's
manufacturing activities.
The Company leases a single story, 10,000 square foot facility in
Hickory, North Carolina under a lease expiring December 31, 1995 (subject to
renewal for three additional years at the Company's option), which houses its
fiber optic manufacturing facilities as well as certain administrative offices.
The Company leases a single story building and a portion of another
building, consisting of an aggregate of approximately 14,000 square feet in
Copiague, Long Island, New York which expires in July 1998. These facilities
house the Company's research and development activities and certain of its
marketing, administrative and executive offices, as well as a warehouse for
customer products and record storage.
The Company believes that its facilities and equipment are well
maintained and adequate to meet its current requirements.
Item 3. Legal Proceedings
The Company is not a party to any material pending legal proceedings.
11
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 1995.
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
The Company's Common Stock commenced trading on the Nasdaq Stock Market -
National Market System under the symbol "TIII" on August 3, 1994, prior to
which such shares were listed on the American Stock Exchange. The following
table sets forth, for each quarter during fiscal 1995 and fiscal 1994, the high
and low sales prices of the Company's Common Stock, adjusted to reflect a 1 for
2 1/2 reverse stock split effective April 26, 1994 (rounded to the nearest
1/16) in the applicable market.
Fiscal 1995 High Low
First Quarter Ended September 30, 1994 7 4 1/4
Second Quarter Ended December 30, 1994 6 5/8 5 3/8
Third Quarter Ended March 31, 1995 6 1/8 4 3/4
Fourth Quarter Ended June 30, 1995 7 1/2 4 1/2
Fiscal 1994 High Low
First Quarter Ended September 24, 1993 6 11/16 4 1/16
Second Quarter Ended December 31, 1993 10 3/4 6 1/4
Third Quarter Ended March 25, 1994 11 11/16 8 1/4
Fourth Quarter Ended June 24, 1994 11 1/16 5 3/4
As of September 27, 1995, the Company had approximately 700 holders of
record of its Common Stock.
To date, the Company has paid no cash dividends. For the foreseeable
future, the Company intends to retain all earnings generated from operations
for use in the Company's business. Additionally, the Company's borrowing
arrangements prohibit the payment of dividends until such indebtedness has been
repaid in full.
12
Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from
the Company's consolidated financial statements for the five years ended June
30, 1995, which statements have been audited by Arthur Andersen LLP,
independent public accountants. The following selected consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations", the consolidated financial
statements and the related notes thereto and other financial information
included elsewhere in this report.
June 30, June 24, June 25, June 26, June 28,
1995 1994 1993 1992 1991
(amounts in thousands except per share data)
STATEMENTS OF
OPERATIONS DATA
Net sales $43,830 $40,147 $33,474 $29,742 $28,563
Operating profit $ 3,602 $ 3,066 $ 1,987 $ 610 $(3,275)
(loss)
Net profit (loss) $ 2,942 $ 2,389 $ 1,212 $ --(2) $(4,445)
Net profit (loss) per
common and common
equivalent share-
Primary $ 0.52 $ 0.45 $ 0.28 -- $ 2.85)
Weighted average number
of common and common
equivalent shares
outstanding 7,989 6,726 5,834 1,826 1,558
BALANCE SHEET DATA
Working capital $15,947 $ 6,734 $10,212 $ 6,995 $ 3,088
Total assets $34,414 $29,378 $28,066 $ 24,782 $23,237
Long-term debt,
including
current portion $ 2,767 $ 7,552 $10,263 $ 12,240 $11,425
Stockholders'
investment $25,183 $15,137 $12,439 $ 7,067 $ 3,112
- ---------------
(1) The Company has not paid cash dividends of its Common Stock or former
Class B Stock in any of the periods presented.
13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
Selected Financial Data and the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Report.
Key financial information follows:
June 30, 1995 June 24, 1994 June 25, 1993
(amounts in thousands)
Net sales $ 43,830 $ 40,147 $ 33,474
Cost of sales (as a
percentage of sales) 70.2% 73.0% 74.3%
Selling, general and
administrative expenses $ 6,827 $ 5,666 $ 5,232
Research and development $ 2,619 $ 2,100 $ 1,370
Interest expense $ 718 $ 711 $ 875
Net profit $ 2,942 $ 2,389 $ 1,212
Fiscal Years Ended June 30, 1995 and June 24, 1994
Net sales for fiscal 1995 increased by $3,683,000 or 9.2% to $43,830,000
from $40,147,000 in fiscal 1994. This increase in sales was primarily the
result of increased unit sales of the Company's network interface devices
("NID"). In August 1995, the Company signed a long term strategic agreement
("ANT Agreement") with Access Network Technologies ("ANT"), a joint venture
between AT&T Network Cable Systems and Raychem Corporation, to develop and
manufacture advanced technology products for sale in the global
telecommunications market. Toward the close of fiscal 1995, the Company
introduced several new products, including products which were jointly
developed and will be jointly manufactured under the ANT Agreement. The new
products combine TII's overvoltage protection with a unique technology designed
to make the products virtually impervious to weather. Certain of these new
products are expected to improve current TII products, as well as open new
markets including the transmission line protector sector of the
telecommunications industry. Two of the Company's current telephone operating
company customers have evaluated these new products and have indicated that
they will approve them for use. As a result, during the first quarter of
fiscal 1996, these customers slowed their purchase of other TII products to
minimize their inventory levels in anticipation of the availability and
delivery of the new products. While limited shipments are in process, TII and
ANT are addressing joint volume production start-up delays under the
ANT Agreement. Due to the delayed production start-up of the new products,
sales for the first quarter of fiscal 1996 are expected to be approximately
10% below first quarter fiscal 1995 sales levels. The Company believes
that attainment of volume production of the new products should begin
at the Company's facilities during the second quarter of fiscal 1996
14
and volume shipments should commence soon after volume production begins.
Fiscal 1995 and 1994 sales include approximately $1,200,000 and $744,000,
respectively, of sales from fiber optic products, sales of which commenced in
the second quarter of fiscal 1994. During the third quarters of fiscal 1995
and 1994, the Company received payments of $777,000 and $680,000, respectively,
from AT&T Corporation ("AT&T") for sales shortfalls corresponding to the
contract years ended December 31, 1994 and 1993, respectively, under an
agreement entered into in fiscal 1989 (the "AT&T Agreement"). See "AT&T
Agreement," below.
Cost of sales improved as a percentage of sales in fiscal 1995,
decreasing to 70.2% from 73.0% in the year earlier period, due to the higher
sales volume which enabled the Company to improve the absorption of fixed
expenses together with the effect of improved manufacturing efficiencies.
Selling, general and administrative expenses increased by $1,161,000 or
20.5% and as a percentage of sales to 15.6% in fiscal 1995 from 14.1% in fiscal
1994 primarily due to increasing the size of the Company's marketing and sales
forces and the increased sales commissions associated with increased sales
volume.
Research and development expenses increased by $519,000 or 24.7% in
fiscal 1995 from fiscal 1994 due, in large part, to staff increases and other
expenses associated with the development of new products to be sold by TII.
Interest expense increased by 1% or $7,000 in fiscal 1995 from fiscal
1994. Of the proceeds received from the exercise of Warrants, primarily during
the fourth quarter of fiscal 1995 and the first quarter of fiscal 1996 (see
"Liquidity and Capital Resources" below), $6,500,000 was used to reduce
outstanding borrowings under the Company's revolving loan agreement. This is
expected to favorably affect interest expense in fiscal 1996.
Net profit increased by $553,000 or 23.1% to $2,942,000 for fiscal 1995
compared to $2,389,000 for fiscal 1994. Net profits during the first quarter
of fiscal 1996 are expected to be below first quarter fiscal 1995 levels as a
result of the costs associated with the normal start-up costs and the delayed
production and shipment of the new products previously discussed.
Fiscal Years Ended June 24, 1994 and June 25, 1993
Net sales for fiscal 1994 increased by $6,673,000 or 19.9% to $40,147,000
from $33,474,000 in fiscal 1993. This increase in sales was primarily the
result of increased unit sales and an increase in sales of protectors to a
network interface manufacturer for incorporation into NID's for a Regional Bell
Operating Company which standardized on the Company's overvoltage protector in
late fiscal 1993. Fiscal 1994 sales include approximately $744,000 of sales
from fiber optic products, sales of which commenced in the second quarter of
1994. During the third quarter of each of fiscal 1994 and 1993, the Company
received payments of $680,000 from AT&T for sales shortfalls corresponding to
the contract years ended December 31, 1993 and 1992 under the AT&T Agreement.
See "AT&T Agreement," below.
15
Cost of sales decreased as a percentage of sales in fiscal 1994 to 73.0%
from 74.3% in the year earlier period due to the higher sales volume which
enabled the Company to improve the absorption of fixed expenses together with
the effect of sales of fiber optic products in the last three quarters of
fiscal 1994 which generally have higher gross profit margins than the Company's
other products.
Selling, general and administrative expenses increased in dollar amount
by $434,000 or 8.3% primarily as a result of a change to a direct sales force
from an indirect sales force and the sales commissions associated with
increased sales volume. However, selling, general and administrative expenses
continued to decrease as a percentage of sales to 14.1% in fiscal 1994 from
15.6% for fiscal 1993 due to the increase in sales.
Research and development expenses increased by $730,000 or 53.3% in
fiscal 1994 from fiscal 1993 due, in large part, to staff increases (primarily
for the development of new products) and an increase in the level of research
projects being performed for the Company by others, including costs incurred
under a research contract with an affiliate of Georgia Tech.
Interest expense declined by $164,000 or 18.7% due to debt reductions
resulting from the making of scheduled debt installment payments coupled with
lower prevailing interest rates during most of the period.
Other income in fiscal 1994 includes a $438,000 capital gain from a
change in investment policy, pursuant to which the Company liquidated a
portfolio of common stocks and reinvested the proceeds in government and money
market securities, offset by a one-time expense of $458,000 related to costs
associated with a planned underwritten common stock offering which was
withdrawn.
Net profit increased by $1,177,000 or 97.1% to $2,389,000 for fiscal 1994
compared to $1,212,000 for fiscal 1993.
Income Taxes
Due to its election to operate under Section 936 of the Internal Revenue
Code, the availability of certain net operating loss carryforwards and
exemptions from income taxes in Puerto Rico (until March 1998) and in the
Dominican Republic, the Company has not been required to pay any United States
federal, Puerto Rico or Dominican Republic taxes on most of its income. The
Revenue Reconciliation Act of 1993 imposed additional limits on the amount of
credit available to the Company under Section 936. Based on fiscal 1995 levels
of qualified wages, fringe benefits and depreciation in Puerto Rico, the
Company's economic activity based credit limitation under the new law is
approximately $3,000,000. The amount of the economic activity based Section
936 credit limitation available for fiscal 1995 will be sufficient to offset
the United States federal income tax on Puerto Rico source income for the
Company's 1995 fiscal year, as computed after utilization of the Company's
available net operating loss carry forwards of approximately $334,000.
Proposed legislation included in the Revenue Reconciliation Bill
of 1995 generally would repeal the Section 936 credit for taxable
years beginning after December 31, 1995. However, since the Company
had elected the Section 936 credit for prior years, it would be eligible to
continue to claim a Section 936 credit for an additional 10 years
under a special grandfather rule subject to a maximum limitation. If the
Company adds a substantial new line of business after September 13,
16
1995, it would cease to be eligible to claim the Section 936 credit beginning
with the taxable year in which such new line of business is added. If enacted,
this proposed legislation would be effective for the Company's 1997 fiscal
year. Based on the Company's current level of possession income and business
plans, the Company believes that it will be eligible to claim a Section
936 credit under the grandfather rule discussed above if this legislation is
enacted. See Note 6 of the Notes to Consolidated Financial Statements.
The Company is subject to United States federal and applicable state
income taxes with respect to its non-Puerto Rico operations.
AT&T Agreement
Included in net sales in each of the above reported periods is an annual
payment from AT&T under the AT&T Agreement, which was entered into in fiscal
1989 as part of a settlement of an arbitration proceeding related to a dispute
under a 1981 supply agreement. Under the AT&T Agreement, seven annual payments
totalling $4,800,000, commencing for the contract year ended December 31, 1989
and increasing in amount over the term of the agreement, are to be made to the
Company. These annual payments are subject to annual reductions equal to 10%
of the dollar amount of TII products, product development and other services
purchased or proposed for purchase from TII by AT&T and its subsidiaries.
These annual payments are further subject to reduction if the Company does not
perform its obligations under the AT&T Agreement. As of June 30, 1995, the
remaining maximum payment (scheduled to be received in March 1996, with respect
to the 1995 calendar year) is $900,000, subject to such reductions.
Seasonality
While the Company's business is not seasonal in nature, since the annual
payments from AT&T are based on the level of AT&T's purchases from the Company
during calendar years, any shortfall payments from AT&T are determined and
recorded as sales during the third quarter (which ends in March) of the
Company's fiscal year. As a result, the Company's sales and income are
generally (absent other factors) highest in that fiscal quarter.
Liquidity and Capital Resources
The following table sets forth the Company's working capital, current
ratio and total debt to equity ratio as of the following dates:
As of
June 30, June 24, June 25,
1995 1994 1993
(dollars in thousands)
Working capital $15,947 $6,734 $10,212
Current ratio 3.44 1.54 2.26
Total debt to equity ratio .37 .94 1.26
17
The Company has no commitments for capital expenditures, but expects to
purchase new equipment and leasehold improvements in the normal course of
business, subject to the maximum amounts permitted under its bank loan
agreements.
On January 31, 1995, a subsidiary of the Company entered into a Revolving
Credit Loan Agreement with Chemical Bank (guaranteed by the Company and other
subsidiaries) which entitles the subsidiary to borrow, from time to time, up to
$8,000,000, reduced by $400,000 on the last day of each fiscal quarter of the
Company commencing on March 25, 1995, through the final maturity date of
January 31, 2000. As a result, at June 30, 1995, the subsidiary was entitled
to borrow up to $7,200,000. The Company initially utilized $4,426,000 of the
proceeds from a loan under this facility to repay the remaining principal
balance outstanding under its June 1991 financing arrangements with three
commercial banks and the Government Development Bank of Puerto Rico and its
secured loan from Overseas Private Investment Corporation ("OPIC"), a for-
profit government agency. There remains outstanding $750,000 of unsecured
indebtedness to OPIC payable on July 19, 2001, which is convertible into Common
Stock of the Company. During the fiscal year ended June 30, 1995, Common
Stock Purchase Warrants and Unit Purchase Options issued in a 1992 private
placement were exercised, resulting in the issuance of 1,582,000 shares of
Common Stock for net proceeds to the Company of approximately $7,100,000.
Subsequent to June 30, 1995, the balance of the Common Stock Purchase Warrants
and Unit Purchase Options were exercised for 1,130,000 shares of Common
Stock, resulting in additional net proceeds to the Company of approximately
$5,500,000. The proceeds from these exercises were used to fully pay
down the outstanding balance under the Company's Revolving Credit Agreement
(which remains available for future borrowings) and fully redeem all
outstanding 27,626 shares of Series A Preferred Stock (at its redemption
price of $100 per share), as well as reduce accounts payable and for general
working capital.
