-----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, Qbc81sS4KNXNmxdUvXOk8wzhyBQ09P+aYNIxSn5oMxZkPC/X2aomP98kO3gXCvYk YsGEqYD9BZmgMgBuJyFhLg== 0000910680-05-000573.txt : 20050922 0000910680-05-000573.hdr.sgml : 20050922 20050922172312 ACCESSION NUMBER: 0000910680-05-000573 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20050624 FILED AS OF DATE: 20050922 DATE AS OF CHANGE: 20050922 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: 0624 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08048 FILM NUMBER: 051098744 BUSINESS ADDRESS: STREET 1: 1385 AKRON ST CITY: COPIAGUE STATE: NY ZIP: 11726 BUSINESS PHONE: 631-789-5000 MAIL ADDRESS: STREET 1: 1385 AKRON STREET CITY: COPIAGUE STATE: NY ZIP: 11726 FORMER COMPANY: FORMER CONFORMED NAME: TII NETWORK TECHNOLOGIES INC DATE OF NAME CHANGE: 20020514 FORMER COMPANY: FORMER CONFORMED NAME: TII INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-K 1 f10k06242005.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington. D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 24, 2005 COMMISSION FILE NUMBER 1-8048 TII NETWORK TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 66-0328885 ------------------------------- ------------------------------------ (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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X] The aggregate market value of the voting stock of the registrant outstanding as of December 31, 2004 the last business day of the registrant's most recently completed second quarter held by non-affiliates of the registrant was approximately $16.1 million. While such market value excludes the market value of shares that may be deemed beneficially owned by executive officers and directors, this should not be construed as indicating that all such persons are affiliates. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-2 of the Exchange Act). Yes [ ] No [X] The number of shares of the Common Stock of the registrant outstanding as of September 19, 2005 was 12,246,096. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement relating to its 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. Forward-Looking Statements Certain statements in this Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as "may," "should," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect the Company's future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements. These factors include, but are not limited to: o exposure to increases in the cost of the Company's products, including increases in the cost of the Company's petroleum-based plastic products (see "Business - Raw Materials" and "Business Manufacturing"); o the Company's dependence for products and product components on Pacific Rim contract manufacturers, including on-time delivery, quality and exposure to changes in cost and changes in the valuation of the Chinese Yuan (see "Business - Manufacturing"); o dependence on, and ability to retain, its "as-ordered" general supply agreements with its largest three customers and win new contracts ( see "Business - Marketing and Sales"); o continued dependence on the traditional copper-based Telco market which has been declining over the last several years due principally to the impact of alternate technologies and competition from multi-system operators (see "Business - Competition"); o the ability of the Company to market and sell products to new markets beyond its principal market - the copper-based Telco market ( see "Business - Marketing and Sales"); o the Company's ability to timely develop products and adapt its existing products to address technological changes, including changes in its principal market (see "Business - Products" and "Business - Research and Development"); o the potential for the disruption of shipments as a result of, among other things, third party labor disputes and political unrest in or shipping disruptions from countries in which the Company's contract manufacturers produce the Company's products (see "Business - Manufacturing"); o weather and similar conditions, particularly the effect of hurricanes/typhoons on the Company's manufacturing, assembly and warehouse facilities in Puerto Rico or the Pacific Rim (see "Business - Manufacturing"); o competition in the Company's traditional Telco market and new markets the Company is seeking to penetrate (see "Business - Competition"); o potential changes in customers' spending and purchasing policies and practices (see "Business - Marketing and Sales"); o general economic and business conditions, especially as they pertain to the Telco industry; o dependence on third parties for product development (see "Business - Research and Development"); o risks inherent in new product development and sales, such as start-up delays and uncertainty of customer acceptance; o the Company's ability to attract and retain technologically qualified personnel (see "Business Research and Development"); o the Company's ability to fulfill its growth strategies; o the level of inventories maintained by the Company's customers; o the Company's ability to maintain listing of its Common Stock on the Nasdaq SmallCap market; o the availability of financing on satisfactory terms (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"). 2 PART I ITEM 1. Business General TII Network Technologies, Inc. and subsidiary (together, the "Company" or "TII"), designs, produces and markets lightning and surge protection products, network interface devices ("NIDs"), station electronics and other products. The Company sells these products principally to United States telephone operating companies ("Telcos"), including the Regional Bell Operating Companies ("RBOCs") and Independent Operating Companies (together, incumbent local exchange carriers or "ILECs") and competitive local exchange carriers ("CLECs"). The Company also sells its products to original equipment manufacturers ("OEMs") and multi-system operators ("MSOs") of communications services. The Company believes that its products offer superior, cost-effective performance, features and characteristics, including high reliability, long life cycles, ease of installation and optimum protection against adverse environmental conditions. This has resulted in TII becoming a leading supplier of overvoltage surge protectors to the ILECs for use at their subscriber locations. Overvoltage surge protection is mandated in the United States by the National Electrical Code ("NEC") to be installed on subscriber telephone lines to prevent injury to users and damage to their equipment due to surges caused by lightning and other hazardous overvoltages. The NEC is published by the National Fire Protection Agency and typically is adopted by states and local municipalities. The 1999 edition of the NEC requires overvoltage surge protection to be included on network powered coax lines, a technology that brings telephony and broadband services to homes and businesses. The Company's patented broadband In-Line(R) coax protector product line has been designed to address this market. The Company also markets a line of NIDs tailored to various customer specifications. NIDs house the FCC mandated demarcation point between Telco-owned and subscriber-owned property. NIDs typically also enclose overvoltage surge protectors and various station electronic products that, among other things, allow a Telco to remotely test the integrity of its lines, thereby minimizing costly maintenance dispatches. In fiscal 2003, three RBOCs (Verizon, SBC and BellSouth) jointly announced a ten to fifteen year multi-billion dollar capital improvement program to deploy fiber optic lines to virtually all homes and businesses within their regions (referred to as Fiber to the Premise, or "FTTP"). FTTP transmission is significantly faster than traditional copper networks currently deployed by most Telcos and MSOs. While the FTTP program is still in the early stage of deployment by the RBOCs, its deployment will impact the Company's traditional protection based products since FTTP networks require less traditional protection than traditional copper networks. The Company files Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, files or furnishes Current Reports on Form 8-K, files or furnishes amendments to those reports, and files proxy and information statements with the Securities and Exchange Commission (the "SEC"). These reports and statements may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports and statements, as well as beneficial ownership reports filed by the Company's officers, directors and beneficial owners of more than 10% of the Company's common stock, may be obtained without charge through the Company's Internet site http://www.tiinettech.com as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC. 3 Products Lightning and Overvoltage Surge Protection Products. The Company designs, produces and markets overvoltage surge protection products primarily for use on the subscribers' home or business telephone lines. Surge protectors: (i) protect the subscribers and their equipment; (ii) reduce the subscribers' loss of service; (iii) reduce the communications providers' loss of revenue due to subscriber outages; and (iv) reduce the communications providers' costs to replace or repair damaged equipment. Overvoltage surge protectors differ in power capacity, application, configuration and price to meet varying needs. In the United States, the NEC mandates overvoltage surge protectors to be installed on all subscribers' telephone lines that are exposed to lightning and accidental contact with electric light or power conductors. Gas Tubes: The Company's gas tubes represent the foundation upon which most of the Company's overvoltage surge protector products are based. The principal component of the Company's overvoltage surge protector is a proprietary two or three electrode gas tube. Overvoltage surge protection is provided when the voltage on a communication line elevates to a level preset in the gas tube, at which time the gases in the tube instantly ionize, momentarily disconnecting the phone or other equipment from the circuit while safely conducting the hazardous surge to ground. When the voltage on the line drops to a safe level, the gases in the tube return to their normal state, returning the phone and other connected equipment to service. The Company's gas tubes are a standard in the industry and have been designed to withstand multiple high-energy overvoltage surges while continuing to operate over a long service life. Modular Station Protectors: One of the Company's most advanced overvoltage surge protectors, marketed under the trademark Totel Failsafe(R) ("TFS"), combines the Company's three electrode gas tube with a thermally operated failsafe mechanism. The three-electrode gas tube is designed to protect equipment from hazardous overvoltage surges and the failsafe mechanism is designed to insure that, under sustained overvoltage conditions, the protector will become permanently grounded. In certain of its modular protectors, the Company combines the TFS protection element with a sealing gel making this protector impervious to severe moisture or environmental contamination while providing advanced overvoltage surge protection. The Company has developed several overvoltage protectors for high-speed broadband applications. Broadband Coaxial Protectors: The 1999 revision to the NEC requires overvoltage surge protection on all network powered subscriber coax lines, a cable technology that brings telephony and broadband services to homes and businesses. As an integral part of the Company's broadband product line, the Company has developed and patented a high-performance, 75-ohm broadband coax protector to safeguard coaxial cable lines. While providing overvoltage surge protection, the Company's In-Line(R) broadband coax protectors are virtually transparent to the network, permitting high-bandwidth signals to be transmitted without adversely affecting the signal. Utilizing the Company's patent on In-Line(R) coaxial cable surge protectors, the Company also offers for sale a 50-ohm base station protector product line which is designed to protect wireless service providers' cell sites from the damaging effects of lightning and other surges. Solid State and Hybrid Modular Station Protectors: Incorporating solid-state components, the Company's products include solid-state overvoltage surge protectors. While solid-state overvoltage surge protectors are faster than gas tube overvoltage surge protectors at reacting to surges, a feature that some customers believe important in protecting certain of their sensitive equipment, they have lower energy handling capability and higher capacitance than gas tubes. When an overvoltage surge exceeds the energy handling capacity of the solid-state protector, it fails, causing the telephone or other connected equipment to cease operating. High capacitance on a communication line adversely affects high-bandwidth transmission, distorting the signal. As a result, most Telcos use high-energy handling, low capacitance gas tube protectors at the subscriber location. In the Telco's switching center, where lower energy handling and higher capacitance is not a major concern, solid-state protectors are used more frequently. As communications equipment becomes more complex, a protector's reaction speed to a surge may be perceived to be more critical than its energy handling capabilities. In response, the Company has combined solid-state protectors with the Company's gas tubes in hybrid overvoltage surge protectors. While generally more expensive and complex than gas tube surge protectors, the hybrid surge 4 protector can provide the speed of a solid-state protector with the energy handling capability of a gas tube. (See "Business - Competition.") AC Powerline Protectors: TII's powerline surge protectors utilize its surge protection technology and are principally used by Telcos at their central office locations. These devices protect the connected communication equipment against damage or destruction caused when overvoltage surges enter equipment through the powerline. These products have superior surge handling characteristics compared to the standard strip surge protectors that plug into a homeowner's AC outlet. AC Powerline/Dataline Protectors: The Company has developed powerline/dataline protectors for personal computers and home entertainment systems. These protectors combine the Company's powerline protection technology with the Company's proprietary protection for the telephone, DSL, Ethernet, universal serial bus ("USB") and coax lines. The powerline/dataline protector has unique protection and low capacitance qualities that are ideal for certain applications, especially where protection and low capacitance are necessary, particularly for residential powerline networking applications. Lightning and overvoltage surge protection products, sold separately from NIDs, accounted for approximately 24%, 31% and 27% of the Company's net sales during the Company's fiscal years 2005, 2004 and 2003, respectively. Network Interface Devices. The Company designs, produces and markets various NIDs, which house the FCC mandated demarcation point between Telco-owned and subscriber-owned property. The Company's NIDs typically also enclose its overvoltage surge protectors and various station electronic products that, among other things, allow Telcos to remotely test the integrity of their lines minimizing costly maintenance dispatches. To address the demand for voice, high-speed data and interactive video services, Telcos and MSOs are expanding and upgrading their networks to accommodate the higher bandwidth necessary to transmit these services. In response, and with future technology in mind, TII has developed a line of broadband NIDs designed to enclose the technology of choice needed to accommodate higher bandwidth signals, whether traditional twisted pair lines, high-bandwidth coaxial cable or fiber optic lines. The Company's broadband NID product line is modular in design and thus facilitates expansion to accommodate additional subscriber access lines. For use in various markets, the NID product line currently consists of enclosures that accommodate from one to twenty-five access lines. The Company's broadband NIDs can also accommodate TII's DSL electronic products in addition to the Company's patented coaxial overvoltage surge protector. NID sales (including overvoltage surge protectors and station electronic products installed therein) represented approximately 54%, 54% and 62% of the Company's net sales during fiscal 2005, 2004 and 2003, respectively. Station Electronic, VOIP Enclosures and Other Products. The Company designs, produces and markets station electronic products that are typically installed within a NID. One of the Company's station electronic products allows a Telco to remotely test the integrity of its lines, minimizing costly maintenance dispatches. Additionally, since Telcos have been expanding and upgrading their networks with new technologies to provide users with the expanded bandwidth necessary for high-speed transmission of data over traditional Telco lines, TII has developed several DSL station electronic products for this market. This product line also includes DSL POTS (Plain Old Telephone Service) Splitters that isolate the voice and data signals on a Telco line to provide separate outputs for phone and data services, enabling DSL service. During fiscal 2005, the Company introduced several passive Voice Over Internet Protocol ("VOIP") products which allow MSO's to consolidate multiple phone lines in one location in order to provide Internet Protocol ("IP") telephony to their cable subscribers. These are the first of several VOIP related products that the Company is developing for this rapidly growing market. Home Networking Systems. To address the growing demands and complexities of communications networks in the home, the Company is in the process of bringing to market a multi-service residential gateway product 5 through its traditional Telco distribution channels. This new system, referred to as a SID (Service Interface Device), is being jointly developed and marketed with a technology partner. Developmental problems that delayed the introduction of the SID have essentially been resolved and the Company anticipates that field trials of the SID will occur at several ILECs in the second half of fiscal 2006. The Company has introduced HomePlug compatible and HomePlug embedded surge protectors that incorporate the Company's proprietary AC protection and a HomePlug powerline communications integrated circuit. This technology enables networking of voice, data and audio devices through the consumers' AC powerlines. This is one of several new products that the Company has introduced to address the growing HomePlug market. These products are also designed to protect sensitive equipment from the effects of lightning and other hazardous surges, without affecting the high-speed signals that are transmitted over the residential powerlines. Research and Development New product opportunities continue to arise in the Company's traditional Telco markets, as well as in the OEM and MSO markets. The Company also continues to evaluate the commercial, industrial and international markets for its current products as well as variations of them. The Company's research and development ("R&D") and related marketing efforts are focused on several projects, currently including: o Expanding powerline protection technology into targeted markets, including residential powerline communications and broadband over powerline, o Developing fiber optic protection solutions, connectivity products and enclosures to address the deployment of FTTP, as well as the expanding use of fiber in homes and businesses, o Further expanding the Company's passive and active VOIP products, o Expanding and enhancing SID, a new multi-service residential gateway system which the Company is in the process of bringing to market, and o Further developing DSL and coaxial cable overvoltage surge protectors and station electronics for the growing broadband communications markets, including Telcos and MSOs. The Company's R&D strategy includes developing products internally, with technology partners and with contract manufacturers. The Company's R&D engineers work closely with its contract manufacturers during the design and development phase of all products, especially its gas tubes and enclosures. The Company is jointly developing and marketing SID and HomePlug products with technology partners. The Company's R&D department is skilled and experienced in various technical disciplines, including physics, electrical, mechanical and software design, with specialization in such fields as plastics, electronics, metallurgy and chemistry. The Company's contract manufacturing partners are similarly skilled in these R&D fields, with engineering and manufacturing expertise to bring a product of the highest quality and at a competitive price to market on time. The Company's other technology partners are skilled in the design of products for advanced communications networks. The Company's R&D expense was $1.3 million, $1.4 million and $1.3 million during fiscal years 2005, 2004 and 2003, respectively. Though essentially spending at the same level these past three fiscal years, the Company has directed a higher portion of its R&D outlays in 2005 to new technologies and products as opposed to its traditional copper-based protection products. (See "Business - Manufacturing") Marketing and Sales The Company markets and sells its products to the Telcos and MSOs through direct sales personnel, as well as manufacturers' representatives. Products are distributed either directly or through national and regional distributors. OEM customers are typically sold direct or through distributors. Prior to selling its products to a Telco, MSO or associated OEM customer, the Company must typically undergo a lengthy product qualification process involving approval agencies designated by law, codes and/or customers. Thereafter, the Company continually submits successive generations of products, as well as new 6 products, to its customers for qualification. The Company's reputation as a leading supplier of overvoltage surge protectors to Telco customers for over 30 years combined with its strategy to develop products by working closely with its customers, provides a strong position from which it can market new products to its current Telco customer base as well as to new emerging market customers. The following customers accounted for 10% or more of the Company's consolidated net sales during one or more of the years presented below. The loss of, or the disruption of shipments to, one of these customers could have a material adverse effect on the Company's results of operations and financial condition.
Year Ended --------------------------------------------------- June 24, June 25, June 27, 2005 2004 2003 --------------- --------------- ------------- Verizon 52% 53% 58% Tyco Electronics Corporation 10% 13% 7% Telco Sales, Inc. 10% 11% 10%
While the Company has begun to more aggressively market and sell into new emerging markets, Telco customers, including those listed above, represented approximately 94% of the Company's sales in fiscal 2005. Verizon and its affiliates ("Verizon") is a Telco RBOC. Tyco Electronics Corporation purchases overvoltage protection products from the Company for inclusion within their products for resale to Telcos. Telco Sales, Inc. is a distributor that purchases the Company's products for resale to Telcos. On July 8, 2005, the Company received a Product Purchase Agreement (the "Verizon Agreement"), which is a general supply agreement, from Verizon Services Corp. setting forth the terms under which the Company is to continue to provide product to Verizon, with additional approved products and an expanded territory, until March 31, 2010. Prices, warranties, benefits, terms and conditions granted to Verizon under the Verizon Agreement are fixed, but must be at least as favorable as those granted by the Company to other commercial customers under like or similar circumstances. The principal products that will be supplied under the terms of the Verizon Agreement are NIDs for deployment by Verizon in its traditional copper transmission network. The products incorporate the Company's sealing technologies and other components, including DSL enabling electronics. Sales of the Company's products to Telcos, including Verizon, are generally through "as-ordered" general supply agreements. General supply agreements do not require Telcos to purchase specific quantities of products and can be terminated for various reasons, including without cause by either party, or extended by mutual written agreement. Purchases of the Company's products are generally based on individual customer purchase orders for delivery from inventory or within up to thirty days. The Company, therefore, has no material firm backlog of orders. The Company believes that its products offer superior, cost-effective performance, features and characteristics, including high reliability, long life cycles, ease of installation and optimum protection against adverse environmental conditions. The Company believes that this, together with responsive customer service, reduces the risks inherent in "as-ordered" contracts. The Company further believes that its superior products and customer care,attributes which have attracted and maintained its Telco business, will enhance the Company's ability to expand into emerging markets. The Company's international sales were approximately $1.2 million in fiscal 2005 (4% of sales), $1.8 million in fiscal 2004 (6% of sales) and $768,000 in fiscal 2003 (3% of net sales). International sales have been made primarily to countries in the Caribbean, South and Central America, Canada, the Pacific Rim and Europe. The Company requires foreign sales to be paid for in U.S. currency. International sales are affected by such factors as the North American Free Trade Agreement ("NAFTA") and future Central American Free Trade Agreement ("CAFTA") requirements, exchange rates, changes in protective tariffs and foreign government import controls. The Company believes international markets continue to offer additional opportunities for its products and continues to seek methods to increase these sales. 7 Manufacturing While the Company maintains a quick-response, low-cost assembly and specialty gas tube manufacturing operation at its facility in Puerto Rico, substantially all high volume production has been outsourced and is now being produced by contract manufacturers within the Pacific Rim, principally Malaysia and China, utilizing, in most cases, the Company's equipment and processes. The Company's primary contract manufacturer is an independent U.S. based corporation with a wholly owned subsidiary located within China. A second contract manufacturer in Malaysia produces most of the Company's proprietary gas tubes. That company also sells its own gas tubes to competitors of the Company. There are strict non-disclosure agreements with each of these contract manufacturers. The Company depends on its contract manufacturers to produce the majority of its products for sale to customers. The Company maintains all final quality assurance approval for all products prior to shipment. The Company's contract manufacturers' facilities are listed by Underwriters Laboratories ("UL") and are ISO 9000 registered. The Company continually evaluates its current and potential contract manufacturers to assure the highest quality product, best delivery and most competitive pricing. Raw Materials The primary components of the Company's products are stamped, drawn and formed parts made out of a variety of commonly available metals, ceramics and plastics. The manufacture of the Company's overvoltage surge protectors and station electronic products use commonly available components, printed circuit boards and standard electrical components, such as resistors, diodes and capacitors. All orders with suppliers of the components utilized in the manufacture of the Company's products are scheduled for delivery within a year. The Company's products contain a significant amount of plastic that is manufactured out of petroleum and the Company imports most of its products from its contract manufacturers, principally in Malaysia and China. A continuation of the trend of increased petroleum prices could have an adverse effect on the cost of the Company's products and profit the Company realizes. Competition The Company faces significant competition across all of its markets and product lines. Its principal competitors within the Telco market are Corning Cable Systems LLC, Tyco Electronics Corporation, which is also a customer of the Company (see "Business - Marketing and Sales") and Bourns Inc. Its principal competition within the MSO market is Panamax, Inc, Belkin Corporation and American Power Conversion Corp. The Company's gas tube overvoltage surge protectors not only compete with other companies' gas tube overvoltage surge protectors, but also with solid-state overvoltage surge protectors. While solid-state surge protectors react faster to surges, gas tube overvoltage surge protectors have generally remained the overvoltage surge protection technology of choice at the subscribers' location by virtually all Telcos because of the gas tube's ability to repeatedly withstand significantly higher energy surges than solid-state surge protectors. This enables gas tubes to survive longer in the field than solid-state surge protectors, reducing loss of service and costs in dispatching a maintenance vehicle to replace the failed surge protector. Further, solid state protectors have significantly higher capacitance than gas tube protectors. Higher capacitance adversely affects transmission on a high bandwidth communication line by distorting the signal. Solid state overvoltage surge protectors are used principally in Telcos' central office switching centers where speed is perceived to be more critical than energy handling capabilities and in regions where there is a low incidence of lightning. The Company believes that, for the foreseeable future, both gas tube and solid state protectors will continue to be used as overvoltage surge protectors within the Telco market. The Company also believes that the deployment of FTTP networks by the Telcos could include less traditional protection requirements. The Company's reputation among its customers is one of providing swift responses to their needs with creative and effective solutions using products compliant with, and in most cases superior in performance to, the demanding specifications of customers. This approach, combined with the Company's history of continually 8 improving technology, improved operations and effective collaborations, allows the Company to bring product solutions to its customers quickly and competitively priced. Principal competitive factors within the Company's markets include price, technology, product features, service, quality, reliability and bringing new products to market on time. Most of the Company's competitors have substantially greater financial, sales, manufacturing and product development resources than the Company. The Company believes that its sales, marketing and research and development departments, its high quality products and service, its contract manufacturers' low cost production capabilities and their engineering resources combined with the Company's overvoltage surge protection technology, enable it to maintain its competitive position. Patents and Trademarks The Company owns or has applied for a number of patents relating to certain of its products or product components and owns a number of registered trademarks that are considered to be of value principally in identifying the Company and its products. TII(R), In-Line(R), Totel Failsafe(R) and Angle Driver(R) are among the registered trademarks of the Company. While the Company considers its patents and trademarks to be important, especially in the early stages of product marketing, it believes that, because of technological advances in its industry, its success depends primarily upon its sales, engineering and manufacturing skills and effective development collaborations which have accelerated time-to-market of improved and new products. To maintain its industry position, the Company relies primarily on technical leadership, trade secrets, its proprietary technology and its contract manufacturers' low cost production capabilities and their engineering resources. Government Regulation The Telco industry is subject to regulation in the United States and in other countries. In the United States, the FCC and various state public service or utility commissions regulate most of the Telcos and other communications access providers who use the Company's products. While such regulations do not typically apply directly to the Company, the effects of such regulations, which are under continuous review and subject to change, could adversely affect the Company's customers and, ultimately, the Company. The NEC requires that an overvoltage surge protector listed by UL or another qualified electrical testing laboratory be installed on all subscriber telephone lines that are exposed to lightning and accidental contact with electric light or power conductors. Listing by UL has been obtained by the Company where required. Compliance with applicable federal, state and local environmental regulations has not had, and the Company does not believe that compliance in the future will have, a material adverse effect on its earnings, capital expenditures or competitive position. Employees On September 1, 2005, the Company had approximately 85 full-time employees, of whom 47 were employed at the Company's Puerto Rico facility. The Company has not experienced any work stoppage as a result of labor difficulties and believes it has satisfactory employee relations. The Company is not a party to any collective bargaining agreements. Seasonality The Company's principal product, NIDs, are typically installed on the side of homes. The Company's sales levels have historically been adversely affected during winter months when severe weather hinders or delays the Telco's installation and maintenance of their outside plant network. As a result, the Company typically experiences lower sales in the Company's fiscal third quarter. Conversely, during the hurricane season, sales may increase based on the severity and location of hurricanes and the number of NIDs that are damaged and need replacement. 9 ITEM 2. Properties The Company occupies a single story building and a portion of another building, consisting of an aggregate of approximately 13,000 square feet, in Copiague, New York under leases that expire in July 2006. These facilities house the Company's principal research and development activities, marketing, administrative and executive offices. The Company also leases a 20,000 square foot facility in Toa Alta, Puerto Rico, which is approximately 20 miles southwest of San Juan, under an agreement that expires in April 2006. This facility contains certain of the Company's assembly and manufacturing, warehousing and quality assurance functions. The Company believes that its facilities and equipment are well maintained and adequate to meet its current requirements. ITEM 3. Legal Proceedings The Company is not a party to any pending legal proceedings. However, from time to time the Company is subject to legal proceedings or claims which arise in the ordinary course of business. While the outcome of such matters can not be predicted with certainty, the Company believes that such matters will not have a material adverse effect on its financial condition or liquidity. ITEM 4. Submission Of Matters To A Vote Of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2005. PART II ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters The Company's common stock trades on the Nasdaq SmallCap Market under the symbol "TIII". The following table sets forth, for each quarter during fiscal 2005 and 2004, the high and low sales prices of the Company's common stock on that market:
