-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QM+2Bq++BteFgzn2CvpYINe93xbKjR2PUGBENJopxUcSREnAQNLsBJUPkXaCYB7r 6U/42LGm2uXJWG0n9fOpyA== 0000910680-02-000824.txt : 20020927 0000910680-02-000824.hdr.sgml : 20020927 20020926205023 ACCESSION NUMBER: 0000910680-02-000824 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20020628 FILED AS OF DATE: 20020927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TII NETWORK TECHNOLOGIES INC CENTRAL INDEX KEY: 0000277928 STANDARD INDUSTRIAL CLASSIFICATION: SWITCHGEAR & SWITCHBOARD APPARATUS [3613] IRS NUMBER: 660328885 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08048 FILM NUMBER: 02773745 BUSINESS ADDRESS: STREET 1: 1385 AKRON ST CITY: COPIAGUE STATE: NY ZIP: 11726 BUSINESS PHONE: 5167895000 MAIL ADDRESS: STREET 1: 1385 AKRON STREET CITY: COPIAGUE STATE: NY ZIP: 11726 FORMER COMPANY: FORMER CONFORMED NAME: TII INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-K 1 form10k062802.txt FORM 10-K (JUNE 28, 2002) SECURITIES AND EXCHANGE COMMISSION Washington. D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 28, 2002 COMMISSION FILE NUMBER 1-8048 TII NETWORK TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 66-0328885 --------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1385 Akron Street, Copiague, New York 11726 ------------------------------------------- (Address of principal executive offices) (Zip Code) (631) 789-5000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock. $.01 par value Series D Junior Participating Preferred Stock Purchase Rights Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the registrant outstanding as of September 9, 2002 held by non-affiliates of the registrant was approximately $3.1 million. While such market value excludes the market value of shares that may be deemed beneficially owned by executive officers and directors, this should not be construed as indicating that all such persons are affiliates. The number of shares of the Common Stock of the registrant outstanding as of September 9, 2002 was 11,682,284. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement relating to its 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. FORWARD-LOOKING STATEMENTS In order to keep the Company's stockholders and investors informed of the Company's future plans, 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 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." The Company's ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company believes that it is in the best interests of its stockholders and potential investors to take advantage of the "safe harbor" provisions of that Act. Such forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements. These factors include, but are not limited to, general economic and business conditions, including the regulatory environment applicable to the communications industry; weather and similar conditions; competition (see "Business - Competition"); potential technological changes, including the Company's ability to timely develop new products and adapt its existing products to technological changes (see "Business - Products" and "Business - Research and Development"); potential changes in customer spending and purchasing policies and practices; the level of inventories maintained by the Company's customers; loss or disruption of sales to major customers as a result of, among other things, third party labor disputes, political unrest in or shipping disruptions from countries in which the Company's contract manufacturers produce the Company's products; the Company's ability to market existing and new products (see "Business- General" and "Business - Marketing and Sales"); its ability to retain and win contracts; risks inherent in new product introductions, such as start-up delays and uncertainty of customer acceptance (see "Business - General"); dependence on third parties for products and product components (see "Business - Raw Materials" and "Business - Manufacturing"); the Company's ability to maintain its relationship with or reduce its dependence upon one of its principal contract manufacturers which is an affiliate of a customer (see "Business - General"), the Company's ability to attract and retain technologically qualified personnel (see "Business - Employees"); the Company's ability to fulfill its growth strategies (see "Business - Research and Development"); the Company's ability to maintain the listing of its Common Sock on the Nasdaq SmallCap market (see "Market For Registrant's Common Equity and Related Stockholder Matters"); the availability of financing on satisfactory terms (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"); and other factors discussed elsewhere in this Report and in other Company reports hereafter filed with the Securities and Exchange Commission. 2 PART I ITEM 1. BUSINESS GENERAL TII Network Technologies, Inc., formerly named TII Industries, Inc. ("Company" or "TII"), designs, produces and markets lightning and surge protection products, network interface devices ("NIDs") and station electronic and other products. The Company sells these products to United States telephone operating companies ("Telcos"), including the Regional Bell Operating Companies ("RBOCs") and Independent Operating Companies (together, incumbent local exchange carriers or "ILECs") and competitive local exchange carriers ("CLECs"). The Company also sells to original equipment manufacturers ("OEMs") and multi-system operators ("MSOs") of communications services. The Company believes that its products offer superior, cost-effective performance features and characteristics, including high reliability, long life cycles, ease of installation and optimum protection against adverse environmental conditions. This has resulted in TII becoming a leading supplier of overvoltage surge protectors to the ILECs for use at their subscriber locations. Overvoltage surge protection is mandated in the United States by the National Electrical Code ("NEC") to be installed on subscriber telephone lines to prevent injury to users and damage to their equipment due to surges caused by lightning and other hazardous overvoltages. The NEC is published by the National Fire Protection Agency and typically is adopted by states and local municipalities. While similar requirements exist in most other developed countries, a significant portion of the world's communications networks remains unprotected from the effects of overvoltage surges. The 1999 edition of the NEC requires overvoltage surge protection to be included on network powered coax lines, a technology that brings telephony and broadband services to homes and businesses. The Company's patented broadband In-Line(R) coax protector product line was designed to address this market. The Company also markets a line of NIDs tailored to various customer specifications. NIDs house the FCC mandated demarcation point between Telco-owned and subscriber-owned property. NIDs typically also enclose overvoltage surge protectors and various station electronic products that, among other things, allow a Telco to remotely test the integrity of its lines, thereby minimizing costly maintenance dispatches. To address the growing demands and complexities of communications' networks in the home, the Company is currently bringing to market a multi-service residential gateway through its traditional Telco distribution channels. This new system, which is being jointly developed and marketed with a technology partner of the Company, is expected to be introduced during the first half of fiscal 2003. As Telcos expand and upgrade their networks with new technologies to provide users with the expanded bandwidth necessary for high-speed transmission of data over traditional Telco lines, TII has developed several station protection and electronic products for use on Telcos digital subscriber lines ("DSL"). DSL is superimposed over the existing telephone lines allowing high-speed data to be transmitted over a telephone line. RESTRUCTURING AND OTHER CHARGES The continuing telecommunications industry-wide slowdown and resulting cutbacks by the service providers in their construction and maintenance budgets, actions taken by the service providers to reduce inventory levels, and a reduction in the number of telephone access lines per subscriber being deployed have had a negative impact on the sales of the Company's traditional products over the last several years. Accordingly, during this period the Company has been restructuring and downsizing its operations to reduce its cost structure to enable it to operate profitably at lower sales levels and position itself for profitable 3 growth with the recovery of the market for its products. Despite previous industry predictions of a turnaround, this slowdown continued through the end of fiscal 2002. As a result, in the fourth quarter of fiscal 2002 the Company took additional actions to reduce costs and improve operating efficiencies. Included in these actions was the further downsizing of the Company's Puerto Rico operations with the objective of creating a quick-response, low-cost assembly and specialty gas tube manufacturing operation and the further expansion of the Company's outsourcing strategy. This action, combined with the consolidation of certain functional departments and management responsibilities into the Company's New York headquarters, resulted in additional workforce reductions and the reevaluation of the Company's property, plant and equipment requirements, whereby the Company retained only those assets consistent with this strategy. Management also reevaluated its home networking strategy and made the decision to discontinue the Digital Closet Product line, which, despite receiving several industry awards, did not achieve expected results. Further, as a result of the continuing telecommunications industry-wide slowdown, the Company also reevaluated its inventories. As a result, the Company recorded charges in the fourth quarter of fiscal 2002 of $4.1 million that consisted of $1.9 million for the write-down of inventories determined to be excess or obsolete, $1.7 million for the impairment of long-lived assets and $0.5 million for severance and other costs. PRODUCTS LIGHTNING AND OVERVOLTAGE SURGE PROTECTION PRODUCTS. The Company designs, produces and markets overvoltage surge protection products principally for the Telco industry. The Company's surge protection products are primarily for use on the subscribers' home or business telephone lines. Surge protectors: (i) protect the subscribers and their equipment; (ii) reduce the subscribers' loss of service; (iii) reduce the communications providers' loss of revenue due to subscriber outages; and (iv) reduce the communications providers' costs to replace or repair damaged equipment. Overvoltage surge protectors differ in power capacity, application, configuration and price to meet varying needs. In the United States, the NEC mandates overvoltage surge protectors to be installed on all subscribers' telephone lines. Gas Tubes: The Company's gas tubes represent the foundation upon which most of the Company's overvoltage surge protector products are based. The principal component of the Company's overvoltage surge protector is a proprietary two or three electrode gas tube. Overvoltage surge protection is provided when the voltage on a communication line elevates to a level preset in the gas tube, at which time the gases in the tube instantly ionize, momentarily disconnecting the phone or other equipment from the circuit while safely conducting the hazardous surge to ground. When the voltage on the line drops to a safe level, the gases in the tube return to their normal state, returning the phone and other connected equipment to service. The Company's gas tubes are a standard in the industry and have been designed to withstand multiple high-energy overvoltage surges while continuing to operate over a long service life. Modular Station Protectors: One of the Company's most advanced overvoltage surge protectors, marketed under the trademark Totel Failsafe(R) ("TFS"), combines the Company's three electrode gas tube with a thermally operated failsafe mechanism. The three-electrode gas tube is designed to protect equipment from hazardous overvoltage surges and the failsafe mechanism is designed to insure that, under sustained overvoltage conditions, the protector will become permanently grounded. In certain of its modular protectors the Company combines the TFS protection element with a sealing gel making this protector impervious to severe moisture or environmental contamination while providing advanced overvoltage surge protection. The Company has developed several overvoltage protectors for high-speed broadband applications. 4 Broadband Coaxial Protectors: The 1999 revision to the NEC requires overvoltage surge protection on all network powered subscriber coax lines, a cable technology that brings telephony and broadband services to homes and businesses. As an integral part of the Company's broadband product line, the Company has developed and patented a high-performance, 75-ohm Broadband Coax Protector to safeguard coaxial cable lines. While providing overvoltage surge protection, the Company's In-Line(R) Broadband Coax Protectors are virtually transparent to the network, permitting high-bandwidth signals to be transmitted without adversely affecting the signal. Capitalizing on the Company's patent for In-Line(R) Coaxial Cable Surge Protectors, the Company has also developed a 50-ohm Base Station Protector product line which protects wireless service providers' cell sites from the damaging effects of lightning and other surges. Solid State and Hybrid Modular Station Protectors: Using solid-state components, the Company has developed solid-state overvoltage surge protectors. While solid-state overvoltage surge protectors are faster than gas tube overvoltage surge protectors at reacting to surges, a feature that some customers believe important in protecting certain of their sensitive equipment, they have lower energy handling capability and higher capacitance than gas tubes. When an overvoltage surge exceeds the energy handling capacity of the solid-state protector, it fails, causing the telephone or other connected equipment to cease operating. High capacitance on a communication line adversely affects high-bandwidth transmission, distorting the signal. As a result, most Telcos use high-energy handling, low capacitance gas tube protectors at the subscriber location. In the Telco's switching center, where lower energy handling and higher capacitance is not a major concern, solid-state protectors are used more frequently. As communications equipment becomes more complex, a protector's reaction speed to a surge may be perceived to be more critical than its energy handling capabilities. In response, the Company has also combined solid-state protectors with the Company's gas tubes in hybrid overvoltage surge protectors. While generally more expensive and complex than gas tube surge protectors, the hybrid surge protector can provide the speed of a solid-state protector with the energy handling capability of a gas tube. (See "Business - Competition.") AC Powerline Protectors: TII's powerline surge protectors utilize the Company's surge protection technology and are principally used by Telcos at their central office ("CO") locations. These devices protect the connected communication equipment against damage or destruction caused when overvoltage surges enter equipment through the powerline. These products have superior surge handling characteristics compared to the standard strip surge protectors that plug into a homeowner's AC outlet. AC Powerline/Dataline Protectors: The Company has recently developed and is marketing a powerline/dataline Lightning and Power Surge Shield(TM). This protector combines the Company's powerline protection technology with the Company's proprietary protection for the telephone, DSL, Ethernet and universal serial bus (USB) and coax lines. The powerline/dataline protector is intended for the residential market and is initially planned to be sold through the Company's traditional Telco distribution channels. Lightning and overvoltage surge protection products, sold separately from NIDs, accounted for approximately 31%, 56% and 59% of the Company's net sales during the Company's fiscal years 2002, 2001 and 2000, respectively. NETWORK INTERFACE DEVICES. The Company designs, produces and markets various NIDs, which house the FCC mandated demarcation point between Telco-owned and subscriber-owned property. The Company's NIDs typically also enclose its overvoltage surge protectors and various station electronic products that, among other things, allow Telcos to remotely test the integrity of their lines minimizing costly maintenance dispatches. 5 To address the demand for voice, high-speed data and interactive video services, Telcos and MSOs are expanding and upgrading their networks to accommodate the higher bandwidth necessary to transmit these services. In response, and with future technology in mind, TII has developed a line of broadband NIDs designed to enclose the technology of choice needed to accommodate higher bandwidth signals, whether traditional twisted pair lines, high-bandwidth coaxial cable or fiber optic lines. The Company's broadband NID product line is modular in design and thus facilitates expansion to accommodate additional subscriber access lines. For use in various markets, the NID product line currently consists of enclosures that accommodate from one to twenty-five access lines. The Company's broadband NIDs can also accommodate TII's patented coaxial overvoltage surge protector. NID sales represented approximately 61%, 39% and 32% of the Company's net sales during fiscal 2002, 2001 and 2000, respectively. STATION ELECTRONIC AND OTHER PRODUCTS. The Company designs, produces and markets station electronic products that are typically installed within a NID. One of the Company's station electronic products allows a Telco to remotely test the integrity of its lines, minimizing costly maintenance dispatches. Additionally, as Telcos expand and upgrade their networks with new technologies to provide users with the expanded bandwidth necessary for high-speed transmission of data over traditional Telco lines, TII has developed several DSL station electronic products for this market, including DSL filters and splitters. HOME NETWORKING SYSTEMS. To address the growing demands and complexities of communications' networks in the home, the Company developed the Digital Closet that integrates several of the Company's and other manufacturers' products and technologies into a multi-service residential gateway for the home. The Digital Closet was to be distributed through national retail outlets and independent installers but the Company was not successful in finding the right partners to develop this distribution channel due, in part, to weak economic conditions. Although the Company received several industry awards for the Digital Closet, sales of the Digital Closet did not achieve expected results. As a result, the Company has decided to discontinue the Digital Closet product line. The Company is currently working with a technology partner to develop a lower cost residential gateway system for distribution through the Company's traditional Telco distribution channels. It is anticipated that this new system will be introduced during the first half of fiscal 2003. RESEARCH AND DEVELOPMENT New product opportunities continue to arise in the Company's traditional Telco markets as well as in the OEM and MSO markets. The Company has also begun to evaluate the residential, commercial, industrial and international markets. Currently, the Company's research and development ("R&D") and related marketing efforts are focused on several projects including: o Refining the design of TII's new line of powerline/dataline protectors that are initially planned to be distributed through the Company's traditional Telco distribution channels. o Expanding and enhancing the broadband NID product line to address anticipated future requirements of Telcos. o Further developing DSL and coaxial cable overvoltage surge protectors and station electronics for the growing broadband communications markets, including Telcos and MSOs. 6 The Company's R&D department currently consists of persons skilled and experienced in various technical disciplines, including physics, electrical and mechanical engineering, with specialization in such fields as electronics, metallurgy and plastics. The Company utilizes advanced computer aided design equipment networked with collaborative partners and directly linked to stereo lithographic modeling capability to accelerate time-to-market. The Company's R&D expense was $1.8 million, $2.9 million and $3.1 million during fiscal years 2002, 2001 and 2000, respectively. The decrease in both fiscal years 2002 and 2001 were due to the Company's ability to reduce these expenses through the use of collaborative engineering efforts with its contract manufacturers. (See "Business - Manufacturing") MARKETING AND SALES Prior to selling its products to a customer, the Company must typically undergo a potentially lengthy product qualification process involving approval agencies designated by law, codes and/or customers. Thereafter, the Company continually submits successive generations of products, as well as new products, to its customers for qualification. The Company believes that being a leading supplier of overvoltage surge protectors for over 30 years, its current position as a leading supplier to the Telcos and its strategy for developing products by working closely with its customers provide a strong position from which it can market its current and anticipated new products. The Company sells to its customers primarily through its direct sales force, a network of distributors and sales representatives. TII also sells to competitive NID suppliers, who incorporate the Company's overvoltage surge protectors into their products for resale to Telcos. The following customers accounted for more than 10% of the Company's consolidated net sales during one or more of the years presented below. The loss of, or the disruption of shipments to, a customer that accounts for greater than 10% of the Company's net sales could have a material adverse effect on the Company's results of operations and financial condition. Year Ended ---------------------------------------- June 28, June 29, June 30, 2002 2001 2000 ------------ ------------ ------------ Verizon Corporation (1) 57 % 33 % 25 % Tyco Electronics Corporation (2) 11 % 26 % 19 % Corning Cable Systems LLC (3) 2 % 7 % 12 % Telco Sales, Inc. 6 % 7 % 12 % ------------------- (1) On June 30, 2000, a wholly-owned subsidiary of Bell Atlantic Corporation was merged with and into GTE Corporation resulting in GTE Corporation becoming a wholly-owned subsidiary of Bell Atlantic. The combined company is doing business as Verizon Communications. The Company has made sales to Bell Atlantic and a subsidiary of GTE Corporation. The Company is operating under a supply agreement with Verizon that expires in April 2004 and provides for a possible extension for up to one year from that date. (2) Tyco Electronics Corporation (a successor to Raychem Corporation) is an OEM that purchases overvoltage protection products from the Company for inclusion within their products, including NIDs. The Company has received a letter from Tyco, that also owns a company that is a competitor and customer of the Company, alleging that a product of the Company infringes on one or more of Tyco's patents and that Tyco would be willing to license the patents to the Company. The Company has consulted its outside counsel and believes there is no patent infringement. (3) Corning Cable Systems LLC (formerly Siecor Corporation) is an OEM that supplies NIDs to Telcos and is required by certain Telcos to purchase TII's overvoltage surge protectors for inclusion within their NIDs. 7 Purchases of the Company's products are generally based on individual customer purchase orders for delivery from inventory or within up to thirty days under general supply contracts. The Company, therefore, has no material firm backlog of orders. The Company's international sales were approximately $1.3 million in fiscal 2002 (4% of sales), $1.9 million in fiscal 2001 (5% of sales) and $1.2 million in fiscal 2000 (2% of net sales). International sales have been made primarily to countries in the Caribbean, South and Central America, Canada, the Pacific Rim and Europe. The Company requires foreign sales to be paid for in U.S. currency. International sales are affected by such factors as NAFTA requirements exchange rates, changes in protective tariffs and foreign government import controls. The Company believes international markets continue to offer additional opportunities for its products and continues to seek methods to increase these sales. MANUFACTURING While the Company maintains a quick-response, low-cost assembly and specialty gas tube manufacturing operation at its facility in Puerto Rico, with the re-alignment of the Company's operations, significantly all the high volume production has been outsourced and is now being produced by contract manufacturers within the Pacific Rim, principally Malaysia and China, utilizing, in most cases, the Company's equipment and processes. The Company maintains all final quality assurance approval for all products prior to shipment. The Company's contract manufacturers' facilities are listed by UL and are ISO 9000 registered. The Company continually evaluates its current and potential contract manufacturers to assure the highest quality product, best delivery and most competitive pricing. One of the Company's contract manufacturers is a subsidiary of Tyco Electronics Corporation that also owns a company that is a competitor and customer of the Company. A second contract manufacturer produces a significant portion of the Company's proprietary gas tubes. This company also sells its own gas tubes to competitors of the Company. There are strict non-disclosure agreements with each of these contract manufacturers and through fiscal 2002, the Company's relationship with each of these manufacturers has had a positive impact on the Company's business. RAW MATERIALS The primary components of the Company's products are stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics. The manufacture of the Company's overvoltage surge protectors and station electronic products use commonly available components, printed circuit boards and standard electrical components, such as resistors, diodes and capacitors. While the Company has no orders with suppliers of the components utilized in the manufacture of its products with delivery scheduled later than a year, the Company believes that the raw materials used will continue to be available in sufficient supply at competitive prices. The Company depends on its contract manufacturers to produce the majority of its products for sale to customers. These manufacturers are responsible for the purchase of raw materials, which must meet the Company's specifications. COMPETITION The Company faces significant competition across all of its product lines. Its principal competitors within the Telco market are Corning Cable Systems LLC and Tyco Electronics Corporation, which are customers of the Company, and Bourns Inc. (see "Business - Marketing and Sales"). 8 The Company's gas tube overvoltage surge protectors not only compete with other companies' gas tube overvoltage surge protectors, but also with solid-state overvoltage surge protectors. While solid-state surge protectors react faster to surges, gas tube overvoltage surge protectors have generally remained the overvoltage surge protection technology of choice at the subscribers location by virtually all Telcos because of the gas tube's ability to repeatedly withstand significantly higher energy surges than solid-state surge protectors. This enables gas tubes to survive longer in the field than solid-state surge protectors, reducing loss of service and costs in dispatching a maintenance vehicle to replace the failed surge protector. Further, solid state protectors have significantly higher capacitance than gas tube protectors. Higher capacitance adversely affects transmission on a high bandwidth communication line by distorting the signal. Solid state overvoltage surge protectors are used principally in Telcos' central office switching centers where speed is perceived to be more critical than energy handling capabilities and in regions where there is a low incidence of lightning. The Company believes that, for the foreseeable future, both gas tube and solid state protectors will continue to be used as overvoltage surge protectors within the Telco market. Solid state and gas tube protectors are produced from different raw materials, manufacturing processes and equipment. The Company's reputation among its customers is one of providing swift responses to their needs with creative and effective solutions using products compliant with, and in most cases superior in performance to, the demanding specifications of customers. This approach, combined with the Company's history of continually improving technology, improved operations and effective collaborations, allows the Company to bring product solutions to its customers faster, more effectively and more competitively priced. Principal competitive factors within the Company's Telco markets include price, technology, product features, service, quality, reliability and bringing new products to market on time. Most of the Company's competitors have substantially greater financial, sales, manufacturing and product development resources than the Company. The Company believes that its sales, marketing and research and development departments, its high quality products, its contract manufacturers low cost production capabilities and their engineering resources combined with the Company's overvoltage surge protection technology, enable it to maintain its competitive position. PATENTS AND TRADEMARKS The Company owns or has applied for a number of patents relating to certain of its products or components thereof and owns a number of registered trademarks which are considered to be of value principally in identifying the Company and its products. The Company also has a number of patents covering various of its products. TII, In-Line(R), Totel Failsafe(R) and Angle Driver(R) are among the registered trademarks of the Company. While the Company considers its patents and trademarks to be important, especially in the early stages of product marketing, it believes that, because of technological advances in its industry, its success depends primarily upon its sales, engineering and manufacturing skills and the effective collaborations which have accelerated time-to-market of improved and new products. To maintain its industry position, the Company relies primarily on technical leadership, trade secrets, its proprietary technology and its contract manufacturers low cost production capabilities and their engineering resources. GOVERNMENT REGULATION The Telco industry is subject to regulation in the United States and in other countries. In the United States, the FCC and various state public service or utility commissions regulate most of the Telcos and other communications access providers who use the Company's products. While such regulations do not typically apply directly to the Company, the effects of such regulations, which are under continuous review and subject to change, could adversely affect the Company's customers and, therefore, the Company. 9 The NEC requires that an overvoltage surge 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 adverse effect on its earnings, capital expenditures or competitive position. CERTAIN TAX ATTRIBUTES Prior to July 1, 2000, the Company had elected the application of Section 936 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). Under that section, the Company was 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 (on a non-consolidated basis), provided that in its current and two preceding tax years at least 80% of its gross income and at least 75% of its gross income from the active conduct of a trade or business were from Puerto Rico sources. Principally as a result of the Company's restructurings, the potential for benefits under Section 936 for the Company was substantially reduced. Accordingly, in order to optimize the Company's tax structure, during fiscal 2001 the Company ended its election under Section 936 of the Code. (See Note 4 of Notes to Consolidated Financial Statements for information relating to the Company's Net Operating Loss Carryforwards.) EMPLOYEES On September 6, 2002, the Company had approximately 102 full-time employees, of whom 56 were employed at the Company's Puerto Rico facility. The Company has not experienced any work stoppage as a result of labor difficulties and believes it has satisfactory employee relations. The Company is not a party to any collective bargaining agreements. ITEM 2. PROPERTIES The Company occupies a single story building and a portion of another building, consisting of an aggregate of approximately 14,000 square feet in Copiague, New York under leases, which expire in July 2003. These facilities house the Company's principal research and development activities, marketing, administrative and executive offices. The Company also leases a 20,000 square foot facility in Toa Alta, Puerto Rico, which is approximately 20 miles southwest of San Juan, under an agreement that expires in April 2006. This facility contains certain of the Company's assembly and manufacturing, warehousing, research and development, and quality assurance resources. 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. 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 2002. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq SmallCap Market under the symbol "TIII". The Company's stock currently trades below $1.00 and as such, is not in compliance with that market's minimum bid price requirement. The Company has until mid-February 2003 to re-gain compliance before it faces the potential de-listing of its stock from that market. The following table sets forth, for each quarter during fiscal 2002 and 2001, the high and low sales prices of the Company's common stock on that market: Fiscal 2002 High Low ---------- ---------- First Quarter Ended September 28, 2001 $ 1.11 $ .51 Second Quarter Ended December 28, 2001 .90 .40 Third Quarter Ended March 29, 2002 .85 .38 Fourth Quarter Ended June 28, 2002 .54 .35 Fiscal 2001 High Low ---------- ---------- First Quarter Ended September 29, 2000 $ 3.00 $ 1.63 Second Quarter Ended December 29, 2000 2.00 .94 Third Quarter Ended March 30, 2001 1.91 1.00 Fourth Quarter Ended June 29, 2001 1.50 .93 As of September 9, 2002, the Company had approximately 407 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. 11 ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data has been derived from the Company's consolidated financial statements for the five years ended June 28, 2002 and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the related notes thereto, included elsewhere in this Report: SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
June 28, June 29, June 30, June 25, June 26, 2002(a) 2001(a) 2000 1999 1998 -------------- ------------- ------------- -------------- ------------- Statements of Operations Data(b) ---------------------------------------- Net sales $ 29,801 $ 39,323 $ 49,635 $ 49,284 $ 50,548 Operating loss $ (6,865) $ (7,589) $ (743) $ (9,211) $ (4,542) Net loss attributable to common stockholders $ (6,541) $ (7,540) $ (1,018) $ (6,402) $ (5,142) Basic and diluted net loss attributable to common stockholders, per share $ (0.56) $ (0.65) $ (0.11) $ (0.79) $ (0.68) Balance Sheet Data ---------------------------------------- Working capital $ 8,224 $ 13,910 $ 19,123 $ 16,488 $ 15,994 Total assets $ 18,528 $ 30,762 $ 37,316 $ 41,230 $ 47,564 Debt $ 489 $ 1,463 $ 1,567 $ 3,077 $ 5,729 Redeemable preferred stock $ - $ 1,626 $ 1,626 $ 2,850 $ 4,738 Stockholders' equity $ 14,779 $ 21,224 $ 28,761 $ 24,893 $ 28,973