The Company may seek additional financings for the acquisition of new
product lines or additional products for its existing product lines should any
such acquisition opportunity present itself to the Company in the future and to
meet working capital needs from time to time. Any such financings may involve
borrowings from banks or institutional lenders or the sale and issuance of debt
or equity securities from private sources or in public markets. The Company's
ability to obtain such financings will be affected by such factors as its
results of operations, financial condition, business prospects and restrictions
contained in credit facilities. There can be no assurances that the Company
will be able to, or the terms on which it may be able to, obtain any such
financings.
Funds anticipated to be generated from operations, together with
available cash and marketable securities and borrowings available under the
Company's Revolving Credit Agreement, are considered to be adequate to finance
the Company's operational and capital needs for the foreseeable future.
Impact of Inflation
The Company does not believe its business is affected by inflation to a
greater extent than the general economy. The Company monitors the impact of
inflation and attempts to adjust prices where market conditions permit.
Inflation has not had a significant effect on sales levels during any of the
reported periods.
18
Item 8. Financial Statements
TII INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Report of Independent Public Accountants 20
Consolidated Balance Sheets -
June 30, 1995 and June 24, 1994 21 to 22
Consolidated Statements of Operations for the
Three Years in the Period Ended June 30, 1995 23
Consolidated Statements of Stockholders'
Investment for the Three Years in the Period Ended
June 30, 1995 24
Consolidated Statements of Cash Flows for the
Three Years in the Period Ended June 30, 1995 25
Notes to Consolidated Financial Statements 26 to 40
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TII Industries, Inc.:
We have audited the accompanying consolidated balance sheets of TII Industries,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1995 and June 24,
1994, and the related consolidated statements of operations, stockholders'
investment and cash flows for each of the three years in the period ended June
30, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TII Industries, Inc. and
subsidiaries as of June 30, 1995 and June 24, 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Juan, Puerto Rico
September 27, 1995.
Stamp No. 1314917 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
20
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND JUNE 24, 1994
(Amounts in thousands except share and per share data)
ASSETS
June 30, June 24,
1995 1994
CURRENT ASSETS:
Cash $ 1,152 $ 1,099
Marketable securities 2,266 2,391
Trade receivables 5,655 5,174
Other receivables 478 405
Inventories 12,278 9,677
Prepaid expenses 645 365
------ ------
Total current assets $22,474 $19,111
------ ------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment 16,228 15,216
Tools, dies and molds 6,027 5,466
Leasehold improvements 5,655 4,881
Office fixtures, equipment and other 2,606 2,410
------ ------
30,516 27,973
Less - Accumulated depreciation and
amortization 20,302 19,058
------ ------
10,214 8,915
------ ------
OTHER ASSETS 1,726 1,352
------ ------
$34,414 $29,378
======= ======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
21
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND JUNE 24, 1994 (continued)
(Amounts in thousands except share and per share data)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
June 30, June 24,
1995 1994
CURRENT LIABILITIES:
Current portion of long-term debt $ 63 $ 5,688
Accounts payable 4,851 5,292
Accrued liabilities 1,613 1,397
----- -----
Total current liabilities 6,527 12,377
----- ------
LONG-TERM DEBT 2,704 1,864
----- ------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' INVESTMENT:
Preferred Stock, par value $1.00 per
share; 1,000,000 authorized and issuable
in series:
Series A Cumulative Convertible
Redeemable Preferred Stock, 100,000
shares authorized;27,626 shares
outstanding at June 30, 1995
and June 24, 1994. (issued and valued
at liquidation value of $100.00 per
share) 2,763 2,763
Series B Cumulative Redeemable Preferred
Stock, 20,000 shares authorized; no
shares outstanding at June 30, 1995
and June 24, 1994 -- --
Common Stock, par value $.01 per share;
30,000,000 shares authorized (with one
vote per share); 5,496,229 and 3,819,966
shares issued at June 30, 1995 and June
24, 1994, respectively 55 38
Class B Stock, par value $.01 per share;
10,000,000 shares authorized (with each
share having ten votes and convertible
into one share of Common Stock); 370,366
shares outstanding at June 30, 1995 and
June 24, 1994 4 4
Class C Stock, par value $.01 per share;
1,000,000 shares authorized (non-
voting); no shares issued -- --
Warrants outstanding 120 120
Capital in excess of par value 21,394 14,317
Retained earnings (accumulated deficit) 1,118 (1,824)
Unrealized gain on marketable securities 10 --
------ ------
25,464 15,418
Less - 17,637 common shares in treasury,
at cost 281 281
------ ------
25,183 15,137
------ ------
$34,414 $29,378
====== ======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
22
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
(Amounts in thousands except per share data)
June 30, June 24, June 25,
1995 1994 1993
NET SALES $43,830 $ 40,147 $33,474
------ ------ ------
COSTS AND EXPENSES
Cost of sales 30,782 29,315 24,885
Selling, general and 6,827 5,666 5,232
administrative expenses
Research and development 2,619 2,100 1,370
expenses ______ ______ ______
Total costs and 40,228 37,081 31,487
expenses ------ ------ ------
Operating income 3,602 3,066 1,987
------ ------ ------
OTHER INCOME (EXPENSE)
Interest expense (718) (711) (875)
Other Income, net 58 34 100
------ ------ -------
Total other expense, net (660) (677) (775)
------ ------ -------
Net profit $2,942 $2,389 $1,212
===== ===== =====
NET PROFIT PER SHARE - PRIMARY $ 0.52 $ 0.45 $ 0.28
===== ===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,989 6,726 5,834
===== ===== =====
NET PROFIT PER SHARE
- FULLY DILUTED $ 0.51 $ 0.41 $ 0.28
===== ===== =====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 8,402 7,943 5,865
===== ===== =====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
23
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
(Amounts in thousands)
Capital in
Class B excess Retained
Preferred Common Common of par Earnings Treasury
Stock Stock Stock Warrants Value (Deficit) Stock
BALANCE,
June 26, 1992 $3,498 $ 15 $ 4 -- $9,191 $(5,360) $ 281
Issuance of
Series A
Preferred
Stock to
an affiliate 200 -- -- -- -- -- --
Issuance of
Series A
Preferred
Stock for
dividends 65 -- -- -- -- (65) --
Conversion of
Series B
Preferred
Stock
into
Common
Stock (1,000) 4 996
Issuance of
Common Stock
from Private
Placement, net of
$630 expenses -- 18 -- -- 3,852 -- --
Exercise of
stock
options -- -- -- -- 90 -- --
Net profit
for the year -- -- -- -- -- 1,212 --
_______ ______ _______ _______ _______ _______ _______
BALANCE,
June 25, 1993 2,763 37 4 -- 14,129 (4,213) 281
Exercise of
stock
options -- 1 -- -- 188 -- --
Warrants issued
for financial
consulting
services -- -- 120 -- -- -- --
Net profit
for the
year -- -- -- -- -- 2,389 --
_______ _______ _______ _______ _______ _______ _______
BALANCE,
June 24, 1994 2,763 38 4 120 14,317 (1,824) 281
Issuance of
Common Stock
from exercise
of private
placement
Warrants and
Unit Purchase
Options net
of $571
expenses -- 16 -- -- 6,802 -- --
Exercise of stock
options -- 1 -- -- 275 -- --
Net profit
for the
year -- -- -- -- -- 2,942 --
_______ _______ _______ _______ _______ _______ _______
BALANCE,
June 30, 1995 $2,763 $55 $4 $120 $21,394 $1,118 $ 281
The accompanying notes to consolidated financial statements are an integral
part of these statements.
24
TII INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1995
(Amounts in thousands)
June 30, June 24, June 25,
1995 1994 1993
CASH FLOWS PROVIDED (USED)
BY OPERATING ACTIVITIES
Net profit $2,942 $2,389 $1,212
---------- --------- ---------
Adjustments to reconcile net profit
to net cash provided by operating
activities
Depreciation and amortization 1,761 1,668 1,650
Provision for inventory obsolescence,
net 300 100 519
Rent expenses paid through the issuance
of Series A Preferred Stock -- -- 200
Gain on sale of marketable securities -- (458) --
Financial consulting services paid
through the issuance of warrants -- 120 --
Amortization of other assets, net 241 150 108
Changes in assets and liabilities, net
of effects from acquisition of
affiliate
(Increase) in trade receivables (481) (946) (587)
(Increase) in other receivables (73) (57) (17)
(Increase) in inventories (2,901) (206) (471)
(Increase) decrease in prepaid
expenses and other assets (895) (989) 38
Increase (decrease) in accounts (225) 1,129 (110)
payable and accrued liabilities --------- --------- ----------
Total adjustments (2,273) 511 1,330
--------- --------- ----------
Net cash provided by operating
activities 669 2,900 2,542
--------- --------- ----------
CASH FLOWS PROVIDED (USED)
BY INVESTING ACTIVITIES
Investments in marketable securities -- -- (3,348)
Sale of marketable securities, net 135 1,415 --
Capital expenditures, net (3,060) (1,506) (1,160)
Proceeds from loan repayment from an
affiliate -- -- 302
---------- --------- ---------
Net cash used by investing
activities (2,925) (91) (4,206)
---------- --------- ---------
CASH FLOWS PROVIDED (USED)
BY FINANCING ACTIVITIES
Proceeds from private placement -- -- 3,870
Proceeds from long-term financing 6,039 -- --
Payment of long-term debt (10,824) (2,724) (1,983)
Proceeds from exercise of options and 7,094 189 90
Warrants ---------- --------- ---------
Net cash provided
(used) by financing 2,309 (2,535) 1,977
activities ---------- --------- ---------
Net increase in cash 53 274 313
Cash at beginning of year 1,099 825 512
---------- --------- ---------
Cash at end of year $1,152 $1,099 $825
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
25
TII INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of significant accounting policies:
Business
TII Industries, Inc. and subsidiaries (the "Company") are engaged in the
design, manufacture and sale of overvoltage surge protectors, network
interface devices and station electronics, which may be incorporated in
network interface devices together with the Company's overvoltage
protectors. The majority of the Company's consolidated sales for each of
the three years ended June 30, 1995 resulted from sales of overvoltage
protector products, which are primarily manufactured in the Company's plants
in Puerto Rico and the Dominican Republic.
Fiscal Year
The Company reports on a 52-53 week year ending on the last Friday in June.
Consolidation
The consolidated financial statements include the accounts of TII
Industries, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Marketable Securities
Prior to fiscal 1995, the portfolio of marketable securities was valued at
the lower of cost or market. Effective for fiscal 1995, SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, requires
the Company to categorize its investments as: held-to-maturity securities,
reported at cost; trading securities, reported at fair value; or
available-for-sale securities, reported at fair value. Changes in the
fair value of trading securities are included in earnings, while changes
in the unrealized gains and losses of available-for-sale securities are
reported as a separate component of stockholders' investment. All of the
Company's marketable securities are classified as available-for-sale.
At June 30, 1995 the portfolio was valued at market of $2,266,000 and
consisted of U.S. Treasury Bills and Notes, other federal backed
agency bonds and notes and other liquid investment grade investments with
the primary investment goal being near-term liquidity and safety of
principal.
Inventories
Inventories are stated at the lower of cost (materials, direct labor and
applicable overhead expenses on the first-in, first-out basis) or market.
26
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
Property and equipment
Depreciation of property and equipment is recorded on the straight-line
method over the estimated useful life of the related property and equipment
(generally 10 years). Leasehold improvements are amortized on a straight-
line basis over the term of the respective leases, or over their estimated
useful lives, whichever is shorter.
Revenue recognition
Sales are recorded as products are shipped and title passes.
Patent costs
The Company follows the policy of deferring certain patent costs which are
amortized on a straight-line basis over the lesser of the life of the
product or the patent.
Net profit per common share
Net profit per common and common equivalent share is calculated using the
weighted average number of common shares outstanding and the net additional
number of shares which would be issuable upon the exercise of dilutive
stock options and warrants assuming that the Company used the proceeds
received to purchase additional shares (up to 20% of shares outstanding)
at market value, retire debt and invest any remaining proceeds in U.S.
government securities. The effect on net profit of these assumed
transactions is considered in the computation.
Statements of Cash Flows
All highly liquid instruments with a maturity of three months or less, when
purchased, are considered cash equivalents. At June 30, 1995 and June 24,
1994, the Company had no cash equivalents.
During 1995, 1994 and 1993, the Company entered into capital leases
amounting to $52,000, $5,000 and $6,000, respectively. In addition, a
stock dividend aggregating $65,000 was accrued and issued on Series A
Preferred Stock during fiscal 1993. Since these transactions did not
involve cash, their effect has been excluded from these statements of cash
flows.
During fiscal 1995, 1994 and 1993, the Company made cash payments of
$762,000, $699,000, and $889,000, respectively, for interest.
27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
(2) Inventories:
Inventories at June 30, 1995 and June 24, 1994 consisted of the following:
June 30, June 24,
1995 1994
(amounts in thousands)
Raw materials $5,988 $3,473
Work-in-process 2,593 3,679
Finished goods 3,697 2,525
------ -----
$12,278 $9,677
====== =====
(3) Agreement with AT&T:
On September 13, 1988, the Company and AT&T entered into an agreement (the
"1988 Agreement") settling all disputes related to a prior agreement which
the Company considered to have been breached. The 1988 Agreement
provides for annual payments to the Company which are subject to
reduction as a result of AT&T purchases. These payments are further
subject to reduction if the Company does not perform pursuant to its
obligations under the 1988 Agreement. During fiscal 1995, 1994 and 1993,
the Company received payments of $777,000, $680,000 and $680,000,
respectively, for the sales shortfall corresponding to the contract years
ended December 31, 1994, 1993 and 1992, respectively. These receipts are
included in net sales. As of June 30, 1995, the remaining payment,
scheduled to be received in March 1996, subject to the reductions
mentioned above, is $900,000.
(4) Acquisition:
On September 23, 1993, the Company acquired 98.5% (and subsequently
acquired an additional 1.1%) of the capital stock of Ditel, Inc., a
North Carolina-based company which designs, manufactures and supplies
fiber optic products to markets similar to the markets to which the
Company sells its current products.
28
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
(5) Long-Term Debt
As of June 30, 1995 and June 24, 1994, the composition of long-term debt
is as follows:
June 30, June 24,
1995 1994
(amounts in thousands)
Revolving credit loan, bearing interest
at a rate described below (10% at
June 30, 1995), secured by assets
with a net book value of approximately
$13,500: $1,800 --
Secured bank loan payable in sixteen
quarterly installments of varying amounts
through May 1, 1995:
Interest at 936 base rate, if applicable, or,
under certain circumstances at 2% over
prime rate (8.31% at June 24, 1994) -- $3,554
Interest at prime rate (7.25% at
June 24, 1994). -- 1,605
Secured subordinated loan payable in
32 quarterly installments of $39 from
September 30, 1993 through June 30, 2001,
bearing interest at 11.25%. -- 1,133
Unsecured subordinated note payable on
July 19, 2001, bearing interest at 10%.