Fiscal 2005 High Low ----------- ----------- First Quarter Ended September 24, 2004 $ 1.62 $ 0.97 Second Quarter Ended December 31, 2004 1.74 1.06 Third Quarter Ended March 25, 2005 2.09 1.37 Fourth Quarter Ended June 24, 2005 2.19 1.16 Fiscal 2004 High Low ------------ ------------ First Quarter Ended September 26, 2003 $ 1.36 $ 0.39 Second Quarter Ended December 26, 2003 2.98 1.01 Third Quarter Ended March 26, 2004 2.67 1.57 Fourth Quarter Ended June 25, 2004 2.05 1.11
As of September 19, 2005, the Company had approximately 334 holders of record of its common stock. To date, the Company has paid no cash dividends. For the foreseeable future, the Company intends to retain all earnings generated from operations for use in the Company's business. Additionally, the Company's borrowing arrangement entered into September 2003 prohibits the payment of cash dividends. 10 Except as previously reported in the Company's Current Report on Form 8-K dated June 24, 2005, the Company did not sell any equity securities during the year ended June 24, 2005 that were not registered under the Securities Act of 1933, as amended. ITEM 6. Selected Financial Data The following Selected Financial Data has been derived from the Company's consolidated financial statements for the five years ended June 24, 2005 and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and the related notes thereto, included elsewhere in this Report: Selected Financial Data (Dollars in thousands, except per share data)
June 24, June 25, June 27, June 28, June 29, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Statements of Operations Data(a): Net sales $ 26,796 $ 28,485 $ 24,073 $ 29,801 $ 39,323 Operating earnings (loss) $ 1,097 $ 1,582 $ (997) $ (6,865) $ (7,589) Net earnings (loss) attributable to common stockholders $ 1,392 $ 1,563 $ (1,008) $ (6,541) $ (7,540) Diluted net earnings (loss) attributable to common stockholders, per share $ 0.11 $ 0.12 $ (0.09) $ (0.56) $ (0.65) Balance Sheet Data: Working capital $ 12,442 $ 11,037 $ 8,235 $ 8,224 $ 13,910 Total assets $ 22,149 $ 17,802 $ 15,101 $ 18,528 $ 30,762 Debt $ - $ - $ 39 $ 489 $ 1,463 Redeemable preferred stock $ - $ - $ - $ - $ 1,626 Stockholders' equity $ 16,853 $ 15,461 $ 13,771 $ 14,779 $ 21,224
- ------------------------ (a) No cash dividends were declared in any of the reported periods. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Report. Overview Business TII Network Technologies, Inc., and subsidiary (together, the "Company" or "TII"), designs, produces and markets lightning and surge protection products, network interface devices ("NIDs"), station electronic and other products. The Company has been a leading supplier of overvoltage surge protectors to U.S. telephone operating companies ("Telcos") for over 30 years. General The Company's primary market, the traditional Telco copper-based transmission network, has been declining over the last several years. This is due principally to the competitive impact of alternative technologies 11 that compete with the Telco's traditional copper-based transmission network (examples include cellular service and Fiber to the Premise ("FTTP")) and competition from multi-system operators ("MSOs"). This trend, which has resulted in cutbacks in copper-based construction and maintenance budgets by the Telcos and a reduction in the number of their access lines, has adversely affected the Company's principal copper-based business. In response to this trend, the Company has been pursuing new markets with new products that take advantage of the Company's proprietary protection and enclosure technologies. The Company's major customer, Verizon, has begun its strategy to deploy FTTP. This multi-year program has resulted in a reduction of capital outlays on its traditional copper network and has therefore impacted the Company's traditional protection based products since FTTP networks require less traditional protection than current copper networks. Though the full extent of the impact on the Company of this program is not yet known, the Company believes that the current embedded copper infrastructure will continue to play a significant role as a transmission medium for years to come. On July 8, 2005, the Company received a Product Purchase Agreement (the "Verizon Agreement"), which is a general supply agreement, executed by Verizon Services Corp., setting forth the terms under which the Company is to continue to provide product to Verizon, with additional approved products and an expanded territory, until March 31, 2010. Prices, warranties, benefits, terms and conditions granted to Verizon under the Verizon Agreement are fixed, but must be at least as favorable as those granted by the Company to other commercial customers under like or similar circumstances. Results of Operations Fiscal Years Ended June 24, 2005, June 25, 2004 and June 27, 2003 Net sales in fiscal 2005 decreased $1.7 million or 5.9% to $26.8 million from $28.5 million in fiscal 2004. The comparative decrease in sales for fiscal 2005 compared to fiscal 2004 was the result of a sharp increase in the need for the Company's products in the first quarter of fiscal 2004, primarily due to the hurricanes that occurred during the summer of calendar 2003. Net sales in fiscal 2004 increased $4.4 million or 18.3% to $28.5 million from $24.1 million in fiscal 2003. The increase in sales for fiscal 2004 compared to fiscal 2003 resulted from an increased need for the Company's products primarily due to the hurricanes that occurred during the summer of calendar 2003, compounded by the low inventory levels that the Company's customers were then carrying, and the impact of the improvement in the telecommunications industry on some of the Company's customers. These increases were partially offset by the reduction in the number of telephone access lines being deployed. Gross profit in fiscal 2005 was $7.9 million compared to $8.6 million in fiscal 2004, a decrease of approximately $713,000, or 8.3%. Gross profit margins for those periods were 29.5% and 30.2%, respectively. The lower gross profit levels and margin was due to the effect of fixed overhead costs on lower sales levels. Gross profit in fiscal 2004 was $8.6 million compared to $5.8 million in fiscal 2003, an increase of approximately $2.8 million or 48.4%. Gross profit margins for those periods were 30.2% and 24.1%, respectively. The improved gross profit level and margin were primarily due to the increased sales levels and the actions that the Company had taken to reduce the cost of producing its products. Selling, general and administrative expenses in fiscal 2005 were $5.5 million compared to $5.7 million in fiscal 2004, a decrease of approximately $189,000 or 3.3% resulting from gains of $222,000 from the sale of the Company's two remaining condominiums in Puerto Rico. Excluding the gains from the condominium sales, selling, general and administrative expenses for fiscal 2005 increased by $33,000. Selling, general and administrative expenses in fiscal 2004 were $5.7 million compared to $5.5 million in fiscal 2003, an increase of approximately $215,000 or 3.9% due to $212,000 of gains from the sale of condominiums in Puerto Rico in fiscal 2003. Research and development expenses in fiscal 2005 were $1.3 million compared to $1.4 million in fiscal 2004, a decrease of approximately $39,000 or 2.9%. Research and development expenses in fiscal 2004 were $1.4 million compared to $1.3 million in fiscal 2003. Though essentially spending at the same level over the last three fiscal years, the Company is spending a higher portion of these expenses on products outside its traditional copper-based telecom related protection products as it seeks to diversify its traditional customer and product base. 12 Interest expense was $7,000 in fiscal 2005 compared to $14,000 in fiscal 2004, a decrease of approximately $7,000 or 50%. Interest expense was $14,000 in fiscal 2004 compared to $41,000 in fiscal 2003, a decrease of approximately $27,000 or 65.9%. The declines were due to lower levels of lease financing obligations which were fully repaid in fiscal 2004. Interest income for fiscal 2005 was $86,000 compared to $32,000 in fiscal 2004, an increase of approximately $54,000. Interest income for fiscal 2004 was $32,000 compared to $17,000 in fiscal 2003, an increase of approximately $15,000 or 88.2%. The increases were due to higher average cash and cash equivalent balances held by the Company. Other income in fiscal 2005 includes a gain of $265,000 resulting from the net settlement received from the surrender of whole-life insurance policies that the Company had held on the life of the Company's Chief Executive Officer. In fiscal 2005 and 2004, the Company recorded a provision for income taxes of $43,000 and $60,000, respectively, primarily due to the limitations on the use of net operating loss carryforwards under alternative minimum tax regulations. (See Note 3 of Notes to Consolidated Financial Statements for information relating to the Company's net operating loss carryforwards.) Due to the Company's pre-tax losses, there was no tax provision during the year ended June 27, 2003. Net earnings for fiscal 2005 were $1.4 million or $0.11 per diluted share, compared to net earnings of $1.6 million or $0.12 per diluted share in fiscal 2004 and a net loss of $1.0 million or $0.09 per diluted share in fiscal 2003. Impact of Inflation The Company does not believe its business is affected by inflation to a greater extent than the general economy. The Company's products contain a significant amount of plastic that is manufactured out of petroleum and the Company imports most of its products from contract manufacturers, principally in Malaysia and China. A continuation of the trend of increased petroleum prices could have an adverse effect on the cost of the Company's products and profit the Company realizes. The Company monitors the impact of inflation and attempts to adjust prices where market conditions permit, except that the Company may not increase prices under the Verizon Agreement. Inflation has not had a significant effect on the Company's operations during any of the reported periods. Liquidity and Capital Resources Fiscal 2005 Liquidity compared to Fiscal 2004 The Company's cash and cash equivalents were $4.5 million at the end of fiscal 2005 compared to $4.2 million at the end of fiscal 2004, an increase of approximately $365,000. Working capital increased to $12.4 million at the end of fiscal 2005 from $11.0 million at the end of fiscal 2004. During fiscal 2005 and fiscal 2004, the Company generated $1.4 million and $3.7 million, respectively, of net cash from operating activities. The cash generated from operating activities in fiscal 2005 was due to net cash generated from operating earnings of $2.3 million (net earnings of $1.4 million plus depreciation and amortization expense of $1.1 million less a net gain on disposal of capital assets of $198,000), and an increase in accounts payable and accrued liabilities of $3.0 million due to increased payables for product associated with a higher level of inventories. These increases were offset, in part, by an increase in accounts receivable of $471,000 due to higher sales in the fourth quarter of fiscal 2005 and an increase in inventories of $3.5 million. The increase in inventories was primarily due to the ordering of product in anticipation of the Verizon Agreement and the higher required inventory levels for an expanded product base. 13 Net cash used in investing activities was $1.1 million in fiscal 2005 compared to $444,000 in fiscal 2004. The increase was due to $1.4 million of purchases of capital assets in fiscal 2005. Most of these purchases were for equipment utilized in establishing production lines at the Company's new contract manufacturer in China. During the period, the Company successfully completed the transition of substantially all production performed in China to this new manufacturer. The increase in investing activities was partially offset by net proceeds of $362,000 from the sale of various Company fixed assets. The Company had no financing activities in fiscal 2005 compared to net cash provided by financing activities of $88,000 in fiscal 2004. The net cash provided by financing activities in fiscal 2004 was due to proceeds received from the exercise of stock options of $127,000, partially offset by $39,000 of payments of debt and obligations under capital leases. Fiscal 2004 Liquidity compared to Fiscal 2003 The Company's cash and cash equivalents were $4.2 million at the end of fiscal 2004 compared to $772,000 at the end of fiscal 2003, an increase of approximately $3.4 million. Working capital increased to $11.0 million at the end of fiscal 2004 from $8.2 million at the end of fiscal 2003. During fiscal 2004 and fiscal 2003, the Company generated $3.7 million and $293,000, respectively, of net cash from operating activities. The cash generated from operating activities in fiscal 2004 was produced from cash provided by changes in operating assets and liabilities of $617,000 and net cash earnings (net earnings of $1.6 million plus depreciation and amortization expense of $1.0 million and a non-cash loss on disposal of capital assets of $512,000) of $3.1 million. The cash produced by changes in operating assets and liabilities resulted from an increase of $1.0 million in accounts payable and accrued liabilities due to timing of payments to vendors and a reduction in inventory of $500,000 due to the fulfillment of sales orders with existing inventory, partially offset by an increase in accounts receivable of $914,000 due to higher sales. Net cash used in investing activities was $444,000 in fiscal 2004 compared to $85,000 of net cash provided in fiscal 2003. The net cash used in investing activities during fiscal 2004 was for purchases of capital assets. Net cash provided by financing activities was $88,000 in fiscal 2004 compared to $474,000 of net cash used in fiscal 2003. The net cash provided by financing activities in fiscal 2004 was due to proceeds received from the exercise of stock options of $127,000, partially offset by $39,000 of payments of debt and obligations under capital leases. In fiscal 2003, $455,000 was used to repay a term loan under a revolving credit facility. Capital Resources The Company has a credit facility that enables it to have up to $3.0 million of borrowings outstanding at any one time, limited by a borrowing base equal to 85% of eligible accounts receivable, subject to certain reserves. Outstanding borrowings under the credit facility will bear interest at a specified bank's prime rate (6.25% at June 24, 2005) plus 1%, but never less than 5% per annum, and the Company is also required to pay an annual facility fee of 3/4 of 1% of the maximum amount of the credit facility. At June 24, 2005, the borrowing base was $3.3 million and there were no borrowings outstanding. The credit facility expires in September 2006 and is automatically renewed for successive two year periods unless terminated by the lender at any time on 60 days notice, or the Company on 60 days notice prior to the end of the current term or any renewal term. The credit facility is guaranteed by the Company's subsidiary and is secured by a lien and security interest against substantially all of the assets of the Company. The credit facility requires, among other things, that the Company maintain a consolidated tangible net worth of at least $12.0 million and working capital of at least $6.0 million. The credit facility also prohibits, without the lender's consent, the payment of cash dividends, significant changes in management or ownership of the Company, business acquisitions, the incurrence of additional indebtedness, other than lease obligations for the purchase of equipment, and the guarantee of the obligations of others. Funds anticipated to be generated from operations, together with available cash, cash equivalents and the Company's credit facility, are considered to be adequate to finance the Company's operational and capital needs for the next twelve months. 14 Contractual Obligations and Commercial Commitments The following table sets forth a schedule of payments required under the Company's contractual obligations and includes the maximum potential payments that may be required under the Company's other commercial commitments:
Due by Period -------------------------------------------------------------- Contractual Obligations: Less Than After Total 1 Year 1 - 3 years 4 - 5 years 5 years --------------- --------------- ---------------- -------------- -------------- Operating lease obligations $ 182,000 $ 175,000 $ 7,000 $ - $ - Other obligations 213,000 213,000 - - - --------------- --------------- ---------------- -------------- -------------- Total contractual cash obligations $ 395,000 $ 388,000 $ 7,000 $ - $ - =============== =============== ================ ============== ==============
The Company has no commitments for capital expenditures, but expects to purchase new equipment and incur leasehold improvements in the normal course of business. Off-Balance Sheet Financing The Company has no off-balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K. Critical Accounting Policies, Estimates and Judgments TII's consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. The Company believes that the determination of the carrying value of the Company's inventories and long-lived assets and establishment of a valuation allowance for deferred tax assets are the most critical areas where management's judgments and estimates most affect the Company's reported results. While the Company believes its estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on the Company's estimates, assumptions and judgments as of the balance sheet date. Inventories are required to be stated at net realizable value at the lower of cost or market. In establishing the appropriate inventory write-downs, management assesses the ultimate recoverability of the inventory, considering such factors as technological advancements in products as required by the Company's customers, average selling prices for finished goods inventory, changes within the marketplace, quantities of inventory items on hand, historical usage or sales of each inventory item, forecasted usage or sales of inventory and general economic conditions. The Company reviews long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value. At June 24, 2005, the Company has provided a valuation allowance against all its net deferred tax assets due to the uncertainty of realizing any future benefits therefrom. If and when the Company's historical and projected pre-tax earnings indicate it will more likely than not realize, all or a portion of its deferred tax assets, the Company would reduce its valuation allowance, accordingly. Recently Issued Accounting Pronouncements In June 2005, the Financial Accounting Standard Board ("FASB") issued SFAS No.154, "Accounting Changes and Error Corrections", a replacement of APB Opinion No. 20, Accounting Changes, and FASB SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all voluntary 15 changes in accounting principles, and changes the requirements for accounting for and reporting of, a change in accounting principle. SFAS No.154 requires retrospective application to prior periods' financial statements of a voluntary change in an accounting principle unless it is impracticable. SFAS No. 154 also requires that a change in method of depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in an accounting estimate that is affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors occurring in fiscal years beginning after June 1, 2005. SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in transition phase as of the date of SFAS No. 154. The Company does not believe that adoption of SFAS No. 154 will have a material impact on its financial statements. In December 2004, the FASB issued SFAS No. 123R, "Share-based Payment," which addresses accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and instead requires that such transactions be accounted for using a fair-value-based method. This statement is effective for annual periods beginning after June 15, 2005 (the Company's 2006 fiscal year), as if all share-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using the fair-value-based method of accounting. The Company will use the modified prospective approach in adopting the provisions of SFAS 123R. The Company has unrecognized stock compensation expense of approximately $69,000 related to unvested options outstanding at June 24, 2005. Future grants of stock options will result in additional compensation expense. In March 2005, the SEC staff issued guidance on Statement No. 123R, Share-Based Payments. Staff Accounting Bulletin No. 107 ("SAB No. 107") was issued to assist preparers by simplifying some of the implementation challenges of Statement No. 123R while enhancing the information that investors receive. SAB No. 107 creates a framework that is premised on (a) considerable judgment will be required by preparers to successfully implement Statement No. 123R, specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB No. 107 include (a) valuation models (SAB No. 107 reinforces the flexibility allowed by Statement No. 123R to choose an option-pricing model that meets the standard's fair value measurement objective), (b) expected volatility (the SAB provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility) and (c) expected term (the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances). The Company will apply the principles of SAB No. 107 in conjunction with its adoption of Statement No. 123R. In March 2005, the FASB issued FASB Interpretation ("FIN") N0. 47, Accounting for Conditional Asset Retirement Obligations - An Interpretaion of FASB Statement No. 143. The FASB issued FIN 47 to address diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. FIN 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective for the Company no later than June 30, 2006. The Company has not yet determined the effect that the adoption will have on its financial position or results of operations. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all companies to recognize a current-period charge for abnormal amounts of idle facility expense, frieght, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 (the Company's 2006 fiscal year). The Company is currently evaluating the effect that this statement will have on its consolidated financial statements. 16 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks The Company is exposed to market risks, including changes in interest rates. The interest payable under the Company's credit facility, under which there were no borrowings outstanding at June 24, 2005, is based on a specified bank's prime interest rate plus 1% and, therefore, is affected by changes in market interest rates. Historically, the effects of movements in the market interest rates have been immaterial to the consolidated operating results of the Company. The Company's products contain a significant amount of plastic that is manufactured out of petroleum and the Company imports most of its products from contract manufacturers, principally in Malaysia and China. A continuation of the trend of increased petroleum prices could have an adverse effect on the cost of the Company's products and profit the Company realizes. The Company requires foreign sales to be paid in U.S. currency and is billed by its contract manufacturers in U.S. currency. Since one of the Company's Pacific Rim suppliers are based in China, the cost of the Company's products could be affected by changes in the valuation of the Chinese Yuan. Historically, the Company has not purchased or entered into interest rate swaps or future, forward, option or other instruments designed to hedge against changes in interest rates, the price of materials it purchases or the value of foreign currencies. 17 ITEM 8. Financial Statements and Supplemental Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders TII Network Technologies, Inc.: We have audited the accompanying consolidated balance sheets of TII Network Technologies, Inc. and subsidiary as of June 24, 2005 and June 25, 2004, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 24, 2005. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule listed in Item 15(a)(2) for each of the years in the three-year period ended June 24, 2005. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TII Network Technologies, Inc. and Subsidiary as of June 24, 2005 and June 25, 2004, and the results of their operations and their cash flows for each of the years in the three year period ended June 24, 2005 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Melville, New York September 14, 2005 18 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 24, June 25, 2005 2004 -------- -------- ASSETS Current Assets: Cash and cash equivalents $ 4,529 $ 4,164 Accounts receivable, net 3,906 3,435 Inventories 8,899 5,405 Other current assets 404 374 -------- -------- Total current assets 17,738 13,378 -------- -------- Property, plant and equipment, net 4,229 3,947 Other assets 182 477 -------- -------- Total Assets $ 22,149 $ 17,802 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 3,733 $ 643 Accrued liabilities 1,563 1,698 -------- -------- Total current liabilities 5,296 2,341 -------- -------- Commitments and contingencies Stockholders' Equity: Preferred stock, par value $1.00 per share; 1,000,000 shares authorized; Series D Junior Participating; no shares outstanding - - Common stock, par value $.01 per share; 30,000,000 shares authorized; 12,178,733 shares issued and 12,161,096 shares outstanding as of June 24, 2005 and 11,925,421 shares issued and 11,907,784 shares outstanding as of June 25, 2004 122 119 Additional paid-in capital 37,989 37,992 Accumulated deficit (20,977) (22,369) -------- -------- 17,134 15,742 Less: Treasury shares, at cost, 17,637 common shares at June 24, 2005 and June 25, 2004; (281) (281) -------- -------- Total stockholders' equity 16,853 15,461 -------- -------- Total Liabilities and Stockholders' Equity $ 22,149 $ 17,802 ======== ========
See notes to consolidated financial statements 19 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Fiscal Year Ended ---------------------------------- June 24, June 25, June 27, 2005 2004 2003 -------- -------- -------- Net sales $ 26,796 $ 28,485 $ 24,073 Cost of sales 18,901 19,877 18,274 -------- -------- -------- Gross profit 7,895 8,608 5,799 -------- -------- -------- Operating expenses: Selling, general and administrative 5,480 5,669 5,454 Research and development 1,318 1,357 1,342 -------- -------- -------- Total operating expenses 6,798 7,026 6,796 -------- -------- -------- Operating earnings (loss) 1,097 1,582 (997) Interest expense (7) (14) (41) Interest income 86 32 17 Other income 259 23 13 -------- -------- -------- Earnings (loss) before income taxes 1,435 1,623 (1,008) Provision for income taxes 43 60 - -------- -------- -------- Net earnings (loss) $ 1,392 $ 1,563 $ (1,008) ======== ======== ======== Net earnings (loss) per common share: Basic $ 0.12 $ 0.13 $ (0.09) ======== ======== ======== Diluted $ 0.11 $ 0.12 $ (0.09) ======== ======== ======== Weighted average common shares outstanding: Basic 11,971 11,820 11,682 Diluted 12,687 12,715 11,682
See notes to consolidated financial statements 20 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
Common Additional Total Stock Common Stock Paid-In Accumulated Treasury Stockholders' Shares Amount Capital Deficit Stock Equity ---------- ---------- ---------- ---------- ---------- ---------- Balance June 28, 2002 11,682,284 $ 117 $ 37,867 $ (22,924) $ (281) $ 14,779 Net loss for the year - - - (1,008) - (1,008) ---------- ---------- ---------- ---------- ---------- ---------- Balance June 27, 2003 11,682,284 117 37,867 (23,932) (281) 13,771 Exercise of stock options 225,500 2 125 - - 127 Net earnings for the year - - 1,563 - 1,563 ---------- ---------- ---------- ---------- ---------- ---------- Balance June 25, 2004 11,907,784 119 37,992 (22,369) (281) 15,461 Exercise of warrants 253,312 3 (3) - - - Net earnings for the year - - - 1,392 - 1,392 ---------- ---------- ---------- ---------- ---------- ---------- Balance June 24, 2005 12,161,096 $ 122 $ 37,989 $ (20,977) $ (281) $ 16,853 ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements 21 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended --------------------------------- June 24, June 25, June 27, 2005 2004 2003 ------- ------- ------- Cash Flows from Operating Activities: Net earnings (loss) $ 1,392 $ 1,563 $(1,008) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 1,136 1,056 1,115 (Gain) loss on disposal of capital assets (198) 512 (212) Changes in operating assets and liabilities: Accounts receivable (471) (914) 997 Inventories (3,494) 500 1,457 Other assets 113 (19) (87) Accounts payable and accrued liabilities 2,955 1,050 (1,969) ------- ------- ------- Net cash provided by operating activities 1,433 3,748 293 ------- ------- ------- Cash Flows from Investing Activities: Capital expenditures (1,430) (444) (244) Net proceeds from sale of fixed assets 362 - 329 ------- ------- ------- Net cash (used in) provided by investing activities (1,068) (444) 85 ------- ------- ------- Cash Flows from Financing Activities: Proceeds from exercise of stock options - 127 - Net repayments of borrowings under revolving credit facility - - (455) Repayment of debt and obligations under capital leases - (39) (19) ------- ------- ------- Net cash provided by (used in) financing activities - 88 (474) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 365 3,392 (96) Cash and cash equivalents, at beginning of year 4,164 772 868 ------- ------- ------- Cash and cash equivalents, at end of year $ 4,529 $ 4,164 $ 772 ======= ======= ======= Non-cash investing and financing activities: Acquisition of equipment under capital leases $ - $ - $ 24 ======= ======= ======= Cash paid during the year for interest $ 7 $ 14 $ 41 ======= ======= ======= Cash paid during the year for income taxes 18 60 - ======= ======= =======
See notes to consolidated financial statements 22 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Description of Business and Summary of Significant Accounting Policies Business: TII Network Technologies, Inc. and subsidiary (together, the "Company") design, produce and market lightning and surge protection products, network interface devices ("NIDs"), station electronics and other products principally to the Telco industry. Fiscal Year: The Company reports on a 52-53 week fiscal year ending on the last Friday in June. Fiscal 2005, 2004 and 2003 each contained 52 weeks. Principles of Consolidation: The consolidated financial statements include the accounts of TII Network Technologies, Inc. and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates. Cash Equivalents: All highly liquid investments with an original maturity at the time of purchase of three months or less are considered cash equivalents. Cash equivalents of $3,037,000 and $3,005,000 at June 24, 2005 and June 25, 2004, respectively, consisted of money market accounts. Inventories: Inventories (materials, direct labor and applicable overhead expenses) are stated at the lower of cost or market, on the first-in, first-out basis. Property, Plant and Equipment: Property, plant and equipment is recorded at cost and depreciated on the straight-line method over the estimated useful life of the related asset. The estimated useful life of machinery and equipment is generally between 5 and 10 years. Leasehold improvements are amortized on a straight-line basis over the term of the respective leases or over their estimated useful lives, whichever is shorter. Depreciation and amortization of plant and equipment was $1,100,000, $1,020,000 and $1,079,000 for the years ended June 24, 2005, June 25, 2004 and June 27, 2003, respectively. Revenue Recognition: The Company's net sales are derived from the sale of its products. The Company does not provide any services to its customers. Product sales are recorded when there is persuasive evidence of the arrangement, usually a customer purchase order, the products are shipped and title passes to the customer and the fee is fixed and determinable and probable of collection. Once a product is shipped, the Company has no acceptance or other post-shipment obligations and product returns and warranty costs have historically been insignificant. Other Assets: Included in other assets at June 24, 2005 and June 25, 2004 are $171,000 and $207,000, respectively, of patent costs, net of accumulated amortization, deemed recoverable by the Company, which are amortized on a straight-line basis over the lesser of the life of the related product or the patent. Amortization of patent costs was $36,000 for each of the three fiscal years ending June 24, 2005. Also included is the cash surrender value of key-man life insurance of approximately $145,000 at June 25, 2004. In March 2005, the Company surrendered the associated whole-life insurance policies for a net settlement of $410,000 which resulted in a gain of $265,000 that is included in the accompanying consolidated statements of operations in other income for the year ended June 24, 2005. In fiscal 2005, the Company sold its remaining two condominiums in Puerto Rico, which had been included in other assets on the June 25, 2004 balance sheet, for an aggregate selling price of $337,000, which resulted in an aggregate gain of $222,000 included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended June 24, 2005. In fiscal 2003, the Company sold two condominiums in Puerto Rico for an aggregate selling price of $329,000, which 23 resulted in an aggregate gain of $212,000 included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended June 27, 2003. Long-Lived Assets: The Company reviews long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Income Taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. Net Earnings (Loss) Per Common Share: Basic net earnings (loss) per share is computed based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of common shares outstanding increased by dilutive common stock options and warrants. Included in the diluted earnings per share calculation for fiscal 2005 and 2004 were 716,000 and 895,000, respectively, incremental shares for options and warrants under the treasury stock method. In fiscal 2005 and 2004, 2,172,850 and 4,022,250 options and warrants outstanding as of June 24, 2005 and June 25, 2004, respectively, were excluded from the calculation of diluted earnings per share since their effect was anti-dilutive as their exercise prices were greater than the average market price of the Company's common stock. Since the Company incurred a loss in fiscal 2003 all securities exercisable for the Company's common stock were anti-dilutive. The following table summarizes all outstanding securities that were exercisable for the Company's common stock.
