10-Q 1 f10q92801.txt FORM 10-Q DATED 9/28/01 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 28, 2001 Commission file number 1-8048 TII INDUSTRIES, INC. (Exact name of registrant as specified in its charter) State of incorporation: DELAWARE IRS Employer Identification No: 66-0328885 1385 Akron Street, Copiague, New York 11726 (Address and zip code of principal executive office) (631) 789-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ The number of shares of the registrant's Common Stock, $.01 par value, outstanding as of October 24, 2001 was 11,682,284 Part I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 28, June 29, 2001 2001 ---------------- --------------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 204 $ 233 Accounts receivable, net 4,851 7,190 Inventories 13,343 13,800 Other 264 109 ---------------- --------------- Total current assets 18,662 21,332 ---------------- --------------- Property, plant and equipment, net 8,204 8,398 Other 937 1,032 ---------------- --------------- TOTAL ASSETS $ 27,803 $ 30,762 ================ =============== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities Current portion of long-term debt and obligations under capital leases $ 252 $ 252 Borrowings under revolving credit facility 626 721 Accounts payable 2,613 4,984 Accrued liabilities 1,027 1,128 Accrued re-alignment expenses 245 337 ---------------- --------------- Total current liabilities 4,763 7,422 ---------------- --------------- Long-Term Debt and Obligations Under Capital Leases 427 490 ---------------- --------------- Series C Convertible Redeemable Preferred Stock, 1,626 shares outstanding at September 28, 2001 and June 29, 2001, respectively; liquidation preference of $1,150 per share 1,626 1,626 ---------------- --------------- Stockholders' Investment Preferred Stock, par value $1.00 per share; 1,000,000 shares authorized; Series C Convertible Redeemable, 1,626 shares issued and outstanding at September 28, 2001 and June 29, 2001, respectively - - Series D Junior Participating, no shares outstanding - - Common Stock, par value $.01 per share; 30,000,000 shares authorized; 11,699,921 shares issued and 11,682,284 shares outstanding at September 28, 2001 and June 29, 2001, respectively 117 117 Warrants and options outstanding 369 369 Capital in excess of par value 37,122 37,122 Accumulated deficit (16,340) (16,103) ---------------- --------------- 21,268 21,505 Less - Treasury stock, at cost; 17,637 common shares (281) (281) ---------------- --------------- Total stockholders' investment 20,987 21,224 ---------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 27,803 $ 30,762 ================ ===============
See Notes to Consolidated Financial Statements 2 TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three month period ended September 28, September 29, 2001 2000 ------------------ ------------------ (Unaudited) Net sales $ 9,098 $ 10,510 Cost of sales 6,828 8,122 ------------------ ------------------ Gross profit 2,270 2,388 ------------------ ------------------ Operating expenses Selling, general and administrative 1,919 1,640 Research and development 561 715 ------------------ ------------------ Total operating expenses 2,480 2,355 ------------------ ------------------ Operating (loss) income (210) 33 Interest expense (28) (28) Interest income 1 50 Other income - (5) ------------------ ------------------ Net (loss) earnings $ (237) $ 50 ================== ================== Net (loss) earnings per common share: Basic $ (0.02) $ - ================== ================== Diluted $ (0.02) $ - ================== ================== Weighted average common shares outstanding: Basic 11,682 11,681 Diluted 11,682 13,044
See Notes to Consolidated Financial Statements 3 TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (Dollars in thousands) (Unaudited)
Warrants and Capital in Options excess of Accumulated Treasury Common Stock Outstanding par value Deficit Stock ------------- --------------- ------------- ----------------- ------------ BALANCE, June 29, 2001 $ 117 $ 369 $ 37,122 $ (16,103) $ (281) Exercise of stock options - - - - - Net loss for the three month period ended September 28, 2001 - - - (237) - ------------- --------------- ------------- ----------------- ------------ BALANCE, September 28, 2001 $ 117 $ 369 $ 37,122 $ (16,340) $ (281) ============= =============== ============= ================= ============
See Notes to Consolidated Financial Statements 4