Convertible into common stock
at a conversion price of $2.50 per share. 750 750
Secured loan payable in sixteen quarterly
installments of varying amounts through
May 1, 1995, bearing interest at
2% over prime (9.25% at June 24, 1994) -- 232
29
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
Various installment notes payable through
1999 and bearing interest ranging from
13.3% to 22.2%, with each secured by
the assets acquired. 89 140
Installment notes payable through 2004,
bearing interest ranging from 8.0% to 9.5%
in 1995 and 1994. Secured by assets with
net book value of approximately $343,000. 128 138
--------- --------
2,767 7,552
Less current portion (63) (5,688)
========= =========
Long-term debt $ 2,704 $ 1,864
The Company entered into an $8,000,000 Revolving Credit Loan Agreement
with Chemical Bank, which, at June 30, 1995, entitled the Company to
have outstanding borrowings of up to $7,200,000, reducing by $400,000
each calendar quarter thereafter. At June 30, 1995, outstanding
borrowings under the revolving loan facility were $1.8 million, which were
subsequently fully paid down. Loans bear interest equal to (a) the greater
of 1% above the bank's prime rate, 2% above a certificate of deposit rate
or 1.5% in excess of a federal funds rate or (b) 3% above the LIBOR rate
for periods selected by the Company. A commitment fee of 1/4 of 1% is
payable on the unused portion of the bank's commitment. The loan is
secured primarily by the Company's accounts receivable and the Company's
continental United States assets. The loan agreement requires the Company
to maintain a minimum net worth of $17,500,000 in fiscal 1996 and
$20,000,000 thereafter, current ratio of 1.25 through fiscal 1997 and 1.50
thereafter and debt service ratio of 1.35 and maximum ratio of debt to
equity of 1.0, all as defined, limits capital expenditures generally
to $3,500,000 per annum and lease obligations to $400,000 per annum
(excluding rentals for the Company's Dominican Republic facilities
and the Company's equipment lease with PRC, each of which is discussed
in Note 11). In addition, the Company may not incur a consolidated net
loss for any two fiscal quarters in any four consecutive quarters and may
not pay cash dividends or repurchase capital stock without the consent of
the bank.
(6) Income taxes:
The Company's policy is to provide for income taxes based on reported
income, adjusted for differences that are not expected to ever enter
into the computation of taxes under applicable tax laws.
Net income from Puerto Rico operations, as determined under the provisions
of Section 936 of the U.S. Internal Revenue Code, is not subject
to U.S. federal income taxes. However, beginning in fiscal 1995
the Revenue Reconciliation Act of 1993 limits the amount of
30
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
allowable credit to a percentage of the qualified wages economic
activity based and fringe benefits for services performed in
Puerto Rico and depreciation in Puerto Rico, as defined (since the Company
has not elected the alternative percentage limit). Based on its fiscal
1995 levels of qualified wages, fringe benefits and depreciation in
Puerto Rico, the Company's economic activity based credit limitation
is approximately $3,000,000 per annum. The amount of the economic
activity based Section 936 credit limitation available for fiscal 1995
will be sufficient to offset the United States federal income tax on
Puerto Rico source income for the Company's 1995 fiscal year, as computed
after utilization of the Company's available net operating loss carry
forwards of approximately $334,000.
Proposed legislation included in the Revenue Reconciliation Bill of 1995
generally would repeal the Section 936 credit for taxable years beginning
after December 31, 1995. However, since the Company elected the Section
936 credit for prior years, it would be eligible to continue to claim a
Section 936 credit for an additional 10 years under a special grandfather
rule. If the Company adds a substantial new line of business after
September 13, 1995, the Company would cease to be eligible to claim the
Section 936 credit beginning with the taxable year in which such new
line of business is added. Possession income that would be eligible for
the Section 936 credit in each of the years during the grandfather
period would be subject to a cap equal to the Company's average
inflation-adjusted possession income for the three of the five most
recent fiscal years ending before September 13, 1995, excluding the years
in which the Company's adjusted possession income is the highest and the
lowest. The Company's Section 936 credit for each year during the
grandfather period would continue to be subject to the economic
activity limitation (as discussed above). If enacted, this proposed
legislation would be effective for the Company's 1997 fiscal year.
Based on the Company's current level of possession income and business
plans, the Company believes that it will be eligible to claim a Section
936 credit under the grandfather rule discussed above if this legislation
is enacted.
The Company has exemptions until June 2009 for Puerto Rico income tax and
Puerto Rico property tax purposes. The level of exemption is 90% for all
purposes. The Company has substantial net operating loss carryforwards
available through fiscal 1998 to offset any remaining Puerto Rico
taxable income. There are no Puerto Rican tax law provisions which
limit the Company's ability to utilize such net operating loss
carryforwards. Furthermore, the Company's United States based subsidiary
operating in the Dominican Republic is exempt from taxation in that
country.
In each of the years in the three-year period ended June 30, 1995, the
Company's U.S. based subsidiaries either generated operating losses or
had net operating loss carryforwards available to offset taxable
income; therefore, for each of these years there is no federal income tax
provision.
31
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
As long as the Company's election under Section 936 is in effect, the
Company cannot be included in a consolidated federal income tax return
with its subsidiaries. As a result, losses from subsidiaries cannot be
used to offset the Company's income and vice versa.
Under the Tax Reform Act of 1986, a company's federal income tax liability
is the greater of the tax computed using either the regular tax method or
an alternative minimum tax method (AMT). Under the AMT method only 90% of
the U.S. based subsidiaries taxable income can be offset by net operating
loss carryforwards. To date, the U.S. subsidiaries have not been subject
to AMT.
At June 30, 1995, the Company had net operating loss carryforwards
aggregating approximately $15,800,000 which expire periodically through
2007, and along with its subsidiaries had consolidated net operating
loss carryforwards aggregating approximately $25,045,000 which expire
periodically through 2010 and general business tax credit carryforward
of approximately $322,000 which expire periodically through 2001. As
a result of the private placement described in Note 9 there has been
an "ownership change" within the meaning of Section 382 of the Code,
which significantly limits the ability of the Company and its subsidiaries
to utilize their net operating losses and tax credit carryforwards.
Generally, following an "ownership change" the amount of available net
operating loss carryforwards and credit equivalents from periods before
the "ownership change" that can be used by a company in any tax year
following the change cannot exceed the long-term tax exempt rate at the
time of such change (which rate was 6.35% as of the time of the private
placement) multiplied by the value of the Company at the time of the
ownership change (with certain adjustments). However, as a result
of the "ownership change", the maximum amount of net operating loss
and tax credit equivalent carryforwards which may be utilized in any year
(and which is utilized to offset income prior to the utilization of a
credit available under Section 936 of the Code) is approximately
$334,000 per year for the possessions corporation and approximately
$380,000 per year for the United States subsidiaries. The effect of the
"ownership change" is somewhat mitigated with respect to the Company as
a result of its Section 936 election since United States federal income
tax is payable only to the extent such tax exceeds the Company's Section
936 credit. In addition, net operating losses generated subsequent to
the "ownership change" are not subject to limitations and may therefore
be fully utilized. As of June 30, 1995, the Company's United States
subsidiaries have approximately $1,993,000 of net operating losses that
were generated subsequent to the "ownership change" and remain available
for use through 2010. In addition, the Company's United States
subsidiaries have available approximately $1,093,000 in unused Section 382
annual net operating loss limitation carryforwards.
32
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
In February 1992, the Financial Accounting Standards Board Issues SFAS
No. 109: Accounting for Income Taxes. This standard requires that the
Company recognize income tax benefits for loss carryforwards, credit
carryforwards and certain temporary differences for which tax benefits
have not previously been recorded. The tax benefits recognized must be
reduced by a valuation allowance in certain circumstances.
Effective June 26, 1993, the beginning of the first quarter of fiscal
1994, the Company adopted the provisions of SFAS No. 109, Accounting
for Income Taxes. As of such date, no financial statement benefit was
recognized for the net operating loss carryforwards due to "ownership
change" limitations, the fact that carryforward allocations to Section 936
income provide no tax benefits and uncertainty as to the realization
of any tax benefit from carryforwards of loss-generating U.S. based
subsidiaries.
Temporary differences between income tax and financial reporting assets
and liabilities (primarily inventory valuation allowances, property and
equipment and accrued employee benefits) and net operating loss
carryforwards give rise to deferred tax assets in the amount of
approximately $1,000,000 for which an offsetting valuation allowance
has been provided due to the uncertainty of realizing any benefit in
the future.
(7) Common stock:
The Company is authorized to issue 30,000,000 shares of Common Stock,
10,000,000 shares of Class B Stock and 100,000 shares of Class C Stock.
On September 27, 1995, 321,284 shares of Class B Stock were converted into
Common Stock resulting in a reduction in outstanding Class B Stock to a
level that all remaining Class B Stock were automatically converted into
Common Stock.
On April 26, 1994, pursuant to a vote of Stockholders, the Company
effected a reverse split of its Common Stock and Class B Stock on a
1 for 2 1/2 basis. The accompanying consolidated financial statements have
been retroactively restated to give effect to this reverse stock split.
The Class C Stock is issuable to management employees who are residents
of Puerto Rico. The shares may be redeemed at the discretion of the
Company at $.01 per share. There are no shares of Class C Stock issued.
33
NOTES TO CONSOLIDATED
FINANCIALS STATEMENTS
(continued)
Employee stock option plans
The Company's 1986 Stock Option Plan (the "1986 Plan") permits the
Compensation Committee of the Board of Directors to grant, until January
1996, options to employees, officers, consultants and certain members
of the Board of Directors. As amended, 1,950,000 shares were reserved
for issuance under the 1986 Plan. Option terms (not to exceed 10 years),
exercise prices (at least 100% of the fair market value of the Company's
Common Stock on the date of grant) and exercise dates are determined by
the Compensation Committee. Options are also outstanding under the
Company's 1979 Stock Option Incentive Plan and 1983 Stock Option
Incentive Plan, although no further options may be granted under either
plan.
In September 1995, the Board of Directors adopted the Company's 1995 Stock
Option Plan (the "1995 Plan") to replace the 1986 Plan. The 1995
Plan covers an aggregate of 500,000 shares of Common Stock and contains
other terms similar to those contained in the 1986 Plan. The 1995 Plan
is subject to stockholder approval.
A summary of activity under the employee stock option plans and informa-
tion relating to shares subject to option under the employee stock option
plans for the years ended June 30, 1995, June 24, 1994 and June 25, 1993
follows:
June 30, June 24, June 25,
1995 1994 1993
Shares under option at beginning of period 501,415 454,595 399,655
Options granted during period 868,000 10,000 110,800
Options exercised during period (94,028) (62,280) (34,960)
Options canceled/expired during period (6,000) (40,900) (20,900)
--------- -------- -------
Shares under option at end of period 1,269,387 501,415 454,595
========= ======== =======
Options exercisable at end of period 336,634 318,915 319,014
Shares available for future grant at
end of period 126,257 138,257 252,557
Exercise price per share for options
exercised during period $2.50-4.625 $2.50-5.31 $2.50-3.13
Exercise price per share for options
outstanding at end of period $2.50-9.6875 $2.50-9.69 $2.50-7.50
34
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
Other Options Granted
As part of the Company's Finance Agreement with OPIC (see Note 5), the
Company granted OPIC an option to purchase up to 100,000 shares of
Common Stock on or before July 18, 2001 at $2.50 per share. This option
is non-transferable and non-assignable and can be cancelled by the
Company prior to its expiration if, with the prior written consent of
OPIC, the Company's $750,000 ten-year convertible unsecured note payable
to OPIC is repaid.
The Company has granted Strategic Growth International, Inc. ("Strategic")
an option to purchase up to 50,000 shares of Common Stock on or before
October 31, 1995 at $4.125 per share and an option to purchase up to
a maximum of 150,000 shares of Common Stock on or before August 31,
1997 at $7.50 per share. The options were granted in connection with
financial public relations services provided by Strategic.
On December 7, 1994, stockholders approved the Company's 1994 Non-Employee
Director Stock Option Plan covering an aggregate of 300,000 shares of
Common Stock. Each non-employee director is to be granted an option to
purchase 5,000 shares of Common Stock following each annual stockholders'
meeting. Each option is to have a five-year term and be exercisable, on
a cumulative basis, as to 25% of the shares subject to the option in
each year commencing one year after the date of grant at 100% of the
fair market value of the Company's Common Stock on the date of grant.
In December 1994, each of the Company's four non-employee directors were
granted option to purchase 5,000 shares at an exercise price of $5.75
per share. No option granted under this plan have been exercised. The
Board of Directors has adopted amendments to this plan, subject to stock-
holder approval, under which future options granted would cover 10,000
shares annually, and each presently outstanding option and future options
granted under this plan would be for a term of ten years and be
exercisable in full commencing on the date of grant.
See also Note 9 with respect to certain options granted and warrants
issued as part of the Private Placement.
(8) 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.
At June 30, 1995, the Company had authorized 100,000 shares of Series
A Cumulative Convertible Redeemable Preferred Stock ("Series A
Preferred Stock"), of which 27,626 shares were outstanding. Subsequent
to the fiscal year end, all 27,626 shares were redeemed by the Company
for the liquidation value and required redemption amount of $2,762,600.
35
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
(9) Private placement:
Effective August 7, 1992, following stockholder approval, the Company
completed a private placement of $5,500,000 of units of the Company's
securities, consisting of 2,200,000 shares of Common Stock and 2,200,000
Common Stock Purchase Warrants to purchase a like number of shares of
Common Stock during a three-year period at an exercise price of $5.00
per share. The Common Stock and the Common Stock Purchase Warrants have
registration rights.
The amount placed included 400,000 shares of Common Stock and Common Stock
Purchase Warrants issued in exchange for all of the Company's Series B
Preferred Stock which had been purchased in February 1992 for $1,000,000
by Alfred J. Roach and Timothy J. Roach, officers, directors and
principal stockholders of the Company, and another employee of the
Company. Other than the 400,000 shares and Common Stock Purchase Warrants
issued for all of the Company's Series B Preferred Stock, the securities
were sold to investors not previously affiliated with the Company.
The Company also granted to certain designee employees of M.H. Meyerson &
Co. Inc., the private placement selling agent, the right to purchase,
in units, 256,000 shares of Common Stock and Common Stock Purchase
Warrants at a price of $2.833 for one share and one Warrant. The options
were exercisable from August 7, 1993 until August 6, 1997. M.H. Meyerson
& Co. Inc. was also entitled to receive 4% of the exercise price of
certain Warrants issued in the private placement.
During the fiscal year ended June 30, 1995, Common Stock Purchase Warrants
and Unit Purchase Options issued in the private placement were exercised
for 1,582,000 shares of Common Stock. Net proceeds to the Company from
such exercises aggregated approximately $7,100,000. Between July 1, 1995
and August 4, 1995, the remaining Common Stock Purchase Warrants and Unit
Purchase Options were exercised for 1,130,000 shares of Common Stock
and the Company received additional net proceeds of approximately
$5,500,000.