June 24, 2005 June 25, 2004 June 27, 2003 ---------------------------- ---------------------------- ------------------------- Quantity Exercise Quantity Exercise Quantity Exercise Price Price Price ------------- ------------ ------------- ------------- ------------ ----------- Stock option plans (a) 3,316,850 $1.62 2,998,650 $1.68 3,363,350 $1.53 Investor Option - - - - 100,000 2.50 Warrants (b) - - 2,214,000 2.79 2,214,000 2.79 Unit Purchase Options (b) - - 414,000 2.69 414,000 2.69 Warrant (c) - - 750,000 1.00 750,000 1.00 ------------- ------------- ------------ 3,316,850 6,376,650 6,841,350 ============= ============= ============
- ---------- (a) Exercise price in table is the weighted average exercise price of outstanding stock options at year-end. (b) In June 2000, the Company completed a private placement of 1,800,000 units. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock, at $2.79 per share. In connection with this private placement, the Company issued to certain employees of the placement agent 414,000 Unit Purchase Options ("UPO") with an exercise price of $2.69 per UPO. Each UPO consisted of one share of common stock and one warrant to purchase one share of common stock at $2.79 per share. On December 8, 2004, all of the options and warrants associated with this private placement expired unexercised. (c) This warrant was issued in June 2002 as partial consideration to repurchase all of the then outstanding convertible preferred stock. On June 23, 2005, the Company issued 253,312 common shares upon the net common share exercise of the entire warrant. Fair Value of Financial Instruments: The carrying amounts of cash and cash equivalents, receivables and other current assets, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments. 24 Stock Based Compensation: The Company applies the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. The exercise price of all options granted under all the plans has equaled at least the market value of the common stock on the dates of grants. Accordingly, no compensation expense has been recognized for options granted to employees or directors. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If the Company had elected to recognize stock-based compensation cost based on the fair value of the options granted at grant date, as prescribed by SFAS No. 123, the Company's net earnings (loss) and net earnings (loss) per share would have been the pro forma amounts as indicated in the table below.
Fiscal Year Ended ------------------------------------------- June 24, 2005 June 25, 2004 June 27, 2003 ----------- ----------- ----------- Net earnings (loss): As reported $ 1,392,000 $ 1,563,000 $(1,008,000) Deduct: Total stock-based compensation expense using fair value method, net of income taxes 459,000 528,000 506,000 ----------- ----------- ----------- Pro forma $ 933,000 $ 1,035,000 $(1,514,000) Basic net earnings (loss) per share: As reported $ 0.12 $ 0.13 $ (0.09) Proforma $ 0.08 $ 0.09 $ (0.13) Diluted net earnings (loss) per share: As reported $ 0.11 $ 0.12 $ (0.09) Pro forma $ 0.07 $ 0.08 $ (0.13)
The weighted average fair values of options granted were determined based on the Black-Scholes option-pricing model, utilizing the following assumptions:
June 24, June 25, June 27, 2005 2004 2003 ---------------- ------------------ ----------------- Expected term 5 Years 5 Years 5 Years Interest rate 3.9% 3.8% 3.3 % Volatility 142.9% 84.0% 60.5 % Dividends 0% 0% 0 % Weighted average fair value of options granted $ 1.64 $ 1.69 $0.17
Comprehensive Income (Loss): Comprehensive income (loss) equaled the net earnings (loss) for each of the years in the three year period ended June 24, 2005. Segment Information: The Company has evaluated the provisions of Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," and has determined that it has one reportable segment. The Company has disclosed the geographic, major suppliers and major customers' requirements of SFAS No. 131. See Note 6. NOTE 2 - Revolving Credit Facility: The Company had no long-term debt or borrowings under its revolving credit facility at June 24, 2005 or June 25, 2004. The Company has a credit facility that enables it to have up to $3.0 million of borrowings outstanding at any one time, limited by a borrowing base equal to 85% of eligible accounts receivable, subject to certain reserves. Outstanding borrowings under the credit facility will bear interest at a specified bank's prime rate (6.25% at June 24, 2005) plus 1%, but never less than 5% per annum, and the Company is also required to pay an annual facility fee of 3/4 of 1% of the maximum amount of the credit facility. At June 24, 2005, the borrowing 25 base was $3.3 million and there were no borrowings outstanding. The credit facility expires in September 2006 and is automatically renewed for successive two year periods unless terminated by the lender at any time on 60 days notice or the Company on 60 days notice prior to the end of the current term or any renewal term. The credit facility is guaranteed by the Company's subsidiary and is secured by a lien and security interest against substantially all of the assets of the Company. The credit facility requires, among other things, that the Company maintain a consolidated tangible net worth of at least $12.0 million and working capital of at least $6.0 million. The credit facility also prohibits, without the lender's consent, the payment of cash dividends, significant changes in management or ownership of the Company, business acquisitions, the incurrence of additional indebtedness, other than lease obligations for the purchase of equipment, and the guarantee of the obligations of others. At June 24, 2005, the Company was in compliance with all its debt covenants. NOTE 3 - Income Taxes The provision for income taxes of $43,000 and $60,000 in fiscal 2005 and fiscal 2004, respectively, primarily consisted of Federal alternative minimum taxes (AMT), due to the limitations on the use of net operating loss carryforwards for the AMT. The tax effects of temporary differences and net operating loss and credit carryforwards that give rise to the net deferred tax assets (liabilities) are as follows: June 24, June 25, 2005 2004 ------------ ------------ Inventory $ 240,000 $ 147,000 Accounts receivable 36,000 34,000 Accrued expenses 178,000 181,000 Net operating loss carryforwards 12,610,000 12,342,000 Business credit carryforwards 540,000 531,000 ------------ ------------ 13,604,000 13,235,000 Less: valuation allowance (12,821,000) (13,163,000) ------------ ------------ Net deferred tax assets 783,000 72,000 Property, plant and equipment (783,000) (72,000) ------------ ------------ $ - $ - ============ ============ At June 24, 2005, for U.S. Federal income tax purposes, the Company had net operating loss carryforwards of approximately $35,000,000, which expire from 2007 to 2023, a portion of which are subject to Internal Revenue Code Section 382 limitations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which net operating loss carryforwards are utilizable and temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. At June 24, 2005 and June 25, 2004, the Company has provided a valuation allowance against all its net deferred tax assets due to the uncertainty of realizing any future benefits therefrom. If all deferred tax assets are realized in the future, $122,000 of the benefit would increase additional paid-in capital. NOTE 4 - Common Stock, Stock Options and Warrants: Stock Option Plans: The Company's 1995 Stock Option Plan and 1998 Stock Option Plan permit the Board of Directors or the Compensation Committee of the Board of Directors to grant, until September 2005 and October 2008, respectively, options to employees (including officers and directors who are employees), consultants and, in the case of the 1998 Stock Option Plan, non-employee directors. The 1995 Stock Option Plan and 1998 Stock Option Plan cover 1,250,000 and 2,500,000 shares, respectively, of common stock. The Board of Directors or the Compensation Committee determines vesting periods, option terms, which may not exceed 10 years, and exercise prices. At June 24, 2005, options to purchase 1,060,900 and 1,607,950 shares were 26 outstanding under the 1995 Plan and 1998 Plan, respectively. At June 24, 2005, 51,900 and 878,550 options were available for grant under the 1995 Plan and 1998 Plan, respectively. On December 3, 2003, the Company's shareholders approved the 2003 Non-Employee Director Stock Option Plan which expires on September 23, 2013 and replaced the Company's 1994 Non-Employee Director Stock Option Plan on December 4, 2003. As of June 24, 2005, there were options to purchase 648,000 shares of common stock outstanding under these plans. The 2003 Plan provides for the grant of options to purchase up to 500,000 shares of common stock to non-employee directors of the Company. On the date a person initially becomes an outside director, that individual is granted an option to purchase 24,000 shares under the 2003 Plan. At each annual shareholders meeting at which directors are elected, each outside director in office after the meeting is automatically granted an option to purchase 5,000 shares plus additional specified shares for serving on Board committees or as chairperson of a committee. Options granted under the 2003 Plan must have an exercise price equal to the market value of the common stock on the date of grant. All options granted under the 2003 Plan have a term of ten years and are exercisable quarterly beginning immediately on the grant date, except the initial option grant to new outside directors vests quarterly over three years starting one year from the grant date. At June 24, 2005, 394,000 options were available for grant under the 2003 plan. The exercise price of all options granted under all the plans has equaled at least the market value of the common stock on the dates of grants. Certain information relating to the employee stock option plans and the non-employee director plans for the years ended June 24, 2005, June 25, 2004, and June 27, 2003 follows:
Fiscal Year Ended ------------------------------------------------------------------------------------------- June 24, 2005 June 25, 2004 June 27, 2003 --------------------------- --------------------------- ---------------------------- Common Weighted Common Weighted Common Weighted Shares Average Shares Average Shares Average Subject to Exercise Subject to Exercise Subject to Exercise Options Price Options Price Options Price ------------ ----------- ------------ ----------- ------------- ------------ Outstanding at beginning of year 2,998,650 $ 1.68 3,363,350 $ 1.53 3,420,341 $ 1.79 Granted 408,000 1.49 180,000 2.49 590,000 0.32 Exercised - - (225,500) 0.56 - - Canceled or expired (89,800) 2.97 (319,200) 1.36 (646,991) 1.80 ------------ ----------- ------------ ----------- ------------- ------------ Outstanding at end of year 3,316,850 $ 1.62 2,998,650 $ 1.68 3,363,350 $ 1.53 ============ =========== ============ =========== ============= ============ Options exercisable at end of year 3,129,550 2,554,150 2,193,390 Shares available for future grant at end of year 1,324,450 1,690,650 1,053,450
The following additional information relates to options outstanding as of June 24, 2005:
Weighted Weighted Weighted Common Shares Average Average Number of Average Exercise Subject to Exercise Remaining Options Exercise Price Range Options Price Life (Years) Exercisable Price - ----------------------------- --------------- -------------- --------------- ---------------- ------------- $0.29 - $1.50 1,361,000 $ 0.86 8.2 1,221,000 $ 8.50 1.51 - 2.00 923,400 1.62 7.3 891,100 1.62 2.01 - 2.50 822,450 2.31 7.2 807,450 2.31 2.51 - 8.25 210,000 3.85 6.7 210,000 3.85 --------------- -------------- --------------- ---------------- ------------- 3,316,850 $ 1.62 7.6 3,129,550 $ 1.65 =============== ============== =============== ================ =============
27 Warrants: On June 21, 2002, the Company issued a warrant to purchase 750,000 shares of common stock at $1.00 per share in connection with its repurchase of all its then outstanding Series C Convertible Preferred Stock. On June 23, 2005, in accordance with the warrant's original terms, the Company issued 253,312 common shares to the warrant holder upon the net common share exercise of the entire warrant. Accordingly, the Company received no cash proceeds from the exercise of the warrant. NOTE 5 - Preferred Stock The Company is authorized to issue up to 1,000,000 shares of Preferred Stock in series, with each series having such powers, rights, preferences, qualifications and restrictions as determined by the Board of Directors. Series D Junior Participating Preferred Stock: In May 1998, the Company adopted a Stockholder Rights Plan providing for the distribution to the Company's stockholders of one Right ("Right") for each share of the Company's common stock issued and outstanding at the opening of business on May 21, 1998 (the "Distribution Date") and each subsequent share of common stock issued. Each Right entitles the registered holder of a share of common stock to purchase from the Company 1/1000 of a share of Series D Junior Participating Preferred Stock of the Company, at a price of $30 per Right (the "Purchase Price"), subject to adjustment. The Rights have a term of ten years, have no voting power or rights to dividends, are not detachable and not separately transferable from the Company's common stock until they become exercisable. In general, the Rights become exercisable following an announcement that a person or group of affiliated or associated persons (an "Acquiring Person") owns, or the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning, at least 20% of the Company's outstanding common stock. If any person becomes an Acquiring Person by acquiring beneficial ownership of at least 20% of the Company's common stock, each outstanding Right (other than those owned by an Acquiring Person) will "flip in" and become a right to buy, at the Purchase Price, that number of shares of common stock of the Company that will have a market value of two times the Purchase Price. After a person becomes an Acquiring Person (but before such Acquiring Person owns 50% or more of the outstanding common stock), the Company may permit each Right (other than those owned by an Acquiring Person) to be exchanged, without payment of the Purchase Price, for one share of common stock. If (i) the Company is acquired in a merger or other business combination transaction and the Company does not survive or the Company merges, consolidates or engages in a share exchange with another person and does survive but all or part of its stock is changed or (ii) at least 50% of the Company's assets or earning power is sold or transferred, then each outstanding Right will "flip over" and become a right to buy, at the Purchase Price, that number of shares of common stock of the acquiring company that will have a market value of two times the Purchase Price. The Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right at any time prior to the time a person acquires beneficial ownership of at least 20% of the Company's common stock and, if certain conditions are met, within ten days following the time a person has acquired 20% or more of the common stock. NOTE 6 - Significant Customers, Export Sales and Geographical Segments Significant Customers: The following customers accounted for 10% or more of the Company's consolidated net sales during one or more of the years presented below:
Fiscal Year Ended ---------------------------------------------------- June 24, June 25, June 27, 2005 2004 2003 --------------- ------------- ---------------- Verizon 52% 53% 58% Tyco Electronics Corporation 10% 13% 7% Telco Sales, Inc. 10% 11% 10%
28 As of June 24, 2005, one customer accounted for 56% of accounts receivable and as of June 25, 2004 two customers accounted for approximately 47% and 19% of accounts receivable. Export Sales: For each of the three years ended June 24, 2005, export sales were less than 10% of consolidated net sales. Geographical Segments: The Company does not have any operating facilities or producing assets outside the United States and Puerto Rico; however, certain equipment owned by the Company is utilized by the Company's contract manufacturers in Asia. The net book value of such equipment held by the Company's contract manufacturers was approximately $2.8 million and $1.8 million at June 24, 2005 and June 25, 2004, respectively. The Company's operations located in Puerto Rico and New York are managed as one geographic segment. Significant Contract Manufacturers: On May 3, 2000, the Company entered into an agreement with a contract manufacturer in Malaysia to outsource the manufacture of certain of its gas tubes used in its products. The agreement is for ten years, but may be terminated by either party with one year's advance notice. On December 18, 2003, the Company entered into an agreement that expires in June 2009 with a contract manufacturer in China, which is a subsidiary of a U.S. based corporation, to manufacture and supply products to the Company. These two suppliers produce a majority of the Company's products that it sells to its customers. NOTE 7 - Commitments, Contingencies and Related Party Transactions The Company leases real property and equipment under various operating leases with terms expiring through July 2006. The leases require minimum annual rentals, exclusive of real property taxes, of approximately $182,000 in fiscal 2006. Rent expense under operating leases was $203,000, $213,000 and $219,000 in fiscal 2005, 2004 and 2003, respectively. The Company has financed its annual insurance premiums through its broker. The balance outstanding as of June 24, 2005 was $213,000, which is to be paid in equal installments from July 2005 to December 2005 plus interest at 5.25% per annum. The Company had an agreement with David Garwood, a member of the Board of Directors, to provide strategic planning consulting services from April 1, 2002 until its expiration on March 31, 2003 at $10,000 per quarter. On March 7, 2005, the Company terminated its agreement with Timothy J. Roach, President and Chief Executive Officer of the Company, to lease two houses near the Company's Copiague, New York facility, at an aggregate annual rental of $31,000 plus expenses. The houses were used by the Chairman of the Board and other executives, directors and employees when visiting the Company's New York facility. On May 17, 2005, the Company and Timothy J. Roach, the Company's President and Chief Executive Officer, amended and restated his employment agreement that continues through June 30, 2006, with automatic one year extensions subject to certain conditions, under which Mr. Roach is entitled to an annual salary of $300,000, subject to increases and bonuses at the discretion of the Board of Directors or Compensation Committee. Included in the agreement are health and other benefits, including life insurance, and certain termination rights, which may include severance pay of two times his annual compensation. From 1982 until June 25, 2004, the Company had leased equipment from PRC Leasing, Inc., a corporation owned by Alfred J. Roach, the then Chairman of the Board of Directors of the Company. Rent expense under the lease was $50,000 in each of fiscal years 2004 and 2003. On September 14, 2005, the Company agreed to store certain equipment previously leased by the Company from PRC Leasing, Inc., until April 1, 2006, and received a release from Alfred J. Roach, a director of the Company who, at the time, ceased being Chairman of the Company's Board of Directors, for all claims, known or unknown, he might have against the Company, including any regarding the previously leased equipment. Concurrent with this agreement, the Company entered into a consulting agreement with Mr. Roach. The consulting agreement provides for Mr. Roach to consult with the Company's executive officers and directors regarding the Company's business and operations, focusing on the sale and marketing of the Company's products. The four year agreement commences on November 1, 2005 29 (when he will no longer be an employee) and provides for an annual fee of $160,000 per year plus 5% commissions on the net sales, generated as a result of his efforts, of products sold in specified foreign countries where the Company is currently not doing any business. On September 14, 2005, the Company entered into a one year consulting agreement with Charles H. House, a director of the Company. Mr. House is to assist the Company in, among other things, the analysis, development and implementation of a comprehensive go-to-market business plan, for certain products of the Company, in exchange for 35,000 shares of the Company's common stock. From time to time, the Company is subject to legal proceedings or claims which arise in the ordinary course of business. While the outcome of such matters can not be predicted with certainty, the Company believes that such matters will not have a material adverse effect on its financial condition or liquidity. NOTE 8 - Employee Benefits The Company has a defined contribution plan which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The plan covers substantially all U.S. and Puerto Rico employees who meet the eligibility requirements and requires the Company to match employees' contributions up to specified limitations and subject to certain vesting schedules. The matching expense for the Company was $20,000, $20,000 and $21,000 in fiscal 2005, 2004 and 2003, respectively. The Company does not provide its employees any other post-retirement or post-employment benefits, except discretionary severance payments upon termination of employment. NOTE 9 - Supplemental Consolidated Balance Sheet Information June 24, June 25, 2005 2004 ----------- ----------- Accounts receivable: Trade accounts receivable $ 3,994,000 $ 3,521,000 Other receivables 12,000 14,000 Less: allowance for doubtful accounts (100,000) (100,000) ----------- ----------- $ 3,906,000 $ 3,435,000 =========== =========== Inventories, net: Raw materials and subassemblies $ 2,192,000 $ 1,487,000 Work in progress 243,000 175,000 Finished goods 6,464,000 3,743,000 ----------- ----------- $ 8,899,000 $ 5,405,000 =========== =========== Property, plant and equipment: Machinery and equipment $ 7,955,000 $ 7,090,000 Leasehold improvements 5,000 5,000 Office fixtures, equipment and other 608,000 215,000 ----------- ----------- 8,568,000 7,310,000 Less: accumulated depreciation (4,339,000) (3,363,000) ----------- ----------- $ 4,229,000 $ 3,947,000 =========== =========== Accrued liabilities: Accrued payroll, bonus and vacation $ 716,000 $ 945,000 Accrued legal and other professional fees 209,000 212,000 Other accrued expenses 638,000 541,000 ----------- ----------- $ 1,563,000 $ 1,698,000 =========== =========== 30 NOTE 10 - Quarterly Financial Data (Unaudited) The following table reflects the unaudited quarterly results of the Company for the fiscal years ended June 24, 2005 and June 25, 2004, respectively:
Operating Net Diluted net Gross earnings earnings earnings Quarter Ended Net sales profit (loss) (loss) per share(a) - ----------------------------- --------------- ---------------- ---------------- --------------- ----------------- September 24, 2004 $6,952,000 $2,135,000 $600,000 $597,000 $0.05 December 31, 2004 7,053,000 2,074,000 255,000 254,000 0.02 March 25, 2005 5,231,000 1,388,000 (344,000) (53,000) - June 24, 2005 7,560,000 2,298,000 586,000 594,000 0.05 - ----------------------------- --------------- ---------------- ---------------- --------------- ----------------- September 26, 2003 $9,211,000 $2,787,000 $915,000 $913,000 $0.08 December 26, 2003 7,001,000 2,069,000 309,000 320,000 0.02 March 26, 2004 6,038,000 1,935,000 218,000 217,000 0.02 June 25, 2004 6,235,000 1,817,000 140,000 113,000 0.01
- ---------------------------- (a) The sum of the unaudited quarterly income (loss) per share amounts do not always equal the annual amount reported because the per share amounts are computed independently for each quarter and the year based on the weighted average common and common equivalent shares outstanding in each period. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. Item 9A. Controls and Procedures As of the end of the period covered by this Report, management of the Company, with the participation of the Company's President and principal executive officer and the Company's Vice President-Finance and principal financial officer, evaluated the effectiveness of the Company's "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, these officers concluded that, as of June 24, 2005, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports. During the period covered by this Report, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART III The information called for by Part III (Items 10, 11, 12, 13 and 14 of Form 10-K) is incorporated herein by reference to such information which will be contained in the Company's Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to the Company's 2005 Annual Meeting of Stockholders. 31 PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Report of Independent Registered Public Accounting Firm ...................................................18 Consolidated Balance Sheets at June 24, 2005 and June 25, 2004............................................19 Consolidated Statements of Operations for each of the years in the three-year period ended June 24, 2005.................................................................20 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended June 24, 2005.................................................................21 Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 24, 2005.................................................................22 Notes to Consolidated Financial Statements................................................................23 (a)(2) Schedule II - Valuation and Qualifying Accounts...........................................................S-1 (3) Exhibits
Exhibit Number EXHIBIT INDEX - ------ Description 3(a)(1) Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 1-8048). 3(a)(2) Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 3(a)(3) Certificate of Amendment of the Company's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 1-8048). 3(b) By-laws of the Company, as amended. Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 1-8048). 4(a) Rights Agreement dated as of May 15, 1998 between the Company and Harris Trust & Savings Bank formerly Harris Trust of Chicago). Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 4(b)(1) Security Agreement dated as of September 17, 2003 between the Company and Milberg Factors, Inc. ("Lender"). Incorporated by reference to Exhibit 4(b)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 4(b)(2) Guaranty Agreement dated as of September 17, 2003 between TII Systems, Inc. and Lender. Incorporated by reference to Exhibhit 4(b)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 4(b)(3) Security Interest In Inventory Under Uniform Commercial Code Supplement to Security Agreement (Accounts Receivable Financing) Contract dated as of September 17, 2003 between the Company and Lender. Incorporated by reference to Exhibit 4(b)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 32 4(b)(4) Security Agreement - Goods and Chattels dated as of September 17, 2003 between the Company and Lender. Incorporated by reference to Exhibit 4(b)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No 1-8048). 10(a)(1)(A)+ 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(a)(1)(B)*+ Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. 10(a)(2)(A)+ 1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 1-8048). 10(a)(2)(B)+ Non-Qualified Stock Option Contract, dated June 7, 2005, between the Company and Timothy J. Roach. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005. 10(a)(2)(C)+ Form of Incentive Stock Option Contract, dated June 7, 2005, between the Company and separately with each of Kenneth A. Paladino, Nisar Chaudry and Virginia M. Hall. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005. 10(a)(2)(D)+ Form of Incentive Stock Option Contract, dated September 13, 2005 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005. 10(a)(2)(E)*+ Forms of Option Contracts under 1995 Stock Option Plan. 10(a)(3)(A)+ 1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 10(a)(3)(B)*+ Forms of Option Contracts under 1998 Stock Option Plan. 10(a)(4)(A)+ 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Appendix A to the Company's Proxy Statement dated October 27, 2003 (File No. 1-8048). 10(a)(4)(B)+ 2003 Non-Employee Director Stock Option Plan as amended effective September 25, 2004. Incorporated by reference to Exhibit 99(a) to the Company's Form S-8 dated November 15, 2004 (File No. 1-8048). 10(a)(4)(C)*+ Forms of Option Contracts under 2003 Non-Employee Director Stock Option Plan. 10(b)(1)+ Second Amended and Restated Employment Agreement, dated as of May 17, 2005 between the Company and Timothy J. Roach. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 17, 2005 (File No. 1-8048). 10(b)(2)+ Consulting Agreement, dated September 14, 2005, between the Company and Alfred J. Roach. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K (date of earliest event reported) September 13, 2005 (File No. 1-8048). 10(b)(3)+ Consulting Agreement, dated September 14, 2005, between the Company and Charles H. House. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K (date of earliest event reported) September 13, 2005(File No. 1-8048). 10(c)(1) Lease Contract dated April 27, 1998 between the Company and Puerto Rico Industrial Development Company. Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 33 10(d)* Product Purchase Agreement, effective as of April 1, 2005, between the Company and Verizon Services Corp. (confidential treatment has been requested with respect to certain portions of this agreement). 14 Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 2004 (File No. 1-8048). 21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (File No. 1-8048). 23* Consent of KPMG LLP. 31(a)* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b)* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32(a)* Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32(b)* Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------- * Filed herewith. + Management contract or compensatory plan or arrangement. 34 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TII NETWORK TECHNOLOGIES, INC. September 22, 2005 By: /s/ Timothy J. Roach -------------------------------------------- Timothy J. Roach, President, and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. September 22, 2005 By: /s/ Timothy J. Roach -------------------------------------------- Timothy J. Roach, President, and Chief Executive Officer (Principal Executive Officer) September 22, 2005 /s/ Kenneth A. Paladino -------------------------------------------- Kenneth A. Paladino, Vice President-Finance, Chief Operating Officer and Treasurer (Principal Financial Officer) September 22, 2005 /s/ Alfred J. Roach -------------------------------------------- Alfred J. Roach, Director September 22, 2005 /s/ C. Bruce Barksdale -------------------------------------------- C. Bruce Barksdale, Director September 22, 2005 /s/James R. Grover Jr. -------------------------------------------- James R. Grover, Jr., Director September 22, 2005 /s/ Joseph C. Hogan -------------------------------------------- Joseph C. Hogan, Director September 22, 2005 /s/ R.D. Garwood -------------------------------------------- R. D. Garwood, Director September 22, 2005 /s/ Lawrence M. Fodrowski -------------------------------------------- Lawrence M. Fodrowski, Director September 22, 2005 /s/ Mark T. Bradshaw -------------------------------------------- Mark T. Bradshaw, Director September 22, 2005 /s/ Charles H. House -------------------------------------------- Charles H. House, Director
35 TII NETWORK TECHNOLOGIES, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Accounts Balance Beginning of Receivable at End of Fiscal Year Ended Year Additions Write-offs Year - -------------------------------------------- -------------------- ------------------- ------------------ ------------------ June 24, 2005 $ 100,000 - - $ 100,000 June 25, 2004 $ 100,000 - - $ 100,000 June 27, 2003 $ 100,000 - - $ 100,000