- ------------------------ (a) See Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of several factors that affected the Company's results of operations in fiscal 2002 and 2001. (b) No cash dividends were declared in any of the reported periods. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Report. BUSINESS TII Network Technologies, Inc., formerly named TII Industries, Inc. ("Company" or "TII"), designs, produces and markets lightning and surge protection products, network interface devices ("NIDs") and station electronic and other products. The Company has been a leading supplier of overvoltage surge protectors to U.S. telephone operating companies ("Telcos") for over 30 years. RESTRUCTURING AND OTHER CHARGES The continuing telecommunications industry-wide slowdown and resulting cutbacks by the service providers in their construction and maintenance budgets, actions taken by the service providers to reduce inventory levels, and a reduction in the number of telephone access lines per subscriber being deployed have had a negative impact on the sales of the Company's traditional products over the last several years. Accordingly, during this period the Company has been restructuring and downsizing its operations to reduce its cost structure to enable it to operate profitably at lower sales levels and position itself for profitable growth with the recovery of the market for its products. Despite previous industry predictions of a 12 turnaround, this slowdown continued through the end of fiscal 2002. As a result, in the fourth quarter of fiscal 2002, the Company took additional actions to reduce costs and improve operating efficiencies. Included in these actions was the further downsizing of the Company's Puerto Rico operations with the objective of creating a quick-response, low-cost assembly and specialty gas tube manufacturing operation and the further expansion of the Company's outsourcing strategy. This action, combined with the consolidation of certain functional departments and management responsibilities into the Company's New York headquarters, resulted in additional workforce reductions and the reevaluation of the Company's property, plant and equipment requirements, whereby the Company retained only those assets consistent with this strategy. Management also reevaluated its home networking strategy and made the decision to discontinue the Digital Closet Product line, which, despite receiving several industry awards, did not achieve expected results. Further, as a result of the continuing telecommunications industry-wide slowdown, the Company also reevaluated its inventories. As a result, the Company recorded charges in the fourth quarter of fiscal 2002 of $4.1 million that consisted of $1.9 million for the write-down of inventories determined to be excess or obsolete, $1.7 million for the impairment of long-lived assets and $0.5 million for severance and other costs. In the third quarter of fiscal 2001, as part of management's continuing strategy to improve profit margins by finding more cost-effective alternative 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 the 2001 plan was 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 workforce and production facility reductions, the write-down of certain inventories and manufacturing machinery, equipment and leasehold improvements related to manufacturing activities conducted in Puerto Rico that were outsourced or were used for products that 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 of approximately $6.1 million, including an inventory write-down of approximately $2.7 million (net of a reversal of a remaining allowance of $96,000 from a fiscal 1999 re-alignment charge), $2.9 million for the write-down of net fixed assets, a charge of $300,000 for employee termination benefits for a workforce reduction of 70 employees and $300,000 for a lease commitment for excess manufacturing space. (See Note 2 of Notes to Consolidated Financial Statements.) CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS TII's consolidated financial statements have been prepared in accordance with accounting principles that are generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments. The Company believes that the issues associated with determining the carrying value of the Company's inventories and the carrying value of its long-lived assets are the most critical areas where management's judgments and estimates affect the Company's reported results. Inventories are required to be stated at the lower of cost or market. In establishing appropriate inventory reserves management assesses the ultimate recoverability of the inventory considering such issues as technological advancements in products as required by the Company's customers, changes within the marketplace and general economic conditions. While the Company believes its estimates are reasonable, misinterpretation of prevailing conditions could result in actual results varying from reported results that are based on the Company's estimates, assumptions and judgments as of the balance sheet date. The Company reviews long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may 13 not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value. FISCAL YEARS ENDED JUNE 28, 2002, JUNE 29, 2001 AND JUNE 30, 2000 Net sales for fiscal 2002 decreased $9.5 million or 24.2% to $29.8 million from $39.3 million in fiscal 2001. The decrease was primarily due to the continuing telecommunications industry-wide slowdown, cutbacks by telecommunications service providers in their construction and maintenance budgets, actions taken by the service providers to reduce inventory levels and a reduction in the number of telephone access lines per subscriber being deployed. Net sales for fiscal 2001 decreased $10.3 million or 20.8% to $39.3 million from $49.6 million in fiscal 2000. The decrease was principally due to the telecommunications industry-wide slowdown and actions taken by customers to reduce inventory levels. Also contributing to the lower revenue level in fiscal 2001 was the loss of sales as a result of the divestiture of the Company's metal stamping business in fiscal 2000. Additionally, the Company experienced reduced orders early in fiscal 2001 from a significant customer as a result of technical problems the customer had with its product that was unrelated to the Company's components and which has since been resolved. Gross profit in fiscal 2002 was $5.3 million, or 17.8% of sales ($7.2 million, or 24.2% of sales, excluding a $1.9 million inventory write-down for excess and obsolete inventory), compared to $6.5 million, or 16.5% of sales ($9.2 million, or 23.3% of sales, excluding the $2.7 million inventory write-down as a result of the operations re-alignment in fiscal 2001). The improved gross profit margins, are principally due to the success of the Company's continuing cost reduction efforts, including the 2001 operations re-alignment, its outsourcing strategy and an increased level of sales of technologically advanced, higher margin products. Gross profit in fiscal 2001 was $9.2 million, or 23.3% of sales, excluding the $2.7 million inventory write-down as a result of the operations re-alignment, compared to $9.5 million, or 19.1% of sales, in fiscal 2000. The improved gross profit margin, excluding the inventory write-down, is principally due to the success of the Company's fiscal 1999 operations re-alignment and the introduction of technically advanced, higher margin versions of certain mature products. Selling, general and administrative expenses in fiscal 2002 increased $906,000, or 11.6%, to $8.7 million, from $7.8 million in fiscal 2001. Selling, general and administrative expenses for fiscal 2001 increased $706,000, or 10.0%, to $7.8 million from $7.1 million in fiscal 2000. The increase in both years was principally due to increased marketing expenses related to the introduction and marketing of the Company's Digital Closet product line, which was discontinued in the fourth quarter of fiscal 2002, and, in fiscal 2002, $500,000 of severance and other charges. Research and development expenses for fiscal 2002 decreased by $1.1 million, or 38.9%, to $1.8 million from $2.9 million in fiscal 2001. Research and development expenses for fiscal 2001 decreased by $254,000, or 8.1%, to $2.9 million from $3.1 million in fiscal 2000. The decreases in both fiscal years 2002 and 2001 were due to the Company's ability to reduce these expenses through the use of collaborative engineering efforts with its contract manufacturers. The Company recorded a charge of $1.7 million in the fourth quarter of fiscal 2002 for the impairment of long-lived assets it no longer used. See "Restructuring and Other Charges," above, for information concerning this charge and the charge for fiscal 2001 operations re-alignment costs, net of reversals. Interest expense in fiscal 2002 decreased $30,000 to $70,000 due to decreased borrowings under the Company's credit facilities and lower prevailing interest rates. Interest expense in fiscal 2001 decreased 14 $114,000 to $100,000 due to decreased borrowings under the Company's credit facilities and a reduction in interest rates. Interest income in fiscal 2002 decreased $139,000 to $8,000 from $147,000 in fiscal 2001 and by $57,000 to $147,000 from $204,000 in fiscal 2000. The decline in both years was due primarily to lower comparable average cash and marketable securities balances held by the Company during the respective fiscal years. In the fourth quarter of fiscal 2000, the holder of the Company's $750,000 unsecured subordinated note converted that note into 428,571 shares of Common Stock at a reduced conversion price. This transaction resulted in a charge of approximately $332,000 that was recorded in other income (expense). INCOME TAXES Due to the Company's pre-tax losses, there was no tax provision for the three years ended June 28, 2002. Prior to July 1, 2000, the Company had elected the application of Section 936 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). Under that section, the Company was 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 (on a non-consolidated basis), provided that in its current and two preceding tax years at least 80% of its gross income and at least 75% of its gross income from the active conduct of a trade or business were from Puerto Rico sources. Principally as a result of the Company's restructurings, the potential for benefits under Section 936 for the Company was substantially reduced. Accordingly, in order to optimize the Company's tax structure, during fiscal 2001 the Company ended its election under Section 936 of the Code. (See Note 4 of Notes to Consolidated Financial Statements for information relating to the Company's net operating loss carryforwards.) 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 the Company's operations during any of the reported periods. LIQUIDITY AND CAPITAL RESOURCES FISCAL 2002 COMPARED TO FISCAL 2001 ----------------------------------- The Company's cash and cash equivalents balance increased to $868,000 at the end of fiscal 2002 from $233,000 at the end of fiscal 2001. The increase resulted from net cash flows from operations of $2.9 million partially offset by cash outflows from investing activities of $136,000 and financing activities of $2.2 million. Working capital decreased to $8.2 million at the end of fiscal 2002 from $13.9 million at the end of fiscal 2001. This decrease was due primarily to a reduction in accounts receivable of $3.7 million and inventories of $6.4 million offset, in part, by an increase in cash of $635,000, a reduction in short-term borrowings of $721,000 and a reduction of $3.1 million in accounts payable and accrued liabilities. During fiscal 2002, the Company generated $2.9 million of net cash from operating activities, compared to net cash used in operating activities in fiscal 2001 and 2000 of $2.1 million and $5.4 million, respectively. The cash generated from operating activities in fiscal 2002 was produced from cash provided 15 by changes in operating assets and liabilities ($4.8 million) exceeding the Company's net cash loss ($1.9 million). The cash produced by changes in operating assets and liabilities resulted from a decrease of $3.7 million in accounts receivable from the prior year balance to $3.5 million due to improved collections and lower sales and inventory decreases of $4.5 million primarily due to the fulfillment of sales orders with existing inventory and improved inventory management practices, partially offset by a decrease in accounts payable and accrued expenses due to the lower sales volume and cost reduction efforts implemented during the year. The Company used cash to fund a net loss from operations of $1.8 million, excluding non-cash charges of $1.9 million for inventory losses, $1.7 million for the impairment of long-lived assets, and $1.4 million for depreciation and amortization. Net cash used in investing activities was $136,000 in fiscal 2002 compared to $2.0 million and $591,000 of net cash used in fiscal 2001. The comparative reduction in net cash used for investing activities during fiscal 2002 was principally the result of the purchases of capital equipment in fiscal 2001 for new gas tube manufacturing lines at the outsourcing facilities. Net cash used in financing activities was $2.2 million in fiscal 2002 compared to $102,000 in fiscal 2001. The net cash used in financing activities in fiscal 2002 resulted from the repurchase of the Company's Series C Convertible Redeemable Preferred Stock with a face value of $1.6 million for cash of $1.2 million and the issuance of a warrant, the repayment of borrowings under the Company's revolving credit facility of $721,000 and payments of long-term debt and capital leases of $253,000. FISCAL 2001 COMPARED TO FISCAL 2000 ----------------------------------- The Company's cash and cash equivalents balance decreased to $233,000 at the end of fiscal 2001 from $4.4 million at the end of fiscal 2000. The decrease resulted from net cash outflows from operations of $2.1 million, investing activities of $2.0 million and financing activities of $102,000. Working capital decreased to $13.9 million at the end of fiscal 2001 from $19.1 million at the end of fiscal 2000 due to the effects of the re-alignment charge recorded in the fiscal 2001 third quarter, the reduction in cash and the increase in accounts payable and borrowings under the revolving credit facility. Operations used $2.1 million of cash during fiscal 2001, $3.9 million was used to fund a net increase in inventories, resulting primarily from the industry-wide slowdown in capital spending and the actions taken to reduce inventory levels by telecommunications service providers. This increase was partially offset by, among other items, an increase in accounts payable and accrued liabilities of $952,000. Additionally, the Company incurred a net loss of $7.5 million that was offset by non-cash charges including $6.1 million for the operations re-alignment charge, which includes a write-down of inventories of $2.7 million, and $1.7 million for depreciation and amortization During fiscal 2001, investing activities used cash of $2.0 million for capital expenditures and financing activities used cash of $105,000 to repay debt and obligations under capital leases partially offset by $3,000 received from the exercise of stock options. CAPITAL RESOURCES ----------------- The Company has a credit facility ("Credit Facility") that consists 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. As a result of this limitation, the maximum borrowings available to the Company was $5.0 million as of June 28, 2002. Subject to extension in certain instances, the scheduled maturity date of revolving credit loans was April 30, 2003, while the term loan is to be repaid in equal installments through March 31, 2003 with a final payment 16 of $175,000, subject to mandatory repayments from asset disposition proceeds. As of June 28, 2002, $455,000 was outstanding under the term loan. Due to the repurchase of preferred stock and the loss incurred in the fourth quarter, the Company was not in compliance with its tangible net worth covenant at June 28, 2002. On September 24, 2002 the lender amended the loan agreement so that the Company was in compliance with the revised covenant and also agreed to an extension of the credit facility until September, 2003. 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 current operational and capital needs. If the slowdown in the telecommunications industry continues or worsens for an extended period of time, or if the Company cannot extend or secure a new Credit Facility under similar terms, the Company may need to seek additional capital to support its operations. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table sets forth a schedule of payments required under the Company's contractual obligations and includes the maximum potential payments that may be required under the Company's other commercial commitments:
Due by Period -------------------------------------------------------------- Contractual Obligations Total Less Than After 1 Year 1 - 3 years 4 - 5 years 5 years Term loan $ 455,000 $ 455,000 $ - $ - $ - Capital lease obligations 13,000 3,000 10,000 - - Operating leases 468,000 226,000 242,000 - - Other long-term obligations 21,000 18,000 3,000 - - ------------------------------------------------------------------------------ Total contractual cash obligations $ 957,000 $ 702,000 $ 255,000 $ - $ - ==============================================================================
The Company has no commitments for capital expenditures, but expects to purchase new equipment and incur leasehold improvements in the normal course of business, subject to the maximum amount permitted under its revolving credit facility. OFF-BALANCE SHEET FINANCING Except for the operating leases, the Company has no off-balance sheet contractual arrangements. TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES The Company entered into an agreement with David Garwood, a member of the Board of Directors, to provide strategic planning consulting services from April 1, 2002 to March 31, 2003 at $10,000 per quarter. Since fiscal year 1982, the Company has leased equipment from PRC Leasing, Inc., a corporation owned by Alfred J. Roach, the Chairman of the Board of Directors of the Company. This lease was amended on June 5, 2002 to reduce the annual rental to $50,000 per annum. The rental paid prior to the amendment was $139,000 per annum. The Company leases two houses near the Company's Copiague, New York facility from Timothy J. Roach, President and Chief Executive Officer of the Company, at an aggregate annual rental of $31,000. The Company also bears insurance and maintenance costs which approximate $10,000 per year. The houses 17 are used by Alfred J. Roach and other executives, directors and employees when visiting the Company's New York facility. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 may not be amortized. Amortization of existing goodwill will cease upon implementation of SFAS No. 142. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The Company does not have any recorded goodwill or other intangible assets associated with business combinations. Therefore, the implementation of SFAS No. 142, which is effective at the beginning of fiscal 2003 for the Company, is not expected to have a material impact on the Company's consolidated statement of operations or consolidated balance sheet. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," addresses financial accounting and reporting for the impairment or disposal of long-lived assets. These new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30, "Reporting the Results of Operations." This Statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This Statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is required to adopt SFAS No. 144 effective at the beginning of fiscal 2003. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company's consolidated financial statements. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in July 2002. SFAS No. 146, which is effective prospectively for exit or disposal activities initiated after December 31, 2002, applies to costs associated with an exit activity, including restructurings, or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs be recorded as an operating expense when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal by itself will not meet the requirement for recognizing a liability and the related expense under SFAS No. 146. SFAS No.146 grandfathers the accounting for liabilities that were previously recorded under EITF Issue 94-3. Therefore, the accounting for the costs associated with the Company's exit and disposal activities during the three years ended June 28, 2002 will be unaffected upon adoption of SFAS No. 146. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 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. 18 The Company requires foreign sales to be paid for in U.S. currency and is billed by its contract manufacturers in U.S. Currency. Historically, the Company has not purchased or entered into interest rate swaps or future, forward, option or other instruments designed to hedge against changes in interest rates, the price of materials it purchases or the value of foreign currencies. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders TII Network Technologies, Inc.: We have audited the accompanying consolidated balance sheet of TII Network Technologies, Inc. and Subsidiary as of June 28, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule for the year ended June 28, 2002. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. The consolidated balance sheet of TII Network Technologies, Inc. and Subsidiary as of June 29, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows and financial statement schedules for each of the two years in the period ended June 29, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and financial statement schedules in their report dated September 26, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of TII Network Technologies, Inc. and Subsidiary as of June 28, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material aspects, the information set forth therein. KPMG LLP Melville, New York September 12, 2002, except for note 3, which is as of September 24, 2002 20 THE FOLLOWING IS A COPY OF THE LATEST SIGNED AND DATED ACCOUNTANT'S REPORT ISSUED BY ARTHUR ANDERSEN LLP COVERING, AMONG OTHER THINGS, THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 29, 2001 AND EACH OF THE TWO YEARS IN THE PERIOD ENDED JUNE 29, 2001. ARTHUR ANDERSEN LLP HAS NOT REISSUED THAT ACCOUNTANT'S REPORT. THE COMPANY'S NAME AT THE TIME OF THAT ACCOUNTANT'S REPORT WAS TII INDUSTRIES, INC. To TII Industries, Inc.: We have audited the accompanying consolidated balance sheets of TII Industries, Inc. and subsidiaries as of June 29, 2001 and June 30, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 29, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TII Industries, Inc. and subsidiaries as of June 29, 2001 and June 30, 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 2001, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP San Juan, Puerto Rico September 26, 2001 Stamp No. 1759707 of the Puerto Rico Society of Certified Public Accountants has been affixed to the original copy of this report. 21 TII NETWORK TECHNOLOGIES INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 28, June 29, 2002 2001 -------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 868 $ 233 Accounts receivable, net 3,518 7,190 Inventories 7,362 13,800 Other current assets 212 109 ------------- ----------- Total current assets 11,960 21,332 ------------- ----------- Property, plant and equipment, net 5,846 8,398 Other assets 722 1,032 ------------- ----------- Total Assets $ 18,528 $ 30,762 ============= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 476 $ 252 Borrowings under revolving credit facility - 721 Accounts payable and accrued liabilities 3,062 6,112 Accrued re-alignment expenses 198 337 ------------- ----------- Total current liabilities 3,736 7,422 ------------- ----------- Long-term debt 13 490 ------------- ----------- Series C convertible redeemable preferred stock, none and 1,626 shares outstanding at June 28, 2002 and June 29, 2001, respectively; liquidation preference of $1,150 per share - 1,626 ------------- ----------- Commitments and contingencies Stockholders' Equity: Preferred stock, par value $1.00 per share; 1,000,000 shares authorized; Series C, none and 1,626 shares outstanding at June 28, 2002 and June 29, 2001, respectively, and 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 117 117 Additional paid-in capital 37,867 37,491 Accumulated deficit (22,924) (16,103) ------------- ----------- 15,060 21,505 Less: treasury stock, at cost; 17,637 common shares (281) (281) ------------- ----------- Total stockholders' equity 14,779 21,224 ------------- ----------- Total Liabilities and Stockholders' Equity $ 18,528 $ 30,762 ============= ===========
See notes to consolidated financial statements 22 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Fiscal Year Ended ----------------------------------------------------------- June 28, June 29, June 30, 2002 2001 2000 ----------------- ----------------- ----------------- Net sales $ 29,801 $ 39,323 $ 49,635 Cost of sales (includes inventory write-downs of $1,915 and $2,700 in fiscal 2002 and 2001, respectively) 24,493 32,845 40,166 ----------------- ----------------- ----------------- Gross profit 5,308 6,478 9,469 ----------------- ----------------- ----------------- Operating expenses: Selling, general and administrative 8,702 7,796 7,087 Research and development 1,755 2,871 3,125 Impairment of long-lived assets 1,716 - - Operations re-alignment cost, net of reversals - 3,400 - ----------------- ----------------- ----------------- Total operating expenses 12,173 14,067 10,212 ----------------- ----------------- ----------------- Operating loss (6,865) (7,589) (743) Interest expense (70) (100) (214) Interest income 8 147 204 Other income (expense) 106 2 (265) ----------------- ----------------- ----------------- Net loss $ (6,821) $ (7,540) $ (1,018) Excess of carrying value over consideration to repurchase preferred stock 280 - - ----------------- ----------------- ----------------- Net loss attributable to common stockholders $ (6,541) $ (7,540) $ (1,018) ================= ================= ================= Basic and diluted net loss attributable to common stockholders per share $ (0.56) $ (0.65) $ (0.11) ================= ================= ================= Basic and diluted weighted average shares outstanding 11,682 11,682 9,198 ================= ================= =================
See notes to consolidated financial statements 23 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
Additional Total Common Stock Common Stock Paid-In Accumulated Treasury Stockholders' Shares Amount Capital Deficit Stock Equity ------------ ----------- ----------- ------------ ------------ ------------ Balance June 25, 1999 8,832,898 $ 89 $ 32,630 $ (7,545) $ (281) $ 24,893 Exercise of stock options 34,200 - 53 - - 53 Conversion of Series C preferred stock 584,815 6 1,218 - - 1,224 Sale of common stock 1,800,000 18 2,509 - - 2,527 Conversion of debt 428,571 4 1,078 - - 1,082 Net loss for the year - - - (1,018) - (1,018) ------------ ----------- ----------- ------------ ------------ ------------ Balance June 30, 2000 11,680,484 117 37,488 (8,563) (281) 28,761 Exercise of stock options 1,800 - 3 - - 3 Net loss for the year - - - (7,540) - (7,540) ------------ ----------- ----------- ------------ ------------ ------------ Balance June 29, 2001 11,682,284 117 37,491 (16,103) (281) 21,224 Repurchase of Series C preferred stock - - 376 - - 376 Net loss for the year - - - (6,821) - (6,821) ------------ ----------- ----------- ------------ ------------ ------------ Balance June 28, 2002 11,682,284 $ 117 $ 37,867 $ (22,924) $ (281) $ 14,779 ============ =========== =========== ============ ============ ============
See notes to consolidated financial statements 24 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended ---------------------------------------------- June 28, June 29, June 30, 2002 2001 2000 ------------ ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (6,821) $ (7,540) $ (1,018) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,402 1,709 1,659 Provision for inventory losses 1,915 2,898 396 Induced debt conversion cost - - 332 Operations re-alignment - 6,100 (3) Impairment of long-lived assets 1,716 - - Gain on sale of condominium (79) - - Changes in operating assets and liabilities: Accounts receivable 3,672 56 (1,657) Inventories 4,523 (6,828) (70) Other assets (144) 194 (5) Accounts payable and accrued liabilities (3,100) 952 (3,538) Accrued re-alignment expenses (139) 135 (1,507) ------------ ------------- ------------- Net cash provided by (used in) operating activities 2,945 (2,126) (5,411) ------------ ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net of proceeds from dispositions (266) (1,985) (1,138) Net proceeds from sale of condominium 130 - - Net proceeds from sale of subsidiary's assets - - 547 ------------ ------------- ------------- Net cash used in investing activities (136) (1,985) (591) ------------ ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options - 3 53 Repurchase of Series C preferred stock (1,200) - - Net repayments of borrowings under revolving credit facility (721) - - Repayment of debt and obligations under capital leases (253) (105) (782) Net proceeds from sale of common stock - - 2,527 ------------ ------------- ------------- Net cash (used in) provided by financing activities (2,174) (102) 1,798 ------------ ------------- ------------- Net increase (decrease) in cash and cash equivalents 635 (4,213) (4,204) Cash and cash equivalents, at beginning of year 233 4,446 8,650 ------------ ------------- ------------- Cash and cash equivalents, at end of year $ 868 $ 233 $ 4,446 ============ ============= ============= Non-cash investing and financing activities: Issuance of warrants as partial consideration for repurchase of Series C preferred stock $ 96 $ - $ - ============ ============= ============= Cash paid during the year for interest $ 71 $ 87 $ 215 ============ ============= =============
See notes to consolidated financial statements 25 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: TII Network Technologies, Inc. and Subsidiary (the "Company") design, produce and market lightning and surge protection products, network interface devices ("NIDs") and station electronic and other products principally to the Telco industry. FISCAL YEAR: The Company reports on a 52-53 week fiscal year ending on the last Friday in June. Fiscal 2002 and fiscal 2001 contained 52 weeks, while fiscal 2000 contained 53 weeks. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of TII Network Technologies, Inc. and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates. INVENTORIES: Inventories (materials, direct labor and applicable overhead expenses) are stated at the lower of cost or market, on the first-in, first-out basis. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at cost and depreciated on the straight-line method over the estimated useful life of the related asset (generally between 5 and 10 years). Leasehold improvements are amortized on a straight-line basis over the term of the respective leases or over their estimated useful lives, whichever is shorter. REVENUE RECOGNITION: Sales are recorded as products are shipped and title passes to customers. OTHER ASSETS: Included in other assets are $279,000 and $482,000 of patent costs deemed recoverable by the Company, which are amortized on a straight-line basis over the lesser of the life of the related product or the patent and the cash surrender value of key-man life insurance of approximately $145,000 and $91,000 at June 28, 2002 and June 29, 2001, respectively. LONG-LIVED ASSETS: The Company reviews long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The telecommunications industry-wide downturn continued through the end of fiscal 2002, despite previous industry predictions of a turnaround, and as a result, in the fourth quarter of fiscal 2002 the Company took additional actions to reduce costs and improve operating efficiencies. Included in these actions was the further downsizing of the Company's Puerto Rico operations with the objective of creating a quick-response, low-cost assembly and specialty gas tube manufacturing operation and the further expansion of the Company's outsourcing strategy. This action, combined with the consolidation of certain functional departments and management responsibilities into the Company's New York headquarters, resulted in additional workforce reductions and the reevaluation of the Company's property, plant and equipment, 26 whereby the Company retained only those assets consistent with this strategy. Management also reevaluated its home networking strategy and discontinued the Digital Closet product line. As a result, the Company performed a review of the recoverability of its property, plant and equipment and recorded an impairment charge of $1,716,000, primarily for machinery and equipment, molds and computer equipment that will no longer be used. INCOME TAXES: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A deferred tax asset has not been recorded as of June 28, 2002 and June 29, 2001 due to uncertainty of its recoverability in future periods. NET EARNINGS (LOSS) PER COMMON SHARE: Basic earnings (loss) per share are computed based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of common shares outstanding increased by dilutive common stock options and warrants and the effect of assuming the conversion of outstanding convertible preferred stock, if dilutive. Since the Company incurred losses in all reported periods, all securities convertible into, or exercisable for, the Company's common stock were anti-dilutive. Therefore, diluted loss per share equals basic loss per share. The following table summarizes outstanding securities that were convertible into, or exercisable for, the Company's common stock:
June 28, 2002 June 29, 2001 June 30, 2000 ---------------------------- ---------------------------- -------------------------- Exercise Exercise Exercise Quantity Price Quantity Price Quantity Price ------------- ------------ ------------- ------------- ------------ ------------ Stock option plans (a) 3,420,341 $1.79 3,263,241 $1.90 2,757,941 $ 2.08 Investor Option 100,000 2.50 100,000 2.50 100,000 2.50 Warrants - - - - 200,000 7.03 Warrants - - 10,000 6.15 10,000 6.15 Warrants (b) 2,214,000 2.79 2,214,000 2.79 2,214,000 2.79 Unit Purchase Options (b) 414,000 2.69 414,000 2.69 414,000 2.69 Warrant (c) 750,000 1.00 - - - - Convertible preferred stock (d) - - 1,578,641 - 850,474 - ------------- ------------- ------------ 6,898,341 7,579,882 6,546,415 ============= ============= ============