In addition, in 1992 the Company entered into a Consulting Agreement with
WinStar Services, Inc. ("WinStar"), for WinStar to provide financial
consulting services to the Company through, as amended, July 31,
1995, including identifying and analyzing potential acquisitions and
mergers, and evaluating potential investments and other financing
arrangements. For its services WinStar was to receive $7,500 per month
and fees with respect to various transactions that the Company entered
into. The Company paid Winstar $80,000 in connection with the Company's
entering into an $8,000,000 Revolving Credit Loan Agreement in January
1995. In connection with the consulting arrangement, the Company
issued to WinStar options to purchase an aggregate of 400,000
shares of Common Stock. The options are exercisable from February
7, 1993 until February 6, 1996 at option
36
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
prices which vary from $5.00 per share for 200,000 of the shares
to $7.50 per share for 80,000 of the shares. An affiliate, and
an officer, of WinStar purchased 210,000 of the private placement shares
and Warrants. In February 1995, in a private transaction, WinStar's
options and private placement shares and Warrants were transferred to
three employees of WinStar, two of whom are directors of the Company.
The Company has filed a registration statement related to the resale of
the Common Stock issued in its August 1992 private placement, the
shares of Common Stock issued upon exercise of Warrants and Unit Purchase
Options issued in the private placement, and which may be issued
upon exercise of the options granted to WinStar. The registration
statement became effective in August 1994.
Other warrants, for the purchase of 60,000 shares of Common Stock at an
exercise price of $6.56 per share and expiring in August 1998, have been
issued for consulting services.
(10) Significant customers, export sales and foreign components of income:
Significant customers
The following customers accounted for more than 10% of the Company's
consolidated revenues during one or more of the years presented below:
Percentage of Net Sales
for Year Ended
June 30, June 24, June 25,
1995 1994 1993
BellSouth Corporation 8% 11% 22%
Telesector Resources Group 13% 14% 17%
(a subsidiary of NYNEX)
GTE Control Devices * * 12%
Siecor Corporation 30% 34% 11%
* denotes less than 10% for that year.
37
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
Export sales
For each of the three years ended June 30, 1995 export sales were less
than 10% of consolidated net sales.
Foreign components of income
Certain immaterial subsidiaries and components of the Company operate
outside the United States and Puerto Rico.
(11) Commitments and contingencies and related party transactions:
The Company leases real property and equipment with terms expiring through
2000. Substantially all of the real property leases contain escalation
clauses related to increases in property taxes. The leases require
minimum annual rentals, exclusive of real property taxes, as follows:
approximately $101,000, $84,000, $83,000, $23,000 and $19,000 in 1996
through 2000, respectively. The Company has no lease commitments beyond
2000.
On February 1, 1994, the Company entered into an agreement to extend the
term of the lease for its Dominican Republic manufacturing facilities to
November 1998 at the same base rental as in effect at June 25, 1993. In
connection therewith, the Company advanced approximately $634,000 toward
the construction of an annex to two existing buildings that continue
to be leased. The annex replaced two other buildings leased and
occupied by the Company in the same industrial park. The total space
occupied by the Company increased to approximately 73,000 from 70,000
square feet. The amount advanced for construction is being offset against
future rentals.
Since fiscal year 1982, the Company has leased equipment from PRC, a
corporation owned by the Chairman of the Board of the Company.
As required by a loan restructuring in July 1991, all leases with PRC
were replaced by an agreement to lease certain equipment as a group at
the rate of $200,000 per year. The lease was amended in February 1993
to extend its term until July 17, 1996 and provide for extensions until
July 17, 1999 and July 17, 2001 unless cancelled by either party upon
notice prior to the scheduled renewal period, with rentals at the rate
of $200,000 for each year of the lease, payable in shares of Series
A Preferred Stock (valued at their liquidation preference of $100 per
share). As a result of a replacement loan agreement, entered into in
January 1995, all unpaid and future rentals are payable in cash.
At June 30, 1995, accrued rent owed under this agreement totalled
$200,000 which was subsequently paid. Although neither the Company nor
PRC is obligated to renew the equipment lease beyond July 17, 1996, it
is the Company's intention to seek renewals of the equipment lease for
at least the next six years.
The equipment under lease from PRC was purchased by PRC at
various times since 1982 when the Company began leasing
equipment from PRC. The Company is advised that PRC
38
NOTES TO CONSOLIDATED
FINACIAL STATEMENTS
(continued)
employs a depreciation schedule that fully depreciates assets over
a maximum of 10 years or the asset's useful life, whichever is shorter,
and that the original cost of assets under lease to the Company
at June 30, 1995 was approximately $2,803,000 with a current
carrying value of approximately $321,000. All equipment under lease
has been of good quality and most, if not all, equipment is expected to
remain usable by the Company for at least six more years. From time to
time, new purchases of equipment by PRC may replace or be added to the
equipment under lease. It is both the Company's and PRC's intention that
these purchases will be to maintain the level of performance of the
equipment and not increase the rentals paid by the Company.
Rental expense, including property taxes, for fiscal 1995, 1994 and
1993 was approximately $613,000, $556,000 and $619,000, respectively,
including $200,000 each year relating to the equipment leases with PRC.
The Company has noninterest-bearing accounts payable to PRC which were
incurred over a period of time prior to fiscal 1991 for equipment rental
in the amount of $488,000.
(12) Accrued liabilities:
Accrued liabilities consist of the following:
June 30, June 24,
1995 1994
(amounts in thousands)
Payroll, incentive and vacation $ 532 $ 535
Accrued payroll taxes 141 114
Legal and professional fees 400 355
Accrued rent 201 200
Other 280 193
------ ------
$1,554 $1,397
====== ======
39
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(continued)
(13) Quarterly Results (unaudited):
The following table reflects the unaudited quarterly results of the
Company for the years June 30, 1995 and June 24, 1994:
Net Profit
Per Common
and Common
Gross Operating Net Profit Equivalent
Net Sales Profit Income Loss) Share
Quarter Ended
September 30,
1994 $10,456,000 3,115,000 $ 700,000 $ 536,000 $ 0.10
December 30,
1994 10,661,000 3,177,000 760,000 607,000 0.11
March 31,
1995 11,502,000(1) 4,001,000 1,579,000 1,426,000 0.21
June 30,
1995 11,211,000 2,755,000 563,000 373,000 0.09
Quarter Ended
September 24,
1993 $9,090,000 2,402,000 679,000 441,000 $ 0.10
December 31,
1993 9,805,000 2,526,000 584,000 838,000 0.13
March 25,
1994 10,886,000(1) 3,381,000 1,320,000 1,193,000 0.17
June 24,
1994(2) 10,366,000 2,523,000 484,000 (83,000) (0.02)
- ----------------------
(1) Includes payments received from AT&T of $777,000 and $680,000 in the third
quarter of fiscal 1995 and 1994, respectively, for shortfalls or purchases
by AT&T from the Company under the Company's 1988 Agreement with AT&T.
(See Note 3.)
(2) Includes offering costs of $458,000 expensed in the fourth quarter for a
terminated offering.
40
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
The information called for by Part III (Items 10, 11, 12 and 13 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 1995 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of TII Industries, Inc. and subsidiaries
are included in Item 8 of this report, at which point an Index thereof also
appears.
2. Financial Statement Schedules
Report of Independent Public Accountants on Schedules S-1
Schedule I -Marketable Securities - Other Investments S-2
Schedule III - Valuation and Qualifying Accounts S-3
Schedule V - Property and Equipment S-4
Schedule VI - Accumulated Depreciation
and Amortization S-7 to S-9
Schedule VIII - Valuation and Qualifying Accounts S-10
Supplementary schedules called for under Regulation S-X, other than Schedules
I, V, VI and VIII are either not applicable or are included in the
consolidated financial statements or notes thereto.
41
3. Exhibits
Exhibit Number 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
18, 1978. Incorporated by reference to Exhibit 3(a)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 24, 1994 (File No. 1-8048).
3(a)(2) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on January 22, 1980. Incorporated by
reference to Exhibit 3(a)(2) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 24, 1994 (File No.
1-8048).
3(a)(3) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on June 23, 1981. Incorporated by reference to
Exhibit 3(a)(3) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 24, 1994 (File No. 1-8048).
3(a)(4) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on December 4, 1981. Incorporated by reference to
Exhibit 3(a)(4) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 24, 1994 (File No. 1-8048).
3(a)(5) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on December 11, 1986. Incorporated by reference to
Exhibit 3(a)(5) to the Company's Registration Statement on Form
S-8 (File No. 33-11149).
3(a)(6) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on December 16, 1987. Incorporated by reference to
Exhibit 4.06 to the Company's Registration Statement on Form S-8
(File No. 33-53180).
3(a)(7) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on January 10, 1990. Incorporated by reference to
Exhibit 4(c)(7) to the Company's Registration Statement on Form
S-8 (File No. 33-37310).
3(a)(8)(A) Certificate of Designations with respect to the Company's Series
A Cumulative Convertible Redeemable Preferred Stock, as filed
with the Secretary of State of the State of Delaware on July 9,
1991. Incorporated by reference to Exhibit 4(b)(3) to the
Company's Current Report on Form 8-K for the month of July 1991
(File No. 1-8048).
3(a)(8)(B) Certificate of Amendment to Certificate of Designations with
respect to the Company's Series A Cumulative Convertible
Redeemable Preferred Stock, as filed with the Secretary of
State of the State of Delaware on March 2, 1993. Incorporated
42
Exhibit Number Description
by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 26, 1993 (File No. 1-8048).
3(a)(9) Certificate of Amendment of Restated Certificate of Incorporation
of the Company as filed with the Secretary of State of the State
of Delaware on April 25, 1994. Incorporated by reference to
Exhibit 4.01(j) to Amendment No. 2 to the Company's Registration
Statement on Form S-3 (File No. 33-64980).
3(b) By-laws of the Company, as amended. Incorporated by reference
to Exhibit 4.02 to Amendment No. 1 to the Company's Registration
Statement on Form S-3 (File No. 33-64980).
4(a)(1)(A) Revolving Credit Loan Agreement dated January 31, 1995 among TII
International, Inc. ("International"), the Company and Chemical
Bank (the "Bank"). Incorporated by reference to Exhibit 4.1(a)
to the Company's Current Report on Form 8-K dated January 31,
1995 (date of earliest event reported) (File No. 1-8048).
4(a)(1)(B)* First Amendment dated as of August 3, 1995 to the Revolving
Credit Agreement among International, the Company and the Bank.
4(a)(2) Joint and Several Guaranty of Payment dated January 31, 1995
executed in favor of the Bank by the Company and TII Industries
NC, Inc., TII Dominicana, Inc., TII Electronics, Inc., Ditel,
Inc., TII Corporation and Telecommunications Industries, Inc.,
direct or indirect subsidiaries of the Company. Incorporated by
reference to Exhibit 4.1(b) to the Company's Current Report
on Form 8-K dated January 31, 1995 (date of earliest event
reported) (File No. 1-8048).
4(a)(3) Pledge Agreement dated January 31, 1995 between International and
the Bank. Incorporated by reference to Exhibit 4.1(c) to the
Company's Current Report on Form 8-K dated January 31, 1995 (date
of earliest event reported) (File No. 1-8048).
4(a)(4) Security Agreement dated January 31, 1995 between the Company and
the Bank. Incorporated by reference to Exhibit 4.1(d) to the
Company's Current Report on Form 8-K dated January 31, 1995 (date
of earliest event reported) (File No. 1-8048).
4(a)(5) Assignment of Accounts Receivable Agreement dated January 31, 1995
executed by the Company in favor of the Bank. Incorporated by
reference to Exhibit 4.1(e) to the Company's Current Report on
Form 8-K dated January 31, 1995 (date of earliest event reported)
(File No. 1-8048).
4(a)(6) Stock Pledge Agreement dated January 31, 1995 between the Company
and the Bank. Incorporated by reference to Exhibit 4.1(f) to the
Company's Current Report on Form 8-K dated January 31, 1995 (date
of earliest event reported) (File No. 1-8048).
43
Exhibit Number Description
4(a)(7) Security Agreement dated January 31, 1995 between Ditel, Inc., an
indirect subsidiary of the Company, and the Bank. Incorporated
by reference to Exhibit 4.1(g) to the Company's Current Report on
Form 8-K dated January 31, 1995 (date of earliest event reported)
(File No. 1-8048).
10(a)(1)+ 1983 Employee Incentive Stock Option Plan of the Company, as
amended. Incorporated by reference to Exhibit 10(a)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 24, 1994 (File No. 1-8048).
10(a)(2)+ 1986 Stock Option Plan of the Company, as amended. Incorporated
by reference to Exhibit 10(a)(2)(ii) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 24, 1994 (File
No. 1-8048).
10(a)(3)+ 1994 Non-Employee Director Stock Option Plan. Incorporated by
reference to Exhibit 10(a)(2)(iii) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 24, 1994 (File No. 1-
8048).
10(b)(1)+ Employment Agreement dated August 7, 1992 between the Company and
Timothy J. Roach. Incorporated by reference to Exhibit 10(b)(66)
to the Company's Current Report on Form 8-K for the month of
August 1992 (File No. 1-8048).
10(c)(1)(A)+ Consulting Agreement dated June 2, 1992 between the Company and
WinStar Services, Inc. Incorporated by reference to Exhibit
10(b)(63) to the Company's Current Report on Form 8-K for the
month of August 1992 (File No. 1-8048).
10(c)(1)(B)+ Letter Agreement dated September 21, 1993 between the Company and
WinStar Services, Inc. Incorporated by reference to Exhibit
10(b)(63)(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 25, 1993 (File No. 1-8048).
10(c)(1)(C)+ Letter Agreement dated September 14, 1994 between the Company and
WinStar Services, Inc. Incorporated by reference to Exhibit
10(b)(63)(iii) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 (File No. 1-8048).
10(c)(2)+ Form of Options issued to WinStar Services, Inc. Included as
Exhibit 4(b)(8) to the Company's Current Report on Form 8-K for
the month of August 1992 (File No. 1-8048).
10(d)(1)(A)+ Equipment Lease dated July 18, 1991 between PRC Leasing, Inc.
("PRC") and the Company. Incorporated by reference to Exhibit
10(b)(57) to the Company's Current Report on Form 8-K for the
month of July 1991 (File No. 1-8048).
10(d)(1)(B)+ Amendment dated July 18, 1992 to Equipment Lease dated
July 18, 1991 between the Company and PRC. Incorporated
by reference to Exhibit 10(b)(67) to the Company's
44
Exhibit Number Description
Annual Report on Form 10-K for fiscal year ended June 25, 1993
(File No. 1-8048).
10(d)(1)(C)+ Second Amendment dated February 25, 1993 to Equipment Lease dated
July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 10(b)(7) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 25, 1993 (File No. 1-
8048).
10(d)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment
Lease dated July 18, 1991 between the Company and PRC.
Incorporated by reference to Exhibit 4(d) to Amendment No. 2 to
the Schedule 13D filed by Alfred J. Roach (File No. 1-8048).
10(e)(1)(A) Finance Agreement dated June 26, 1991 between Overseas Private
Investment Corporation ("OPIC") and the Company. Incorporated by
reference to Exhibit 10(b)(53) to the Company's Current Report on
Form 8-K for the month of August 1992 (File No. 1-8048).
10(e)(1)(B) Amendment dated July 18, 1991 to Finance Agreement dated June 26,
1991 between OPIC and the Company. Incorporated by reference to
Exhibit 10(b)(56) to the Company's Current Report on Form 8-K for
the month of August 1992 (File No. 1-8048).
10(e)(1)(C) Letter Agreement dated July 18, 1991 between the Company and OPIC.
Incorporated by reference to Exhibit 10(b)(62) to the Company's
Current Report on Form 8-K for the month of July 1991 (File No. 1-
8048).