S-1 Exhibit Number EXHIBIT INDEX - ------ Description 3(a)(1) Restated Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 10, 1996. Incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1996 (File No. 1-8048). 3(a)(2) Certificate of Designation, as filed with the Secretary of State of the State of Delaware on May 15, 1998. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 3(a)(3) Certificate of Amendment of the Company's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 5, 2001. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) December 5, 2001 (File No. 1-8048). 3(b) By-laws of the Company, as amended. Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005 (File No. 1-8048). 4(a) Rights Agreement dated as of May 15, 1998 between the Company and Harris Trust & Savings Bank formerly Harris Trust of Chicago). Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 7, 1998 (File No. 1-8048). 4(b)(1) Security Agreement dated as of September 17, 2003 between the Company and Milberg Factors, Inc. ("Lender"). Incorporated by reference to Exhibit 4(b)(1) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 4(b)(2) Guaranty Agreement dated as of September 17, 2003 between TII Systems, Inc. and Lender. Incorporated by reference to Exhibhit 4(b)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 4(b)(3) Security Interest In Inventory Under Uniform Commercial Code Supplement to Security Agreement (Accounts Receivable Financing) Contract dated as of September 17, 2003 between the Company and Lender. Incorporated by reference to Exhibit 4(b)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 4(b)(4) Security Agreement - Goods and Chattels dated as of September 17, 2003 between the Company and Lender. Incorporated by reference to Exhibit 4(b)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No 1-8048). 10(a)(1)(A)+ 1994 Non-Employee Director Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 2001 (File No. 1-8048). 10(a)(1)(B)*+ Form of Option Contract under 1994 Non-Employee Director Stock Option Plan. 10(a)(2)(A)+ 1995 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1997 (File No. 1-8048). 10(a)(2)(B)+ Non-Qualified Stock Option Contract, dated June 7, 2005, between the Company and Timothy J. Roach. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005. 10(a)(2)(C)+ Form of Incentive Stock Option Contract, dated June 7, 2005, between the Company and separately with each of Kenneth A. Paladino, Nisar Chaudry and Virginia M. Hall. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated (date of earliest event reported) June 7, 2005. 10(a)(2)(D)+ Form of Incentive Stock Option Contract, dated September 13, 2005 between the Company and Kenneth A. Paladino. Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated (date of earliest event reported) September 13, 2005. 10(a)(2)(E)*+ Forms of Option Contracts under 1995 Stock Option Plan. 10(a)(3)(A)+ 1998 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10(a)(4) to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2003 (File No. 1-8048). 10(a)(3)(B)*+ Forms of Option Contracts under 1998 Stock Option Plan. 10(a)(4)(A)+ 2003 Non-Employee Director Stock Option Plan. Incorporated by reference to Appendix A to the Company's Proxy Statement dated October 27, 2003 (File No. 1-8048). 10(a)(4)(B)+ 2003 Non-Employee Director Stock Option Plan as amended effective September 25, 2004. Incorporated by reference to Exhibit 99(a) to the Company's Form S-8 dated November 15, 2004 (File No. 1-8048). 10(a)(4)(C)*+ Forms of Option Contracts under 2003 Non-Employee Director Stock Option Plan. 10(b)(1)+ Second Amended and Restated Employment Agreement, dated as of May 17, 2005 between the Company and Timothy J. Roach. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated (date of earliest event reported) May 17, 2005 (File No. 1-8048). 10(b)(2)+ Consulting Agreement, dated September 14, 2005, between the Company and Alfred J. Roach. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K (date of earliest event reported) September 13, 2005 (File No. 1-8048). 10(b)(3)+ Consultating Agreement, dated September 14, 2005, between the Company and Charles H. House. Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K (date of earliest event reported) September 13, 2005(File No. 1-8048). 10(c)(1) Lease Contract dated April 27, 1998 between the Company and Puerto Rico Industrial Development Company. Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1998 (File No. 1-8048). 10(d)* Product Purchase Agreement, effective as of April 1, 2005, between the Company and Verizon Services Corp. (confidential treatment has been requested with respect to certain portions of this agreement). 14 Code of Ethics for Senior Financial Officers. Incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 2004 (File No. 1-8048). 21 Subsidiaries of the Company. Incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2002 (File No. 1-8048). 23* Consent of KPMG LLP. 31(a)* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31(b)* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32(a)* Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32(b)* Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------- * Filed herewith. + Management contract or compensatory plan or arrangement. EX-10 2 ex10a1b-f10k06242005.txt EX-10(A)(1)(B) EXHIBIT 10(a)(1)(B) THIS STOCK OPTION AGREEMENT entered into as of ______________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and _____________ ("Optionee"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company has adopted, and the Company's stockholders have approved at the Company's 1994 Annual Meeting of Stockholders, the Company's 1994 Non-Employee Director Stock Option Plan, (as amended on September 20, 1995, which amendments were approved by the Company's stockholders on December 6, 1995, and as further amended which amendments were approved by the Company's stockholders on December 6, 2000, the "Plan") to foster the Company's ability to attract and retain the services of experienced and knowledgeable directors who are not common law employees of the Company and to provide additional incentive for such directors to continue to work for the best interests of the Company and its stockholders through the continuing ownership of shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"); NOW, THEREFORE, in consideration of the foregoing and the covenants contained herein, it is hereby agreed: 1. The Company, in accordance with and subject to the terms and conditions of this Agreement and the Plan, grants to Optionee a stock option to purchase up to an aggregate of 25,000 shares of Common Stock at an exercise price of $_____ per share (such number of shares and exercise price being subject to adjustment as provided in the Plan). 2. This option shall expire at 5:00 P.M., New York time, on ____________, subject to earlier termination as provided in the Plan. 3. Except as otherwise provided below and in the Plan, this option may be exercised at any time or times until it expires or is earlier terminated as provided in the Plan. Notwithstanding the foregoing, this option may not be exercised at any time in an amount less than 100 shares (or the remaining shares then covered by and purchasable under this option if less than 100 shares). This option may not be exercised in respect of a fraction of a share. 4. This option shall be exercised by the giving of written notice to the Company at its New York office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President-Administration, specifying the number of shares of Common Stock being purchased and accompanied by the payment in full of the aggregate exercise price for the shares to be purchased in cash or by check. Optionee shall not have the rights of a stockholder with respect to shares subject to this option until the date of issuance of a stock certificate to Optionee for such shares. In addition, Optionee shall pay to the Company in cash or by check, upon demand, the amount, if any, which the Company determines is necessary to satisfy its obligation to withhold federal, state and local income and other taxes or other amounts incurred by reason of the grant or exercise of this option. 5. It is a condition to the exercise of this option that either (i) a Registration Statement under the Securities Act of 1933, as amended, or any succeeding act (collectively, the "Securities Act"), with respect to the shares underlying this option shall be effective and current at the time of exercise of this option or (ii) in the opinion of counsel to the Company, there shall be an exemption from registration under the Securities Act for the issuance of shares of Common Stock upon such exercise. Nothing herein shall be construed as requiring the Company to register shares subject to the Plan for issuance or for resale. 6. This option is subject to all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by Optionee. In the event of a conflict between the terms of this option and the terms of the Plan, the terms of the Plan shall govern. The Company may amend the Plan and options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. 7. This option may not be transferred otherwise than by will or the laws of descent and distribution and may be exercised, during Optionee's lifetime, only by Optionee or Optionee's legal representatives. 8. This option shall be binding upon and inure to the benefit of any successor or assign of the Company and to the executor, administrator or other legal representative entitled by law and the Plan to the Optionee's rights hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC. By:_________________________ Timothy J. Roach, President ----------------------------- ----------------------------- Address EX-10 3 ex10a2e-f10k062405.txt EX-10(A)(2)(E), FORMS OF OPTION CONTRACTS, 1995 EXHIBIT 10(a)(2)(E) TII NETWORK TECHNOLOGIES, INC. 1995 STOCK OPTION PLAN NON-QUALIFIED STOCK OPTION CONTRACT THIS NON-QUALIFIED STOCK OPTION CONTRACT entered into as of ______________________________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and ____________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1995 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_______ per share, being at least equal to the fair market value of such shares of Common Stock on the date hereof. This option is not intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. The term of this option shall be _____ years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until ________________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next __________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor (a) in cash or by certified check, (b) with previously acquired shares of Common Stock which have been held by the Optionee for at least six months valued as provided in the Plan, or (c) a combination of the foregoing. 4. The Company an/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. 6. Notwithstanding anything herein to the contrary, if at any time the Committee shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 7. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock. 8. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. -2- 9. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 10. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 11. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 13. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 14. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. 15. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC. By: ----------------------------------------- Timothy J. Roach, President , Optionee Address: TII NETWORK TECHNOLOGIES, INC. 1995 STOCK OPTION PLAN INCENTIVE STOCK OPTION CONTRACT THIS INCENTIVE STOCK OPTION CONTRACT entered into as of _________________________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and ________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1995 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_____ per share, being at least equal to the fair market value of such shares of Common Stock on the date hereof. This option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), although the Company makes no representation or warranty as to such qualification. 2. The term of this option shall be _____ years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor (a) in cash or by certified check, (b) with previously acquired shares of Common Stock which have been held by the Optionee for at least six months valued as provided in the Plan, or (c) a combination of the foregoing. 4. The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. In the event of any disposition of the shares of Common Stock acquired pursuant to the exercise of this option within two years from the date hereof or one year from the date of transfer of such shares to him, the Optionee shall notify the Company thereof in writing within 30 days after such disposition. In addition, the Optionee shall provide the Company on demand with such information as the Company shall reasonably request in connection with determining the amount and character of the Optionee's income, the applicable deduction and the obligation to withhold taxes or other amount incurred by reason of such disqualifying disposition, including the amount thereof. The Optionee shall pay the Company and/or the Subsidiary, as the case may be, in cash on demand the amount, if any, which the Company determines is necessary to satisfy such withholding obligation. 6. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. -2- 7. Notwithstanding anything herein to the contrary, if at any time the Committee shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock, or (c) permit the Company to determine the occurrence of a "disqualifying disposition," as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of this option. 9. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 10. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 11. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 12. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 13. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. -3- 14. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 15. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. 16. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC. By: -------------------------------------------------- Timothy J. Roach, President , Optionee Address -4- EX-10 4 ex10a3b-f10k06242005.txt EX-10(A)(3)(B); 1998 STOCK OPTION PLAN EXHIBIT 10(a)(3)(B) INCENTIVE STOCK OPTION LESS THAN 10% STOCKHOLDER PAYMENT WITH CASH ONLY TII INDUSTRIES, INC. 1998 STOCK OPTION PLAN INCENTIVE STOCK OPTION CONTRACT THIS INCENTIVE STOCK OPTION CONTRACT entered into as of _________________________ between TII INDUSTRIES, INC., a Delaware corporation (the "Company"), and ________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_____ per share, being at least equal to the fair market value of such shares of Common Stock on the date hereof. This option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), although the Company makes no representation or warranty as to such qualification. 2. The term of this option shall be _____ years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor in cash or by certified check. 4. The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the -2- grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. In the event of any disposition of the shares of Common Stock acquired pursuant to the exercise of this option within two years from the date hereof or one year from the date of transfer of such shares to him, the Optionee shall notify the Company thereof in writing within 30 days after such disposition. In addition, the Optionee shall provide the Company on demand with such information as the Company shall reasonably request in connection with determining the amount and character of the Optionee's income, the applicable deduction and the obligation to withhold taxes or other amount incurred by reason of such disqualifying disposition, including the amount thereof. The Optionee shall pay the Company and/or the Subsidiary, as the case may be, in cash on demand the amount, if any, which the Company determines is necessary to satisfy such withholding obligation. 6. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. 7. Notwithstanding anything herein to the contrary, if at any time the Company shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common -3- Stock hereunder, this option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock, or (c) permit the Company to determine the occurrence of a "disqualifying disposition," as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of this option. 9. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 10. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 11. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 12. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 13. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 14. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. -4- 15. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. 16. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII INDUSTRIES, INC. By: ------------------------------------------- Timothy J. Roach, President , Optionee ----------------- Address -5- INCENTIVE STOCK OPTION LESS THAN 10% STOCKHOLDER PAYMENT WITH PREVIOUSLY OWN STOCK TII INDUSTRIES, INC. 1998 STOCK OPTION PLAN INCENTIVE STOCK OPTION CONTRACT THIS INCENTIVE STOCK OPTION CONTRACT entered into as of _________________________ between TII INDUSTRIES, INC., a Delaware corporation (the "Company"), and ________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_____ per share, being at least equal to the fair market value of such shares of Common Stock on the date hereof. This option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), although the Company makes no representation or warranty as to such qualification. 2. The term of this option shall be _____ years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor (a) in cash or by certified check, (b) with previously acquired shares of Common Stock which have been held by the Optionee for at least six months valued as provided in the Plan, or (c) a combination of the foregoing. -1- 4. The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. In the event of any disposition of the shares of Common Stock acquired pursuant to the exercise of this option within two years from the date hereof or one year from the date of transfer of such shares to him, the Optionee shall notify the Company thereof in writing within 30 days after such disposition. In addition, the Optionee shall provide the Company on demand with such information as the Company shall reasonably request in connection with determining the amount and character of the Optionee's income, the applicable deduction and the obligation to withhold taxes or other amount incurred by reason of such disqualifying disposition, including the amount thereof. The Optionee shall pay the Company and/or the Subsidiary, as the case may be, in cash on demand the amount, if any, which the Company determines is necessary to satisfy such withholding obligation. 6. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. -2- 7. Notwithstanding anything herein to the contrary, if at any time the Company shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock, or (c) permit the Company to determine the occurrence of a "disqualifying disposition," as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of this option. 9. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 10. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 11. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 12. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. -3- 13. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 14. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 15. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. 16. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII INDUSTRIES, INC. By: -------------------------------------------------- Timothy J. Roach, President , Optionee ----------------- Address INCENTIVE STOCK OPTION OVER 10% STOCKHOLDER PAYMENT WITH CASH ONLY TII INDUSTRIES, INC. 1998 STOCK OPTION PLAN INCENTIVE STOCK OPTION CONTRACT THIS INCENTIVE STOCK OPTION CONTRACT entered into as of _________________________ between TII INDUSTRIES, INC., a Delaware corporation (the "Company"), and ________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_____ per share, being at least equal to 110% of the fair market value of such shares of Common Stock on the date hereof. This option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), although the Company makes no representation or warranty as to such qualification. 2. The term of this option shall be five years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. -2- 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor in cash or by certified check. 4. The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. In the event of any disposition of the shares of Common Stock acquired pursuant to the exercise of this option within two years from the date hereof or one year from the date of transfer of such shares to him, the Optionee shall notify the Company thereof in writing within 30 days after such disposition. In addition, the Optionee shall provide the Company on demand with such information as the Company shall reasonably request in connection with determining the amount and character of the Optionee's income, the applicable deduction and the obligation to withhold taxes or other amount incurred by reason of such disqualifying disposition, including the amount thereof. The Optionee shall pay the Company and/or the Subsidiary, as the case may be, in cash on demand the amount, if any, which the Company determines is necessary to satisfy such withholding obligation. 6. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such -3- exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. 7. Notwithstanding anything herein to the contrary, if at any time the Company shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock, or (c) permit the Company to determine the occurrence of a "disqualifying disposition," as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of this option. 9. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 10. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 11. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 12. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. -4- 13. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 14. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 15. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. 16. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII INDUSTRIES, INC. By: --------------------------------------------- Timothy J. Roach, President , Optionee ----------------- Address INCENTIVE STOCK OPTION OVER 10% STOCKHOLDER PAYMENT WITH PREVIOUSLY OWN STOCK TII INDUSTRIES, INC. 1998 STOCK OPTION PLAN INCENTIVE STOCK OPTION CONTRACT THIS INCENTIVE STOCK OPTION CONTRACT entered into as of _________________________ between TII INDUSTRIES, INC., a Delaware corporation (the "Company"), and ________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_____ per share, being at least equal to 110% of the fair market value of such shares of Common Stock on the date hereof. This option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), although the Company makes no representation or warranty as to such qualification. 2. The term of this option shall be five years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until __________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next _________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor (a) in cash or by certified check, (b) with previously acquired shares of Common Stock which have been held by the Optionee for at least six months valued as provided in the Plan, or (c) a combination of the foregoing. -1- 4. The Company and/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. In the event of any disposition of the shares of Common Stock acquired pursuant to the exercise of this option within two years from the date hereof or one year from the date of transfer of such shares to him, the Optionee shall notify the Company thereof in writing within 30 days after such disposition. In addition, the Optionee shall provide the Company on demand with such information as the Company shall reasonably request in connection with determining the amount and character of the Optionee's income, the applicable deduction and the obligation to withhold taxes or other amount incurred by reason of such disqualifying disposition, including the amount thereof. The Optionee shall pay the Company and/or the Subsidiary, as the case may be, in cash on demand the amount, if any, which the Company determines is necessary to satisfy such withholding obligation. 6. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. -2- 7. Notwithstanding anything herein to the contrary, if at any time the Company shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock, or (c) permit the Company to determine the occurrence of a "disqualifying disposition," as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of this option. 9. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 10. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 11. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 12. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. -3- 13. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 14. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 15. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. 16. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII INDUSTRIES, INC. By: --------------------------------------- Timothy J. Roach, President , Optionee ----------------- Address -4- NON-QUALIFIED STOCK OPTION PAYMENT WITH CASH ONLY TII INDUSTRIES, INC. 1998 STOCK OPTION PLAN NON-QUALIFIED STOCK OPTION CONTRACT THIS NON-QUALIFIED STOCK OPTION CONTRACT entered into as of ______________________________ between TII INDUSTRIES, INC., a Delaware corporation (the "Company"), and _________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_______ per share, being at least equal to the fair market value of such shares of Common Stock on the date hereof. This option is not intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. The term of this option shall be _____ years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until ________________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next __________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor in cash or by certified check. 4. The Company an/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. 6. Notwithstanding anything herein to the contrary, if at any time the Company shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, -2- qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 7. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock. 8. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 9. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 10. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 11. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 13. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 14. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. -3- 15. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII INDUSTRIES, INC. By: ------------------------------------------------ Timothy J. Roach, President , Optionee ----------------- Address -4- NON-QUALIFIED STOCK OPTION PAYMENT WITH PREVIOUSLY OWNED STOCK TII INDUSTRIES, INC. 1998 STOCK OPTION PLAN NON-QUALIFIED STOCK OPTION CONTRACT THIS NON-QUALIFIED STOCK OPTION CONTRACT entered into as of ______________________________ between TII INDUSTRIES, INC., a Delaware corporation (the "Company"), and _________________________________________________ (the "Optionee"). W I T N E S S E T H: - - - - - - - - - - 1. The Company, in accordance with the allotment made by the Compensation Committee of the Company's Board of Directors (the "Committee") and subject to the terms and conditions of the 1998 Stock Option Plan of the Company (the "Plan"), grants to the Optionee an option to purchase an aggregate of _______ shares of the Common Stock, $.01 par value per share, of the Company ("Common Stock") at an exercise price of $_______ per share, being at least equal to the fair market value of such shares of Common Stock on the date hereof. This option is not intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. The term of this option shall be _____ years from the date hereof, subject to earlier termination as provided in the Plan. However, this option shall not be exercisable until ________________________________, at which time it shall become exercisable as to _______ shares of Common Stock, and as to an additional _______ shares of Common Stock on each of the next __________ anniversaries of the date hereof. The right to purchase shares of Common Stock under this option shall be cumulative, so that if the full number of shares purchasable in a period shall not be purchased, the balance may be purchased at any time or from time to time thereafter, but not after the expiration of the option. Notwithstanding the foregoing, in no event may a fraction of a share of Common Stock be purchased under this option. 3. This option shall be exercised by giving written notice to the Company at its then principal office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President - Administration, stating that the Optionee is exercising the option hereunder, specifying the number of shares being purchased and accompanied by payment in full of the aggregate purchase price therefor (a) in cash or by certified check, (b) with previously acquired shares of Common Stock which have been held by the Optionee for at least six months valued as provided in the Plan, or (c) a combination of the foregoing. 4. The Company an/or any Subsidiary may withhold cash and/or shares of Common Stock to be issued to the Optionee in the amount which the Company determines is necessary to satisfy its obligation to withhold taxes or other amounts incurred by reason of the grant or exercise of this option or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the Optionee to pay the Company such amount in cash promptly upon demand. 5. Notwithstanding the foregoing, this option shall not be exercisable by the Optionee unless (a) a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock to be received upon the exercise of this option shall be effective and current at the time of exercise or (b) there is an exemption from registration under the Securities Act for the issuance of the shares of Common Stock upon such exercise. The Optionee hereby represents and warrants to the Company that, unless such a Registration Statement is effective and current at the time of exercise of this option, the shares of Common Stock to be issued upon the exercise of this option will be acquired by the Optionee for his own account, for investment only and not with a view to the resale or distribution thereof. In any event, the Optionee will notify the Company of any proposed resale of the shares of Common Stock issued to him upon exercise of this option. If (i) the Optionee is an "affiliate" of the Company within the meaning of the Securities Act at the time of any such resale or (ii) at the time of exercise of this option the shares issued were not subject to a current and effective Registration Statement under the Securities Act covering their issuance, then any subsequent resale or distribution of shares of Common Stock by the Optionee will be made only pursuant to (x) a Registration Statement under the Securities Act which, at the time of resale, is effective and current with respect to the Optionee's sale of shares of Common Stock being sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Optionee shall, prior to any offer of sale or sale of such shares of Common Stock, provide the Company (unless waived by the Company) with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemption to the proposed sale or distribution. Such representations and warranties shall also be deemed to be made by the Optionee upon each exercise of this option. Nothing herein shall be construed as requiring the Company to register the shares subject to this option under the Securities Act. 6. Notwithstanding anything herein to the contrary, if at any time the Company shall determine, in its discretion, that the listing or qualification of the shares of Common Stock subject to this option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to, or in connection with, the granting of an option or the issue of shares of Common Stock hereunder, this option may not be exercised in whole or in part unless such listing, -2- qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 7. The Company may affix appropriate legends upon the certificates for shares of Common Stock issued upon exercise of this option and may issue such "stop transfer" instructions to its transfer agent in respect of such shares as it determines, in its discretion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act or (b) implement the provisions of the Plan or this Contract or any other agreement between the Company and the Optionee with respect to such shares of Common Stock. 8. Nothing in the Plan or herein shall confer upon the Optionee any right to continue in the employ of the Company, any Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, any Parent or its Subsidiaries to terminate such employment at any time for any reason whatsoever without liability to the Company, any Parent or any of its Subsidiaries. 9. The Company and the Optionee agree that they will both be subject to and bound by all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by the Optionee and is made a part hereof. Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan. In the event of a conflict between the terms of this Contract and the terms of the Plan, the terms of the Plan shall govern. 10. The Optionee represents and agrees that he will comply with all applicable laws relating to the Plan and the grant and exercise of this option and the disposition of the shares of Common Stock acquired upon exercise of the option, including without limitation, federal and state securities and "blue sky" laws. 11. This option is not transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. This Contract shall be binding upon and inure to the benefit of any successor or assign of the Company and to any heir, distributee, executor, administrator or legal representative entitled to the Optionee's rights hereunder. 13. This Contract shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of law rules thereof. 