- ----------------------------------- (a) Weighted average exercise price of outstanding stock options at year-end. (b) In June 2000, the Company completed a private placement of 1,800,000 units, each unit consisting of one share of common stock and one warrant to purchase one share of common stock, at $2.79 per share. In connection with this private placement, the Company issued to certain employees of the placement agent 414,000 Unit Purchase Options ("UPO") with an exercise price of $2.69 per UPO. Each UPO consists of one share of common stock and one warrant to purchase one share of common stock at $2.79 per share. (c) This warrant was issued in June 2002 as partial consideration to repurchase all outstanding convertible preferred stock. (d) All outstanding Series C convertible redeemable preferred stock was repurchased in June 2002. For fiscal 2001 and 2000, assumes conversion of the Series C preferred shares at 95% of the average of the closing bid prices of the Company's common stock during the ten consecutive trading days immediately preceding the applicable fiscal year end. CASH EQUIVALENTS: All highly liquid investments with an original maturity at the time of purchase of three months or less are considered cash equivalents. 27 FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash equivalents, receivables and other current assets, accounts payable, accrued liabilities and accrued realignment expenses approximate fair value because of the short-term nature of these instruments. The carrying amount of the Company's term loan and borrowings under the revolving credit facility approximates fair value because these instruments have a prime or LIBOR based interest rate that is adjusted for market rate fluctuations. STOCK BASED COMPENSATION: The Company applies the intrinsic value method in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for options granted to employees or directors with an exercise price at least equal to the market value of the underlying common stock at the date of grant. COMPREHENSIVE LOSS: Other comprehensive loss was immaterial for the two years ended June 29, 2001 and comprehensive loss equaled net loss for the year ended June 28, 2002. SEGMENT INFORMATION: The Company utilizes the "management" approach prescribed in Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," to assess its segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The Company has evaluated the provisions of SFAS No. 131 and, based on the management approach, has determined that its operating decisions and performance measures are geared towards one segment. The Company however, has disclosed the geographic and major customers' requirements of SFAS No. 131. See Note 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 may not be amortized. Amortization of existing goodwill will cease upon implementation of SFAS No. 142. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The Company does not have any recorded goodwill or other intangible assets associated with business combinations. Therefore, the implementation of SFAS No. 142, which is effective at the beginning of fiscal 2003 for the Company, is not expected to have a material impact on the Company's consolidated statement of operations or consolidated balance sheet. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," addresses financial accounting and reporting for the impairment or disposal of long-lived assets. These new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30, "Reporting the Results of Operations." This Statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This Statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is required to adopt SFAS No. 144 effective at the beginning of fiscal 2003. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company's consolidated financial statements. 28 SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in July 2002. SFAS No. 146, which is effective prospectively for exit or disposal activities initiated after December 31, 2002, applies to costs associated with an exit activity, including restructurings, or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 requires that exit or disposal costs be recorded as an operating expense when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal by itself will not meet the requirement for recognizing a liability and the related expense under SFAS No. 146. SFAS No.146 grandfathers the accounting for liabilities that were previously recorded under EITF Issue 94-3. Therefore, the accounting for the costs associated with the Company's exit and disposal activities during the three years ended June 28, 2002 will be unaffected upon adoption of SFAS No. 146. NOTE 2 - OPERATIONS RE-ALIGNMENT In the third quarter of fiscal 2001, as part of management's continuing strategy to improve profit margins by finding more cost-effective alternative 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 the 2001 plan was 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 workforce and production facility reductions, the write-down of certain inventories and manufacturing machinery, equipment and leasehold improvements related to manufacturing activities conducted in Puerto Rico that were outsourced or products that 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 of approximately $6.1 million, including an inventory write-down of approximately $2.7 million (net of a reversal of a remaining allowance of $96,000 from a fiscal 1999 re-alignment charge), $2.9 million for the write-down of net fixed assets, a charge of $300,000 for employee termination benefits for a workforce reduction of 70 employees and $300,000 for a lease commitment for excess manufacturing space. The corresponding cash activity for the fiscal years ended June 29, 2001 and June 28, 2002 and the remaining allowance balances which are reflected in "accrued re-alignment expenses" in the accompanying consolidated balance sheets, are as follows:
Fixed Employee Excess Asset Inventory Termination Manufacturing Write-downs Write-down Benefits Space Total ------------- -------------- ----------------- -------------------- ---------------- Fiscal 2001 restructuring costs and asset write-downs $ 2,900,000 $ 2,700,000 $ 300,000 $ 300,000 $ 6,200,000 Cash payments during fiscal 2001 - - (224,000) (39,000) (263,000) Non-cash activity (2,900,000) (2,700,000) - - (5,600,000) ------------- -------------- ----------------- -------------------- ---------------- Balance June 29, 2001 $ - $ - $ 76,000 $ 261,000 $ 337,000 Cash payments during fiscal 2002 - - (76,000) (63,000) (139,000) ------------- -------------- ----------------- -------------------- ---------------- Balance June 28, 2002 $ - $ - $ - $ 198,000 $ 198,000 ============= ============== ================= ==================== ================
As of June 28, 2002 there were accrued severance costs of $283,000 that were principally paid during the first two months of fiscal 2003. 29 NOTE 3 - LONG-TERM DEBT AND BORROWINGS UNDER REVOLVING CREDIT FACILITY: The composition of long-term debt is as follows:
June 28, June 29, 2002 2001 ------------------ ---------------- Term loan $ 455,000 $ 683,000 Obligations under capital leases, payable through 2004, bearing interest from 11.0% to 12.0%, secured by assets with a net book value of $31,000 13,000 20,000 Installment notes payable through 2004, bearing interest from 8.0% to 9.5% 21,000 39,000 ------------------ ---------------- 489,000 742,000 Current portion (476,000) (252,000) ------------------ ---------------- $ 13,000 $ 490,000 ================== ================
The Company has a credit facility that consists of a $6.0 million revolving line of credit and a term loan. The revolving line of credit 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 eligible accounts receivable and 50% of eligible inventory, subject to certain reserves. As a result of such limitations, the maximum borrowings available to the Company was limited to $5.0 million as of June 28, 2002. Subject to extension in certain instances, the scheduled maturity of revolving credit loans is September 30, 2003, while the term loan is to be repaid in equal installments through March 31, 2003 with a final payment of $175,000, subject to mandatory repayments from certain asset disposition proceeds. As of June 28, 2002, $455,000 was outstanding under the term loan. As of June 28, 2002 the Company had no borrowings under the revolving line of credit and at June 29, 2001 there were $721,000 of such borrowings outstanding. Outstanding revolving line of credit loans bear interest at a rate per annum based on: (a) a floating rate equal to the greater of the bank's prime rate, or 0.5% per annum in excess of a specified weighted average of rates on overnight Federal funds transactions plus, in either case, 0.25% per annum; (b) to the extent selected by the Company, a fixed rate based upon the bank's LIBOR rate for specified loan periods plus 2.50% per annum; or (c) to the extent selected by the Company, a rate equal to the daily average of a published "one-month" LIBOR rate plus 2.50% per annum. Outstanding term loans bear interest based at the same rates per annum as revolving line of credit loans plus 0.25% per annum (5.25% at June 28, 2002 and 7.25% at June 29, 2001). The loan agreements also require the payment by the Company of specified fees. The credit facility is secured by a lien and security interest against substantially all of the assets of the Company and its subsidiary, regardless of whether comprising a part of the borrowing base, and a pledge of all the subsidiary's capital stock. The loan agreements, as amended, require, among other things, that: (a) the Company maintain a consolidated tangible net worth of at least $14.0 million at June 28, 2002 (with such minimum amount to be increased each fiscal quarter thereafter by an amount equal to 50% of the Company's consolidated net income for the preceding quarter); (b) capital expenditures not to exceed $5.8 million for any fiscal year; and (c) no new operating leases be entered into if, after, giving effect thereto, the aggregate annual rental payments for all leased property (excluding capital leases) would exceed $750,000 in any one fiscal year. The loan agreements also impose limitations on, among other things, dividends on and redemptions (and repurchases) of equity securities and the incurrence of additional indebtedness. Due to the repurchase of Series C Convertible Redeemable preferred stock and the loss incurred in the fourth quarter, the Company was not in compliance with its tangible net worth covenant at June 28, 2002. On September 24, 2002 the lender amended the loan agreement so that the Company was in compliance with the revised covenant and also agreed to an extension of the credit facility until September, 2003. 30 Future payments for long-term debt are as follows: Fiscal Year Amount ---------------------------------------- ----------------- 2003 $ 476,000 2004 13,000 ----------------- 489,000 Less: current portion (476,000) ----------------- $ 13,000 ================= In the fourth quarter of fiscal 2000, the holder of the Company's $750,000 unsecured subordinated note converted that note into 428,571 shares of common stock at a reduced conversion price. This transaction resulted in a charge of approximately $332,000 that was recorded in other income (expense). NOTE 4 - INCOME TAXES The tax effects of temporary differences and net operating loss and credit carryforwards that give rise to the net deferred tax assets are as follows: June 28, 2002 ------------- Inventory $ 1,829,000 Accounts receivable 35,000 Property, plant and equipment depreciation and impairment charges 4,155,000 Accrued expenses 271,000 Federal net operating loss carryforwards 10,338,000 Business credit carryforwards 574,000 ------------- 17,202,000 Less: valuation allowance (17,202,000) ------------- $ - ============= At June 28, 2002, for U.S. Federal income tax purposes, the Company had net operating loss carryforwards of approximately $29,538,000, which expire from 2008 to 2022. At June 28, 2002, the Company has provided a valuation allowance against all its net deferred tax assets due to the uncertainty of realizing any benefit therefrom in the future. Prior to July 1, 2000, the Company had elected the application of Section 936 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). Under that section, the Company was 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 (on a non-consolidated basis), provided that in its current and two preceding tax years at least 80% of its gross income and at least 75% of its gross income from the active conduct of a trade or business were from Puerto Rico sources. Principally as a result of the Company's restructurings, the potential for benefits under Section 936 for the Company was substantially reduced. Accordingly, in order to optimize the Company's tax structure, during fiscal 2001 the Company ended its election under Section 936 of the Code. NOTE 5 - COMMON STOCK, STOCK OPTIONS AND WARRANTS: STOCK OPTION PLANS: The Company's 1995 Stock Option Plan and 1998 Stock Option Plan permit each of the Board of Directors and the Compensation Committee of the Board of Directors to grant, until September 2005 and October 2008, respectively, options to employees (including officers and directors who 31 are employees) and consultants covering 1,250,000 and 2,500,000 shares, respectively, of common stock. The Board of Directors or the Compensation Committee determines vesting periods, option terms, which may not exceed 10 years, and exercise prices. At June 28, 2002, options to purchase 1,194,500 and 1,833,841 shares were outstanding under the 1995 Plan and 1998 Plan, respectively. Additionally, 47,000 options are outstanding under the Company's 1986 Stock Option Plan, although no further options may be granted under that plan. The 1994 Non-Employee Director Stock Option Plan covers an aggregate of 700,000 shares of common stock (with 345,000 options outstanding as of June 28, 2002) and provides that (i) non-employee directors are granted options to purchase 25,000 shares of common stock upon their initial election to the Board and following each annual meeting of stockholders thereafter; (ii) all options vest in full immediately following their grant; (iii) the term of options granted is ten years; and (iv) the period following termination of service during which a non-employee director may exercise an option is twelve months, except that an option shall automatically terminate upon cessation of service as a non-employee director for cause. The exercise price of all options granted under all the plans has equaled at least the market value of the common stock on the dates of grants. Certain information relating to the employee stock option plans and the director plan for the years ended June 28, 2002, June 29, 2001 and June 30, 2000 follows:
Fiscal Year Ended ------------------------------------------------------------------------------------------- June 28, 2002 June 29, 2001 June 30, 2000 --------------------------- --------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ------------ ----------- ------------ ----------- ------------- ------------ Outstanding at beginning of year 3,263,241 $1.90 2,757,941 $2.08 2,474,501 $2.18 Granted 280,000 0.63 759,000 1.39 534,000 1.60 Exercised - - (1,800) 1.56 (34,200) 1.56 Canceled or expired (122,900) 1.97 (251,900) 2.43 (216,360) 2.10 ------------ ----------- ------------ ----------- ------------- ------------ Outstanding at end of year 3,420,341 $1.79 3,263,241 $1.90 2,757,941 $2.08 ============ =========== ============ =========== ============= ============ Options exercisable at end of period 2,062,358 859,900 773,369 Shares available for future grant at end of period 1,018,459 1,177,959 196,059
The following is additional information relating to options outstanding as of June 28, 2002:
Weighted Weighted Weighted Average Average Number Average Exercise Number Exercise Remaining of Shares Exercise Price Range of Shares Price Life (Years) Exercisable Price - ----------------------------- --------------- -------------- --------------- -------------- -------------- $0.41 - $1.50 912,500 $0.97 7.9 451,000 $0.98 1.51 - 2.00 1,475,500 1.64 6.0 906,653 1.63 2.01 - 2.50 905,341 2.31 6.1 577,705 2.31 2.51 - 8.25 127,000 5.70 3.0 127,000 5.70 --------------- -------------- --------------- -------------- -------------- 3,420,341 $1.10 6.3 2,062,358 $1.73 =============== ============== =============== ============== ==============
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date, as prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated in the table below. 32
Fiscal Year Ended --------------------------------------------------------------------- June 28, 2002 June 29, 2001 June 30, 2001 -------------------- ------------------- --------------------- Net loss: As reported $ (6,821,000) $ (7,540,000) $ (1,018,000) Pro Forma $ (7,662,000) $ (8,619,000) $ (2,105,000) Diluted loss per share: As reported $ (0.56) $ (0.65) $ (0.11) Pro Forma $ (0.63) $ (0.74) $ (0.23)
The weighted average fair value of options granted were determined based on the Black-Scholes option-pricing model, utilizing the following assumptions:
June 28, June 29, June 30, 2002 2001 2000 ---------------- ------------------ ----------------- Expected term 5 years 5 Years 5 Years Interest rate 3.1% 5.4% 6.0% Volatility 88.1% 65.1% 62.3% Dividends 0% 0% 0% Weighted average fair value of options granted $0.44 $0.83 $0.93
OTHER OPTIONS AND WARRANTS OUTSTANDING: As of June 28, 2002, the Company had outstanding an option exercisable into 100,000 shares of common stock at $2.50 per share that expires in July 2003. In June 2000, the Company completed a private placement of 1,800,000 units at $1.75 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock, for net proceeds of $2,527,000. Each warrant entitles its holder to purchase, until December 8, 2004, one share of common stock at an exercise price of $2.79. In connection with this private placement, the Company issued to certain employees of the placement agent 414,000 Unit Purchase Options (UPO). Each UPO can be exercised at an exercise price of $2.69 per UPO until December 8, 2004. Each UPO consists of one share of common stock and one warrant to purchase one share of common stock at $2.79. Both the warrants and UPOs are subject to possible adjustment of the number of shares issuable upon their exercise and their exercise prices if certain events occur. In June 2002, the Company issued a warrant to purchase 750,000 shares of common stock (see Note 6.) NOTE 6 - PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares of Preferred Stock in series, with each series having such powers, rights, preferences, qualifications and restrictions as determined by the Board of Directors. SERIES C CONVERTIBLE PREFERRED STOCK: In January 1998, the Company completed a private placement of 5,000 shares of Series C Convertible Preferred Stock (the "Series C Preferred Stock") and warrants to purchase an aggregate of 200,000 shares of its common stock at an exercise price of $7.03 per share, all of which warrants expired unexercised on January 25, 2001, for an aggregate purchase price of $5.0 million. The Series C Preferred Stock bore no dividends, were convertible into shares of the Company's common stock at a conversion price equal to the lower of $5.58 per share or 95% of the average of the closing bid prices of the Company's common stock during the ten consecutive trading days immediately preceding the conversion date of the Series C Preferred Stock. The Series C Preferred Stock was redeemable at the option of the holders at a price equal to $1,150 per share in certain events, including the failure of the Company to maintain the listing of the Company's common stock on the Nasdaq National Market. Because 33 the Series C Preferred Stock had conditions for redemption that were not solely within the control of the Company, they were classified outside of stockholders' equity in the accompanying consolidated balance sheets. During fiscal 2002 and 2001, no shares were converted. During fiscal 2000, 1,224 shares were converted into 584,815 shares of common stock. On June 21, 2002, the Company repurchased all of the remaining outstanding Series C Preferred Stock in exchange for $1.2 million in cash and a warrant to purchase 750,000 shares of common stock at $1.00 per share exercisable until June 2005. Costs associated with the transaction were $50,000. The fair value of the warrant was $96,000 based on the Black Scholes option-pricing model. The excess of the carrying value of the Series C Preferred Stock of $1,626,000 over the fair value of the consideration paid to repurchase the Series C Preferred Stock and costs of the transaction, amounting to $280,000, was recorded as an increase to additional paid-in capital. SERIES D JUNIOR PARTICIPATING PREFERRED STOCK: In May 1998, the Company adopted a Stockholder Rights Plan providing for the distribution to the Company's stockholders of one Right ("Right") for each share of the Company's common stock issued and outstanding at the opening of business on May 21, 1998 (the "Distribution Date") and each subsequent share of common stock issued. Each Right entitles the registered holder of a share of common stock to purchase from the Company 1/1000 of a share of Series D Junior Participating Preferred Stock of the Company, at a price of $30 per Right (the "Purchase Price"), subject to adjustment. The Rights have a term of ten years, have no voting power or rights to dividends, are not detachable and not separately transferable from the Company's common stock until they become exercisable. In general, the Rights become exercisable following an announcement that a person or group of affiliated or associated persons (an "Acquiring Person") owns, or the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning, at least 20% of the Company's outstanding common stock. If any person becomes an Acquiring Person by acquiring beneficial ownership of at least 20% of the Company's common stock, each outstanding Right (other than those owned by an Acquiring Person) will "flip in" and become a right to buy, at the Purchase Price, that number of shares of common stock of the Company that will have a market value of two times the Purchase Price. After a person becomes an Acquiring Person (but before such Acquiring Person owns 50% or more of the outstanding common stock), the Company may permit each Right (other than those owned by an Acquiring Person) to be exchanged, without payment of the Purchase Price, for one share of common stock. If (i) the Company is acquired in a merger or other business combination transaction and the Company does not survive or the Company merges, consolidates or engages in a share exchange with another person and does survive but all or part of its stock is changed or (ii) at least 50% of the Company's assets or earning power is sold or transferred, then each outstanding Right will "flip over" and become a right to buy, at the Purchase Price, that number of shares of common stock of the acquiring company that will have a market value of two times the Purchase Price. The Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right at any time prior to the time a person acquires beneficial ownership of at least 20% of the Company's common stock and, if certain conditions are met, within ten days following the time a person has acquired 20% or more of the common stock. 34 NOTE 7 - SIGNIFICANT CUSTOMERS, EXPORT SALES AND GEOGRAPHICAL SEGMENTS: SIGNIFICANT CUSTOMERS The following customers accounted for more than 10% of the Company's consolidated net sales during one or more of the years presented below:
Fiscal Year Ended ---------------------------------------------------- June 28, June 29, June 30, 2002 2001 2000 --------------- ------------- ---------------- Verizon Corporation (1) 57% 33% 25% Tyco Electronics Corporation (2) 11% 26% 19% Corning Cable Systems LLC (3) 2% 7% 12% Telco Sales, Inc. 6% 7% 12%
- ------------------------------ (1) On June 30, 2000, a wholly-owned subsidiary of Bell Atlantic Corporation was merged with and into GTE Corporation resulting in GTE Corporation becoming a wholly-owned subsidiary of Bell Atlantic. The combined company is doing business as Verizon Communications. The Company has made sales to Bell Atlantic and a subsidiary of GTE Corporation. The Company is operating under a supply agreement with Verizon that expires in April 2004 and provides for a possible extension for up to one year from that date. (2) Tyco Electronics Corporation (a successor to Raychem Corporation) is an OEM that purchases overvoltage protection products from the Company for inclusion within their products, including NIDs. The Company has received a letter from Tyco, that also owns a company that is a competitor and customer of the Company, alleging that a product of the Company infringes on one or more of Tyco's patents and that Tyco would be willing to license the patents to the Company. The Company has consulted its outside counsel and believes there is no patent infringement. (3) Corning Cable Systems LLC (formerly Siecor Corporation) is an OEM that supplies NIDs to Telcos and is required by certain Telcos to purchase TII's overvoltage surge protectors for inclusion within their NIDs. EXPORT SALES: For each of the three years ended June 28, 2002, export sales were less than 10% of consolidated net sales. GEOGRAPHICAL SEGMENTS: The Company does not have any operating facilities or producing assets outside the United States and Puerto Rico, except certain equipment owned by the Company in those geographic areas is utilized by the Company's outsource manufacturers in Asia. The net book value of such equipment held by the Company's outsource manufacturers was approximately $2.6 million at June 28, 2002. Consequently, the Company's operations located in Puerto Rico and New York are managed as one geographic segment. On May 3, 2000 the Company entered into an agreement with a contract manufacturer in Asia to outsource the manufacture of certain of its gas tubes used in its products. The agreement is for ten years, but may be terminated by either party after four years with one year's advance notice. On November 24, 1998 the Company entered into an agreement with an indefinite term with another contract manufacturer in Asia, to manufacture and supply products to the Company. NOTE 8 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS The Company leases real property and equipment under various leases with terms expiring through April 2006. The leases require minimum annual rentals, exclusive of real property taxes, of approximately $226,000, $86,000, $78,000 and $78,000 in fiscal years 2003, 2004, 2005 and 2006 respectively. Substantially all of the real property leases contain escalation clauses related to increases in property taxes. 35 The Company has received a letter from Tyco that also owns a Company that is a competitor and customer of the Company, alleging that a product of the Company infringes on one or more of Tyco's patents and that Tyco would be willing to license the patents to the Company. The Company has consulted its outside counsel and believes there is no patent infringement. The Company entered into an agreement with David Garwood, a member of the Board of Directors, to provide strategic planning consulting services from April 1, 2002 to March 31, 2003 at $10,000 per quarter. Since fiscal year 1982, the Company has leased equipment from PRC Leasing, Inc., a corporation owned by Alfred J. Roach, the Chairman of the Board of Directors of the Company. This lease was amended on June 5, 2002 to reduce the annual rental to $50,000 per annum. The rental paid prior to the amendment was $139,000 per annum. The Company leases two houses near the Company's Copiague, New York facility from Timothy J. Roach, President and Chief Executive Officer of the Company, at an aggregate annual rental of $31,000. The Company also bears insurance and maintenance costs which approximate $10,000 per year. The houses are used by Alfred J. Roach and other executives, directors and employees when visiting the Company's New York facility. Rental expense, including property taxes, for fiscal 2002, 2001 and 2000 was approximately $578,000, $584,000 and $681,000 respectively, including $139,000 for fiscal 2002 and 2001, and $200,000 for fiscal 2000 relating to the equipment leases with PRC. NOTE 9 - EMPLOYEE BENEFITS The Company has a defined contribution plan which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The plan covers substantially all U.S. and Puerto Rico employees who meet the eligibility requirements and requires the Company to match employees' contributions up to specified limitations and subject to certain vesting schedules. The matching expense for the Company due to these plans was $26,000, $25,000 and $25,000 for the fiscal years ended June 28, 2002, June 29, 2001 and June 30, 2000, respectively. The Company does not provide its employees any other post-retirement or post-employment benefits, except discretionary severance payments upon termination of employment. NOTE 10 - SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
June 28, June 29, 2002 2001 -------------------- -------------------- Accounts receivable: Trade accounts receivable $ 3,602,000 $ 7,150,000 Other receivables 16,000 98,000 Less: allowance for doubtful accounts (100,000) (58,000) -------------------- -------------------- $ 3,518,000 $ 7,190,000 ==================== ==================== Inventories: Raw materials and subassemblies $ 4,101,000 $ 3,967,000 Work in progress 144,000 2,649,000 Finished goods 3,617,000 7,824,000 -------------------- -------------------- 7,862,000 14,440,000 Less: write-down to net realizable value (500,000) (640,000) -------------------- -------------------- $ 7,362,000 $ 13,800,000 ==================== ==================== Property, plant and equipment: Machinery and equipment $ 5,636,000 $ 18,405,000 Tools, dies and molds 1,308,000 6,757,000 Leasehold improvements 1,126,000 3,924,000 Office fixtures, equipment and other 326,000 2,092,000 -------------------- -------------------- 8,396,000 31,178,000 36 Less: accumulated depreciation (2,550,000) (22,780,000) -------------------- -------------------- $ 5,846,000 $ 8,398,000 ==================== ==================== Accounts payable and accrued liabilities: Accounts payable $ 1,853,000 $ 4,984,000 Accrued payroll, incentive and vacation 763,000 375,000 Accrued payroll taxes 4,000 30,000 Accrued legal and professional fees 202,000 348,000 Other accrued expenses 240,000 375,000 -------------------- -------------------- $ 3,062,000 $ 6,112,000 ==================== ====================
NOTE 11 - QUARTERLY FINANCIAL DATA (UNAUDITED) AND FOURTH QUARTER CHARGES The following table reflects the unaudited quarterly results of the Company for the fiscal years ended June 28, 2002 and June 29, 2001:
Diluted Operating Net (Loss) Gross (Loss) Net (Loss) Income Quarter Ended Net Sales Profit (Loss) Income Income Per Share - ----------------------------- --------------- ---------------- ---------------- --------------- ----------------- 2002 FISCAL YEAR September 28, 2001 $9,098,000 $2,270,000 $ (210,000) $ (237,000) $(0.02) December 28, 2001 6,432,000 1,391,000 (1,189,000) (1,199,000) (0.10) March 29, 2002 6,988,000 1,679,000 (857,000) (848,000) (0.07) June 28, 2002 (a) 7,283,000 (32,000) (4,609,000) (4,537,000) (0.36) 2001 FISCAL YEAR September 29, 2000 $10,510,000 $2,388,000 $ 33,000 $ 50,000 $ 0.00 December 29, 2000 10,805,000 2,442,000 36,000 70,000 0.01 March 30, 2001 (b) 8,228,000 (748,000) (6,960,000) (6,937,000) (0.59) June 29, 2001 9,780,000 2,396,000 (698,000) (723,000) (0.06)
(a) During the fourth quarter of fiscal 2002, as a result of new product configurations and the notification from certain customers that certain products would no longer be ordered, the Company reevaluated excess and obsolete inventory and also made the decision to discontinue the Digital Closet product line. As a result, in the fourth quarter of fiscal 2002, the Company recorded a charge of $1.9 million for the write-down of inventories. The Company also recorded a charge of $1,716,000 for the impairment of long-lived assets in the fourth quarter of fiscal 2002 (see Note 1). (b) The net loss includes a net charge of $6.1 million for costs to re-align operations, $2.7 million of which was due to the related inventory write-down and has been reflected as a reduction of gross profit (see Note 2). 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES As recommended by the Company's Audit Committee, the Company's Board of Directors on April 9, 2002 decided to no longer engage Arthur Andersen LLP ("Andersen") as the Company's independent public accountants and engaged KPMG LLP ("KPMG") to serve as the Company's independent public accountants. While the Company's stockholders, at the Annual Meeting of Stockholders held on December 5, 2001, ratified the appointment of Andersen as the Company's independent public accountants for the fiscal year ending June 28, 2002, the Company's Board of Directors retained the right to select different auditors should it then deem it in the Company's interests. The selection of KPMG was based on, among other factors, KPMG's industry expertise and the engagement team's experience and qualifications. Andersen's report on the financial statements of the Company for each of the past two fiscal years did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years, and the subsequent interim period through the date of termination of Andersen's engagement, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference to the subject matter of the disagreements in connection with their report on the Company's consolidated financial statements for such years. During the Company's two most recent fiscal years, and the subsequent interim period through the date of termination of Andersen's engagement, there was no "reportable event," as that term is defined in Item 304(a)(1)(v) of Regulation S-K, and there was no disagreement or difference of opinion with Andersen regarding any "reportable event." During the two most recent fiscal years and the subsequent interim period through the date of this Report, neither the Company nor anyone on behalf of the Company consulted KPMG regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the financial statements of the Company or any matter that was either the subject of a disagreement, within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K. The Company provided Andersen with a copy of the foregoing statements and requested that Andersen furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by the Company. By letter dated April 12, 2002 to the Commission, Andersen advised that it was in agreement with the statements contained above, except for the information contained in the first and fifth paragraphs which did not relate to Andersen. 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 2002 Annual Meeting of Stockholders. 38 PART IV ITEM 14. CONTROLS AND PROCEDURES. (a) Not applicable to this Report. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation of those controls. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Reports of Independent Public Accountants.............................20 Consolidated Balance Sheets at June 28, 2002 and June 29, 2001.............................................................22 Consolidated Statements of Operations for each of the three years in the period ended June 28, 2002................................23 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 28, 2002....................24 Consolidated Statements of Cash Flows for each of the three years in the period ended June 28, 2002..........................25 Notes to Consolidated Financial Statements.......................................................26 (a)(2) Schedule II - Valuation and Qualifying Accounts.....................S-1 (3) Exhibits -------- Exhibit Number Description - ------ ----------- 2 Asset Purchase Agreement, dated February 26, 1999, by and between TII-Ditel, Inc. and Ditel, Inc. Incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated (date of earliest event reported) February 26, 1999. (File No. 1-8048). 3(a)(1) Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 1-8048). 3(a)(2) Certificate of Designation, as filed with the Secretary of State of the State of Delaware on January 26, 1998. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) January 26, 1998 (File No. 1-8048). 3(a)(3) Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 3(a)(4) Certificate of Amendment of the Company's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 1-8048). 3(b) By-laws of the Company, as amended. Incorporated by reference to Exhibit 4.02 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 33- 64980). 39 4(a) Rights Agreement dated as of May 15, 1998 between the Company and Harris Trust & Savings Bank formerly Harris Trust of Chicago). Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 4(b)(1) Revolving Credit, Term Loan and Security Agreement dated April 30, 1998 among Company, TII Corporation and GMAC Commercial Credit LLC (successor of BNY Financial Corporation) ("Lender"). Incorporated by reference to Exhibit 4(a)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 4(b)(2) Consent and Amendment dated as of July 22, 1999 between the Company, TII Corporation and the Lender. Incorporated by reference to Exhibit 4(b)(1)B to the Company's Annual Report on Form10-K for the fiscal year ended June 25, 1999 (File No. 1-8048). 4(b)(3) Consent and Amendment dated as of September 26, 2001 between the Company and the Lender. Incorporated by reference to Exhibit 4(b)(1)(C) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 4(b)(4)* Amendment dated as of September 26, 2001 between the Company and the Lender. 4(b)(5)* Amendment dated as of June 7, 2002 between the Company and the Lender. 4(b)(6)* Amendment dated as of September 24, 2002 between the Company and the Lender. 4(b)(7) Patent Collateral Assignment and Security Agreement between Company and Lender. Incorporated by reference to Exhibit 4(e)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 4(b)(8)* Amended and Restated Patent Collateral Assignment and Security Agreement between Company and Lender dated as of December 10, 2001. 4(b)(9) Trademark Collateral Assignment and Security Agreement between Company and Lender. Incorporated by reference to Exhibit 4(e)(ii) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 4(b)(10)* Amended and Restated Trademark Collateral Assignment and Security Agreement between Company and Lender dated as of December 10, 2001. 10(a)(1)+ 1986 Stock Option Plan of the Company, as amended. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 10(a)(2)+ 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(a)(3)+ 1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 1-8048). 