TII INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the three month periods ended September 28, 2001 September 29, 2000 -------------------- -------------------- (Unaudited) Cash Flows from Operating Activities: Net (loss) earnings $ (237) $ 50 Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 340 444 Provision for inventory -- 99 Changes in operating assets and liabilities: Decrease (increase) in accounts receivables 2,339 (1,188) Decrease in inventories 457 530 (Increase) decrease in other assets (99) 86 Decrease in accounts payable, accrued liabilities and accrued re-alignment expenses (2,564) (1,583) ------- ------- Net cash provided by (used in) operating activities 236 (1,562) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net of dispositions (107) (222) ------- ------- Net cash used in investing activities (107) (222) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options -- 4 Payments of debt and obligations under capital leases (63) (624) Payments of borrowings under the revolving credit facility (95) -- ------- ------- Net cash (used) provided by financing activities (158) (620) ------- ------- Net decrease in cash and cash equivalents (29) (2,404) Cash and cash equivalents, at beginning of period 233 4,446 ------- ------- Cash and cash equivalents, at end of period $ 204 $ 2,042 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH TRANSACTIONS: Cash paid during the period for interest $ 29 $ 21 ======= =======
See Notes to Consolidated Financial Statements 5 TII INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - INTERIM FINANCIAL STATEMENTS: The unaudited interim consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles for interim financial statements and in accordance with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are considered necessary for a fair presentation of the Company's financial position and results of operations and cash flows for the interim periods presented. The consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. For the three-month periods ended September 28, 2001 and September 29, 2000, respectively, comprehensive income (loss) equaled Net earnings (loss). NOTE 2 - FISCAL YEAR: The Company reports on a 52-53 week fiscal year ending on the last Friday in June, with fiscal quarters ending on the last Friday of each calendar quarter. The Company's fiscal year ending June 28, 2002 will contain 52 weeks. Fiscal 2001 had 52 weeks. NOTE 3 - NET (LOSS) EARNINGS PER COMMON SHARE: Basic net (loss) earnings per common share is computed using the weighted average number of shares outstanding during the period. Diluted net earnings per common share is computed using the weighted average number of shares outstanding adjusted for the dilutive incremental shares attributed to outstanding stock warrants and options to purchase common stock and preferred stock convertible into common stock. The following table sets forth the computation of basic and diluted earnings per share:
For the three month period ended September 28, September 29, 2001 2000 --------------- -------------- (in thousands) Numerator for diluted calculation: Net (loss) earnings $ (237) $ 50 ======== ======== Denominator: Weighted average common shares outstanding 11,682 11,681 Dilutive effect of stock warrants and options -- 570 Dilutive effect of conversion of Series C Convertible Redeemable Preferred Stock -- 793 -------- -------- Denominator for diluted calculation 11,682 13,044 ======== ========
6 Stock warrants and options to purchase approximately 6.0 million shares of common stock and approximately 2.7 million equivalent common shares related to the Series C Convertible Redeemable Preferred Stock for the three month period ended September 28, 2001 were outstanding but not included in the computation of diluted net earnings per common share since their inclusion would be antidilutive. NOTE 4 - INVENTORIES: Inventories consisted of the following major classifications: September 28, 2001 June 29, 2001 ------------------- ---------------- (in thousands) Raw materials and subassemblies $ 3,336 $ 3,967 Work in process 2,321 2,649 Finished goods 8,326 7,824 -------- -------- 13,983 14,440 Less: allowance for obsolescence (640) (640) -------- -------- $ 13,343 $ 13,800 ======== ======== NOTE 5 - OPERATIONS RE-ALIGNMENT: In the third quarter of fiscal 2001, as part of management's continuing strategy to improve profit margins by finding cost-effective ways of producing its products, and also as a result of the successes under a fiscal 1999 re-alignment plan, management committed to a plan to further re-align its operations. A key element of this 2001 plan is the expansion of the Company's outsourcing strategy with contract manufacturers to produce a substantial portion of the remaining components and subassemblies that the Company was still manufacturing. Included in this plan were additional workforce and production facility reductions, the assessment of future usage and recoverability of certain inventories and manufacturing machinery, equipment and leasehold improvements as certain manufacturing activities conducted in Puerto Rico were outsourced