14. The invalidity or illegality of any provision herein shall not affect the validity of any other provision. -3- 15. The Optionee agrees that the Company may amend the Plan and the options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the day and year first above written. TII INDUSTRIES, INC. By: --------------------------------- Timothy J. Roach, President , Optionee --------------------------- Address -4- EX-10 5 ex10a4c-f10k06242005.txt EX-10(A)(4)(C); 2003 NON-EMP DIR STOCK OPT PLAN EXHIBIT 10(a)(4)(C) THIS STOCK OPTION AGREEMENT entered into as of ______________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and _____________ ("Optionee"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company has adopted, and the Company's stockholders have approved at the Company's 2003 Annual Meeting of Stockholders, the Company's 2003 Non-Employee Director Stock Option Plan, as amended on September 28, 2004 ( the "Plan"), to foster the Company's ability to attract and retain the services of experienced and knowledgeable directors who are not common law employees of the Company and to provide additional incentive for such directors to continue to work for the best interests of the Company and its stockholders through the continuing ownership of shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"); NOW, THEREFORE, in consideration of the foregoing and the covenants contained herein, it is hereby agreed: 1. The Company, in accordance with and subject to the terms and conditions of this Agreement and the Plan, grants to Optionee a stock option to purchase up to an aggregate of ________shares of Common Stock at an exercise price of $_____ per share (such number of shares and exercise price being subject to adjustment as provided in the Plan). 2. This option shall expire at 5:00 P.M., New York time, on ____________, subject to earlier termination as provided in the Plan. 3. This option shall vest and become exercisable, on a cumulative basis, in twelve equal quarterly installments commencing one year following the date hereof. Notwithstanding the foregoing, this option may not be exercised at any time in an amount less than 100 shares (or the remaining shares then covered by and purchasable under this option if less than 100 shares). This option may not be exercised in respect of a fraction of a share. 4. This option shall be exercised by the giving of written notice to the Company at its New York office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President-Administration, specifying the number of shares of Common Stock being purchased and accompanied by the payment in full of the aggregate exercise price for the shares to be purchased in cash or by check. Optionee shall not have the rights of a stockholder with respect to shares subject to this option until the date of issuance of a stock certificate to Optionee for such shares. In addition, Optionee shall pay to the Company in cash or by check, upon demand, the amount, if any, which the Company determines is necessary to satisfy its obligation to withhold federal, state and local income and other taxes or other amounts incurred by reason of the grant or exercise of this option. 5. It is a condition to the exercise of this option that either (i) a Registration Statement under the Securities Act of 1933, as amended, or any succeeding act (collectively, the "Securities Act"), with respect to the shares underlying this option shall be effective and current at the time of exercise of this option or (ii) in the opinion of counsel to the Company, there shall be an exemption from registration under the Securities Act for the issuance of shares of Common Stock upon such exercise. Nothing herein shall be construed as requiring the Company to register shares subject to the Plan for issuance or for resale. 6. This option is subject to all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by Optionee. In the event of a conflict between the terms of this option and the terms of the Plan, the terms of the Plan shall govern. The Company may amend the Plan and options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. 7. This option may not be transferred otherwise than by will or the laws of descent and distribution and may be exercised, during Optionee's lifetime, only by Optionee or Optionee's legal representatives. 8. This option shall be binding upon and inure to the benefit of any successor or assign of the Company and to the executor, administrator or other legal representative entitled by law and the Plan to the Optionee's rights hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC. By: ------------------------------------------------- Timothy J. Roach, President ----------------------------- (Optionee) ----------------------------- (Optionee Address) THIS STOCK OPTION AGREEMENT entered into as of ______________ between TII NETWORK TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and _____________ ("Optionee"). W I T N E S S E T H: -------------------- WHEREAS, the Board of Directors of the Company has adopted, and the Company's stockholders have approved at the Company's 2003 Annual Meeting of Stockholders, the Company's 2003 Non-Employee Director Stock Option Plan ( the "Plan") to foster the Company's ability to attract and retain the services of experienced and knowledgeable directors who are not common law employees of the Company and to provide additional incentive for such directors to continue to work for the best interests of the Company and its stockholders through the continuing ownership of shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"); NOW, THEREFORE, in consideration of the foregoing and the covenants contained herein, it is hereby agreed: 1. The Company, in accordance with and subject to the terms and conditions of this Agreement and the Plan, grants to Optionee a stock option to purchase up to an aggregate of ________shares of Common Stock at an exercise price of $_____ per share (such number of shares and exercise price being subject to adjustment as provided in the Plan). 2. This option shall expire at 5:00 P.M., New York time, on ____________, subject to earlier termination as provided in the Plan. 3. This option shall vest and become exercisable, on a cumulative basis, in four equal quarterly installments commencing on the date hereof. Notwithstanding the foregoing, this option may not be exercised at any time in an amount less than 100 shares (or the remaining shares then covered by and purchasable under this option if less than 100 shares). This option may not be exercised in respect of a fraction of a share. 4. This option shall be exercised by the giving of written notice to the Company at its New York office, presently 1385 Akron Street, Copiague, New York 11726, Attention: Vice President-Administration, specifying the number of shares of Common Stock being purchased and accompanied by the payment in full of the aggregate exercise price for the shares to be purchased in cash or by check. Optionee shall not have the rights of a stockholder with respect to shares subject to this option until the date of issuance of a stock certificate to Optionee for such shares. In addition, Optionee shall pay to the Company in cash or by check, upon demand, the amount, if any, which the Company determines is necessary to satisfy its obligation to withhold federal, state and local income and other taxes or other amounts incurred by reason of the grant or exercise of this option. 5. It is a condition to the exercise of this option that either (i) a Registration Statement under the Securities Act of 1933, as amended, or any succeeding act (collectively, the "Securities Act"), with respect to the shares underlying this option shall be effective and current at the time of exercise of this option or (ii) in the opinion of counsel to the Company, there shall be an exemption from registration under the Securities Act for the issuance of shares of Common Stock upon such exercise. Nothing herein shall be construed as requiring the Company to register shares subject to the Plan for issuance or for resale. 6. This option is subject to all of the terms and conditions of the Plan, receipt of a copy of which is acknowledged by Optionee. In the event of a conflict between the terms of this option and the terms of the Plan, the terms of the Plan shall govern. The Company may amend the Plan and options granted to the Optionee under the Plan, subject to the limitations contained in the Plan. 7. This option may not be transferred otherwise than by will or the laws of descent and distribution and may be exercised, during Optionee's lifetime, only by Optionee or Optionee's legal representatives. 8. This option shall be binding upon and inure to the benefit of any successor or assign of the Company and to the executor, administrator or other legal representative entitled by law and the Plan to the Optionee's rights hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TII NETWORK TECHNOLOGIES, INC. By: -------------------------------------------------- Timothy J. Roach, President ----------------------------- (Optionee) ----------------------------- (Optionee Address) EX-10 6 exibit10-d.txt EXHIBIT 10(D) Confidential Treatment has been requested for certain portions of this Agreement that have been redacted in this Exhibit. These portions are indicated by an asterisk (*). The omitted portions of this Agreement have been separately filed with the Securities and Exchange Commission. Product Purchase Agreement between Verizon Services Corp. and TII Network Technologies, Inc. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 1. PARTIES 1 2. TERM 1 3. DEFINITIONS 1 4. SCOPE 3 5. CUSTOMER'S OPTIONS UNDER THE AGREEMENT 3 6. SOFTWARE LICENSE 3 7. PRICE AND TERMS OF PAYMENT 3 8. PURCHASE ORDERS; CANCELLATION OF PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGEMENT6 9. PAYMENT TERMS, BILLING 7 10. INVENTORY RETURN 7 11. RECORDS AND REPORTS 7 12. BAR CODING 8 13. ELECTRONIC PURCHASING 8 14. PRECEDENCE OF DOCUMENTS 9 15. DELIVERY 9 16. BILL OF SALE 10 17. INSPECTION AND ACCEPTANCE 11 18. PRODUCT WARRANTIES, SERVICES AND SUPPORT 11 19. INFORMATION AND INTELLECTUAL PROPERTY 18 20. CUSTOMER'S PROPERTY AND TOOLING 19 21. COMPLIANCE WITH LAWS 13 22. FORCE MAJEURE 14 23. ASSIGNMENT 15 24. TAXES 21 i NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 25. PLANT AND WORK RULES AND RIGHT OF ACCESS 17 26. INDEMNIFICATION 17 27. INSURANCE 24 28. INFRINGEMENT 25 29. CUSTOMER LIMIT OF LIABILITY 26 30. RELATIONSHIP OF PARTIES 20 31. TERMINATION 21 32. DISPUTE RESOLUTION 22 33. NOTICES 22 34 NO HAZARDOUS PRODUCT OR COMPONENTS 34 35. GOVERNMENT CONTRACT PROVISIONS 23 36. QUALITY 30 37. STANDARDIZATION 30 38. NONWAIVER 24 39. SEVERABILITY 24 40 SECTION HEADINGS 24 41. SURVIVAL OF OBLIGATIONS 24 42. CHOICE OF LAW AND JURISDICTION 25 43. ENTIRE AGREEMENT 25 44. SIGNATURES 25 ii NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. EXHIBITS AND ATTACHMENTS EXHIBIT A: AFFILIATES VERIZON WEST (PRIOR GTE AFFILIATED COMPANIES) EXHIBIT B COMPONENTS OF PRODUCT AND SERVICES ATTACHMENT B-1: DETAILED DESCRIPTION OF PRODUCT AND SERVICES ATTACHMENT B-2: PRODUCT AND SERVICE PRICES ATTACHMENT B-3 PRODUCT DELIVERY INTERVAL EXHIBIT C PURCHASE FOR RESALE - LICENSE WARRANTY AND PRODUCT SUPPORT- NOT APPLICABLE EXHIBIT D: PURCHASE FOR INTERNAL USE, WARRANTY AND PRODUCT SUPPORT ATTACHMENT D-1 WARRANTY PERIOD ATTACHMENT D-2 PRODUCT REPAIR RATES - NOT APPLICABLE ATTACHMENT D-3 REPAIR PARTS PRICING - NOT APPLICABLE ATTACHMENT D-4 SELLER'S WORKING HOUR SCHEDULE AND CONTACT INFORMATION ATTACHMENT D-5 ON-SITE ASSISTANCE RATES ATTACHMENT D-6 TRAINING TERMS AND STANDARDS ATTACHMENT D-7 TRAINING PRICES ATTACHMENT D-8 DISCLOSURE OF POTENTIAL DEFECTS EXHIBIT E: ELECTRONIC PURCHASING ATTACHMENT E-1 ELECTRONIC DATA INTERCHANGE (EDI) ATTACHMENT E-2 E-PROCUREMENT ARIBA TRANSACTIONS - NOT APPLICABLE ATTACHMENT E-3 SELLER CIF REQUIREMENTS - NOT APPLICABLE ATTACHMENT E-4 SELLER PUNCHOUT REQUIREMENTS - NOT APPLICABLE EXHIBIT F: PRIMARY SELLER COMPLIANCE WITH MINORITY, WOMAN-OWNED, DISABLED AND VIETNAMERA VETERAN BUSINESS ENTERPRISES (MWDVBE) UTILIZATION iii NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. ATTACHMENT F-1 MWDVBE CONTRACT COMPLIANCE EXHIBIT G: VERIZON LOGISTICS AND NETWORK SERVICES TRANSPORTATION AND ROUTING INSTRUCTIONS AND REQUIREMENTS ATTACHMENT G-1 VERIZON SHIPPING INSTRUCTIONS - VERIZON LOGISTICS AND VERIZON NETWORK SERVICES ATTACHMENT G-2 VERIZON TRANSPORTATION ROUTING INSTRUCTION ATTACHMENT G-3 OCEAN CONTAINER PLANNING AND LOADING PROCEDURE - NOT APPLICABLE ATTACHMENT G-4 VERIZON - SUPPLIER ROUTING INSTRUCTIONS ATTACHMENT G-5 STATE TO STATE GRID EXHIBIT H: QUALITY STANDARDS, PROCEDURES AND COMPLAINTS ATACHMENT H-1 QUALITY STANDARDS, PROCEDURES AND COMPLAINTS ATTACHMENT H-2 TL9000 REQUIREMENTS EXHIBIT I PERFORMANCE COMPENSATION PAYMENTS - PRODUCT AVAILABILITY EXHIBIT J - BILLING VERIFICATION & AUTHORIZATION FOR PAYMENT PROCESS (BVAPP) - NOT APPLICABLE EXHIBIT K STANDARDIZATION VERIZON ATTACHMENT K-1 STANDARDIZATION VERIZON EAST ATTACHMENT K-2 STANDARDIZATION VERIZON WEST iv NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. PRODUCT PURCHASE AGREEMENT 1. PARTIES (a) This Product Purchase Agreement (Agreement) is made between TII Network Technologies, Inc., a Delaware corporation, with offices at 1385 Akron Street, Copiague, New York 11726 ("Seller") and Verizon Services Corp., ("Customer"), a Delaware corporation, with offices at 240 East 38th Street New York, New York 10016, for the benefit of itself and its Affiliated Entities defined in this Agreement and listed at EXHIBIT A hereof entitled "AFFILIATES: VERIZON WEST (PRIOR GTE AFFILIATED COMPANIES)", which may be changed by Customer upon written notice to Seller. (b) An Affiliate that issues an Order hereunder shall also be a Customer and may enforce the terms and conditions of this Agreement with respect to any Product or Service purchased by such Affiliate as though it were a direct signatory to the Agreement. 2. TERM (a) Effective date and Term. This Agreement shall be effective on April 1, 2005 and shall continue in effect until March 31, 2010 unless earlier terminated or extended. This Agreement shall be automatically terminated unless renewed by the mutual written agreement of the parties prior to the expiration of the term. (b) Existing Purchase Orders Continue. The termination or expiration of this Agreement shall not affect the obligations of either party to the other under existing Purchase orders (POs) issued pursuant to this Agreement (except to the extent orders are terminated or modified in accordance with the Section 8 hereof entitled "PURCHASE ORDERS"), but such POs shall continue in effect as if this Agreement has not been ended. 3. DEFINITIONS The terms defined in this Section shall have the meanings set forth below whenever they appear in this Agreement, unless the context in which they are used clearly requires a different meaning or a different definition is described for a particular Section or provision: (a) "Affiliate" means, at any time, and with respect to any corporation, person or other entity, any other corporation, person or entity that at such time, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first corporation, person, or other entity. As used in this definition, "Control" means (a) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a corporation, person or other entity, whether through the ownership of voting securities, or by contract or otherwise, or (b) direct or indirect ownership in the aggregate of twenty percent (20%) or more of any class of voting or equity interests in the other corporation, person or entity. Affiliate shall also include those companies identified in EXHIBIT A hereof entitled "AFFILIATES VERIZON WEST (PRIOR GTE AFFILIATED COMPANIES)", which may be changed by Customer upon written notice. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 1 Orders for Products or Services under this Agreement may be placed by any Customer Affiliate. A Customer Affiliate that obtains or uses any Product or Service shall be entitled to all of the rights and benefits afforded to Customer under this Agreement and may enforce this Agreement in its own name. (b) "Order" means a purchase order, or other written communication and/or electronic transmission that Customer may deliver to Seller for the purchase of Product and/or Service. (c) "Product" means all goods, supplies, materials, parts, components, and assemblies, and documentation described in ATTACHMENT B-1 hereof entitled "DETAILED DESCRIPTION OF PRODUCTS AND SERVICES." (d) "Specifications" shall mean specifications for the Product or Service as set forth in an Order, as well as Seller's then current published specifications and user documentation, and Customer's requirements as set forth in the exhibits hereto or otherwise communicated to Seller, and applicable industry and government requirements. 4. SCOPE (a) This Agreement is for the benefit of all U. S. and foreign Affiliates of Customer. Customer may purchase for its own use, to provide services to third parties, or for distribution, Seller's Product. Reference to "Customer" shall include Affiliates. (b) This Agreement is nonexclusive and shall not be construed to require Customer to purchase any specific amount of Product from Seller or to require Customer to sell any, all or a portion of Product it orders, or restrict the purchase, resale and/or distribution of Product to any geographic area. This is an "as ordered" agreement. (c) This Agreement does not by itself order any Product. Customer shall order Product by submitting an Order and Seller shall fulfill the Order as specified in Section 8 for (i) Product listed in ATTACHMENT B-2 hereof entitled "PRODUCT AND SERVICES PRICES" at the prices specified and (ii) other Product or Service for which Seller accepts an Order at the price as quoted to Customer in writing. (d) In order to facilitate international purchases of Products, the parties may find it convenient to enter into separate agreements between Seller and Customer and/or their respective affiliates authorized to conduct, or to negotiate for the right to conduct, business in foreign countries. The parties agree to use their best commercially reasonable efforts, to assure that the terms and conditions of any such agreements are consistent with the terms and conditions of this Agreement, subject to applicable requirements of local law and business practice. (e) This is not an exclusive dealings agreement. (f) The Product Delivery Interval is set forth in ATTACHMENT B-3 hereof entitled "PRODUCT DELIVERY INTERVAL" of EXHIBIT B hereof entitled "COMPONENTS OF PRODUCT AND SERVICES." NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 2 5. CUSTOMER'S OPTIONS UNDER THE AGREEMENT (a) Internal Use. If Customer orders Product for internal use, then the provisions of EXHIBIT D hereof entitled "PURCHASE FOR INTERNAL USE - WARRANTY AND PRODUCT SUPPORT," shall apply. Internal use includes use by Customer, its Affiliates, employees, agents and subcontractors, and use whereby Customer provides services to third parties in the normal course of its business. 6. SOFTWARE LICENSE - NOT APPLICABLE 7. PRICE AND TERMS OF PAYMENT 7.1 PRICES PRODUCTS AND SERVICES (a) Prices. Products and Services will be furnished by Seller in accordance with the prices stated in ATTACHMENT B-2 hereof entitled "PRODUCT AND SERVICE PRICES." All costs and prices identified include full compliance with all terms and conditions of this Agreement. Such prices shall be applicable to Orders issued to Seller by Customer at the location and by the method agreed to by the parties. (b) Increase During Term. Seller shall not, during the term of this Agreement, increase the prices for PRODUCT or SERVICES specified in ATTACHMENT B-2 hereof entitled "PRODUCT AND SERVICES PRICES." (c) Reductions. Price reductions may be initiated by Seller at any time. Any price decrease shall be effective immediately upon announcement by Seller and shall apply to all Orders that have not been processed by Customer for payment to Seller. In addition, Customer shall receive credit or refund, at Customer's option, within thirty (30) days, for the difference between the price paid by Customer and the reduced price for all affected Products still in customer's inventory. (d) Continuous Improvements. Seller and Customer shall identify areas for Seller's continuous improvement in cost, quality, and service over the term of this Agreement. Seller shall afford Customer the ability to realize such improvement including price reductions. (e) New Technology Replacement. Customer and Seller recognize that Seller may develop and market new Product ("New Technology") that are designed to enhance or replace the Product provided for in this Agreement. Seller agrees to include the New Technology as part of its Product offerings within the terms provided for in this Agreement, and at a price for comparable, successor, or substitute features and functionality, no greater than the pricing, for Product or Purchase volumes stated within this Agreement, subject to the following: Seller 1. New Technology shall only be furnished to Customer pursuant to a written amendment hereto and for former GTE companies in accordance with section 6 entitled "Product Changes" of ATTACHMENT K-2 hereof NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 3 entitled STANDARDIZATION - VERIZON WEST", and for former Bell Atlantic companies in accordance with section 1 entitled "Changes to Hardware or Software/Product Change Notices" of ATTACHMENT K-1 hereof entitled "STANDARDIZATION - VERIZON EAST" including the notice requirements therein, except that price reductions may be made at any time. 2. New Technology shall be priced at the same or lower price for comparable, or successor, substitute features and functionality, as the replaced Product in accordance with the mutual goal of Continuous Improvement. 3. In the event New Technology will cause the Seller to incur greater per-unit costs compared to current Product but will offer substantially increased capacity or features which will allow Customer to reduce its total costs or offer more services such that Seller believes a price increase is justified, then: 3(i). Seller shall provide to Customer a written detailed explanation of such proposed price increase including a breakdown of the additional costs incurred by the Seller in providing such Product and how such additional features or capacity shall help reach the goal of Continuous Improvement. 3(ii). Seller shall ensure continued availability of the current Product during the Term at the same or lower price as stated in EXHIBIT B-3 hereof entitled "PRODUCT DELIVERY INTERVAL" unless otherwise agreed to pursuant to a written amendment to this Agreement. 4. All such proposed changes to ATTACHMENT B-3 hereof entitled "PRODUCT DELIVERY INTERVAL" shall be subject to Customer's written Agreement evidenced by a written amendment to this Agreement . (f) New Technology Additions Seller may propose the addition of New Technology to ATTACHMENT B-1 hereof entitled "DETAILED DESCRIPTION OF PRODUCT AND SERVICE" which is not intended to replace or upgrade current PRODUCT("New Technology Addition"). Seller shall provide a detailed written explanation of how such New Technology Addition will meet the joint goal of Continuous Improvement. All proposed New Technology Additions shall only be furnished to Customer pursuant to a written Amendment to this Agreement or pursuant to a separate written agreement between the parties. 7.2 FIRM PRICE QUOTE - NOT APPLICABLE 7.3 MOST FAVORED CUSTOMER (a) Seller represents that all of the prices, warranties, benefits, terms and conditions granted to Customer by Seller hereunder will be as favorable as the prices, warranties, benefits, NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 4 terms and conditions granted to Seller's other commercial customers under like or similar circumstances. (b) If at any time during the term of this Agreement, Seller shall offer more favorable prices, warranties, benefits, terms, or conditions for substantially the same or similar Product or Services as those provided hereunder, then: 1. Seller shall, within thirty (30) days after the effective date of such offering, notify Customer of such fact in accordance with Section 33 hereof, entitled "NOTICES", and offer Customer the more favorable offering and negotiate any additional differentiating factors; and 2. This Agreement and all applicable Orders shall be deemed to be automatically amended, effective retroactively to the effective date of the more favorable offering, and Seller shall provide the same prices, warranties, benefits, terms and conditions to Customer; and 3. Customer shall have the right to decline to accept the offering, in which event such automatic amendment shall be deemed to be void. (c) Seller's compliance with this clause shall be subject, at Customer's option, to independent verification in accordance with the Section 11 hereof, entitled "RECORDS AND REPORT." 7.4 DISTINGUISH PAYMENT AND ACCEPTANCE. Payment by Customer of such invoices does not mean or imply that the Product has been accepted and does not impair or limit in any way Customer's full rights and remedies which shall be and remain as set forth hereof. 7.5 INVOICES FOR FIRM PRICE QUOTES - NOT APPLICABLE 7.6 CRITICAL MILESTONES Seller agrees to the schedule attached hereto as EXHIBIT B hereof with ATTACHMENTS B-1 hereof entitled "DETAILED DESCRIPTION OF PRODUCT AND SERVICES", B-2 hereof entitled "PRODUCT AND SERVICE PRICES", and B-3 hereof entitled "PRODUCT DELIVERY INTERVAL", which set forth certain "Critical Performance Milestones" which must occur as part of the Project and the dates by which Seller has represented that each of the products will be available to Buyer (the "Critical Performance Dates"). In the event Seller fails to meet a Critical Performance Date, Seller shall be considered in breach of contract and shall be liable to compensate Customer in accordance with EXHIBIT I hereof entitled "PERFORMANCE COMPENSATION PAYMENTS." 7.7 FEATURE AVAILABILITY (a) Seller shall make any new features and innovations in architecture or functionality in the PRODUCT, available to Customer during the term of this Agreement. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 5 8. PURCHASE ORDERS; CANCELLATION OF PURCHASE ORDERS, REVOCATION OF ACKNOWLEDGEMENT (a) An Order may be mailed, sent by facsimile transmission or electronic data interchange (EDI). Prior to initiating an EDI transaction, the parties will execute an EDI Trading Agreement which will set forth the terms and conditions of EDI transactions (attached as ATTACHMENT E-1 hereof entitled "ELECTRONIC DATA INTERCHANGE (EDI)"). (b) Seller shall be obligated to acknowledge Orders within ten (10) days of receipt, without conditioning such acknowledgement on the acceptance by Customer of any terms inconsistent with or in addition to those set forth in this Agreement. Upon acknowledgement, the Order and related acknowledgement shall constitute a binding contract for the purchase and sale of the applicable Product governed by the provisions of this Agreement, as such provisions may be modified as provided herein. (c) Seller may enforce each Order only against the Affiliate that has submitted the Order. Default by an Affiliate shall not affect any other Affiliate party to this Agreement. (d) If an Affiliate shall be in material breach or default of this Agreement, including, but not limited to, timely payment for Product purchased and such breach shall continue for a period of thirty (30) days after receipt of Seller's written notice, then, in addition to all other rights and remedies of law or equity or otherwise, Seller shall have the right to suspend delivery of Product on outstanding Orders or revoke existing acknowledgements only with respect to such Affiliate. (e) If Seller shall be in material breach or default of this Agreement, and such breach shall continue for a period of thirty (30) days after Seller's receipt of Customer's written notice thereof, then, in addition to all other rights and remedies of law or equity or otherwise, Customer shall have the right to immediately cancel all applicable Orders without any obligation or liability to Seller for said cancellation. However, if Seller fails to tender delivery of Product on the respective date agreed upon or as set forth in Seller's acknowledgement, then Customer shall have the right to immediately cancel all applicable Orders without further obligation or liability to Seller for said cancellation with the exception of Seller's inventories of Product which are private labeled for Customer and not saleable elsewhere, or any obligation to provide Seller a time period to cure said breach. (f) Unless specified otherwise in an Exhibit or Attachment to this Agreement, Customer may reschedule Orders for convenience, in whole or in part, without obligation or liability, by providing written notice to Seller at least ten (10) days before scheduled ship date of Product or date Service is to be rendered. (g) Existing Purchase Orders Continue. The termination or expiration of this Agreement shall not affect the obligations of either party to the other under existing Purchase Orders (POs) issued pursuant to this Agreement (except to the extent orders are terminated or modified in accordance with the Section entitled "PURCHASE ORDERS"), but such POs shall continue in effect as if this Agreement had not been ended. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 6 (h) Change Order. Customer may, by issuing a written document labeled as a "Change Order", make changes to a PO. If any change required by a Change Order alters the value of the Products ordered, Seller shall promptly notify Customer and Seller shall adjust the price accordingly. If the amount of the price adjustment is not specified in this Agreement, then the amount of any change in price caused by the adjustment may be no greater than Seller's reasonable documentable increased costs and expenses. Seller shall notify Customer within three (3) business days of Seller's receipt of a Change Order if the Change Order will cause an increase in price. Customer may, at its discretion, agree to the changed price or withdraw the underlying Change Order. 9. PAYMENT TERMS, BILLING (a) Payment Due Date. Payment for Product shall be due 30 days from date of receipt of goods, or receipt of an undisputed invoice, whichever occurs later, unless payment terms more favorable to Customer are stated on Seller's invoice and Customer elects to pay on such terms. However, payment shall not indicate acceptance of any Product . (b) Disputed Invoices, Right of Set Off. If Customer disputes all or any portion of an invoice, it shall be required to pay only the amount not in dispute. Customer shall be entitled to set off any amount Seller owes it against amounts payable under this or any other Agreement. Payment by Customer shall not result in waiver of any of its rights under this Agreement. Customer shall not be obligated to pay Seller for Services that are not fully and properly invoiced. (c) Invoices For Charges Specified in an Order. Seller shall not issue and invoice for Product prior to shipment of such Product. Invoices for charges specified in an Order shall be submitted by Seller to the address specified in the Order. Invoices shall include, but not be limited to, (i) Order number; (ii) Order line number; (iii) Product identification number; (iv) ship to address; (v) quantity shipped and billed; (vi) net unit cost; and (vii) net invoice amount. 10. INVENTORY RETURN - NOT APPLICABLE As Product is private labeled for Customer, and therefore not saleable to others, this section is not applicable. 11. RECORDS AND REPORTS (a) Complete Records. Seller shall maintain complete and accurate records of all invoices, all amounts billable to and payments made by Customer, in accordance with generally accepted accounting practices. Seller shall retain and make available upon request such records for a period of six (6) years from the date of final shipment of Product or rendering of services covered by this Agreement. (b) Monthly Purchase Report. When requested by Customer, Seller shall, for all Orders placed directly with Seller, provide Customer a monthly purchase report by ordering location, listing Product and Service purchased under this Agreement, including description, part number, quantities shipped, and associated list and net prices. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 7 (c) Seller agrees to provide reasonable supporting documentation concerning any disputed amount(s) within twenty (20) days after Customer or its Affiliates provides written notification of the dispute to the Seller. (d) Customer and Seller shall mutually agree upon the independent auditor who, at Customer's option, shall audit Seller's records of Seller's transactions with its other commercial customers (provided the identity of such other commercial customers shall not be disclosed to Customer) for verification of comparable pricing and other commercial elements in accordance with Section 7.3 hereof entitled "MOST FAVORED CUSTOMER" and Seller's compliance with all other provisions of this Agreement. Seller shall be responsible for all audit/verification expenses should the audit reveal or determine that there is a deficiency or violation of Section 8 hereof entitled "PURCHASE ORDERS; CANCELLATION OF PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGEMENT". At Customer's request, the independent auditor shall have access to the Seller's records, for purposes of audit during normal business hours during the term of this agreement and during the respective periods in which Seller is required to maintain such records. The accuracy of Seller's billing shall be determined from the results of such audits. (e) Minority, Woman owned, Disabled and Vietnam Era Veteran Business Enterprises (MWDVBE) Utilization. With respect to the Seller's Compliance (as the Primary Seller) with Minority, Woman-owned, Disabled and Vietnam era Veteran Business Enterprises (MWDVBE) Utilization, Seller must submit the Prime Seller Quarterly Reports as described on the website and submit them via the website at http://www.verizon.com/diversity/Sellers to Customer on a quarterly basis thirty (30) business days following the end of each quarter. In addition, Seller (as the Primary Seller) agrees to provide opportunities for MWDVBE in accordance with ATTACHMENT F-1 hereof entitled "PRIMARY SELLER CONTRACT COMPLIANCE", of EXHIBIT F hereof entitled "PRIMARY SELLER COMPLIANCE WITH MINORITY, WOMAN-OWNED, DISABLED AND VIETNAM ERA VETERAN BUSINESS ENTERPRISES (MWDVBE) UTILIZATION" and before executing this Agreement, at the Request for Proposal (RFP) Stage shall answer the questions set forth in the document entitled "MWDVBE RFP QUESTIONNAIRE." 