10(a)(4)+ 1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(b)(1)+ Amended and Restated Employment Agreement dated as of August 1, 1997 between the Company and Timothy J Roach. Incorporated by reference to Exhibit 10(b)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 40 10(b)(2)+ Employment Agreement dated as of September 5, 2000 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 10(b)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(b)(3)+ Employment Agreement dated as of June 30, 2000 between the Company and Thomas J. Guzek. Incorporated by reference to Exhibit 10(b)(8) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(b)(6)+* Consultant Agreement dated as of March 29, 2002 between the Company and R. Dave Garwood. 10(c)(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(c)(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(c)(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(c)(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(c)(1)(E) Fourth Amendment dated June 27, 2000 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(C)1(E) to the Company's Annual Report on Form10-K for the fiscal year ended June 30, 2000 (File No.1-8048). 10(c)(1)(F) Fifth Amendment dated July 18, 2001 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(c)(1)(F) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(c)(1)(G)* Sixth Amendment dated June 5, 2002 to Equipment Lease dated July 18, 1991 between the Company and PRC. 10(d)(1) Lease Contract dated April 27, 1998 between the Company and Puerto Rico Industrial Development Company. Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 10(e)(1)* Exchange Agreement dated as of June 21, 2002 between the Company and the remaining investor in the Company's January 26, 1998 private placement. 10(e)(2)* Warrant dated as of June 21, 2002 issued to the remaining investor in the Company's June 26, 1998 private placement. 10(e)(3)* Registration Rights Agreement dated as of June 21, 2002 issued to the remaining investor in the Company's June 26, 1998 private placement. 10(f)(1) Form of Warrant issued to the investors in the Company's June 8, 2000 private placement and underlying the Unit Purchase Option. Incorporated by reference to Exhibit 10(f)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 41 10(f)(2) Subscription Agreement and Investor Information Statement, including registration rights undertaking of the Company, by and among the Company and the investors in the Company's June 8, 2000 private placement. Incorporated by reference to Exhibit 10(f)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(f)(3) Placement Agent Agreement dated as of May 15, 2000 by and among the Company and M.H. Meyerson & Co., Inc., as placement agent, with respect to the Company's June 8, 2000 private placement. Incorporated by reference to Exhibit 10(f)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(f)(4) Form of Unit Purchase Option issued to the placement agent for Company's June 8, 2000 private placement. Incorporated by reference to Exhibit 10(f)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 21* Subsidiaries of the Company. 23* Consent of KPMG LLP. 99(a)* Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99(b)* Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------- * Filed herewith. + Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K During the fourth quarter of the Company's fiscal year ended June 28, 2002, the Company filed the following Current Reports on Form 8-K dated (date of earliest event reported): (1) April 9, 2002 reporting under Item 4, Changes in Registrant's Certifying Accountant, and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits. (2) May 16, 2002 reporting under Item 5, Other Events, and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits. (3) June 21, 2002 reporting under Item 5, Other Events, and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits. Not financial statements were filed with any of the foregoing Current Reports on Form 8-K. 42 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. September 25, 2002 TII NETWORK TECHNOLOGIES, INC. By: /s/ Timothy J. Roach ---------------------------------------- Timothy J. Roach, President, Chief Executive Officer and Director 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 25, 2002 /s/ Alfred J. Roach ------------------------------------ Alfred J. Roach, Chairman of the Board and Director September 25, 2002 /s/ Timothy J. Roach ------------------------------------ Timothy J. Roach, President, Chief Executive Officer (principal executive officer) and Director September 25, 2002 /s/ Kenneth A. Paladino ------------------------------------ Kenneth A. Paladino, Vice President-Finance and Treasurer (principal financial officer) September 25, 2002 /s/ C. Bruce Barksdale ------------------------------------ C. Bruce Barksdale, Director September 25, 2002 /s/ James R. Grover, Jr. ------------------------------------ James R. Grover, Jr., Director September 25, 2002 /s/ Joseph C. Hogan ------------------------------------ Joseph C. Hogan, Director September 25, 2002 /s/George S. Katsarake ------------------------------------ George S. Katsarakes, Executive Vice President and Chief Operating Officer and Director September 25, 2002 /s/ Dorothy Roach ------------------------------------ Dorothy Roach, Director September 25, 2002 /s/ R. D. Garwood ------------------------------------ R. D. Garwood, Director September 25, 2002 /s/ Lawrence M. Fodrowski ------------------------------------ Lawrence M. Fodrowski, Director 43 I, Timothy J. Roach, certify that: 1. I have reviewed this annual report on Form 10-K of TII Network Technologies, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: September 25, 2002 /s/ Timothy J. Roach - ----------------------------------------- Timothy J. Roach President and Principal Executive Officer I, Kenneth A. Paladino, certify that: 1. I have reviewed this annual report on Form 10-K of TII Network Technologies, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: September 25, 2002 /s/ Kenneth A. Paladino - -------------------------------- Kenneth A. Paladino, Vice President - Finance, Treasurer and Principal Financial Officer SCHEDULE II TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance at Balance Beginning of at End of Fiscal Year Ended Year Additions Dispositions Year - -------------------------------------------- -------------------- ------------------- ------------------ ------------------- June 28, 2002 $ 58,000 73,000 (31,000) $ 100,000 June 29, 2001 144,000 - (86,000) 58,000 June 30, 2000 $116,000 44,000 (16,000) $ 144,000
S-1 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 2 Asset Purchase Agreement, dated February 26, 1999, by and between TII-Ditel, Inc. and Ditel, Inc. Incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated (date of earliest event reported) February 26, 1999. (File No. 1-8048). 3(a)(1) Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 1-8048). 3(a)(2) Certificate of Designation, as filed with the Secretary of State of the State of Delaware on January 26, 1998. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) January 26, 1998 (File No. 1-8048). 3(a)(3) Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 3(a)(4) Certificate of Amendment of the Company's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 1-8048). 3(b) By-laws of the Company, as amended. Incorporated by reference to Exhibit 4.02 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (File No. 33- 64980). 4(a) Rights Agreement dated as of May 15, 1998 between the Company and Harris Trust & Savings Bank formerly Harris Trust of Chicago). Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 4(b)(1) Revolving Credit, Term Loan and Security Agreement dated April 30, 1998 among Company, TII Corporation and GMAC Commercial Credit LLC (successor of BNY Financial Corporation) ("Lender"). Incorporated by reference to Exhibit 4(a)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 4(b)(2) Consent and Amendment dated as of July 22, 1999 between the Company, TII Corporation and the Lender. Incorporated by reference to Exhibit 4(b)(1)B to the Company's Annual Report on Form10-K for the fiscal year ended June 25, 1999 (File No. 1-8048). 4(b)(3) Consent and Amendment dated as of September 26, 2001 between the Company and the Lender. Incorporated by reference to Exhibit 4(b)(1)(C) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 4(b)(4)* Amendment dated as of September 26, 2001 between the Company and the Lender. 4(b)(5)* Amendment dated as of June 7, 2002 between the Company and the Lender. 4(b)(6)* Amendment dated as of September 24, 2002 between the Company and the Lender. 4(b)(7) Patent Collateral Assignment and Security Agreement between Company and Lender. Incorporated by reference to Exhibit 4(e)(i) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 4(b)(8)* Amended and Restated Patent Collateral Assignment and Security Agreement between Company and Lender dated as of December 10, 2001. 4(b)(9) Trademark Collateral Assignment and Security Agreement between Company and Lender. Incorporated by reference to Exhibit 4(e)(ii) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 4(b)(10)* Amended and Restated Trademark Collateral Assignment and Security Agreement between Company and Lender dated as of December 10, 2001. 10(a)(1)+ 1986 Stock Option Plan of the Company, as amended. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 1996 (File No. 1-8048). 10(a)(2)+ 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(a)(3)+ 1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 1-8048). 10(a)(4)+ 1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(b)(1)+ Amended and Restated Employment Agreement dated as of August 1, 1997 between the Company and Timothy J Roach. Incorporated by reference to Exhibit 10(b)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1997 (File No. 1-8048). 10(b)(2)+ Employment Agreement dated as of September 5, 2000 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 10(b)(7) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(b)(3)+ Employment Agreement dated as of June 30, 2000 between the Company and Thomas J. Guzek. Incorporated by reference to Exhibit 10(b)(8) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(b)(6)+* Consultant Agreement dated as of March 29, 2002 between the Company and R. Dave Garwood. 10(c)(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(c)(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(c)(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(c)(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(c)(1)(E) Fourth Amendment dated June 27, 2000 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(C)1(E) to the Company's Annual Report on Form10-K for the fiscal year ended June 30, 2000 (File No.1-8048). 10(c)(1)(F) Fifth Amendment dated July 18, 2001 to Equipment Lease dated July 18, 1991 between the Company and PRC. Incorporated by reference to Exhibit 10(c)(1)(F) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(c)(1)(G)* Sixth Amendment dated June 5, 2002 to Equipment Lease dated July 18, 1991 between the Company and PRC. 10(d)(1) Lease Contract dated April 27, 1998 between the Company and Puerto Rico Industrial Development Company. Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 10(e)(1)* Exchange Agreement dated as of June 21, 2002 between the Company and the remaining investor in the Company's January 26, 1998 private placement. 10(e)(2)* Warrant dated as of June 21, 2002 issued to the remaining investor in the Company's June 26, 1998 private placement. 10(e)(3)* Registration Rights Agreement dated as of June 21, 2002 issued to the remaining investor in the Company's June 26, 1998 private placement. 10(f)(1) Form of Warrant issued to the investors in the Company's June 8, 2000 private placement and underlying the Unit Purchase Option. Incorporated by reference to Exhibit 10(f)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(f)(2) Subscription Agreement and Investor Information Statement, including registration rights undertaking of the Company, by and among the Company and the investors in the Company's June 8, 2000 private placement. Incorporated by reference to Exhibit 10(f)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(f)(3) Placement Agent Agreement dated as of May 15, 2000 by and among the Company and M.H. Meyerson & Co., Inc., as placement agent, with respect to the Company's June 8, 2000 private placement. Incorporated by reference to Exhibit 10(f)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 10(f)(4) Form of Unit Purchase Option issued to the placement agent for Company's June 8, 2000 private placement. Incorporated by reference to Exhibit 10(f)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-8048). 21* Subsidiaries of the Company. 23* Consent of KPMG LLP. 99(a)* Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99(b)* Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------- * Filed herewith. + Management contract or compensatory plan or arrangement. EX-4 3 ex4_b4.txt EX-4(B)(4) - GMAC COMMERCIAL CREDIT LTR TO TII EXHIBIT 4(b)(4) GMAC COMMERCIAL CREDIT LLC 1290 Avenue of the Americas New York, New York 10104 As of December 10, 2001 TII NETWORK TECHNOLOGIES, INC. 1385 Akron Street Copiague, New York 11726 Re: Amendment to Loan Documents --------------------------- Gentlemen: Reference is made to certain financing arrangements by and among GMAC COMMERCIAL CREDIT LLC, formerly known as BNY FACTORING LLC, as successor by merger to BNY Financial Corporation ("Lender"), TII Industries, Inc. (the "Borrower") and TII Corporation (which has recently been dissolved) pursuant to certain financing agreements, including that certain Revolving Credit, Term Loan and Security Agreement dated April 30, 1998 ("Credit Agreement"), together with various other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto (all of the foregoing, together with the Credit Agreement, as the same now exist or may hereafter be amended, restated, renewed, extended, supplemented, substituted or otherwise modified, collectively, the "Loan Documents"). Borrower has requested that Lender agree to amend certain provisions of the Loan Documents, all as more fully set forth herein. Lender has agreed to accommodate Borrower's request subject to the terms and conditions hereof. 1. Amendment. --------- (a) Borrower has advised Lender that as of the date hereof, Borrower has changed its name to "TII Network Technologies, Inc." (the "TII Name Change"). In order for the Borrower's representations and warranties under Section 5.6 of the Credit Agreement to be accurate and correct, Borrower has requested that Lender agree to amend the Loan Documents to reflect the TII Name Change. (b) Lender hereby agrees to the proposed amendment to the Loan Documents to reflect the TII Name Change. (c) Borrower and Lender hereby acknowledge, confirm and agree that, as of the date hereof, any and all references to TII Industries, Inc., Industries or terms of similar import contained anywhere in any of the Loan Documents (including the use of the word "Industries" as part of other defined terms) shall be amended and restated to mean and include TII Network Technologies, Inc. 2. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore made by the Borrower to Lender pursuant to the Loan Documents, Borrower hereby represents, warrants and covenants with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Loan Documents): (a) No Event of Default exists or has occurred and is continuing on the date of this amendment. (b) Borrower has delivered to Lender a true copy of the amendment to the certificate of incorporation of Industries as certified and issued by the Secretary of State of the State of Delaware, evidencing the name change of TII Industries, Inc. to TII Network Technologies, Inc. (c) As soon as practicable following the date hereof, Borrower shall deliver copies of related certifications of name change and/or applications for change of name filed with the Department of State of each state where Borrower is qualified to do business as a foreign corporation (to the extent any such filing is required by applicable law). (d) Borrower irrevocably and unconditionally authorizes Lender to file at any time and from time to time such financing statements with respect to the Collateral naming Lender or its designee as the secured party, and Borrower as debtor, as Lender may require, and including any other information with respect to Borrower or otherwise required by Article 9 of the UCC of such jurisdiction as Lender may determine, together with any amendments and continuations with respect thereto, which authorization shall apply to all financing statements filed on, prior to or after the date hereof. Borrower hereby ratifies and approves all financing statements naming Lender or its designee as secured party, and Borrower as debtor with respect to the Collateral (and any amendments with respect to such financing statements) filed by or on behalf of Lender prior to the date hereof and Borrower ratifies and confirms the authorization of Lender to file such financing statements (and amendments, if any). Borrower hereby authorizes Lender to adopt on behalf of Borrower any symbol required for authenticating any electronic filing. In no event shall Borrower at any time file, or permit to cause to be filed, any correction statement or termination statement with respect to any financing statement (or amendment or continuation with respect thereto) naming Lender or its designee as secured party and Borrower as debtor. In the event that the description of the collateral in any financing statement naming Lender or its designee as the secured party and any Borrower, as debtor, includes assets and properties of Borrower that do not at any time constitute Collateral, whether hereunder, under any of the other Loan Documents or otherwise, the filing of such financing statement shall nonetheless be deemed authorized by Borrower to the extent of the Collateral included in such description and it shall not render the financing statement ineffective as to any of the Collateral or otherwise affect the financing statement as it applies to any of the Collateral. (e) This amendment and each instrument required to be executed and delivered by Borrower hereunder has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of contained herein -2- and therein constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms. (f) Except as specifically set forth herein, no other changes or modifications to the Loan Documents are intended or implied, and in all other respects, the Loan Documents shall continue to remain in full force and effect in accordance with their respective terms as of the date hereof. Except as specifically set forth herein, nothing contained herein shall evidence a waiver or amendment by Lender of any other provision of the Loan Documents nor shall anything contained herein be construed as a consent by Lender to any transaction other than that specifically consented to herein. (g) The terms and provisions of this amendment shall be for the benefit of the parties hereto and their respective successors and assigns; no other person, firm, entity or corporation shall have any right benefit or interest under this amendment. This amendment may be signed in counterparts, each of which shall be an original and all of which when taken together shall constitute one amendment. In making proof of this amendment, it shall not be necessary to produce or account for more than one counterpart signed by the party to be charged. (h) This amendment sets forth the entire agreement and understanding of the parties with respect to the matter set forth herein. This amendment cannot be changed, modified, amended or terminated except in writing executed by the party to be charged. IN WITNESS WHEREOF, GMACCC and Industries have executed this amendment as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC., FORMERLY KNOWN AS TII INDUSTRIES, INC. By: /s/ Timothy J. Roach ------------------------------------ Title: President [SIGNATURES CONTINUED ON NEXT PAGE] -3- [SIGNATURES CONTINUED FROM PRIOR PAGE] GMAC COMMERCIAL CREDIT LLC By: /s/ Frank Imperato ------------------------------------ Title: Senior Vice President ACKNOWLEDGED AND AGREED: TII NETWORK TECHNOLOGIES, INC., FORMERLY KNOWN AS TII INDUSTRIES, INC. By: /s/ Timothy J. Roach ---------------------------- Title: President -4- EX-4 4 ex4_b5.txt EX-4(B)(5) - AMENDMENT TO LOAN DOCUMENTS 6/7/02 EXHIBIT 4(b)(5) GMAC COMMERCIAL CREDIT LLC 1290 Avenue of the Americas New York, New York 10104 June 7, 2002 TII NETWORK TECHNOLOGIES, INC. 1385 Akron Street Copiague, New York 11726 Re: Amendment to Loan Documents --------------------------- Gentlemen: Reference is made to certain financing arrangements by and among GMAC COMMERCIAL CREDIT LLC, formerly known as BNY FACTORING LLC, as successor by merger to BNY Financial Corporation ("Lender"), TII Industries, Inc., now known as TII Network Technologies, Inc. ("Borrower"), and TII Corporation (which was subsequently dissolved), pursuant to certain financing agreements, including that certain Revolving Credit, Term Loan and Security Agreement dated April 30, 1998 (the "Credit Agreement"), together with various other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto (all of the foregoing, together with the Credit Agreement, as the same has been, is hereby being, and may hereafter be amended, restated, renewed, extended, supplemented, substituted or otherwise modified, collectively, the "Loan Documents"). Borrower has requested that Lender agree to amend certain provisions of the Loan Documents, all as more fully set forth herein. Lender has agreed to accommodate Borrower's request subject to the terms and conditions hereof. I. Amendments. (1) Section 2.1(a)(ii) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(ii) fifty percent (50%) of Eligible Inventory (the "Inventory Advance Rate"; together with the Receivables Advance Rate, collectively the "Advance Rates"), provided, however, that the maximum amount of outstanding Revolving Advances against Eligible Inventory to Borrower hereunder shall not exceed $2,000,000 at any one time, less" (2) Section 3.5 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "3.5 Unused Facility Fees. Borrower shall pay to Lender monthly, on the first day of the month for the immediately preceding month, if the average combined closing daily balance of all Revolving Advances and amounts due under Letters of Credit outstanding during any such calendar month (for each month, collectively, the "Average Daily Closing Revolver Balances") is, in the aggregate, less than the Maximum Revolving Advance Amount (such difference for each month, the "Applicable Revolver Amount"), an unused facility fee at a rate equal to three eighths of one percent (.375%) per annum of the Applicable Revolver Amount." (3) Section 6.5 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "6.5 Net Worth. Cause to be maintained at all times a consolidated Net Worth in an amount (the "Minimum Net Worth") not less than (a) for Borrower's fiscal quarter ending March 29, 2002, $17,750,000, (b) for Borrower's fiscal quarter ending June 29, 2002, $17,500,000 less a one-time charge not exceeding $1,000,000 for writeoffs of intangibles and certain equipment related to the consolidation of Borrower's facilities in the Commonwealth of Puerto Rico, and (c) for each of Borrower's fiscal quarters thereafter, an amount equal to the sum of the Minimum Net Worth required for the immediately previous fiscal quarter plus fifty percent (50%) of Net Income (to the extent Net Income is positive) for such immediately previous fiscal quarter. Notwithstanding anything in this Agreement to the contrary, Borrower shall be deemed to be in compliance with this Section 6.5 at all times during any fiscal quarter other than the last day of such fiscal quarter (each such time hereinafter an "Interim Date") if, as of any Interim Date, Borrower's consolidated Net Worth is not more than $150,000 less than the applicable Minimum Net Worth required hereunder as of the last day of such fiscal quarter. Nothing herein shall release Borrower from its obligation to maintain the requisite Minimum Net Worth as of the last day of each fiscal quarter." (4) Section 7.4 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "7.4. Investments. Purchase or acquire obligations or stock of, or any other interest in, any Person, except (a) obligations issued or guaranteed by the United States of America or any agency thereof, (b) commercial paper with maturities of not more than 180 days and a published rating of not less than A-1 or P-1 (or the equivalent rating), (c) certificates of time deposit and bankers' acceptances having maturities of not more than 180 days and repurchase agreements backed by United States government securities of a commercial bank if (i) such bank has a combined capital and surplus of at least $500,000,000, or (ii) its debt obligations, or those of a holding company of which it is a Subsidiary, are rated not less than A (or the equivalent rating) by a nationally recognized investment rating agency, -2- (d) U.S. money market funds that invest solely in obligations issued or guaranteed by the United States of America or an agency thereof, and (e) in one transaction or a series of transactions to be consummated not later than June 21, 2002, all of the issued and outstanding shares of Series C Convertible Preferred Stock of Borrower for total consideration of cash in the amount of not more than $1,200,000 plus the issuance of a warrant, in form and content satisfactory to Lender, for not more than 750,000 shares of common stock of Borrower at an exercise price of not less than $1.00 per share (such number of shares and exercise price being subject to potential anti-dilution adjustment)." (e) Section 10 of the Credit Agreement is hereby amended by: (i) deleting the semi-colon (;) and the word "or" at the end of Section 10(o); (ii) inserting a period in lieu thereof; and (iii) deleting Section 10(p) in its entirety. II. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore made by Borrower to Lender pursuant to the Loan Documents, Borrower hereby represents, warrants and covenants with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Loan Documents): A. No Event of Default exists or has occurred and is continuing on the date of this amendment upon giving effect to the terms of this amendment. B. This amendment has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with its terms. C. Except as specifically set forth herein, no other changes or modifications to the Loan Documents are intended or implied, and in all other respects, the Loan Documents shall continue to remain in full force and effect in accordance with their respective terms as of the date hereof. Except as specifically set forth herein, nothing contained herein shall evidence a waiver or amendment by Lender of any other provision of the Loan Documents nor shall anything contained herein be construed as a consent by Lender to any transaction other than that specifically consented to herein. D. The terms and provisions of this amendment shall be for the benefit of the parties hereto and their respective successors and assigns; no other person, firm, entity or corporation shall have any right benefit or interest under this amendment. This amendment may be signed in counterparts, each of which shall be an original and all of which when taken together shall constitute one amendment. In making proof of this amendment, it shall not be necessary to produce or account for more than one counterpart signed by the party to be charged. -3- E. This amendment sets forth the entire agreement and understanding of the parties with respect to the matter set forth herein. This amendment cannot be changed, modified, amended or terminated except in writing executed by the party to be charged. III. Amendment Fee. In consideration of the amendments to the Loan Documents set forth herein Borrower unconditionally agrees to pay an amendment fee in the amount of $15,000, which amendment fee shall be fully earned as of the effective date of this amendment, shall not be subject to refund, rebate or proration for any reason whatsoever, and shall be charged by Lender to Borrower as of the date hereof. [SIGNATURES ON FOLLOWING PAGE] -4- IN WITNESS WHEREOF, Lender and Borrower have executed this amendment as of the day and year first above written. GMAC COMMERCIAL CREDIT LLC By: /s/ David Duffy ------------------------------------- Title: Vice President ACKNOWLEDGED AND AGREED: TII NETWORK TECHNOLOGIES, INC. By: /s/ Kenneth A. Paladino ------------------------------- Title: Vice President Finance -5- EX-4 5 ex4_b6.txt EX-4(B)(6) - GMAC LTR TO TII 9/24/02 EXHIBIT 4(b)(6) GMAC COMMERCIAL CREDIT LLC 1290 Avenue of the Americas New York, New York 10104 as of September 24, 2002 TII NETWORK TECHNOLOGIES, INC. 1385 Akron Street Copiague, New York 11726 Re: Amendment to Loan Documents --------------------------- Gentlemen: Reference is made to certain financing arrangements by and among GMAC COMMERCIAL CREDIT LLC, formerly known as BNY FACTORING LLC, as successor by merger to BNY Financial Corporation ("Lender"), TII NETWORK TECHNOLOGIES, INC., formerly known as TII Industries, Inc., ("Borrower") and TII Corporation (which was subsequently dissolved), pursuant to certain financing agreements, including that certain Revolving Credit, Term Loan and Security Agreement dated April 30, 1998 (the "Credit Agreement"), together with various other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto (all of the foregoing, together with the Credit Agreement, as the same has been, is hereby being, and may hereafter be amended, restated, renewed, extended, supplemented, substituted or otherwise modified, collectively, the "Loan Documents"). Borrower has requested that Lender agree to amend certain provisions of the Loan Documents, all as more fully set forth in this letter Re: Amendment to Loan Documents ("Amendment"). Lender has agreed to accommodate Borrower's request subject to the terms and conditions hereof. 1. Amendments. ---------- (a) Section 6.5 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "6.5 Net Worth. Cause to be maintained at all times a consolidated Net Worth in an amount (the "Minimum Net Worth") not less than (a) for Borrower's fiscal quarter ending March 29, 2002, $17,750,000, (b) for Borrower's fiscal quarter ending June 28, 2002, $14,000,000, and (c) for each of Borrower's fiscal quarters thereafter, an amount equal to the sum of the Minimum Net Worth required for the immediately previous fiscal quarter plus fifty percent (50%) of Net Income (to the extent Net Income is positive) for such immediately previous fiscal quarter. Notwithstanding anything in this Agreement to the contrary, Borrower shall be deemed to be in compliance with this Section 6.5 at all times during any fiscal quarter other than the last day of such fiscal quarter (each such time hereinafter an "Interim Date") if, as of any Interim Date, Borrower's consolidated Net Worth is not more than $150,000 less than the applicable Minimum Net Worth required hereunder as of the last day of such fiscal quarter. Nothing herein shall release Borrower from its obligation to maintain the requisite Minimum Net Worth as of the last day of each fiscal quarter." (b) The first sentence of Section 13.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "13.1 Term. This Agreement, which shall inure to the benefit of and shall be binding upon the respective successors and permitted assigns of each of the Borrower and the Lender, shall become effective on the date hereof and shall continue in full force and effect until September 30, 2003 (the "Term") unless sooner terminated as herein provided." 2. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore made by Borrower to Lender pursuant to the Loan Documents, Borrower hereby represents, warrants and covenants with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Loan Documents): (a) No Event of Default exists or has occurred and is continuing on the date of this amendment upon giving effect to the terms of this amendment. (b) This Amendment has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with its terms. (c) Except as specifically set forth herein, no other changes or modifications to the Loan Documents are intended or implied, and in all other respects, the Loan Documents shall continue to remain in full force and effect in accordance with their respective terms as of the date hereof. Except as specifically set forth herein, nothing contained herein shall evidence a waiver or amendment by Lender of any other provision of the Loan Documents nor shall anything contained herein be construed as a consent by Lender to any transaction other than that specifically consented to herein. -2- (d) The terms and provisions of this Amendment shall be for the benefit of the parties hereto and their respective successors and assigns; no other person, firm, entity or corporation shall have any right benefit or interest under this amendment. This Amendment may be signed in counterparts, each of which shall be an original and all of which when taken together shall constitute one amendment. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart signed by the party to be charged. (e) This Amendment sets forth the entire agreement and understanding of the parties with respect to the matter set forth herein. This Amendment cannot be changed, modified, amended or terminated except in writing executed by the party to be charged. 3. Amendment Fee. In consideration of the amendments to the Loan Documents set forth herein, Borrower unconditionally agrees to pay an amendment fee in the amount of $15,000, which amendment fee shall be fully earned as of the date of hereof, shall not be subject to refund, rebate or proration for any reason whatsoever, and shall be charged by Lender to Borrower as of the date hereof. IN WITNESS WHEREOF, Lender and Borrower have executed this Amendment as of the day and year first above written. GMAC COMMERCIAL CREDIT LLC By: /s/ David Duffy ------------------------------------- Title: Vice President ACKNOWLEDGED AND AGREED: TII NETWORK TECHNOLOGIES, INC. By: /s/ Kenneth A. Paladino ------------------------------- Title: Vice President Finance -3- EX-4 6 ex4_b8.txt EX-4(B)(8)-AMEND&RESTATED PATENT COLLATERAL EXHIBIT 4(b)(8) AMENDED AND RESTATED PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT --------------------------------- AGREEMENT made this 10th day of December, 2001 by and between TII NETWORK TECHNOLOGIES, INC., formerly known as TII INDUSTRIES, INC., a Delaware corporation ("DEBTOR"), with its chief executive office at 1385 Akron Street, Copiague, New York 11726 and GMAC COMMERCIAL CREDIT LLC, formerly known as BNY FACTORING LLC, as successor by merger to BNY Financial Corporation, ("SECURED PARTY"), having an office at 1290 Avenue of the Americas, New York, New York 10104. W I T N E S S E T H: ------------------- WHEREAS, Debtor has adopted, used and is using, and is the owner of the entire right, title, and interest in and to the patents and applications therefor described in Exhibit A annexed hereto and made a part hereof; and WHEREAS, Secured Party and Debtor have heretofore entered into financing arrangements pursuant to which Secured Party has made and may continue to make loans and advances and provide other financial accommodations to Debtor as set forth in the Revolving Credit, Term Loan and Security Agreement, dated April 30, 1998, by and among Secured Party, Debtor and TII Corporation (the "CREDIT AGREEMENT"), the Patent Collateral Assignment and Security Agreement dated April 30, 1998 by and between Debtor and Secured Party (the "Existing Patent Security Agreement") together with various other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Agreement (all of the foregoing, together with the Credit Agreement and the Existing Patent Security Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "FINANCING AGREEMENTS"); and WHEREAS, pursuant to the terms of this Amended and Restated Patent Collateral Assignment and Security Agreement, the Secured Party and Debtor have agreed to amend and restate the terms of the Existing Patent Security Agreement to update and modify certain information contained therein; and WHEREAS, in order to induce Secured Party to continue to make loans and advances and provide other financial accommodations pursuant to the Financing Agreements, Debtor has agreed to grant to Secured Party, and to confirm its prior grant to Secured Party of, certain collateral security as set forth herein; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees as follows: 1. GRANT OF SECURITY INTEREST (a) As collateral security for the prompt performance, observance and indefeasible payment in full of all of the Obligations (as hereinafter defined), Debtor hereby grants to Secured Party a continuing security interest in and a general lien upon, and hereby assigns and transfers to Secured Party: all of Debtor's now existing or hereafter acquired right, title and interest in and to: all of Debtor's interest in any patents; all applications, registrations and recordings relating to such patents in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, any political subdivision thereof or in any other countries, and all reissues, extensions and renewals thereof including, without limitation, those patents, applications, registrations and recordings described in Schedule A hereto (the "PATENTS"), and any and all proceeds of any of the foregoing, including, without limitation, any claims by Debtor against third parties for infringement of the Patents or any licenses with respect thereto (all of the foregoing are collectively referred to herein as the "COLLATERAL"). 