and products were eliminated, and other cost saving measures. Accordingly, during the third quarter of fiscal 2001, the Company recorded a net re-alignment of operations charge on the Consolidated Statement of Operations of approximately $6.1 million, including an inventory write-down of approximately $2.7 million and net of a reversal of a remaining reserve of $96,000 from a fiscal 1999 re-alignment charge. The components of the remaining balance of this charge as of June 29, 2001, the corresponding cash activity in the three-month period ended September 28, 2001 and the remaining reserve balances are reflected in "Accrued re-alignment expenses" in the accompanying Consolidated Balance Sheets, as follows: Employee Excess Termination Manufacturing Benefits Space Total ----------- ------------- ----- Balance, June 29, 2001 $ 76,000 $ 261,000 $ 337,000 Cash payments during fiscal 2002 (76,000) (16,000) (92,000) --------- --------- --------- Balance, September 28, 2001 $ -- $ 245,000 $ 245,000 ========= ========= ========= NOTE 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 enter into the computation of taxes under 7 applicable tax laws. The Company has certain exemptions available until January 2009 for Puerto Rico income tax and Puerto Rico property tax purposes and the Company also has net operating loss carryforwards available through fiscal 2006. In addition, the Company, in its US subsidiaries, has net operating loss carryforwards that expire periodically through 2020, and general business tax credit carryforwards that expire periodically through 2012. 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 for which a full (100%) offsetting valuation allowance has been provided due to the uncertainty of realizing any benefit in the future. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the foregoing consolidated financial statements and notes thereto. RESULTS OF OPERATIONS Net sales for the fiscal 2002 first quarter were $9.10 million compared to $10.51 million for the comparative prior year period, a decrease of approximately $1.41 million or 13.4 percent. The decrease for the fiscal 2002 first quarter was primarily due to the continuing telecommunications industry-wide slowdown, a reduction in the growth of access lines and the actions taken by service providers to reduce capital spending and inventory levels. This slowdown is expected to continue into the second half of fiscal 2002. Gross profit for the fiscal 2002 first quarter was $2.27 million compared to $2.39 million for the comparative prior year period, a decrease of approximately $118,000 or 4.9 percent however, gross profit margins improved to 25.0 percent compared to 22.7 percent. However, gross profit margins improved to 25.0 percent compared to 22.7 percent. The lower gross profit was due to the lower comparable sales levels, offset to a large degree by the improved gross profit margin. The improved gross profit margin is due to the success of the Company's operations re-alignments, outsourcing strategy and sales of technologically advanced higher margin products. Selling, general and administrative expenses for the first quarter of fiscal 2002 were $1.92 million compared to $1.64 million for the comparable prior year period, an increase of approximately $279,000 or 17.0%. The increase for the quarter was principally due to increased marketing expenses related to the introduction of the Company's new Digital Closet product line, which expenses are expected to continue to increase during the remainder of fiscal 2002. Research and development expenses for the first quarter of fiscal 2002 were $561,000 compared to $715,000 for the comparable prior year period, a decrease of approximately $154,000 or 21.5%. While the Company continues to invest in new product development it has been able to reduce its direct outlays through the use of collaborative engineering efforts with its contract manufacturers. Interest expense for the first quarter of each of fiscal 2002 and 2001 was $28,000. Lower interest rates in the fiscal 2002 period offset higher levels of borrowings under the Company's credit facility. 8 Interest income for the first quarter of fiscal 2002 decreased by $49,000 to $1,000 from $50,000 due to reduced average cash and cash equivalents balances. The net loss for the first quarter of fiscal 2002 was $237,000 compared to net earnings in the comparable prior year fiscal quarter of $50,000. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents balance was $204,000 at September 28, 2001 compared to $233,000 at the end of fiscal 2001, a reduction of approximately $29,000. Working capital was approximately $13.90 million at the end of each of the periods. During the first three months of fiscal 2002, $236,000 of cash was provided by operations due to a reduction in receivables of $2.34 million and inventories of $457,000, offset, in large part, by a decrease in accounts payable, accrued liabilities and accrued re-alignment expenses of $2.56 million. Investing activities used $107,000 for capital expenditures and financing activities used $158,000 for debt repayments. The Company has a credit facility ("Credit Facility"), consisting of a $6.0 million revolving credit facility and a term loan. The revolving credit facility enables the Company to have up to $6.0 million of revolving credit loans outstanding at any one time, limited by a borrowing base equal to 85% of the eligible accounts receivable and 50% of the eligible inventory, subject to certain reserves. Subject to extension in certain instances, the scheduled maturity date of revolving credit loans is April 30, 2003, while the term loan is to be repaid through March 31, 2003, subject to mandatory repayments from asset disposition proceeds and insurance proceeds in certain circumstances. As of September 28, 2001, $627,000 was outstanding under the term loan and $626,000 was outstanding under the revolving credit facility. The Company is in compliance with the covenants and terms of the Credit Facility. The Credit Facility requires the Company to maintain a minimum tangible net worth, which includes the value of outstanding Series C Redeemable Preferred Stock, of at least $19.5 million. If losses continue, the Company may cease to be in compliance with the tangible net worth covenant. In that event, if the Company is unable to obtain a waiver or amendment of the covenant, the Company may be unable to borrow under the Credit Facility and may have to repay all loans then outstanding under the Credit Facility. Funds anticipated to be generated from operations, together with available cash and borrowings under the Credit Facility, are considered to be adequate to finance the Company's operational and capital needs for the foreseeable future. If the slowdown in the telecommunications industry continues for an extended period of time, the Company will most likely need to seek additional capital to support its operations. FORWARD-LOOKING This Report contains and, from time to time, other reports and oral or written statements issued by the Company or on its behalf by its officers may contain forward-looking statements concerning, among other things, the Company's future plans and objectives that are or may be deemed to be forward-looking statements. Such forward-looking statements are subject to a number of known 9 and unknown risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements. These factors include, but are not limited to, general economic and business conditions, including the regulatory environment applicable to the communications industry; weather and similar conditions; competition; potential technological changes, including the Company's ability to timely develop new products and adapt its existing products to technological changes; potential changes in customer spending and purchasing policies and practices; loss or disruption of sales to major customers as a result of, among other things, third party labor disputes and shipping disruptions from countries in which the Company's contract manufacturers produce the Company's products; Company's ability to market its existing, recently developed and new products and retain and win contracts; risks inherent in new product introductions, such as start-up delays and uncertainty of customer acceptance; dependence on third parties for products and product components; the Company's ability to attract and retain technologically qualified personnel; the Company's ability to fulfill its growth strategies; the availability of financing on satisfactory terms to support the Company's growth; and other factors discussed elsewhere in this Report and in other Company reports hereafter filed with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks, including changes in U.S. dollar interest rates. The interest payable under the Company's Credit Agreement is principally between 250 and 275 basis points above the London Interbank Offered Rate ("LIBOR") and, therefore, affected by changes in market interest rates. Historically, the effects of movements in the market interest rates have been immaterial to the consolidated operating results of the Company. The Company requires foreign sales to be paid for in U.S. currency, and generally requires such payments to be made in advance, by letter of credit or by U.S. affiliates of the customer. PART II. OTHER INFORMATION Not Applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TII INDUSTRIES, INC. Date: November 9, 2001 By: /s/ Kenneth A. Paladino ----------------------- Kenneth A. Paladino Vice President-Finance, Treasurer and Chief Financial Officer 10