12. BAR CODING Seller agrees to comply with the standards for Bar Coding as specified in ATTACHMENT G-1 hereof entitled "VERIZON LOGISTICS SHIPPING INSTRUCTIONS", Section 6 entitled "PACKAGE LABELING INSTRUCTION. 13. ELECTRONIC PURCHASING (a) Electronic Data Interchange. Seller agrees to participate with customer in the development of an electronic data interchange (EDI) for the communication of purchase orders, acknowledgements, subsequent invoicing or other data that may be communicated between customer and seller. Seller further agrees to the terms and conditions as set forth in ATTACHMENT E-1 hereof entitled "ELECTRONIC DATA INTERCHANGE (EDI), of EXHIBIT E hereof entitled "ELECTRONIC PURCHASING", for the transmission of such electronically communicated data. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 8 14. PRECEDENCE OF DOCUMENTS (a) All quotations, purchase orders, acknowledgements, and invoices issued pursuant to this Agreement shall be subject to the provisions contained in this Agreement. The terms and conditions of this Agreement will control over any conflicting or inconsistent terms contained in any quotation, purchase order, acknowledgement or invoice. Unless Seller's rejection is forwarded to Customer within ten (10) days of receipt of the purchase order, the following provisions, as they relate to the Product ordered pursuant to a particular purchase order, can be changed by language contained in that purchase order: (i) the quantity, (ii) shipping instructions, or (iii) delivery date. (b) Except for the changes enumerated in Section 14 (a) (i-iii) above, no modification to this Agreement or additional terms contained in any quotation, purchase order, acknowledgement, or invoice shall be valid without the prior written approval of the authorized representatives of the parties. 15. DELIVERY (a) Title to a Product sold pursuant to this Agreement shall pass at the F.O.B. point by Seller as described in Section 15(b). Any loss or damage to a Product prior to the passing of title shall be for the account and risk of Seller and after the passing of title shall be for the account and risk of Customer. (b) Shipments of Product may be made FOB Origin, freight collect ("OC"). When Customer requests Seller to arrange the transportation of the Product, Seller shall ship Product freight collect in accordance with the Shipping and Carrier Routing Instruction, EXHIBIT G-2 hereof entitled " VERIZON TRANSPORTATION ROUTING INSTRUCTION ", (which Customer may revise and provide to Seller), unless otherwise specified on Customer's Order. (c) Failure of Seller to ship Product in accordance with Customer's freight routing instructions may result in charge-backs to Seller for excess freight charges. (d) Unless instructed otherwise by Customer, Seller shall, for Orders placed, (i) see that all subordinate documents bear Customer's Order number; (ii) enclose a packing list with each shipment and when more than one package is shipped, identify the one containing the packing list; (iii) mark Customer's Order number on packages as required and all shipping papers; (iv) render invoices showing Customer's Order number; (v) render separate invoices for each shipment or Order; (vi) invoice Customer by mailing or otherwise transmitting invoices, bills, and notices to the billing address on the Order; and (vii) make available a bill of lading upon request. If requested by Customer, Seller will forward shipping notices with invoices. (e) Standard delivery intervals for Product shall be specified in EXHIBIT B-3 hereof entitled "PRODUCT DELIVERY INTERVAL," and may be amended only by a written document signed by both parties. Standard delivery intervals begin from the date of Seller's receipt of Customer's Order. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 9 (f) Seller shall ship Product to Customer within (i) the delivery intervals specified in EXHIBIT B-3 hereof entitled "PRODUCT DELIVERY INTERVAL ," (which do not include in-transit interval), or (ii) as otherwise provided by Seller to Customer in a purchase order acknowledgement or other written means (provided that such time period is not longer than the time period specified in EXHIBIT B-3 hereof entitled " PRODUCT DELIVERY INTERVAL," without Customer's written request or agreement). If Seller fails to meet a delivery date, Customer may require an expedited delivery, with any additional costs to be borne by Seller, or Customer may cancel all or part of the Order in accordance with Section 8 hereof entitled "PURCHASE ORDERS; CANCELLATION OF PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGMENT." If Product is delivered ahead of the delivery date, Customer may withhold payment for Product until after the specified delivery date or place Product in storage, at Seller's expense, until the specified delivery date. In no event will Customer be liable for Premium shipping modes unless previously authorized. Shipping and routing instructions may be altered, orally or in writing, as mutually agreed upon by Seller and Customer. If requested by Customer, Seller agrees to substantiate such charges by providing Customer with the original freight bill or a copy thereof. (g) Product shall be packaged for shipment, at no additional charge, in commercially suitable containers, consistent with all applicable laws, that provide protection against damage during the shipment, handling and storage of the Product in reasonably dry, unheated quarters. (h) Stock Provision: Seller shall maintain on its premises, stocks as agreed to. Should Customer's abnormal demand deplete Seller's safety stocks, Seller shall be given an adequate period of time, not to exceed 90 days, to replenish said stock. During the last quarter of this Agreement term, Seller will be required to discontinue production and deplete the inventory down to zero unless specifically authorized otherwise in writing by Customer. Customer's liability will be limited to the quantities of Product inventory. (i) Forecast and Abnormal Demand: Customer shall upon request by Seller make a reasonable effort to share with Seller its forecasted requirements and Customer's inventories for the Products to be provided under this Agreement. In the case of Abnormal Demand, which shall be defined as an unforecasted requirement or any other unforeseen event, the Seller's set delivery interval may be altered as mutually agreed by both parties. It is understood that the Seller shall use its best efforts to provide the Products in an expeditious manner as outlined in section 22 (c) entitled Extraordinary Support. Customer shall not be liable or obligated to Seller as a result of a failure to purchase its forecasted requirements. 16. BILL OF SALE Seller shall, upon request and after payment by Customer, execute and deliver to Customer a bill of sale or similar document evidencing conveyance of Product, free and clear of all liens, security interests and encumbrances. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 10 17. INSPECTION AND ACCEPTANCE (a) All product shall be subject to inspection by Customer after delivery to determine conformity with Customer's order and seller's advertised or published specifications. Unless otherwise mutually agreed, Customer shall have a period of ninety (90) days following arrival of product at the delivery destination specified by Customer within which to inspect the product for conformity with Customer's order and seller's advertised and published specifications and to provide Seller with written notice of any discrepancy or rejection. If the product is to be installed by Customer, Customer shall have the longer of thirty (30) days following such installation or following completion of any Seller independent testing period within which to complete such inspection, provided that installation shall occur not more than thirty (30) days from delivery. Following notification by Customer, if Seller is unable to or replace product that does not conform, in whole or in part, within twenty (20) business days or such lesser time as is determined by customer to be reasonable, then Customer may return product to Seller, at Seller's risk and expense, and receive a refund of all amounts paid with respect to the returned product. For such product returns, Customer shall notify seller and arrange for the return of product . Inspection or failure to inspect on any occasion shall not affect Customer's rights under the "WARRANTY" provisions of this Agreement or any other rights or remedies available to Customer, under this Agreement. (b) Customer's right to inspect and test does not relieve Seller from its testing, inspection and quality control obligations. Time used by Seller to correct nonconformities as described in (a) and for Customer or Seller to retest nonconforming Products shall extend Customer's allowable time for inspection and acceptance or rejection. 18. PRODUCT WARRANTIES, SERVICES AND SUPPORT (a) Seller shall provide warranties and Product, Services and Support as set forth in EXHIBIT D hereof entitled "PURCHASE FOR INTERNAL USE -, WARRANTY AND PRODUCT SUPPORT." (b) Seller warrants that it will disclose all potential or actual product defects in accordance with ATTACHMENT D-8 hereof entitled "DISCLOSURE OF POTENTIAL DEFECTS." 19. INFORMATION AND INTELLECTUAL PROPERTY. (a) Information Defined. The term "Information" includes: programs and related documentation; specifications, drawings, models, technical and business data and plans; works of authorship and other creative works; and ideas, knowledge and know-how. Information may be transmitted in writing (or other tangible form) or orally. (b) No Seller Confidential Information. No Information Seller provides to Customer (even if labeled or otherwise designated as proprietary or confidential) shall be considered by Customer to be confidential or proprietary. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 11 (c) Customer Information. Information that Customer furnishes to Seller or that Seller otherwise comes into contact with under this Agreement will remain Customer's property. Seller will return such Information to Customer upon termination of the Agreement or at Customer's earlier request. Unless such Information was previously known to Seller free of any obligation to keep it confidential or is made public by Customer or a third party without breach of any agreement, Seller will keep the Information confidential and use it only in performing this Agreement. In addition, except with Customer's separate, advance written consent, in no event shall Seller (i) store Customer Information regarding Customer's systems, infrastructure or customers outside of the United States, (ii) make Customer Information regarding Customer's systems, infrastructure or customers available to persons located outside of the United States, (iii) access any Customer systems from outside of the United States, or (iv) make access to any Customer systems available to any person who is then located outside of the United States. (d) Work Product. The entire right, title and interest in all edits, original inventions and works of authorship created by Seller, or on Seller's behalf, specifically for Customer hereunder, or using Customer's proprietary Information, shall be transferred to and vested in Customer. All such works shall be considered to be made for hire. Seller agrees to provide documentation and to sign all documents prepared or supplied by Customer which Customer believes are necessary to ensure the conveyance of all such right, title and interest, including patent, trademark and copyright, to Customer. It is understood and agreed that Seller shall retain ownership of all pre-existing Seller's intellectual property, even if included in the Product, and all other intellectual property not created for Customer. (e) No Seller Licenses. Customer does not grant Seller any license, express or implied, under any patent, copyright, trademark, trade secret or otherwise, except for the sole purposes of Seller's performance of this Agreement. (f) Publicity And Disclosure 1. Seller shall not provide copies of this Agreement, or otherwise disclose the terms of this Agreement, to any third party without the prior written consent of Customer; provided, however, that Seller may, without obtaining Customer's consent, provide copies or make disclosures to prospective Customers of the business of Seller or of any Affiliate; or for the purpose of obtaining third party financing; and any regulatory or judicial body requesting such information. 2. Customer will not approve issuance of a press release to announce this or other agreements in which the Seller is providing products or services to Customer, other than in exceptional situations where Customer determines that a release would significantly benefit Customer. The Seller shall not, without Customer's prior written approval, release any advertising, sales promotion, press releases and other publicity matters relating to the Product furnished or the Service performed pursuant to this Agreement, when Customer's respective name or mark is mentioned or language from which the connection of said name or mark NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 12 may be inferred or implied. Customer may withhold approval in its sole discretion. 20. CUSTOMER'S PROPERTY AND TOOLING (a) Customer Ownership. Title to and the right to immediate possession of any property, including patterns, tools, molds, jigs, dies, information provided in tangible form or made for Seller's performance under this Agreement, and any other equipment or material, furnished to Seller or paid for by Customer shall vest in Customer. Seller may not furnish any articles made therefrom to any other party without the prior written consent of Customer. Seller shall keep adequate records of such property and Seller will safely store, protect, preserve, repair and maintain such property at Seller's expense. (b) Customer Disclaimer of Warranties. If Customer allows Seller to use any of Customer's tools or equipment, such tools and equipment are supplied to Seller "AS-IS" with no warranties whatsoever. CUSTOMER EXPRESSLY DISCLAIMS ALL WARRANTIES, INCLUDING ANY WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. It is Seller's responsibility to inspect the tools and equipment to assure that they are safe and fit for their intended purposes. Seller shall indemnify and hold Customer, as well as any Customer Affiliate, harmless against any claims, demands and liabilities that result from Seller's use of such tools and equipment, including, but not limited to, any claims, demands and liabilities resulting from defects or other failures of the tools and equipment, the inadequacy of a tool or equipment for a particular task or the failure to properly use any tool or equipment. 21. COMPLIANCE WITH LAWS (a) Seller shall comply with the provisions of all applicable federal, state, county and local laws, ordinances, regulations and codes (including procurement of required permits or certificates) in manufacturing, assembling, selling and providing Product and in performing its other obligations under this Agreement, including, but not limited to, the standards promulgated under the Occupational Safety and Health Act, Executive Order 11246, as amended, Section 503 of the Vocational Rehabilitation Act of 1973, as amended, the Vietnam Era Veterans Readjustment Assistance Act of 1974, the Immigration Reform and Control Act of 1986, the Civil Rights Acts of 1964 and 1991, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and all rules and regulations relative to these Acts and other applicable equal employment opportunity laws, rules and regulations, which are expressly incorporated herein by reference. Irrespective of whether a specification is furnished, if Product or containers furnished are required to be constructed, packaged, labeled, or registered in a prescribed manner, Seller shall comply with applicable federal, state or local laws. Seller shall indemnify Customer against all claims, loss or damage sustained because of its noncompliance. (b) If any persons furnished under the Agreement by Seller have a disability as defined in the Americans with Disabilities Act, 42 U.S.C.A. 12101 et seq. (the ADA), Seller shall, where required by Title I of the ADA and at its sole expense, provide "reasonable accommodations" that may be required under Title I of the ADA including, but not limited NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 13 to, "auxiliary aids and services" to make aural, visual materials or interpreters available to individuals furnished by Seller with impairments so that such individuals are able to perform the essential functions of the job they are contracted to perform. Seller further agrees to indemnify and defend Customer for any losses, fines, reasonable attorney fees, or other penalties that may be incurred or assessed upon Customer due to Seller's failure to comply with the provisions of the Title I of the ADA with respect to the persons furnished by Seller. (c) Product furnished shall comply, to the extent applicable, with the requirements of the Federal Communications Commission's Rules and Regulations, as may be amended, including those sections concerning the labeling of such Product and the suppression of radiation to specified levels. If the Product generates interference harmful to radio communications, and such Product was installed in accordance with such Rules and Regulations, then Seller shall provide to Customer methods for suppressing the interference. If the interference cannot be reasonably suppressed, Seller shall accept return of the Product, refund to Customer the price paid for the Product and bear all expenses for removal and shipment of such Product. Nothing herein shall be deemed to diminish or otherwise limit Seller's obligations under the "WARRANTY" provisions of this Agreement herein or any other rights or remedies available to Customer, whether at law or in equity. (d) When Product furnished under this Agreement is subject to registration under Part 68 of the Federal Communications Commission's Rules and Regulations as they may be amended from time to time ("Part 68"), Seller warrants that such Product furnished under this Agreement is registered under and complies with Part 68 including, but not limited to, all labeling and customer instruction requirements unless such Product is furnished as part of a technical field trial or unless the Product is provided for services not covered or exempt under Part 68. Seller agrees to defend and hold Customer harmless from any liability, claim or demand (including the costs, expenses and reasonable attorney's fees on account thereof) that may arise out of Seller's non-compliance with Part 68. Customer agrees to promptly notify Seller of any liability, claim or demand against Customer for which Seller is responsible under this clause and gives Seller full opportunity and authority to assume the defense, including appeals, and to settle such liability, claims and demands, provided that if Customer reasonably believes that Seller is not adequately handling such defense or settlement, Customer reserves the right to assume the defense or settlement. 22. FORCE MAJEURE (a) Force Majeure. Neither party shall be responsible for any delay or failure in performance of any part of this Agreement to the extent that such delay or failure is caused by fire, flood, explosion, war, embargo, government requirement, civil or military authority, acts of God, terrorism, strikes, slowdowns, picketing, boycotts, or any other circumstances beyond its reasonable control and not involving any fault or negligence of the party affected (Condition). If any such Condition occurs, the party delayed or unable to perform ("delayed party") shall give written notice to the other party Within five (5) business days. If such Condition remains at the end of thirty (30) days, the party affected by the other's delay or inability to perform ("affected party") may elect to (i) terminate such purchase order or part thereof, or (ii) suspend such purchase order for NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 14 the duration of the Condition, and if Customer is the suspending party, buy elsewhere comparable material to that to be sold under such purchase order, and apply to any commitment the purchase price of such purchase, and require the delayed party to resume performance of such purchase order once the Condition ceases, with an option in the affected party to extend the period of this Agreement up to the length of time the Condition endured. (b) Notices. Unless written notice is otherwise given to the delayed party by the affected party within sixty (60) days after the affected party is notified of the Condition, (a)(ii) above shall be deemed selected. (c) Extraordinary Support. (1) In addition to the provisions for replacement of Product set forth in EXHIBIT D hereof entitled "PURCHASE FOR INTERNAL USE, WARRANTY AND PRODUCT SUPPORT" Seller agrees, in any event, if any natural or other disaster or emergency causes an out of service condition, Seller shall use extraordinary effort to locate or provide (i.e. procure or manufacture) and ship to Customer replacement Product within forty-eight (48) hours of verbal notification by Customer within the limits of available transportation. (2) Such emergency support shall be available twenty four (24) hours a day, seven (7) days a week during the term of this Agreement and for a period of ten (10) years after the expiration of this Agreement or survival of the technology, whichever is greater. (3) Charges for replacement Product shall be at the prices contained in ATTACHMENT B-2 hereof entitled "PRODUCT AND SERVICES PRICES", for the term of this Agreement. (4) Extraordinary Support: Seller agrees to the extent possible to provide extraordinary support (materials, manpower, etc.) within Seller's resource and manpower limitations to furnish abnormal demand for Products under this Agreement at the prices listed herein, plus any additional extraordinary support costs incurred to assist Customer in restoring service which has been disrupted because of catastrophic conditions (fire, flood, etc.) Extraordinary support shall be defined as that level of effort required (i.e., including overtime) to provide Products in a time frame that is mutually agreeable. 23. ASSIGNMENT (a) No Seller Assignment. Seller may not assign any right or interest under this Agreement or a PO issued pursuant to this Agreement (excepting moneys due or to become due) or delegate any work or other obligation owed by Seller under this Agreement without first obtaining the written permission of Customer, which Customer may refuse in its sole discretion. Any attempted assignment or delegation in contravention of this section shall be void and ineffective. Any assignment of money shall be void and ineffective to the extent that: (1) Seller fails to provide Customer at least thirty (30) days prior written notice of such assignment; or (2) such NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 15 assignment attempts to impose upon Customer obligations to the assignee in addition to the payment of such monies, or preclude Customer from dealing solely and directly with Seller in all matters pertaining to the Agreement including, but not limited to, the negotiation of amendments or the settlement of charges due. (b) Customer Assignment. Customer may freely assign all or part of this Agreement. 24. TAXES (a) The Seller and Customer acknowledge and agree that it is their mutual objective and intent to legally minimize, to the extent feasible, the aggregate Federal, state or local tax with respect to the products or related services being purchased under this Agreement. (b) With respect to any purchase products or services under this Agreement, if any Federal, state or local tax excluding any tax levied on property or income (a "Tax") is required by applicable law to be collected from Customer by Seller, then (i) Seller will bill, as a separately stated item, Customer for such Tax, (ii) Customer will timely remit such Tax to Seller, and (iii) Seller will timely remit such collected Tax to the applicable taxing authority. (c) If either Party is audited by a taxing authority or other governmental entity the other Party agrees to reasonably cooperate with the Party being audited in order to respond to any audit inquiries in a proper and timely manner so that the audit and/or any resulting controversy may be resolved expeditiously. (d) If applicable law places the responsibility on Seller to collect a Tax from Customer and Seller fails to do so, Customer will not be responsible for any interest or penalties associated with Seller's failure to collect such Tax. Furthermore, Seller shall not bill a Tax to Customer on products or services under this Agreement which are, by law, not taxable. (e) If an exemption procedure is available, such as a resale exemption certificate, and Customer complies with such procedure, then Seller will not bill or collect such Tax during the effective period of the exemption. (f) Customer's Purchase Order may provide Seller additional tax instruction as allowed by law including, but not limited to, Customer's self accrual and payment of taxes, temporary storage, research and development and/or other special jurisdictional exemptions. (g) Seller will be responsible for personal property or ad valorem taxes on property owned by Seller and Customer will be responsible for such taxes on property owned by Customer. Each Party is responsible for properly reporting owned property and neither Party will be responsible for either reporting or paying personal property or ad valorem taxes owed by the other Party. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 16 25. PLANT AND WORK RULES AND RIGHT OF ACCESS (a) The respective agents and employees of the parties, while on the premises of the other, shall comply with all plant rules, regulations and company standards for security, including (when required by U. S. government regulations) submission of satisfactory clearance from U. S. Department of Defense and other federal authorities concerned. (b) Each party shall permit reasonable access during normal working hours to its facilities in connection with the work. Reasonable prior notice shall be given when access is required. (c) If Seller is given access, whether on-site or through remote facilities, to any Customer computer or electronic data storage system in order for Seller to accomplish the work called for in this Agreement, Seller shall limit such access and use solely to perform work within the scope of this Agreement and shall not access or attempt to access any computer system, electronic file, software or other electronic services other than those specifically required to accomplish the work required under this Agreement. Seller shall limit such access to those of its employees who are qualified and required, subject to Customer requiring written authorization, to have such access in connection with this Agreement, and shall strictly follow all Customer's security rules and procedures for use of Customer's electronic resources. All user identification numbers and passwords disclosed to Seller and any information obtained by Seller as a result of Seller's access to and use of Customer's computer and electronic data storage systems shall be deemed to be, and shall be treated as, Customer Confidential Information under applicable provisions of this Agreement. Seller agrees to cooperate with Customer in the investigation of any apparent unauthorized access by Seller to Customer's computer or electronic data storage systems or unauthorized release of Confidential Information by Seller. (d) Seller is responsible for ensuring that all of Seller's employees, agents, subcontractors or other persons furnished by Seller: (1) comply with all plant rules, regulations, and security procedures; and (2) work in harmony with all others working on the property of Customer and its Affiliates. If Seller installs any products on the premises of Customer or its Affiliate, Seller shall be responsible for promptly removing all packaging materials and debris. Seller may not bring any toxic or hazardous materials onto any premises of Customer or its Affiliate without the permission of Customer, and Seller shall be responsible for removing any such toxic or hazardous materials in accordance with all relevant laws, section 34 entitled "NO HAZARDOUS PRODUCTS AND COMPONENTS" and any additional requirements of Customer. 26. INDEMNIFICATION (a) Indemnification. Seller shall defend, indemnify and hold harmless Customer, its parents, subsidiaries and affiliates, and its and their respective directors, officers, partners, employees, agents, successors and assigns ("indemnified parties") from any claims, demands, lawsuits, damages, liabilities, judgments and settlements of every kind ("claims") that may be made: (a) by anyone for injuries (including death) to persons or damage to property, including theft, resulting in whole or in part from the acts or NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 17 omissions of seller or those persons furnished by seller, including its subcontractors (if any); (b) by persons furnished by Seller and its subcontractors (if any) under worker's compensation or similar acts, (c) by anyone in connection with or based upon products, services, information or work provided by seller and its subcontractors (if any) or contemplated by this agreement, including claims regarding the adequacy of any disclosures, instructions or warnings related to any such products or services; and (d) under any federal securities laws or under any other statute, at common law or otherwise arising out of or in connection with the performance by seller contemplated by this agreement or any information obtained in connection with such performance. The foregoing indemnification shall apply whether Seller or an indemnified party defends such claim and whether the claim arises or is alleged to arise out of the sole acts or omissions of the Seller (and/or any subcontractor of Seller) or out of the concurrent acts or omissions of Seller (and/or any subcontractor of Seller) and any indemnified parties. Seller further agrees to bind its subcontractors (if any) to similarly indemnify, hold harmless and defend the indemnified parties. (b) No Limitations. The obligations of this provision are in addition to Seller's obligation to provide insurance (pursuant to section 27 entitled "INSURANCE"), and shall not be limited by any limitation on the amount or type of damages, compensation or benefits payable by Seller under the Worker's Compensation Acts, Longshoremen and Harborworker's Act, Disability Benefits Act or any other employee benefit act. (c) Notices. Customer will provide Seller with written notice of any written claim covered by this indemnification and will cooperate with seller in connection with Seller's evaluation of such claim. Seller shall defend any indemnified party, at the indemnified party's request, against any claim. Promptly after receipt of such request, Seller shall assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Seller shall not settle or compromise any such claim or consent to the entry of any judgment without the prior written consent of each indemnified party and without an unconditional release of all claims by each claimant or plaintiff in favor of each indemnified party. 27. INSURANCE (a) Limit Requirements. Seller shall secure and maintain at its expense during the term of this Agreement (i) Commercial General Liability Insurance (including, but not limited to, premises-operations, broad form property damage, products/completed operations, contractual liability, independent contractors, personal injury) with limits of at least $2,000,000. combined single limit for each occurrence. (Limits may be satisfied with primary and/or excess coverage.) (ii) Commercial Automobile Liability with limits of at least $2,000,000. combined single limit for each occurrence. (Limit may be reduced to $1,000,000 if contract does not require Seller to use vehicles to deliver products or perform services.) (iii) Workers' Compensation insurance as required by Statute, and Employer's Liability insurance with limits of not less than $1,000,000 per occurrence. (b) Additional Requirements. The insurer must be licensed to do business in the state in which the work is performed and must have Bests Rating "AX" or better. Seller shall deliver a certificate of insurance on which VERIZON Communications Inc., its NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 18 subsidiaries and affiliates and named company Verizon Services Corp., are included as additional insureds with reference to (i) above. Certificates of insurance must be provided prior to any work being performed and must be kept in force during the term of this Agreement. It is also agreed that Seller's policy is primary. (c) No Subrogation. Seller shall waive its rights of subrogation against Customer for Workers' Compensation claims. Seller shall, prior to rendering such services, furnish to the address specified in Notices provision of this Agreement, certificates or evidence of the foregoing insurance indicating the amount and nature of such coverage, the expiration date of each policy, and stating that no material change or cancellation of any such policy shall be effective unless thirty (30) days' prior written notice is given to Customer. Seller shall have the option, when permitted by law, to self-insure any or all of the foregoing risks. (d) No Limitation. Seller is responsible for determining whether the above minimum insurance coverages are adequate to protect its interests. The above minimum coverages do not constitute limitations upon Seller's liability. (e) Endorsements. The policies referred to above shall contain an endorsement naming Verizon as an Additional Insured and eliminating and removing any exclusion of liability for i) injury, including bodily injury and death, to an employee of the insured or of Customer or ii) any obligation of the insured to indemnify, hold harmless, defend or otherwise make contribution to Customer because of damage arising out of injury, including bodily injury and death, to an employee of Customer. (f) Self-Insure. Should Seller elect to self-insure, in lieu of Certificates of Insurance as stipulated in this section Seller shall provide to Customer: (i) the self-insurance registration identification number assigned by each state in which Seller desires to provide services to Customer or manufactures Product; (ii) a letter of certification from Seller's insurance carrier or self- insurance administrator that Seller is self-insured for the coverages and amounts as stipulated in this Agreement, including that Customer is an additional insured and shall be indemnified and saved harmless from all claims, suits, and liabilities as set forth within this Agreement; and (iii) a notification of the states in which Seller is provided coverage under its self-insurance. 