2. OBLIGATIONS SECURED The security interest, lien and other interests granted to Secured Party pursuant to this Agreement shall secure the prompt performance, observance and indefeasible payment in full of any and all loans, indebtedness, liabilities and obligations of any kind owing by Debtor to Secured Party, however evidenced, whether as principal, guarantor or otherwise, whether arising under the Credit Agreement, the other Financing Agreements or otherwise whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, original, renewed or extended, whether arising directly or acquired from others (including without limitation, Secured Party's participations or interests in Debtor's obligations to others) and including, without limitation, Secured Party's charges, commissions, interest, expenses, costs and attorneys' fees chargeable to Debtor under this agreement, the Financing Agreements or in connection with any of the foregoing (all hereinafter referred to as "OBLIGATIONS"). 3. REPRESENTATIONS, WARRANTIES AND COVENANTS Debtor hereby represents, warrants and covenants with and to Secured Party that the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which, or compliance with, being a continuing condition of the making of loans by Secured Party to Debtor under the Financing Agreements: (a) Debtor will pay and perform all of the Obligations according to their terms. (b) All of the existing Collateral is valid and subsisting in full force and effect, and Debtor owns the sole, full, and clear title thereto, and the right and power to grant the security interests granted hereunder. Debtor will, at Debtor's expense, perform all acts and execute all documents necessary to maintain the existence of the Collateral as valid, subsisting and registered patents including, without limitation, the filing of any renewal affidavits and applications. The Collateral is not subject to any liens, claims, mortgages, assignments, licenses, -2- security interests, or encumbrances of any nature whatsoever, except the security interests granted hereunder and the licenses permitted under Section 3(e) below. (c) Debtor will not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or lien upon, encumber, grant an exclusive or non-exclusive license relating to the Collateral, except as permitted herein or in the Financing Agreements, or otherwise dispose of any of the Collateral without the prior written consent of Secured Party. Nothing in this agreement shall be deemed a consent by Secured Party to any such action, except as such action is expressly permitted hereunder. (d) Debtor will, at Debtor's expense, perform all acts and execute all documents requested at any time by Secured Party to evidence, perfect, maintain, record, or enforce the security interest in the Collateral granted hereunder or to otherwise further the provisions of this agreement. Debtor hereby authorizes Secured Party to execute and file one or more financing statements (or similar documents) with respect to the Collateral signed only by Secured Party or as otherwise determined by Secured Party. Debtor further authorizes Secured Party to have this or any other similar security agreement filed with the Commissioner of Patents and Trademarks or other appropriate federal, state or government office. (e) As of the date hereof, Debtor does not have any Patents registered, or subject to pending applications, in the United States Patent and Trademark Office or any similar office or agency in the United States other than those described in Schedule A annexed hereto and has not granted any licenses with respect thereto other than as set forth in Schedule B hereto. (f) Debtor will, concurrently with the execution and delivery of this agreement, execute and deliver to Secured Party five (5) originals of a Special Power of Attorney in the form of Exhibit 1 annexed hereto for the implementation of the assignment, sale or other disposition of the Collateral pursuant to Secured Party's exercise of the rights and remedies granted to Secured Party hereunder. (g) Secured Party may, in its discretion, pay any amount or do any act which Debtor fails to pay or do as required hereunder or as requested by Secured Party to preserve, defend, protect, maintain, record, amend or enforce the Obligations, the Collateral, or the security interest granted hereunder including but not limited to all filing or recording fees, court costs, collection charges and reasonable attorneys' fees. Debtor will be liable to Secured Party for any such payment, which payment shall be deemed an advance by Secured Party to Debtor, shall be payable on demand together with interest at the then applicable rate set forth in the Financing Agreements and shall be part of the Obligations secured hereby. (h) Debtor shall not file any application for the registration of a Patent with the United States Patent and Trademark Office or any similar office or agency in the United States, any state therein, or any other country, unless Debtor has by thirty (30) days prior written notice informed Secured Party of such action. Upon request of Secured Party, Debtor shall execute and deliver to Secured Party any and all assignments, agreements, instruments, documents, and such other papers as may be requested by Secured Party to evidence the security interests of Secured Party in such Patent. -3- (i) Debtor has not abandoned any of the Patents and Debtor will not do any act, nor omit to do any act, whereby the Patents may become abandoned, invalidated, unenforceable, avoided or avoidable. Debtor shall notify Secured Party immediately if it knows or has reason to know of any reason why any application, registration, or recording may become abandoned, canceled, invalidated, avoided or avoidable. (j) Debtor will render any assistance necessary to Secured Party in any proceeding before the United States Patent and Trademark Office, any federal or state court, or any similar office or agency in the United States or any state therein or any other country to maintain such application and registration of the Patents as Debtor's exclusive property and to protect Secured Party's interest therein, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference, and cancellation proceedings. (k) Debtor will promptly notify Secured Party if Debtor (or any affiliate or subsidiary thereof) learns of any use by any person of any other process or product which infringes upon any Patent. If requested by Secured Party, Debtor, at Debtor's expense, shall join with Secured Party in such action as Secured Party, in Secured Party's discretion, may deem advisable for the protection of Secured Party's interest in and to the Patents. (l) Debtor assumes all responsibility and liability arising from the use of the Patents and Debtor hereby indemnifies and holds Secured Party harmless from and against any claim, suit, loss, damage, or expense (including attorneys' fees) arising out of any alleged defect in any product manufactured, promoted, or sold by Debtor (or any affiliate or subsidiary thereof) in connection with any Patent or out of the manufacture, promotion, labeling, sale or advertisement of any such product by Debtor (or any affiliate or subsidiary thereof). (m) Debtor will promptly pay Secured Party for any and all costs and reasonable expenditures incurred by Secured Party pursuant to the provisions of this agreement or for the defense, protection, or enforcement of the Obligations, the Collateral, or the security interests granted hereunder, including, but not limited to, all filing or recording fees, court costs, collection charges, travel expenses, and attorneys' fees and reasonable legal expenses. Such costs and reasonable expenditures shall be payable on demand, together with interest at the then applicable rate set forth in the Financing Agreements and shall be part of the Obligations secured hereby. 4. EVENTS OF DEFAULT All Obligations shall become immediately due and payable, without notice or demand, at the option of Secured Party, upon the occurrence of any one or more defaults or events of default hereunder or under any of the Financing Agreements (each an "EVENT OF DEFAULT" hereunder). -4- 5. RIGHTS AND REMEDIES Upon the occurrence of any such Event of Default and during the continuance thereof, in addition to all other rights and remedies of Secured Party, whether provided under law, the Financing Agreements or otherwise, Secured Party shall have the following rights and remedies which may be exercised without notice to, or consent by, Debtor except as such notice or consent is expressly provided for hereunder: (a) Secured Party may require that neither Debtor nor any affiliate or subsidiary of Debtor make any use of the Patents for any purpose whatsoever. Secured Party may make use of any Patents for the sale of goods, completion of work-in-process or rendering of services or otherwise in connection with enforcing any other security interest granted to Secured Party by Debtor or any subsidiary or affiliate of Debtor. (b) Secured Party may grant such license or licenses relating to the Collateral for such term or terms, on such conditions, and in such manner, as Secured Party shall in its discretion deem appropriate. Such license or licenses may be general, special, or otherwise, and may be granted on an exclusive or non-exclusive basis throughout all or any part of the United States of America, its territories and possessions, and all foreign countries. (c) Secured Party may assign, sell, or otherwise dispose of the Collateral or any part thereof, either with or without special conditions or stipulations except that if notice to Debtor of intended disposition of Collateral is required by law, the giving of five (5) business days prior notice in the manner set forth in subparagraph 6(b) hereof shall be deemed reasonable notice thereof and Debtor waives any other notice with respect thereto. Secured Party shall have the power to buy the Collateral or any part thereof, and Secured Party shall also have the power to execute assurances and perform all other acts which Secured Party may, in its discretion, deem appropriate or proper to complete such assignment, sale, or disposition. (d) In addition to the foregoing, in order to implement the assignment, sale, or other disposition of any of the Collateral pursuant to Subparagraph 5(c) hereof, Secured Party may at any time execute and deliver on behalf of Debtor, pursuant to the authority granted in the Powers of Attorney described in Subparagraph 3(f) hereof, one or more instruments of assignment of the Patents (or any application, registration, or recording relating thereto), in form suitable for filing, recording, or registration. Debtor agrees to pay Secured Party on demand all costs incurred in any such transfer of the Collateral, including, but not limited to, any taxes, fees, and reasonable attorneys' fees and legal expenses. (e) Secured Party may first apply the proceeds actually received from any such license, assignment, sale, or other disposition of Collateral to the costs and expenses thereof, including, without limitation, attorneys' fees and all legal, travel, and other expenses which may be incurred by Secured Party. Thereafter, Secured Party may apply any remaining proceeds to such of the Obligations as Secured Party may in its discretion determine. Debtor shall remain liable to Secured Party for any expenses or obligations remaining unpaid after the application of such proceeds, and Debtor will pay Secured Party on demand any such unpaid amount, together with interest at a rate equal to the highest rate then payable on the Obligations. -5- (f) Debtor shall supply to Secured Party or to Secured Party's designee, Debtor's knowledge and expertise relating to the manufacture and sale of the products and services to which the Patents relate and Debtor's customer lists and other records relating to the Patents and the distribution thereof. (g) Nothing contained herein shall be construed as requiring Secured Party to take any such action at any time. All of Secured Party's rights and remedies, whether provided under law, this agreement, the other Financing Agreements or otherwise, shall be cumulative and none is exclusive. Such rights and remedies may be enforced alternatively, successively, or concurrently. 6. MISCELLANEOUS (a) Any failure or delay by Secured Party to require strict performance by Debtor of any of the provisions, warranties, terms, and conditions contained herein or in any other agreement, document, or instrument, shall not affect Secured Party or Secured Party's right to demand strict compliance and performance therewith, and any waiver of any default shall not waive or affect any other default, whether prior or subsequent thereto, and whether of the same or of a different type. None of the warranties, conditions, provisions, and terms contained herein or in any other agreement, document, or instrument shall be deemed to have been waived by any act or knowledge of Secured Party, its agents, officers, or employees, but only by an instrument in writing, signed by an officer of Secured Party and directed to Debtor, specifying such waiver. (b) All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made: if by hand, telex, telegram or facsimile immediately upon sending; if by Federal Express, Express Mail or any other overnight delivery service, one (1) day after dispatch; and if mailed by certified mail, return receipt requested, five (5) business days after mailing. All notices, requests and demands are to be given to the respective parties at the following addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph) set forth herein: If to Debtor: TII NETWORK TECHNOLOGIES, INC. 1385 Akron Street Copiague, New York 11726 Attention: President Telephone: (631) 789-2600 Telecopier: (631) 789-1661 If to Secured Party: GMAC COMMERCIAL CREDIT LLC 1290 Avenue of the Americas New York, New York 10104 Attention: Loan Administration Department Mr. Frank Imperato, Senior Vice President Telephone: (212) 884-7026 Telecopier: (212) 884-7162 -6- (c) In the event that any provision hereof shall be deemed to be invalid by any court, such invalidity shall not affect the remainder of this agreement. (d) All references to Debtor and Secured Party herein shall include their respective successors and assigns. All references to the term "person" herein shall mean an individual, sole proprietorship, limited partnership, general partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture association, organization or other entity or a government department or any agency, instrumentality or political subdivision thereof. (e) This agreement shall be binding upon and for the benefit of the parties hereto and their respective successors and assigns. No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this agreement signed by the party to be charged thereby. (f) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS RULES). ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST THE DEBTOR WITH RESPECT TO ANY OF THE OBLIGATIONS, THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE DEBTOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE SECURED PARTY TO BRING PROCEEDINGS AGAINST THE DEBTOR IN THE COURTS OF ANY OTHER JURISDICTION. THE DEBTOR WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. ANY JUDICIAL PROCEEDINGS BY THE DEBTOR AGAINST THE SECURED PARTY INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN THE CITY OF NEW YORK, STATE OF NEW YORK. (g) EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE -7- TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (h) In the event of any conflict of any of the terms or provisions of this agreement with any of the terms or provisions of the Credit Agreement, the terms or provisions of the Credit Agreement shall control. (i) This agreement amends, restates, replaces and supercedes in its entirety, without a breach in continuity, the Existing Patent Security Agreement, as the Existing Patent Security Agreement has heretofore been amended, restated, renewed, replaced, substituted, extended or otherwise modified. -8- IN WITNESS WHEREOF, Debtor and Secured Party have executed this agreement as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC., FORMERLY KNOWN AS TII INDUSTRIES, INC. By: /s/ Timothy J. Roach ------------------------------------ Title: President GMAC COMMERCIAL CREDIT LLC By: /s/ Frank Imperato ------------------------------------ Title: Senior Vice President -9- STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) As of this 10th day of January, 2002, before me personally came Timothy J. Roach, to me known, who being duly sworn, did depose and say, that he is the Presidnet of TII NETWORK TECHNOLOGIES, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of said corporation. /s/ Leonard W. Suroff ---------------------------------------- Notary Public STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) As of this 10th day of January, 2002, before me personally came Frank Imperato, to me known, who, being duly sworn, did depose and say, that he is a Senior Vice President of GMAC COMMERCIAL CREDIT LLC, the limited liability company described in and which executed the foregoing instrument; and that he signed his name thereto with the consent of the members thereof /s/ Ellen M. Allen ---------------------------------------- Notary Public SCHEDULE A LIST OF PATENTS AND APPLICATIONS --------------------------------
- -------------------------------------------------------------------------------------------------------------------- Patent Description Patent Number Date of Patent/ Application - -------------------------------------------------------------------------------------------------------------------- Protector Housing DES 274,721 07/17/84 - -------------------------------------------------------------------------------------------------------------------- Electronic Test or The Like DES 278,041 03/19/85 - -------------------------------------------------------------------------------------------------------------------- Protector Housing for Telecommunications DES 287,583 01/06/87 Equipment - -------------------------------------------------------------------------------------------------------------------- Protector Housing for Telecommunications DES 292,089 09/29/87 Equipment or The Like - -------------------------------------------------------------------------------------------------------------------- Protector Housing for Telecommunications DES 299,130 12/27/88 Equipment - -------------------------------------------------------------------------------------------------------------------- Protector Housing for Telecommunications DES 312,460 11/27/90 Equipment - -------------------------------------------------------------------------------------------------------------------- Multiple Telephone Network Interface Housing DES 320,796 10/15/91 - -------------------------------------------------------------------------------------------------------------------- Telephone Network Interface Module DES 347,229 5/24/94 - -------------------------------------------------------------------------------------------------------------------- Telephone Terminal Apparatus DES 347,438 05/31/94 - -------------------------------------------------------------------------------------------------------------------- Combined Environmentally Sealed Telephone DES 355,406 02/14/95 Terminal Module and Covered Telephone Jack - -------------------------------------------------------------------------------------------------------------------- Solid State Surge Protector Module for Telephone DES 368,251 03/26/96 Communications Line - -------------------------------------------------------------------------------------------------------------------- Exterior Surface of An Environmentally Sealed DES 384,670 10/07/97 Telephone Terminal Module With Test Light - -------------------------------------------------------------------------------------------------------------------- Exterior Surface of An Environmentally Sealed DES 384,671 10/07/97 Telephone Terminal Module - -------------------------------------------------------------------------------------------------------------------- Terminal Closure DES 385,850 11/04/97 - -------------------------------------------------------------------------------------------------------------------- Environmentally Sealed Electrical Terminal with DES 389,800 01/27/98 Hook-up Wire Management - -------------------------------------------------------------------------------------------------------------------- Thermal Switch Short Circulating Device for 4,275,432 06/23/81 Arrester Systems - -------------------------------------------------------------------------------------------------------------------- Excess Voltage Arrester 4,277,812 07/07/81 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Patent Description Patent Number Date of Patent/ Application - -------------------------------------------------------------------------------------------------------------------- Transformerless Hybrid Circuit 4,278,847 07/14/81 - -------------------------------------------------------------------------------------------------------------------- Fail Safe Surge Arrester Systems 4,303,959 12/01/81 - -------------------------------------------------------------------------------------------------------------------- Surge Arrester Assembly 4,319,300 03/09/82 - -------------------------------------------------------------------------------------------------------------------- Surge Arrester Assembly 4,320,435 03/16/82 - -------------------------------------------------------------------------------------------------------------------- Four-Party Automatic Number Identification Circuit Arrangements 4,324,953 04/13/82 - -------------------------------------------------------------------------------------------------------------------- Telephone Ringer Isolator Circuit Arrangement 4,331,838 05/25/82 - -------------------------------------------------------------------------------------------------------------------- Procedure for Manufacturing Gas-Filled Discharge Devices 4,383,723 05/17/83 - -------------------------------------------------------------------------------------------------------------------- Telephone Carrier System Repeater and Power System 4,392,225 07/05/83 - -------------------------------------------------------------------------------------------------------------------- Surge Arrester Assembly 4,394,704 07/19/83 - -------------------------------------------------------------------------------------------------------------------- Overvoltage Surge Arrester with Predetermined Creepage Path 4,396,970 08/02/83 - -------------------------------------------------------------------------------------------------------------------- Equipment Protector and Energy Saving Apparatus 4,415,943 11/15/83 - -------------------------------------------------------------------------------------------------------------------- Equipment for Manufacturing Gas-Filled Discharge Tubes for Use as Transient Protection 4,424,026 01/03/84 - -------------------------------------------------------------------------------------------------------------------- Miniature Central Surge Protectors 4,424,546 01/03/84 - -------------------------------------------------------------------------------------------------------------------- Signalling and Channel Loop Test Circuits for Station Carrier Telephone Systems 4,431,875 02/14/84 - -------------------------------------------------------------------------------------------------------------------- Solid State Hybrid Circuits 4,433,215 02/21/84 - -------------------------------------------------------------------------------------------------------------------- Combination Power and Communications Line Protector Apparatus 4,438,477 03/20/84 - -------------------------------------------------------------------------------------------------------------------- Power Supplies with Latch-Up Prevention and Auto Backup 4,600,875 07/15/86 - -------------------------------------------------------------------------------------------------------------------- Station Interface & Protector Apparatus 4,624,514 11/25/86 - -------------------------------------------------------------------------------------------------------------------- Line Protector 4,701,825 10/20/87 - -------------------------------------------------------------------------------------------------------------------- Station Interface & Protector Apparatus 4,853,960 08/01/89 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Patent Description Patent Number Date of Patent/ Application - -------------------------------------------------------------------------------------------------------------------- Retrofit Network Interface Apparatus 4,860,350 08/22/89 - -------------------------------------------------------------------------------------------------------------------- Self Contained Air Gap Assembly 4,866,562 09/12/89 - -------------------------------------------------------------------------------------------------------------------- Surge Suppression on AC Power Lines 4,912,589 03/27/90 - -------------------------------------------------------------------------------------------------------------------- Weatherproofing Apparatus for Telephone Connectors 4,917,617 04/17/90 - -------------------------------------------------------------------------------------------------------------------- Utility Meter to Telephone Line Interface 5,018,192 05/21/91 - -------------------------------------------------------------------------------------------------------------------- Back-up Surge Arrester 5,050,033 09/17/91 - -------------------------------------------------------------------------------------------------------------------- Solid State Station Protectors 5,210,677 05/11/93 - -------------------------------------------------------------------------------------------------------------------- Solid State Station Protectors 5,224,012 06/29/93 - -------------------------------------------------------------------------------------------------------------------- Miniature Station Protector Modules 5,224,013 06/29/93 - -------------------------------------------------------------------------------------------------------------------- Back-up Air Gaps 5,282,109 01/25/94 - -------------------------------------------------------------------------------------------------------------------- Weatherproof Telephone Network Interface Modules 5,291,553 03/01/94 - -------------------------------------------------------------------------------------------------------------------- Weatherproof Station Protection Modules 5,307,231 04/26/94 - -------------------------------------------------------------------------------------------------------------------- Network Interface Modules 5,367,569 11/22/94 - -------------------------------------------------------------------------------------------------------------------- Solid State Surge Protectors 5,384,679 01/24/95 - -------------------------------------------------------------------------------------------------------------------- Insulation Displacement Terminal Connectors 5,453,021 09/26/95 - -------------------------------------------------------------------------------------------------------------------- Miniature Station Protector Modules with an internal Protector Housing 5,457,592 10/10/95 - -------------------------------------------------------------------------------------------------------------------- Miniature Station Protector Modules with an internal Protector Housing 5,490,032 02/06/96 - -------------------------------------------------------------------------------------------------------------------- Minature Gas Tube Assembly with Back-Up Air Gap 5,508,675 04/16/96 - -------------------------------------------------------------------------------------------------------------------- Weatherproof Telephone Station Protectors 5,508,877 04/16/96 - -------------------------------------------------------------------------------------------------------------------- Weatherproof Telephone Station Protectors 5,537,471 07/16/96 - -------------------------------------------------------------------------------------------------------------------- Modular Device for Telephone Network Interface Apparatus 5,553,136 09/03/96 - -------------------------------------------------------------------------------------------------------------------- Co-axial Transmission Line Surge Arrestor 5,566,056 10/15/96 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Patent Description Patent Number Date of Patent/ Application - -------------------------------------------------------------------------------------------------------------------- Combined Overvoltage Station Protector Apparatus Having Maintenance Termination and Half Ringer Circuitry 5,572,397 11/05/96 - -------------------------------------------------------------------------------------------------------------------- Mounting Clip with Back-Up Overvoltage Protection 5,581,428 12/03/96 - -------------------------------------------------------------------------------------------------------------------- Overvoltage Protection Circuits 5,623,388 04/22/97 - -------------------------------------------------------------------------------------------------------------------- Network Interface Enclosure 5,633,926 05/27/97 - -------------------------------------------------------------------------------------------------------------------- Wire Termination Device 5,637,011 06/10/97 - -------------------------------------------------------------------------------------------------------------------- Network Interface Apparatus With Coaxial Transmission Line Surge Arrestor 5,657,196 08/12/97 - -------------------------------------------------------------------------------------------------------------------- Switchable Electrical Socket (AUTO-JACK) 5,704,797 01/06/98 - -------------------------------------------------------------------------------------------------------------------- Optical Fiber Enclosure System 5,708,751 01/13/98 - -------------------------------------------------------------------------------------------------------------------- Overvoltage Protection Modules with Back-up Protection for Communications Lines 5,721,663 02/24/98 - -------------------------------------------------------------------------------------------------------------------- Coaxial Transmission Line Surge Arrestor with Fusable Link 5,724,220 03/03/98 - -------------------------------------------------------------------------------------------------------------------- Mounting Clip with a Pair of Overvoltage 08/087,451 07/09/93 Protection Apparatuses - -------------------------------------------------------------------------------------------------------------------- Telephone Network Interface Apparatus 08/287,505 08/08/94 - -------------------------------------------------------------------------------------------------------------------- Overvoltage Protection Circuits 08/438,448 05/10/95 - -------------------------------------------------------------------------------------------------------------------- Multi Fiber Fusion Splice Protection Sleeve 08/573,260 12/15/95 - -------------------------------------------------------------------------------------------------------------------- Combination Coaxial Surge Arrestor/Power Extractor 08/740,732 11/04/96 - -------------------------------------------------------------------------------------------------------------------- Customer Bridge Module 08/747,655 11/13/96 - -------------------------------------------------------------------------------------------------------------------- Fiber Optic Runway System 08/768,127 12/07/96 - -------------------------------------------------------------------------------------------------------------------- Multi Fiber Fusion Splice Protection Sleeve 08/796,926 02/07/97 - -------------------------------------------------------------------------------------------------------------------- Fiber Optic Cable Bend Radius Control 98/03159 02/18/98 - -------------------------------------------------------------------------------------------------------------------- Fiber Optic Cable Bend Radius Control 08/819,407 03/17/97 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Patent Description Patent Number Date of Patent/ Application - -------------------------------------------------------------------------------------------------------------------- Cable Interconnection Apparatus for Network 08/851,886 05/06/97 Interface Device - -------------------------------------------------------------------------------------------------------------------- Residential Protection Service Center 08/868,351 06/03/97 - -------------------------------------------------------------------------------------------------------------------- Network Interface Device (Auto-Jack-In-A-Box) 08/933,284 09/18/97 - -------------------------------------------------------------------------------------------------------------------- Ethernet Overvoltage/Overcurrent Protection System 08/984,593 12/03/97 - -------------------------------------------------------------------------------------------------------------------- Network Interface Device for High Speed Data Lines 08/993,271 12/18/97 - -------------------------------------------------------------------------------------------------------------------- Modular Device for Telephone Network Interface Apparatus 95/06081 06/16/95 - -------------------------------------------------------------------------------------------------------------------- Co-Axial Transmission Line Surge Arrestor 95/00992 01/25/95 - -------------------------------------------------------------------------------------------------------------------- Residential Protection Service Center 09/052,233 03/31/98 - -------------------------------------------------------------------------------------------------------------------- Residential Protection Service Center 09/163,129 09/29/98 - -------------------------------------------------------------------------------------------------------------------- Surge Suppressor 09/197,820 11/23/98 - -------------------------------------------------------------------------------------------------------------------- Surge Suppressor With Virtual Ground 09/266,118 03/10/99 - -------------------------------------------------------------------------------------------------------------------- Combination Ground Fault Interrupter/Surge Suppressor 09/299,265 04/26/99 - -------------------------------------------------------------------------------------------------------------------- Test Contract for Overvoltage Protection Apparatus 09/473,079 12/28/99 - -------------------------------------------------------------------------------------------------------------------- Surge Suppressor 09/567,301 05/08/00 - -------------------------------------------------------------------------------------------------------------------- Drop Fault Current Interrupter 09/630,208 08/01/00 - -------------------------------------------------------------------------------------------------------------------- Telecommunications Terminal Block 09/645,705 08/24/00 - --------------------------------------------------------------------------------------------------------------------