10(e)(2) Promissory Note dated July 19, 1991 for the principal amount of
$750,000 issued by the Company to OPIC. Incorporated by reference
to Exhibit 10(b)(55) to the Company's Current Report on Form 8-K
for the month of July 1991 (File No. 1-8048).
10(e)(3) Option to Purchase 250,000 Shares of Common Stock of the Company
granted to OPIC on July 18, 1991. Incorporated by reference to
Exhibit 10(a)(3) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 24, 1994 (File No. 1-8048).
10(f)(1)(A) Investor Relations Consultant Agreement dated October 30, 1992
between the Company and Strategic Growth International, Inc.
("Strategic"). Incorporated by reference to Exhibit 10.11(a) to
Amendment No. 1 to the Company's Registration Statement on Form S-
3 (File No. 33-64980).
10(f)(1)(B)* Letter Agreement dated July 24, 1995 between the Company and
Strategic.
10(f)(2) Option dated November 1, 1992 issued to Strategic. Incorporated
by reference to Exhibit 10.11(b) to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (File No. 33-64980).
45
Exhibit Number Discription
10(f)(3)(A) Stock Option Agreement dated September 14, 1994 between the
Company and Strategic, as amended. Incorporated by reference to
Exhibit 10(b)(70)(ii) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 24, 1994 and to Exhibit 10(f)(1)(B)
filed herewith.
10(f)(4) Letter Agreement dated September 14, 1994 between the Company and
Strategic modifying registration rights granted to Strategic.
Incorporated by reference to Exhibit 10(b)(71) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 24, 1994
(File No. 1-8048).
10(g)(1) Lease Contract dated December 15, 1989 between the Company and
Puerto Rico Industrial Development Company. Incorporated by
reference to Exhibit 10(c)(1) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 29, 1990 (File No. 1-
8048).
10(g)(2)* Consolidated Contract of Lease Renewal and Construction dated
February 1, 1994 between TII Dominicana, Inc., a subsidiary of the
Company, and The Industrial Development Corporation of the
Dominican Republic.
11* Calculation of earnings per share.
22 Subsidiaries of the Company. Incorporated by reference to Exhibit
22 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 24, 1994.
24* Consent of independent public accountants.
27* Financial data schedule.
__________________
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Report on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1995.
UNDERTAKING
The undersigned hereby undertakes to furnish to the Securities and
Exchange Commission, upon request, all constituent instruments defining the
rights of holders of long-term debt of the Registrant and its consolidated
subsidiaries not filed herewith. Such instruments have not been filed
since none are, nor are being, registered under Section 12 of the Securities
and Exchange Act of 1934 and the total amount of securities authorized under
any of such instruments does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
46
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 INDUSTRIES, INC.
(Registrant)
September 28, 1995 By /s/ Richard P. Bankosky
Richard P. Bankosky, Treasurer,
Vice President-Finance and CFO
(Principal Financial and Accounting
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 28, 1995 /s/ Alfred J. Roach
Alfred J. Roach, Chairman of the
Board of Directors and Director
September 28, 1995 /s/ Timothy J. Roach
Timothy J. Roach, President (Chief
Executive Officer) and Director
September 28, 1995 /s/ Richard P. Bankosky
Richard P. Bankosky, Treasurer,
Vice President-Finance and CFO
(Principal Financial and Accounting
Officer)
September 28, 1995 /s/ C. Bruce Barksdale
C. Bruce Barksdale, Senior Vice
President and Director
47
September 28, 1995 /s/ Dorothy Roach
Dorothy Roach, Secretary
and Director
September 28, 1995 /s/ Joseph C. Hogan
Joseph C. Hogan, Director
September 28, 1995 /s/ James R. Grover, Jr.
James R. Grover, Jr., Director
September 28, 1995 /s/ William J. Rouhana, Jr.
William J. Rouhana, Jr., Director
September 28, 1995 /s/ Timothy R. Graham
Timothy R. Graham, Director
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TII Industries, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of TII Industries,
Inc. and subsidiaries as of June 30, 1995 and June 24, 1994, and for each of
the three years in the period ended June 30, 1995, included in this Form 10-K
and have issued our report thereon dated September 27, 1995. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedules for the years ended June 30, 1995, June 24,
1994 and June 25, 1993, listed under Item 14(a) of this Form 10-K are the
responsibility of the Company's management, are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. These schedules have been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
San Juan, Puerto Rico
September 27, 1995.
Stamp No. 1314918 of the
Puerto Rico Society of
Certified Public Accountants
has been affixed to the
original copy of this report.
S-1
SCHEDULE I
TII INDUSTRIES, INC. AND SUBSIDIARIES
MARKETABLE SECURITIES - OTHER INVESTMENTS
JUNE 30, 1995
Amount at
which each
Number of portfolio
shares Market of equity
or units values of security
principal of each issues and each
Name of Issuer amount issue at other security
and title of of bond Cost of balance carried in the
each issue and notes each issue sheet balance sheet
- -------------------- ---------- ---------- ----------- -----------
U.S. Treasury Bill
of 08/10/95 $1,160,000 $1,124,344 $1,124,344 $1,124,344
U.S. Treasury Note
of 02/15/98 300,000 302,085 309,843 309,843
Fed. Agricultural
Mtge. Corp. Note of
07/05/95 145,000 142,787 144,950 144,950
Fed. Farm Credit Bank
Bond of 07/05/95 100,000 100,000 100,016 100,016
Ford Motor Credit Co.
Note of 12/11/95 100,000 99,621 100,125 100,125
Standard Credit Card
Master Tr. of 08/07/97 410,000 418,712 418,454 418,454
Chemical Bank Trust
Cash 67,978 67,978 67,978 67,978
_________ _________ _________
$2,255,527 $2,265,710 $2,265,710
========= ========= =========
S-2
SCHEDULE III
TII INDUSTRIES, INC. AND SUBSIDIARIES
____________________________________________
VALUATION AND QUALIFYING ACCOUNTS
____________________________________________
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND END OF
YEAR EXPENSES PERIOD
--------------- ---------------- ------------
CLASSIFICATION
JUNE 30, 1995 $1,166,000 $300,000 $1,466,000
INVENTORY OBSOLESCENCE ====== ====== ======
JUNE 24, 1994 $1,066,000 $100,000 $1,166,000
INVENTORY OBSOLESCENCE ====== ====== ======
JUNE 25, 1993 $547,000 $519,000 $1,066,000
INVENTORY OBSOLESCENCE ====== ====== ======
S-3
SCHEDULE V
TII INDUSTRIES, INC. AND SUBSIDIARIES
____________________________________________________
PROPERTY AND EQUIPMENT
_____________________________________________________
June 30, 1995
Balance Other Balance
at Changes at
June 24, Additions Add June 30,
Classification 1994 at cost Retirements (Deduct)(b) 1995
- ------------- ------ ------- -------- -------- ------
Machinery and $15,216,000 $1,841,000 $(600,000) $(229,000) $16,228,000
Equipment (a)
Tools, Dies 5,466,000 550,000 --- 11,000 6,027,000
and Molds
Leasehold 4,881,000 556,000 --- 218,000 5,655,000
Improvements
Office
Fixtures,
Equipment and
Other 2,410,000 216,000 (20,000) --- 2,606,000
_________ ________ _________ _________ __________
$27,973,000 $3,163,000 $(620,000) --- $30,516,000
========== ========= ========= ========= ==========
Balance Other Balance
at Changes at
June 25, Additions Add June 24,
Classification 1993 at cost Retirements (Deduct)(b) 1994
- -------------- ------- -------- --------- -------- ---------
Machinery and $15,218,000 $668,000(a) $(269,000) $(401,000) $15,216,000
Equipment
Tools, Dies and 5,236,000 226,000 --- 4,000 5,466,000
Molds
Leasehold 4,096,000 416,000 --- 369,000 4,881,000
Improvements
Office
Fixtures,
Equipment and
Other 2,229,000 185,000 (32,000) 28,000 2,410,000
__________ _________ _________ ________ __________
$26,779,000 $1,495,000 $(301,000) --- $27,973,000
========== ========= ========= ======== ==========
Balance Additions Balance
at Charged to Other at
June 26, Costs and Changes June 25,
Classification 1992 Expenses Retirements (Deduct)(b) 1993
- -------------- ------- --------- -------- --------- --------
Machinery and $14,808,000 $350,000(a) ---- $60,000 $15,218,000
Equipment
Tools, Dies and 4,991,000 240,000 ---- 5,000 5,236,000
Molds
Leasehold 3,769,000 271,000 ---- 56,000 4,096,000
Improvements
Office
Fixtures,
Equipment and
Other 2,062,000 305,000 (17,000) (121,000) 2,229,000
_________ ________ ___________ ________ __________
$25,630,000 $1,166,000 $(17,000) $ --- $26,779,000
========== ========= ======== ======= ==========
(a) All additions, except $5000 leased were purchased for cash.
(b) All changes are reclassifications of assets.
S-4
SCHEDULE VI
TII INDUSTRIES, INC. AND SUBSIDIARIES
____________________________________________________
ACCUMULATED DEPRECIATION AND AMORTIZATION
_____________________________________________________
June 30, 1995
Additions Other
Charged to Changes
Balance at Costs Add Balance at
June 24, and (Deduct) June 30,
Classification 1994 Expenses Retirements (a) 1995
- -------------- ---------- --------- ----------- -------- --------
Machinery and $10,706,000 $947,000(a) $(497,000) --- $11,156,000
Equipment
Tools, Dies and 3,559,000 394,000 --- --- 3,953,000
Molds
Leasehold 2,966,000 301,000 --- --- 3,267,000
Improvements
Office
Fixtures,
Equipment and
Other 1,827,000 119,000 (20,000) --- 1,926,000
__________ __________ __________ ________ __________
$19,058,000 $1,761,000 $(517,000) --- $20,302,000
========== ========= ========= ======== ==========
Additions Other
Charged to Changes
Balance at Costs Add Balance at
June 25, and (Deduct) June 24,
Classification 1993 Expenses Retirements (a) 1994
- -------------- ---------- -------- -------- -------- ---------
Machinery and $10,035,000 $936,000(a) $(263,000) $(2,000) $10,706,000
Equipment
Tools, Dies and 3,136,000 423,000 --- --- 3,559,000
Molds
Leasehold 2,756,000 210,000 --- --- 2,966,000
Improvements
Office
Fixtures,
Equipment and
Other 1,739,000 118,000 (32,000) 2,000 1,827,000
___________ _________ _________ ________ ___________
$17,666,000 $1,687,000 $(295,000) --- $19,058,000
Additions Other
Charged to Changes
Balance at Costs Add Balance at
June 24, and (Deduct) June 25,
Classification 1995 Expenses Retirements (a) 1993
- -------------- --------- -------- ----------- ---------- ---------
Machinery and $9,084,000 $951,000(a) ---- --- $10,035,000
Equipment
Tools, Dies and 2,723,000 413,000 ---- --- 3,136,000
Molds
Leasehold 2,575,000 181,000 ---- --- 2,756,000
Improvements
Office Fixtures,
Equipment and
Other 1,650,000 105,000 (16,000) --- 1,739,000
__________ __________ _________ ________ __________
$16,032,000 $1,650,000 $(16,000) --- $17,666,000
========== ========= ======== ======== ==========
(a) All changes are reclassifications assets.
S-5
TII INDUSTRIES, INC.
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
JUNE 30, 1995
EXHIBIT INDEX
-------------
Exhibit Number 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 18,
1978. Incorporated by reference to Exhibit 3(a)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
24, 1994 (File No. 1-8048).
3(a)(2) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on January 22, 1980. Incorporated by reference to
Exhibit 3(a)(2) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 (File No. 1-8048).
3(a)(3) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on June 23, 1981. Incorporated by reference to Exhibit
3(a)(3) to the Company's Annual Report on Form 10-K for the fiscal
year ended June 24, 1994 (File No. 1-8048).
3(a)(4) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on December 4, 1981. Incorporated by reference to
Exhibit 3(a)(4) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 (File No. 1-8048).
3(a)(5) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on December 11, 1986. Incorporated by reference to
Exhibit 3(a)(5) to the Company's Registration Statement on Form S-8
(File No. 33-11149).
3(a)(6) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on December 16, 1987. Incorporated by reference to
Exhibit 4.06 to the Company's Registration Statement on Form S-8
(File No. 33-53180).
3(a)(7) Certificate of Amendment of Restated Certificate of Incorporation
of the Company, as filed with the Secretary of State of the State
of Delaware on January 10, 1990. Incorporated by reference to
Exhibit 4(c)(7) to the Company's Registration Statement on Form S-8
(File No. 33-37310).
3(a)(8)(A) Certificate of Designations with respect to the Company's Series A
Cumulative Convertible Redeemable Preferred Stock, as filed with
the Secretary of State of the State of Delaware on July 9, 1991.
Incorporated by reference to Exhibit 4(b)(3) to the Company's
Current Report on Form 8-K for the month of July 1991 (File No. 1-
8048).
3(a)(8)(B) Certificate of Amendment to Certificate of Designations with
respect to the Company's Series A Cumulative Convertible Redeemable
Preferred Stock, as filed with the Secretary of State of the State
of Delaware on March 2, 1993. Incorporated by reference to Exhibit
4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 26, 1993 (File No. 1-8048).
Exhibit Number Description
3(a)(9) Certificate of Amendment of Restated Certificate of Incorporation
of the Company as filed with the Secretary of State of the State of
Delaware on April 25, 1994. Incorporated by reference to Exhibit
4.01(j) to Amendment No. 2 to the Company's Registration Statement
on Form S-3 (File No. 33-64980).
3(b) By-laws of the Company, as amended. Incorporated by reference to
Exhibit 4.02 to Amendment No. 1 to the Company's Registration
Statement on Form S-3 (File No. 33-64980).
4(a)(1)(A) Revolving Credit Loan Agreement dated January 31, 1995 among TII
International, Inc. ("International"), the Company and Chemical
Bank (the "Bank"). Incorporated by reference to Exhibit 4.1(a) to
the Company's Current Report on Form 8-K dated January 31, 1995
(date of earliest event reported) (File No. 1-8048).
4(a)(1)(B)* First Amendment dated as of August 3, 1995 to the Revolving Credit
Agreement among International, the Company and the Bank.
4(a)(2) Joint and Several Guaranty of Payment dated January 31, 1995
executed in favor of the Bank by the Company and TII Industries NC,
Inc., TII Dominicana, Inc., TII Electronics, Inc., Ditel, Inc., TII
Corporation and Telecommunications Industries, Inc., direct or
indirect subsidiaries of the Company. Incorporated by reference
to Exhibit 4.1(b) to the Company's Current Report on Form 8-K dated
January 31, 1995 (date of earliest event reported) (File No. 1-
8048).
4(a)(3) Pledge Agreement dated January 31, 1995 between International and
the Bank. Incorporated by reference to Exhibit 4.1(c) to the
Company's Current Report on Form 8-K dated January 31, 1995 (date
of earliest event reported) (File No. 1-8048).
4(a)(4) Security Agreement dated January 31, 1995 between the Company and
the Bank. Incorporated by reference to Exhibit 4.1(d) to the
Company's Current Report on Form 8-K dated January 31, 1995 (date
of earliest event reported) (File No. 1-8048).