28 INFRINGEMENT (a) Infringement Indemnification. Seller shall indemnify, defend and hold harmless Customer and its affiliates, shareholders, directors, officers, employees, contractors, and agents from all claims, suits, demands, damages, liabilities, expenses (including reasonable fees and disbursements of counsel) judgments, settlements and penalties of every kind ("Claims") arising from or relating to any actual or alleged infringement or misappropriation of any patent, trademark, copyright, trade secret or any actual or alleged violation of any other intellectual property rights arising from or in connection with the Products provided or the Services performed under this Agreement. Notwithstanding anything to the contrary contained in this Agreement (including, but not limited to, Section 26 hereof entitled "INDEMNIFICATION" and Section 27 hereof entitled "INSURANCE"), the provisions of this Section 28 hereof entitled "INFRINGEMENT" shall govern the rights of Customer and its affiliates, shareholders, NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 19 directors, officers, employees, contractors, and agents to indemnification for Claims of infringement, misappropriation or violation of intellectual property rights. (b) Procedures. The procedures set forth in Section 26 hereof entitled "INDEMNIFICATION" shall apply in the case of any claims of infringement, misappropriation or violation of intellectual property rights for which indemnification will be sought. Without limitation of Section 26 hereof entitled "INDEMNIFICATION", if the sale or use of the Products or Services is enjoined, Seller shall, at Customer's option and Seller's expense, either: (1) Procure for Customer the right to use the Products or Services; (2) Replace the Products or Services with equivalent, non-infringing Products or Services; (3) Modify the Products or Services so they become non-infringing; or (4) Remove the Products or Services and refund the purchase price, including transportation, installation, removal and other incidental charges. 29. CUSTOMER LIMITATION OF LIABILITY. Seller agrees that neither Customer nor any Customer Affiliate shall be liable for any consequential, special, indirect, incidental, punitive or exemplary damages for any acts or failure to act under this Agreement. 30. RELATIONSHIP OF PARTIES (a) Seller's Relationship. In providing any Services under this Agreement, Seller is acting solely as an independent contractor and not as an agent of any other party. Persons furnished by the respective parties shall be solely the employees or agents of such parties, respectively, and shall be under the sole and exclusive direction and control of such parties. They shall not be considered employees of the other party for any purpose. Each party shall be responsible for compliance with all laws, rules and regulations involving its respective employees or agents, including (but not limited to) employment of labor, hours of labor, health and safety, working conditions and payment of wages. Each party shall also be responsible, respectively, for payment of taxes, including federal, state, and municipal taxes, chargeable or assessed with respect to its employees or agents, such as social security, unemployment, worker's compensation, disability insurance and federal and state income tax withholding. Neither party undertakes by this Agreement or otherwise to perform or discharge any liability or obligation of the other party, whether regulatory or contractual, or to assume any responsibility whatsoever for the conduct of the business or operations of the other party. Nothing contained in this Agreement is intended to give rise to a partnership or joint venture between the parties or to impose upon the parties any of the duties or responsibilities of partners or joint venturers. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 20 (b) Customer's Contractors. Customer reserves the right to enlist contractors for engineering, installation or maintenance services with respect to Seller's Products. (c) No Subcontractors. Seller shall not, without Customer's prior written approval, subcontract any portion of the work to be performed hereunder (for example, including but unlimited to installation and maintenance services). 31. TERMINATION (a) Without Cause. Customer or Seller may terminate this Agreement without cause, effective immediately, upon written notice to the other. Termination shall not affect any purchase order placed, any subordinate agreement executed prior to the date of termination, or any fully paid up license granted to Customer. Upon termination of this Agreement without cause, Customer shall not be liable to Seller, either for compensation or for damages of any kind or character whatsoever, whether on account of the loss by Seller of present or prospective profits on sales or anticipated sales, or expenditures, investments or commitments made in connection with the establishment, development or maintenance of Seller's business, or on account of any other cause or thing whatsoever except Customer's liability for private labeled Product, under Section 8 hereof. The termination shall not prejudice the rights or liabilities of the parties with respect to Product sold, or any indebtedness then owing by either party to the other. (b) For Insolvency, Court Action, or Assignment. Either party may terminate this Agreement, effective immediately, without liability for said termination, upon written notice to the other party, if any of the following events occur: 1) The other files a voluntary petition in bankruptcy; 2) The other is adjudged bankrupt; 3) A court assumes jurisdiction of the assets of the other under a federal reorganization act; 4) A trustee or receiver is appointed by a court for all or a substantial portion of the assets of the other; 5) The other becomes insolvent or suspends its business; 6) The other makes an assignment of its assets for the benefit of its creditors, except as required in the ordinary course of business; (c) Material Breach. Customer or Seller may terminate this Agreement for a material breach or default of any of the terms, conditions or covenants of this Agreement by the other, provided that such termination may be made only following the expiration of a thirty (30) day period during which the other party has failed to cure such breach after having been given written notice of such breach. This subsection shall not apply to Customer's cancellations or Seller's revocations under Section 8 hereof entitled "PURCHASE ORDERS; CANCELLATION OF PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGEMENT." NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 21 (d) Termination by Seller for Non-Payment: Seller may terminate this Agreement, or cancel an Order(s) for non-payment of the purchase price and then only if after sixty (60) days of receipt of written notice of non-payment in accordance with Section 33 hereof, entitled "NOTICES", Customer fails to pay such purchase price and thereupon Seller issues its written notice of default and Customer fails to pay such purchase price within ten (10) business days of receipt of such notice of default. In no way shall such termination act to impair Customer's right, title and interest to the Product purchased hereunder, and under Section 19 hereof entitled "INFORMATION AND INTELLECTUAL PROPERTY" and under and Section 28 hereof entitled "INFRINGEMENT." 32. DISPUTE RESOLUTION (a) Nature of Dispute Resolution. The parties desire to resolve certain disputes, controversies and claims arising out of this Agreement without litigation. Accordingly, except in the case of (i) a dispute, controversy or claim relating to a breach or alleged breach on the part of either party of the provisions of Section 19 entitled "INFORMATION AND INTELLECTUAL PROPERTY", (ii) a suit, action or proceeding to compel Seller to comply with its obligations to indemnify Customer pursuant to this Agreement or (iii) a suit, action or proceeding to compel either party to comply with the dispute resolution procedures set forth in this Section 32 hereof entitled "DISPUTE RESOLUTION", the parties agree to use the following alternative procedure as their sole remedy with respect to any dispute, controversy or claim arising out of or relating to this Agreement or its breach. The term "Dispute" means any dispute, controversy or claim to be resolved in accordance with the dispute resolution procedure specified in this Section 32 hereof entitled "DISPUTE RESOLUTION." (b) Procedure. At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute arising under this Agreement. The parties intend that these negotiations be conducted by nonlawyer, business representatives. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the representatives for purposes of these negotiations shall be treated as confidential information developed for purposes of settlement, shall be exempt from discovery and production, and shall not be admissible in any lawsuit without the concurrence of all parties. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in evidence in the lawsuit. (c) Remedies At Law or Equity. If the negotiations do not resolve the Dispute within sixty (60) days of the initial written request, the parties may pursue their available remedies in law or equity. 33. NOTICES (a) Notices (with the exception of price change notifications pursuant to Section 7, Price and Terms of Payment) concerning this Agreement shall be in writing and shall be given or made by means of telegram, facsimile transmission, certified or registered mail, express NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 22 mail or other overnight delivery service, or hand delivery, proper postage or other charges paid and addressed or directed to the respective parties as follows. A notice that is sent by facsimile shall also be sent by one of the other means set out in this subsection. To Seller: At Seller's address shown on the first page of this Agreement, Attention: Vice President, Contract Administration To Customer: VERIZON 700 Hidden Ridge Irving, TX 75038 Attention: Sr. Sourcing Process Leader and to the Affiliate that placed the Order if different than Verizon Services Corp. (b) Notices for change in ownership, change in name of firm, or change in mailing address must be given by Seller by mailing to Customer within thirty (30) days of such change. Notices for change in ownership must include the names of all new owners or officers, registered agent for service of process and state of incorporation or organization. 34. NO HAZARDOUS PRODUCTS AND COMPONENTS (a) Seller's Representations. Seller represents that each Product furnished by Seller is safe for all intended uses, is nontoxic and presents no abnormal hazards to persons or the environment. Seller agrees to notify Customer in writing and to supply an appropriate Material Safety Data Sheet (MSDS) to Verizon Services Corp., Integrated Technical Services Division, 221 E 37th Street, 4th Floor, New York, New York 10016 as well as to the ship-to point, if any Product or component thereof is toxic or hazardous under any Federal, state or local law or if the Product is capable of constituting a hazard. Seller represents that Products display all reasonable notices and warnings of foreseeable hazards. Seller further represents that if any Products or containers would be or could be classified as hazardous or otherwise regulated waste at the end of its useful life, Seller has advised Customer in writing and provided Customer with proper disposal instructions. (b) Notices. Seller shall immediately notify Customer by telephone (followed by written confirmation within twenty-four hours) if Product purchased or materials used fail to comply with applicable safety rules or standards of the United States Consumer Product Safety Commission or the Environmental Protection Agency or contain a defect that presents a foreseeable risk to the public health or injury to the public or the environment, whether by itself or when used by Customer for its intended purpose. (c) Shipping and Routing Instructions. Seller shall comply with Section 7 entitled "HAZARDOUS MATERIALS REGULATIONS GENERAL of ATTACHMENT G-1 SECTION I entitled "VERIZON SHIPPING INSTRUCTIONS - VERIZON LOGISTICS AND VERIZON NETWORK SERVICES." NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 23 35. GOVERNMENT CONTRACT PROVISIONS If an Order contains a notation that Product or Service is intended for use under a government contract, it shall be subject to the then current government contract provisions printed on or attached to such Order. 36. QUALITY Seller shall follow the requirements and procedures in EXHIBIT H, ATTACHMENT H-1 hereof entitled "QUALITY STANDARDS, PROCEDURES AND COMPLAINTS" in respect to Products ordered by Customer. Where compliance with the TL9000 standard is required, Seller and Customer shall follow the requirements and procedures in EXHIBIT H, ATTACHMENT H-2 hereof entitled ""TL9000 REQUIREMENTS." 37. STANDARDIZATION (a) In respect to Products ordered by or in behalf of the former Bell Atlantic Affiliates, Seller and Customer shall follow the requirements and procedures described in EXHIBIT K, ATTACHMENT K-1 hereof entitled "STANDARDIZATION VERIZON EAST." (b) In respect to Products ordered by or in behalf of the former GTE Affiliates, Seller and Customer shall follow the requirements and procedures described in EXHIBIT K, ATTACHMENT K-2 hereof entitled "STANDARDIZATION VERIZON WEST." 38. NONWAIVER Either party's failure to enforce any of the provisions of this Agreement or any purchase order, or to exercise any option, shall not be construed as a waiver of such provisions, rights, or options, or affect the validity of this Agreement or any purchase order. 39. SEVERABILITY If any of the provisions of this Agreement shall be invalid or unenforceable, then such invalidity or unenforceability shall not invalidate or render unenforceable the entire Agreement. The entire Agreement shall be construed as if not containing the particular invalid or unenforceable provision or provisions, and the rights and obligations of Seller and Customer shall be construed and enforced accordingly. 40. SECTION HEADINGS The headings of the sections are inserted for convenience only and are not intended to affect the meaning or interpretation of this Agreement. 41. SURVIVAL OF OBLIGATIONS Seller's obligations under this Agreement, which by their nature would continue beyond the termination, cancellation or expiration of this Agreement, shall survive termination, cancellation or expiration of this Agreement, including but not limited to, obligations to indemnify, insure and maintain confidentiality, and continued availability of Product support and warranty provisions set forth in Exhibit D. NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 24 42. CHOICE OF LAW AND JURISDICTION State Law And Forum. The validity, interpretation and performance of this agreement shall be governed by the procedural and substantive laws of the state of New York without regard to conflicts of laws. All actions under this agreement shall be brought in a court of competent subject matter jurisdiction in the county of New York in the state of New York and both parties agree to accept the personal jurisdiction of such court. Seller also agrees to submit, at Customer's option, to the jurisdiction of any court in the United States wherein an action is commenced against Purchaser based on a claim for which Seller has indemnified Purchaser hereunder. The application of the U. N. Convention on Contracts for the International Sale of Goods is specifically excluded from this Agreement. 43. ENTIRE AGREEMENT This Agreement together with its exhibits and attachments constitutes the entire agreement between the parties and cancels all contemporaneous or prior agreements, whether written or oral, with respect to the subject matter of this Agreement. Except as provided in Section 14 hereof entitled "PRECEDENCE OF DOCUMENTS", and Section 8 hereof entitled "PURCHASE ORDERS; CANCELLATION OF PURCHASE ORDERS; REVOCATION OF ACKNOWLEDGEMENT", no modifications shall be made to this Agreement unless in writing and signed by authorized representatives of the parties. 44. SIGNATURES Each party represents that it has executed this Agreement through its authorized representative:
CUSTOMER: SELLER: Verizon Services Corp TII Network Technologies, Inc. /s/ GEORGE S. DOWELL /s/ TIMOTHY J. ROACH -------------------------------------------------- ------------------------------------------------- (Signature) (Signature) George S. Dowell Timothy J. Roach -------------------------------------------------- ------------------------------------------------- (Printed Name) (Printed Name) VP - Supply Chain Services President & CEO -------------------------------------------------- ------------------------------------------------- (Title) (Title) June 28, 2005 May 17, 2005 -------------------------------------------------- ------------------------------------------------- (Date) (Date)
NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. 25 EXHIBIT A AFFILATES VERIZON WEST (FORMER GTE AFFILIATES) Exhibit A 1 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. EXHIBIT A GTE AFFILIATED ENTITIES The names of certain GTE Affiliated Business Units are in the process of being changed as a result of the merger of GTE Corporation and Bell Atlantic Corporation. The legal entities themselves have not changed under the merger. The only change is either in the name of the company or a change in the doing-business-as (d/b/a) name. For ease of reference, where not obvious as from a d/b/a, the name by which a Verizon company was formerly known has been included in parenthesis (f/k/a). That f/k/a is not part of the legal name. Exhibit A 1 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. GENERAL ADMINISTRATION GTE Corporation GTE Finance Corporation GTE REinsurance Company Limited GTE Life Insurance Company Limited GTE Service Corporation, d/b/a Verizon Services Group GTE Shareholder Services Incorporated Verizon Investment Management Corp. (f/k/a GTE Investment Management Corporation) Verizon Realty Corp. (f/k/a GTE Realty Corporation) GTER Incorporated GTE-TCCA, Inc. SELECT SERVICES ContelVision, Inc. GTE Main Street Incorporated Verizon Media Ventures Inc. (f/k/a GTE Media Ventures Incorporated) Verizon Select Services Inc. (f/k/a GTE Communications Corporation) Verizon Select Services of Virginia Inc. (f/k/a GTE Communications Corporation of Virginia) INFORMATION SERVICES Verizon Information Services Inc. (f/k/a GTE Information Services Incorporated) General Telephone Directory Company C. por A. Verizon International Telecom Services Inc. (f/k/a Telecom Services Corporation) GTE Directories (B) SDN.BHD. (Brunei) Verizon Directories Corp. (f/k/a GTE Directories Corporation) Verizon Directories Distribution Corp. (f/k/a GTE Directories Distribution Corporation) Verizon Directories Sales Corp. (f/k/a GTE Directories Sales Corporation) GTEX Corporation GTE Directorios - Republica Dominicana, C. por A. GTE GmbH Verizon New Media Services Inc. (f/k/a GTE New Media Services Incorporated) GTE Yellow Pages Publishing Hungary Kft INFORMATION TECHNOLOGY Verizon Data Services Inc . (f/k/a GTE Data Services Incorporated) Verizon Data Services International Inc. (f/k/a GTE Data Services International Incorporated) GTE Airfone of Canada Incorporated NETWORK SERVICES GTE Alaska Incorporated, d/b/a Verizon Alaska GTE Arkansas Incorporated, d/b/a Verizon Arkansas Verizon California Inc. (f/k/a) GTE California Incorporated) Contel Advanced Systems, Inc. Verizon Florida Inc. (f/k/a GTE Florida Incorporated) GTE Funding Incorporated Verizon Hawaii Inc. (f/k/a GTE Hawaiian Telephone Company Incorporated) GTE Hawaiian Tel Insurance Company Incorporated Verizon Hawaii International Inc. (f/k/a GTE Hawaiian Tel International Incorporated) GTE Far East (Services) Limited The Micronesian Telecommunications Corporation GTE Pacifica Incorporated, d/b/a Verizon Pacifica GTE Midwest Incorporated, d/b/a Verizon Midwest Verizon North Inc. (f/k/a GTE North Incorporated) Verizon Northwest Inc. (f/k/a GTE Northwest Incorporated) Verizon West Coast Inc. (f/k/a GTE West Coast Incorporated) Verizon South Inc. (f/k/a GTE South Incorporated) Exhibit A 2 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. GTE Southwest Incorporated, d/b/a Verizon Southwest Contel of Minnesota, Inc., d/b/a Verizon Minnesota Contel of the South, Inc. d/b/a Verizon South Systems/ Verizon North Systems GTE Consolidated Services Incorporated INTERNATIONAL CODETEL International Communications Incorporated GTE Anglo Holding Company Incorporated La Compagnie de Telephone Anglo-Canadienne/Anglo-Canadian Telephone Company TELUS Corporation 3554864 Canada Ltd. Aerotech Specialties Ltd. ISM Information Systems Management (B.C.) Corporation Telecom Leasing Canada (TLC) Limited TELUS Communications (B.C.) Inc. TELUS Holdings Inc. TELUS Communications Inc. TELUS Enterprises Inc. TELUS Services Inc. TELUS Advanced Services Inc. TELUS Mobility Cellular Inc. TELUS Risk Management Inc. The QuebecTel Group Inc. DynEC Inc. Groupe Fortune 1000 Inc. Quebec-Telephone Quebec -Communications Inc. Quebec Tel Aliz. Inc. QuebecTel Communications Inc. SWAP-T Inc. Versalys Inc. GTE China Incorporated GTE International Telecommunications Services LLC GITS Branch LLC GTE Holdings Mexico, S. de R.L. de C.V. GTE Data Services-Mexico, S.A. de C.V. GTEDS Services-Mexico, S.A. de C.V. GTE Information Services (UK) Limited Herold Business Data AG Panorama Polska Sp. z o.o. GTE Supply do Brasil, Ltda. Guangzhou Guangtong-GTE Tianwei Communications Development Company Ltd. GTE Holdings (Canada) Corporation Compania Dominicana de Telefonos, C. por A. (CODETELl) Operaclora de Procesamiento de Informacion y Telefonia, C. por A. (OPITEL) Quality Telecommunications, C. por A. GTE Dominican Republic Holdings LLC GTE International Telecommunications Incorporated GITI Services Puerto Rico Incorporated GTE do Brasil Limitada GTE PCS International Incorporated GTE Venezuela Incorporated VenWorld Telecom, C.A. (Venezuela) Compania Anonima Nacional Telefonos de Venezuela (CANTV) GTE Holdings (Puerto Rico) LLC Caribe Information Investments Incorporated Axesa Informacion Incorporado Telecommunicaciones de Puerto Rico, Inc. Celulares Telefonica Inc. Datacom Caribe, Inc. Puerto Rico Telephone Company, Inc. GTE International Telephone Incorporated Informatica y Telecommunicaciones, C. por A. (Dominican Republic) GTE Investments Incorporated WIRELESS PRODUCTS AND SERVICES GTE Consumer Services Incorporated GTE Wireless Incorporated Contel Cellular International, Inc. Exhibit A 3 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. GT Towers Incorporated GTE Mobile Communications International Incorporated CTI Holdings, S.A. CTI Compania de Telefonos del Interior S.A. CTI Norte Compania de Telefonos del Interior S.A. CTI PCS Holdings S.A. CTI PCS S.A. GTE Mobilnet of Cleveland Incorporated GTE Wireless of Ohio Incorporated GTE Mobilnet of Eastern North Carolina Incorporated GTE Wireless of the South Incorporated GTE Wireless Service Corporation GTE Airfone Incorporated GTE Railfone Incorporated Mexfone, S.A. de C.V. OTHER OPERATIONS Contel Federal Systems, Inc. GTE Telecommunications Services Incorporated GTE Signaling LLC Contel Page International, Inc. GTE Telecom International Incorporated GTE Telecom International Systems Corporation GTE Assets Incorporated GTE Enterprise Initiatives Incorporated GTE Products of Connecticut Corporation GTE Communication Systems Corporation (acting through its Verizon Logistics division) GTE International Incorporated GTE Overseas Corporation Verizon Laboratories Inc. (f/k/a GTE Laboratories Incorporated) GTE Operations Support Incorporated Televac, Inc. Verizon Credit Inc. (f/k/a GTE Leasing Corporation) Verizon Capital Acceptance Corp. (f/k/a GTE Leasing Acceptance Corporation) Kalama Grain Terminal, Inc. GTE Transfer Corporation Verizon Technology Corp. (f/k/a GTE Technology Corporation) BBNT Solutions LLC Federal Network Systems LLC GTE.Net LLC, d/b/a Verizon Internet Solutions Exhibit A 4 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. EXHIBIT B COMPONENTS OF PRODUCTS AND SERVICES ATTACHMENT B-1 DETAILED DESCRIPTION OF PRODUCTS AND SERVICES ATTACHMENT B-2 PRICES ATTACHMENT B-3 DELIVERY INTERVAL - DOES NOT INCLUDE IN TRANSIT TIME * Exhibit B NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission. EXHIBIT C PURCHASE FOR RESALE - LICENSE, WARRANTY AND PRODUCT SUPPORT NOT APPLICABLE EXHIBITS 3 1 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except by written agreement EXHIBIT D PURCHASE FOR INTERNAL USE - WARRANTY AND PRODUCT SUPPORT ATTACHMENT D-1 WARRANTY PERIOD ATTACHMENT D-2 PRODUCT REPAIR RATES - NOT APPLICABLE ATTACHMENT D-3 REPAIR PARTS PRICING - NOT APPLICABLE ATTACHMENT D-4 SELLERS WORKING HOUR SCHEDULE AND CONTACT INFORMATION ATTACHMENT D-5 ON-SIGHT ASSISTANCE RATES - NOT APPLICABLE, Seller with provide on-Site assistance to Customer as mutually agreed to without charge. ATTACHMENT D-6 TRAINING TERMS AND STANDARDS ATTACHMENT D-7 TRAINING PRICES - NOT APPLICABLE, Seller with provide training to Customer as mutually agreed to without charge. ATTACHMENT D-8 DISCLOSURE OF POTENTIAL OR ACTUAL DEFECTS * NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT E ELECTRONIC PURCHASING ATTACHMENT E-1 ELECTRONIC DATA INTERFACE (EDI) ATTACHMENT E-2 E-PROCUREMENT ARIBA TRANSACTIONS - NOT APPLICABLE ATTACHMENT E-3 SELLER CIF REQUIREMENTS - NOT APPLICABLE ATTACHMENT E-4 SELLER PUNCHOUT REQUIREMENTS - NOT APPLICABLE * 2 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT F Primary Seller Compliance with Minority, Woman-owned, Disabled and Vietnam era Veteran Business Enterprises (MWDVBE) Utilization ATTACHMENT F-1 MWDVBE CONTRACT COMPLIANCE TII is currently a reporting participant. 4 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT F PRIMARY SUPPLIER COMMITMENT COMPLIANCE WITH MINORITY, WOMAN-OWNED, DISABLED AND VIETNAM ERA VETERAN BUSINESS ENTERPRISES (MWDVBE) UTILIZATION 1. SUPPLIER COMMITMENT. The Primary Supplier (Seller) agrees to provide opportunities for Certified (1) Suppliers identified as Minority (2),Woman (3) -owned (4), Business Enterprises ("MWDVBE")(5), Disabled, Service Disabled and Vietnam Era Veteran (6) Business Enterprises ("DVBE"), (hereinafter "Diversified Suppliers") in accordance, at a minimum, with the terms and conditions of this Section. 2. PRIMARY SUPPLIER COMMITMENTS. A. SUPPLIER DIVERSITY UTILIZATION PLAN. The Primary Supplier must submit an approved Supplier Diversity Utilization Plan ("Plan") within sixty (60) days after execution of this Agreement, if not already supplied in the RFP response. The Plan must include a statement that the Primary Supplier will achieve MWDVBE and PC Percent Commitments specified in this section, and a commitment to report results utilizing the reporting method described below: CONTRACT SPECIFIC REPORTING. The Primary Supplier must relate MWDVBE expenditures to specific Verizon contracts and track them by using the Contract Specific method of reporting of the Prime Supplier MWDVBE Quarterly Report found on line at http://www.verizon.com/supplierdiversity. In this case, the Primary Supplier will also provide: (1) A list of the name(s) and address(s) of any Diverse Suppliers the Primary Supplier has identified to use in support of this Agreement, (2) A description of the products/services or scope of work to be performed by Diverse Suppliers and, (3) The percentage or volume of contract work to be performed by each such firm. - --------------------------- (1) Currently certified as MWDVBE by an authorized certifying body, such as NMSDC, WBENC, or other similar local, state, or federal certifying body, among others. (2) "Minority" is defined as a business of which at least 51% of the ownership and control is held by individuals who are members of a minority group, and of which at least 51% of the net profits accrue to members of a minority group. Such persons include, but are not limited to Black Americans, Hispanic Americans, Asian Pacific Americans, Native Americans; "Control" is defined as having overall fiscal/legal responsibility and exercising the power to make policy decisions; Asian Pacific Americans (persons with origins from Japan, China, the Philippines, Vietnam, Korea, Samoa, Guam, U.S. Trust Territory of the Pacific Islands (Republic of Palau), the Commonwealth of the Northern Mariana Islands, Laos, Cambodia (Kampuchea), Taiwan; Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Republic of the Marshall Islands, Federated States of Micronesia., Macao, Hong Kong, Fiji, Tonga, Kiribati, Tuvalu, or Nauru; Subcontinent Asian Americans (persons with origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or Nepal; and Native Americans (American Indians, Eskimos, Aleuts, and Native Hawaiians). Members of other groups designated by the U. S. Small Business Administration. (3) "Women-owned" is defined as a business that is at least 51% owned and controlled by a woman or women. Such women's business enterprise shall further be classified as either minority or non-minority women-owned business, depending upon the greater portion of ownership; "Owned" is defined as at least 51% of the business or in the case of a publicly owned business, at least 51% of the stock is owned either by a minority or women; "Control" is defined as having overall fiscal/legal responsibility and exercising the power to make policy decisions. (4) "Owned" is defined as at least 51% of the business or in the case of a publicly owned business, at least 51% of the stock owned either by a minority or women. Transfer of ownership or purchase of an existing business by a minority (or non-minority women) from a non-minority (or non-minority male), that remains actively involved in the operation of the business, does not qualify as a minority-owned or women-owned business. (5) A "minority business" or "women-owned business" may be an individual partnership, a joint venture or a corporation, other than an employee of a Verizon company. (6) A business that is at least 51% owned and controlled by an owner or owners who are Veterans or Disabled Veterans who are veterans of the military, naval, or air service of the United States with a service-connected disability or who are disabled as defined by the Americans With Disabilities Act. This classification can also include agencies that employ 51% or more disabled persons. ATTACHMENT F-1 1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission The list of Diverse Suppliers by the Primary Supplier in its (Contract-Specific) Suppler Diversity Utilization Plan form shall constitute: o A representation by the Primary Supplier to Verizon in regard to the Diverse Supplier(s) that: (a) it intends to use the firm for the work specified in the Supplier Diversity Utilization Plan; (b) on the basis of information known to it and after reasonable inquiry, it believes such Diverse Supplier(s) to be technically and financially qualified to perform the work specified, and that the firm is available to perform the work; and (c) the Diversified Supplier(s) identified is currently certified as MWDVBE by an authorized certifying body. o A commitment that the Primary Supplier will enter into a contract with each such Diverse Supplier (or approved substitutes) in accordance with its Supplier Diversity Utilization Plan. o A commitment by the Primary Supplier that it will not substitute a Diverse Supplier listed in its Supplier Diversity Utilization Plan without notifying Verizon. Unless the Primary Supplier has a reasonable belief that use of a designated Diverse Supplier will potentially cause personal injury or damage to property, or that such Diverse Supplier has engaged in illegal or unethical behavior, no substitution(s) of Diverse Supplier(s) designated on the Primary Supplier's Utilization Plan Form may be made without notifying Verizon in writing, citing the specific reason(s) for substitution. B. PRIMARY SUPPLIER MWDVBE PERCENT COMMITMENT. The Primary Supplier shall engage the services of certified Diversified Supplier(s) for an amount equivalent to at least "sixteen" percent (16%) of dollars spent under this Agreement in 2003, "seven-teen" percent (17%) in 2004 and 2005 and eight-teen percent (18%) in 2005 and thereafter in MWDVBE utilization under the Agreement ("MWDVBE Percent Commitment"). C. PRIMARY SUPPLIER COMPLIANCE; STANDARDS AND REMEDIES. I. COMPLIANCE STANDARDS. Verizon has the right to determine compliance by the Primary Supplier with the Supplier Diversity Utilization Plan and the MWDVBE Percent Commitments (hereinafter collectively the "MWDVBE Commitments") established in this Section. Verizon may determine that the Primary Supplier is achieving its MWDVBE Commitments as set forth in this Section by examining reports received from the Primary Supplier, performing on-site inspections, conducting progress meetings regarding work required by the Agreement, contacting involved Diversified Supplier, or through other Verizon actions taken in the ordinary course of administering the Agreement. II. QUARTERLY COMPLIANCE REPORTS. "Verizon Prime Supplier MWDVBE Quarterly Reports", shall be submitted via the website http://www.verizon.com/supplierdiversity by the Primary Supplier, as required by this agreement, no later than thirty (30) days following the end of each quarter. This document is intended to provide a reporting mechanism to monitor the Primary Supplier's progress in achieving its MWDVBE Commitments as set forth in this Section. III. UPDATES. An annual update of the Primary Supplier's Supplier Diversity Utilization Plan will be required to ensure compliance with this Agreement's provision for continuous year over year improvement. IV. COMMITMENTS NOT ACHIEVED. In the event that the Primary Suppliers MWDVBE Commitments hereunder are not achieved and the Primary Supplier can not demonstrate to the reasonable satisfaction of Verizon that commercially reasonable efforts were made to accomplish such MWDVBE Commitments, such failure shall constitute an occasion of default and Verizon reserves the right and shall have the option to invoke the default and termination provisions of this Agreement. Verizon in addition to Article(s) of this Agreement pertaining to default and termination shall have all other rights and remedies available at law and in equity and under this Agreement. Verizon may also require that the Primary Supplier, upon request, submit additional documentation and information concerning the Primary Supplier's performance in achieving its MWDVBE Commitments and compliance with its Supplier Diversity Utilization Plan. V. CURE PERIOD FOR COMMITMENTS NOT ACHIEVED. Should the Primary Supplier continue to fail in achieving the MWDVBE Commitments of this Agreement or any amendments thereto after having been given notice of such failure to meet its MWDVBE Commitments, and failing to cure such ATTACHMENT F-1 2 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission Commitments within thirty (30) days of receiving such notice by achieving its requirements, the Primary Supplier shall be in default and no further cure shall be permitted. VI. SUPPLIER REPORT CARD. In addition, the Primary Supplier's ability to achieve its MWDVBE Commitments shall reflect upon and shall contribute to the Primary Supplier's overall grade on the Supplier Report Card or other performance measurement(s). ATTACHMENT F-1 3 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT G VERIZON LOGISTICS AND NETWORK SERVICES TRANSPORTATION AND ROUTING INSTRUCTIONS AND REQUIREMENTS ATTACHMENT G-1 VERIZON SHIPPING INSTRUCTIONS - VERIZON LOGISTCS AND VERIZON NETWORK SERVICES ATTACHMENT G-2 VERIZON TRANSPORTATION ROUTING INSTRUCTION ATTACHMENT G-3 OCEAN CONTAINER PLANNING AND LOADING PROCEDURE - NOT APPLICABLE ATTACHMENT G-4 VERIZON - SUPPLIER ROUTING INSTRUCTIONS ATTACHMENT G-5 STATE TO STATE GRID * EXHIBITS NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT H QUALITY STANDARDS, PROCEDURES AND COMPLAINTS ATTACHMENT H-1 QUALITY STANDARDS AND PROCEDURES ATTACHMENT H-2 TL9000 EXHIBITS NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT H ATTACHMENT H-1 QUALITY STANDARDS, PROCEDURES AND COMPLAINTS 1.1 QUALITY COMMITMENT Commitment to quality is a primary requirement of this Agreement and as used herein shall mean conformance to the terms, conditions and SPECIFICATIONS of this Agreement. Customer will assure continued Quality Improvement in the Products and Services purchased pursuant to this Agreement. Seller will demonstrate commitment to a Quality Improvement Process by providing: 1. A published statement of its quality policy signed by an officer of the company; 2. An established means of measuring and reporting customer satisfaction; 3. A quality training and awareness program; 4. A continuous Quality Improvement Process; 5. An established means of monitoring conformance to requirements for Products and Services; and 6. An established Product Quality Inspection Program. 