SCHEDULE B - LICENSES PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT --------------------------------------------------- I. License Agreement dated October 22, 1992 between Georgia Tech Research Corporation and TII Industries, Inc. granting TII an exclusive, royalty bearing license under U.S. Patent No. 5,368,501 and reserving to Georgia Tech Research Corporation an irrevocable, non-exclusive, royalty-free, nontransferable license to practice the patented invention for educational and research and development activities. II. License Agreement dated September 30, 1997 between CITEL S.A. and TII Industries, Inc. granting TII a sole, royalty-bearing license under U.S. Patent No. 4,616,155 and the French, Indian and Belgian counterpart patents and reserving to CITEL the right to practice the patented invention commercially. EXHIBIT 1 SPECIAL POWER OF ATTORNEY ------------------------- (PATENT) ------ STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) KNOW ALL MEN BY THESE PRESENTS, that TII NETWORK TECHNOLOGIES, INC. ("DEBTOR"), having an office at 1385 Akron Street, Copiague, New York 11726, hereby appoints and constitutes, severally, GMAC COMMERCIAL CREDIT LLC ("SECURED PARTY"), and each of its officers, its true and lawful attorney, with full power of substitution and with full power and authority to perform the following acts on behalf of Debtor at any time after the occurrence and during the continuance of an Event of Default under the Security Agreement (as hereinafter defined): 1. Execution and delivery of any and all agreements, documents, instrument of assignment, or other papers which Secured Party, in its discretion, deems necessary or advisable for the purpose of assigning, selling, or otherwise disposing of all right, title, and interest of Debtor in and to any patents and all registrations, recordings, reissues, extensions, and renewals thereof, or for the purpose of recording, registering and filing of, or accomplishing any other formality with respect to the foregoing. 2. Execution and delivery of any and all documents, statements, certificates or other papers which Secured Party, in its discretion, deems necessary or advisable to further the purposes described in Subparagraph 1 hereof. This Power of Attorney, being a power coupled with an interest, is made pursuant to a Patent Collateral Assignment and Security Agreement between Debtor and Secured Party, of even date herewith (the "SECURITY AGREEMENT") and may not be revoked until payment in full of all Debtor's "Obligations", as such term is defined in the Security Agreement and is subject to the terms and provisions thereof. December 10, 2001 TII NETWORK TECHNOLOGIES, INC. By: ------------------------------------- Name: Timothy J. Roach Title: President STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) As of this 10th day of January, 2002, before me personally came Timothy J. Roach, to me known, who being duly sworn, did depose and say, that he is the President of TII NETWORK TECHNOLOGIES, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of said corporation. ---------------------------------------- Notary Public EX-4 7 ex4_b10.txt EX-4(B)(10) - AMEND&RESTATED TRADEMARK COLLATERAL EXHIBIT 4(b)(10) AMENDED AND RESTATED TRADEMARK COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT --------------------------------- AGREEMENT made this 10th day of December, 2001 by and between TII NETWORK TECHNOLOGIES, INC., formerly known as TII INDUSTRIES, INC., a Delaware corporation ("DEBTOR"), with its chief executive office at 1385 Akron Street, Copiague, New York 11726 and GMAC COMMERCIAL CREDIT LLC, formerly known as BNY FACTORING LLC, as successor by merger to BNY FINANCIAL CORPORATION, ("SECURED PARTY"), having an office at 1290 Avenue of the Americas, New York, New York 10104. W I T N E S S E T H: -------------------- WHEREAS, Debtor has adopted, used and is using, and is the owner of the entire right, title, and interest in and to the trademarks, trade names, terms, designs and applications therefor described in Schedule A annexed hereto and made a part hereof; and WHEREAS, Secured Party and Debtor have heretofore entered into financing arrangements pursuant to which Secured Party has made and may continue to make loans and advances and provide other financial accommodations to Debtor as set forth in the Revolving Credit, Term Loan and Security Agreement, dated April 30, 1998, by and among Secured Party and Debtor and TII Corporation (the "CREDIT AGREEMENT"), the Trademark Collateral Assignment and Security Agreement dated April 30, 1998 by and between Debtor and Secured Party (the "Existing Trademark Security Agreement"), together with various other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Agreement (all of the foregoing, together with the Credit Agreement and the Existing Trademark Security Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "FINANCING AGREEMENTS"); and WHEREAS, pursuant to the terms of this Amended and Restated Trademark Collateral Assignment and Security Agreement, the Secured Party and Debtor have agreed to amend and restate the terms of the Existing Trademark Security Agreement to update and modify certain information contained therein; and WHEREAS, as an inducement to the Secured Party to continue to make loans and advances and provide other financial accommodations pursuant to the Financing Agreements, Debtor has agreed to grant to Secured Party certain collateral security as set forth herein; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees as follows: -1- 1. GRANT OF SECURITY INTEREST -------------------------- (a) As collateral security for the prompt performance, observance and indefeasible payment in full of all of the Obligations (as hereinafter defined), Debtor hereby grants to Secured Party a continuing security interest in and a general lien upon, and hereby conditionally assigns to Secured Party: all of Debtor's now existing or hereafter acquired right, title, and interest in and to: all of Debtor's trademarks, trade names, tradestyles and service marks; all prints and labels on which said trademarks, trade names, tradestyles and service marks appear, have appeared or will appear, and all designs and general intangibles of a like nature; all applications, registrations and recordings relating to the foregoing in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, any political subdivision thereof or in any other countries, and all reissues, extensions and renewals thereof including those trademarks, terms, designs and applications described in Schedule A hereto (the "TRADEMARKS"); the goodwill of the business symbolized by each of the Trademarks, including, without limitation, all customer lists and other records relating to the distribution of products or services bearing the Trademarks; and (c) any and all proceeds of any of the foregoing, including, without limitation, any claims by Debtor against third parties for infringement of the Trademarks or any licenses with respect thereto (all of the foregoing are collectively referred to herein as the "COLLATERAL"). 2. OBLIGATIONS SECURED ------------------- The security interest, lien and other interests granted to Secured Party pursuant to this Agreement shall secure the prompt performance, observance and indefeasible payment in full of any and all loans, indebtedness, liabilities and obligations of any kind owing by Debtor to Secured Party, however evidenced, whether as principal, guarantor or otherwise, whether arising under the Credit Agreement, the other Financing Agreements or otherwise, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended and whether arising directly or acquired from others (including, without limitation, Secured Party's participations or interests in Debtor's obligations to others) and including, without limitation, Secured Party's charges, commissions, interest, expenses, costs and attorneys' fees chargeable to Debtor under this agreement, the Financing Agreements or in connection with any of the foregoing (all hereinafter referred to as "OBLIGATIONS"). 3. REPRESENTATIONS, WARRANTIES AND COVENANTS ----------------------------------------- Debtor hereby represents, warrants and covenants to Secured Party the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which, or compliance with, being a continuing condition of the making of loans by Secured Party to Debtor under the Financing Agreements: (a) Debtor will pay and perform all of the Obligations according to their terms. (b) All of the existing Collateral is valid and subsisting in full force and effect, and Debtor owns the sole, full, and clear title thereto, and the right and power to grant the -2- security interests granted hereunder. Debtor will, at Debtor's expense, perform all acts and execute all documents necessary to maintain the existence of the Collateral as valid, subsisting and registered trademarks, including, without limitation, the filing of any renewal affidavits and applications. The Collateral is not subject to any liens, claims, mortgages, assignments, licenses, security interests, or encumbrances of any nature whatsoever, except the security interests granted hereunder and the licenses permitted under Section 3(e) below. (c) Debtor will not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or lien upon, encumber, grant an exclusive or non-exclusive license relating thereto, except as permitted herein, in the Financing Agreements, or otherwise dispose of any of the Collateral without the prior written consent of Secured Party. Nothing in this agreement shall be deemed a consent by Secured Party to any such action, except as such action is expressly permitted hereunder. (d) Debtor will, at Debtor's expense, perform all acts and execute all documents requested at any time by Secured Party to evidence, perfect, maintain, record, or enforce the security interest in the Collateral granted hereunder or to otherwise further the provisions of this agreement. Debtor hereby authorizes Secured Party to execute and file one or more financing statements (or similar documents) with respect to the Collateral, signed only by Secured Party or as otherwise determined by Secured Party. Debtor further authorizes Secured Party to have this or any other similar security agreement filed with the Commissioner of Patents and Trademarks or other appropriate federal, state or government office. (e) As of the date hereof, Debtor does not have any Trademarks registered, or subject to pending applications, in the United States Patent and Trademark Office or any similar office or agency in the United States other than those described in Schedule A annexed hereto and has not granted any licenses with respect thereto other than as set forth in Schedule B hereto. (f) Debtor will, concurrently with the execution and delivery of this agreement, execute and deliver to Secured Party five (5) originals of a Power of Attorney in the form of Exhibit I annexed hereto for the implementation of the assignment, sale or other disposition of the Collateral pursuant to Secured Party's exercise of the rights and remedies granted to Secured Party hereunder. (g) Secured Party may, in its discretion, pay any amount or do any act which Debtor fails to pay or do as required hereunder or as requested by Secured Party to preserve, defend, protect, maintain, record, amend or enforce the Obligations, the Collateral, or the security interest granted hereunder including but not limited to all filing or recording fees, court costs, collection charges and reasonable attorneys' fees. Debtor will be liable to Secured Party for any such payment, which payment shall be deemed an advance by Secured Party to Debtor, shall be payable on demand together with interest at the then applicable rate set forth in the Financing Agreements and shall be part of the Obligations secured hereby. (h) Debtor shall not file any application for the registration of a Trademark with the United States Patent and Trademark Office or any similar office or agency in the United States, any state therein, or any other country, unless Debtor has by thirty (30) days prior written notice informed Secured Party of such action. Upon request of Secured Party, Debtor shall -3- execute and deliver to Secured Party any and all assignments, agreements, instruments, documents and such other papers as may be requested by Secured Party to evidence the security interests of Secured Party in such Trademark. (i) Debtor has not abandoned any of the Trademarks and Debtor will not do any act, nor omit to do any act, whereby the Trademarks may become abandoned, invalidated, unenforceable, avoided or avoidable. Debtor shall notify Secured Party immediately if it knows or has reason to know of any reason why any application, registration, or recording may become abandoned, canceled, invalidated, avoided or avoidable. (j) Debtor will render any assistance necessary to Secured Party in any proceeding before the United States Patent and Trademark Office, any federal or state court, or any similar office or agency in the United States or any state therein or any other country to maintain such application and registration of the Trademarks as Debtor's exclusive property and to protect Secured Party's interest therein, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference, and cancellation proceedings. (k) Debtor will promptly notify Secured Party if Debtor (or any affiliate or subsidiary thereof) learns of any use by any person of any term or design likely to cause confusion with any Trademark. If requested by Secured Party, Debtor, at Debtor's expense, shall join with Secured Party in such action as Secured Party, in its discretion, may deem advisable for the protection of Secured Party's interest in and to the Trademarks. (l) Debtor assumes all responsibility and liability arising from the use of the Trademarks and Debtor hereby indemnifies and holds Secured Party harmless from and against any claim, suit, loss, damage, or expense (including attorneys' fees) arising out of any alleged defect in any product manufactured, promoted, or sold by Debtor (or any affiliate or subsidiary thereof) in connection with any Trademark or out of the manufacture, promotion, labelling, sale or advertisement of any such product by Debtor (or any affiliate or subsidiary thereof). (m) Debtor will promptly pay Secured Party for any and all costs and reasonable expenditures incurred by Secured Party, pursuant to the provisions of this agreement or for the defense, protection, or enforcement of the Obligations, the Collateral, or the security interests granted hereunder, including, but not limited to, all filing or recording fees, court costs, collection charges, travel expenses, and reasonable attorneys' fees and reasonable legal expenses. Such costs and reasonable expenditures shall be payable on demand, together with interest at the then applicable rate set forth in the Financing Agreements and shall be part of the Obligations secured hereby. 4. EVENTS OF DEFAULT ----------------- All Obligations shall become immediately due and payable, without notice or demand, at the option of Secured Party, upon the occurrence of any one or more defaults or events of default hereunder or under any of the Financing Agreements (each an "EVENT OF DEFAULT" hereunder). -4- 5. RIGHTS AND REMEDIES ------------------- Upon the occurrence of any such Event of Default and during the continuance thereof, in addition to all other rights and remedies of Secured Party, whether provided under law, the Financing Agreements or otherwise, Secured Party shall have the following rights and remedies which may be exercised without notice to, or consent by, Debtor except as such notice or consent is expressly provided for hereunder: (a) Secured Party may require that neither Debtor nor any affiliate or subsidiary of Debtor make any use of the Trademarks or any marks similar thereto for any purpose whatsoever. Secured Party may make use of any Trademarks for the sale of goods, completion of work in process or rendering of services in connection with enforcing any other security interest granted to Secured Party by Debtor or any subsidiary of Debtor. (b) Secured Party may grant such license or licenses relating to the Collateral for such term or terms, on such conditions, and in such manner, as Secured Party shall in its discretion deem appropriate. Such license or licenses may be general, special, or otherwise, and may be granted on an exclusive or non-exclusive basis throughout all or any part of the United States of America, its territories and possessions, and all foreign countries. (c) Secured Party may assign, sell or otherwise dispose of the Collateral or any part thereof, either with or without special conditions or stipulations except that if notice to Debtor of intended disposition of Collateral is required by law, the giving of five (5) business days notice in the manner set forth in subparagraph 6(b) hereof shall be deemed reasonable notice thereof and Debtor waives any other notice with respect thereto. Secured Party shall have the power to buy the Collateral or any part thereof, and Secured Party shall also have the power to execute assurances and perform all other acts which Secured Party may, in its discretion, deem appropriate or proper to complete such assignment, sale, or disposition. (d) In addition to the foregoing, in order to implement the assignment, sale, or other disposition of any of the Collateral pursuant to Subparagraph 5(c) hereof, Secured Party may at any time execute and deliver on behalf of Debtor, pursuant to the authority granted in the Powers of Attorney described in Subparagraph 3(f) hereof, one or more instruments of assignment of the Trademarks (or any application, registration, or recording relating thereto), in form suitable for filing, recording, or registration. Debtor agrees to pay Secured Party on demand all costs incurred in any such transfer of the Collateral, including, but not limited to, any taxes, fees, legal expenses and reasonable attorneys' fees and legal expenses. (e) Secured Party may first apply the proceeds actually received from any such license, assignment, sale, or other disposition of Collateral to the costs and expenses thereof, including, without limitation, attorneys' fees and all legal, travel and other expenses which may be incurred by Secured Party. Thereafter, Secured Party may apply any remaining proceeds to such of the Obligations as Secured Party may in its discretion determine. Debtor shall remain liable to Secured Party for any expenses or obligations remaining unpaid after the application of such proceeds, and Debtor will pay Secured Party on demand any such unpaid amount, together with interest at a rate equal to the highest rate then payable on the Obligations. -5- (f) Debtor shall supply to Secured Party or its designee, Debtor's knowledge and expertise relating to the manufacture and sale of the products and services bearing the Trademarks and Debtor's customer lists and other records relating to the Trademarks and the distribution thereof. (g) Nothing contained herein shall be construed as requiring Secured Party to take any such action at any time. All of Secured Party's rights and remedies, whether provided under law, the Financing Agreements, this agreement, or otherwise, shall be cumulative and none is exclusive. Such rights and remedies may be enforced alternatively, successively, or concurrently. 6. MISCELLANEOUS ------------- (a) Any failure or delay by Secured Party to require strict performance by Debtor of any of the provisions, warranties, terms, and conditions contained herein or in any other agreement, document, or instrument, shall not affect Secured Party or Secured Party's right to demand strict compliance and performance therewith, and any waiver of any default shall not waive or affect any other default, whether prior or subsequent thereto, and whether of the same or of a different type. None of the warranties, conditions, provisions, and terms contained herein or in any other agreement, document, or instrument shall be deemed to have been waived by any act or knowledge of Secured Party, its agents, officers, or employees, but only by an instrument in writing, signed by an officer of Secured Party and directed to Debtor, specifying such waiver. (b) All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made: if by hand, telex, telegram or facsimile immediately upon sending; if by Federal Express, Express Mail or any other overnight delivery service, one (1) day after dispatch; and if mailed by certified mail, return receipt requested, five (5) business days after mailing. All notices, requests and demands are to be given to the respective parties at the following addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph) set forth herein: -6- If to Debtor: TII NETWORK TECHNOLOGIES, INC. 1385 Akron Street Copiague, New York 11726 Attention: President Telephone: (631) 789-2600 Telecopier: (631) 789-1661 If to Secured Party: GMAC COMMERCIAL CREDIT LLC 1290 Avenue of the Americas New York, New York 10104 Attention: Loan Administration Department Mr. Frank Imperato, Senior Vice President Telephone: (212) 884-7026 Telecopier: (212) 884-7162 (c) In the event that any provision hereof shall be deemed to be invalid by any court, such invalidity shall not affect the remainder of this agreement. (d) All references to Debtor and Secured Party herein shall include their respective successors and assigns. All references to the term "person" or "Person" herein shall mean any individual, sole proprietorship, limited partnership, general partnership, corporation (including a business trust), unincorporated association, joint stock corporation, trust, joint venture, association, organization or other entity or government or any agency or instrumentality or political subdivision thereof. (e) This agreement shall be binding upon and for the benefit of the parties hereto and their respective successors and assigns. No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this agreement signed by the party to be charged thereby. (f) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS RULES). ANY JUDICIAL PROCEEDING BROUGHT BY OR AGAINST THE DEBTOR WITH RESPECT TO ANY OF THE OBLIGATIONS, THIS AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, UNITED STATES OF AMERICA, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE DEBTOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE SECURED PARTY TO BRING PROCEEDINGS AGAINST THE DEBTOR IN THE COURTS OF ANY OTHER JURISDICTION. THE DEBTOR WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER AND -7- SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. ANY JUDICIAL PROCEEDINGS BY THE DEBTOR AGAINST THE SECURED PARTY INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN THE CITY OF NEW YORK, STATE OF NEW YORK. (g) EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, AND EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (h) In the event of any conflict of any of the terms or provisions of this Agreement with any of the terms or provisions of the Credit Agreement, the terms or provisions of the Credit Agreement shall control. (i) This agreement amends, restates, replaces and supercedes in its entirety, without a breach in continuity, the Existing Trademark Security Agreement, as the Existing Trademark Security Agreement has heretofore been amended, restated, renewed, replaced, substituted, extended or otherwise modified. -8- IN WITNESS WHEREOF, Debtor and Secured Party have executed this agreement as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC., FORMERLY KNOWN AS TII INDUSTRIES, INC. By: /s/ Timothy J. Roach ------------------------------------ Title: President GMAC COMMERCIAL CREDIT LLC By: /s/ Frank Imperato ------------------------------------ Title: Senior Vice President -9- STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) As of this 10th day of January, 2002, before me personally came Timothy J. Roach, to me known, who being duly sworn, did depose and say, that he is the President of TII NETWORK TECHNOLOGIES, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of said corporation. /s/ Leonard W. Suroff ------------------------------------ Notary Public STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) As of this 10th day of January, 2002, before me personally came Frank Imperato, to me known, who, being duly sworn, did depose and say, that he is a Senior Vice President of GMAC COMMERCIAL CREDIT LLC, the limited liability company described in and which executed the foregoing instrument; and that he signed his name thereto with the consent of the members thereof. /s/ Ellen M. Allen ------------------------------------ Notary Public -10- SCHEDULE A LIST OF TRADEMARKS AND APPLICATIONS
- -------------------------------------------------------------------------------------------------------------------- Trademark Registration/ Registration/ Application Number Application Date - -------------------------------------------------------------------------------------------------------------------- TII 912,671 06/08/71 - -------------------------------------------------------------------------------------------------------------------- THOR 1,111,268 01/16/79 - -------------------------------------------------------------------------------------------------------------------- TII 1,112,170 01/30/71 - -------------------------------------------------------------------------------------------------------------------- TFS 1,114,427 03/06/79 - -------------------------------------------------------------------------------------------------------------------- TOTEL FAILSAFE 1,122,720 07/24/79 - -------------------------------------------------------------------------------------------------------------------- AdvanceMan 1,131,674 03/11/80 - -------------------------------------------------------------------------------------------------------------------- PARTYLINE PAK 1,131,675 03/11/80 - -------------------------------------------------------------------------------------------------------------------- TII 1,155,357 05/26/81 - -------------------------------------------------------------------------------------------------------------------- BIG MAC 1,267,817 02/21/84 - -------------------------------------------------------------------------------------------------------------------- TII (Electronics) 1,304,795 11/13/84 - -------------------------------------------------------------------------------------------------------------------- TII (Fiber Optics) 1,925,136 10/10/95 - -------------------------------------------------------------------------------------------------------------------- LIGHTRAX 2,074,184 06/24/97 - -------------------------------------------------------------------------------------------------------------------- AUTO-JACK 2,074,236 06/24/97 - -------------------------------------------------------------------------------------------------------------------- PRO-TRACTOR 75/187,089 PENDING - -------------------------------------------------------------------------------------------------------------------- TII 6672-95 PENDING (Venezuela) - -------------------------------------------------------------------------------------------------------------------- TOTEL 75/477600 05/01/98 - -------------------------------------------------------------------------------------------------------------------- TOTEL LIGHTING SHIELD 75/624509 01/21/99 - -------------------------------------------------------------------------------------------------------------------- TII LIGHTNING SHIELD 75/625670 01/25/99 (STYLIZED) - -------------------------------------------------------------------------------------------------------------------- ANGLE DRIVER 75/874053 12/17/99 - -------------------------------------------------------------------------------------------------------------------- TOTEL LIGHTING SURGE SHIELD 76/102653 08/03/00 -11- - -------------------------------------------------------------------------------------------------------------------- Trademark Registration/ Registration/ Application Number Application Date - -------------------------------------------------------------------------------------------------------------------- TII LIGHTING SURGE 76/102366 08/03/00 SHIELD - -------------------------------------------------------------------------------------------------------------------- M2 76/195632 01/17/01 - -------------------------------------------------------------------------------------------------------------------- TII LIGHTING AND POWER SURGE SHIELD 76/271011 06/13/01 - --------------------------------------------------------------------------------------------------------------------
SCHEDULE B PERMITTED LIENS AND LICENSES ---------------------------- None -12- EXHIBIT I SPECIAL POWER OF ATTORNEY STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) KNOW ALL MEN BY THESE PRESENTS, that TII NETWORK TECHNOLOGIES, INC. ("DEBTOR"), having an office at 1385 Akron Street, Copiague, New York 11726, hereby appoints and constitutes, severally, GMAC COMMERCIAL CREDIT LLC ("SECURED PARTY"), and each of its officers, its true and lawful attorney, with full power of substitution and with full power and authority to perform the following acts on behalf of Debtor at any time after the occurrence and during the continuance of an Event of Default under the Security Agreement (as hereinafter defined): 1. Execution and delivery of any and all agreements, documents, instrument of assignment, or other papers which Secured Party, in its discretion, deems necessary or advisable for the purpose of assigning, selling, or otherwise disposing of all right, title, and interest of Debtor in and to any trademarks and all registrations, recordings, reissues, extensions, and renewals thereof, or for the purpose of recording, registering and filing of, or accomplishing any other formality with respect to the foregoing. 2. Execution and delivery of any and all documents, statements, certificates or other papers which Secured Party, in its discretion, deems necessary or advisable to further the purposes described in Subparagraph 1 hereof. This Power of Attorney, being a power coupled with an interest, is made pursuant to an Amended and Restated Trademark Collateral Assignment and Security Agreement between Debtor and Secured Party, of even date herewith (the "SECURITY AGREEMENT") and may not be revoked until indefeasible payment in full of all Debtor's "Obligations", as such term is defined in the Security Agreement and is subject to the terms and provisions thereof. December 10, 2001 TII NETWORK TECHNOLOGIES, INC. By: ------------------------------------ Name: Timothy J. Roach Title: President -13- STATE OF NEW YORK ) ) ss.: COUNTY OF SUFFOLK ) As of this 10th day of January, 2002, before me personally came Timothy J. Roach, to me known, who being duly sworn, did depose and say, that he is the President of TII NETWORK TECHNOLOGIES, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the Board of Directors of said corporation. ------------------------------------ Notary Public EX-10 8 ex10_b6.txt EX-10(B)(6) - CONSULTANT AGMT - R. GARWOOD EXHIBIT 10(b)(6) March 29, 2002 Mr. R. Dave Garwood RD Garwood Inc. 8400 Jett Ferry Road Atlanta, GA 30350-4709 Dear Mr. Garwood: This will constitute and confirm our agreement that R. Dave Garwood will act as a consultant (hereinafter "Consultant") for TII Network Technologies, Inc. (hereinafter referred to as "TII"). 1. Consultant is retained by TII to assist TII in establishing a comprehensive, long term strategic plan for the company and to continue to monitor and enhance our Sales Operating Plan. 2. For the services to be rendered by Consultant hereunder, TII agrees to pay and the Consultant accepts as full and complete compensation therefor at the rate of Ten Thousand Dollars ($10,000.00) per quarter, for the time spent by the Consultant for the services to be rendered by Consultant hereunder. 3. All expenses associated with services rendered by the Consultant hereunder will be pre-approved by TII. Consultant will render invoices for all such expenses necessarily incurred by the consultant in the performance of said services monthly. Vouchers for expenses are to be accompanied by stubs, airplane tickets, and accounts in reasonable detail. TII agrees to reimburse all such costs promptly upon receipt of invoice covering same. 4. Consultant does hereby sell, assign, transfer and set over to TII all of Consultant's right, title and interest in and to any result and inventions conceived or developed hereunder. 5. The Consultant shall for all purposes hereunder be deemed an independent contractor and not an employee of TII. Consultant is responsible for the payment of all applicable taxes. 6. There are no other agreements or understandings, oral or written, between the Consultant and TII regarding the subject matter of this Agreement or any part thereof, with the exception of the NonDisclosure Agreement dated December 4, 2000, attached hereto as Attachment A, and this Agreement may only be changed in writing signed by both the parties hereto. Mr. R. Dave Garwood March 29, 2002 RD Garwood Inc. Page 2 7. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 8. The term of this Agreement shall commence April 1, 2002 and terminate March 31, 2003. This Agreement may be extended, in writing, for an additional period, if both parties agree it is mutually beneficial to do so. 9. This Agreement can be canceled by either party with written notice 30 days prior to the end of each quarter during the term of this Agreement. This Agreement supersedes all previous agreements made between the Consultant and TII. If the foregoing is in accordance with your understanding of the Agreement between us, will you kindly signify same by signing this Agreement in the space hereinbelow provided. Very truly yours TII NETWORK TECHNOLOGIES, INC. /s/ Timothy J. Roach -------------------- Timothy J. Roach President & CEO Agreed and Accepted R. Dave Garwood, RD Garwood Inc. /s/ R. Dave Garwood - ------------------------------------- Fed. Tax ID ####-##-#### Attachments: Attachment A ATTACHMENT A NONDISCLOSURE AGREEMENT THIS AGREEMENT is made on December 4, 2000 by and between TII Industries, Inc. ("TII") and R. Dave Garwood ("Receiving Party") . 1. PURPOSE. The parties hereto wish to carry on discussions during the course of which TII may disclose certain Confidential Information to the Receiving Party (the "Discussions") . For and in consideration of those discussions and the covenants and promises contained herein, the parties hereby agree to the terms and conditions hereinafter expressed. 2. DEFINITION. "Confidential Information" shall mean any and all information, formula, technology, technical data, or know-how, including, but not limited to, that which relates to, or processes, research, products, services, customers, markets, software, developments, inventions, processes, designs, lab reports, research data, drawings, engineering, marketing, corporate business, or finances, which TII may disclose to the Receiving Party, whether orally or in writing, directly or indirectly, and which relates to, arises from or involves the body of knowledge relating to the intended purpose of the parties herein. Receiving Party agrees that the existence of both this Nondisclosure Agreement itself and any evaluations of TII product which may result therefrom shall be included within the information kept confidential. 3. CONFIDENTIAL INFORMATION DOES NOT INCLUDE INFORMATION WHICH: ----------------------------------------------------------- 1) Is rightfully in the possession of the Receiving Party at the time of disclosure and the Receiving Party informs TII in writing within 15 days of the time of disclosure. 2) Prior to disclosure is, or after disclosure becomes, but not a result of any inaction or action of the Receiving Party, part of the public knowledge or literature. 3) Is approved for public release by TII. 4) Is disclosed to the Receiving Party by a third party who is und er no obligation to TII to maintain such information in confidence. 4. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Receiving Party agrees that it shall keep any and all Confidential Information strictly confidential and shall not disclose it, directly or indirectly, to any third party under any circumstances without the express written consent of an officer of TII. The Receiving Party shall not disclose the Confidential Information to its employees, except those who are required to have such information in order to further the purpose of the parties intended herein. 5. RETURN OF MATERIALS . Any materials or documents, accompanied by all copies or reproductions of such materials or documentation, which have been furnished to the Receiving Party will be returned immediately upon, and in no case later than five (5) business days after delivery by TII in writing, of notice of the conclusion of the Discussions. 6. PATENT OR COPYRIGHT INFRINGEMENT . Neither this Agreement nor the disclosure by TII hereunder of any Confidential Information to Receiving Party shall be deemed by implication or otherwise to grant, convey, assign, or vest in any way in or to the Receiving Party any right in any property or in any copyrights or patents, nor shall this Agreement grant the Receiving Party any rights in or to the Confidential Information, except the limited right to review such Confidential Information solely for the purpose of furthering the purpose of the parties intended herein. 