4(a)(5) Assignment of Accounts Receivable Agreement dated January 31, 1995
executed by the Company in favor of the Bank. Incorporated by
reference to Exhibit 4.1(e) to the Company's Current Report on Form
8-K dated January 31, 1995 (date of earliest event reported) (File
No. 1-8048).
4(a)(6) Stock Pledge Agreement dated January 31, 1995 between the Company
and the Bank. Incorporated by reference to Exhibit 4.1(f) to the
Company's Current Report on Form 8-K dated January 31, 1995 (date
of earliest event reported) (File No. 1-8048).
4(a)(7) Security Agreement dated January 31, 1995 between Ditel, Inc., an
indirect subsidiary of the Company, and the Bank. Incorporated by
reference to Exhibit 4.1(g) to the Company's Current Report on Form
8-K dated January 31, 1995 (date of earliest event reported) (File
No. 1-8048).
Exhibit Number Description
10(a)(1)+ 1983 Employee Incentive Stock Option Plan of the Company, as
amended. Incorporated by reference to Exhibit 10(a)(1) to the
Company's Annual Report on Form 10-K for the fiscal year ended June
24, 1994 (File No. 1-8048).
10(a)(2)+ 1986 Stock Option Plan of the Company, as amended. Incorporated by
reference to Exhibit 10(a)(2)(ii) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 24, 1994 (File No. 1-
8048).
10(a)(3)+ 1994 Non-Employee Director Stock Option Plan. Incorporated by
reference to Exhibit 10(a)(2)(iii) to the Company's Annual Report
on Form 10-K for the fiscal year ended June 24, 1994 (File No. 1-
8048).
10(b)(1)+ Employment Agreement dated August 7, 1992 between the Company and
Timothy J. Roach. Incorporated by reference to Exhibit 10(b)(66)
to the Company's Current Report on Form 8-K for the month of August
1992 (File No. 1-8048).
10(c)(1)(A)+ Consulting Agreement dated June 2, 1992 between the Company and
WinStar Services, Inc. Incorporated by reference to Exhibit
10(b)(63) to the Company's Current Report on Form 8-K for the month
of August 1992 (File No. 1-8048).
10(c)(1)(B)+ Letter Agreement dated September 21, 1993 between the Company and
WinStar Services, Inc. Incorporated by reference to Exhibit
10(b)(63)(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 25, 1993 (File No. 1-8048).
10(c)(1)(C)+ Letter Agreement dated September 14, 1994 between the Company and
WinStar Services, Inc. Incorporated by reference to Exhibit
10(b)(63)(iii) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 (File No. 1-8048).
10(c)(2)+ Form of Options issued to WinStar Services, Inc. Included as
Exhibit 4(b)(8) to the Company's Current Report on Form 8-K for
the month of August 1992 (File No. 1-8048).
10(d)(1)(A)+ Equipment Lease dated July 18, 1991 between PRC Leasing, Inc.
("PRC") and the Company. Incorporated by reference to Exhibit
10(b)(57) to the Company's Current Report on Form 8-K for the month
of July 1991 (File No. 1-8048).
10(d)(1)(B)+ Amendment dated July 18, 1992 to Equipment Lease dated July 18,
1991 between the Company and PRC. Incorporated by reference to
Exhibit 10(b)(67) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 25, 1993 (File No. 1-8048).
10(d)(1)(C)+ Second Amendment dated February 25, 1993 to Equipment Lease dated
July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 10(b)(7) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 25, 1993 (File No. 1-
8048).
Exhibit Number Description
10(d)(1)(D) Restated Third Amendment dated December 14, 1993 to Equipment Lease
dated July 18, 1991 between the Company and PRC. Incorporated by
reference to Exhibit 4(d) to Amendment No. 2 to the Schedule 13D
filed by Alfred J. Roach (File No. 1-8048).
10(e)(1)(A) Finance Agreement dated June 26, 1991 between Overseas Private
Investment Corporation ("OPIC") and the Company. Incorporated by
reference to Exhibit 10(b)(53) to the Company's Current Report on
Form 8-K for the month of August 1992 (File No. 1-8048).
10(e)(1)(B) Amendment dated July 18, 1991 to Finance Agreement dated June 26,
1991 between OPIC and the Company. Incorporated by reference to
Exhibit 10(b)(56) to the Company's Current Report on Form 8-K for
the month of August 1992 (File No. 1-8048).
10(e)(1)(C) Letter Agreement dated July 18, 1991 between the Company and OPIC.
Incorporated by reference to Exhibit 10(b)(62) to the Company's
Current Report on Form 8-K for the month of July 1991 (File No. 1-
8048).
10(e)(2) Promissory Note dated July 19, 1991 for the principal amount of
$750,000 issued by the Company to OPIC. Incorporated by reference
to Exhibit 10(b)(55) to the Company's Current Report on Form 8-K
for the month of July 1991 (File No. 1-8048).
10(e)(3) Option to Purchase 250,000 Shares of Common Stock of the Company
granted to OPIC on July 18, 1991. Incorporated by reference to
Exhibit 10(a)(3) to the Company's Annual Report on Form 10-K for
the fiscal year ended June 24, 1994 (File No. 1-8048).
10(f)(1)(A) Investor Relations Consultant Agreement dated October 30, 1992
between the Company and Strategic Growth International, Inc.
("Strategic"). Incorporated by reference to Exhibit 10.11(a) to
Amendment No. 1 to the Company's Registration Statement on Form S-3
(File No. 33-64980).
10(f)(1)(B)* Letter Agreement dated July 24, 1995 between the Company and
Strategic.
10(f)(2) Option dated November 1, 1992 issued to Strategic. Incorporated by
reference to Exhibit 10.11(b) to Amendment No. 1 to the Company's
Registration Statement on Form S-3 (File No. 33-64980).
10(f)(3)(A) Stock Option Agreement dated September 14, 1994 between the Company
and Strategic, as amended. Incorporated by reference to Exhibit
10(b)(70)(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 24, 1994 and to Exhibit 10(f)(1)(B) filed
herewith.
10(f)(4) Letter Agreement dated September 14, 1994 between the Company and
Strategic modifying registration rights granted to Strategic.
Incorporated by reference to Exhibit 10(b)(71) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 24, 1994
(File No. 1-8048).
Exhibit Number Description
10(g)(1) Lease Contract dated December 15, 1989 between the Company and
Puerto Rico Industrial Development Company. Incorporated by
reference to Exhibit 10(c)(1) to the Company's Annual Report on
Form 10-K for the fiscal year ended June 29, 1990 (File No. 1-
8048).
10(g)(2)* Consolidated Contract of Lease Renewal and Construction dated
February 1, 1994 between TII Dominican, Inc., a subsidiary of the
Company, and the Industrial Development Corporation of the
Dominican Republic.
11* Calculation of earnings per share.
22 Subsidiaries of the Company. Incorporated by reference to Exhibit
22 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 24, 1994.
24* Consent of independent public accountants.
27* Financial data schedule.
__________________
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
Exhibit 4(a)(1)(B)
FIRST AMENDMENT dated as of August 3, 1995 to the
Revolving Credit Loan Agreement (as it may be amended,
modified, supplemented or restated, the "Loan Agreement")
dated January 31, 1995 among TII INTERNATIONAL, INC., a
Delaware corporation (the "Borrower"); TII INDUSTRIES,
INC., a Delaware corporation ("Industries"); and CHEMICAL
BANK, a New York State banking Corporation (the "Bank").
WHEREAS, the Borrower and Industries have requested and the Bank hereby agrees
to amend the Loan Agreement to reflect the requests herein set forth:
NOW, THEREFORE, the Borrower, Industries and the Bank hereby agree as follows:
1. Amendment to Article VI, Affirmative Covenants, Section 6.03,
Financial Statements, Reports, Etc. (g)
Section 6.03(g) of the Loan Agreement is hereby amended by deleting
it in its entirety and by substituting therefor the following:
"(g) Within one hundred (100) days after the end of each Fiscal
Year, a one (1) year operating plan including balance sheet
and income statement, prepared on a consolidated basis, and
prepared by the chief financial officer of Industries, in form
and substance satisfactory to the Bank in its sole discretion."
2. Amendment to Article VII, Negative Covenants, Section 7.02.
Liens and Encumbrances(e).
Section 7.02(e) of the Loan Agreement is hereby amended by deleting
"80%" and by substituting therefor "100%".
3. Amendment to Article VII, Negative Covenants, Section 7.12.
Dividends, Stock Redemption and Stock Purchase.
Section 7.12 of the Loan Agreement is hereby amended by deleting the
"." at the end of such section and by inserting the following:
"and (c) Industries may redeem up to 15,000 shares of its
Series A Cumulative Convertible Redeemable Preferred Stock
at an aggregate price of $1,500,000."
This FIRST AMENDMENT shall be construed and enforced in accordance with the
laws of the State of New York.
All capitalized terms not otherwise defined herein are used with the respective
meanings given to such terms in the Loan Agreement.
Except as expressly waived herein, the Loan Agreement shall continue in full
force and effect in accordance with the original terms thereof. The
FIRST AMENDMENT herein contained is limited specifically to the matters set
forth above and does not constitute directly or by implication an amendment
or waiver of any other provision of the Loan Agreement or any default which may
occur or may have occurred under the Loan Agreement.
The Company hereby represents that, after giving effect to this FIRST
AMENDMENT, no Event of Default or default exists under the Loan
Agreement or any other related documents.
1
This FIRST AMENDMENT may be executed in counterparts, each of which shall
constitute an original but all of which, when taken together, shall
constitute but one FIRST AMENDMENT. This FIRST AMENDMENT shall be come
effective when duly executed counterparts hereof which, when taken together,
bear the signatures of each of the parties hereto shall have been delivered
to the Bank.
IN WITNESS WHEREOF, the Borrower, Industries and the Bank caused this FIRST
AMENDMENT to be duly executed by their duly authorized officers all as
of the day and year first above written.
TII INTERNATIONAL, INC.
By: /s/ Richard Bankosky
Name: Richard Bankosky
Title: Treasurer, Vice President-Finance
and C.F.O. (Principal Financial
and Accounting Officer)
TII INDUSTRIES, INC.
By: /s/ Richard Bankosky
Name: Richard Bankosky
Title: Treasurer, Vice President-Finance
and C.F.O. (Principal Financial
and Accounting Officer)
CHEMICAL BANK
By: /s/ Christopher Zimmerman
Name: Christopher Zimmerman
Title: Vice President
2
Exhibit 10(f)(1)(A)
July 24, 1995
Strategic Growth International, Inc.
111 Great Neck Road
Suite 606
Great Neck, New York 11021
Gentlemen:
Reference is made to (a) that certain Agreement dated October 30, 1992
(the "Agreement") and (b) a Stock Option Agreement dated September 14, 1994
pursuant to which an option to purchase up to 150,000 shares of Common Stock
(the "Second Option") was granted to you by the Company.
The Agreement dated October 30, 1992 is hereby extended until August 31,
1996 at the rate of $6,000 per month.
As additional consideration for the extension of the Agreement, the term
of Second Option to purchase 150,000 Shares of Common Stock at $7.50 per share
is extended from August 31,1995 to August 31, 1997.
All other provisions of the Agreement and Second Option shall remain in
full force and effect, unchanged by the aforementioned amendment.
If the foregoing correctly sets forth our understanding kindly so signify
by signing and returning a copy of this letter.
Very truly yours,
TII INDUSTRIES, INC.
By: \s\ Timothy J. Roach
AGREED: Timothy J. Roach
President
STRATEGIC GROWTH
INTERNATIONAL, INC.
By: \s\ Stanley Altschuler
Stanley Altschuler, President
TJR:mv
Exhibit 10(g)(2)
EXHIBIT 10(g)(2)
INDUSTRIAL DEVELOPMENT CORPORATION OF THE DOMINICAN REPUBLIC
INDUSTRIAL FREE ZONE OF SAN PEDRO de MACORIS
CONSOLIDATED CONTRACT OF LEASE RENEWAL AND CONSTRUCTION
BETWEEN: The INDUSTRIAL DEVELOPMENT CORPORATION OF THE DOMINICAN REPUBLIC, an
autonomous institution of the State, organized according to law No.288 dated
June 30, 1966, with its domicile and principal offices installed at its local
site on the corner formed by, General Gregorio Luperon and 27 of February
avenues opposite the Independence Plaza, of this city, represented by its
General Director, Mister JOSE ANTONIO GUZMAN ALVAREZ, Dominican, of adult age,
married, of this domicile and residence, holder of Personal Identification No.
67018, series 31, who from hereon will be named as "The CORPORATION"; and, for
the other part, TII DOMINICANA INC., commercial entity organized in conformity
with the laws of the United States of America, with its social domicile and
establishment in the Industrial Free Zone of San Pedro de Macoris, represented
by its Financial Vice-president, Mister THOMAS F. BELLEAU, North American, of
adult age, married, domiciled and resident at 1385 Akron St. Copiague N.Y.
11726, occasionally in this city, with Passport No. 062047604, who hereon will
be named as "The LESSEE," have agreed to the following:
WHERE AS: "The CORPORATION" is the landlord and manager of the Industrial Free
Zone of San Pedro de Macoris, by virtue of Decree No. 1574, dated October 11,
1971.
WHERE AS: "The LESSEE" has requested that "The CORPORATION" renew the lease
marked with No. CFI-A-155-4-92, dated April 23, 1992, by means of which "The
CORPORATION" leases to "The LESSEE," for a term of two (2) years, from July 1,
1992, and ending on July 1, 1994, the real property that are described next:
a).- One A-SPM type one story building, roofed with asbestos and cement,
built of iron and concrete, with a height to the eave of 14.6 feet, and annex,
with a construction surface of 29,185.75 square feet, whose drawings are
attached to this contract, located in Lot No. 19, of Block" 1-A," of the
Industrial Free Zone of San Pedro de Macoris.
b).- One A-SPM type one story building, roofed with aluzinc, built of iron
and concrete, with an area of 13,555.77 square feet, with a height to the eave
of 14.0 feet, whose drawings are attached to this contract, located in Lot No.
4, of Block" 1-B," of the drawing of the Industrial Free Zone of San Pedro de
Macoris.
c).- Two A-SPM type one story buildings, roofed with aluzinc, built of iron
and concrete, with an area of combined fabrication of 27,666.84 square feet,
with a height to the eave of 14.6 feet, whose drawings are attached to this
contract, located in Lot No. 8 & 9, of Block "4-B," of the drawings of the
Industrial Free Zone of San Pedro de Macoris.
WHERE AS: By virtue of contract No. CFI-I-435-10-93, dated October 29, 1993,
"The CORPORATION" recognized the investment made by "The LESSEE" of THREE
HUNDRED SIXTY NINE THOUSAND SIX HUNDRED FORTY THREE and 89/100 GOLD DOMINICAN
1
PESOS (RD$369,643.89), representing the proportional contribution, based on
occupied square feet, by "The LESSEE" for the construction of the electric
substation in order to elevate the voltage in the industrial zone. This
investment is to be recognized as prepaid rent for a period of seven (7)
months, at RD$0.75 per square foot, whose investment would be recognized
starting on July 1, 1994, which would extend the contract dated April 23, 1992
until February 1, 1995; but "The LESSEE" by means of the communication dated
December 22,1993, requested "The CORPORATION" that the referred contribution be
applied starting on November 1, 1993 through January 1, 1994, in the
understanding that the remaining balance would be applied through this
contract, at a rate of ONE WITH 30/100 GOLD DOMINICAN PESOS (RD$1.30) per
square foot per month.