1.2 QUALITY SYSTEM Seller shall document, implement and maintain a quality control, assurance and improvement system which assures that the System(s), Product(s) and Services provided to Customer meet all performance standards and requirements, and perform in accordance with Specifications, including, but not limited to those contained in APPENDIX A hereof, entitled "Quality, Reliability and Engineering Specifications," together with the following: TL 9000 Quality Management System Requirements, Book 1 Release 3.0, and TL 9000 Quality Management System Measurements, Book 2, Release 3.0. Seller shall be in compliance with all updates to such performance standards and requirements, including all those listed in this Article hereof, entitled QUALITY, STANDARDS, PROCEDURES, AND COMPLAINTS or in any appendix attached hereto, or as currently denominated by the QuEST Forum, Telcordia or Verizon. Seller agrees to allow Customer or Customer's Agent to conduct periodic on-site reviews at Seller's Hardware manufacturing and Software development facility(s) to verify compliance with Specifications. Seller also agrees to develop corrective action plans for any quality system deficiencies that may be detected during these periodic on-site reviews, and submit such plans to the Customer or Customer's agent within thirty (30) days after the review. Further, Seller agrees to implement these corrective action plans within six (6) months after the review. 1.3 QUALITY PERFORMANCE REPORTING SELLER agrees to provide, at no cost to Customer, data reports, upon request by Customer, which demonstrate the performance of the Seller's Product while in development, manufacture and service, and the adherence of the Seller's Product to the Specifications. Requirements for collecting, calculating and reporting data are defined in documents listed in APPENDIX A hereof-entitled QUALITY, RELIABILITY AND ENGINEERING SPECIFICATIONS. All required reports and data shall be delivered to Customer's Seller Quality Management Organization at: EXHIBIT H ATTACHMENT H-1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission Specialist Supply Chain Services Quality Management Verizon Corporate Sourcing 700 Hidden Ridge Irving, TX 75038 And to Customer's Sourcing Process Organization at: Sr. Sourcing Process Leader Verizon Corporate Sourcing 700 Hidden Ridge Irving, TX 75038 Seller agrees to render other periodic reports for service affecting conditions or other conditions that affect the operations and administrative procedures of Customer of its AFFILIATES, or as otherwise requested by Customer of Its AFFILIATES. All provided information shall be proprietary to Customer. 1.4 SOURCE INSPECTION Source Inspection means that Customer shall have the right to conduct due diligence inspection and testing at the Seller's, and any of its subcontractors, facilities at any point(s) or on a continuing basis as Customer may deem appropriate. Source Inspection applies to all Products. Source Inspection shall be performed by a Customer's representative. When requested, Seller will furnish Customer full access to its facilities and those of its subcontractors. Seller will provide Appropriate Documentation To Demonstrate That the Product Does Conform to All SPECIFICATIONS, and the Seller's projected failure rate, along with the test data that substantiates the conformance of Product prior to shipment. Should Customer give Seller written notice that it requires source inspection of Product prior to shipment, Seller shall notify Customer when the Product is ready for inspection and Customer or its agent shall be given reasonable opportunity to inspect the Product at any time prior to shipment under agreed upon Quality Program Specifications listed in APPENDIX A hereof entitled QUALITY, RELIABILITY AND ENGINEERING SPECIFICATIONS. Inspection or failure to inspect on any occasion shall not affect Customer's rights under Article 14 hereof, entitled WARRANTY or any other provisions of this Agreement. Seller shall make available at no additional cost to Customer, such production testing facilities, labor, data, specifications, procedures and such other documents, and assistance as necessary for Customer or its agent to perform inspection, as indicated in APPENDIX A hereof-entitled QUALITY, RELIABILITY AND ENGINEERING SPECIFICATIONS. In addition, Seller shall make available to Customer or its agent at no additional charge, data obtained through Seller's normal routines, which show results of Seller's inspection, tests and audits of Product as specified in the Quality Program Specifications. Such data shall be sufficient to demonstrate that the Product meets all quality and reliability requirements. Where Customer's Seller Quality Management finds received Products do not meet Specifications, the cost of inspection and testing, replacement and shipping shall be incurred by the Seller. EXHIBIT H ATTACHMENT H-1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission Customer reserves the right to have the Seller inspect and test 100% of their Product at their cost in cases where Product does not meet SPECIFICATIONS. 1.5 PRODUCT TESTING All Product shipped to Purhaser shall receive Seller testing to demonstrate functionality, quality and reliability. The Seller's test environment shall emulate or simulate the Customer's actual Product application/usage conditions as identified in the Specifications. Seller's testing shall be of a sufficient magnitude and duration to demonstrate full Product feature functionality in accordance with Specifications. If Seller's quality level for this final test stage does not conform to the Specifications, then Seller shall notify Customer immediately of such no-conformance before Product shipment, and Customer will advise Seller as to the disposition of this Product (accept or not accept). 1.6 QUALITY SURVEILLANCE Seller agrees to quality system surveillance activities through Customer or its agent designated by Customer to demonstrate that that the quality system is achieving results consistent with product quality, engineering and reliability requirements. The scope and frequency of these surveillance activities will be based on the Seller achieving and maintaining consistent and stable quality and reliability results. 1.7 TECHNICAL ANALYSIS If the parties agree to pursue technical analysis activities with third parties, Seller agrees to fund Product technical analysis activities that may be required by Customer to deploy the Product, in the Customer's NETWORK through Customer's or its agent's program or through test laboratories approved by Customer or its agent. Customer may request Product technical analysis activities in instances where the Seller cannot provide sufficient validation of Product performance, quality and reliability. 1.8 COMPLAINTS 1.8.1 ENGINEERING COMPLAINTS The Seller shall handle all Engineering Complaints (EC) submitted by Customer in accordance with GR230, Issue 2, as modified below, together with such further and additional requirements set forth in APPENDIX A hereof entitled Quality, Reliability and Engineering Specifications. a) Verizon recognizes (Section 2.1.R2-1, Applicable Use of Engineering Complaints; Section 2.2. CR-2, Emergency or Special Handling; Section 2.3.R2-3 Non-Applicable Uses of Engineering Complaints: and Section 2.5.3. R2-9 EC Confirmation Report-EO-150) as guidelines and typical examples, "NOT" as requirements or objectives: b) Verizon "DOES NOT" recognize (Section 2.5.4.R2-11, EC Interim Report-EO-151) the Seller shall notify Verizon of a proposed Action Plan for the Complaint within 15 days of receipt. In addition the following requirements shall be adhered to: In the event that a Customer's Engineering Complaint (EC) is marked "SERVICE EMERGENCY," then Seller agrees to exert effort that goes beyond that which is customarily provided to resolve the EC. Such effort will be consistent with the level of effort the Seller will furnish to support Customer and its AFFILIATES under Exhibit D, Warranty and Product Support and Section 22 (c), entitled EXTRAORDINARY SUPPORT. EXHIBIT H ATTACHMENT H-1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission Upon receipt of Customer's EC identified as a fire or safety hazard, Seller agrees to acknowledge receipt of such EC and to respond within twenty-four (24) hours. This response shall include the proposed remedy or proposed corrective action to resolve the stated problem, or the date when the accepted solution will be completed. In the event the Seller anticipates that the proposed solution to the EC will exceed thirty (30) days, and then Seller shall, once every two weeks, issue an Interim Report to Customer, reporting actions taken and progress made during the reporting period. In addition, such reports will indicate the date by which Seller anticipates that the ongoing EC study will be successfully concluded. Seller shall create and maintain a tracking system that records and summarizes all events surrounding any EC submitted by Customer. Seller shall also provide Customer with on-going reports at monthly intervals as to what manifested the EC, what remedial actions were made by Seller as a result of the Complaint and what was the result of those remedial actions. The overall progress and performance results shall be reviewed by Customer and Seller to evaluate the overall quality of the process. Upon Acceptance of Seller's resolution by Customer, Seller shall implement necessary changes within thirty (30) days. In the event an EC causes Customer to incur additional costs, Seller shall be responsible to reimburse Customer and/or its Affiliate for such costs. Customer shall substantiate such costs and submit to Seller a claim. for such costs. Seller shall pay such claim within thirty (30) days after resolution of the EC upon which the claim is based. In the event Seller fails to pay such claim, Seller shall compensate Customer in accordance with Exhibit I, entitled PERFORMANCE COMPENSATION PAYMENTS. If Customer or its Affiliate disagree with Seller on the implementation schedule and/or resolution of Complaint, Customer or its Affiliate shall have the right to escalate the matter for review on the implementation schedule, validity of the complaint, and/or resolution to higher management in accordance with Section 32 hereof, entitled DISPUTE RESOLUTION. 1.8.2 SELLER QUALITY COMPLAINTS In the event Customer determines that Product furnished hereunder does not perform in a satisfactory manner or is unsatisfactory in other respects, Customer may issue a Seller Quality Complaint (SQC) in writing to notify Seller. Seller shall provide an acknowledgment to Customer within ten (10) days of receipt. Within twenty (20) days the Seller shall provide a final report specifying, as required, the change in design, manufacturing process or installation and/or engineering instructions required to address Customer's SQC. The report will include the root cause of the SQC, condition and a plan for immediate corrective action to correct the SQC, and a long-term plan to ensure continued quality Products are provided. Nothing herein shall obviate Seller's obligations (including but not limited to the following EXHIBITS and/or Sections of this Agreement regarding warranty, repair and replacement): EXHIBIT K-2 STANDARDIZATION hereof, Exhibit K-1, Part B, Section 1 entitled CHANGES TO HARDWARE OR SOFTWARE/PRODUCT CHANGE NOTICES (PCNs), and EXHIBIT D PURCHASE FOR INTERNAL USE, LICENSE WARRANTY AND PRODUCT SUPPORT. EXHIBIT H ATTACHMENT H-1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission Customer's points of contact for all complaint information and correspondence shall be: Specialist Supply Chain Services Quality Management Verizon Corporate Sourcing 700 Hidden Ridge Irving, TX 75038 and: Sr. Sourcing Process Leader Verizon Corporate Sourcing 700 Hidden Ridge Irving, TX 75038 1.9 E-REPORT CARDS (ERC) e-Report Cards may be used as a means of measuring the Seller's overall performance to ensure the Seller is in compliance with established performance levels. Seller shall be responsible for reporting performance data in accordance with specific metrics to be developed for the applicable product/service. Grades will be assigned to assess the Seller's performance via the eRC process, and the Seller shall be required to meet a grade of "B" or above. Within an agreed upon timeframe after the execution of this Agreement, the Customer may implement the eRC process utilizing Seller's product performance data. For any elements of the eRC that are below a grade of "B", the Seller shall be required to develop a written Corrective Action Plan, within a specified timeframe as stated by the Customer. If within a mutually agreed upon timeframe, the Corrective Action Plan has not led to an acceptable improvement of the said elements (to a grade of "B" or above), then the Customer may exercise remedies as set forth in this Agreement. If, based upon the monthly data collected for the Customer's eRC process, the Seller fails to maintain a total grade of "B" or above for three (3) consecutive months, the Customer may, in addition to other rights under this Agreement, terminate such as specified in the TERMINATION FOR CAUSE provision of this Agreement. The Customer's right to terminate this Agreement for Cause are not precluded by the Customer's delay in exercising its rights under this Agreement. 1.10 CONTINUOUS QUALITY IMPROVEMENT PLAN Seller shall have a written plan for continuously assessing and improving the quality and reliability of Product. Seller's Quality Improvement Plan (QIP) shall incorporate and use a well defined and written set of metrics, approved by Customer's Seller Quality Leader (SQL). This plan will assess internal development data and field performance data used to improve Seller's performance. Metric collection, analysis and reporting should be conducted on a continual basis. Both file performance and in-process data shall be utilized. All information, including, but is not limited to, plans, procedures and results, in Seller's QIP shall be made available for monthly review. EXHIBIT H ATTACHMENT H-1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission APPENDIX A QUALITY, RELIABILITY AND ENGINEERING SPECIFICATIONS Seller shall be expected to comply with the most current issue of the documents below that apply. "TL 9000 Quality Management System - Requirements Handbook, Release 3.0 and TL 9000 Quality Management System Measurements, Release 3.0" Copies may be ordered through the American Society for Quality by calling (800) 248-1946. Additional information on TL 9000 may be found on the QUEST Forum web site at www.questforum.org. Information and ordering instructions for the technical references below may be obtained by contacting Telcordia Technologies at the following number: 1-800-521-2673 (current charges apply). *
TECHNICAL REFERENCES -------------------- Number Date Title TL 9000 3/01 TL 9000 Quality Management System - Requirements Handbook, Release 3.0 TL 9000 3/01 TL 9000 Quality Management System Measurements Handbook, Release 3.0 GR-63 10/95 Network Equipment - Building System (NEBS) Requirements: Physical Protection GR-78 09/97 Generic Requirements for the Physical Design and Manufacture of Telecommunications Products and Equipment GR-209 09/98 Requirements for Product Change Notices GR-230 12/97 Requirements for Engineering Complaints GR-282 Rev 1 Software Reliability And Quality Acceptance Criteria (SRQAC), A Module Of RQGR, 12/97 FR-796 GR-383 10/00 COMMON LANGUAGE(R) Equipment Codes (CLEITM Codes) - Generic Requirements for Bar Code Labels GR-485 02/01 Common Language(R) Equipment Codes (CLEITM Codes)- Generic Requirements for Processes and Guidelines GR-929 12/00 Reliability and Quality Measurements for Telecommunications Systems RQMS-Wire line), A Module of RQMS, FR-929 and RQGR, FR-796 GR-1089 12/97 Electromagnetic Compatibility and Electrical Safety Generic Criteria for Network Telecommunications Equipment GR-1315 12/97 In-Process Quality Metrics (IPQM) GR-1421 06/96 Generic Requirements for ESD Protective Circuit Packet Containers SR-NWT-2759 01/95 A View of Packaging, Palletization and Marking Requirements SR-332 05/01 Reliability Prediction Procedure for Electronic Equipment TR-NWT-000357 10/93 Generic Requirements for Assuring Reliability of Components Used in Telecommunications Equipment TR-NWT-000418 12/97 Generic Reliability Assurance Requirements For Fiber Optic Transport Systems A Module Of RQGR, FR-796 Replaced; (Now) GR-418 TR-NWT-000840 06/00 Supplier Support Generic Requirements (SSGR), A Module of LSSGR, FR-64; OTGR, FR-439; and TSGR, FR-440 Replaced; (Now) GR-840 TR-NWT-000870 02/91 Electrostatic Discharge Control in the Manufacture of Telecommunications Equipment
EXHIBIT H ATTACHMENT H-1 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT H ATTACHMENT H-2 TL 9000 REQUIREMENTS (REPRESENTATION AND WARRANTY LANGUAGE) QUALITY SYSTEM WARRANTY: A. TL 9000 REPRESENTATION AND WARRANTY 1. As used in this Section, the term: (a) "TL 9000 Registration" is a certification of TL 9000 Compliance and indicates the successful completion of a Registration Audit by a TL 9000 Registrar, including the receipt of a TL 9000 Certificate. TL 9000 Registration (i) may apply to the quality management system for Hardware, Software, Services, and/or Documentation or any combination thereof and (ii) may cover an entire company, a business unit, facility or a limited, defined product line as mutually agreed by Seller and the Registrar. The scope of TL 9000 Registration will be clearly defined within the TL 9000 Certificate. TL 9000 Registration lasts for 3 years, covers 100% of the scope of the entity being registered (i.e., company, organizational unit, facility or limited, defined product line) and the TL 9000Quality Management System Requirements. (b) "TL 9000 Certificate" defines the scope of TL 9000 Registration and certifies that Seller's applicable quality management system is TL 9000 Compliant and has successfully completed a TL 9000 Registration Audit by a TL 9000 Registrar. (c) "TL 9000 Registration Audit" means a planned, independent and documented assessment of a Seller's quality management system that is performed by a TL 9000 Registrar to determine TL 9000 Compliance of such system. (d) "TL 9000 Registrar" means an organization that meets the requirements established by the Quality Excellence for Suppliers of Telecommunications Leadership Forum ("QuEST Forum") and affirmed by the accreditation body for the purpose of administering the TL 9000 Registration process. Registrars perform TL 9000 Registration Audits under a contractual arrangement with the Seller (the "Registration Contract"). Registrars are responsible for verifying that a contracting Seller has implemented a quality management system that complies with TL 9000 Requirements for as long as the Registration Contract is in effect. (e) "TL 9000 Quality Management System Requirements," referred to herein as "TL 9000 Requirements," mean the telecommunications quality system requirements that are common to the design, development, production, delivery, EXHIBIT H ATTACHMENT H-2 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission installation and maintenance of hardware, software and/or services established by the QuEST Forum. In addition to common quality requirements, the QuEST Forum has also established separate quality system requirements that are specific to hardware, software and services, respectively, as part of the TL 9000 Requirements. TL Requirements also include such Requirements as updated or amended from time to time by the QuEST Forum. (f) "TL 9000 Compliant" or "TL 9000 Compliance" means that Seller's applicable quality management system fully meets the TL 9000 Requirements as documented by the receipt of either: (i) TL 9000 Certificate; or (ii)TL 9000 Compliance Statement as such terms are defined herein. (g) "TL 9000 Compliance Statement" is an affirmative indication in writing that Seller's quality management system has met the TL 9000 Requirements from any quality auditor who is independent of Seller, is certified to perform TL 9000 audits and is not a TL 9000 Registrar ("Quality Auditor"). (h) "TL 9000 Product Category Table" means the auditable TL 9000 Requirements (which are referred to herein as the TL 9000 Quality System Measurements) as published in TL 9000 Quality Management System - Measurements Handbook by the QuEST Forum. * 2. (a) Seller represents, warrants and agrees that within one year from execution of this Agreement, or sooner if possible, it will use commercially reasonable efforts to ensure that the processes it utilizes to produce Hardware, Software, Services, and/or Documentation or any combination thereof under this Agreement will be under quality management system(s) that shall have undergone TL 9000 Registration. Seller shall maintain its TL 9000 Registration for the term of this Agreement. Seller shall provide Customer written documentation of its TL 9000 Registration, consisting of copies of Seller's TL 9000 Certificate(s) within thirty (30) days from the date of issuance of such written documentation of TL 9000 Registration. (b) If Seller has not provided documented evidence of its TL 9000 Registration, i.e., the TL 9000 Certificate, within one year, or sooner if possible, from the execution of this Agreement, then, Seller shall provide Customer upon Customer's request and at no additional charge, the following for each of Seller's quality management systems described above that have not achieved TL 9000 Registration: EXHIBIT H ATTACHMENT H-2 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission o A TL 9000 quality plan that conforms to the most current versions of (i) the TL 9000 Requirements and (ii) the TL 9000 Quality System Measurements. o The elements to be detailed in such quality plan shall include (at minimum): (i) a schedule for achieving TL 9000 Registration; and (ii) designation of Seller's quality representative and of the Seller senior executive with quality responsibility. (c) Seller shall provide Customer upon Customer's request or on the reporting basis stated herein and at no additional charge, the following information for each of Seller's quality management systems described above whether such systems have achieved TL 9000 Registration or not: (i) TL 9000 Registration Audit results, if any; (ii) Quality management system review goals and objectives on an annual basis; and (iii) the TL 9000 Registration Audit results for any business unit that has achieved TL 9000 Registration and received the TL 9000 Certificate. (d) Prior to achievement of TL 9000 Registration, Customer and Seller will mutually agree on the format for delivery of quality performance measurements. Seller shall provide Customer with these measurements for each of Seller's quality management systems described above, which shall be submitted on a quarterly basis (within 20 working days after the end of each quarter (e) After the achievement of TL 9000 Registration, Seller shall provide Customer with quality performance measurements for each of Seller's quality management systems described above. These measurements shall be submitted on a quarterly basis in conformance with the TL 9000 Quality System Measurements, including the TL 9000 Product Category Table, as required by TL 9000 Registration. 3. If Seller allows its TL 9000 Registration to lapse or if Seller is not compliant with the most current TL 9000 Requirements, Seller agrees to allow Customer or Customer's agent to conduct periodic on-site reviews at Seller's Hardware production/Software development facility(s) to verify compliance with TL 9000 Requirements or any such other industry-wide quality requirements that replaced TL 9000. Seller also agrees to develop corrective action plans for any of its quality systems that fail to comply with TL 9000 Requirements, or any such other industry-wide quality requirements that replaced TL 9000, that may be detected during these periodic on-site reviews, and submit such plans in writing to the Customer or Customer's agent for Customer's agreement within thirty (30) days after any such on-site review. Further, Seller agrees to implement these corrective action plans within a time frame as agreed to by Customer within such corrective action plan. EXHIBIT H ATTACHMENT H-2 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission B. ORDER OF PRECEDENCE In the event of conflict between the TL 9000 Representation and Warranty and any corresponding term of this Agreement, the terms of TL 9000 Representation and Warranty will take precedence. C. SUBCONTRACTORS Seller represents, warrants and agrees that within 180 days from execution of this Agreement, or sooner if possible, it will use commercially reasonable efforts to ensure that the processes utilized by each of its subcontractors, if any, to produce component part(s) of the Hardware, Software, Services, and/or Documentation or any combination thereof provided under this Agreement will all be under quality management systems that are mutually agreeable to the parties. Seller shall monitor and audit such quality management systems and share the results of such monitoring and auditing with Customer on a quarterly basis to the extent such reporting would be allowed by the applicable subcontracts and in a format and on a reporting basis as are mutually agreed to by the parties. At such time that the TL 9000 Requirements for subcontractors have been established, Seller shall assure that each of its subcontractors that produce component part(s) of the Hardware, Software, Services, and/or Documentation or any combination thereof provided under this Agreement is performing under a quality management system that is TL 9000 Compliant and shall provide to Customer on a quarterly basis: (1) such measurements regarding the quality systems of subcontractors as is mandated by the TL 9000 Requirements; (2) an identification of key subcontractors, their respective TL 9000 Compliance status and schedule for achieving TL 9000 Compliance; and (3) the designation of Seller's subcontractors' quality representative. D. TERM OF TL 9000 REPRESENTATIONS AND WARRANTIES The representations, warranties and remedies set forth in this Section: (a) shall be in effect for the Term of this Agreement; and (b) are in addition to any other rights or remedies available to Customer under this Agreement or otherwise at law or equity. Notwithstanding anything to the contrary herein, the TL 9000 Registration Audit results, any information required to be disclosed under this Section, and the TL 9000 Certificate provided by Seller under this Section shall not be deemed proprietary to Seller. EXHIBIT H ATTACHMENT H-2 NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT I PERFORMANCE COMPENSATION PAYMENTS PRODUCT AVAILABILITY AND PERFORMANCE REMEDIES * EXHIBIT I NOTICE CONFIDENTIAL - Not for use or disclosure outside of Verizon except with Verizon's written permission EXHIBIT J BILLING VERIFICATION & AUTHORIZATION FOR PAYMENT PROCESS (BVAPP) NOT APPLICABLE EXHIBITS 10 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except by written agreement EXHIBIT K ATTACHMENT K-1 STANDARDIZATION VERIZON EAST ATTACHMENT K-2 STANDARDIZATION VERIZON WEST * EXHIBITS 11 NOTICE CONFIDENTIAL - Not for use or disclosure outside Verizon except with Verizon's written permission EX-23 7 ex23_f10k06242005.txt KPMG - 09252005 Exhibit 23 ---------- Consent of Independent Registered Public Accounting Firm The Board of Directors TII Network Technologies, Inc. We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-64965, 33-64967, 333-45151, 333-68579, 333-70714, 333-70716 and 333-120509) and registration statements on Form S-3 (Nos. 33-64980 and 333-41998) of TII Network Technologies, Inc. of our report dated September 14, 2005, relating to the consolidated balance sheets of TII Network Technologies, Inc. and subsidiary as of June 24, 2005 and June 25, 2004 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 24, 2005, and the related financial statement schedule listed in Item 15(a)(2), which report appears in the June 24, 2005 Annual Report on Form 10-K of TII Network Technologies, Inc. KPMG Melville, New York September 14, 2005 EX-31 8 ex31a_f10k06242005.txt 31(A) - T.J. ROACH Exhibit 31(a) ------------- CERTIFICATIONS 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 22, 2005 /s/ Timothy J. Roach ----------------------------- Timothy J. Roach, President (Principal Executive Officer) EX-31 9 ex31b_f10k06242005.txt 31(B) K.A. PALADINO Exhibit 31(b) ------------- CERTIFICATIONS 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 22, 2005 /s/ Kenneth A. Paladino ----------------------------- Kenneth A. Paladino, Vice President - Finance (Principal Financial Officer) EX-32 10 ex32a_f10k06242005.txt 32(A) T.J. ROACH EXHIBIT 32(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 24, 2005, 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 22, 2005 /s/ Timothy J. Roach --------------------------- Timothy J. Roach Principal Executive Officer EX-32 11 ex32b_f10k06242005.txt 32(B) K.A. PALADINO EXHIBIT 32(b) ------------- CERTIFICATION PURSUANT TO 18 U.S.C. SECTIOBN 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 24, 2005 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 22, 2005 /s/ Kenneth A. Paladino --------------------------- Kenneth A. Paladino Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----