7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and for the benefit of the undersigned parties, their successors, and assigns, provided that Confidential Information may not be assigned without written consent of TII. Failure to enforce any provision of this Agreement shall not constitute a waiver of any obligations hereof. 8. ARBITRATION. Any controversy or claim arising out of or relating to this agreement or any breach thereof or performance thereunder shall be settled by binding arbitration in New York, pursuant to the Commercial arbitration rules then in effect of the American Arbitration Association ("AAA") . The arbitrator's(s') award shall be final and binding, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each party shall bear its own legal and other costs related to the arbitration, except that the arbitrator(s) shall determine who shall bear the cost of the AAA and the arbitrator(s) . 9. GOVERNING LAW AND JURISDICTION . This Agreement shall be governed by and construed under the laws of the State of New York. TII INDUSTRIES, INC. RD GARWOOD INC. - -------------------- --------------- By:/s/ George S. Katsarakes By: /s/ R. David Garwood ------------------------- ---------------------------- NAME: George S. Katsarakes NAME: R. Dave Garwood -------------------- --------------- TITLE: Executive Vice President & COO TITLE: President ------------------------------ --------- EX-10 9 ex10c1g.txt EX-10(C)(1)(G) - 6TH AMDT. TO EQUIPMENT LEASE EXHIBIT 10(c)(1)(G) SIXTH AMENDMENT TO EQUIPMENT LEASE SIXTH AMENDMENT, dated as of June 5, 2002 (the "Sixth Amendment"), to Equipment Lease dated July 18, 1991 (the "Equipment Lease") between PRC Leasing, Inc., a corporation organized and existing under the laws of the Commonwealth of Puerto Rico (herein called "Lessor"), and TII Network Technologies, Inc., a corporation organized and existing under the laws of the State of Delaware and authorized to do business in Puerto Rico (herein called "Lessee"). WHEREAS, Lessor and Lessee entered into an Equipment Lease dated July 18, 1991, as amended by a First Amendment dated as of July 18, 1992, a Second Amendment dated as of February 25, 1993, a Restated Third Amendment dated as of December 14, 1993, a Fourth Amendment dated as of June 27, 2000, and a Fifth Amendment dated as of July 18, 2001 (the "Fifth Amendment") (as amended to date, the "Equipment Lease"); and WHEREAS, the term of the Equipment Lease is scheduled to expire on July 18, 2002; and WHEREAS, the parties wish to extend the term thereof; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein as set forth, the parties agree hereto as follows: 1. Amendment to Equipment Lease. The Equipment Lease is hereby amended as of the date hereof as follows: (a) Section 2 of the Equipment Lease is hereby deleted in its entirety and new Section 2 is hereby inserted in its place: 2. Lease of Equipment. For and in consideration of the covenants and agreements hereinafter contained to be kept and performed by Lessee, Lessor has leased and does hereby lease to Lessee the personal property known and described in Exhibit "A" hereto, hereafter designated as "Equipment," to have and to hold the same unto Lessee until July 18, 2003; provided, however, that this Equipment Lease shall be automatically renewed for additional one-year periods on each July 18 commencing July 18, 2003 and ending on the succeeding July 17 unless terminated at the end of any such year by either the Lessor or the Lessee on 180 days prior written notice. (b) Section 4 of the Equipment Lease is deleted in its entirety and the following new Section 4 is inserted in its place: 4. Rents. Lessee shall pay as rent for the leasing of the Equipment for the remaining term of the Lease following the date of the Fifth Amendment of the Equipment Lease at the rate of $50,000.00 per annum, payable in advance in two equal semi-annual installments on each of July 18 and January 18. 2. Terms. All capitalized terms used, but not defined in this Sixth Amendment, herein shall be used as defined in the Equipment Lease. -2- 3. Choice of Law. This Sixth Amendment shall be deemed to have been executed and entered into in the Commonwealth of Puerto Rico and shall be construed, enforced and performed in accordance with the laws thereof. 4. Exclusion of Oral Statements. This Sixth Amendment contains all of the agreements of the parties hereto with respect to the subject matter hereof. No oral or other statements, proposals or other agreements with respect to the subject matter hereof shall be binding on either of the parties hereto. 5. Agreement to Continue Equipment Lease as Amended. The Equipment Lease, as heretofore and hereby amended (including, without limitation, Exhibit A attached to the Fourth Amendment) shall remain and continue in full force and effect after the date hereof. PRC Leasing, Inc. TII Network Technologies, Inc. By: /s/ Alfred J. Roach By: /s/ Timothy J. Roach ------------------------ ------------------------- Alfred J. Roach Timothy J. Roach President President -3- EX-10 10 ex10_e1.txt EX-10(E)(1) - EXCHANGE AGREEMENT EXHIBIT 10(e)(1) EXCHANGE AGREEMENT EXCHANGE AGREEMENT (this "AGREEMENT"), dated as of June 21, 2002, by and among TII NETWORK TECHNOLOGIES, INC. (formerly named TII Industries, Inc.), a Delaware corporation, with headquarters located at 1385 Akron Street, Copiague, NY, 11726 (the "COMPANY"), and LEONARDO, L.P., a Cayman Islands limited partnership (the "INVESTOR"). WHEREAS: A. Effective as of January 26, 1998, the Company, the Investor and certain other investors (collectively, the "OTHER INVESTORS") entered into a Securities Purchase Agreement (the "PURCHASE AGREEMENT"); B. Pursuant to the Purchase Agreement, the Investor and the Other Investors purchased from the Company an aggregate of 5,000 shares of its Series C Convertible Preferred Stock, par value $0.01 per share (the "PREFERRED SHARES"), and warrants (the "OLD WARRANTS") to purchase an aggregate of 200,000 shares of the Company's Common Stock, par value $0.01 per share ("COMMON STOCK"); and C. The Old Warrants have expired, the Other Investors have converted all of their Preferred Shares and the Investor wishes to exchange with the Company, upon the terms and conditions stated in this Agreement, all of its remaining Preferred Shares for cash and a warrant (a "NEW WARRANT") being delivered contemporaneously herewith to purchase New Warrant Shares (as defined in Section 1(a) below). D. The Company desires to grant certain rights to the holders of the New Warrants Shares to effect the registration of such shares pursuant to a registration statement filed with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT"); such rights shall be as set forth in the Registration Rights Agreement being entered into contemporaneously herewith (the "REGISTRATION RIGHTS AGREEMENT"). NOW THEREFORE, the Company and the Investor hereby agree as follows: 1. EXCHANGE OF PREFERRED SHARES. (a) Exchange of Preferred Shares. Concurrently herewith, the Investor is exchanging with, and delivering to, the Company, free and clear of any and all liens, claims, restrictions, security interests or any other encumbrances whatsoever (collectively, "LIENS"), an aggregate of 1,626 Preferred Shares for an aggregate payment by the Company of $1,200,000 (the "CASH PURCHASE PRICE") and the issuance by the Company of New Warrants to purchase an aggregate of 750,000 shares (the "NEW WARRANT SHARES" and, together with the New Warrants, the "SECURITIES") of Common Stock. (b) Form of Payment. Concurrently herewith, (i) the Company is (A) paying the Cash Purchase Price to the Investor by wire transfer of immediately available funds in accordance with the Investor's written wire instructions set forth on Schedule A attached hereto and (B) issuing to the Investor New Warrants to purchase the New Warrant Shares and (ii) the Investor is delivering to the Company one or more stock certificates representing an aggregate of 1,026 Preferred Shares, along with stock powers therefor duly endorsed in blank. 2. INVESTOR'S REPRESENTATIONS AND WARRANTIES. The Investor represents and warrants to the Company that: (a) Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Investor and is a valid and binding agreement of the Investor enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. (b) Title to Preferred Shares; Only Preferred Shares Owned by Investor. The Investor is the sole, true, lawful record and beneficial owner of the Preferred Shares exchanged with the Company hereunder, and there are no restrictions on voting rights or rights of disposition pertaining to such Preferred Shares. The Investor has good and marketable title to such Preferred Shares, free and clear of any and all Liens. The Investor does not own (of record or beneficially) any Preferred Shares other than the Preferred Shares exchanged with the Company hereunder. (c) Investor Status. The Investor is an "accredited investor," as that term is defined in Rule 501(a)(3) of Regulation D promulgated under the 1933 Act. (d) Investment Purpose. The Investor is acquiring the New Warrant (and intends to acquire the New Warrant Shares) for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, all within the meaning of the 1933 Act. (e) Reliance on Exemptions. The Investor understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and the Investor's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Investor set forth herein in order to determine the availability of such exemptions and the eligibility of such Investor to acquire such securities. (f) Information. The Investor and its advisors, if any, have been afforded the opportunity to review all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Investor, including all SEC Documents (as defined in Section 3(d) below). The Investor and its advisors, if any, have been afforded the opportunity to review the Company's Annual Report on Form 10-K for the year ended June 29, 2001, Quarterly Reports on Form 10-Q for the quarters ended September 28, 2001, December 28, 2001 and March 29, 2002, Proxy Statement used in connection with the Company's Annual Meeting of Stockholders held on December 5, 2001 and Current Reports on Form 8-K dated (date of earliest event reported) December 5, 2001, February 15, 2002 and April 9, 2002, each of which have been filed with the SEC, and has been -2- afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by the Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company 's representations and warranties contained in Section 3 below. The Investor understands that its investment in the Securities involves a high degree of risk. The Investor has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. (g) No Governmental Review. The Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. (h) Transfer or Resale. The Investor understands that: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Investor shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Investor provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) except pursuant to the Registration Rights Agreement, neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. (i) Legends. The Investor understands that the certificates or other instruments representing the New Warrants and the stock certificates representing the New Warrant Shares, except as set forth below, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. -3- (j) The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for sale and sold under the 1933 Act, (ii) in connection with a sale transaction, such holder provides the Company with an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that a public sale, assignment or transfer of such Securities may be made without registration under the 1933 Act, or (iii) such holder provides the Company with reasonable assurances that such Securities can be sold pursuant to paragraph (k) of Rule 144. The Investor acknowledges, covenants and agrees to sell the Securities represented by a certificate(s) from which the legend has been removed, only pursuant to (i) a registration statement that is effective and current under the 1933 Act, or (ii) advice of counsel that such sale is exempt from registration required by Section 5 of the 1933 Act. (k) Residency. The Investor is a resident of the jurisdiction specified in the Schedule of Investors. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Investor that: (a) Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 30,000,000 shares of Common Stock, of which, as of the close of business on June 17, 2002, 11,682,284 shares were issued and outstanding, and (in addition to the Conversion Shares and the New Warrant Shares) 7,166,800 shares were reserved and available for issuance pursuant to outstanding options, warrants and other securities convertible into or exchangeable for Common Stock and (ii) 1,000,000 shares of Preferred Stock, par value $1.00 per share, of which, as of the date hereof, 5,000 shares were designated as Preferred Shares and 1,626 of such Preferred Shares were issued and outstanding. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as set forth on Schedule 3(a), there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements, by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries. (b) Organization and Qualification. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its -4- subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith. (c) Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into, and perform its obligations under, this Agreement and the New Warrants (collectively, the "TRANSACTION DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby, including without limitation the issuance of the Warrants and the reservation for issuance and the issuance of the New Warrant Shares upon exercise of the New Warrants, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) the Transaction Documents have been duly executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or other laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. (d) Issuance of New Warrant Shares. The New Warrant Shares have been duly authorized and reserved for issuance upon exercise of the New Warrants. Upon exercise in accordance with the New Warrants, the New Warrant Shares, will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. Based, in part, upon the representations, warranties and covenants of the Investors contained herein, the issuance by the Company of the New Warrants, is exempt from registration under the 1933 Act. (e) SEC Documents; Financial Statements. Since June 30, 2001, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The Company has made available to each Investor or its respective representatives true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly -5- present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except to the extent information contained in any of the SEC Documents has been revised, corrected or superseded by a later filing of any such SEC Document, none of the SEC Documents currently contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (f) No Changes. Since March 29, 2002, there has not been, occurred or arisen any: (i) amendments or changes to the Certificate of Incorporation or Bylaws of the Company; (ii) destruction of, damage to or loss of any material assets, material business or material customer of the Company (whether or not covered by insurance); (iii) labor trouble or aim of wrongful discharge or other unlawful labor practice or action by employees of the Company or any of its Subsidiaries; (iv) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company other than required by GAAP; (v) revaluation by the Company of any of its assets other than as required by GAAP; (vi) declaration, setting aside or payment of a dividend or other distribution (whether in cash, stock or property) in respect of any Company capital stock; or any split, combination or reclassification in respect of any shares of Company capital stock, or any issuance or authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of Company capital stock, or any direct or indirect repurchase, redemption, or other acquisition by the Company of any shares of Company capital stock (or options, warrants or other rights convertible into, exercisable or exchangeable therefor); (vii) commencement, notice or threat of any lawsuit, proceeding or other investigation against the Company or its affairs is reasonably likely to have material adverse affect on the Company's consolidated financial position; (viii) issuance or sale, or contract to issue or sell, by the Company of any shares of Company capital stock or securities convertible into, or exercisable or exchangeable for, shares of Company capital stock, or any securities, warrants, options or rights to purchase any of the foregoing, other than pursuant to stock option plans, warrant and convertible security of the company, which plans, warrants and convertible securities are reflected in the Company's Annual Report of Form 10-K for the year ended June 29, 2001 and as contemplated by this Agreement; -6- (ix) any event or condition of any character that has had or is reasonably likely to have a material adverse effect on the Company other than as reflected or contemplated in the SEC Documents and other than events or conditions that generally affect the industry in which the Company operates; or (x) negotiation or agreement by the Company or any officer thereof to do any of the things described in the preceding clauses (i) through (x) of this Section 3(f) for and on behalf of the Company and its subsidiaries. 4. GOVERNING LAW; MISCELLANEOUS. (a) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York applicable to agreements made and performed entirely within such state without regard to the principles of conflict of laws that would require the application of the laws of a jurisdiction other than New York. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (b) Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. (c) Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (d) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. (e) Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Investors, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the -7- Company nor any Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. (f) Notices. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Kenneth A. Paladino, CFO TII Network Technologies, Inc. 1385 Akron Street Copiague, NY 11726 Fax: (516) 789-2228 With a copy to: Richard A. Rubin, Esq. Jenkens & Gilchrist Parker Chapin LLP 405 Lexington Avenue New York, NY 10174 Fax: (212) 704-6288 If to the Investor, to : c/o Angelo Gordon & Co. 245 Park Avenue, 26th Floor New York, NY 10167 Attention: Gary I. Wolf Fax: (212) 867-5436 With a copy to: Douglas A. Cifu, Esq. Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019 Fax: (212) 492-0436 -8- Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. (g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. (h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. (i) Publicity. The Company and one representative selected by the Investors shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Investor, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations (although each Investor shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release and shall be provided with a copy thereof). (j) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. [The next page is the signature page] -9- IN WITNESS WHEREOF, the Investors and the Company have caused this Exchange Agreement to be duly executed as of the date first written above. COMPANY: TII NETWORK TECHNOLOGIES, INC. By:/s/ Kenneth A. Paladino ------------------------------------- Name: Kenneth A. Paladino Its: VP Finance, Treasurer and CFO INVESTOR: LEONARDO, L.P. By: Angelo Gordon & Co., L.P. Director of Leonardo Capital Management Inc. General Partner By:/s/ Michael L. Gordon ------------------------------------- Name: Michael L. Gordon Title: Chief Operating Officer -10- SCHEDULE A Wire instructions for the Investor: CITIBANK,N.A. 20 EXCHANGE PLACE NEW YORK, N.Y. ABA # 021-000-089 CREDIT A/C BEAR STEARNS SECURITIES 383 MADISON AVENUE NEW YORK, N.Y. CR A/C # 09253186 FFC LEONARDO, L.P. c/o ANGELO GORDON & CO., L.P. 245 PARK AVENUE, 26th FL NEW YORK, N.Y. 10167 FFC A/C # 103-74900-1-6 SCHEDULE 3(a) ------------- Capitalization Table(a) as of 06/17/02 Common Stock outstanding........................................................................11,682,284 Option held by Norman Pessin IRA, exercisable @ $2.50 until 7/18/2003..............100,000 Warrants from 2000 private placment, exercisable @ $2.79 until 12/8/04...........1,800,000 Unit purchase options held by private placement agent exercisable @ $2.69 until 12/8/04......................................................................414,000 Warrants issuable upon exercise of unit purchase options, which warrants, if issued, will be exercisable at $2.79...............................................414,000 Options outstanding under existing plans..........................................3,430,341 6,158,341 ---------- 17,840,625 Options available for future grant under existing plans..........................................1,008,459 ---------- Total..........................................................................................18,849,084 ==========
- ----------- (a) Excludes (i) Series C Preferred Stock being purchased hereby and Common Stock issuable upon exercise of the New Warrant and (ii) Preferred Stock purchase rights to purchase, at $30 per one one-thousandth of a share, Series D Junior Participating Preferred Stock (under the Shareholders' Rights Plan) entitling the holder to purchase for $30, a number of shares of Common Stock having a market value of $60. EX-9 11 ex10_e2.txt EX-10(E)(2) - COMMON STOCK PURCHASE WARRANT EXHIBIT 10(e)(2) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. TII NETWORK TECHNOLOGIES, INC. COMMON STOCK PURCHASE WARRANT WQ - 1 1. Issuance. For good and valuable consideration, the receipt of which is hereby acknowledged by TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), Leonardo, L.P., a Cayman Islands limited partnership, or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on June 21, 2005 (the "Expiration Date"), SEVEN HUNDRED FIFTY THOUSAND (750,000) fully paid and nonassessable shares of the Company's Common Stock, $.01 par value per share (the "Common Stock") at an initial exercise price per share equal to $1.00 (the "Exercise Price"), subject to further adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. This Warrant is exercisable in whole or in part at the Exercise Price per share of Common Stock payable hereunder, payable, at the election of the Holder: (a) in cash or by certified or official bank check; (b) by "cashless exercise" by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof; or (c) by "net exercise" by means of tendering this Warrant Certificate to the Company in exchange for an amount in cash equal to the Market Value of the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the product of the Exercise Price and the aggregate number of shares of Common Stock issuable upon exercise of this Warrant. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased (in the case of clause (a) above), the Holder shall be entitled to receive (i) in the case of clause (a) or clause (b) above, a certificate or certificates for the shares of Common Stock so purchased or (ii) in the case of clause (c) above, such amount of cash as is determined pursuant to such clause (c). For the purposes of this Section 2, "Market Value" shall be an amount equal to the average of the closing bid prices of a share of Common Stock for the five (5) trading days preceding the Company's receipt of the Notice of Exercise Form duly executed. The Holder may not exercise this Warrant pursuant to Section 2(c) for any cash payments which would be prohibited under any restrictions contained in any mortgage, indenture or loan agreement now or hereinafter binding upon the Company, including, without limitation, the Revolving Credit, Term Loan and Security Agreement dated as of April 30, 1998 (as the same has been and may be amended, extended, renewed, increased, restated, modified, supplemented or refinanced from time to time, the "Credit Agreement") among the Company, TII Corporation and BNY Financial Corporation (the "Lender"); provided, however, the Holder may, at any time, partially exercise this Warrant pursuant to Section 2(c) for a cash payment by the Company equal to the maximum amount of cash the Company would be permitted to pay any individual or entity without breaching the terms of such mortgage, indenture or loan agreement. For the purposes hereof, if any cash payment, which is prohibited under a specific restriction or restrictions contained in any mortgage, indenture or loan agreement, would be included in a "basket" or similar carve-out to such restriction or restrictions contained in such mortgage, indenture or loan agreement, as the case may be, then such cash payment shall not be considered prohibited under such restriction or restrictions contained in such mortgage, indenture or loan agreement. The Holder acknowledges that the Lender has not, by its review and/or approval of the form of this Warrant, waived any restrictions on cash payments by the Company which are contained in the Credit Agreement on the date hereof. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). The Company shall use its best efforts and all due diligence to increase the number of shares of Common Stock so reserved to cure any deficiencies, and, if necessary, to obtain approval of its stockholders therefor, including authorization of such additional number of shares of Common Stock as may be required in excess of the number so reserved. 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Adjustment of Exercise Price and Number of Shares. The Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: 6.1. Adjustment of Exercise Price and Number of Shares upon Issuance of Common Stock. If and whenever on or after the date of issuance of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (for the purposes of this paragraph, Common Stock shall include the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but shall exclude shares of Common Stock issued or deemed to have been issued by the Company in connection with (i) any employee benefit plan which has been approved by the Company's Board of Directors, pursuant to which the Company's securities may be issued to any employee, officer, consultant or director -2- for services provided to the Company, (ii) equipment leases, (iii) the issuance of any securities upon exercise, exchange or conversion of any securities of the Company that are exercisable or exchangeable for, or convertible into, Common Stock that are outstanding on the date of original issuance of this Warrant and (iv) this Warrant ) for a consideration per share less than a price (the "Applicable Price") equal to the Exercise Price in effect immediately prior to such issuance or sale, then immediately after such issue or sale the Exercise Price then in effect shall be reduced to an amount equal to the product of: (a) the Applicable Price; and (b) a fraction, (x) the numerator of which shall be the number of Fully Diluted Shares (as defined below) outstanding immediately prior to such issue or sale plus the number of shares that the aggregate consideration received by the Company for such issuance or sale would purchase at the Applicable Price, and (y) the denominator of which shall be the number of Fully Diluted Shares outstanding immediately prior to such issue or sale plus the number of shares issued in such issuance or sale. Upon each such adjustment of the Exercise Price pursuant to the immediately preceding sentence, the number of shares of Common Stock acquirable upon exercise of this Warrant shall be adjusted to the number of shares determined by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. At any time, the number of "Fully Diluted Shares" outstanding at such time shall mean the number of shares of Common Stock outstanding at such time plus the number of shares of Common Stock that may be issued upon exercise, exchange or conversion of securities of the Company that are exercisable or exchangeable for, or convertible into, Common Stock that are outstanding at such time. 6.2. Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under Section 6.1 above, the following shall be applicable: (a) Issuance of Options. If the Company in any manner grants or sells any rights, warrants or options to subscribe for or purchase (i) Common Stock or any other stock or (ii) securities directly or indirectly convertible into or exchangeable or exercisable for Common Stock ("Options") and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any stock or securities, other than Options, directly or indirectly convertible into or exchangeable or exercisable for Common Stock ("Convertible Securities") issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 6.2(a), the "lowest price per share for which one share of Common Stock is issuable upon exercise of such Options or upon conversion, exchange or exercise of such Convertible Securities" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Exercise Price shall, subject to Sections 6.2(c) and (d), be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities. -3- (b) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 6.2(b), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Convertible Security and upon conversion, exchange or exercise of such Convertible Security. No further adjustment of the Exercise Price shall, subject to Sections 6.2(c) and (d), be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Exercise Price had been or is to be made pursuant to other provisions of this Section 6.2, no further adjustment of the Exercise Price shall, subject to Sections 6.2(c) and (3), be made by reason of such issue or sale. (c) Change in Option Price or Rate of Conversion. If the purchase price or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, sale, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Options or Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Exercise Price in effect at the time of such change shall be adjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of shares of Common Stock acquirable hereunder shall be correspondingly readjusted. For purposes of this Section 6.2(c), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall, subject to Section 6.2(d), be made if such adjustment would result in an increase of the Exercise Price then in effect. (d) Expiration or Termination of Options or Convertible Securities. If any Options or Convertible Securities (or any portion thereof) that shall have given rise to an adjustment pursuant to Section 6.1 shall have expired or terminated without the exercise, exchange or conversion thereof and/or if by reason of the terms of such Options or Convertible Securities there shall have been an increase or increases, with the passage of time or otherwise, in the price payable upon the exercise, exchange or conversion thereof, then the Exercise Price shall be readjusted (but to no greater extent than originally adjusted with respect to the issuance or sale of such Options or Convertible Securities, as the case may be) on the basis of (x) eliminating from the computation any additional shares of Common Stock corresponding to such Option or Convertible Securities as shall have expired or terminated, (y) treating the additional shares of Common Stock, if any, actually issued or issuable pursuant to the previous exercise, exchange or conversion (as applicable) of such Options or Convertible Securities as having been issued for the consideration actually received and receivable therefor and (z) treating any of such -4- Options and Convertible Securities that remain outstanding as subject to exercise, exchange or conversion on the basis of such exercise or conversion price as shall be in effect at such time. 6.3. Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under Sections 6.1 and 6.2, the following shall be applicable: (a) Calculation of Consideration Received. In case any Option or Convertible Security is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options or Convertible Securities by the parties thereto, the Options or Convertible Securities, as the case may be, will be deemed to have been issued for $0.01; provided, however, that in the case the parties thereto shall allocate specific consideration to such Options or Convertible Securities, such Options or Convertible Securities, as the case may be, shall be deemed to have been issued for the portion of the consideration allocable to such Options or Convertible Securities, as determined in good faith by the Company. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the aggregate amount received by the Company therefor less underwriter's discounts and commissions (if any). If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the Closing Price of such securities on the date of receipt of such securities. If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities (but including capital stock of a business whose shares are not (x) listed or admitted to trading on the New York Stock Exchange or, (y) if shares of such stock are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares of such stock are listed or admitted to trading, or, (z) if the shares of such stock are not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, in either case as reported by the National Association of Securities Dealers, Inc.) will be determined jointly by the Company and the Holder. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder. The determination of such appraiser shall be final and binding upon all parties absent manifest error, and the fees and expenses of such appraiser shall be borne by the Company. -5- (b) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 6.4. Adjustment of Exercise Price upon Subdivision or Combination of Common Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. Any adjustment under this Section 6.4 shall become effective at the close of business on the date the subdivision or combination becomes effective. 6.5. Distribution of Assets. If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or other similar transaction) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case: (a) the Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the Closing Price of the Common Stock on the trading day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company's Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the Closing Price of the Common Stock on the trading day immediately preceding such record date; and (b) either, at the election of the Company, (i) the number of shares of Common Stock obtainable upon exercise of this Warrant shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding clause (a), or (ii) in the event that the Distribution is of common stock of a company whose common stock is traded on a national securities exchange or a national automated quotation system, then the holder of this Warrant shall receive an additional warrant to purchase -6- Common Stock, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the amount of the assets that would have been payable to the holder of this Warrant pursuant to the Distribution had the holder exercised this Warrant immediately prior to such record date and with an exercise price equal to the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding clause (a). 6.6. Merger, Sale of Assets, Etc. If at any time while this Warrant, or any portion hereof, is outstanding and unexpired there shall be (i) a reorganization (other than a stock split or combination, stock dividend, reclassification, or like capital adjustment of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation or other entity including a merger or consolidation in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then as a part of such reorganization, merger, consolidation, sale or transfer lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and payment of the Exercise Price then in effect, the number of shares of stock or other securities or property resulting from such reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 6. The foregoing provisions of this Section 6 shall similarly apply to successive reorganization, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation or other entity that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable for shares in connection with any such transactions is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably practicable, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 6.7. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the Holder; provided that no such adjustment will increase the Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 6. -7- 6.8. Notices. (a) Immediately upon any adjustment of the Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment. (b) The Company will give written notice to the holder of this Warrant at least ten (10) days prior to the date on which the Company closes its books or takes a record (i) with respect to any dividend or distribution upon the Common Stock, (ii) with respect to any pro rata subscription offer to holders of Common Stock or (iii) for determining rights to vote with respect to any dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder. (c) The Company will also give written notice to the holder of this Warrant at least ten (10) days prior to the date on which any merger, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder. 7. Transfer to Comply with the Securities Act. This Warrant has not been registered under the Securities Act and has been issued to the Holder for investment purposes and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Securities Act relating to such security or an opinion of counsel reasonably satisfactory to the Company that registration is not required under the Securities Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 8. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given: (i) upon receipt, when delivered personally, (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically generated and kept on file by the sending party), or (iii) one (1) business day after deposit with a nationally recognized overnight delivery service, such as Federal Express, in each case with postage and delivery fees prepaid, addressed to the party to receive same at the following addresses, or at such other addresses as a party may designate by written notice to each of the other parties hereto. COMPANY: TII Network Technologies, Inc. 1385 Akron Street Copiague, NY 11726 Fax: (631) 789-5099 Attention: Kenneth A. Paladino, CFO with a copy to: Jenkens & Gilchrist Parker Chapin LLP 405 Lexington Avenue New York, NY 10174 Fax: (212) 704-6288 Attention: Richard A. Rubin, Esq. -8- HOLDER: Leonardo, L.P. c/o Angelo Gordon & Co. 245 Park Avenue, 26th Floor New York, NY 10167 Fax: (212) 867-5436 Attention: Gary I. Wolf with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019 Fax: (212) 492-0436 Attention: Douglas A. Cifu, Esq. 9. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant and the Exchange Agreement, each between the Company and the Initial Holder dated June __, 2002, contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Each of the Company and each Holder hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each of the Company and each Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Warrant shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Warrant in that jurisdiction or the validity or enforceability of any provision of this Warrant in any other jurisdiction. -9- 11. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 12. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Capitalized terms used herein which are not otherwise defined shall have the meanings ascribed to such terms as in the Securities Purchase Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 21st day of June, 2002. TII NETWORK TECHNOLOGIES, INC. By: /s/ Kenneth A. Paladino ------------------------------------ Name: Kenneth A. Paladino ----------------------------------- Title: VP Finance, Treasurer and CFO ---------------------------------- Attest: /s/ Richard A. Rubin - ------------------------------ -10- TII NETWORK TECHNOLOGIES, INC. Notice of Exercise |_| [Check this box if this Warrant is being exercised pursuant to Section 2(a).] The undersigned hereby irrevocably elects to exercise the right to purchase ________ shares of Common Stock covered by this Warrant according to the conditions hereof and herewith makes payment of the Exercise Price for such number of shares in full. |_| [Check this box if this Warrant is being exercised pursuant to Section 2(b).] The undersigned hereby irrevocably elects to exercise the right to purchase ________ shares of Common Stock covered by this Warrant according to the conditions hereof and herewith surrenders an aggregate of ________ shares of shares of Common Stock (which such number of shares of Common Stock are computed in accordance with Section 2 of this Warrant). |_| [Check this box if this Warrant is being exercised pursuant to Section 2(c).] The undersigned hereby irrevocably elects to exercise the "net exercise" of this Warrant according to the conditions hereof and herewith surrenders this Warrant in exchange for a cash payment equal to $____________ (which such payment is computed in accordance with Section 2 hereof). If this Warrant is being exercised pursuant to Section 2(a) or 2(b), the undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant for and to purchase thereunder, shares of the stock provided for herein, and requests that certificates for such shares be issued in the name of: -------------------------------------------- -------------------------------------------- (Please Print Name, Address and Social Security No. or Tax Identification No.) and, if said number of shares shall not be all the shares purchasable thereunder, that a new Warrant certificate for the balance remaining of the shares purchasable under the within Warrant certificate be registered in the name of the undersigned holder of this Warrant or the holders' assignee as below indicated and delivered to the address stated below. Date: ________, 20__. Name of holder of this Warrant or Assignee: ______________________ (Please Print) Address: -------------------------------------------- -------------------------------------------- Signature: -------------------------------------------- Note: The above signature must correspond with the name as written upon the face of this Warrant certificate in every particular without alteration or enlargement or any change whatever unless this Warrant has been assigned. Signature Guaranteed: --------------------------------- EX-10 12 ex10_e3.txt EX-10(E)(3) - REGISTRATION RIGHTS AGREEMENT EXHIBIT 10(e)(3) REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT is made and entered into as of June 21, 2002 (this "Agreement"), between TII Network Technologies, Inc. (formerly named TII Industries, Inc.), a Delaware corporation (the "Company") with headquarters located at 1385 Akron Street, Copiague, NY, 11726, and LEONARDO, L.P., a Cayman Islands limited partnership, (the "Investor"). Unless otherwise provided in this Agreement, capitalized terms used herein have the respective meanings given to them in Section 1.1 hereof. Capitalized terms used herein and not defined have the respective meanings given to them in the Exchange Agreement (as defined below). WHEREAS, the Company and the Investor are entering into an Exchange Agreement, of even date herewith (the "Exchange Agreement"), providing for the exchange of 1,626 shares of the Company's Series C Convertible Preferred Stock, par value $0.01 per share, held by the Investor for cash and a warrant to purchase shares of the Company's Common Stock (the "Warrant") and; WHEREAS, the Company and the Investor intend for any shares of the Company's Common Stock issued upon the exercise of the Warrant (the "Warrant Shares") to be covered in a registration statement filed under the Securities Act. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- 1.1 Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Agreement" means this Agreement as the same may be amended, supplemented or modified in accordance with the terms hereof. "Charter Documents" means the Company's Certificate of Incorporation and the By-laws of the Company. "Commission" means the Securities and Exchange Commission. "Company" has the meaning set forth in the preamble to this Agreement. "Designated Holder" means the Investor and any transferee of the Investor to whom Registrable Securities have been transferred in accordance with Section 7.4 of this Agreement, other than a transferee to whom Registrable Securities have been transferred pursuant to a Registration Statement under the Securities Act or Rule 144 under the Securities Act. 2 "Effectiveness Period" means the period commencing with the date of this Agreement and ending on the date that all Registrable Securities have ceased to be Registrable Securities. "Exchange Agreement" has the meaning set forth in the recitals to this Agreement. "Holders' Counsel" has the meaning set forth in Section 4.1(a). "Indemnified Party" has the meaning set forth in Section 6.2. "Indemnifying Party" has the meaning set forth in Section 6.2. "Inspector" has the meaning set forth in Section 4.1(g). "Investor" has the meaning set forth in the preamble to this Agreement. "Liability" has the meaning set forth in Section 6.1. "NASD" means the National Association of Securities Dealers, Inc. "Person" means an individual partnership, corporation, association, trust, joint venture, unincorporated organization, and any governmental department or agency or political subdivision thereof. "Records" has the meaning set forth in Section 4.1(g). "Registrable Securities" means, subject to Section 2.2, (a) the Warrant Shares, and (b) any shares of Common Stock issued, in connection with the Warrant Shares, by way of share dividend or share split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise and any shares of Common Stock issuable upon conversion, exercise or exchange thereof. "Registration Expenses" has the meaning set forth in Section 4.5. "Registration Statement" means a Registration Statement filed pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Shelf Registration Statement" has the meaning set forth in Section 3.1. "Warrant Shares" has the meaning set forth in the Recitals to this Agreement. 3 ARTICLE II GENERAL; SECURITIES SUBJECT TO THIS AGREEMENT --------------------------------------------- 2.1 Grant of Rights. The Company hereby grants registration rights to the Designated Holders upon the terms and conditions set forth in this Agreement. 2.2 Registrable Securities. For the purposes of this Agreement, Registrable Securities will cease to be Registrable Securities, when (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act by the Commission and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) such Registrable Securities are sold to the public pursuant to Rule 144 under the Securities Act or (iii) such Registrable Securities may be sold to the public pursuant to Paragraph (k) of Rule 144 under the Securities Act. 2.3 Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns of record Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. ARTICLE III SHELF REGISTRATION STATEMENT ---------------------------- 3.1 Shelf Registration Statement. If, at any time that the Warrant Shares are Registrable Securities in accordance with Section 2.2, Form S-3 is available for the registration of the resale of the Registrable Securities hereunder and any Registrable Securities are not covered under another effective Registration Statement, then the Company shall promptly (in no event later than 15 days after such availability of Form S-3) file with the Commission a shelf registration statement pursuant to Rule 415 of the Securities Act (the "Shelf Registration Statement") on Form S-3, with respect to the resale, from time to time, of any Registrable Securities held by a Designated Holder which are not covered under another effective Registration Statement. 3.2 Effective Shelf Registration Statement. The Company shall use commercially reasonable efforts to keep any Shelf Registration Statement, filed in accordance with Section 3.1, continuously effective under the Securities Act for so long as the Warrant Shares are Registrable Securities in accordance with Section 2.2; provided, however, that in no event shall the Company be required to keep such Shelf Registration Statement effective during the period, if any, that the Company is not eligible to use Form S-3. ARTICLE IV REGISTRATION PROCEDURES 4.1 Obligations of the Company. Subject to Section 3.1, the Company shall effect the registration of the Registrable Securities as promptly as practicable after 4 the date hereof, and, in connection with the Registrable Securities, the Company shall, as expeditiously as possible: (a) prepare and file with the Commission a Registration Statement on Form S-3 (or any successor form thereto), and cause such Registration Statement to become effective; provided, however, that before filing a Registration Statement or prospectus or any amendments or supplements thereto, the Company shall provide counsel selected by the Designated Holder holding a majority of the Registrable Securities being registered in such registration ("Holders' Counsel") and any other Inspector with an adequate and appropriate opportunity to review and comment on such Registration Statement and each prospectus included therein (and each amendment or supplement thereto) to be filed with the Commission, subject to such documents being under the Company's control; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the period specified in Article III; (c) furnish to each Designated Holder prior to filing a Registration Statement, at least one copy of such Registration Statement as is proposed to be filed, and thereafter such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), and the prospectus included in such Registration Statement (including each preliminary prospectus) and any prospectus filed under Rule 424 under the Securities Act as each such Designated Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Designated Holder; (d) register or qualify such Registrable Securities under such other securities or "blue sky" laws of such jurisdictions within the United States as any Designated Holder may reasonably request, and to continue such registration or qualification in effect in such jurisdiction for as long as permissible pursuant to the laws of such jurisdiction, or for as long as any such Designated Holder requests or until all of such Registrable Securities are sold, whichever is shortest, and do any and all other acts and things which may be reasonably necessary or advisable to enable any such Designated Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Designated Holder; provided, however, that the Company shall not be required to (x) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 4.1(d), (y) subject itself to taxation in any such jurisdiction or (z) consent to general service of process in any such jurisdiction; (e) notify each Designated Holder: (i) when a prospectus, any prospectus supplement, a Registration Statement or a post-effective amendment to a Registration Statement has been filed with the Commission, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other federal or state 5 governmental authority for amendments or supplements to a Registration Statement or related prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation or threatening of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceedings for such purpose; (v) of the existence of any fact or happening of any event which makes any statement of a material fact in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue or which would require the making of any changes in the Registration Statement or prospectus in order that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (vi) determination by counsel of the Company that a post-effective amendment to a Registration Statement is advisable. (f) subject to Section 4.3, upon the occurrence of any event contemplated by Section 4.1(e)(v), as promptly as practicable prepare a supplement or amendment to such Registration Statement or related prospectus and furnish to each seller of Registrable Securities a reasonable number of copies of such supplement to or amendment of such Registration Statement or prospectus as may be necessary so that, after delivery to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (g) make available at reasonable times for inspection by any seller of Registrable Securities, any managing underwriter participating in any disposition of such Registrable Securities pursuant to a Registration Statement, Holders' Counsel and any attorney, accountant or other agent retained by any managing underwriter (each, an "Inspector" and collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' officers, directors and employees, and the independent public accountants of the Company, to supply all information reasonably requested by any such Inspector in connection with such Registration Statement. Records that the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors (and the Inspectors shall confirm their agreement in writing in advance to the Company if the Company shall so request) unless (x) the disclosure of such Records is necessary, in the Company's judgment, to avoid or correct a misstatement or omission in the Registration Statement, (y) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction after exhaustion of all appeals therefrom or (z) the information in such Records has been made generally available to the public. Each seller of Registrable Securities agrees that it shall, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, 6 give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; (h) if such sale is pursuant to an underwritten offering and required under the terms of the underwriting agreement that the Company enters into in connection therewith, obtain "comfort" letters dated the effective date of the registration statement and the date of the closing under the underwriting agreement from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as Holders' Counsel or the managing underwriter reasonably requests; (i) furnish, at the request of any Designated Holder on the date such securities are delivered to the underwriters for sale pursuant to such registration or, if such securities are not being sold through underwriters, on the date the Registration Statement with respect to such securities becomes effective, an opinion, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as the underwriters, if any, and such seller may reasonably request and are customarily included in such opinions; (j) comply in all material respects with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable but no later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement covering a period of twelve (12) months beginning after the effective date of the Registration Statement, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (k) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed, provided that the applicable listing requirements are satisfied; (l) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; and (m) take all other steps reasonably necessary to effect the registration of the Registrable Securities contemplated hereby. 4.2 Seller Information. In connection with any Registration Statement in which a Designated Holder is participating pursuant to Article III hereof, each such Designated Holder shall promptly furnish to the Company in writing such information with respect to such Designated Holder and the Designated Holders' plan of distribution as the Company may reasonably request or as may be required by law for use in connection with any such Registration Statement or preliminary, final or summary 7 prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing and all information required to be disclosed in order to make the information previously furnished to the Company by such Designated Holder not materially misleading or necessary to cause such Registration Statement not to omit a material fact with respect to such Designated Holder or plan of distribution necessary in order to make the statements therein not misleading. Any Designated Holder who fails to provide such information to the Company shall not be entitled to use the Registration Statement or any preliminary, final or summary prospectus or amendment or supplement relating thereto. 4.3 Notice of Use and Notice to Discontinue. In the event (a) of the happening of any event of the kind described in Section 4.1(e)(ii) (to the extent the Company is required in the opinion of counsel to take the action requested thereunder and is taking such action), 4.1(e)(iii) (in connection with a stop order), 4.1(e)(iv) (to the extent that in the opinion of counsel sales under the Registration Statement in question are no longer permitted as a result of such suspension), 4.1(e)(v) or 4.1(e)(vi) hereof or (b) that, in the good faith judgment of the Company's board of directors after consultation with Company counsel, it is advisable to suspend the use of a prospectus included in any Registration Statement for a discrete period of time due to pending material corporate developments or similar material events that have not yet been publicly disclosed and as to which the Company after consultation with counsel believes public disclosure will be prejudicial to the Company (and that such public disclosure would be required absent such suspension), the Company shall deliver a certificate in writing, signed by an authorized senior executive officer of the Company, to the Designated Holders, to the effect of the foregoing and thereafter the Designated Holders shall discontinue any disposition of Registrable Securities pursuant to the Registration Statement and the prospectus included therein, and the Company, subject to the terms of this Section 4.3, shall thereafter not be required to maintain the effectiveness or update the Registration Statement or the prospectus included therein. The Company will use its reasonable best efforts to ensure that the use of the Registration Statement and the prospectus may be resumed as soon as practicable, in the case of suspension under Section 4.3(a), and, in the case of a pending development or event referred to in Section 4.3(b) hereof, as soon as, in the good faith judgment of the Company, public disclosure of such material corporate development or similar material event would not have a material adverse effect on the Company. Notwithstanding the foregoing, the Company shall not under any circumstances be entitled to: exercise its right under Section 4.3(b) hereof to suspend the use of a Registration Statement and related prospectus: (a) more than two (2) times in any twelve month period; and (b) for a period or multiple periods aggregating to more than 90 days in any twelve month period. 4.4 Registration Expenses. The Company shall pay all expenses arising from or incident to its performance of, or compliance with, this Agreement, including, without limitation, (i) Commission, stock exchange and NASD registration and filing fees, (ii) all fees and expenses incurred in complying with securities or "blue sky" laws (including reasonable fees, charges and disbursements of counsel to any underwriter incurred in connection with "blue sky" qualifications of the Registrable Securities as may be set forth in any underwriting agreement), (iii) all printing expenses, 8 and (iv) the fees, charges and disbursements of counsel to the Company and of its independent public accountants and any other accounting fees, charges and expenses incurred by the Company. All of the expenses described in the preceding sentence of this Section 4.5 are referred to herein as "Registration Expenses." The Designated Holders of Registrable Securities sold pursuant to a Registration Statement shall bear the expense of any broker's commission or underwriter's discount or commission relating to registration and sale of such Designated Holders' Registrable Securities and shall bear the fees and expenses of their own counsel and the Inspectors. ARTICLE V COVENANTS --------- 5.1 Rule 144. The Company covenants that from and after the date hereof it shall use commercially reasonable efforts to (a) file any reports required to be filed by it under the Securities and Exchange Act of 1934, as amended, and (b) take such further action as each Designated Holder of Registrable Securities may reasonably request (including providing any information necessary to comply with Rule 144 under the Securities Act, all to the extent required from time to time to enable such Designated Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, or (ii) any similar rule or regulation hereafter adopted by the Commission. ARTICLE VI INDEMNIFICATION --------------- 6.1 Indemnification by the Company. (a) The Company agrees to indemnify and hold harmless each Designated Holder, its directors, officers, Affiliates and each Person who controls (within the meaning of Section 15 of the Securities Act) any of the foregoing from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) (each, a "Liability" and collectively, "Liabilities"), (i) arising out of or based upon any untrue, or allegedly untrue, statement of a material fact contained in any Registration Statement or preliminary, final or summary prospectus contained therein (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), (ii) arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading, or (iii) arising directly out of the Company's failure to comply with its obligations under Articles IV and V hereof; provided, however, that (x) the Company will not be liable insofar as any such Liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission contained in such Registration Statement or preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing in reliance and in conformity with information furnished in writing to the 9 Company by or on behalf of a Designated Holder expressly for use therein, including, without limitation, the information furnished to the Company pursuant to Section 4.2; and (y) the Company will not be liable with respect to any Liabilities arising out of or based on any untrue statement or alleged untrue statement of a material fact or any omission or alleged omission to state a material fact contained in any Registration Statement or preliminary, final or summary prospectus or amendment or supplement which is corrected in the Registration Statement, prospectus, amendment or supplement, if the person asserting any such Liability purchased Registrable Securities from a Designated Holder but was not sent or given a copy of the corrected Registration Statement, prospectus, amendment or supplement at or prior to the written confirmation of the sale of such Registrable Securities to such person if the corrected Registration Statement, prospectus, amendment or supplement had been delivered to such Designated Holder at least four (4) Business Days prior to the date of such written confirmation of such sale. (b) Each Designated Holder agrees to indemnify and hold harmless the Company, its directors and officers and each Person who controls (within the meaning of Section 15 of the Securities Act) the Company to the same extent as the foregoing indemnity from the Company to the Designated Holders, mutatis mutandis, but only if such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with information with respect to such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use in such Registration Statement or preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing, including, without limitation, the information furnished to the Company pursuant to Section 4.2; provided, however, that the total amount to be indemnified by such Designated Holder pursuant to this Section 6.1(b) shall be limited to the net proceeds received by such Designated Holder in the offering to which the Registration Statement or prospectus relates. 6.2 Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder (the "Indemnified Party") agrees to give prompt written notice to the indemnifying party (the "Indemnifying Party") after the receipt by the Indemnified Party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which the Indemnified Party intends to claim indemnification or contribution pursuant to this Agreement; provided, however, that the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of any Liability that it may have to the Indemnified Party hereunder (except to the extent that the Indemnifying Party is materially prejudiced by such failure). The Indemnified Party shall have the right to participate in the defense of any such action and shall be entitled to select counsel in such defense. It being understood, however, that the Indemnifying Party shall not be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Indemnified Parties. No Indemnifying Party shall be liable for any settlement entered into without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the consent of such Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which such Indemnified Party is a party and indemnity has been sought hereunder by such Indemnified Party, unless such settlement 10 includes an unconditional release of such Indemnified Party from all liability for claims that are the subject matter of such proceeding. 6.3 Contribution. If the indemnification provided for in this Article VI from the Indemnifying Party is unavailable to an Indemnified Party hereunder in respect of any Liabilities referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Liabilities in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions which resulted in such Liabilities, as well as any other relevant equitable considerations. The relative faults of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the Liabilities referred to above shall be deemed to include, subject to the limitations set forth in Section 6.1, any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding; provided that the total amount to be contributed by such Designated Holder shall be limited to the net proceeds received by such Designated Holder in the offering. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6.3 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE VII MISCELLANEOUS ------------- 7.1 Recapitalizations, Exchanges, etc. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to the shares of Common Stock, or other securities of the Company, that may be issued in respect of, in exchange for, or in substitution of the shares of Common Stock, and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, reclassifications, recapitalizations and the like occurring after the date of this Agreement. If, and as often as, there are any changes in the shares of Common Stock, by way of any stock dividends, splits, reverse splits, combinations, or reclassifications, or through merger, consolidation, reorganization or recapitalization or by any other means occurring after the date of this Agreement, appropriate adjustment shall be made to the provisions of this Agreement, as may be required, so that the rights, privileges, duties and 11 obligations hereunder shall continue with respect to the shares of Common Stock as so changed. 7.2 Remedies. The Designated Holders, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive in any action for specific performance the defense that a remedy at law would be adequate. 7.3 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in the manner provided for under the Exchange Agreement. 7.4 Successors and Assigns; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto as hereinafter provided. The rights of the Designated Holder contained in Article III hereof shall be, (i) with respect to any Registrable Security that is transferred to an Affiliate of a Designated Holder, automatically transferred to such Affiliate and (ii) with respect to any Registrable Security that is transferred in all cases to a non-Affiliate, transferred only with the prior written consent of the Company. All of the obligations of the Company hereunder shall survive any such transfer; provided, however, that no such transfer referred to in the preceding clauses (i) or (ii) shall be effective unless the transferee shall expressly agree in writing to assume the obligations of a Designated Holder hereunder. 7.5 Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless consented to in writing by (i) the Company and (ii) the Designated Holder. 7.6 Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. The parties hereto confirm that any facsimile copy of another party's executed counterpart of this Agreement (or its signature page thereof) will be deemed to be an executed original thereof. 7.7 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.8 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 12 7.9 Rules of Construction. Unless the context otherwise requires, references to sections or subsections refer to sections or subsections of this Agreement. 7.10 Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto with respect to the subject matter contained herein. There are no restrictions, promises, representations, warranties or undertakings with respect to the subject matter contained herein, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties with respect to such subject matter. 7.11 Further Assurances. Each of the parties shall, and shall cause their respective Affiliates to, execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. 7.12 Other Agreements. Nothing contained in this Agreement shall be deemed to be a waiver of, or release from, any obligations any party hereto may have under, or any restrictions on the transfer of Registrable Securities or other securities of the Company imposed by, any other agreement including, but not limited to, the Charter Documents and the Exchange Agreement. 7.13 Termination. This Agreement and the obligations of the parties hereunder shall terminate upon the end of the Effectiveness Period, except for liabilities or obligations under Section 4.4, which shall remain in effect in accordance with its terms, and liabilities or obligations arising under Article VI which shall remain in effect for three years after the termination of this Agreement. 7.14 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK THAT APPLY TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Registration Rights Agreement on the date first written above. TII NETWORK TECHNOLOGIES, INC. By:/s/ Kenneth A. Paladino ---------------------------------------- Name: Kenneth A. Paladino Title: VP Finance, Treasurer and CFO INVESTOR: LEONARDO, L.P. By: Angelo Gordon & Co., L.P. Director of Leonardo Capital Management Inc. General Partner By:/s/ Michael L. Gordon ---------------------------------------- Name: Michael L. Gordon Title: Chief Operating Officer EX-21 13 ex_21.txt EX-21 - SUBSIDIARY OF THE REGISTRANT EXHIBIT 21 SUBSIDIARY OF THE REGISTRANT The following is the Registrant's subsidiary as of the date of filing of this Report: State of Jurisdiction Name of Corporation ---- -------------- TII Systems, Inc. Puerto Rico EX-23 14 ex_2310k.txt EX-23 - CONSENT OF INDEPENDENT PUBLIC ACCOUNTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTS The Board of Directors TII Network Technologies, Inc: We consent to the incorporation by reference in the previously filed registration statements on Form S-8 (Nos. 33-11449, 33-26930, 33-37310, 33-53180, 33-59090, 33-64961, 33-64965, 33-64967, 333-45151, 333-68579, 333-70714 and 333-70716) and previously filed registration statements on Form S-3 (Nos. 33-64980 and 333-41998) of TII Network Technologies, Inc. of our report dated September 12, 2002, except for note 3, which is as of September 24, 2002, relating to the consolidated balance sheet of TII Network Technologies, Inc. and Subsidiary as of June 28, 2002 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, and the related schedule, which report appears in the June 28, 2002 Annual Report on Form 10-K of TII Network Technologies, Inc. KPMG LLP Melville, New York September 24, 2002 EX-99 15 ex99_a.txt EX-99(A) - CERTIFICATION OF TIMOTHY J. ROACH EXHIBIT 99(a) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of TII Network Technologies, Inc. (the "Company") on Form 10-K for the year ended June 28, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy J. Roach, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. September 25, 2002 /s/ Timothy J. Roach ---------------------------------------- Timothy J. Roach Principal Executive Officer EX-99 16 ex99_b.txt EX-99(B) - CERTIFICATION - KENNETH A. PALADINO EXHIBIT 99(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of TII Network Technologies, Inc. (the "Company") on Form 10-K for the year ended June 28, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth A. Paladino, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. September 25, 2002 /s/ Kenneth A. Paladino ---------------------------------------- Kenneth A. Paladino Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----