WHERE AS: "The LESSEE" has requested "The CORPORATION" to construct an annex to
the buildings located in Lots No. 8 & 9, of Block" 4-B," whose lots have a
surface area of 4,000 square meters.
WHERE AS: "The LESSEE" has requested "The CORPORATION" to accept the return of
the buildings located within Lots No. 19, of Block" 1-A" and No. 4 of Block" 1-
B" of the particular drawing of the Industrial Free Zone of San Pedro de
Macoris, in "as is" condition without necessity of "The LESSEE" to carry out
demolitions to the improvements already built, in a term of thirty (30) days
starting from the delivery of keys of the annex, that by this contract will be
constructed, for which it requests "The CORPORATION" a grace period for
installation purposes, where no billing will be made for the returned
buildings.
WHERE AS: "The LESSEE" has solicited "The CORPORATION" to consolidate in one
contract contracts marked with Nos. CFI-A-155-4-92, CFI-I-435-10-93 and the
Letter Contract No. CFI-I-500-12-93, dated April 23, 1992, October 29, 1993 and
December 16, 1993, respectively.
WHERE AS: At December 16, 1993, "The CORPORATION" and "The LESSEE" signed the
l e t t er contract marked with No. CFI-I-500-12-93, where "The LESSEE"
communicated to "The CORPORATION" the intention of constructing an annex that
is specified herein, of approximately 45,416.05 square feet.
THEREFORE: And in the understanding that the previous paragraph is an integral
part of this document, the following stipulations have been agreed to:
FIRST ARTICLE: "The CORPORATION" agrees to consolidate into one and "The
LESSEE" who so accepts, contracts marked with No. CFI-A-155-4-92, CFI-I-435-10-
93 and the Letter Contract No. CFI-I-500-12-93, dated April 23 1992, October
29, 1993 and December 16, 1993, respectively, that cover the real property
described below, under the following terms and conditions.
a). One A-SPM type, one story building, roofed with asbestos and
cement, built of iron and concrete, with a height to the eave of 14.6 feet, and
2
annex, with a construction surface of 29,185.75 square feet, whose drawings are
attached to this contract, located in Lot No. 19, of Block" 1-A," of the
Industrial Free Zone of San Pedro de Macoris.
b).- One A-SPM type, one story building, roofed with aluzinc, built of iron and
concrete, with an area of 13,555.77 square feet, with a height to the eave of
14.0 feet, whose drawings are attached to this contract, located in Lot No. 4,
of Block" 1-B, " of the particular drawing of the Industrial Free Zone of San
Pedro de Macoris.
c).- Two A-SPM type, one story buildings, roofed with aluzinc, built of
iron and concrete,
with an area of combined fabrication of 27,666.84 square feet, with a height to
the eave of
14.6 feet, whose drawings are attached to this contract, located in Lots No. 8
& 9, of Block"
4-B," of the particular drawing of the Industrial Free Zone of San Pedro de
Macoris.
TERM: The present contract will be for a term of FIVE (5) YEARS, starting on
November 1, 1993 through November 1, 1998.
PARAGRAPH: "The LESSEE" will request an extension of this contract, under new
terms and conditions, by notifying "THE CORPORATION" in writing ninety (90)
days before the expiration of the term previously agreed to.
SECOND ARTICLE: RENT FEE. The agreed price of this lease is (A) SEVENTY FIVE
CENTS (RD$0.75) per square foot per month, or a total of FIFTY TWO THOUSAND
EIGHT HUNDRED SIX AND 27/100 GOLD DOMINICAN PESOS (RD$52,806.27) per month, for
the first three (3) months of this lease, that is to say, the months of
NOVEMBER 1993, DECEMBER 1993 and JANUARY 1994, applying the contribution made
for the construction of the electric substation; B) ONE WITH 30/100 GOLD
DOMINICAN PESOS (RD$1.30) per square foot, making a total of NINETY ONE
THOUSAND FIVE HUNDRED THIRTY WITH 87/100 GOLD DOMINICAN PESOS (RD$91,530.87)
per month, starting from February 1, 1994 until the rent fee adjustment
mentioned in Paragraph IV of Article 21 is made.
FORM OF PAYMENT: "The LESSEE" commits to pay at "The CORPORATION" FIVE MILLION
EIGHT HUNDRED SIXTY TWO THOUSAND FOUR HUNDRED TWO WITH 81/100 GOLD DOMINICAN
PESOS (RD$5,862,402.81); "The CORPORATION" declares to have received the sums
of a) THREE HUNDRED SIXTY NINE THOUSAND SIX HUNDRED FORTY THREE WITH 89/100
GOLD DOMINICAN PESOS (RD$369,643.89), as the contribution of "The LESSEE" for
the electric substation; b) ONE HUNDRED THOUSAND GOLD DOMINICAN PESOS
(RD$100,000.00) by means of Receipt No. 5298, dated December 16, 1993; c) TWO
MILLION SIX HUNDRED FORTY SIX THOUSAND THREE HUNDRED SEVENTY NINE and 46/100
GOLD DOMINICAN PESOS (RD$2,646,379.46) at the signing of this contract; d) ONE
MILLION NINETY EIGHT THOUSAND FIVE HUNDRED FIFTY ONE WITH 78/100 GOLD DOMINICAN
PESOS (RD$1,098,551.78) on February 18, 1994; (e) ONE MILLION NINETY EIGHT
T H O U S A ND FIVE HUNDRED FIFTY ONE WITH 78/100 GOLD DOMINICAN PESOS
(RD$1,098,551.78) on April 2,1994; and, f) FIVE HUNDRED FORTY NINE THOUSAND TWO
HUNDRED SEVENTY FIVE WITH 89/100 GOLD DOMINICAN PESOS(RD$549,275.89) at the
receipt of the keys of the annex that later on will be specified.
3
"The LESSEE" is obliged to obtain and maintain during the term of the present
contract an insurance policy with an insurance company acceptable to" The
CORPORATION" which covers the civil responsibility of "The LESSEE" and/ or "The
CORPORATION" for damages caused to third parties for accident or for any other
cause in the buildings, their annexes and adjacent places, rented by "The
LESSEE." This policy will be for a coverage of FIFTY THOUSAND GOLD DOMINICAN
PESOS (RD$50,000.00) in connection with the accidents that could occur to any
one person or their property; and, HUNDRED THOUSAND GOLD DOMINICAN PESOS
(RD$100,000.00) for any accident or disaster that could ensue and affect more
than one person or their properties. Also, "The LESSEE" is obliged to insure
for their actual value, but never for amounts less than ELEVEN MILLION FIVE
HUNDRED FORTY SEVEN THOUSAND NINETY SIX WITH 62/100 GOLD DOMINICAN PESOS
( R D$11,547,096.62) the rented building(s), against the risks of fire,
hurricane, quake, storm, floods, etc., or any other resulting damage from Acts
of God and other related risks, among others but not limited to only those.
PARAGRAPH I: The amounts not paid when due, will accrue interest at the rate
of one and half percent (1 1/ 2%) a month or fraction thereof.
PARAGRAPH II: "The CORPORATION" has received from "The LESSEE" THREE HUNDRED
THIRTY SEVEN THOUSAND NINE HUNDRED SIXTY and 11/100 GOLD DOMINICAN PESOS
(RD$337,960.11), that is the deposit of the contract marked with the No. CFI-A-
155-4-92, dated April 23, 1992, a guarantee never applicable to monthly lease
payments.
PARAGRAPH III: The amount deposited and previously mentioned, will become for
the benefit of "The CORPORATION" when for any reason "The LESSEE" loses the
Authorization referred by the Third Article of this contract. This sum will
also be converted in a deposit that will guarantee the possible repairs and/or
changes not covered that could have suffered the buildings and/or extensions,
if any upon termination of this contract. It is understood that if the check
given by "The LESSEE" to "The CORPORATION" for the mentioned sum, lacks
sufficient funds at the moment it is presented for collection, this contract
will automatically become void and without effect.
THIRD ARTICLE: The parties agree that the lease under this contract is subject
to the condition that "The LESSEE" maintains the approval of the National
Council of Free Zones of Export, based on Law No. 8-90, dated January 15, 1990,
"The LESSEE" will not be able to use the site leased for a purpose other than
its industry in ELECTRONICS, for which the lessee shall maintain the approval
of the mentioned National Council of Free Zones of Export.
PARAGRAPH: It is expressly agreed by the parties, that the leased building in
this contract will be utilized only and exclusively for production and
generation of employment, according to the activity for which it was
contracted. In case "The LESSEE" ceases production, non complying with the
previously expressed, the present contract will cease and be rescinded.
FOURTH ARTICLE: ALTERATIONS. "The LESSEE" may not make any alterations nor
substantial modification of the rented sites, without the previous consent in
writing of "The CORPORATION."
4
Also "The LESSEE" is required, in case of making any alteration or modification
of the leased sites, previous authorization of "The CORPORATION," to comply
with all the national and municipal laws, ordinances and regulations, that
regulates the matter. It is also understood, that in case "The LESSEE" orders
or makes any repair, alteration, change or improvement of the leased buildings,
once authorized by "The CORPORATION," "The CORPORATION" will not be responsible
under any concept, for payment of the materials used or for manpower employed
in the before mentioned tasks.
"The LESSEE" will have a right to remove, upon expiration of the contract, the
equipment and improvements installed by it in the rented places, as long as
these are left in the same state as they were found, except for the
depreciation that results from the normal use of the locations.
FIFTH ARTICLE: REPAIRS AND MAINTENANCE: "The LESSEE" will maintain properties
in good condition at their expense, making the large repairs and small repairs
that are necessary for that end, as well as all the operations required for the
good maintenance of the same, with the exception of the annex to be constructed
whose responsibility will be assumed six (6) months after of the delivery of
keys, of manner to keep in good condition the leased sites and their annexes.
In this regard, "The LESSEE" will have to their expense without this
enumeration being limited:
a) The interior and exterior painting of the buildings;
b) The leaks that could occur in the roof;
c) The repairs of floors and roofs, doors and windows, sanitary and electric
installations.
It is also understood that "The LESSEE" will not be responsible for the repair
of damages caused by hidden structural defects of the leased property.
PARAGRAPH: "The LESSEE" will not be authorized to carry out any act or enter
into any contract that could create or be used as foundation to mortgage or to
obtain any privilege on the leased buildings and/or their improvements or any
other asset that belongs to the "The CORPORATION." If by any act or omission of
"The LESSEE" any complaint or action is filed against "The CORPORATION," or in
any time a lien is registered on the building and/or the leased buildings or on
any other property of "The CORPORATION," "The LESSEE" must at its own expense
take the necessary measures so that complaints or actions are withdrawn and
said liens cancelled or obtain for "The CORPORATION" an insurance Policy or
bond satisfactory to "The CORPORATION" protecting it against the resulting
risks of complaints, actions or liens. In case "The CORPORATION" suffers any
damage, "The LESSEE" will reimburse all the costs, damages and prejudice that
"The CORPORATION" had suffered, including the necessary funds in order to
reimburse the legal expenses and reasonable fees incurred by it.
SIXTH ARTICLE: TOTAL OR PARTIAL DESTRUCTION.- In case the buildings leased are
destroyed in total or part, whichever the causes of the damage, "The LESSEE"
should inform immediately "The CORPORATION" so that they can present the proper
claim to the insurance companies.
5
When a damage of this type occurs "The CORPORATION" will have the option, to
reconstruct the building(s) or to cancel this contract. In this last
eventuality "The LESSEE" would not be obliged to pay more rent than the
corresponding fraction of time the lessee used and enjoyed the real property,
for which "The CORPORATION" commits to return to "The LESSEE," in case that
"The LESSEE" had given any advance in payment of rent or prepaid this lease,
the pending and not consumed amount paid.
If the total or partial destruction of the building is due to a fault or
negligence of "The LESSEE," they will be made responsible for the damage
caused, to the extent these are not covered by insurance.
SEVENTH ARTICLE: INSPECTION OF THE BUILDING. "The LESSEE" is obliged to allow
the access to the officials of "The CORPORATION" and/or designated personnel
when considered necessary by "The CORPORATION", to the site and/or the rented
sites, for the purpose of carrying out the inspection of the same and check
that their use adjusts to the laws and regulations, the terms and conditions
specified in the present contract.
EIGHTH ARTICLE: BANKRUPTCY OF "THE LESSEE." "The LESSEE" commits to notify "The
CORPORATION" of any sue, judgement, judicial act or application of tentative
agreement, that could lead to bankruptcy, regardless of the country where each
action is attempted. Such notification should be in writing within twenty (20)
days following the sue, judgement, judicial act or application of tentative
agreement.
In that moment, "The CORPORATION" can at its entire discretion, declare
canceled the present contract, without affecting their right to intervene in
the bankruptcy procedure.
NINTH ARTICLE: WATER SERVICE, ELECTRICITY, COLLECTION OF GARBAGE, CLEANING OF
STREETS, SEWER SERVICE AND PAYMENT OF INSURANCE PREMIUMS. The services of
water, electricity, collection of garbage, cleaning of streets and sewer
service, used or residual will be the responsibility of "The LESSEE." In the
event that it fails to pay all or any of these services or the insurance
premiums pursuant to the terms and conditions of this contract, "The
CORPORATION" may, at its convenience, pay on behalf of "The LESSEE", and then
bill the Lessee for the amounts due, amounts become due upon presentation and
bear interest at twelve percent (12%) per annum for every month the
reimbursement is not made plus a three percent (3%) fee for transmittal,
commissions and others.
TENTH ARTICLE: BREACH. Failure to comply with any of the clauses and
conditions of this contract by "The LESSEE" may be cause for termination and
ten (10) days after "The CORPORATION" has notified "The LESSEE" through a
marshall if LESSEE" fails to cure the event of noncompliance within the
indicated term.
In this case "The CORPORATION" will again come into possession of the leased
property without necessity of judicial procedure or indemnity of any nature,
ten (10) days after notice of vacating the rented places. In any event "The
6
CORPORATION reserves the right of claiming the entirety of the amounts referred
to in the Second Article of the present contract.
ELEVENTH ARTICLE: TERMINATION OF THE CONTRACT. The parties agree that this
present contract may not be automatically renewed. In the event that "The
LESSEE" wishes to renew this contract for more years, it must do so under new
terms and conditions and as established in the First Article of this contract.
In the event that it is not renewed "The LESSEE" should deliver the sites
rented to "The CORPORATION" after their inspection, within a term of twenty
(20) days after notification is made through a Marshall as requested by "The
CORPORATION.
"The LESSEE" agrees and is bound to "The CORPORATION" to pay the term of this
lease or the balance due, if it decides to terminate the present contract
before its expiration, or if this is finished due to a cause attributable to
"The LESSEE."
TWELFTH ARTICLE: It is agreed that any change or modification that "The
LESSEE" desires to make in the building (s), should be notified to "The
CORPORATION" within the twenty (20) days after signing of this contract and
that the costs of said changes will be paid by "The LESSEE."
THIRTEENTH ARTICLE: COMPETENT COURTS. For all purposes and consequences of
this contract, the parties state that their respective domiciles are for "The
CORPORATION" at the corner formed by the General Gregorio Luperon and 27 of
February Avenues, opposite the Square of Independence, of this city, and, for
"The LESSEE" in the real property that is the object of this present contract.
The parties also agree, that in the event of any litigation or difference
between them, in regard to the present contract, these will be the submitted to
the Dominican Republic Courts resigning in advance to appeal to any other
Courts that for any cause may have jurisdiction of these litigations or
differences.
Also, they agree that anything not foreseen in this contract, be governed by
the laws of the Dominican Republic.
FOURTEENTH ARTICLE: DELIVERY OF POLICIES. "The LESSEE" commits in delivering
to "The CORPORATION" at its requirement the certificates or insurance policies
that name "The CORPORATION" as beneficiary of insurance, in conformity with the
Clauses of the present contract.
FIFTEENTH ARTICLE: CESSION OF CONTRACT. It is expressly agreed that "The
CORPORATION" may render or transfer its rights in virtue of the present
contract.
It is also agreed that "The LESSEE" may not render nor transfer the rights it
has under this contract, nor may it sub-lease all or part of the buildings
rented, without the previous consent, however, such consent will not be denied
in arbitrary or capricious form, but for justified reasons.
7
SIXTEENTH ARTICLE: "The LESSEE" is formally bound and obligated to provide the
enterprise for which it is leasing the buildings, with all the equipment and
technical procedures necessary to avoid pollution from dust, impurities,
excessive noise, etc., that will contaminate the environment and/or, affect,
disturb, hinder or in any way upset the operation of other companies in the
Industrial Free Zone. In case that "The LESSEE" fails to comply, the present
contract will be null and void and "The CORPORATION" will be in immediate
possession of the rented sites.
SEVENTEENTH ARTICLE: SUSPENSION OF ACTIVITIES. It is expressly agreed by the
parties that the industrial operation of "The LESSEE" will be continuous and
therefore any temporary suspension of over seven (7) working days, will be
notified in writing to "The CORPORATION" within the (24) subsequent hours to
this suspension. "The CORPORATION" will have the right to end the present
lease contract unilaterally and without responsibility, in the case "The
LESSEE" suspends their industrial operations for a period of sixty(60) days in
the course of a (1) calendar year or for any period of thirty (30) consecutive
days, except suspensions due exclusively to causes outside the control of "The
L E SSEE," will suffice to terminate the present contract with a mere
notification to the domicile elected by "The LESSEE," by "The CORPORATION" and
without necessity of any judicial intervention.
EIGHTEENTH ARTICLE: "The CORPORATION" as operator and manager of the
Industrial Free Zone of San Pedro de Macoris, will provide protection and
surveillance services in this Zone during 24 hours of working days and
holidays, at the entrance and exit gate and the perimeter of the referred Zone
(Military Security); custom services; collection of garbage in the streets;
gardening services in green common areas; services of the personnel that search
for employment and other.
It is expressly agreed that "The CORPORATION" will bill for these services, the
sum of TWENTY CENTS (RD$0.20) per month per square foot of leased construction,
starting from February 1, 1994 until the formal delivery of the annex that will
be constructed per this contract, in the understanding that a new cost
adjustment will be made, and documented in the complementary contract referred
to in the Twenty First Article, Paragraph IV of this same act.
NINETEENTH ARTICLE: VARIOUS REGULATIONS. "The LESSEE" is required to comply
with the following regulations:
1) It is expressly agreed that the steam boilers that "THE LESSEE" will
operate will be placed outside the leased buildings, as well as the
transformers, electric plants and compressors, therefore "The LESSEE" must
obtain previous authorization in writing from "The CORPORATION" for the
location and construction of the places where the referred equipment will be
installed.
2) Any additional security service, contracted by "The LESSEE" must rely on
the authorization of "The CORPORATION," except for the protection to be
provided within the buildings.
8
3) "The LESSEE" expressly agrees to respect all the parking and traffic signs
placed by "The CORPORATION" in the referred Zone and have all its personnel
obey all the traffic and parking rules. The shipping and receiving ramps will
always be constructed in the places elected by "The CORPORATION."
4) "The LESSEE" will not store materials, supplies or products, nor will it be
permitted to remain in areas located outside of the permanent structure,
without the written consent of "The CORPORATION." The approvals for external
storage will be granted only when the storage area is out of view. The
containers or shipping vans must be parked in the loading ramp of the
building(s) or in the parking designated by "The CORPORATION" for this purpose,
but never in the streets or other forbidden areas. It is understood that these
vans or containers will remain in the loading ramp of the building(s) leased
only when giving the service of loading or unloading is being given.
5) Six (6) months after the delivery of the buildings, everything related to
leaks, problems with floors, roofs, windows and doors, will be paid by "The
LESSEE."
6) "The LESSEE" will not install nor maintain signs in the Zone except those
that indicate the name of the same and the types of products manufactured by
it. The design, dimension and colors of any sign will be submitted and
approved by "The CORPORATION" before their installation.
7) "The LESSEE" commits to place the external waste collection areas where
these will not be seen from the streets and adjacent lots.
8) "The CORPORATION" will be responsible for planting and maintaining the
green areas and gardening in general, and, "The LESSEE" cannot make any
changes, nor plant trees without the previous written consent of "The
CORPORATION."
9) "The LESSEE" must become a member of the association of lessees of the
Zone, to abide by their regulations and to pay all the reasonable fees
established for their members.
10) "The LESSEE" agrees to permanently inform "The CORPORATION" in
writing, the names, telephone numbers and postal addresses of the principal
executives responsible for the operations in the Zone and their superiors, if
they exist in their offices or in the main offices located outside of the
Dominican Republic. Any changes in the names, telephone numbers and postal
addresses of these executives and superiors will also be promptly informed in
writing to "The CORPORATION."
11) The present lease contract and the industrial operations will be
subject to all the present
and future legal and administrative disposition on industrial free zones that
emanate of the Law or of applicable Departments of the Dominican Republic
Government, especially the fiscal tax monetary, of labor and social security
r e gulations. "The LESSEE" cannot allege ignorance of these laws or
administrative dispositions and their noncompliance will be reason for
cancellation of this contract.
9
12) "The LESSEE" commits in endowing the company of an area used
exclusively as dining room which will not be utilized for a different purpose
for which it was constructed or destined. "The LESSEE" will instruct their
employees in the use of this facility, and therefore it is forbidden to eat in
other places of the zone, as well as the consumption of food in the outside.
TWENTIETH ARTICLE: It is agreed between the parties that the residuals or
waste of paper, cardboard and related materials generated or originated by "The
LESSEE" in the Industrial Free Zone of San Pedro de Macoris, will be the
exclusive property of "The CORPORATION" who will dispose of the same as they
wish. Any contradiction on the part of "The LESSEE" to this stipulation will
be cause or rescission of all rights of the present lease contract, without
responsibility for "The CORPORATION."
TWENTY FIRST ARTICLE: SPECIAL CLAUSES - CONSTRUCTION OF ANNEX. "The
CORPORATION," by means of the present act, obligates formally and expressly to
"The LESSEE" that solicited it, to construct in a term of ONE HUNDRED TEN (110)
working days, An (1) ANNEX, of a plant, with walls of blocks and armed
concrete, metallic structure and roof of aluzinc, with a surface of fabrication
of 45,416.05 square feet, in Lot No. 8 & 9, of Block" 4-B" of the particular
drawing of the Industrial Free Zone of San Pedro de Macoris, in order to become
part, of this same contract, which construction cost is the sum of FIVE MILLION
FOUR HUNDRED NINETY TWO THOUSAND SEVEN HUNDRED FIFTY EIGHT WITH 92/100 GOLD
DOMINICAN PESOS (RD$5,492,758.92), according to Budget dated November 15, 1993,
to be covered by "The LESSEE" in the manner that is specified in the Second
Article of this same act.
PARAGRAPH I: In case that the construction work previously indicated were
delayed, by irrelevant causes to the will of "The CORPORATION" or by reason of
act of God justified (torrential rains, storms, floods, etc.), "The LESSEE"
recognizing these conditions will have the obligation of conceding to "The
CORPORATION" the extension that both parties consider reasonable.
PARAGRAPH II: It is expressly agreed that "The LESSEE" will solicit in writing
to "The CORPORATION" any modification to the project object of this contract.
Also that the overruns or additions produced during the execution of the work
will be covered by "The LESSEE" whenever these are originated by official
changes in the costs, modifications needed during the construction process or
for any another justified cause, previous acceptance in writing by "The
LESSEE."
PARAGRAPH III: It is understood by the parties that the noncompliance of the
previously established payment plan, the construction work will be suspended
and "The LESSEE," will be charged a construction penalty of ONE THOUSAND GOLD
DOMINICAN PESOS (RD$1,000.00) for every day of delay in these payments without
affecting the clauses of this contract regarding breach (events of non-
compliance) and the established option for the rescission in favor of "The
CORPORATION".
Also, "The CORPORATION" commits and obligates with "The LESSEE" to penalize the
contractor constructing the annex, with the sum of TWO THOUSAND GOLD DOMINICAN
10
PESOS (RD$2,000.00) daily, in case of not finishing the work in the agreed
term.
PARAGRAPH IV: It is expressly agreed by the parties that when the building to
be constructed by "The CORPORATION" for "The LESSEE," in the previously agreed
term is delivered, a complementary contract will be subscribed to this contract
modifying the quantity of square feet, the amount of the fees and adjusting the
amount of the deposit of guarantee, as well as the difference that may
originate as a result of the prepayment of rent for the term of this contract.
PARAGRAPH V: "The LESSEE" commits to return in a term of thirty (30) days,
starting from the delivery of keys of the annex to be constructed, the plants
located within Lot No. 19, of Block" 1-A" and 4 of Block" 1-B" of the
particular drawing of the Industrial Free Zone of San Pedro de Macoris, "The
CORPORATION" commits to accept them in the condition in which they are, without
necessity of "The LESSEE" to demolish the improvements already built, in the
understanding that for the transfer of the machineries of mentioned plants to
the new construction will operate a grace period of thirty (30) days, in which
no billing will take place for the buildings being returned.
TWENTY SECOND ARTICLE: This contract substitutes in all its parts those marked
with No. CFI-A-155-4-92, CFI-I-435-10-93 and the Letter Contact No. CFI-I-500-
12-93, dated April 23, 1992, October 29, 1993 and December 16, 1993,
respectively.
TWENTY THIRD ARTICLE: For those items not covered in this contract the parties
will refer to the common law and elect domicile as previously indicated.
PERFORMED and SIGNED in two (2) originals of a same tenor and effect, one for
each one of the parties, at Santo Domingo, National District, capital of the
Dominican Republic, today FIRST of FEBRUARY of the year ONE THOUSAND NINE
HUNDRED NINETY FOUR (1994).
11
FOR THE CORPORATION OF INDUSTRIAL DEVELOPMENT
JOSE ANTONIO GUZMAN ALVAREZ
GENERAL DIRECTOR
FOR TII DOMINICANA, INC.
"The LESSEE"
THOMAS F. BELLEAU
FINANCIAL VICE-PRESIDENT
I CERTIFY And I GIVE Faith: That the signatures in this document of gentlemen
JOSE ANTONIO GUZMAN ALVAREZ and THOMAS F. BELLEAU, consist and whom I give
faith to know, were freely and voluntarily signed in my presence by them
declaring under oath that those are the signatures that they accustom use in
all their acts.
In Santo Domingo, National District, Capital of the of the Dominican Republic,
FIRST of FEBRUARY of the year ONE THOUSAND NINE HUNDRED NINETY FOUR (1994).
ATTORNEY
NOTARY PUBLIC
12
Exhibit 11
EXHIBIT 11
TII INDUSTRIES, INC. AND SUBSIDIARIES
____________________________________________
COMPUTATION OF PER SHARE EARNINGS
____________________________________________
Year
Three Months Ended
Ended June 30,
June 30, 1995 1995
PRIMARY EARNINGS PER SHARE
Weighted Average of Common Stock
Beginning of period (shares)
Common Stock outstanding 4,017,000 3,802,000
Class B Common Stock 371,000 371,000
--------- ---------
4,388,000 4,173,000
Issuance of common stock 325,000 199,000
--------- ---------
4,713,000 4,372,000
Common Stock Equivalents
Options and warrants 2,923,000 3,175,000
Preferred Stock
Preferred Stock, Series A
convertible at $6.25 442,000 442,000
--------- ---------
8,078,000 7,989,000
========= =========
Primary Earnings Per Share Computation
Net profit (loss)
Add: Effects of using the Modified $373,000 $2,942,000
Treasury Stock Method
Reduction of interest expense on debt
Interest earned on investment in U.S. 216,000 646,000
Government Securities 152,000 566,000
--------- ---------
Adjusted Net Profit $741,000 $4,154,000
========= =========
Adjusted Net profit/weighted average of
common stock** $741,000/8,078,000 and
$4,154,000/7,989,000 $0.09 $0.52
========= =========
Market price at end of period $6.81 $6.81
========= =========
Average market price for the period $6.31 $5.99
========= =========
EXHIBIT 11
TII INDUSTRIES, INC. AND SUBSIDIARIES
____________________________________________
COMPUTATION OF PER SHARE EARNINGS
____________________________________________
Three
Months Year
Ended Ended
June 30, June 30,
1995 1995
FULLY DILUTED EARNINGS PER SHARE
Weighted average of Common Stock outstanding 4,713,000 4,372,000
Incremental shares from options and
warrants* 2,923,000 3,175,000
Preferred stock conversion 442,000 555,000
OPIC loan 300,000 300,000
--------- ---------
8,378,000 8,402,000
Fully Diluted Earnings Per Share Computation
Net profit (loss) $373,000 $2,942,000
Add: Effects of using the Modified
Treasury Stock Method
Reduction of interest expense on
debt 235,000 722,000
Interest earned on investment in
U.S. Government Securities 144,000 603,000
Adjusted Net Profit (loss) $752,000 $4,267,000
Adjusted net profit (loss)/weighted average
of common stock** $752,000/8,378,000 and
$4,267,000/8,402,000 $0.09 $0.51
* Since the number of shares of common stock obtainable by assuming the
exercise of all options and warrants with an exercise price below market
exceeds 20% of the number of shares of common stock outstanding at the end
of the period, the treasury stock method is modified. All options and
warrants are assumed to have been exercised and the aggregate proceeds
therefrom to have been applied, first to repurchase outstanding common
shares, but not to exceed 20% of the outstanding shares and, second to
reduce borrowings with any remaining funds invested in U.S. Government
Securities or commercial paper.
** Loss per share is based on the weighted average of common stock outstanding
since any assumption of conversion is antidilutive.
Exhibit 24
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated September 27, 1995, included in this Annual Report on Form
10-K, into the Company's previously filed Registration Statements on Form S-8
(Nos. 2-71781, 2-90852, 33-2555, 33-11449, 33-26930, 33-37310, 33-53180, 33-
59096 and 33-64980).
Arthur Andersen LLP
San Juan, Puerto Rico
September 27, 1995